A summary of the Risk Management System

The Risk Management Method is a system for managing and measuring financial institution risks in an integrated manner (credit risk, market risk, operational risk, liquidity risk, and so on). In addition, after evaluating these risks qualitatively or quantitatively, it is also required to establish a system (integrated risk management system) for integrating the risks of the entire financial institution.

Risks that deposit handling financial institutions should manage to include the following.

Credit risk

Risk of loss or loss due to the worsening of the credit recipient's financial state, which causes the value of assets (including off-balance-sheet assets) to diminish or evaporate.

Regarding credit risk, in addition to abolishing the application of the internal rating method (FIRB, AIRB) for credit to financial institutions and large-scale business corporations and using the standard method, the lower limit of risk assets is set on the "capital floor." 

Market risk

Interest rates, foreign currency exchange rates, and stock prices are among market risk variables that can affect the value of assets and obligations (including off-balance-sheet assets and liabilities). In addition, there is a risk that profits generated from assets and liabilities will fluctuate and suffer losses.

Operational risk

Risk of incurring losses due to improper business processes of financial institutions, activities or systems of officers and employees, or exogenous events (included in the calculation of capital adequacy ratio) and "operational risk" by financial institutions themselves.

For operational risk, it is proposed to abolish the advanced measurement method (AMA) and shift the basic method (BIA) and gross profit-sharing method (TSA) to a new standard method.

Conclusion

For credit risk, market risk, and operational risk, each risk is quantified by a method such as VaR. The amount of integrated risk is calculated after considering the correlation between each risk and finance. 

The review work is expected to be completed by the end of 2016, and then the application will be promoted every few years with a transition period. It is expected that domestic standard banks will continue to apply the system in stages.

Based on these trends, major renovation work is expected for each Risk Management System in the future. When considering introducing a new risk management system or system renewal at each financial institution, it is necessary to monitor future trends carefully.

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Created on Jul 1st 2022 12:44. Viewed 186 times.

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