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stress test for equity Price movements
Exposure to the equity market has been minimal, so that even a 20% adverse movement in equity Prices has no discernible impact on our capital adequacy ratio.
oPerational risk and its management
operational risk is inherent in all businesses and is the risk of direct or indirect impacts resulting from inadequate or failed internal processes or systems or from external events.
Frauds (both internal and external), errors, it system breakdowns, natural disasters, terrorist action are some of the common sources of operational risk. obviously, operational risk cannot be totally eliminated and the challenge is to manage and contain any operational losses within acceptable levels as determined by the Board.
organisation structure for managing oPerational risks
BOARD Audit BIRMC Risk Management Operational Risk Management Department Other Operating Departments/ Business Units
Capital Adequacy is
now at comfortable
levels providing
the platform to
aggressively pursue
the new business
opportunities fast
becoming available
with the dawn
of peace. We are
however, mindful
of the need for
continued strong risk
management and
appropriate pricing
to preserve capital to
meet our aforesaid
primary objectives.
139
Pagehow we manage oPerational risks
our operational risk management framework is designed to ensure that our Operational Risks exposures are proactively managed and controlled within acceptable levels consistent with the Bank’s risk appetite. the framework incorporates industry best practices and meets regulatory guidelines. the key components of the framework include:
Governance Loss Data Internal and External Key Risk Indicators (KRIs) Issue Management Control and Self Assessment Strategy Ex ecu tion Str uc tu re governance
it is the process by which the Board of directors defines key objectives for the Bank and oversees progress towards achieving those objectives. it defines overall operational risk culture in Bank, and sets the tone as to how the Bank implements and executes its operational risk management strategy. the objective is to firmly embed risk management in the vision, strategies, tools and tactics of the Bank. governance sets the precedence for strategy, structure and Execution.
strategy
the Bank’s strategy for operational risk drives the other components within the management framework and provides clear guidance on risk appetite or tolerance, policies and processes for day- to-day risk management.
structure
this includes initiatives like laying down an organisational framework that leverages current risk processes and developing risk measurement models to assess and allocate capital as per the Basic indicator approach. centralised aggregation of operational Pages 056-068 Pages 069-075 Pages 076-079 Pages 080-083 Pages 086-087 Pages 088-121 Pages 124-143 Pages 146-152 Pages 153-218 Pages 219-248
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risk information collected via various self-assessments across the Bank further provides useful insights and inputs into constantly evolving the operational risk management structure. the implementation of these concepts allows risk to be handled consistently throughout the Bank.
Execution
after establishing the operational risk management structure, adequate procedures have been designed and implemented to ensure execution of and compliance with these policies at business line level.
finally appropriate risk mitigation and internal control procedures are established by the business units such that residual risk is mitigated to the acceptable level. regular reviews are carried out to analyse the control environment and test the effectiveness of implemented controls, thereby ensuring business operations are conducted efficiently, but within acceptable risk limits.
The following controls and risk
mitigation strategies are being executed throughout the branch network to manage and maintain Operational Risk at an acceptable level.
operational risk Policy
Bank has a well defined policy on operational risk management. the policy is based on internal control functions, treatment for operational losses, new product review process, etc.
key risk indicators
‘key risk indicators’ (kris) are established to ensure that timely warning is received prior to the occurrence of an event. effectiveness of kris lies in setting threshold at the acceptable level of risk. Execution and implementation of the operational risk framework is key to setting up an effective operational risk environment ensuring that business is conducted within appropriate risk tolerance limits.
risk and control self-assessment
internal control is one of the primary lines of defence in safeguarding our employees, assets, and information and preventing and detecting errors, omissions and frauds. the Bank undertakes, annually, a comprehensive assessment of its key operational risk exposures to ensure that management and internal controls are adequate, effective, appropriate and comply with our policies.
Business continuity management
the Bank has designed robust business continuity management programmes which will enable the Bank to continue to manage and operate its businesses, and provide customers access to products and services.
insurance
certain risks that have high probability of occurrence and low impact and those of low probability of occurrence and high impact are insured to minimise losses.
internal audit
the internal audit function also periodically reviews the entire operational risk management process across the network to provide an assurance to the Board and the senior management.
training
staff across the entire branch network are trained on an ongoing basis to ensure their knowledge and skills are kept up to date with the latest developments and techniques.
code of conduct
a code of conduct of ethics has been drawn up and is adopted by employees at all levels without exception.
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Pageoperational loss events tracking/ monitoring
Business units and Branches are required to periodically report on any operational loss events to the risk management division where a database of loss events is maintained. this is analysed on an ongoing basis to identify trends if any, and thereby review and revise procedures and controls to minimise future operational losses.
operational losses for year 2011
90% of our losses are due to external frauds, most of which have been beyond the control of the Bank.
as a result of our rigid internal control and monitoring system, losses generated through internal process were contained to only 10% of total operational losses.
operational losses for the year 2011 as a percentage of operational expenses was 1.5%. this is above the internally set tolerance level of 1%. however, 1% of this was due to a robbery at one of our branches and it is believed that a large part of this will be recovered by law enforcement authorities and from insurance.
capital management
as the Bank and its subsidiaries operate across a wide spectrum of clients, regions and products, it recognises the importance of continuously monitoring, evaluating and aggregating risk exposures across the entire Group and ensuring its activities are supported by sufficient capital.
central Bank of sri lanka (cBsl) has issued new guidelines to encourage banks to develop integrated risk management techniques for monitoring and managing their risks and to assure
the regulator that adequate capital is held to meet the various risks to which they are exposed.
in line with this, it is the policy of the Bank to maintain a strong capital base so as to ensure and reinforce the confidence of all stakeholders including customers, creditors and regulatory authorities.
People’s Bank’s primary objectives when managing capital are -
∙ to safeguard the Bank’s ability to continue as a going concern and to have sufficient capital to finance its expansion plans;
∙ to optimise returns to our owners; ∙ to comply with the regulatory capital
requirements set by the cBsl.
capital adequacy is calculated in line with the guidelines set by the cBsl - ∙ standardised approach is used for
credit risk;
∙ Basic indicator approach for operational risk;
∙ standardised approach for market risk.
during 2011, the Bank boosted its capital base by way of an issue of debentures totalling 5 Bn.
Pages 056-068 Pages 069-075 Pages 076-079 Pages 080-083 Pages 086-087 Pages 088-121 Pages 124-143 Pages 146-152 Pages 153-218 Pages 219-248
financial review corPorate resPonsiBility outline of our rePorting initiatives a Pictorial view of 2011 comPliance rePort corPorate governance risk management key Performance indicators financial rePorts annexes
Page 006 Page 007 Pages 008-011 Pages 012-017 Pages 020-022 Pages 024-030 Pages 032-036 Page 037 Page 040-053 oPerational highlights financial highlights chairman’s message chief executive officer/ general manager's review Board of directors corPorate management executive management Zonal management Business review Page
142
capital requirementcredit risk represented 74% of the total risk-weighted assets (rwa), while 23% was on account of operational risk. market risk accounted for only 3% of the rwa.
Average RWA over last three years and CAR
capital adequacy is now at comfortable levels providing the platform to aggressively pursue the new business opportunities fast becoming available with the dawn of peace. we are however, mindful of the need for continued strong risk management and appropriate pricing to preserve capital to meet our aforesaid primary objectives.