Octagon Advisors

RISK MANAGEMENT

The financial marketplace is becoming increasingly complex and volatile. The challenge is for managements of financial institutions to have a clear understanding of the risks taken by their organizations.

Risk management should not be an afterthought. There is a need to embed the risk management process within the corporate decision making structure so that risks can be identified and managed in an on-going manner.

Leveraging on our core competencies in various aspects of risk management for banks and financial institutions, we offer consultancy services in the following areas:

Bankwide Risk Management Framework

Overview

To ensure that all risk exposures of the bank are adequately measured, monitored and controlled, it is essential that a robust risk management framework is instituted in the bank. This includes effective risk oversight from the Board and senior management, a proper organization structure, the identification and measurement of various aspects of risk, adequate risk reporting, the establishment of risk limits and appropriate internal controls. Such a framework requires the involvement of all in the bank, including the Board and senior management, and staff from the various business and support units.

Our Services

We provide consulting services to assist banks in the development of a Bankwide Risk Management framework, including policy review and formulation and the establishment of a management structure that is in line with international best practices. Such a framework will also take into account local regulatory requirements as well as the capability and structure of the bank’s existing risk management functions.

The development of the Bankwide Risk Management Framework will typically encompass the following key steps:

	Review current risk management framework, policies and gaps. A comprehensive gap report will be developed to document in detail the gaps identified and possible areas of enhancement and improvement.
	Enhance/Define risk management framework, including setting up of a proper risk governance structure.
	Enhance/Develop bank-wide risk management policy framework, including review and development of a policy framework for the bank’s risk management activities.

Credit Risk Management

Overview

Credit Risk refers to the potential loss arising from any failure by customers to fulfill their obligation, as and when they fall due. The major components of Credit Risk Management will typically cover the following areas:

	Organizational Controls
	Robust Process for Credit Analysis and Approvals
	Monitoring of Portfolio Quality
	Limits on Portfolio Concentration
	Collection and NPL Management
	Stress Testing

Our Services

Our Services in relation to Credit Risk Management include the following (please also refer to details under Basel II Capital Framework):

	Gap Analysis: Assessment of the bank’s current operating environment in various aspects of Credit Risk Management, including gaps and changes required for the bank to qualify for Basel II Standardized (SA) and/or Internal Ratings-Based (IRB) approaches.
	Review and/or Development of Credit Risk Policies and Guidelines: Review, enhance and develop relevant Credit Risk Management policies and guidelines, including the roles and responsibilities of various departments.
	Credit Modeling: Develop framework and processes to assist banks in the conduct of credit modeling, including: model design and development, model validation and model implementation. Our services related to Credit Rating Models can be summarized as follows:

	Stress Testing: Define framework and procedures for the conduct of credit stress testing, including policy, methodology, design of test scenarios and risk parameters, development of reports on outcome of test, etc.
	Credit Review: Assist banks in performing credit review of selected samples of credit cases, and provide our inputs and recommendations for follow-up actions.
	Credit Portfolio Management: Provide advices on credit portfolio management approaches and strategies.
	Collections and NPL Management: Development of aging and classification policies, as well as effective collection strategies based on the bank’s loss & recovery experience.

Market Risk Management (MRM)

Overview

Market risk is the risk of losses arising from on and off-balance-sheet positions due to movements in market prices. Based on Basel principles, such risks include the risks pertaining to interest rate-related instruments and equities in the trading book, and foreign exchange risk and commodity risk throughout the bank (i.e. in both trading and banking books).

As stipulated by Basel, banks are allowed to adopt either of the two approaches for computing regulatory market risk capital: the Standardized Approach (SA) and the Internal Model Approach (IMA).

Our Services

Our Services in relation to Market Risk Management include the following:

	Gap Analysis: Assessment of the bank’s current operating environment to map out the scope of changes required for the bank to qualify for SA or IMA.
	User Specifications (including market risk reports) and systems RFP Development
	Review and/or Development of Market Risk Policies and Guidelines
	Develop Framework and Procedures for Effective Market Risk Management
	Model Validation

Operational Risk Management (ORM)

Overview

Operational Risk refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The main types of operational risk include:

	Internal and external fraud
	Employment practices and workplace safety
	Clients, products and business practices
	Damage to physical assets
	Business disruption and system failures
	Execution, delivery and process management

Our Services

We provide the following consulting services to banks in the area of ORM:

	Gap Analysis: Assessment of the bank’s current operating environment to map out the scope of changes required for the bank in various aspects of ORM, including the various Basel II approaches for operational risk.
	Development of Framework for Monitoring and Reporting of Operational Risks, covering areas such as Key Operational Risk Indicators, Risk and Control Self-Assessment Processes, Operational Loss Reporting Processes and setting up of Loss Events Database.
	Review and Development of ORM Policies, such as New Product Program policy, Business Continuity Policy and Plans, Technology Risk Management Policy, Outsourcing Policy and Anti-money Laundering Policy, etc.

Liquidity Risk (LR) Management

Overview

Liquidity, or the ability to fund increases in assets and meet obligations as they fall due, is crucial to the ongoing viability of any banking organization. The gap between the maturity structure of a bank’s assets (such as loans and investments) and liabilities (such as deposits) requires careful management in order to ensure that the bank meets all funding obligations. Sound liquidity management will help to reduce the probability of the bank facing serious liquidity problems and thus causing a liquidity crisis which would eventually affect the viability of the bank.

Our Services

We provide the following services to help our clients meet the required objectives:

	Gap analysis: Conduct gap analysis to review the bank’s current Liquidity Risk Management policies and practices, and provide our recommendations on how the bank can further enhance this function.
	Development of a proper risk governance and organization structure to support LR management.
	Development of policies, processes and guidelines: for managing liquidity risk.
	Provide recommendations to banks on appropriate Liquidity Risk measurement methodology that incorporates all assumptions used.
	Provide a comprehensive set of liquidity risk reports for banks to monitor and assess its liquidity risk exposure.
	Development of a set of policy and processes for conducting liquidity stress testing.
	Development of models for projecting the bank’s potential cash flows arising from each balance sheet item.
	Development of appropriate funding contingency plan that details the range of actions to be taken by the bank under the various stress scenarios.

Bank Book Interest Rate Risk (BBIRR) Management

Overview

Under the Basel II capital framework, interest rate risk in the banking book has been identified as one of the important issues that banks and supervisors should particularly focus on when carrying out the supervisory review process. Banking book interest rate risk refers to the exposure of a bank’s financial condition to adverse movements in interest rates, and is commonly assessed from 2 different perspectives: the earnings perspective and the economic value perspective.

A robust interest rate risk management framework should be instituted to ensure that the banking book interest rate risk is actively managed.

Our Services

Our consulting services in relation to banking book Interest Rate Risk Management include:

	Gap Analysis: Conduct gap analysis to review the bank’s current Interest Rate Risk Management policies and practices, and provide our recommendations on how the bank can further enhance this function.
	Roles and Responsibilities for various organizational units responsible for Banking Book Risk Management
	Review of existing policies and guidelines, established by the bank for managing its IRR so as to ensure that all key aspects of the risk management processes are addressed in the policies and guidelines.
	Review of existing policies and guidelines, established by the bank for managing its IRR so as to ensure that all key aspects of the risk management processes are addressed in the policies and guidelines.
	Review impact of the implementation of IAS 39 accounting standard on the banks’ IRR management and reporting.
	Development of methodology for measuring the IRR. including areas such as selection of the appropriate interest rate curves, construction of the interest rate scenarios, construction of balance sheet growth scenarios, etc
	Formulation of procedures for conducting stress tests on the bank’s IRR. This will include the construction of the appropriate stress scenarios.