2011 Annual Report - Khaleeji Commercial Bank BSC

KHALEEJI COMMERCIAL BANK BSC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2011
31. RISK MANAGEMENT (continued)
Settlement risk
The Bank’s activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss
due to the failure of a company to honour its obligations to deliver cash, securities or other assets as contractually agreed.
Settlement limits form part of the credit approval / limit monitoring process described earlier. Acceptance of settlement risk
on free settlement trades requires transaction specific or counterparty specific approvals from RMD.
Liquidity Risk
Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations associated with its financial liabilities that
are settled by delivering cash or another financial assets.
Management of liquidity risk
The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to
the Bank’s reputation.
Financial Control Department (FCD) collates data from treasury and other business units regarding the liquidity profile of their
financial assets and liabilities and details of other projected cash flows arising from projected future business. FCD communicates
the information to the treasury who manages the Bank’s portfolio of short-term liquid assets, largely made up of short-term
placements with other banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank as a
whole.
The daily liquidity position is monitored by FCD. The Bank has in place a Liquidity Contingency Plan, the elements of which are
periodically tested. Tools for implementation of regular stress testing under various scenarios are in place. All liquidity policies
and procedures are subject to review by ALCO and approval by appropriate authorities. A summary report, including any
exceptions and remedial action taken, is submitted regularly to ALCO members.
Exposure to liquidity risk
The key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to deposits from customers.
For computation of this, net liquid assets are considered as including cash and bank balances and placements with financial
Institutions less placements from financial institution, and deposits comprise current accounts, placements from non-financial
institutions and individuals, and equity of investment account holders.
Details of the reported Bank ratio of net liquid assets to deposits and customers at the reporting date and during the reporting
period were as follows:
2011 2010
% %
At 31 December 23.21 10.52
Average for the period 11.68 15.79
Maximum for the period 23.21 19.44
Minimum for the period 6.54 10.52
For maturity profile of assets and liabilities refer to note 28.
Market Risk
Market risk is the risk that changes in market prices, such as profit rate, equity prices, foreign exchange rates and credit spreads
will affect the Bank’s income, future cash flows or the value of its holdings of financial instruments. Market risk comprises three
types of risk: currency risk, profit rate risk and other price risk. The objective of market risk management is to manage and
control market risk exposures within acceptable parameters, while optimising the return on risk.
Consolidated Financial Statements
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