MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4208.12.31IV. FI management of riskBecause market conditions andcompany structures vary, there is no singlerisk management system that works for allFIs. Each FI should tailor its riskmanagement program to its needs andcircumstances. Sound risk managementsystems, however, have several things incommon; for example, they areindependent of risk-taking activities.Regardless of the risk managementprogram’s design, each program should:1. Identify risk: To properly identifyrisks, an FI must recognize and understandexisting risks or risks that may arise fromnew business initiatives, including risksthat originate in non-bank subsidiaries andaffiliates. Risk identification should be acontinuing process, and should occur atboth the transaction and portfolio level.2. Measure risk: Accurate and timelymeasurement of risk is essential toeffective risk management systems. An FIthat does not have a risk measurementsystem has limited ability to control ormonitor risk levels. Further, the morecomplex the risk, the more sophisticatedshould be the tools that measure it. An FIshould periodically conduct tests to makesure that the measurement tools it uses areaccurate. Good risk measurement systemsassess the risks of both individualtransactions and portfolios. During thetransition process in FI mergers andconsolidations, the effectiveness of riskmeasurement tools is often impairedbecause of the technologicalincompatibility of the merging systems orother problems of integration. Therefore,the resulting FI must make a strong effortto ensure that risks are appropriatelymeasured across the consolidated entity.Larger, more complex FIs must assess theimpact of increased transaction volumeacross all risk categories.3. Monitor risk: FIs should monitorrisk levels to ensure timely review of riskpositions and exceptions. Monitoringreports should be frequent, timely,accurate, and informative and should bedistributed to appropriate individuals toensure action, when needed. For large,complex FIs, monitoring is essential toensure that management’s decisions areimplemented for all geographies,products, and legal entities.4. Control risk: The FI shouldestablish and communicate risk limitsthrough policies, standards, andprocedures that define responsibility andauthority. These control limits should bevalid tools that management should beable to adjust when conditions or risktolerances change. The FI should have aprocess to authorize exceptions orchanges to risk limits when warranted. Inmerging or consolidating FIs, the transitionshould be tightly controlled; businessplans, lines of authority, and accountabilityshould be clear. Large, diversified FIsshould have strong risk controls coveringall geographies, products, and legalentities.The Board must establish the FI’sstrategic direction and risk tolerances. Incarrying out these responsibilities, theBoard should approve policies that setoperational standards and risk limits.Well-designed monitoring systems willallow the Board to hold managementaccountable for operating withinestablished tolerances. Capablemanagement and appropriate staffing arealso essential to effective riskmanagement. FI management isresponsible for the implementation,integrity, and maintenance of riskmanagement systems. Management alsomust keep the directors adequatelyinformed. Management must:a. Implement the FI’s strategy;b. Develop policies that define theFI’s risk tolerance and ensure that they arecompatible with strategic goals;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-42 - Page 3