My first Publication ocbc_ar17_fullreport_english | Page 94

RISK MANAGEMENT
(This section forms an integral part of OCBC’s audited financial statements)
System and Infrastructure
Robust internal control processes
and automated systems have been
designed and implemented to support
our market risk management approach.
This includes automated stress tests
with analytical capability, enhanced
accuracy, granularity and coverage of VaR
elements. These process and systems are
also reviewed regularly to assess their
continual effectiveness.
ASSET LIABILITY
MANAGEMENT
Asset liability management is the
strategic management of the Group’s
balance sheet structure and liquidity
requirements, covering liquidity
sourcing and diversification as well
as interest rate and structural foreign
exchange management.
ASSET LIABILITY MANAGEMENT
OVERSIGHT AND ORGANISATION
The Asset Liability Management
Committee (“ALCO”) is the senior
management group that is responsible for
the management of the Group’s balance
sheet and liquidity risks. The ALCO is
chaired by the CEO and includes senior
management from the business, risk and
support units.
The ALCO is supported by the Corporate
Treasury department within the Group
Finance Division. The Asset Liability
Management (“ALM”) department
within GRM monitors the banking
book interest rate, structural foreign
exchange and liquidity risk profiles for
the Group under both business-as-usual
and stressed scenarios. These are based
on the standards established in the ALM
framework, policies and procedures
which are subject to regular reviews
to ensure that they remain relevant in
the context of the prevailing market
conditions and practices.
ASSET LIABILITY
MANAGEMENT APPROACH
The asset liability management
framework comprises liquidity risk
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OCBC ANNUAL REPORT 2017
management, interest rate risk
management and structural foreign
exchange risk management.
Liquidity Risk
The objective of liquidity risk management
is to ensure that there are sufficient funds
to meet contractual and regulatory
financial obligations and to undertake
new transactions.
Our liquidity management process
involves establishing liquidity
management policies and limits, and
regular monitoring against them.
We also perform short-term liquidity
stress tests based on institution
specific and market-wide liquidity
stress scenarios. The results of the
stress tests are used to adjust liquidity
risk management strategies, policies
and positions and to develop effective
contingency funding plans.
Liquidity monitoring is performed daily
within a framework for projecting cash
flows on a contractual and behavioural
basis. Simulations of liquidity exposures
under stressed market scenarios are
performed, and the results are taken
into account in the risk management
processes. Indicators such as liquidity
and deposit concentration ratios are used
to establish the level of optimal funding
mix and asset composition. Funding
strategies are established to provide
effective diversification and stability in
funding sources across tenors, products
and geographies. In addition, we maintain
liquid assets in excess of regulatory
requirements to strengthen our ability to
meet liquidity needs during a crisis. These
liquid assets comprise statutory reserve
eligible securities as well as marketable
shares and debt securities.
In 2017, we continued our daily regulatory
reporting of our group-wide Liquidity
Coverage Ratio (“LCR”), excluding OCBC
Wing Hang Hong Kong, OCBC Wing Hang
Macao and OCBC Yangon. We will be
including OCBC Wing Hang Hong Kong
and OCBC Wing Hang Macao in our
reporting from January 2018 and OCBC
Yangon later in 2018. We will also be
implementing the regulatory reporting
of group-wide NSFR from January 2018
and will incorporate OCBC Yangon later
in 2018.
Interest Rate Risk
The primary goal of interest rate risk
management, including IRRBB is to ensure
that interest rate risk exposures are
maintained within defined risk tolerances
and are consistent with our risk appetite.
Interest rate risk is the risk to earnings
and capital arising from exposure to
adverse movements in interest rates.
The material sources of interest rate
risk are repricing risk, yield curve risk,
basis risk and optionality risk. A range of
techniques are used to measure these
risks from an earnings and economic
value perspective. One method involves
the simulation of the impact of various
interest rate scenarios on the Group’s net
interest income and economic value of
equity (“EVE”). Other measures include
interest rate sensitivity measures such
as PV01 as well as repricing gap profile
analysis. Triggers are set based on our
risk appetite on earnings and capital.
The results are used to adjust interest
rate risk management strategies, policies
and positions.
Limits are established to manage
interest rate exposures and reviewed
regularly to ensure they remain relevant
in the context of the prevailing external
environment. Control systems are in place
to monitor the risk profile against the
approved risk thresholds.
We are in the process of implementing
the regulatory reporting of group-wide
IRRBB, which will take effect from
December 2018.
Structural Foreign Exchange Risk
Structural foreign exchange exposure
arises primarily from our net investment
and retained earnings in overseas
branches, subsidiaries as well as other
strategic and property assets. We manage
structural foreign exchange risk through
hedges and matched funding for foreign
currency investments where appropriate.