Risk monitoring
Category: Corporate Governance
Banks should monitor risk levels to ensure timely review of risk positions and limit or policy exceptions. Monitoring reports should be frequent, timely, accurate, and informative, and should be distributed to appropriate individuals that perform oversight functions.
These days more banks have some form of risk monitoring system rather than have formal risk measures. Many banks monitor performance measures such as volume, turnover, settlement fails, delays and errors. Several banks monitor losses directly, with an analysis of each occurrence and a description of the nature and causes of the loss provided to Management Board and to the Supervisory Council.
Risk monitoring is largely driven by a bank’s ability to identify and measure its risks. The more advanced the identification and measurement, the greater the potential to monitor shifts in asset quality and the potential impact on related exposures.
Example
Credit risk monitoring should allow management to focus on the largest exposures and highest risks. The largest exposures and the lowest-quality credits should be monitored more frequently. In recent years, many banks have turned to vendors of market-based models to develop early-warning systems that monitor their riskiest customers and «biggest movers,» or those customers with the greatest deterioration in credit quality from period to period.
The importance of risk assessment is evidenced by the fact that best international practice applies the risk approach for bank supervision for identifying significant or emerging problems, in individual banks and the banking system. Risk assessment approach used by many international central banks promotes the identification of problems and ensures that problems are appropriately corrected.
Because banking is essentially a business of accepting and managing risk, that philosophy is centered on evaluating risks and risk management.
Supervision by risk consists of evaluating the quantity of risk exposure in a bank and determining the quality of risk management systems in place to control risk. The supervision by risk framework provides consistent definitions of risk, a structure for assessing these risks, and a more integrated use of risk assessment in the supervision process.
The business and control risks will have 5 quantitative components (Capital, Assets, Market Risk, Earnings and Liabilities) as well as 1 qualitative component (Business, including for example operational, reputational and legal risk).
NBU has recently developed and issued for comments the draft of its own risk assessment framework to be used in supervision of Ukrainian banks. This framework includes 10 risk factors and is substantially based on the risk supervision models applied by western central banks.
Banks’ Supervisory Councils and Management Boards are expected to understand the nature of these risks and ensure that the banks’ risk management systems adequately address all relevant risks.
The following is a brief description of these risk categories.