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)
OPERATIONAL RISK (continued)
The Bank has completed conducting one cycle of Risk Control Self-Assessment (RCSA) of Operational risk for majority of
the departments of the Bank to identify the important Key Risk Areas, Key Risk Indicators and Key Risk Triggers: the RCSA
process is a continuous process and will be conducted at regular frequencies across the Bank. A software for monitoring these
triggers and recording actual and near miss losses is already in place. The medium term objective of the Bank is to generate
statistically reliable data to upgrade to more sophisticated modes of Operational Risk Control both to manage the risk better
and to reduce capital commitment.
CAPITAL MANAGEMENT
The Central Bank of Bahrain (CBB), sets and monitors capital requirements for the Bank as a whole. In implementing current
capital requirements CBB requires the Bank to maintain a prescribed ratio of total capital to total risk-weighted assets. Capital
adequacy regulations of CBB is based on the principles of Basel II of the IFSB guidelines.
The Bank’s regulatory capital is analysed into two tiers:
• Tier 1 capital, includes ordinary share capital, disclosed reserves including share premium, general reserves, legal / statutory
reserve as well as retained earnings after deductions for goodwill and other regulatory adjustments relating to items that
are included in equity but are treated differently for capital adequacy purposes. As on 31 December 2011, the deductions
to Tier 1 were Nil.
• Tier 2 capital, includes interim retained profits reviewed by the auditors and an allowed portion profit equalisation reserve
(PER) and investment risk reserves (IRR). As per CBB, the PER & IRR can be up to a maximum amount equal to the capital
charge pertaining to 30% of the risk weighted assets financed by equity of investment account holders.
Certain limits are applied to elements of the capital base in line with regulatory requirements. Tier 1 capital should represent at
least half of the total eligible capital, i.e. Tier 2 capital is limited to 100% of Tier 1 capital. The limit on Tier 2 capital is based on the
amount of Tier 1 capital after all deductions of investments pursuant to Prudential Consolidation and Deduction Requirements
(PCD) Module of the CBB. The PCD Module sets out the regulatory rules for prudential consolidation, pro-rata consolidation
or deduction where the own controlling or significant minority stakes in regulated financial entities, insurance entities and have
significant exposures to investment in commercial entities. It also sets out the framework for the prudential deductions from
capital for various instances including exposures to counterparties exceeding the large exposure limits as set out by CBB. As on
31 December 2011, the Bank was not required to make any deductions under the requirements of the PCD Module.
Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according
to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures.
For computation of credit risk on assets financed by equity of investment account holders, 30% of risk weight assets are
considered as against 100% for assets self-financed.
The Bank’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain
future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Bank
recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the
advantages and security afforded by a sound capital position.
The Bank has adopted the standardised approach to credit and basic indicator approach for management of operational risk
under the CBB capital adequacy framework. The Bank on a conservative basis for capital management does not claim any of
the benefits for permissible credit risk mitigants against credit exposure.
Consolidated Financial Statements
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