BBK annual report eng 21.5.5

Risk Management Department conductsbacktesting in accordance with the MarketRisk Capital Adequacy Regulations issuedby the Bahrain Monetary Agency. Backtestinginvolves comparing on a daily basis, the onedaydaily VaR with the average daily profitand loss (i.e. average of that day and thenext day profit and loss). The objective isto ensure that the assumptions used forcomputing VaR are reasonable and resultin a VaR number that is a good indicator ofworst possible losses.The chart below depicts the results ofcomparing the average profit and loss againstthe consolidated VaR for Bahrain and Kuwaitduring the year 2004. In circumstances wherethe average profit and loss was a loss, theVaR was always greater than the loss,indicating a high correlation between themovement of projected loss and actual loss.During the year actual loss never exceededthe VaR estimates indicating that theassumptions used in computation of theVaR number are reasonable.The Bank also regularly conducts stresstesting to identify events or scenarios thatcould greatly impact material trading positionstaken by the Bank. As per the BahrainMonetary Agency requirements, validationof the internal model is conducted by theInternal Audit Department of the Bank aswell as by the external auditors.Legal riskLegal risk is the risk that contracts are notlegally enforceable or documented correctly.It is the Bank's policy to use standarddocuments for the majority of its lending. Thestandard documents of the Bank are preparedin consultation with the Bank's in-house LegalDepartment and/or external legal counsel. Allnon-standard documents are approved by theBank's in-house Legal Department and/orexternal legal counsel.The policies and procedures of the Bankensure that credit facilities are released afterobtaining proper documents.Operational riskOperational risk is the exposure to lossresulting from inadequate or failed internalprocesses, people and systems or fromexternal events. The Bank has clearly definedoperations procedures for each of its productsand services. The Bank has advancedcomputer systems which enable it to runoperations with speed and accuracy.All computer systems and operationsprocedures are approved by Internal AuditDepartment. The Internal Audit Departmentoperates independent of other units of theBank and reports directly to the AuditCommittee which consist members of theBoard. It conducts regular reviews of allbusiness areas of the Bank and reportscontrol deficiencies and exceptions to theBank's policies and procedures.It also recommends measures to improveoperational risk and these recommendationsare implemented by the managementimmediately.The Bank also has contingency plans to takecare of any failure of its computer systems.Regular back-ups are made for all importantdatasets and they are stored outside theBank's premises. This ensures that in caseof any system failure, the Bank will be in aposition to continue its operations without theloss of critical data or business transactions.As part of the disaster recovery plan, the Bankhas established a back up site centre to standin and be operational during an emergency.The Bank established a specific BusinessContinuity Plan (BCP) unit. The main objectiveof BCP is to ensure that in the event offull/partial disaster, the Bank should be ableto continue providing essential services tocustomers so that the adverse effect of anydisaster on the Bank’s business is minimized.Operational risk framework comprisingKey Risk Areas, Risk Grading, Key ControlStandards, Key Risk Indicators, in linewith Basel II / BMA requirements, isunder implementation.Backtesting VaR - January to December 2004200Actual P&L100Jan 04 Apr 04Jul 04Sep 04 Dec 041 Day VaR @ 99%0-100-200-300VaR & P/L in USD 000-400