Risk management done at Bank Resona Perdania comprises the overall scope of existing business activities, based on the need of having a balance between business operational functions and their risk management. Through, a well-functioning risk management and policy, thus risk management becomes a strategic partner for the business unit in obtaining optimal results gained from the company’s operation.
In 2012, Bank Resona Perdania’s Board of Directors set risk appetite and risk tolerance policy in line with the Bank’s strengths and sustainable business strategy. The increasing assets on the balance sheet and liquidity in 2012 indicated Bank’s has grown stronger. Hence, Bank’s can perform stress testing to ensure that Bank’s activities are in accordance with the risk appetite, capital adequacy and labor allocation.
In order to develop risk management with international banking standard, Bank Resona Perdania continuously develops and enhances the framework of risk management system and integrated internal control structure, so it can provide early risk detection information and take the necessary action to minimize the risk. The Bank has also prepared the Internal Capital Adequacy Assessment Process (ICAAP) component to meet Bank Indonesia Circular Letter No. 14/37/DPNP dated December 27, 2012 on Minimum Capital Requirement based on Risk Profile and Fulfillment of Capital Equivalency Maintained Assets (CEMA), which is has been reported for the first time in January 2013 for the position end of December 2012.
Risk management becomes an integral part of the Bank’s main activities and the management’s responsibilities toward ensuring the achievement of objectives. This way risk management is always fully integrated into the Bank’s governance. The risk management’s framework is outlined in the policies, procedures, transaction limits, authorities and other provisions as well as various risk management tools, which apply in the whole scope of business activities. To ensure those policies and procedures are in conformity with the development of the existing business, thus evaluation is always conducted periodically according to changes in risk parameters, aside from reviewing Risk Management Policy and other related policies. Risk Management Division effectively monitors the implementation of risk management strategy and provides consultations and recommendations to other divisions/ sections/ branches offices in all matters related to risk management implementation.
An evaluation of the accuracy of models and data validation as well as the development of risk management tools is conducted to support the risk measurement process, allowing for a focus to maintain risk management effectiveness. Every new product/activity is always reviewed by risk management perspective to ensure the availability of proper mitigation and handling before the new product/ activity is implemented and launched to the market, including monitoring on Basel III implementation plan in relation with regulations on Net Stable Funding Ratio (NSFR), Liquidity Coverage Ratio (LCR) and add-on capital to countercyclical risk.
Strategically, Bank Resona Perdania ensures that each step of risk management taken leads to contribution, by means of increasing the possibility of real achievement and providing improvements in the aspects of security, soundness, regulatory compliance, environmental protection, public perception, product quality, reputation, corporate governance, operating efficiency, etc. To prepare for such things, Bank Resona Perdania continues to evolve and implement improved risk management strategies as well as increased maturity and sophisticated risk management capabilities in line with the Bank’s characters and in accordance with the direction of Bank Indonesia, including the calculation of capital adequacy to anticipate credit risk, market, operation and other related risks.
Credit risk is a risk associated with debtors and/ or other parties inability to meet their obligation to the Bank. Credit risk results from the Bank’s biggest activities which are loans, financial investment instruments such as stocks and bonds, acceptance, trade financing, and others that includes credit concentration on debtors, geographical areas, products, and specific types and fields of business.Credit risk management is therefore always implemented through the quality improvement of productive asset and credit portfolio to ensure that the Bank’s credit portfolio is diversified into various industry sectors and market segments and to anticipate credit concentration risk.
In general, credit risk management is implemented at both transactional and portfolio levels. The four-eye principle is applied at the transactional level. The principle underlines that every recommendation and loan decision involves Business Unit and Credit Examination Division to responsible in managing risk independently, in order to obtain an objective view, recommendation and decision. The four-eye principle mechanism is conducted through a Credit Committee wherein processes loan decisions is executed through a Credit Committee Meeting mechanism. The decision is made by majority of Directors, by considering the recommendations from the Business Unit and Credit Examination Division who passess the competence, capacity and integrity.This will enable the loan granting process to be more comprehensive and prudence.
To optimize the settlement of Non Performing Loans, including of collateral takeover, the Bank conducts regular monitoring of delayed payments and debtors that categorized in monitored doubtful debtors, thus the Bank always endeavors to increase the role and function of special unit namely Credit Monitoring and Recovery Section (CMRS). Thus, it is expected that the marketing function is focused on the business activities and credit risk mitigation process (to anticipate Non Performing Loans), auditing and monitoring on early detection due to a periodic change in rating can also be improved efficiently and effectively.
Various measures have been taken by Bank Resona Perdania to support a more prudent loan granting process that incorporates a more integrated credit risk management. Thus, in 2012, without ignoring the prudential principle, the trend in low quality credit decreased and credit grew nearly 17.71% compared to the previous year. The Bank has also improved its credit and credit risk management policies.
To anticipate credit risk that attached to a debtor’s business, in line with Bank Indonesia Circular Letter No. 13/6/DPNP dated February 18, 2011 regarding Guidelines for Risk Weighted Asset Calculation for Credit Risk by using Standardized Approach Methodology, Bank Resona Perdania has implemented a standardized method to calculate credit risk in accordance with Bank Indonesia regulation.
The credit risk calculation system is supported by a periodic stress testing that is conducted periodically every 6 (six) months, to ensure ensuring that there is adequate capital to anticipate the likelihood of an extreme level of credit risk caused by both internal and external conditions.
In addition, the improvements of internal credit rating implementation to measure credit worthiness and to calculate the default probability for each debtor are continuously done to attain the proper risk appetite and risk tolerance that matches the bank’s characteristic and business complexity.
The improvement includes aspects of managerial and shareholders, industry evaluation, financial performance, business performance, and collateral. Credit risk implementation is also done through an improvement of Credit Application System, parameter validation used in calculating the credit risk, conducting NPL simulations to improve loan quality and periodically evaluating the loan portfolio based on volume, quality, composition and probability degree. This improvement in credit rating is to support internal rating based approach of credit risk calculation, to be used for internal purposes in evaluating and measuring the credit risk comprehensively.
Market risk is a risk attached to the on balance sheet and off balance sheet including derivative transactions due to the changes 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 in conformity with Bank Indonesia Circular Letter No.9/33/DPNP/2007 on Guidelines for Standardized Method in Calculation of Minimum Capital Adequacy Requirement of Commercial Bank by considering Market Risk. In spite of this, Bank Resona Perdania has implemented market risk management by using an internal model that meets both the Basel II principles and the Bank’s characteristics, among others are implementing Value at Risk (VaR) using historical simulation method to identify whether the allocated capital can absorbs market risk potential due to simulated loss on exposure position. The Risk Management Division on a daily basis conducts measurement of market risk and market to market.
The market risk framework allows the Bank to correctly measure and manage risk caused by the changes in market factors such as interest rate, exchange rate, etc. This includes trading book instruments and interest rate discrepancy on the balance sheet. Every 30 minutes the Bank continuously maintains a net open position not to exceed 20% of the Bank’s capital. Therefore, a strategy is executed to adjust the size of the position: the limitation of position per currency and total limit for all currencies. So that a net open position much lower than limit that stipulated by Bank Indonesia.
The Bank always maintains an open position by implementing various limitations; using hedging technique; 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,ensuring that the limits can be monitored in an effective and efficient manner.
Another factor that the Bank concerns is the interest rate risk on its banking book, which is measured using Net Interest Income (NII) Gap and Duration Gap methods. The risk takes into consideration significant interest rate risk such as repricing, yield curve and basis risk.
The Bank also conducts quarterly stress testing using assumptions that carefully developed to test the condition trend of the Bank’s portfolio, and back testing using historical data/ daily series parameters and assumptions in accordance with Bank Indonesia stipulation (Standardized Shock Scenario).
Liquidity risk is a risk caused by bank’s inability to meet due obligations upon maturity from sources of cash flow and/ or high quality liquid assets that can be used as collateral without disrupting the bank’s activities and financial condition.
Liquidity risk is managed with the objective of maintaining the bank’s ability to meet all the obligations due in the future, by using different approaches such as monitoring fund availability based on liquidity guidelines, establishing a secondary minimum reserve and managing 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.
In accordance with SEBI No. 11/16/DPNP dated July 6, 2009 regarding Risk Management Implementation for Liquidity Risk and SEBI No. 13/23/DPNP dated October 25, 2011 regarding The Amendment of SEBI No. 5/21/DPNP dated September 29, 2003 regarding Risk Management Implementation for Commercial Bank, the Bank has also calculated liquidity risk due to the due date mismatch between assets and liabilities including administrative account transactions grouped based on time bucket, thus the Bank can identify and manage such mismatch risk through negative gap limit for each time bucket.
From year 2011 to 2012, Bank Resona Perdania actively examined the situation of global economic developments including the debt crisis faced by some European countries such as Greece and Italy, as well as the weakening of the American economy and the threat of fiscal cliff. The Bank has developed several stress test scenarios to measure the impacts of internal and external events that are likely to affect the Bank’s performance, such as dwindling supply of USD currency in the market, decreasing export transactions, and others. These stress test scenarios are periodically adjusted to reflect the latest development so that the scenarios remain relevant.
To strengthen funding, especially in emergency situations, the Bank collaborates with several 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.
Operational risk management is conducted by identifying the administration process risk, developing a Disaster Recovery Plan (DRP), reviewing information security policy and risk management system, and outsourcing. The Bank also has a procedure that encompasses general 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 segregation of duty and mandatory leave. Meanwhile, specific control relates to a specific line of the Bank’s business and supporting activities, such as: trading transaction reconciliation, improved administration of debtor loan documentation, security of physical assets, and access limitation to certain locations, and more.
It is undeniable that the Bank has always been the focus of criminal fraud. From year to year, the criminal fraud is getting more sophisticated with their operations not only in Indonesia but also in the international community. Therefore, the Bank always pay attention to particular concern for potential fraud. In 2012, the management appointed Anti-Fraud Function Officer and set Anti- Fraud Policy that included whistleblower mechanism and building a database of employees within a framework of ‘Know Your Employee’.
Bank consistently apply risk identification using a methodology that can help to manage and control risk comprehensive, namely:
Loss Event Database (LED) is a structured media used to record data of operational risk losses and incidents related to operating activities. With this database, the Bank is able to analyze the roots of the problems occurred and decide appropriate control measures to prevent the recurring of the problem. To support the LED management, the Bank is using Operational Risk Management System application.
Operational Risk and Control Self Assessment (RCSA) is a method used as a means to identify and measure control over the potential risks of every division/ section’s activities and functions. RCSA is performed by each risk owner by coordinating with operational risk officer. The results of RCSA assess whether existing controls are adequate and run effectively to address potential operational risk likely to occur so as to provide effective solutions with the right target. RCSA parameter is always renewed based on the guidelines and instructions from Resona Bank, Japan.
Key Risk Indicator (KRI) is a method used to identify trend in potential operational risk in every section/division. KRI monitoring focus is mapped based on the RCA results. By using KRI as an early warning signal, it is expected that the risk potential can be early detected or resolved when the problem is still minor.
As the Bank’s risk culture is very important in the operational risk management, the Bank will continue to build awareness of the importance of risk culture for all employees, as well as enhance the capability of identifying potential risks and monitoring mechanisms against existing risks. It can be done by holding an operational risk forum wherein all levels of employees can continuously participate. In addition, the implementation of training to all employees in line with their competences has become a top priority in mitigating operational risk.
The Bank also conducts annual stress testing with scenarios that possible to occur, such as employee strike, the increased frequency of errors, and etc.
For the calculation of capital adequacy, the Bank uses the basic indicator approach in accordance with Bank Indonesia Circular Letter No.11/3/DPNP/2009 dated January 27, 2009 on Calculation of Risk Weighted Assets (RWA) for Operational Risk Using the Basic Indicator Approach (BIA).
Compliance risk is a risk that arises when bank does not comply and/ or does not implement applicable laws and regulations. The risk can derive from the bank’s deviating behavior/ activities that are in conflict with the applicable general standards.
To enhance its role, the Compliance Unit by Decree of the Board of Directors No.060/Kep-Dir/XII/2012 is upgraded to be Compliance Division which effective valid in the beginning of year 2013. Thus, it is expected that Compliance Division can contribute more in ensuring the Bank’s compliance to applicable laws and regulations, including taking charge of identification process, measurement, monitoring and control of compliance risk.
In addition, Bank Resona Perdania monitors compliance risk at all times by placing compliance officers in each division and section. The compliance officers monitor every activity in the Division/ Section and ensure that the compliance level of activity undertaken is adequate and does not violate the internal and external regulations. Comprehensively, operational risk oversight is conducted by Compliance section under the supervision of the Director In-Charge for Compliance Function.
Various other efforts are conducted to increase effectiveness the role of an independent internal control, assessing Bank Resona Perdania’s level of compliance with Bank Indonesia’s regulations and the applicable laws. In addition, the Bank has established policies and procedures concerning compliance risk as a work guideline in the compliance risk management and its tools such as compliance checklist, also ensures that all policies, rules, systems, procedures and activities that the Bank takes on are in accordance with applicable laws.
In 2012 Compliance Unit regularly hold a monthly compliance forum to ensure that employees have a good understanding of the new regulations issued either by regulator or management during the year.
Legal risk is a risk that arises from legal obligations and/or judicial weakness aspect that can derive from the weakness in the bank’s engagement, there are changes in regulations and laws that lead the bank’s transactions to become inconsistent with the prevailing terms. The risk could potentially cause a litigation process.
Legal risk is monitored by Legal Unit of Bank Resona Perdania, that ensured all agreements and contracts can protect interests of the Bank. It includes monitoring on going litigation process or that having the legal risk potential in the future. In this case, Legal Unit continuously conducts a periodic review on legal documents, agreements and contracts with third parties, and evaluates the weaknesses of agreement that can pose legal risks for the Bank.
In addition, the Bank actively assesses legal risks that reflected from the potentials of lawsuit and cases received, and the Bank sets policies and procedures for the legal risk management. The same implementation process also conducted in the Bank’s subsidiary company to ensure that the strategy set can be well implemented. For that reason, the Bank sets policies and procedures for strategic risk management.
Strategic risk is a risk caused by inaccuracy of a decision and/ or the implementation of a strategic decision, as well as the failure to anticipate changes in the business environment. Strategic risk can derive from a weakness in strategy formulation process and the inaccuracy of strategy formulation, inadequate management information system, insufficient internal and external analysis results, overly aggressive strategic direction, and the failure in anticipating changes in business environment.
Bank has ensured that setting the target already considered the risk associated to the Bank’s strength. In order that strategic risk oversight becomes effective, Planning Division monitors the realization based on the actual report, which is to be compared with the business plan target. Planning Division conducts the monitoring on a regular basis and communicates the results to the Board of Directors.
To minimize the negative impact and incorrect strategic decision making, as well as the failure to anticipate changes in the business environment, the Bank always monitors business development and adapts it to the Bank’s condition, which examines and discusses before the strategy is approved, by involving the relevant Division/ Section including measuring and reviewing monthly business plan targets, as well as internalizing/communicating to all employees. This is designed as transparency efforts 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 a Bank. Reputation risk can be rooted from 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 Planning Division, particularly in managing negative publicity. In this case, the Bank already had a manual for internal and external communications to maintain the accuracy of the information and sustainability information conveyed either into or out of the Bank.
The Bank always pays special attention to customer complaints as part of the Bank’s reputation risk management.
The Bank also sets the parameters of reputation risk and mitigation in reputation risk management, and sets policies and procedures for reputation risk management.