Saturday, 14 February 2015

Market Risk

Market Risk

A Market risk is the exposure that arise due to the movement of market variables (interest rate and exchange rate) from a portfolio owned by the bank, which reverses direction than expected (adverse movement ), can result in losses for the bank.

Active supervision of the Board of Commissioners and Board of Directors (Risk Oversight functions)

  1. Commissar Council and Board of Directors is obligated to assess and provide approval of the arrangement and change strategies, policies and procedures pertaining to market risk.
  2. Commissar Council and Board of directors should ensure that the organizational structure clearly assign individuals, committees, and the unit of work in bank is responsible for managing market risk so that there is a separation between risk management market and the implementation of business activities.
  3. Make sure that in the strategy, policies and procedures pertaining to market risk, for example to manage interest rate risks there is limit interest rate risk, the risk-measurement system and standard interest rates and assessment of the position and the measurement of results exposure to the risk of interest rate, reporting system and internal control policy implementation against the risk of interest rates.
  4. The Bank must use a system or method that is appropriate and in accordance with the breadth and complexity of its business.
  5. The Board of Commissioners and Board of Directors is obliged to monitor the implementation of policies of market risk.
  6. The Bank must have sufficient internal control systems to manage market risk.
  7. Make sure that the available human resources who understand the philosophy of risk-taking (Risk-taking) the transactions in the market, factors that affect risk, particularly the risk of exchange rates, and other risks incurred as a result of execution of transactions on the market.
  8. To be able to perform this task with both the Board of Commissioners and Board of Directors is obligated to have an adequate understanding about the type and level of market risk exposure, and being able to see these risks in relation to the overall business of the bank.

Policies, procedures and the determination Limit ( Risk Management Codification ).

In this case a bank needs to have comprehensive policies and procedures and written to manage market risk. In these policies and procedures, the bank must ensure that in determining interest rates, has implemented the principle of prudence.

The process of identifying and measuring market risk effectively (Risk Measurement)
As already mentioned above, there are three forms of market risks that need to be identified and assessed, that is:

  1. The risk of interest rate changes, namely exposure due to changes in interest rates, more specifically, namely the risk of declining profits or increased losses due to interest rate changes by the time the bank has financial assets and financial liabilities of different interest rate and duration.
  2. The risk of price fluctuations, that is, the risk of decrease in the price of financial assets due to changes in the price of assets (such as securities).
  3. Foreign exchange risk, i.e. the risk of loss because the bank has a position of net-assets or net-liability in foreign exchange because it did not correspond to the expected value.
e.    Control Of Market Risk (Risk Controlling Department)

 The interest risk control

To position managed to maturity, banks had to put the responsibility of which include:
  1. Reconciliation of positions managed and recorded in a management information system.
  2. Control of accuracy of profit/loss and compliance to the terms and applicable accounting standards, especially the recognition of the discount, premium, bookkeeping and recognition in the accrual of the coupon.
  3. Classification and formation of the proper provision of something like that conditions.
For securities and bonds that are listed or traded on the stock market, the bank should implement internal control process which aims to monitor the difference between mortgage interest results (spread) of securities and bonds with compare results (yield) from the position of portfolio with government bonds.

When the possibility of failure kept the interest rate risk exposure are identified explicitly because of its tendency to increase, the bank must give at least the recognition of discount and apply more rigorous monitoring against the letter valuable and existing bonds while performing risk mitigation that may be done to reduce the losses.

 Exchange rate risk control

Control the exact exchange rate risk should be built in order to meet the requirements and limitations set forth in the applicable provisions.
Example of controlling the exchange rate should aim to:
  1. Protect profits in denominations of FX ( foreign exchange) and or prevent costs and losses in FX against the denomination opposite movements of FX currency rate.
  2. Consider the principle of prudence and the selection of proper hedging Chief against the provision of funds and transactions that include credit risk exposures in FX currency.
Prioritizing the establishment of a provision in the FX currency that are equivalent in the amount of domestic currency.

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