My first Publication ocbc_ar17_fullreport_english | Page 88

RISK MANAGEMENT
(This section forms an integral part of OCBC’s audited financial statements)
Committee (“NPAC”). This process
provides a platform to ensure that all risks
associated with new product or market
initiatives are comprehensively identified,
assessed, managed and mitigated before
market introduction.
BASEL REQUIREMENTS
We have implemented the MAS Notice
637 on Risk Based Capital Adequacy
Requirements for Banks incorporated in
Singapore (“MAS Notice 637”), including
the enhanced quality of regulatory capital
base and expanded risk coverage under
Basel III. As part of enhanced public
disclosures on risk profile and capital
adequacy driven by changes in Part XI of
MAS Notice 637, the Board approves the
risk disclosure policy which - among other
requirements - includes establishing and
maintaining internal control processes
over the disclosure. The Board has also
appointed the Group Chief Financial
Officer to attest that the Pillar 3 report
has been prepared in accordance with
internal control processes approved by
the Board. Please refer to the Pillar 3
Disclosures section for information as
at 31 December 2017.
For credit risk, we have adopted the
Foundation Internal Ratings-Based
(“F-IRB”) approach and supervisory
slotting criteria to calculate credit risk-
weighted assets for major wholesale
portfolios and the Advanced Internal
Ratings-Based (“A-IRB”) approach for
major consumer, small business and
margin lending portfolios. Other credit
portfolios, including those belonging
to OCBC Wing Hang and Bank OCBC
NISP are on the Standardised approach.
They will be progressively migrated to
the internal ratings-based approaches.
The regulatory capital to be set aside for
credit risk-weighted assets depends on
various factors, including internal risk
grades, product type, counterparty type
and maturity.
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OCBC ANNUAL REPORT 2017
For market risk, we have adopted the
Standardised approach. Risk weights
for market risk assets are specified
according to the instrument category,
maturity period, credit quality grade
as well as other factors and applied to
the corresponding notional amount
as prescribed under MAS Notice 637.
For operational risk, we have adopted
the Standardised approach except for
Bank OCBC NISP and OCBC Wing Hang,
which have adopted the Basic Indicator
approach. Operational risk-weighted
assets are derived by applying specified
factors or percentages to the annual gross
income for the prescribed business lines in
accordance with regulatory guidelines.
We conduct the Internal Capital Adequacy
Assessment Process (“ICAAP”) at least
annually to evaluate if we are able to
maintain sound capital levels after
considering business plans and material
risks under both base case and severe
stress scenarios. Management actions are
proposed where necessary to ensure that
the Group remains prudently managed.
Implementing the Basel framework is
an integral part of our efforts to refine
and strengthen our risk management.
We closely follow ongoing industry and
regulatory developments, including
higher liquidity and capital requirements.
CREDIT RISK
MANAGEMENT
Credit risk arises from the risk of loss
of principal or income on the failure of
an obligor or counterparty to meet its
contractual obligations. As our primary
business is commercial banking, we are
exposed to credit risks from our lending
activities. Trading and investment
banking activities, such as the trading
of foreign exchange, derivatives, debt
securities, commodities, securities
underwriting and the settlement of
transactions, also expose the Group
to counterparty and issuer credit risks.
For derivative transactions, the total
credit exposure is quantified by the
transactions’ current positive mark-to-
market value plus an appropriate add-on
factor for potential future exposure.
CREDIT RISK MANAGEMENT
OVERSIGHT AND ORGANISATION
The Credit Risk Management Committee
(“CRMC”) is the senior management
group that supports the BRMC and
Group Chief Executive Officer (“CEO”)
in managing credit risk, including the
reshaping of credit portfolios. It reviews
the credit profile of material portfolios
by business segments and geography to
ensure that credit risk taking is aligned
with the relevant business strategy and
consistent with our risk appetite. The
CRMC also recommends and monitors
exposure undertaken against risk limits
and highlights any material risk issues to
the BRMC and CEO. In addition, the CRMC
reviews the enterprise-wide credit risk
philosophy, the credit risk management
framework and major credit risk policies
for the approval of the BRMC. It also
oversees compliance with the risk
management framework and policies
and the effectiveness of infrastructure,
methodologies and systems.
Credit Risk Management (“CRM”)
departments ensure the execution
of the credit risk management
framework, policies and procedures.
These departments also independently
manage credit risk to ensure adequacy
of risk-returns within our risk appetite,
customer targets, limits and risk
standards. Dedicated risk functions are
responsible for portfolio risk monitoring,
risk measurement methodology, risk
reporting and remedial management.
Regular risk reports are provided to the
CRMC, CEO, BRMC and the Board in a
timely, objective and transparent manner
for review. These reports include detailed
credit exposures, credit migration,
expected losses and risk concentrations
by business portfolio and geography.
Regular stress tests and portfolio reviews