Annual Report 2010 (PDF) - USB Bank

Notes to the Financial Statements
as at 31 December 2010
30. Risk management (continued)
Operational risk
Operational risk is the risk of loss arising from system failure, human error, fraud or external events.
The Bank manages operational risk through procedures and controls. Controls include segregation
of duties, controllable access, reconciliation of accounts and balances. In addition, the Bank’s General
Inspection Unit, performs periodic reviews and evaluates the efficiency of these controls and procedures.
Additionally, an insurance coverage exists in order to cover unanticipated operating losses.
Equity securities price risk
The risk of the price of equity shares arises when there is an unfavourable change in the price of
investments in equity securities held by the Bank. The Bank is not subject to significant risk from such
changes.
Regulatory risk
The Bank’s operations are supervised by the Central Bank of Cyprus. In carrying out is regulatory
duties, the Central Bank of Cyprus follows, inter alia by the European Union’s underlying legal framework,
as well as the regulatory framework of Central Bank of Cyprus. Future changes in the legal or regulatory
duties as a result of arrangements either by European Union or Central Bank of Cyprus, may have impact
on the Bank’s operations. The most recent proposed revision of Basel framework (Basel III) aims to
promote a more resilient banking sector. These proposals focus on capital, liquidity and provisions and
are expected to increase their defences and reduce the pro-cyclical leverage in the sector. Basel III is
in the process of adoption by the EU and it will then need to be transposed into national legislation in
Cyprus.
Intensity of competition
The operational environment of the Bank is highly competitive. Competition arises from commercial
banks, cooperative credit institutions, and international banking units. Any intensification of competition
as a result of more competitive interest rates being offered on deposits and advances compared to those
offered by the Bank, may create pressure on the Bank’s profitability..
Litigation risk
The Bank may, from time to time, become involved in legal or arbitration proceedings which may affect
its operations and results. Litigation risk arises from pending or potential legal proceedings against
the Bank and in the event that legal issues are not properly dealt with by the Bank, resulting in the
cancellation of contracts with customers thus exposing the Bank to legal actions against it.
31. Capital management
The adequacy of the Bank’s capital is monitored on a continuous basis in order to ensure compliance
with the requirements of supervisory authorities, to maintain a base for support and growth of its
activities and to protect the shareholder’s interests.
For compliance purposes with the Central Bank of Cyprus (CBC) requirements for the computation of
capital adequacy, the Bank has implemented and has fully complied with the provisions of the CBC’s Directive
“Computation of Capital Requirements” (“Basel II”) throughout the year, on the basis of which it is required
by every financial institution to maintain a minimum capital adequacy ratio of 8% (2009: 8%).
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Αnnual Report 2010