The credit risk implementation is also done through an improvement of the Credit Application System, parameter validation used in calculating the credit risk, conducting NPL simulations, to improve loan quality and periodically evaluate the loan portfolio based on volume, quality, composition and probability factor.
Market risk is a risk attached to the balance sheet and administrative account, including derivative transactions, due to the change in the overall market condition, including the risk of option price change.
The calculation of Minimum Capital Adequacy Requirement still follows the prevailing standard method mandated by Bank Indonesia. However, Bank Resona Perdania implements an internal model that meets both the Basel II principles and the bank's own characteristics, using - among others - Value at Risk (VaR) calculation using a historical simulation. This approach is taken to identify the bank’s capital adequacy to absorb any potential market risk.
The Market Risk framework allows the bank to correctly measure and manage risk caused by changes in market factors such as interest rate, exchange rate, etc. Including trading book instruments, and interest rate discrepancy (difference) on the balance sheet. The Bank continuously maintains a net foreign exchange position every 30 minutes, where it cannot exceed 20% of the Bank's capital, and therefore a limit is set both per currency type, as well as total foreign currency.
The Bank always maintains an open position by using hedging technique, by monitoring all treasury transactions, particularly the fair market value provided by dealers, independently and as close as possible to real time using Trade Order Management System on Bloomberg, to ensure that the limits can be monitored in an effective and efficient manner.
Another factor that is considered by the Bank is the interests rate risk on its banking book that is measured using Net Interest Income (NII) Gap method and Duration Gap that considers significant interest rate risk such as reprising, yield curve, and basis risk.
The current internal model will continue to be developed using prudent principles, such as implementing quarterly stress testing analysis that is based on a careful assumption developed to test the Bank’s portfolio condition tendency and regular back testing by using historical data/parameter daily series, as well as other assumptions that meet the Bank Indonesia’s Standardized Shock Scenario.
Liquidity risk is a risk brought about by the bank’s inability to meet due obligations upon maturity from cash flow and/or high quality liquid assets resources that can be used as collateral without disrupting the bank’s activities and financial condition.
Liquidity risk is managed with the objective to maintain the bank’s ability to meet all its obligations that are due in the future, among others by using different approaches such as monitoring fund availability based on liquidity guidelines, and establish a secondary minimum reserve, and manage maturity gap. Other indicators used are, among others: Loans to Deposit Ratio, Gap Analysis, Liquidity Structured Trend, and Funding Trend, all of which are routinely presented at meetings/ALCO meetings.
The Bank conducts analysis using Liquidity Stress Testing on the Bank’s Liquidity strength by using various scenario assumptions (bank-specific scenario and general market scenario), that possess potential disruption to the bank’s liquidity, as well as other relevant issues, such as the sovereign debt crisis in Europe, particularly that of Greece, that has adversely impacted liquidity in foreign currency. Other analyses include imposing transaction limits with the bank’s counter-parties, and concentration gap limits in accordance with its time gap limit.
Additionally, the Bank also established a soft limit to mitigate liquidity risk caused by funding concentration. The monitoring of soft limit compliance is implemented by the Risk Management Division, and whenever these limits are exceeded, than the relevant party will hold a joint meeting to identify a solution for such challenges.
To strengthen funding, especially in emergency situations, the Bank collaborates with other banks to obtain committed line facility that can be used as liquidity buffer and contingency funding.
Operational Risk may be rooted in – among others - human resources, internal process inadequacy, insufficient system and infrastructure, and other external factors. It is therefore essential, that Bank Resona Perdania continue to develop a risk culture, through the internalization and communication of SOP (Standard Operating Procedures) for all employees to increase their awareness on the importance of risk culture and form a special task force to review process weakness in all the bank’s activities.
Operational risk management is conducted by identifying the administration process risk, developing a disaster recovery procedure plan (DRP), reviewing information security policy and system risk management, and outsourcing.
The Bank also has in place a procedure that encompasses general control and specific control. General control is an operational control applied to all the bank’s lines of business and supporting activities, such as the implementation of function separation and mandatory leave. Whereas specific control relates to a specific line of business and the bank’s supporting activities, such as: trading transaction reconciliation, improved administration of debtor loan documentation, security of physical assets, and access limitation to certain locations, among others.
Risk identification is conducted by developing methods that help manage and control risk comprehensively:
- Loss Event Database (LED): the media used to administer data on losses and other related operational risks related to operational activities. Having such database, enables the Bank to analyze the root cause of the problem, and decide on the appropriate remedial action and/or solution to avoid repetition of such problems in the future.
- Control Self Assessment (CSA): a method utilized as a tool to identify and measure the control of potential risk of activities and functions across the Bank’s different Departments/Divisions/Sections. This is crucial as it ensures that the existing control mechanism is effective to identify any gap that may arise. The risk mapping in every Department/Division/Section is conducted by incorporating Control Self Assessment into Key Risk Indicator as guidelines for better risk management. CSA parameters are continuously updated in accordance with guidance and instructions from Resona Bank, Japan.
- Key Risk Indicator (KRI): a method utilized to monitor risk in every Department/Division/Section that is conducted by mapping Control Self Assessment (CSA) results to obtain and monitor main risk indicators. This is designed as an early warning signal, to detect potential risk as it happens and resolve risk while the problem is still manageable.
The existing database helps the bank analyze the root cause of the problem, seek the best solution, and avoid repetition of a similar or greater risk in the future.
Additionally, the bank conducts ongoing relevant training for all employees as a main priority to mitigate operational risk.
Compliance risk is a risk that arises when a bank does not comply with and/or does not implement prevailing regulations and terms, that can derive from the bank’s deviating behaviour/ activities that are in conflict with the applicable general standards.
Bank Resona Perdania conducts an ongoing compliance risk, where every Department/Section/Division has its own compliance officer. The compliance level for the various external and internal regulations is also monitored by the Compliance Unit that reports to the Compliance Director.
Various other efforts are conducted to ensure that effective internal control is in place, conduct an assessment on Bank Resona Perdania’s compliance to Bank Indonesia applicable laws and regulations. Additionally, the Bank has also established compliance risk policy and procedure, to ensure that all policies, provisions, systems, procedures, and business activities of the bank are in compliance with the applicable laws and regulations.
Legal risk is a risk caused by legal obligations and/or judicial weakness aspect that can derive from the bank’s weakness in the bank’s engagement, change in legislation and regulations, that render the bank’s transactions inconsistent with the prevailing terms, and could potentially cause a litigation process.
The Bank considers the prevailing legal risk evaluation procedure to be sound. The legal risk is monitored by the Bank’s legal officers to ensure that all agreements and contracts will safeguard the bank’s interest, including the monitoring of any ongoing litigation process, or any other procedure that carries legal risk potential in the future. Therefore, the Bank conducts regular reviews of legal documents, agreements, and other third party contracts. The bank then evaluates any potential agreement weakness that has any legal risk implications for the Bank.
Additionally, the Bank also actively evaluates the legal risk reflected in any potential legal litigation, any legal case, and establishes policies and procedures to manage legal risk.
A similar approach is used for the Bank’s subsidiaries, to ensure that the approved strategy can be implemented well, for which the Bank establishes policy and procedure to manage strategic risk.
Strategic Risk is a risk caused by the inaccuracy of a decision and/or the implementation of a strategic decision, and the failure to anticipate changes in the business environment. Strategic risk can derive from a weakness in the strategy formulation process, and the inaccuracy of strategy formulation, inadequate management information system, insufficient internal and external analysis results, overly aggressive strategic direction, and failure to anticipate changes in the business environment.
To minimize the negative impact and incorrect strategic decision making, and the failure to anticipate changes in the business environment, the Bank always monitors business development and adapts it to the Bank’s condition. The Bank’s strategic plan is reviewed by a special committee, which reviews and discusses before the strategy is approved, by involving the relevant Section/Division, including measuring and reviewing monthly business plan targets, and internalizing/communicating to all employees. This is designed as transparency measure and increase awareness on the importance of attaining business targets in an organization without disregarding any potential risk that may arise.
Reputation risk is a risk caused by the decline of stakeholders’ trust that derives from a negative perception toward the Bank. Reputation risk can be rooted in the Bank’s various business activities, such as events that adversely impact the bank, negative publicity in the media, violation of business ethics, and customer complaints. However, this can also be caused internally from the Bank’s own weakness in corporate governance, its corporate culture, and business practice.
To anticipate and minimize the adverse effect of reputation risk, a consistent monitoring process is put in place. This is conducted by the Planning Division, particularly in managing negative publicity and customer complaints, including improving Risk Reputation Management policy. The management of both of these problems is expected to mitigate the occurrence of reputation risk. Additionally, the Bank has also established reputation risk parameters and mitigation for reputation risk management, and designed a policy and procedure to manage risk reputation