Website: www.bb.org.

bd
Department of Off-Site Supervision
Bangladesh Bank
Head Office
Dhaka
8 October, 2018
DOS Circular No. 04 Date: -----------------------
23 Ashwin , 1425
Chief Executives
All Scheduled Banks in Bangladesh

Dear Sir,

Risk Management Guidelines for banks

Please refer to DOS circular no.02 dated February 15, 2012 and DOS circular letter no.13 dated September 9, 2015 on the cap

Bangladesh Bank (BB) has continued its effort for upgrading the initiatives taken to manage various risks of banks in a prudent

1 Soft copies of risk management reports (CRMR prepared for June & December and MRMR for all other mont

2 Board Risk Management Committee(BRMC) meeting minutes within 7 days of the meeting held;

3 Board approved Risk Appetite Statement (RAS ) on yearly basis within first two months of the year;
4. A soft copy of Stress Test report on half yearly basis along with CRMR;

5. A review report of Risk Management Policies and effectiveness of risk management functions with the approval of the board

Instructions of DOS circular No.02 dated February 15, 2012 and DOS circular letter no.13 dated September 9, 2015 hereby sta

This circular along with the guidelines are available on the website of Bangladesh Bank and shall come into force with immedia

Yours sincerely,
Enclosure: As above Sd./-

(Md. Sirajul Islam)

General Manager (Current charge)
Phone: 9530081

Risk Management Guidelines for Banks

October 2018

Department of Off-site Supervision Bangladesh Bank

Preamble

Taking risk is an integral part of financial intermediation and banking business. Failure to assess and manage risks adequately

The banking sector throughout the world underwent a vulnerable situation due to recent global financial crisis. Developing coun

Relationship between our local banks and internationally recognized banks has expanded due to increase in foreign trade and

The setting of an appropriate strategy and risk tolerance/appetite levels, a holistic risk management approach and effective rep

There is no alternative but to ensure sound risk management practices for surviving in the competitive environment. Therefore,

Risk management is a discipline at the core of every enterprise and encompasses all activities that affect its risk profile. Howev

Chief Advisor

S. M. Moniruzzaman
Deputy Governor
Bangladesh Bank

Advisor
S. M. Rabiul Hassan
Executive Director
Bangladesh Bank

Coordinator

Md. Arifuzzaman
Deputy General Manager
Bangladesh Bank

Members of Working Committee

Md. Aminur Rahman Chowdhury, Joint Director, Bangladesh Bank

A. N. M. Moinul Kabir, Joint Director, Bangladesh Bank
Jebunnessa Karima, Joint Director, Bangladesh Bank
Mohammad Atiqur Rahaman, Deputy Director, Bangladesh Bank
Shirajum Munira, Deputy Director, Bangladesh Bank Md. Jahangir Alam, EVP, AB Bank Ltd.
Md. Ashraful Azim, SVP, Shahjalal Islami Bank Ltd. Pronob Kumar Roy, SAVP, Dutch Bangla Bank Ltd.
Md. Nurul Huda, AGM, Agrani Bank Ltd.
M. Shahed Wali, Sr. Credit Manager, Standard Chartered Bank

Table of Contents
Chapter 1: Objective of risk management
1.1 Introduction 1
1.2 Scope of application 1
1.3 Objectives 1
1.4 Dimensions of Risk Management 2
1.4.1 Risk Culture 2
1.4.2 Risk Strategy and Risk Appeti 2
1.4.3 Risk Governance and Organiz 3
1.4.4 Risk Assessment and Treatme 3
1.4.4.1 Risk Assessment 3 1.4.4.2 Risk Treatment 4
Chapter 2: Risk management system
2.1 Elements of a sound risk managem 52.2 Essential criteria for ensuring sou
2.3.1 Board Oversight 6 2.3.2 Senior Management Oversigh
 2.4 Policies, procedures and limit struct 72.5 Risk measurement, monitoring and
2.7 Optimal Risk Management Organo 9
2.7.1 Role of board of directors 9 2.7.2 Role of Board Risk Managem
2.7.4.1 Essential criteria for appoi 11 2.7.4.2 Role of Chief Risk Officer (
2.7.5 Risk management Division/De 13
2.7.5.1 Scope of work of RMD 13 2.7.5.2 Role of Risk Management D
2.8 The Concept16 2.8.1 Definition of Risk Appetite 17
2.8.2 Risk Appetite Objectives 17 2.8.3 Risk Appetite Framework
Chapter 3: Risk management process
3.1 Risk Management Process 203.2 Steps of risk management process
Chapter 4: Operational risk management
4.1 Introduction 254.2 Categorization of operational risk
Chapter 5: Capital management
5.1 Capital management and its relatio 345.2 Framework of capital management
5.2.1 Roles and responsibilities of Board of Directors and Senior Management 34 Chapter 6: Risk management reporting
6.1 Risk management reporting 37 6.2 Penalty for non-compliance 37
Glossary 38
Bibliography 39
List of Acronyms
ADR Advance Deposit Ratio
ALCO Asset-Liability Management Committee
ALM Asset Liability Management
BB Bangladesh Bank
BCBS Basel Committee on Banking Supervision
BIS Bank for International Settlements
BOD Board of Directors
BIU Basel Implementation Unit
BRMC Board Risk Management Committee
CRAR Capital to Risk Weighted Asset Ratio
BCP Basel Core Principles
CRO Chief Risk Officer
CRR Cash Reserve Ratio
ERMC Executive Risk Management Committee
ICAAP Internal Capital Adequacy Assessment Process
MCO Maximum Cumulative Outflow
MIS Management Information System
OBS Off-Balance Sheet
PEST Political, Legal, Social and Technological analysis
RAF Risk Appetite Framework
RAS Risk Appetite Statement
RMD Risk Management Division
RWA Risk Weighted Asset
SLR Statutory Liquidity Requirement
SLP Structural Liquidity Profile
SWOT Strengths, Weaknesses, Opportunities, Threats analysis
VaR Value at Risk
WBG Wholesale Borrowing Guidelines

Chapter 1 Objective of risk management

1.1 Introduction

This guideline is issued by Bangladesh Bank (BB) under section 45 of Bank Company Ain , 1991 with a view to provide a struct

This guideline is prepared in line with internationally accepted risk management principles and best practices. The guideline is a

1.2 Scope of application

The guideline pertains to all scheduled banks (conventional, Islamic Shariah and Islamic banking branches/windows of convent
In issuing the guidelines, Bangladesh Bank intends to provide guidance to all banks on minimum standards for risk managemen

However, Bangladesh Bank considers compulsory for all banks to self-assess their risk profile and operational context, and cus
1.3 Objectives

In publishing the guidelines, the objectives of Bangladesh Bank are:

• To promote better risk culture at all levels of the banks.

• To provide minimum standards for risk management practices.
• To improve financial soundness of individual banks and stability of the overall financial sector.
• To encourage banks to adopt and implement a sound risk management framework. • To introduce important r

1
1.4 Dimensions of Risk Management
1.4.1 Risk Culture

Every banking institution should develop an integrated and institution-wide risk culture, based on a full understanding of the risk

A bank should develop its risk culture through policies, examples, communication, and training of staff regarding their responsib

Risk culture and its impact on effective risk management must be a major concern for the board and senior management. A sou

The top level of the bank sets the tone for the desired risk culture. The risk culture can be strengthened through:
• Enabling an open and respectful atmosphere in which employees feel encouraged to speak up when observin
• Clarifying the range of acceptable risks using an embedded risk appetite statement and various forms of com
• Aligning incentives with objectives and clarifying how breaches in policies/procedures will be addressed.

1.4.2 Risk Strategy and Risk Appetite

Risk tolerance and risk appetite are terms often used interchangeably: risk appetite describes the absolute risks a bank is a prio

A bank’s strategy details the long-term, and in some cases, short-term goals and objectives, as well as how progress toward the

The board of directors sets the strategies and the senior management is responsible for implementing those strategies and com

Risk appetite statement plays an important role in cascading the risk strategy down through the institution. It should include me

A good practice includes the following:

• Regular review of risk appetite statement as a formal process;

• Top-down and bottom up processes to define risk metrics and risk appetite; and,
• Limit systems that are aligned with overall governance so that breaches are quickly flagged and appropriate c
1.4.3 Risk Governance and Organization

Risk governance refers to the structure, rules, processes, and mechanisms by which decisions about risks are taken and imple
Risk governance should follow a three-lines-of-defense-model.
The first line of defense provides that the business and operation units of the institution have in place effective processes to ide
The second line of defense relates to the appropriate Internal Control framework put in place to ensure effective and efficient op
• adequate control of risks;
• prudent conduct of business;
• reliability of financial and non-financial information reported or disclosed (both internally and externally); and,
• compliance with laws, regulations, supervisory requirements, and the institution's internal policies and proced

The Internal Control framework encompasses risk control function and compliance function, and should cover the whole organi

The third line of defense consists of the bank’s internal audit which performs independent periodic reviews of the first two lines

1.4.4 Risk Assessment and Treatment

The ultimate responsibility for risk assessment lies solely with a bank: it should evaluate its risks critically and not rely on extern

Risk management process is the systematic application of management policies, procedures and practices to the assessment,

Regardless of types of structure kept in place or strategies formulated by the bank, the risk management process should includ
1.4.4.1 Risk Assessment

Risk assessment is the overall process of risk identification, analysis, and evaluation.
Risk identification is the starting point for understanding and managing risks and/or crucial activities. Institutions should identify

Risk analysis involves developing an understanding of the risk. It provides an input to risk evaluation and to decisions on the m

Risk evaluation is undertaken to assist in making decisions, based upon the outcomes of risk analysis, about which risks need t

1.4.4.2 Risk Treatment

After the exposed risks are assessed, banks should choose the best option to eliminate or mitigate unacceptable risks. Risk tre
• Avoiding the risk by deciding not to start or continue with the activity that gives rise to the risk.
• Accepting and retaining the risk by making informed decision and having plans for managing and funding the
• Reducing the likelihood of the risk through staff training, changing procedures, or by reducing the impact throu
• Sharing the risk with another party or parties through insurance, consortium financing, etc.

Selecting the most appropriate risk treatment option involves balancing the costs and efforts of implementation against the bene

One of the most important ways for banks to address risks is to put in place adequate risk control mechanisms. The institution s

Monitoring and review need to be integral parts of the risk treatment plan to ensure that measures remain effective. The institut

• detection of changing risk sources and factors within and outside the institution,
• obtaining further information to improve risk assessment,
• ensuring that contranalyzing and learidentifying emerging risks.

Chapter 2

Risk management system

A bank’s risk management system shall include policies, procedures, limits, and controls in its foundation. This foundation provi

The success of risk management in banks will depend on the effectiveness of the risk management system providing the found

2.1 Elements of a sound risk management system

The key elements of a sound risk management system for effective business operations should encompass the following:

a) Active involvement of board and senior management;

b) Adequate organization, policies and procedures;
c) Appropriate management information systems; and
d) Comprehensive internal controls and limits.
It should not be understood that risk management functions are only limited to the Risk Management Division/Department (RMD

2.2 Essential criteria for ensuring sound risk management

For ensuring successful risk management across the organization, the following features should, at least, be present in the ban

a) Submission of consolidated report to the Board and senior management team incorporating different types of
b) Consistency between the risks taken by the management and the risks perceived by the
Board;
c) Active, firm-wide risk management approach that includes all business lines;
d) Developing in-house expertise relying on various sources/factors including market data, credit ratings, publish
e) Alignment of treasury functions with risk management;
f) Active management of contingent liabilities;
g) Using both firm-specific and market-wide stress scenarios for liquidity management;
h) Efficient and effective management of asset and liability;
i) Taking the stress testing result into consideration to understand the impact of adverse scenario on the bank’s
j) Independent risk management function with sufficient authority, logistic support and continuous communicatio
k) Experienced and expert personnel for performing risk management activities;
l) Giving importance to the risk management officials’ opinion.

2.3 Board and Senior Management Oversight

The top level authorities of the bank are responsible to ensure the ongoing effectiveness of the risk management system.
While the overall responsibility for risk management is recognized to rest with the board of directors, it is the duty of senior man

2.3.1 Board Oversight

The board of directors has the ultimate responsibility for the risks taken by the bank. Therefore, it must define the risk appetite,
To perform the risk oversight role properly, board members shall have a clear understanding of the types of risks inherent in bus

2.3.2 Senior Management Oversight

While the overall responsibility for risk management rests with the board of directors, it is the responsibility of senior manageme

It has to ensure that the policies are embedded in the culture of the bank. It is also responsible for implementing risk manageme

2.4 Policies, procedures and limit structure

The board of directors and senior management must formulate and implement risk management policies and procedures to dea
These policies and procedures include not only those relevant to specific risk areas like Credit Policy, Liquidity Management Po
The management should review risk policies, procedures, and limits in a timely manner and update them when necessary. Furt
Banks shall consider the following key factors to ensure adequacy of policies, procedures and limits:-

a) Proper documentation of policies, procedures and limits considering the risks associated with the activity, revi
b) Assignment of full accountability and delegation of authority in the policies for each activity and product area;
c) Development of compliance monitoring procedures incorporating internal compliance checks for adherence to

2.5 Risk measurement, monitoring and management reporting systems

Banks shall perform the following key activities to ensure effective risk measurement, monitoring and management reporting sy

a) Identifying and measuring all quantifiable and material risk factors supported by proper information systems th

b) Providing regular and sufficiently detailed reports (i.e. types of risk, impact on business, possible recommenda
c) Assessing the effectiveness of the risk measurement, monitoring and management reporting systems conside

2.6 Internal controls and comprehensive audits

Internal control plays a critical role in managing risks of a financial institution. With comprehensive internal control structure in p
The bank’s internal control system should be adequately tested and reviewed by its internal audit. The coverage, procedures, a
Banks shall perform the following activities to ensure its internal control environment:-

a) Establishing and maintaining an effective system of internal controls, including the enforcement of official lines
b) Having a properly structured system of internal controls for promoting effective operations, providing reliable f
c) Evaluating the adequacy of the internal control environment considering the following factors:
i) the appropriateness of the system in relation to the type and level of risks; ii) clear lines of authority and segregation of duties
v) the adequacy of procedures for ensuring compliance with applicable laws, regulations and internal policies an
vi) review of internal controls and information systems;
vii) adequate documentation of coverage, procedures, findings and management responses to audits;
viii) appropriate and timely attention to identified material weaknesses and objective verification and review of ma
2.7 Optimal Risk Management Organogram

Below is the organogram that should be followed by all scheduled banks operating in the country. Each bank is given the flexibi

2.7.1 Role of board of directors

The board of directors of the bank shall give utmost importance on sound risk management practices. They will take every poss
a) Establishing organizational structure for enterprise risk management within the bank and ensuring that top ma
b) Assigning sufficient authority and responsibility to risk management related officials;
c) Ensuring uninterrupted information flow to RMD for sound risk management;
d) Continuously monitoring the bank's performance and overall risk profile through reviewing various reports;
e) Ensuring the formulation, review(at least annually) and implementation of appropriate policies, plans and proc
f) Defining and reviewing the risk appetite, risk tolerance, limit etc. in line with strategic planning;
g) Making sure maintenance of adequate capital and provision to absorb losses resulting from risk;
h) Ensuring that internal audit reviews the credit operations, foreign exchange operations and securities portfolio
i) Monitoring the function of Board Risk Management Committee.

2.7.2 Role of Board Risk Management Committee (BRMC) in addition to but not excluding the role defined in the related BRPD

a) Formulating and reviewing (at least annually) risk management policies and strategies for sound risk manage
b) Monitoring implementation of risk management policies & process to ensure effective prevention and control m
c) Ensuring construction of adequate organizational structure for managing risks within the bank;
d) Supervising the activities of Executive Risk Management Committee (ERMC) ;
e) Ensuring compliance of BB instructions regarding implementation of core risk management;
f) Ensuring formulation and review of risk appetite, limits and recommending these to Board of
Directors for their review and approval;
g) Approving adequate record keeping & reporting system and ensuring its proper use;
h) Holding at least 4 meetings in a year (preferably one meeting in every quarter) and more if deemed necessary
i) Analyzing all existing and probable risk issues in the meeting, taking appropriate decisions for risk mitigation,
j) Submitting proposal, suggestions & summary of BRMC meetings to board of directors at least on quarterly ba
k) Complying with instructions issued from time to time by the regulatory body;
l) Ensuring appropriate knowledge, experience, and expertise of lower-level managers and staff involved in risk
m) Ensuring sufficient & efficient staff resources for RMD;
n) Establishing standards of ethics and integrity for staff and enforcing these standards;
o) Assessing overall effectiveness of risk management functions on yearly basis. Banks are encouraged to pres
2.7.3 Role of Executive Risk Management Committee (ERMC)

Bank shall form ERMC comprising of CRO (as the Chairman), Head of ICC, CRM/CAD, Treasury, AML, ICT, ID, Operation, Bus
Reference of ERMC will include, but limited to:-
a) Identifying, measuring and managing bank’s existing and potential risks through detailed risk analysis;
b) Holding meeting at least once in a month based on the findings of risk reports and taking appropriate decision
c) Ensuring incorporation of all the decisions in the meeting minutes with proper dissemination of responsibilities
d) Minimizing/controlling risks through ensuring proper implementation of the decisions;
e) Reviewing risks involved in new products and activities and ensuring that the risks can be measured, monitor

f) Submitting proposals, suggestions & summary of ERMC meetings to CEO, BRMC on regular basis;
g) Implementing the decisions of BRMC and board meetings regarding risk issues;
h) Assessing requirement of adequate capital in line with the risk exposures and ensuring maintenance of the sa
i) Determining risk appetite, limits in line with strategic planning through threadbare discussions among the mem
j) Contributing to formulation of risk policies for business units;
k) Handling “critical risks” (risks that require follow-up and further reporting);
l) Following up reviews and reports from BB and informing BRMC the issues affecting the bank’s operation.
m) Ensuring arrangement of Annual Risk Conference in the bank.

2.7.4 Chief Risk Officer (CRO)

In banking institution, the Chief Risk Officer (CRO) is responsible for ensuring intense and effective risk management across the

2.7.4.1 Appointment of CRO

Bank shall appoint Chief Risk Officer (CRO) who will act as the head of Risk Management Department. Appointment, dismissal

Bank shall consider the following criteria as a minimum for appointing CRO:-

1) Senior executive having mainstream banking experience preferably covering

i. Core risk management
ii. Internal Control and Compliance
iii. Capital managemen
Branch banking
v. Core banking system
vi. Risk based certification

2) Minimum three years hands on working experience in risk management

3) The position of the CRO should be equal to or at-least one grade higher than the other department heads for

2.7.4.2 Role of Chief Risk Officer (CRO)

To bring better transparency, synergy and prudence into risk management structure in the bank, the role and responsibilities of
CRO of a bank shall undertake the following responsibilities, but not limited to, in order to ensure transparency in managing risk

• To oversee the development and implementation of the bank’s risk management functions as a primary role;
• To support the Board of Directors/Board’s Risk Management Committee in its development of the bank’s risk
• To actively engage with the management in the process of setting risk appetite and limits for the various busin
• To contribute and participate in key decision-making processes (i.e. strategic planning, capital and liquidity pla
• To manage the implementation of all aspects of the risk function, including implementation of processes, tools
• To assist in the development of and manage processes to identify and evaluate business risks and control the
• To manage the process for developing risk management policies and procedures, risk limits and approval aut
• To monitor major and critical risk issues independently with full empowerment;
• To communicate views of the board and senior management throughout the bank;
• To adopt proper financial protection measures through risk transfer, risk avoidance, and risk retention program
 To provide opinion regarding extent of risk in case of credit proposal for big amounts (to be set by the bank) b
 To monitor portfolio health and ensure good quality asset growth;
• To ensure proper compliance of BB’s recommendations regarding risk issues including all core risks;
• To provide a methodology to identify and analyze the financial impact of loss to the organization, employees,
• To disseminate information and strategies to personnel regarding emerging risk issues and industry specific ri
• To implement environmental and social (E&S) safeguard for the asset portfolio;
• To oversee the information security aspects for the bank;
• To ensure arrangement of ERMC meeting on monthly basis wherein top management team shall address, dis
• To ensure proper disclosure of key performance indicators of the bank via Pillar III of Basel III accords;
• To remain aligned and acquainted with other countries’ economic and financial positions;
• To organize Annual Risk Conference (at-least one day-long) with the participation of all the branch managers
• Ensuring adequate internal and external training on risk management issues for increasing efficiency of RMD

It is to be mentioned that CRO should not be given dual responsibility, more specifically the responsibility of Chief Operating Off

2.7.5 Risk management Division/Department

Banks must have an independent full-fledged risk management department/division. The Risk Management Division/Departme
• managing the process for developing risk policies and procedures;
• coordinating with business users/units to prepare functional specifications;
• preparing and forwarding risk reports; and • assisting in the implementation of all aspects of the risk function

The risk management function shall be functionally and hierarchically independent from business and other operation functions
According to the business size and nature of activity, the bank will form various desks under the Risk Management Department

1) Credit Risk
2) Market Risk
3) Liquidity Risk
4) Operational Risk
5) Risk Research and policy development
It is noted that there is a negative relationship between capital and bank risk, i.e. when the capital increases, the bank risk decr

2.7.5.1 Scope of work of RMD

• Involvement of RMD officials limited to risk management related activities

• Involvement of RMD in annual budget/strategy meeting
• Internal risk assessment (annually)
• Access to any information related to risk throughout the bank
• Request to ICC Division to conduct audit on any specific issue if deemed necessary
• Membership of all important committees like SMT, ALCO, CCD, Credit Risk Committee, Budget committee, B

2.7.5.2 Role of Risk Management Division/Department (RMD)

The RMD needs to manage and measure risks on the basis of the bank’s approved risk parameters independently in line with r

• Collecting and analyzing data/information for identifying risks and making appropriate recommendations for ri
• Preparing risk management reports, arranging monthly meeting of ERMC and preparing meeting minutes, dis
• Ensuring timely submission of risk management reports, meeting minutes, compliance report and other docum
• Assisting BRMC/ERMC by providing risk issues that are needed to be addressed;
• Designing bank’s overall risk management strategy;
• Ensuring significant contribution in establishing sophisticated risk management infrastructure with a sufficientl
• Conducting, developing and overseeing Stress Testing activity;
• Utilizing the Stress Test result and scenario analysis to better understand potential risk exposures under a var
• Developing and testing different models (such as VaR, HHI index, Collection scoring, Vintage curve etc.), and
• Assisting senior management in formulating strategic planning considering bank’s risk exposures and industry
• Supporting the board, BRMC and ERMC in formulation, review and approval of the enterprisewide risk govern
• Monitoring on ongoing basis the risk-taking activities and risk exposures in line with the board approved risk a
• Taking initiatives for interim review of risk appetites on request of other related departments and informing the
• Establishing an early warning or trigger system for breaches of the bank’s risk appetite or limits;
• Communicating views of the board and senior management throughout the bank;
• Taking initiatives for establishing enterprise/comprehensive risk management policies and procedures with the
• Monitoring concerned departments in formulating and reviewing related risk management policies and proced
• Monitoring compliance of irregularities found in core risk inspection reports of BB;
• Adopting proper financial protection measures through risk transfer, risk avoidance, and risk retention program
• Taking appropriate steps to control or mitigate risk exposures and ensure reporting the same to senior manag

RMD of the bank is encouraged to prepare a comparative analysis report on bank’s gain/loss due to/lack of proper risk manage
2.7.5.3 Desk-wise functions of RMD

For smooth functioning of risk management activities, the desks of RMD should commonly do the following tasks:

All the desks are individually responsible for collecting the related data/information, progress report of the previously taken deci

Credit Risk related desk rumel

• Assisting in formulation and review of credit risk management policies, guidelines, manual, setting up of credi
• Monitoring loan portfolio to ensure good quality asset growth;
• Monitoring credit concentration and ensuring compliance of internal limit;
• Closely monitoring the stressed loans to avoid adverse classification;
• Monitoring and following up overdue loans, SMA loans, NPL, law suit cases, written off loans, regular account
collateral against loans, credit rating of borrowers, taken over loans etc.;
• Using different models for identifying related risks;
• Maintaining liaison with independent internal loan review desk as per revised CRM guidelines and ensuring its
• Conducting Stress -Testing activity to understand shock resilience capacity of the bank;
• Analyzing Stress Testing report, finding out the vulnerable areas that are needed to be addressed and accord

Market Risk related desk sahed

• Ensuring that the treasury department calculates interest sensitive assets and liabilities properly for determini
• Measuring interest rate risk of the bank by applying various tools such as sensitivity analysis, duration gap an
• Monitoring foreign exchange related risk such as exchange rate risk, maintenance of FX related limits, repatri
• Measuring equity price risk by using various tools like VaR and monitoring the same to keep market exposure
• Conducting Stress -Testing activity to understand shock resilience capacity of the bank;
• Analyzing Stress Testing report, finding out the vulnerable areas that are needed to be addressed and accord

Liquidity Risk related desk usuf

Treasury is primarily responsible for managing liquidity risk. Since RMD is responsible for overseeing enterprise level risk, it will

• Ensuring that the treasury department prepares Structural Liquidity Profile, projected sources and uses of fun
• Regularly monitoring liquidity ratios, liability concentration, growth of asset and liability including off-balance s
• Playing major role in setting liquidity strategy;
• Assessing opportunity loss resulted from improper liquidity management.
• Conducting Stress -Testing activity to understand shock resilience capacity of the bank;
• Analyzing Stress Testing report, finding out the vulnerable areas that are needed to be addressed and accord
Operational Risk related desk zhk

• Identifying the vulnerable areas related to operational risk in collaboration with ICC and advising the senior m
• Assisting in managing risks related to lapses in people, process and system;
• Monitoring unsettled issues (identified fraud/forgeries, major irregularities etc.) through ICC;
• Playing an important role to uphold the reputation of the bank by minimizing operational risks.

Risk Research and Policy Development desk zhk

• Developing, testing, and using different models (such as VaR, Collection scoring, Vintage curve etc.) for mea
• Reviewing effectiveness of enterprise-wide risk governance framework and recommending necessary policy m
• Conducting research to explore reasons behind concurrence of the identified risks and suggesting the senior
• Exploring emerging risks and recommending preventive measures to achieve the organizational goal;
• Assisting senior management in formulating strategic planning considering bank’s risk exposures and industry
• Preparing a consolidated Risk Appetite Statement (RAS) based on the information provided by the related div
• Developing the KRI reporting format based on the complexity and size of the bank, suggesting mitigating mea

2.8 The Concept of Risk Appetite usuf

The risk management framework is expected to be developed and applied within an overarching statement of risk appetite. Ris

A strategic plan is a document reflecting the mission and strategic goals of a bank, generally for a period of at least five years. A

A strategic plan should contain, at least the following, but not limited to,:

a) Analysis of the external environment in which the bank operates, including the PEST (Political,
Economic, Social and Technological) analysis;
b) Critical review of the institutional performance including SWOT (Strengths, Weaknesses,
Opportunities, Threats) analysis;
c) Bank’s strategic goals and objectives;
d) Corporate Governance
e) Compliance with laws and regulations
f) Strengthening Internal Control & Compliance and Review System
g) Optimization of operating expenses
h) Reducing Non-performing loans
i) Increasing NPL recovery
j) Deposit growth with a view to optimizing cost of fund
k) Lending growth with industry and business segment focus
l) Maintaining adequate capital for absorbing all material losses
m) Maintaining optimum liquidity
n) Risk Appetite Statement for all material risks
o) Human resources development
p) Automation and effective Management Information System (MIS)
q) Proactive risk management and governance

2.8.1 Definition of Risk Appetite

Risk appetite is the level and type of risk a bank is able and willing to assume in its exposures and business activities, given its

2.8.2 Risk Appetite Objectives

In support of the bank’s mission, the risk appetite focuses mainly on the following five overarching risk management objectives:

• Upholding the highest ethical standards of conduct;

• Preserving the long-term financial resilience of the bank;
• Avoiding losses when investing public money;
• Ensuring compliance with legal and regulatory obligations;
• Maintaining a robust internal control environment and safeguarding operational continuity.

2.8.3 Risk Appetite Framework

The science of developing and adopting a risk appetite framework (RAF) is still evolving at banks all over the world. Some ban

Risk appetite framework should include the following criteria:

 Be reviewed and approved by the board of directors at least annually;

 Be in line with the organization’s strategy, objectives and key stakeholders’ demands;
 Cover all key risks, discussing risk preferences both in terms of risks that are sought out and risks that should
 Clearly document risks as part of a risk register, including risk-specific definitions, risk owner, how and how of
 Recognize that losses occur and are part of business but include loss tolerances that are reflective of overall
 Reflect the human and technological resources needed to measure and manage the bank’s risks in a timely fa

2.8.4 Developing Risk Appetite Statement

Developing a risk appetite statement is a complex endeavor and is both art and science. The steps in its development include:

 Start with the bank’s overall strategic and financial objectives.

 Consider annual reports and financial statements, regulatory requirements, Peer group and industry-wise gro
 Determine the bank’s risk profile.
 Set tolerances for exposures and potential losses in consultation with the business line and related departme
 Get board approval and communicate it throughout the organization.

• In preparing Risk Appetite Statement (RAS), banks are required to set the loan growth target in line with its strategic objective

2.8.5 Areas of Risk Appetite

Banks shall prepare risk appetite statement covering all regulatory requirements related to risks, components of pillar II under B

 Overall growth of total loans and advances including off-balance sheet item
 Credit concentration(borrower/sector/geographical area wise)
 Gross and net NPL to total loans
 Cash recovery against classified loan/written off loan
 Amount of loan outstanding with acceptable rated customers (ECA score up to 3) to the amount lies with total
 Unsecured exposure* to total exposure ( funded )
 Rescheduled loans to total classified loans
 Written off loan to total classified loans
 Interest waiver as % of NPL
 Impact on Net Interest Income (NII) due to adverse change in interest rate  Bucket-wise gap under simple s
 Exchange Rate shock to operating income
 Value at Risk (VAR) for securities and FX
 Overdue accepted bills (payable and receivable) to total loans
 Net Open Position limit
 Exchange rate shock to operating income
 Liability concentration(Top-10 deposit suppliers to total deposit)
 Bucket-wise gap under structural Liquidity Profile (SLP)
 Liquidity ratios (at least for regulatory requirements) including Commitment Limit and Wholesale borrowing Gu
 Loss due to overall operational risk
 Loss due to internal and external fraud
 Operational loss due to employment practice and workplace safety, clients, products, and business practice, d
 Expected operational loss as % of operating income
 Operating expenses to operating income
 CRAR including CRAR after combined minor shock
 Credit rating of bank itself
 CAMELS rating
 Core risks rating
 Regulatory ratios

* Unsecured exposure is the exposure against which no eligible collateral (defined by BB) is held.

Banks shall set risk limit for regulatory issues in line with the thresholds laid down by BB but they are encouraged to apply their
Chapter 3

Risk Management Process

3.1 Risk Management Process

Banks shall comply with the latest core risk guidelines and risk management guideline circulated by BB for effective risk manag

An effective risk management system includes the implementation of clearly defined policies and processes to facilitate the iden

3.2 Steps of risk management process

Risk Management is an iterative process that, with each cycle, can contribute progressively to organizational improvement by p

Steps of Risk Management Process in a Banking Organization:

Step 1 – Communicate and Consult

Step 2 – Establish the context
Step 3 – Identify the risks
Step 4 – Analyze the risks
Step 5 – Evaluate the risks
Step 6 – Treat the risks
Step 7 – Monitor the risks

Step-1- Communication and Consult

This is preparatory step that aims to identify the responsible persons involved in risk assessment (including identification, analy
In this step, management must communicate the roles, responsibilities, accountabilities of the internal stake holders. Formation

Step-2- Establishment of the context:

This is another preparatory stage that closes to starting the formal risk management process. Before risk can be clearly unders

The steps to assist establishing the context within which risk will be identified are:- a)-Establish the internal context:
Under this sub-step the objectives and goals of a business or activity must first be identified to ensure that all significant risks ar
This sub-step defines the overall environment in which the bank operates. An analysis of these factors will identify the strengths
It is important to define the limits, objectives, appetite and scope of the activity or issue under examination. For example, in con

Step-3: Risk Identification:

The next step is to identify possible risks that may affect, either negatively or positively, the objectives of the business and the a

There are two main ways to identify banking risks:-

1. Identifying retrospective risks
Retrospective risks are those that have previously occurred, such as incidents or accidents.
Methods of identifying retrospective risks include:
 Audit reports
 Various risk reports
 Regular reports
 Hazard or incident logs or registers
 Customer complaints
 Changes in regulations
 Past employee survey/exit interview
 Media reports (Print or electronic)
 Bangladesh Bank inspection report

2. Identifying prospective risks:

Prospective risks are those that have not yet happened, but might happen sometime in the future.
Methods for identifying prospective risks include:
 Brainstorming with staff or external stakeholders
 Researching the economic scenario(macro or micro both local and global)
 Conducting interviews with the relevant people and/or organizations
 Undertaking surveys of staff or clients to identify anticipated issues or problems or risks
 Reviewing policy, process, systems

Step 4. Analysis of the risks

The risk analysis step assists in determining which risks have a greater consequence or impact than others. Thus analyzing the
It is important to consider the consequences and the likelihood of risk in the context of the size, complexity, objective of the acti

Table 1– Likelihood scale

Rating LIKELIHOOD
The potential for problems to occur in a year
5 ALMOST CERTAIN: will probably occur, could occur several times per year
4 LIKELY: high probability, likely to arise once per year
3 POSSIBLE: reasonable likelihood that it may arise over a five-year period
2 UNLIKELY: plausible, could occur over a five to ten year period
1 RARE: very unlikely but not impossible, unlikely over a ten year period

Table 2 – Loss or damage impact scale

Rating POTENTIAL IMPACT

In terms of the objectives of the Bank
5 CATASTROPHIC: most objectives may not be achieved, or several severely affected
4 MAJOR: most objectives threatened, or one severely affected
3 MODERATE: some objectives affected, considerable effort to rectify requires medical attention and has some
2 MINOR: easily remedied, with some effort the objectives can be achieved
1 NEGLIGIBLE: very small impact, rectified by normal processes

Step 5. Evaluation of the risks

Risk evaluation involves comparing the level of risk found during the analysis process with previously established risk criteria, a

Step 6. Treatment of risks

Risk treatment is about considering options for treating risks, evaluating those options, preparing the risk treatment plans and im

 Options for treatment need to be proportionate to the significance of the risk, and the cost of treatment comm

 Options for risk treatment

It identifies the following options that may assist in the minimization of negative risk or an increase in the impact of positive risk.

1- Avoid the risk

2- Change the likelihood of the occurrence
3- Change the consequences
4- Share the risk
5- Retain/Accept the risk supported by the CRAR as per Basel III

In fact the options are the following and can be applied either individually or in combination:

• Avoiding the risk by deciding not to start or continue with the activity that gives rise to the risk.
• Accepting and retaining the risk by making informed decision and having plans for managing and funding the
• Reducing the likelihood of the risk through staff training, changing procedures, or by reducing the impact throu
• Sharing the risk with another party or parties through insurance, consortium financing, etc.

Step 7. Monitoring and review of risks:

Risks need to be monitored periodically to ensure changing circumstances do not alter the risk priorities. Very few risks will rem

A risk management plan at every business level should be reviewed at least on an annual basis. An effective way to ensure tha

Risk management should be fully incorporated into the operational and management processes at every level of the organizatio

3.3 KRI/Risk Register:

The KRI is one of the effective tools for comprehensive risk management that should be maintained by each bank to identify the

Minimum components of risk register should be as follows:

1 Date: As the risk register is a living document, it is important to record risk identification date, target date and
2 Risk Number: A unique identifying number of the risk
3 Risk Description: A brief description of the risk, it’s causes and impact
4 Existing Controls: A brief description of the controls that are currently in place for the risk
5 Consequence: The consequence (severity or impact) of rating for the risk, using scales(e.g. 1-5 with 5 being m
6 Likelihood: The likelihood(probability) rating for the risk, using scales (e.g. 1-5, with 5 being most likely)
7 Overall risk score: Determined by multiplying likelihood (probability) times consequence (Impact) for a scale ra
8 Risk Ranking: A priority list which is determined by the relative ranking of the risk by their overall risk score
9 Trigger: Something which indicates that a risk is about to occur or has already occurred
10 Management Action: Action which is to be taken if the risk found adverse
11 Risk Owners: The person(s) for whom the risk is being generated or is supposed to look after the situation be

Management of credit, market, liquidity and other risks

In managing credit, market, liquidity and operational risks, banks shall follow the latest core risk management guidelines on Cre
Banks are encouraged to develop different tools and models for measuring credit, market and liquidity risks. For example: GINI

Chapter 4
Operational risk management

4.1 Introduction

Operational risk is defined as the risk of unexpected losses due to physical catastrophe, technical failure and human error in the

It is clear that operational risk differs from other risks in that it is typically not directly taken in return for an expected reward, but

Operational risk can be subdivided into two components: operational strategic risk and operational failure risk. It is also defined

Operational strategic risk arises from environmental factors such as a new competitor that changes the business paradigm, a m

Operational failure risk arises from the potential for failure in the course of operating the business. A firm uses people, process,

Operational Risk

Operational strategic risk

The risk of choosito environmental factors,

such as

• Political
• Government
• Regulation
• Taxation
• Societal
• Competition, etc. Operational failure risk

The risk encountered in the pursuit of a particular strategy due to

• People
• Process
• Technology
4.2 Categorization of operational risk

Banks are required to adopt and utilize standard categorizations of operational risk events, according to Event Type and Busine

Event Type Business Line Scenario Descriptions

Type A:
Internal Fraud Corporate Financ Loan Fraud
Embezzlement
Failure to follow procedures/limits
Trading & Sales Unauthorized trading/rogue trader
Misappropriation of assets
Breach of trading limits
Retail Banking Theft of customer data/information
Embezzlement
Theft of assets
Commercial Banking
Fraudulent transfer of funds
Embezzlement
Theft of customer funds
Payment and Settlement
Payment fraud
Theft of client funds or assets
Asset ManagemenUnauthorized trading activities
Not allocated to any
business line Embezzlement
Misuse of confidential information Misappropriation of assets
Type B:
External Fraud Corporate Financ Client misrepresentation of information
Theft
Loan fraud
Trading & Sales Loan fraud
Cybercrime
Forgery
Retail Banking Cybercrime
Check fraud
Theft of information/data
Commercial BankFraudulent transfer of funds Credit product fraud (loans, L/C,
guarantees)
Payment and SettPayment fraud
Not allocated to aLoan fraud
Cybercrime
Robbery
Type C:
Employment
Practices and
Workplace SafetyTrading & Sales Discrimination
Occupational accident
Retail Banking Occupational accident
Discrimination
Environmental issue
Not allocated to any
business line Pandemic
Wrongful termination Discrimination
Type D:
Clients, Products,Corporate Financ Regulatory breach
Compromised customer information Fiduciary breach

Business PracticeTrading & Sales Fiduciary breach

Regulatory breach
Compromised customer information
Retail Banking Regulatory breach
Mis-selling
Compromised customer information
Commercial Banking Noncompliance with money laundering regulations Regulatory breach
Mis-selling
Asset Management Mis-selling
Not allocated to
business line any Client suitability
Noncompliance with money laundering regulations
Type E:
Damage to Physical
Assets Trading & Sales Business continuity failure
Damage to building and premises
Retail Banking Fire
Flood
Damage to building and premises
Commercial Banking Damage to building and premises Natural disaster
Not allocated to
business line any Natural disaster Terrorist attack vandalism Earthquake
Type F:
Business
Disruption and
System Failure Trading & Sales IT system failure
Retail Banking IT system failure Utility outage
Commercial BankOff-shoring/Outsourcing risk IT system failure
Payment and SettIT system failure
Failure of payments infrastructure
Agency Services IT system failure
Asset ManagemenIT system failure
Not allocated to aIT system failure
Type G:
Execution,
Delivery, and
Process
Management Corporate Financ Inaccurate/Incomplete contract
Transaction error
Staff error in lending process
Trading & Sales Data entry error Model risk
Retail Banking Pricing error
Failure of external supplier
Commercial BankFailure to follow procedures Lost or incomplete loan/legal
documentation
Processing error
Collateral management error
Payment and SettData entry error
Failure to follow procedures
Agency Services Processing error
Asset ManagemenMismanagement of account assets
Not allocated to aUnapproved access given to client accounts Inaccurate financial statement
Failure of supplier/vendor
Tax noncompliance
4.3 Operational risk management framework

An operational risk management framework should be based on an appropriate definition of operational risk, which clearly artic
4.4 Board oversight

The board is responsible for creating an organizational culture that places high priority on effective operational risk managemen

a) Establish tolerance level and set strategic direction in relation to operational risk. Such a strategy should be b
b) Approve the implementation of a bank-wide framework to explicitly manage operational risk as a distinct risk t
c) Provide senior management clear guidance and direction regarding the principles underlying the framework a
d) Establish a management structure capable of implementing the bank’s operational risk management framewo
e) Review the operational risk management framework regularly to ensure that the bank is managing the operat
4.5 Senior management oversight

The senior management should at least:

a) Translate the operational risk management framework established by the board into specific policies, process
b) Clearly assign authority, responsibility and reporting relationships to encourage and maintain this accountabili
c) Assess the appropriateness of the management oversight process in light of the risks inherent in a business u
d) Ensure that bank activities are conducted by qualified staff with the necessary experience, technical capabiliti
e) Ensure that the bank’s operational risk management policy has been clearly communicated to staff at all level
4.6 Policies, procedures and limits
Particular attention should be given to the quality of documentation controls and to transactionhandling practices. Policies, proc

The bank should put in place an operational risk management policy. The policy should include at least, but not limited to, the fo
a) The strategy given by the board of the bank;
b) The systems and procedures to set up effective operational risk management framework; and
c) The structure of operational risk management function and the roles and responsibilities of individuals involve

The policy should establish a process to ensure that any new or changed activity, such as new products or systems conversion

Banks should also establish policies for managing the risks associated with outsourcing activities. Outsourcing activities can red

4.7 Risk assessment and quantification

Banks should identify and assess the operational risk inherent in all material products, activities, processes and systems and its

Effective risk assessment allows the bank to better understand its risk profile and most effectively target risk management resou

(a) Self risk assessment: A bank assesses its operations and activities against a menu of potential operational ris

(b) Risk mapping: in this process, various business units, organizational functions or process flows are mapped b

(c) Risk indicators: risk indicators are statistics and/or metrics, often financial, which can provide insight into a ba

(d) Historical data analyses: The use of data on a bank’s historical loss experience could provide meaningful info

4.8 Mitigation of risks

Some significant operational risks have low probabilities but potentially very large financial impact. Moreover, not all risk events

However, banks should view risk mitigation tools as complementary to, rather than a replacement for, thorough internal operatio

Investments in appropriate processing technology and information technology security are also important for risk mitigation. Ho

4.9 Risk monitoring

An effective monitoring process is essential for adequately managing operational risk. Regular monitoring activities help quickly

a) Monitor assessment of all types of operational risk faced by the bank;

b) Assess the quality and appropriateness of mitigating actions, review effectiveness of the same periodically; an
c) Ensure that adequate controls and systems are in place to identify and address problems before they become

It is essential that:

i. Responsibility for the monitoring and controlling of operational risk should follow the same type of organization
ii. Senior management ensure that an agreed definition of operational risk together with a mechanism for monito
iii. This mechanism should be appropriate to the scale of risk and activity undertaken.

In addition to monitoring operational loss events, banks should specify and identify appropriate indicators that provide early war

The results of monitoring activities should be included in regular management and board reports, as should compliance reviews

4.10 Risk reporting

Senior management should ensure that information is received by the appropriate people, on a timely basis, in a form and form

a) The critical operational risks facing, or potentially facing, the bank;

b) Risk events and issues together with intended remedial actions;
c) The effectiveness of actions taken;
d) Details of plans formulated to address risk issues;
e) Areas of stress where crystallization of operational risks is imminent; and
f) The status of steps taken to address operational risk.

The operational risk reports should contain internal financial, operational, and compliance data, as well as external market infor

Reports should be analyzed with a view to improving existing risk management performance as well as developing new risk ma

In general, the board should receive sufficient higher level information to enable them to understand the bank’s overall operatio

4.11 Establishing control mechanism

Control activities are designed to address the operational risks that a bank has identified. For all material operational risks that h

4.12 Contingency planning

Banks should have disaster recovery and business continuity plans to ensure its ability to operate as a going concern and minim

4.13 Internal controls

Internal control systems should be established to ensure adequacy of the risk management framework and compliance with a d

a) Top-level reviews of the bank's progress towards the stated objectives;

b) Checking for compliance with management controls;
c) Policies, processes and procedures concerning the review, treatment and resolution of noncompliance issues
d) A system of documented approvals and authorizations to ensure accountability to the appropriate level of man

Although a framework of formal, written policies and procedures is critical, it needs to be reinforced through a strong control cul

Operational risk can be more pronounced where banks engage in new activities or develop new products (particularly where th

Banks should have in place adequate internal audit coverage to ensure that policies and procedures have been implemented e

To the extent that the audit function is involved in oversight of the operational risk management framework, the board should en

An effective internal control system also requires existence of appropriate segregation of duties and that personnel are not assi

In addition to segregation of duties, banks should ensure that other internal practices are in place as appropriate to control oper

Chapter 5 Capital Management

5.1 Capital management and its relationship with risk management

Capital management in a bank usually refers to implementing measures aimed at maintaining adequate capital, assessing inter

Risk management is increasingly becoming difficult to separate from capital management. Most banking risks can be quantified

a) Capital management helps to ensure that the bank has sufficient capital to cover the risks associated with its
b) As part of the internal capital adequacy assessment process (ICAAP), management identifies the risks that th
c) Capital is used to cover some of these risks, and the remainder of these risks is mitigated by means of collate

The outcomes of capital management are:

i. A Capital Plan that meets the needs of the bank over a longer time horizon; ii. An ICAAP that determines prec
iii. A process to regularly compare available capital with current and projected solvency needs, and address deficiencies in a tim
5.2 Framework of capital management

Banks will devise and establish suitable capital management systems in order to calculate the capital adequacy ratio and secur

Roles and responsibilities at various levels as well as the framework of capital management are outlined as below:

5.2.1 Roles and responsibilities of Board of Directors and Senior Management

The Board of Directors and Senior Management will take the following steps:

-1 Define the goals of capital management in an official policy statement. Such goals must include the following:
a) Regulatory compliance, such that capital levels always exceed BB’s requirements;
b) Capital levels are aligned with the risks in the business and consistent with the strategic
plan; and
c) Maintain capital at an appropriate level for balancing between maximizing shareholder returns and protecting

-2 Integrate capital management into the bank’s strategic plan, taking into account the fact that lack of the same

-3 These planning processes are used then to review capital ratios, targets, and levels of different classes of cap

-4 Review the policies and specific measures for developing and establishing an adequate capital management

-5 Disseminate the capital management policies throughout the bank. The policies should be inclusive of the foll

a) The roles and responsibilities of the Board of Directors, executive risk management committee and Basel Imp
b) Basic policies for maintaining sufficient capital and on the capital allocation process;
c) Policy on the risk limits in relation to the capital;
d) The definition of capital and risk as used in the Internal Capital Adequacy Assessment
Process (ICAAP);
e) Calculation of the capital adequacy ratio in line with capital adequacy guidelines issued by
Bangladesh Bank; and
f) Methods of internal capital adequacy assessment in conducting capital allocation process, and the basis for th

-6 Analyze present as well as future capital needs of the bank and adopt suitable capital-raising methods, satisfy

-7 Ensure consistency of the capital management system with the bank’s risk profile and the competing busines
 -8 Set an appropriate level of capital target for the short-term, medium-term and long-term and develop a Capita

a) BB's regulatory capital requirements;

b) Coverage of unexpected losses up to a certain probability of occurrence (economic capital);
c) Expected asset growth and profitability;
d) Dividend policy; and
e) Stress test scenarios.
f) Specifying the basis for the calculation of capital to be allocated to risk;
g) Preparing capital management rules exhaustively covering the arrangements necessary for the ICAAP and th

h) Ensuring consistency of the definition of capital used in the ICAAP and the bank's corporate management pol

i) Making clear the basis for determining the definition of capital as used in the ICAAP in reference to capital as

j) Keeping the BIU, with close relationship with RMD, in charge of the ICAAP and the calculation of the capital a

Chapter 6

Risk Management Reporting

6.1 Risk management reporting

After proper analysis, risks are to be prioritized and reported to competent authorities (both internal and external) by RMD on re
Banks shall prepare Monthly Risk Management Report (MRMR) and Comprehensive Risk Management Report (CRMR) accord

In addition to the above reporting requirements, all banks must submit review report (board resolution copy) of Risk Manageme

6.2 Penalty for non-compliance

If a bank’s employee willfully/knowingly furnishes false information in reporting to BB, such an offence is punishable under secti
Glossary

Risks are the potential that an uncertainties, event, action or inaction will adversely impact the ability of an entity to achieve its o

Risk management framework is a set of components that provide the foundations and organizational arrangements for designin

Risk culture is about understanding risks the financial institution faces and how they are managed. A sound and consistent risk

Risk appetite is the amount and type of risk an organization is prepared to pursue or take, in order to attain the objectives of the

Risk capacity is the amount and type of risk an organization is able to support in pursuit of its business objectives.

Risk tolerance(s) is/are quantified risk criteria or measures of risk exposure that serve to clarify and communicate risk appetite.

Risk target is the optimal level of risk that an organization wants to take in pursuit of a specific business goal.

Risk limit is a measure of risk, either expressed in terms of (gross) exposure or possible loss or in another metric that tends to c

Risk exposure designates a gross measure of risk, before taking account of risk mitigation and before applying any particular kn

Risk severity is determined by the size of the possible loss or the gravity of the impact, in the event that a certain risk should ma

Risk Profile is the amount or type of risk a financial institution is exposed to. Forward Risk Profile is a forward looking view of ho

Risk governance refers to the structure, rules, processes, and mechanisms by which decisions about risks are taken and imple

Bibliography

1 Corporate governance principle for banks, BCBS, July,2015.

2 https://www.ausport.gov.au/__data/assets/word_doc/0005/454928/Risk_Management_process.
doc
-----------------

d September 9, 2015 on the captioned subject.

rious risks of banks in a prudent manner. Meanwhile, core risk management guidelines and other risk related guidelines have been revised.

er and MRMR for all other months) for successive months of each quarter along with the minutes of monthly Executive Risk Management C

of the meeting held;

wo months of the year;

s with the approval of the board of directors by the end of 2nd month following the end of each year.

d September 9, 2015 hereby stand superseded by this circular.

all come into force with immediate effect.

s and manage risks adequately may lead to losses endangering the soundness of individual financial institutions and affecting the stability o

financial crisis. Developing countries like Bangladesh were also affected in the aftermath of the global financial crisis. Consequently, povert

to increase in foreign trade and commerce. The competition among the banks has increased and new and complex products/services/techn

ment approach and effective reporting lines to the competent authority in its management and supervisory functions, enables management

petitive environment. Therefore, banks should give greater emphasis on continuous improvement in risk management, and set their perform

that affect its risk profile. However, this function needs not be uniform across all banks. The definition of a sound or adequate risk managem
52.3 Board and Senior Management Over 6
6
 72.6 Internal controls and comprehensive 8

10 2.7.3 Role of Executive Risk Man 10 2.7.4 Chief Risk Officer (CRO)
12

14 2.7.5.3 Desk-wise functions of RMD 15

17 2.8.4 Developing Risk Appetite St 18 2.8.5 Areas of Risk Appetite

203.3 KRI/Risk Register 23

264.3 Operational risk management fram 284.4 Board oversight

34
Risk management reporting
91 with a view to provide a structured way of identifying and analyzing potential risks, and devising and implementing responses appropriate

best practices. The guideline is also aligned with the revised version of Basel Core Principles (BCP) for Effective Banking Supervision publi

ng branches/windows of conventional banks) operating in Bangladesh.

m standards for risk management. These Guidelines are not intended to be so comprehensive as to cover each aspect of a bank’s risk man

and operational context, and customize their risk management architecture and approach to attain organizational goals while meeting the m

financial sector.
ework. • To introduce important risk management tools and techniques for assessment and necessary treatment of various risks.

on a full understanding of the risks it faces and how they are managed, considering risk tolerance and appetite. Since the business of banks

of staff regarding their responsibilities for risk. Every member of the bank should be fully aware of his or her responsibility regarding risk ma

d and senior management. A sound risk culture encourages effective risk management, promotes sound risk-taking and ensures that risk-ta

gthened through:
 aged to speak up when observing new or excessive risks;
ement and various forms of communication and training; and,
cedures will be addressed.

he absolute risks a bank is a priori open to take; while risk tolerance relates to the actual limits that a bank has set.

well as how progress toward their achievement is measured. Along with business goals, the bank should have risk goals and risk strategie

menting those strategies and communicating them throughout the organization.

e institution. It should include metrics and indicators in relation to specific risk types. The risk-appetite statement should be well-embedded a

quickly flagged and appropriate counter-measures are taken.

about risks are taken and implemented. It covers the questions about what risk management responsibilities lie at what levels and the way

place effective processes to identify, assess, measure, monitor, mitigate, and report on their risks. Each unit operates in accordance with th
ensure effective and efficient operations, including the following;

h internally and externally); and,

on's internal policies and procedures.

d should cover the whole organization, including the activities of all business, support, and control units. The risk management unit, headed

dic reviews of the first two lines of defense, provides assurance and informs strengths and potential weaknesses of the two first lines.

s critically and not rely on external assessments.

nd practices to the assessment, treatment, controlling, and monitoring of risk. The process should be an integral part of management, be em

nagement process should include proper risk assessment and treatment as described below.
vities. Institutions should identify the nature of risk, sources of risk, cost of risk, areas of impacts, events, their causes, and their potential co

uation and to decisions on the most appropriate strategies and techniques for risk treatment. The institution’s risk analysis involves measurin

nalysis, about which risks need treatment and the priority for treatment implementation. Some risks need to be immediately addressed and

gate unacceptable risks. Risk treatment options are not necessarily mutually exclusive or appropriate in all circumstances. The options can
s rise to the risk.
ns for managing and funding the consequences of the risk if it occurs.
s, or by reducing the impact through diversifying credit portfolio, setting up off-site data backup etc.
nancing, etc.

implementation against the benefits derived, regarding legal, regulatory, and other requirements.

rol mechanisms. The institution should establish and communicate risk limits through policies, standards and procedures that define respon

res remain effective. The institution’s monitoring and review processes should encompass all aspects of risk management process for the p

oundation. This foundation provides adequate, timely, and continuous identification, assessment, measurement, monitoring, mitigation, and

ment system providing the foundation and arrangements that are put in place throughout the organization at all levels. The system should b

d encompass the following:

ement Division/Department (RMD). Business lines are primarily responsible for the risks they are taking. Because the line personnel can un

d, at least, be present in the bank:-

m incorporating different types of risks, risk mitigation measures, comparison of risk levels with limits, the level of capital required for absorbi

arket data, credit ratings, published analyses, etc.;

adverse scenario on the bank’s profitability or capital;

ort and continuous communication with business lines;

risk management system.

ctors, it is the duty of senior management to transform the strategies into operational policies, procedures, and processes for effective risk m

it must define the risk appetite, risk tolerance and risk limit, and set risk strategies. The board is responsible for understanding the nature o
the types of risks inherent in business lines and take appropriate steps to ensure continued awareness of any changes in the level of risks.

sponsibility of senior management to transform the strategic directions set by the Board into operational policies, procedures, and processe

for implementing risk management strategies and policies and ensuring that procedures are put in place to manage and control the risks in

nt policies and procedures to deal with various risks that arise from the bank’s business and operational activities. The bank’s policies and m
Policy, Liquidity Management Policy, and Operational Risk Management Policy, but also those related to the overall risk management.
date them when necessary. Further, independent assurance from internal audit about the efficacy of these policies should also be obtained.
 associated with the activity, review and approval by the appropriate internal authority;
each activity and product area; and
mpliance checks for adherence to all policies, procedures and limits by an independent function within a bank such as an internal control uni

g and management reporting systems:-

by proper information systems that provide the management with timely and accurate reports on the financial condition, operating performa

business, possible recommendations for mitigation etc) on risk issues (if any) to line managers engaged in the day-to-day management of
ement reporting systems considering the adequacy of the risk monitoring practices and reports addressing all material risks; appropriatenes

ive internal control structure in place, management will be better able to contain risks within the level commensurate with the institution’s ris
dit. The coverage, procedures, and findings of the audit regarding the internal controls should be adequately reviewed by the Audit Committ

g the enforcement of official lines of authority and the appropriate segregation of duties.
e operations, providing reliable financial reporting, safeguarding assets and ensuring compliance with relevant laws, regulations and interna
ollowing factors:
thority and segregation of duties across the organization; iii) sufficient independence of the control functions; iv) the reliability, accuracy and
gulations and internal policies and procedures;

t responses to audits;
ve verification and review of management’s actions to correct those deficiencies.
 ry. Each bank is given the flexibility to enhance the organogram according to their size and complexity. When the banks will formulate their

actices. They will take every possible initiative to keep various risks (credit, market, liquidity, operational risks etc.) within tolerable level. For
e bank and ensuring that top management as well as staffs responsible for risk management possess sound expertise and knowledge to a

gh reviewing various reports;

propriate policies, plans and procedures for risk management;
strategic planning;
s resulting from risk;
perations and securities portfolio management functions etc. to assess the effectiveness of internal control system;

ole defined in the related BRPD circular

strategies for sound risk management;

effective prevention and control measures;
s within the bank;

management;
ese to Board of

r) and more if deemed necessary;

ate decisions for risk mitigation, incorporating the same in the meeting minutes and ensuring follow up of the decisions for proper implemen
directors at least on quarterly basis;

anagers and staff involved in risk management;

s. Banks are encouraged to preserve video recording of the BRMC meetings for verification by the team from Bangladesh Bank (DOS) invol
ry, AML, ICT, ID, Operation, Business, Finance, Recovery and Head of any other department related to risk if deemed necessary. RMD will

ugh detailed risk analysis;

s and taking appropriate decisions to minimize/control risks;
dissemination of responsibilities to concerned divisions/departments;

risks can be measured, monitored, and controlled adequately;

RMC on regular basis;

d ensuring maintenance of the same through persuading senior management and board;
bare discussions among the members;

fecting the bank’s operation.

ctive risk management across the organization. The CRO works to ensure that the bank is compliant with rules, regulations, and reviews fac

artment. Appointment, dismissal and other changes to the CRO position should be approved by the board or its risk management committe

the other department heads for effective risk management.

, the role and responsibilities of the CRO is of paramount significance. The CRO leading the independent risk management department sha
re transparency in managing risks at all levels:

ent functions as a primary role;

development of the bank’s risk appetite and for translating the risk appetite into a risk limits structure;
e and limits for the various business lines with a view to achieve bank’s overall strategic planning and monitoring their performance relative
planning, capital and liquidity planning, new products and services, compensation design and operation);
plementation of processes, tools and systems to identify, measure, manage, monitor and report risks;
te business risks and control them;
ures, risk limits and approval authorities;

dance, and risk retention programs;

mounts (to be set by the bank) before submission to EC/board for sanctioning;

including all core risks;

to the organization, employees, the public, and the environment;
sk issues and industry specific risks;

agement team shall address, discuss and resolve risk issues across the bank;
ar III of Basel III accords;
al positions;
ation of all the branch managers and deputy branch managers including the officials related to risk issues;
for increasing efficiency of RMD officials.

ponsibility of Chief Operating Officer, Chief Financial Officer, Chief of the internal audit function or any other function.

Management Division/Department (RMD) shall be headed by the Chief Risk Officer (CRO). It should have separate desks within the risk ma

of all aspects of the risk function.

ss and other operation functions. The officials who take and own risks should not be given responsibility for monitoring and evaluating their
e Risk Management Department to perform its assigned activities. However, necessary desks under the division should be as follows -
tal increases, the bank risk decreases. Hence, there must be a close relationship and communication between Basel Implementation Unit (

ommittee, Budget committee, Basel implementation committee etc. But RMD’s role will be only as an observer and to raise flags on risk iss

eters independently in line with regulatory requirements. The role of RMD includes, but not limited to, the following:

propriate recommendations for risk mitigation;

d preparing meeting minutes, disseminating the decisions to the concerned department/divisions, monitoring and follow up of implementatio
mpliance report and other documents to BB;

nt infrastructure with a sufficiently robust data-base, data architecture and information technology;

ential risk exposures under a variety of adverse circumstances;

scoring, Vintage curve etc.), and observe their use for measuring and monitoring risks;
ank’s risk exposures and industry as a whole;
of the enterprisewide risk governance framework which includes the bank’s risk culture, risk appetite, risk limits, and MAT;
e with the board approved risk appetite, risk limit and corresponding capital or liquidity needs (i.e. capital planning)
d departments and informing the board of directors and BRMC time to time about the status of risk exposures as compared to appetite;
k appetite or limits;

policies and procedures with the approval of the board;

management policies and procedures;

dance, and risk retention programs;

orting the same to senior management and BRMC.

ue to/lack of proper risk management activities and its impact on capital and send the same to senior management & board of the bank and
he following tasks:

port of the previously taken decisions of ERMC and BRMC from concerned divisions/department for proper risk analysis and identification o

ines, manual, setting up of credit risk appetite, limit, tolerance, MAT etc. with due consideration for sector, industry, geographical location, re

written off loans, regular accounts with unsatisfactory repayment, loans having excess over limit, overdue accepted bills, off-balance sheet e

CRM guidelines and ensuring its proper functioning.

ded to be addressed and accordingly advising the same to senior management and board to ensure maintenance of adequate capital for ab

d liabilities properly for determining the impact of interest rate fluctuation on the profitability of the bank;
sitivity analysis, duration gap analysis etc.;
ance of FX related limits, repatriation of export proceeds, outstanding of overdue accepted bill, reconciliation of long pending Nostro accoun
e same to keep market exposure safe and sound.

ded to be addressed and accordingly advising the same to senior management and board to ensure maintenance of adequate capital for ab

seeing enterprise level risk, it will ensure proper implementation of the instructions laid down in the ALM guidelines such as maintenance of

ojected sources and uses of fund, statement of total time and demand liabilities and calculates all regulatory liquidity ratios such as CRR, S
d liability including off-balance sheet items, Asset-liability of off-shore banking unit etc. to manage liquidity risk;

ded to be addressed and accordingly advising the same to senior management and board to ensure maintenance of adequate capital for ab
h ICC and advising the senior management and board to review the existing policies to prevent recurrences of the unexpected incidents;

) through ICC;
operational risks.

ring, Vintage curve etc.) for measuring/assessing risks;

ecommending necessary policy measures;
risks and suggesting the senior management probable ways to control the same;
e the organizational goal;
ank’s risk exposures and industry as a whole;
ation provided by the related divisions/departments;
bank, suggesting mitigating measures to concerned departments based on the KRI provided by them, preparing summary of KRI and subm

g statement of risk appetite. Risk appetite along with risk tolerance and risk threshold are to be set and approved by the Board. The risk ap

r a period of at least five years. A good strategic plan must be clear, consistent with goals, flexible, and adjustable to changes in the environ

e PEST (Political,

eaknesses,
and business activities, given its business objectives and obligations to stakeholders (depositors, creditors, shareholders, borrowers, regula

ng risk management objectives:-

al continuity.

ks all over the world. Some banks have adopted a high-level, brief, and qualitative statement of RAF, while others have made it complex, le

sought out and risks that should be minimized;

ons, risk owner, how and how often each risk will be measured, assumptions related to each risk, judgment on severity and likelihood, and s
ces that are reflective of overall business objectives.
age the bank’s risks in a timely fashion.

teps in its development include:

eer group and industry-wise growth, bank’s own portfolio growth, trend of NPL, profitability and capital, liquidity position, risk management c
iness line and related departments.

n line with its strategic objectives and mention it in both absolute amount and percentage form. For example if a bank wants to make 20% l

s, components of pillar II under Basel III, strategic planning and all other probable risks exist in the bank. For example in setting appetite for

o 3) to the amount lies with total rated customers

Bucket-wise gap under simple sensitivity analysis for interest rate change

mit and Wholesale borrowing Guideline(WBG) Limit

roducts, and business practice, damage to physical assets , business disruption and system failure, execution, delivery and process manag

ey are encouraged to apply their own prudence for determining/fixing the maximum/minimum perimeter for those issues considering their ris
d by BB for effective risk management. They will develop and implement their own guidelines and various types of risk management tools in

nd processes to facilitate the identification and quantification of risks inherent in a bank’s different activities. The policy should be formally e

organizational improvement by providing management with a greater insight into risks and their impact. It is a series of multi-steps that, whe
 nt (including identification, analysis and evaluation) and also the persons engaged in the treatment, monitoring and review of risk.
nternal stake holders. Formation of policies, review/revision, and dissemination of the policies is also part of this step. Risk owners/originato

Before risk can be clearly understood and dealt with, it is important to understand the context in which it exists.

h the internal context:

ensure that all significant risks are understood. This ensures that risk decisions always support the broader goals and objectives of the busi
factors will identify the strengths, weaknesses, opportunities and threats to the business in the external environment. Local and global issu
xamination. For example, in conducting a risk analysis for a new product or project loan, such as the introduction of a new branch, wing of b

ectives of the business and the activity under analysis. The purpose of this step is to identify what could go wrong (likelihood) and what is th

than others. Thus analyzing the likelihood and consequences of each identified risk and deciding which risk factors will potentially have the
 complexity, objective of the activity of a banking company is pursuing. It is important to note that the likelihood/frequency and also the impa

medical attention and has some impact on overall health of the bank and also may impact on the economy the bank is operating in

iously established risk criteria, and deciding whether these risks require treatment. The result of a risk evaluation is a prioritized list of risks

ng the risk treatment plans and implementing those plans to achieve the desired outcome.

and the cost of treatment commensurate with the potential benefits of treatment. Risk treatment should also aim to enhance positive outcom

ase in the impact of positive risk.

s rise to the risk.
ns for managing and funding the consequences of the risk if it occurs.
s, or by reducing the impact through diversifying credit portfolio, setting up off-site data backup etc.
nancing, etc.

priorities. Very few risks will remain static, therefore the risk management process needs to be regularly repeated, so that new risks are cap

s. An effective way to ensure that is to combine risk planning or risk review with annual business planning.

s at every level of the organization and should be driven from the top down.

ained by each bank to identify the key business and financial risks, to define and implement respective controls/mitigating factors to reduce

ntification date, target date and completion dates for treating risks.

ng scales(e.g. 1-5 with 5 being most severe)

5, with 5 being most likely)
nsequence (Impact) for a scale ranging from 1-25
risk by their overall risk score

sed to look after the situation before the risk is generated (mainly business line personnel).

management guidelines on Credit, Foreign Exchange, Asset-Liability (including appendix), Internal Control & Compliance, ICT security and
iquidity risks. For example: GINI coefficient, Herfindahl–Hirschman Index (HHI) for measuring concentration risk, Credit Risk Modeling for m

cal failure and human error in the operation of a bank, including fraud, failure of management, internal process errors and unforeseeable ex

turn for an expected reward, but exists in the natural course of corporate activity, and that this affects the risk management process. At the s

onal failure risk. It is also defined as internal operational risk.

nges the business paradigm, a major political and regulatory regime change, and other factors that are generally outside the control of the b

ss. A firm uses people, process, and technology to achieve business plans, and any one of these factors may experience a failure of some
ording to Event Type and Business Line. Not all Business Lines will be relevant for all banks. There are seven major Event Types, and eig
gulations Regulatory breach
ancial statement

erational risk, which clearly articulates what constitutes operational risk in the bank. The framework should cover the bank’s tolerance for op

tive operational risk management and adherence to sound operating controls. Operational risk management is most effective where a bank

isk. Such a strategy should be based on the requirements and obligation to the stakeholders of the bank;
perational risk as a distinct risk to the bank’s safety and soundness;
ples underlying the framework and approve the corresponding policies developed by senior management;
tional risk management framework specifying clear lines of management responsibility, accountability and reporting; and
he bank is managing the operational risks. This review process should also aim to assess industry best practice in operational risk manage

ard into specific policies, processes and procedures that can be implemented and verified within the different business units;
ge and maintain this accountability and ensure that the necessary resources are available to manage operational risk effectively;
the risks inherent in a business unit’s policy;
y experience, technical capabilities and access to resources, and that staff responsible for monitoring and enforcing compliance with the ba
communicated to staff at all levels of the organization that are exposed to material operational risks.

handling practices. Policies, processes and procedures related to advanced technologies supporting high transactions volumes, in particula

at least, but not limited to, the followings:

t framework; and
ponsibilities of individuals involved.

products or systems conversions, will be evaluated for operational risk prior to coming into effect. It should be approved by the board and d

es. Outsourcing activities can reduce the bank’s risk profile by transferring activities to others with greater expertise and scale to manage th

s, processes and systems and its vulnerability to these risks. Banks should also ensure that before new products, activities, processes and s

ely target risk management resources. Amongst the possible tools that may be used by banks for identifying and assessing operational risk

menu of potential operational risk vulnerabilities. This process is internally driven and should be based on approved checklists to identify th

s or process flows are mapped by risk type. This exercise can reveal areas of weakness and help prioritize subsequent management action

ich can provide insight into a bank’s risk position. These indicators are to be reviewed on a periodic basis (such as monthly or quarterly) to

ce could provide meaningful information for assessing the bank’s exposure to operational risk and developing a policy to mitigate/control the

act. Moreover, not all risk events can be controlled, e.g. natural disasters. Risk mitigation tools or programs can be used to reduce the expo

ent for, thorough internal operational risk control. Having mechanisms in place to quickly recognize and rectify legitimate operational risk erro

important for risk mitigation. However, banks should be aware that increased automation could transform high-frequency, low-severity losse

monitoring activities help quickly detecting and correcting deficiencies in the policies, processes and procedures for managing operational r

ness of the same periodically; and

ss problems before they become major concerns.

ow the same type of organizational structure that has been adopted for other risks, including market and credit risk;
her with a mechanism for monitoring, assessing and reporting is designed and implemented; and

indicators that provide early warning of an increased risk of future losses. Such indicators (often referred to as key risk indicators or early w

s, as should compliance reviews performed by the internal audit and risk management functions.

timely basis, in a form and format that will assist in the monitoring and control of the business. The reporting process should include inform

as well as external market information about events and conditions that are relevant to decision making. Reports should be distributed to a

s well as developing new risk management policies, procedures and practices.

stand the bank’s overall operational risk profile and focus on the material and strategic implications for the business.

ll material operational risks that have been identified, the bank should decide whether to use appropriate procedures to control and/or mitig

ate as a going concern and minimize losses in the event of severe business disruption. The business disruption and contingency plans shou

mework and compliance with a documented set of internal policies concerning the risk management system. Principal elements of this coul
olution of noncompliance issues; and
ty to the appropriate level of management.

ced through a strong control culture that promotes sound risk management practices. Board and senior management are responsible for es

w products (particularly where these activities or products are not consistent with the bank’s core business strategies), enter unfamiliar mark

dures have been implemented effectively. The board (either directly or indirectly through its audit committee) should ensure that the scope a

framework, the board should ensure that the independence of the audit function is maintained. This independence may be compromised if

and that personnel are not assigned responsibilities which may create a conflict of interest. Assigning such conflicting duties to individuals,

ce as appropriate to control operational risk.

adequate capital, assessing internal capital adequacy of the bank and calculating its capital adequacy ratio. It is gaining increasing importan

t banking risks can be quantified as numerical indicators, and this quantification naturally leads to the principle that increased capital can be

ver the risks associated with its activities;

gement identifies the risks that the bank is exposed to, and determines the means by which they will be mitigated;
is mitigated by means of collateral or other credit enhancements, contingency planning, additional reserves and valuation allowances, and

. An ICAAP that determines precise levels of required capital (the “solvency need”) according to the measures of balance sheet capital and
and address deficiencies in a timely manner.

capital adequacy ratio and secure adequate capital to cover the risks they face, from the standpoint of ensuring soundness and appropriate

e outlined as below:

goals must include the following:

areholder returns and protecting the interests of depositors and other creditors.

unt the fact that lack of the same could jeopardize the achievement of the bank's strategic objectives. Annually, conduct a detailed strategic

levels of different classes of capital against the Bank’s risk profile and risk appetite. The board must be satisfied that capital levels under s

n adequate capital management system with a full grasping of the assessment, monitoring and control techniques of internal capital adequa

es should be inclusive of the following matters:

ement committee and Basel Implementation Unit (BIU) of the bank with regard to capital management;

nes issued by

tion process, and the basis for the calculation of capital to be allocated to risks.

e capital-raising methods, satisfying the prudential and regulatory requirements of BB;

ofile and the competing business environment;

 long-term and develop a Capital Plan to achieve the target. The Capital Plan must identify the capital issuance requirements and options a

nomic capital);

necessary for the ICAAP and the calculation of the capital adequacy ratio and specify the arrangements appropriately in a manner befitting

ank's corporate management policy and plans, its strategic objectives, etc.;

ICAAP in reference to capital as defined under regulations concerning capital adequacy ratios-Tier 1, Tier 2 capital, and eligible capital; (To

nd the calculation of the capital adequacy ratio independent from other offices/divisions and secure a check-and-balance system;

rnal and external) by RMD on regular basis.

agement Report (CRMR) according to the formats provided by BB as a minimum requirement. They can also include additional information

olution copy) of Risk Management Policies and effectiveness of risk management functions with the approval of the board of directors to DO

offence is punishable under section 109(2) of the Bank Company Ain 1991. BB may impose penalty as per section 109(7) of the said Ain if a
ability of an entity to achieve its organizational objectives. In this definition, uncertainties include events which may or may not happen as w

tional arrangements for designing, implementing, monitoring, reviewing and continually improving risk management throughout the organiz

ged. A sound and consistent risk culture throughout a financial institution is a key element of effective risk management. Risk culture and its

der to attain the objectives of the organization and those of its shareholders and stakeholders.

usiness objectives.

and communicate risk appetite. Risk tolerances are used in risk evaluation in order to determine the treatment needed for acceptable risk.

business goal.

in another metric that tends to correlate with exposure or possible loss. Being a limit, this measure of risk is articulated as an indication of

before applying any particular knowledge about the probability of loss events that would activate the exposure.

vent that a certain risk should materialize. It does not imply any particular knowledge about how likely or frequent such an event might be.

le is a forward looking view of how the risk profile may change both under expected and stressed economics conditions.

about risks are taken and implemented. Risk governance covers the questions about what risk management responsibilities lie at what leve

agement_process.
d guidelines have been revised. Moreover, modification of the prudential regulations is done on regular basis. As part of this endeavor, the

y Executive Risk Management Committee (ERMC) meeting within the next month of the reporting quarter;
utions and affecting the stability of the overall financial system.

ncial crisis. Consequently, poverty and human inequality increased significantly around the world as well as the indicators of human resource

complex products/services/technology platform have been introduced. As a result, risk in the banking industry has increased remarkably as

unctions, enables management of banks to take risks knowingly and treat risks where appropriate. Risk management is a part of internal go

anagement, and set their performance goals in line with strategic planning/objectives. While the extent of risk management function perform

ound or adequate risk management system is ever changing, as new technology accommodates innovation and better information and as
 11

18

284.5 Senior management oversight 284.6 Policies, procedures and limits

ementing responses appropriate to their impact. These responses generally draw on strategies of risk prevention, risk transfer, impact mitig

ective Banking Supervision published by the Basel Committee on Banking Supervision (BCBS) in September 2012. The BCP on 'Risk Mana

each aspect of a bank’s risk management activity. A bank may, depending on its size and complexity, establish a more sophisticated framew

tional goals while meeting the minimum requirements set out in the guidelines.

ment of various risks.

tite. Since the business of banks involves risk taking, it is fundamental that risks are appropriately managed. A sound and consistent risk cu

r responsibility regarding risk management. Risk management should not be confined to risk specialists or to control functions. Business an

k-taking and ensures that risk-taking activities beyond the institution’s risk appetite are recognized, assessed, reported, and addressed in a
 ave risk goals and risk strategies which enable them to achieve the desired risk profile.

ment should be well-embedded and be consistent with the bank’s capacity to take risk, taking into consideration the capital constraints, and

es lie at what levels and the ways the board influences risk-related decisions; and the role, structure, and staffing of risk organization. A goo

it operates in accordance with the risk policies and delegated mandates. The units are responsible for having skills, operating procedures, s

e risk management unit, headed by a Chief Risk Officer has the responsibility for recommending and monitoring the bank’s risk appetite an

esses of the two first lines.

egral part of management, be embedded in the culture and practices, and should be tailored to the business processes of the organization.
eir causes, and their potential consequences. They must recognize and understand risks that may arise from both existing and new busines

s risk analysis involves measuring risk by considering consequences of an unfavorable event and likelihood of such event occurring. Factor

be immediately addressed and should be brought to the attention of the competent authority promptly. Risk evaluation mainly involves com

circumstances. The options can include the following and can be applied either individually or in combination:

d procedures that define responsibilities and authority. These limits will help the concerned parties know when the risk becomes unaccepta

k management process for the purposes of:

ment, monitoring, mitigation, and reporting of risks posed by its activities at the business line and institution-wide levels.

t all levels. The system should be comprehensive enough to capture all the material risks to which the institution is exposed. It should facilit
cause the line personnel can understand the risks of their activities, any lack of accountability on their part may hinder sound and effective

vel of capital required for absorbing large losses, and suggestions for restoring capital;

and processes for effective risk management. The senior management should be fully aware of the activities undertaken by the institution th

e for understanding the nature of risks significant to the bank and for ensuring that the management is taking necessary steps to implemen
any changes in the level of risks. Board shall approve the strategies and significant risk management policies developed by senior executive

licies, procedures, and processes for effective risk management. The senior management should be fully aware of the activities undertaken

manage and control the risks in accordance with those policies keeping in view the strategic direction and risk appetite specified by board.

ivities. The bank’s policies and more detailed procedures should provide guidance for the day-to-day implementation of broad risk strategie
e overall risk management.
policies should also be obtained.
nk such as an internal control unit.

ial condition, operating performance and risk exposure of the bank.

the day-to-day management of the bank's business operations.

all material risks; appropriateness of the key assumptions, data sources, procedures, analysis and documentation; adaption of changes in b

ensurate with the institution’s risk appetite, risk tolerance, risk limit and strategy. An effective internal control system enforces the official line
y reviewed by the Audit Committee and any material weakness found should be addressed promptly and appropriately.

ant laws, regulations and internal policies.

s; iv) the reliability, accuracy and timeliness of all financial, operational and regulatory reports;
en the banks will formulate their own risk management policy guidelines, they should name the various desks specifically in the organogram

s etc.) within tolerable level. For this purpose the board will play the following role:-
nd expertise and knowledge to accomplish the risk management function properly;

he decisions for proper implementation;

m Bangladesh Bank (DOS) involved in monitoring risk management activities. The team may meet the members of BRMC and ERMC of the
 if deemed necessary. RMD will act as secretariat of the committee. The ERMC, from time to time, may invite top management (CEO, AMD

les, regulations, and reviews factors that could negatively affect the bank’s objectives. According to the Basel Committee on Banking Super

or its risk management committee. If the CRO is removed from his/her position, this should be disclosed publicly. The bank should also disc

isk management department shall have sufficient stature, authority and seniority. He or she shall have direct access to the board of director
toring their performance relative to risk-taking and limit adherence;

eparate desks within the risk management department for overseeing each key risk area. The main functions of the department include, bu

monitoring and evaluating their risks. Safeguards against conflict of interest should be put in place to maintain independence of the risk ma
ision should be as follows -
een Basel Implementation Unit (BIU) and RMD.

rver and to raise flags on risk issues but not be part of decision making process.

g and follow up of implementation status;

mits, and MAT;

es as compared to appetite;

gement & board of the bank and DOS of BB on yearly basis.

 risk analysis and identification of risks, making appropriate recommendations, preparing memo on related issues, monitoring and following

ndustry, geographical location, regulatory limits, best practices, current business and economic conditions;

ccepted bills, off-balance sheet exposure, forced loan, movement of adverse classification,

enance of adequate capital for absorbing any unforeseen losses.

on of long pending Nostro account transaction etc. through concerned departments;

enance of adequate capital for absorbing any unforeseen losses.

delines such as maintenance of regulatory requirements of liquidity ratios, liquidity forecasting etc. For doing this, the desk will perform the f

y liquidity ratios such as CRR, SLR, ADR, LCR, NSFR, MCO, WBG, Undrawn Commitment etc.;

enance of adequate capital for absorbing any unforeseen losses.

s of the unexpected incidents;

paring summary of KRI and submitting the same to BRMC on quarterly basis.

proved by the Board. The risk appetite must reflect strategic planning of the bank which includes shareholder aspirations within the constrain

stable to changes in the environment. A bank must have a board approved strategic plan for ensuring the substantial growth and lead the b
shareholders, borrowers, regulators). Risk appetite is generally expressed through both quantitative and qualitative means and should con

others have made it complex, lengthy, and quantitative. Risk appetite is the cornerstone of a successful risk management framework.

on severity and likelihood, and speed at which risks could manifest;

dity position, risk management culture and practices etc.

e if a bank wants to make 20% loan growth in a particular year to achieve its strategic planning/objective, it should state the percentage of l

r example in setting appetite for liquidity risks they should look into the ratios laid down in the ALM guidelines and related circulars issued b

on, delivery and process management

those issues considering their risk taking capacity, risk management practices etc. For example: bank having trouble with liquidity should fol
ypes of risk management tools in consistent with the complexity, size and nature of business, risk strategy and BB guidelines. The risk stra

The policy should be formally established and approved by the board of directors and should clearly set out the parameters under which d

a series of multi-steps that, when undertaken in sequence, enable continual improvement in decision-making.
ring and review of risk.
f this step. Risk owners/originator should be informed of his/her/their role when dealing with the risks. All the stake holders should be comm

goals and objectives of the business. This approach encourages long-term and strategic thinking. b)-Establish the external context
vironment. Local and global issues are also important to be considered. c)-Establish the risk management context
uction of a new branch, wing of banking business or a new product line, it is important to clearly identify the parameters for this activity to en

wrong (likelihood) and what is the consequence (loss or damage) of it occurring.

k factors will potentially have the greatest effect and should, therefore, receive priority with regard to how they will be managed. The level o
ood/frequency and also the impact/consequence will vary from bank to bank.

y the bank is operating in

uation is a prioritized list of risks that require further action. This step is about deciding whether risks are acceptable or need treatment.

o aim to enhance positive outcomes.

peated, so that new risks are captured in the process and effectively managed.

rols/mitigating factors to reduce the risks faced by the bank and its subsidiaries. Business Line managers shall report the key risks issues to

l & Compliance, ICT security and Prevention of money laundering and terrorist financing.
n risk, Credit Risk Modeling for measuring Expected Loss, Interest rate sensitivity and duration analysis for interest rate risk, VaR for equity

ess errors and unforeseeable external events.

sk management process. At the same time, failure to properly manage operational risk can result in a misstatement of a bank’s risk profile a

erally outside the control of the bank. It also arises from a major new strategic initiative, such as getting into a new line of business or redoin

ay experience a failure of some kind. Accordingly, operational failure risk is the risk that exists within the business unit caused by the failure
ven major Event Types, and eight major (Level 1) Business Lines, and within each combination of Event Type and Business Line there may
cover the bank’s tolerance for operational risk, as specified through the policies for managing this risk and the bank’s prioritization of operat

nt is most effective where a bank’s culture emphasizes high standards of ethical behavior at all levels of the bank. The board should promote

eporting; and
actice in operational risk management appropriate for the bank’s activities, systems and processes.

nt business units;
tional risk effectively;
 nforcing compliance with the bank’s risk policy have authority and are independent from the units they oversee;

ansactions volumes, in particular, should be well documented and disseminated to all relevant personnel.

be approved by the board and documented. Senior management should ensure that it is clearly communicated and understood to staff at a

xpertise and scale to manage the risks associated with specialized business activities. However, a bank’s use of third parties does not dimin

ducts, activities, processes and systems are introduced or undertaken, the operational risk inherent in them is subject to adequate assessm

g and assessing operational risk are:

approved checklists to identify the strengths and weaknesses of the operational risk environment.

subsequent management actions.

such as monthly or quarterly) to alert banks to changes that may be indicative of risk concerns. Such indicators may include the number of

ng a policy to mitigate/control the risk. An effective way of making good use of this information is to establish a framework for systematically

can be used to reduce the exposure to, or frequency and/or severity of such events. For example, insurance policies can be used to extern

ify legitimate operational risk errors can greatly reduce exposures. Careful consideration also needs to be given to the extent to which risk m

high-frequency, low-severity losses into low-frequency, high-severity losses. The later may be associated with loss or extended disruption of

dures for managing operational risk. Promptly detecting and addressing these deficiencies can substantially reduce the potential frequency
o as key risk indicators or early warning indicators or operational risk matrix) should be forward-looking and could reflect potential sources o

ng process should include information such as:

eports should be distributed to appropriate levels of management and to areas of the bank on which concerns may have an impact. Report

ocedures to control and/or mitigate the risks, or bear the risks. For those risks that cannot be controlled, the bank should decide whether to

ption and contingency plans should take into account different types of scenarios to which the bank may be vulnerable and should be comm

m. Principal elements of this could include, for example:

anagement are responsible for establishing a strong internal control culture in which control activities are an integral part of the regular activ

strategies), enter unfamiliar markets, and/or engage in businesses that are geographically distant from the head office. It is therefore importa

e) should ensure that the scope and frequency of the audit program is appropriate to the risk exposures. Audit should periodically validate th

endence may be compromised if the audit function is directly involved in the operational risk management process. The audit function may p

h conflicting duties to individuals, or a team, may enable them to conceal losses, errors or inappropriate actions. Therefore, areas of potentia

It is gaining increasing importance around the world, as reflected from taking several reform initiatives and changes in the prudential requir

ple that increased capital can be held to cover unexpected losses at a certain confidence level. The followings indicate the relationship betw
s and valuation allowances, and other mechanisms.

res of balance sheet capital and regulatory capital ;

ring soundness and appropriateness of the their businesses. In this regard banks shall follow the latest guidelines on Risk Based Capital A

ally, conduct a detailed strategic planning process over a three-year time horizon, the outcomes of which are embodied in a Strategic Plan.

tisfied that capital levels under specific stressed economic scenarios are sufficient to remain above both BB and the Bank’s internal require

niques of internal capital adequacy as well as the significance of capital management;

ance requirements and options around capital products, such as the issuance of common equity, timing and markets to execute the Capital

ppropriately in a manner befitting the scale and nature of the bank business and its risk profile;

capital, and eligible capital; (To update the literature in terms of Basel III)

k-and-balance system;

so include additional information related to the concerned risk areas depending on the nature, complexity and size of business. Bank shall a

al of the board of directors to DOS of BB on yearly basis.

section 109(7) of the said Ain if a bank fails to submit the above mentioned reports within stipulated time without any acceptable/satisfactory
ch may or may not happen as well as uncertainties caused by ambiguity or a lack of information.

agement throughout the organization. The notion of a risk management framework is essentially equivalent to the concept of Enterprise Ris

anagement. Risk culture and its impact on effective risk management must be a major concern for the board and senior management

ment needed for acceptable risk.

is articulated as an indication of risk tolerance with the intention to constrain risky activities or positions within an entity to an acceptable lev

equent such an event might be.

cs conditions.

nt responsibilities lie at what levels and the ways the board influences risk-related decisions; and the role, structure, and staffing of risk orga
sis. As part of this endeavor, the previous guideline has been revised for ensuring sound risk management culture effectively in the banks an
the indicators of human resources development also deteriorated. Weak risk management, though cannot be considered as a specific trigg

try has increased remarkably as compared to that of earlier time. It is indispensable to ensure risk management culture/practice at enterpris

nagement is a part of internal governance involving all areas of banks. There is a strong link between good corporate governance and soun

sk management function performed and structure kept in place depend on the size and complexity of individual banks, risk management is m

n and better information and as market efficiency grows. Each banking institution should put in place a comprehensive risk management pr
294.7 Risk assessment and quantification 294.8 Mitigation of risks
ention, risk transfer, impact mitigation or risk acceptance.

er 2012. The BCP on 'Risk Management Processes' (CP15) requires that banks have a comprehensive risk management process (including

ish a more sophisticated framework than outlined in this document.

. A sound and consistent risk culture throughout a financial institution is a key element of effective risk management.

o control functions. Business and operational units, under the oversight of the management body, should be primarily responsible for mana

ed, reported, and addressed in a timely manner. Weaknesses in risk culture are often the root cause for occurrence of significant risk events
tion the capital constraints, and potential profit and loss consequences.

affing of risk organization. A good practice in this dimension is where the board has regular involvement in managing key risk issues, and ris

ng skills, operating procedures, systems, and controls in place to ensure their compliance with risk policies and mandates.

oring the bank’s risk appetite and policies, and for following up and reporting on risk related issues across all risk types.

s processes of the organization.

m both existing and new business initiatives. They should put in place adequate tools and techniques to identify risk because risks not ident

d of such event occurring. Factors that affect consequences and likelihood should also be identified. Risk analysis can be undertaken with v

k evaluation mainly involves comparing the level of risk found during the analysis process with the bank’s risk appetite, risk tolerance level a

hen the risk becomes unacceptable and align their actions and behaviors with the institution’s set risk appetite, risk tolerance, and strategy.

wide levels.

ution is exposed. It should facilitate processes for assessment and necessary treatment of these risks. The minimum standards of a sound
may hinder sound and effective risk management.

s undertaken by the institution that could expose it to various risks. It should possess necessary knowledge and skills to be able to align the

ng necessary steps to implement those strategies and manage accompanying risks.

es developed by senior executives and review them on regular basis. While performing their oversight function, board of directors should no

ware of the activities undertaken by the bank that could expose it to various risks. It should possess necessary knowledge and skills to be a

risk appetite specified by board. For effective oversight of risk management, management shall provide the members of the board with suffi

mentation of broad risk strategies, and generally should include limits designed to shield the institution from imprudent and unwarranted risk
ntation; adaption of changes in business or products; adequacy of information technology or management information system environment;

l system enforces the official lines of authority and provides for appropriate separation of duties. A major part of the internal control structure
ppropriately.
ks specifically in the organogram. If the bank wants, they can give functional designation to the officials according to the risk areas they are

mbers of BRMC and ERMC of the bank from time to time to get a closer perspective of risk management culture and practice.
te top management (CEO, AMD, DMD, Country heads or senior most executives), to attend the meetings so that they are well aware of risk

sel Committee on Banking Supervision, CRO has been referred as an independent senior executive with distinct responsibility for the risk m

blicly. The bank should also discuss the reasons for such removal with its supervisor. CRO’s performance and compensation should be revi

ct access to the board of directors and make direct reports to the board or its Risk Management Committee. He or she is to be directly supe
ns of the department include, but not limited to, the following:

tain independence of the risk management function. Sufficient resources should be provided to Risk Management Department where the pe
issues, monitoring and following up of implementation status of the decisions of meeting minutes, ensuring regulatory compliance on relate

g this, the desk will perform the following activities:-

er aspirations within the constraints of regulatory requirements, creditor and legal obligations.

ubstantial growth and lead the bank in an efficient and logical way.
ualitative means and should consider extreme conditions, events, and outcomes. It should be stated in terms of the potential impact on prof

sk management framework.
 should state the percentage of loan growth along with increased amount of loans. In this regard, banks have to mention at least previous th

es and related circulars issued by BB. In addition, the banks shall also consider the CRMR report in setting the above limits. Apart from the

ng trouble with liquidity should follow more stringent/conservative measure and set the limit for AD ratio below the regulatory threshold.
and BB guidelines. The risk strategy should be determined taking into consideration bank’s capital adequacy, expected level of profitability,

ut the parameters under which different risks are to be managed/controlled.

e stake holders should be communicated after due consultation that everybody should inform and notify RMD as and when they identify som

blish the external context

parameters for this activity to ensure that all significant risks are identified.

hey will be managed. The level of risk is analyzed by combining estimates of likelihood (table 1) and consequences (table 2),
ceptable or need treatment.
hall report the key risks issues to RMD as and when identified/detected. RMD should review the KRI based on the reports provided by the l
interest rate risk, VaR for equity and FX risk, Stress testing for credit, market and liquidity risk, structural liquidity profile for liquidity risk etc.

atement of a bank’s risk profile and expose the bank to significant losses.

a new line of business or redoing how current business is to be done in the future. It is also defined as external operational risk.

siness unit caused by the failure of people, process, systems or technology. A certain level of the failures may be anticipated and should be
ype and Business Line there may be one or more Scenario Descriptions. The following list of Scenario Descriptions, categorized by Event T
he bank’s prioritization of operational risk management activities, including the extent of, and manner in which, operational risk is transferre

bank. The board should promote an organizational culture, which establishes through both actions and words the expectations of integrity f
 ated and understood to staff at all levels in units that are exposed to material operational risks. Senior management also needs to place pro

se of third parties does not diminish the responsibility of the board and senior management to ensure that the third-party activity is conducte

m is subject to adequate assessment procedures. While a number of techniques are evolving, operating risk remains the most difficult risk ca

tors may include the number of failed trades, staff turnover rates and the frequency and/or severity of errors and omissions. Threshold/limit

h a framework for systematically tracking and recording the frequency, severity and other relevant information on individual loss events. Ban

ce policies can be used to externalize the risk of “low frequency, high severity” losses which may occur as a result of events such as third-pa

given to the extent to which risk mitigation tools such as insurance truly reduce risk, or transfer the risk to another business sector or area, o

th loss or extended disruption of services caused by internal factors or by factors beyond the bank’s immediate control e.g. external events.

reduce the potential frequency and/or severity of a loss event. There should be regular reporting of pertinent information to senior manage
could reflect potential sources of operational risk such as rapid growth, the introduction of new products, employee turnover, transaction bre

rns may have an impact. Reports should fully reflect any identified problem areas and should motivate timely corrective action on outstandi

e bank should decide whether to accept these risks, reduce the level of business activity involved, or withdraw from this activity completely.

vulnerable and should be commensurate with the size and complexity of its operations. Management should identify critical business proce
 integral part of the regular activities of a bank.

head office. It is therefore important for banks to ensure that special attention is given to internal control activities including review of policies

dit should periodically validate that the bank’s operational risk management framework is being implemented effectively across the bank.

rocess. The audit function may provide valuable input to those responsible for operational risk management, but should not have direct ope

ons. Therefore, areas of potential conflict of interest should be identified, minimized, and subjected to careful independent monitoring and r

changes in the prudential requirements undertaken by banks in different countries in line with the reform measures proposed by the Basel

ngs indicate the relationship between risk management and capital requirement:
idelines on Risk Based Capital Adequacy and related BB circulars/instructions to assess its capital adequacy.

re embodied in a Strategic Plan. The planning process should include forecasting key economic variables which business lines may use in

B and the Bank’s internal requirements;

markets to execute the Capital Plan under different market and economic conditions. The following factors should be taken into account in

nd size of business. Bank shall arrange monthly meeting of ERMC to discuss the risk issues based on the findings of the risk reports prepa

hout any acceptable/satisfactory reason.

 to the concept of Enterprise Risk Management (ERM).

d and senior management

in an entity to an acceptable level.

structure, and staffing of risk organization.

culture effectively in the banks and all scheduled banks are hereby instructed to follow the attached 'Risk Management Guidelines for Banks
be considered as a specific trigger for the financial crisis, has been identified along with weak internal governance as an underlying factor. W

ment culture/practice at enterprise level to conduct business successfully with the internationally renowned banks, to upgrade the banks’ fin

corporate governance and sound risk management. Without proper risk management, the various functions in a banking institution cannot

dual banks, risk management is most effective when basic principles and elements of risk management are applied consistently throughout

prehensive risk management program tailored to its needs and the circumstances under which it operates. In this context, BB has revised p
30 4.9 Risk monit 30 4.10 Risk repor 314.11 Establishing control mechanism 32 4.12 Contingen
management process (including effective Board and senior management oversight) to identify, measure, evaluate, monitor, report and con

e primarily responsible for managing risk on day-to-day basis, considering risk tolerance and risk appetite, and in line with bank’s risk policie

urrence of significant risk events, financial institution failures, and financial crisis.
managing key risk issues, and risk management responsibilities are proportionate to the risks assumed at a particular level or unit.

and mandates.

all risk types.

ntify risk because risks not identified at this stage will not be included in further analysis.

nalysis can be undertaken with varying degrees of detail, depending on the nature of risk, severity of risk; and the information, data and res

sk appetite, risk tolerance level and regulatory limits. Based on this comparison, the need for appropriate treatment should be considered.

ite, risk tolerance, and strategy.

minimum standards of a sound risk management system include the following elements.
 and skills to be able to align the risk levels with the board’s strategies through risk assessment and treatment. Top management should be

on, board of directors should not be involved in day-to-day activities of risk management. They shall make it clear to the bank’s manageme

sary knowledge and skills to be able to align the risk levels with the board’s strategies through risk assessment and treatment. Top managem

members of the board with sufficient information to enable them to understand the bank’s risk profile, how risks are assessed and prioritize

imprudent and unwarranted risks.

nformation system environment; consistency in management information reporting and other forms of communication; compliance with set

rt of the internal control structure is the establishment of limits such as limits on liquidity, officer limits, limits on non-performing assets etc. T
ording to the risk areas they are assigned to:

ture and practice.

o that they are well aware of risk management process. The responsibilities/ Terms of

stinct responsibility for the risk management function and the institution's comprehensive risk management framework across the entire org

nd compensation should be reviewed and approved by the board or its risk management committee.

He or she is to be directly supervised by the Board Risk Management Committee (BRMC). CRO should not have any reporting relationship
gement Department where the personnel possess needed experience and qualifications, including market and product knowledge and comm
regulatory compliance on related issues, assisting in formulation and review of risk appetite and risk related policies/guidelines. The desks
ms of the potential impact on profitability, capital and liquidity.
ve to mention at least previous three years’ real performance along with the current year risk appetite, tolerance and limit. The expected loa

g the above limits. Apart from the regulatory requirements, the banks should set Risk Appetite, Tolerance and limit for all the probable areas

w the regulatory threshold.

cy, expected level of profitability, market reputation, adequacy and experienced personnel, logistic support, macro and micro economic scen
MD as and when they identify something to be noted in the risk register as potential risk to be addressed. This information to RMD officials s

quences (table 2),

on the reports provided by the line managers, RMD will suggest mitigation measures to concerned units and also submit the effectiveness
uidity profile for liquidity risk etc.

ernal operational risk.

ay be anticipated and should be built into the business plan. These failures can be expected to occur periodically, although both their impac
criptions, categorized by Event Type and Business Line, represent the largest scenarios most frequently reported by banks. For any bank, it
ich, operational risk is transferred outside the bank. It should also include policies outlining the bank’s approach to identifying, assessing, m

rds the expectations of integrity for all employees in conducting the business of the bank. Generally, the board should at least:
agement also needs to place proper monitoring and control processes in order to have effective implementation of the policy. The policy sho

he third-party activity is conducted in a safe and sound manner and in compliance with applicable laws. Outsourcing arrangements should b

remains the most difficult risk category to quantify. It would not be feasible at the moment to expect banks to develop such measures. How

s and omissions. Threshold/limits could be tied to these indicators such that when exceeded, could alert management on areas of potential

on on individual loss events. Banks may also combine internal loss data with external loss data (from other banks), scenario analyses, and

result of events such as third-party claims resulting from errors and omissions, physical loss of securities, employee or third-party fraud, an

other business sector or area, or even create a new risk e.g. legal or counterparty risk.

iate control e.g. external events. Such problems may cause serious difficulties for banks and could jeopardize a bank’s ability to conduct ke

nt information to senior management and the board that supports the proactive management of operational risk. Senior management shou
mployee turnover, transaction breaks, system failure, and so on. When thresholds are directly linked to these indicators an effective monitori

ly corrective action on outstanding issues. To ensure the usefulness and reliability of these reports, management should regularly verify the

aw from this activity completely. To be effective, control activities should be an integral part of the regular activities of a bank. A framework o

ld identify critical business processes, including those where there is dependence on external vendors or other third parties, for which rapid
vities including review of policies and procedures to incorporate such conditions.

d effectively across the bank.

t, but should not have direct operational risk management responsibilities.

ul independent monitoring and review.

easures proposed by the Basel Committee on Banking Supervision.

which business lines may use in allocating resources. New strategic initiatives to be undertaken over the planning period and their financial
s should be taken into account in setting the capital targets:

indings of the risk reports prepared by the RMD and shall submit the CRMR and MRMR along with the minutes of ERMC meeting to DOS o
anagement Guidelines for Banks'. Each bank shall prepare a comprehensive risk management guideline following this latest one and consi
rnance as an underlying factor. Where they existed, sound risk management practices helped institutions to endure financial crisis significan

banks, to upgrade the banks’ financial soundness indicators to a satisfactory level, and over all, to maintain financial stability in the banking

ns in a banking institution cannot work together to achieve the bank’s objectives. It is an essential part of helping the bank grow and promote

applied consistently throughout the financial institution.

In this context, BB has revised previously issued six (06) core risks guidelines to adapt with the changing banking environment as well as t
32 4.13 Internal c 32
valuate, monitor, report and control or mitigate all material risks on a timely basis and to assess the adequacy of their capital and liquidity in

and in line with bank’s risk policies and procedures.

particular level or unit.
nd the information, data and resources available. Analysis should be quantitative and qualitative in nature. To the maximum possible extent

eatment should be considered.

ent. Top management should be aware of the bank’s risk profile on an ongoing basis and should regularly report it to the board or a board le

it clear to the bank’s management that risk management is not an impediment to the conduct of business nor a mere supplement to a comp

ent and treatment. Top management should be aware of the financial institution’s risk profile on an ongoing basis and should regularly repo

risks are assessed and prioritized by the management team, risk response strategies, implementation of risk management procedures and
munication; compliance with set limits, goals or objectives; adequacy, accuracy and timeliness of reports to the board and senior manageme

on non-performing assets etc. These limits ensure that the bank’s management does not take excessive risks while pursuing business targ
framework across the entire organization.

ot have any reporting relationships with business verticals of the bank and should not be given any business targets. CRO shall provide all t
nd product knowledge and command of risk discipline. Likewise, adequate budget should be allocated to this function to enable it carry out
d policies/guidelines. The desks are also responsible for monitoring the associated risks through concerned department/divisions. In additio
ance and limit. The expected loan growth/amount is also to be distributed in each sector, industry and regional area under the head of Risk

nd limit for all the probable areas of risks. Possible areas for setting risk appetite are as follows:-
macro and micro economic scenario, risk management practices etc. The board of directors, senior management and other officials of the b
his information to RMD officials should preferably be in black and white or even through e-mail. RMD officials will then include the item in the
nd also submit the effectiveness of the mitigation measures to BRMC on quarterly basis.
dically, although both their impact and their frequency may be uncertain.
ported by banks. For any bank, it is unlikely, but possible, that some of the scenarios may occur under business lines in addition to the ones
oach to identifying, assessing, monitoring and controlling/mitigating the risk. The degree of formality and sophistication of the bank’s operati

ard should at least:

ation of the policy. The policy should be regularly reviewed and updated, to ensure it continue to reflect the environment within which the ba

tsourcing arrangements should be based on robust contracts and/or service level agreements that ensure a clear allocation of responsibiliti

to develop such measures. However, the banks could systematically track and record frequency, severity and other information on individua

anagement on areas of potential problems.

banks), scenario analyses, and risk assessment factors.

employee or third-party fraud, and natural disasters.

ze a bank’s ability to conduct key business activities. Banks should therefore establish disaster recovery and business continuity plans that

l risk. Senior management should establish a program to:

e indicators an effective monitoring process can help identify key material risks in a transparent manner and enable the bank to act upon th

ement should regularly verify the timeliness, accuracy, and relevance of reporting systems and internal controls in general. Management ma

ctivities of a bank. A framework of formal, written policies and procedures is necessary; it needs to be reinforced through a strong control cu

her third parties, for which rapid resumption of service would be most essential. Plan should be tested periodically to ensure that they are li
anning period and their financial impact are then determined;
utes of ERMC meeting to DOS of BB within stipulated time. Discussions & decisions of ERMC must be reflected in the meeting minutes. Ba
llowing this latest one and considering its nature, size and complexities of business activities, get it approved by the board and shall submit
o endure financial crisis significantly better than others.

n financial stability in the banking sector.

lping the bank grow and promote sustainability and resilience.

anking environment as well as to deal with various risk issues prudently. Yet risk management in banks should further move from a complia
acy of their capital and liquidity in relation to their risk profile and market and macroeconomic conditions. The risk management process is co
To the maximum possible extent, banks should establish systems/models that quantify their risks; however, in some risk categories, such as
eport it to the board or a board level risk committee for review.

or a mere supplement to a company’s overall compliance program but is, instead, an integral component of the company’s strategy, culture

basis and should regularly report it to the board or a board level committee for review.

sk management procedures and infrastructure, and the strength and weaknesses of the overall system. To serve this purpose, managemen
the board and senior management.

sks while pursuing business targets.

s targets. CRO shall provide all the key risk issues prevailing in the bank to BRMC meetings and a copy to the CEO for acknowledgement. T
his function to enable it carry out its crucial function effectively.
d department/divisions. In addition, the desks will perform the following specific tasks:-
nal area under the head of Risk Appetite, Risk Tolerance and Risk Limit/Threshold. Risk appetite should be measurable and subject to time
ement and other officials of the bank should be aware of and understand their respective responsibilities within the risk management system
s will then include the item in the risk register.
ness lines in addition to the ones reported in the table.
phistication of the bank’s operational risk management framework should be commensurate with the bank’s risk profile. There should be se
environment within which the bank operates.

a clear allocation of responsibilities between external service providers and the outsourcing institution. Furthermore, banks need to manage

nd other information on individual loss events. Such data could provide meaningful information for assessing the bank’s exposure to operati

nd business continuity plans that address this risk.

d enable the bank to act upon these risks appropriately. Regular reviews should be carried out by internal audit, or other qualified parties, to

rols in general. Management may also use reports prepared by external sources (auditors, supervisors) to assess the usefulness and reliab

rced through a strong control culture that promotes sound risk management practices.

odically to ensure that they are likely to be effective in case of need.

ected in the meeting minutes. Banks shall also submit the board approved Risk Appetite Statement (RAS) on yearly basis and BRMC meet
ed by the board and shall submit a copy to the Department of Off-site Supervision (DOS) for information. The bank shall review the guideline
ould further move from a compliance-driven function toward a top level comprehensive activity relevant at the highest levels of decision mak
e risk management process is commensurate with the risk profile and systemic importance of the bank. Other relevant CPs touch on Corpo
in some risk categories, such as reputational and operational risks, quantification may be difficult and complex. When it is not possible to q
the company’s strategy, culture and value generation process.

serve this purpose, management will oversee the development, implementation and maintenance of an appropriate Management Informatio
the CEO for acknowledgement. The CRO must have access to any information necessary for performing his/her duties. In this context boar
measurable and subject to time consideration for periodic review and must have risk treatments. In case of interim review (if necessary), th
thin the risk management system.
s risk profile. There should be separation of responsibilities and reporting lines between operational risk control functions, business lines and
hermore, banks need to manage residual risks associated with outsourcing arrangements, including disruption of services. Firms that utilize

g the bank’s exposure to operational risk and developing a policy to mitigate/control that risk.
udit, or other qualified parties, to analyze the control environment and test the effectiveness of implemented controls, thereby ensuring busi

assess the usefulness and reliability of internal reports.

on yearly basis and BRMC meeting minutes on regular basis. Besides they shall submit a soft copy of Stress Test report to DOS of BB on h
e bank shall review the guideline at least once a year for adapting with the changing environment. Besides, banks shall reconstruct its risk
he highest levels of decision making and strategy setting.
her relevant CPs touch on Corporate Governance (CP14), Capital adequacy (CP16), Credit risk (CP17), Problem Assets Provisions and Re
plex. When it is not possible to quantify risks, qualitative measures should be adopted to capture those risks.
propriate Management Information System (MIS) that identify, measure, monitor and control bank’s various risk. Through effective communi
s/her duties. In this context board and CEO/MD will provide full support to him/her.
f interim review (if necessary), the revised appetite statement shall have to be approved by the board of directors and submitted to DOS of B
trol functions, business lines and support functions in order to avoid conflict of interest. The framework should also articulate the key proces
ion of services. Firms that utilize thirdparty vendors to provide services with which customers come into direct contact (such as a partnershi
d controls, thereby ensuring business operations are conducted in a controlled manner.
s Test report to DOS of BB on half yearly basis along with risk reports. The risk reports and forwarding letter are to be signed by the CRO.
, banks shall reconstruct its risk management organogram and appoint Chief Risk Officer (CRO) as the head of Risk Management Departm
oblem Assets Provisions and Reserves (CP18), Concentration Risk and Large Exposure Limits (CP19), Market risk (CP22), Liquidity risk (C
risk. Through effective communications between the board and senior management, members of the board should be confident that the ba
ectors and submitted to DOS of BB and communicated throughout the organization. However, repeated review of risk appetite statement is
uld also articulate the key processes the bank needs to have in place to manage operational risk.
ect contact (such as a partnership with a mobile network operator to allow customers to transfer funds via SMS) need to exercise caution so
r are to be signed by the CRO.
ad of Risk Management Department (RMD) following the instructions of the revised risk management guidelines issued by BB. For ensuring
rket risk (CP22), Liquidity risk (CP24), Operational risk (CP25), Interest rate risk (CP23), Financial Reporting and External Audit (CP27), Dis
d should be confident that the bank’s executives understand the risks that the enterprise faces and are accomplished in their day-to-day man
iew of risk appetite statement is discouraged.
MS) need to exercise caution so that service interruptions do not damage the reputation of the bank.
ines issued by BB. For ensuring proper identification, measurement, timely treatment of risks and implementation of the said guideline, the
g and External Audit (CP27), Disclosure and Transparency (CP28).
mplished in their day-to-day management of enterprise risk.
ntation of the said guideline, the banks are also instructed to submit the following reports to DOS of BB within the stipulated time frame :-
in the stipulated time frame :-
REGULATION ON RISK MANAGEMENT IN COMMERCIAL BANKS

Chapter I
Introduction
General Provisions for Application of Risk Management

Article 1. Concept of Risk and Essence of its Application

1 The banking system has undergone rapid changes in its external environment and internal situation, followed
2 As a result, increase in complex risks related with bank operations determined a growing need for good corpo
3 Application of risk management will benefit both the banking system and the bank supervising authorities. Thr
4 For the bank supervisory authority, application of risk management will expedite assessment of the likelihood
5 The essence of application of risk management is adequacy of procedures and methodology for risk manage
6 Risk within the context of banking is a potential event, whether anticipated or unanticipated, that may negative
7 Following the accurate identification of risk, the Bank will then have to proceed with measurement, monitoring
8 The results of the monitoring, including timely, accurate, and informative evaluation of these risk exposures, w
Article 2. Powers and Responsibilities of Bank Management with Respect to Risk Management
1 The Bank is required to analyze and design adequate control measures against those threats which may crea
2 The powers and responsibilities of the Supervisory Board shall cover at least the following:
a) Approval and evaluation of risk management policy at least once each year or at a higher frequency in the ev
b) Evaluating the report provided by the Board of Directors on implementation of the above-mentioned risk mana
c) Evaluation of decisions exceeding the decision-making powers of the Board of Directors, and thus requiring a
3 The powers and responsibilities of the Board of Directors shall cover at least the following:
a) Preparation of a comprehensive, written risk management policy and strategy, including the establishment an
b) The risk management policy and strategy shall be revised at least once each year or at a higher frequency in
c) Responsibility for implementation of the risk management policy and overall risk exposures taken on by the B
d) Evaluate and decide on transactions exceeding the authority of subordinated structural units or transactions r
e) Develop a risk management culture at all levels of the organization, with scope including adequate communic
f) Ensure the development of the competency of employees concerned with application of risk management, inc
g) Ensure that the risk management function is applied on an independent basis, reflected among others by seg
h) Conduct regular reviews at a frequency determined according to the needs of the Bank to obtain assurance o
h.a) accuracy of the risk assessment methodology;
h.b) adequate functioning of the risk management information system; and
h.c) propriety of policies, procedures, and establishment of risk limits.

Article 3. Human Resources (HR)

1 The Bank shall establish clear qualification requirements at each job level of the Bank risk management unit;
2 To ensure that risk management processes are implemented on the basis of prudential principles, the Bank sh
3 The Bank shall develop adequate systems for employee recruitment, development and training, and remuner
4 The Bank shall deploy competent officers and staff in the Risk Management Unit in accordance with the natur
5 The officers and staff deployed in the Risk Management Unit shall possess the following skills:
a) Understanding of the inherent risk in each product/business line of the Bank;
b) Understanding of the relevant risk factors and market conditions affecting the products/business lines of the B
c) Experience and ability to understand and communicate the implications of the Bank’s risk exposures to the Bo

Article 4. Organization and Functions of Risk Management

1 The organizational structure of a Bank shall be designed to ensure that any unit conducting a particular transa
2 For the purpose of effective application of risk management, each Bank shall prepare an organizational struct
3 Risk Management Committee may have permanent and non-permanent members and shall consist of at leas
a) If the Bank has 3 (three) members of the Board of Directors, risk management committee may be staffed with
Marketing, Operations, or other similar Director) and the Compliance Director;
b) The Bank is required to appoint the Compliance Director as a permanent member of the
Risk Management Committee;
c) The recommendations issued by the Risk Management Committee shall reflect an agreement reached among
d) Relevant executive officers are officers at one level below those members of the Board of Directors who are in
e) Membership of executive officers in the Risk Management Committee shall be appropriate to the issues discu
4 The powers and responsibility of the Risk Management Committee are to provide recommendations to the Ge
a) Formulation of the Risk Management policy and any amendments thereto, including the risk management stra
b) Improvements or advancements in application of Risk Management on a regular basis as a result of any chan
c) Justification of matters pertaining to business decisions made in departure from normal procedure (irregulariti
5 The organizational structure of the Risk Management Unit shall be appropriate to the size and complexity of B
6 For a relatively large bank in terms of total assets with highly complex business operations, the organizationa
7 Depending on the size and complexity of Bank operations, the position of the officer in charge of the Risk Man
8 The Risk Management Unit shall be independent of risk-taking units, such as treasury and investment, credit,
9 The powers and responsibilities of the Risk Management Unit shall cover the following:
a) Monitoring of implementation of the risk management strategy recommended by the Risk Management Comm
b) Monitoring of positions/risk exposures on an overall basis, by type of risk, and by business line;
c) Application of stress testing to ascertain the impact of implementation of risk management policy and strategy
d) Study of proposal for any new activity and/or product submitted or developed by a specific unit within the Ban
e) Preparation and submission of the risk profile report to the General Director and Risk Management Committe
10 Risk – taking units are required to provide information on the inherent risk exposure within their own units to th

Article 5. Policy, Procedures, and Establishment of Limits

1 The Risk Management Policy is a written guide for the application of risk management and shall be consisten
2 Risk Management Policy shall be established, among others, by putting together a Risk Management Strateg
a) The Bank maintains risk limit consistent with the policies and internal procedures of the
Bank, laws and respective normative acts;
b) The Bank is managed by human resources possessing knowledge, experience, and expertise in risk manage
c) Determination of risks related to banking products and transactions on the basis of the Bank’s analysis of inhe
d) Establishment of use of a risk measurement method and risk management information system for precise cal
e) Setting of limits and establishment of risk tolerances representing limits of potential risk that can be absorbed
f) Establishment of the internal control system for application of risk management in order to ensure compliance
g) Evaluation of risk rating as the ground for implementing corrective actions of some aspects of banking produc
h) Preparation of a contingency plan for worst-case scenarios (external and internal factors) to ensure the surviv
3 Adoption of the risk management strategy shall also take into account the financial condition of the Bank, the
4 In formulating procedures and setting risk limits, the Bank shall take into account risk appetite based on its ex
a) Accountability and clear scale of delegation of authority;
b) Adequate documentation of procedures and establishment of limits to facilitate review and the audit trail;
c) Regular review of procedures and limits at least once each year or at a higher frequency, commensurate to th
d) Establishment of limits on the basis of overall limit, limit by type of risk, and limit by specific business line invo

Article 6. Processes for Application of Risk Management

1 Risk management process includes: identification of risks, risk measurement, monitoring and limits, risk mana
2 The purpose of risk identification is to identify all types of inherent risk in each business line that may potentia
b) cover all business lines (operations);
c) consolidate and analyze risk information from all available sources of information;
d) analyze risk probability and the consequences of these risks.
3 The risk measurement approach is used to measure the risk profile of the Bank in order to obtain a picture of
a) sensitivity of the product/activity to changes in factors that affect it under both normal conditions and abnorma
b) trend of changes in these factors, based on fluctuations and changes in the past, and correlations;
c) risk factors on an individual basis;
d) aggregate risk exposure, taking account of risk correlation;
e) all risks inherent in all banking transactions and products and that may be integrated into the management inf
4 Measurement of risk may use a quantitative or qualitative method. Generally, the simplest approach for meas
5 A Bank with large operations and a high degree of complexity may develop and use an internal model. Howe
6 The method used in measurement of risk shall be commensurate to the type, scale, and complexity of busine
7 The method of risk measurement shall be clearly understood by employees concerned with risk control, includ
8 As part of the application of risk monitoring, risk limits shall be established at least as follows:
a) take into account the ability of Bank capital to absorb risk exposures or losses that may arise, and the extent
b) take into consideration past experience of losses and capacity of human resources;
c) ensure that any positions exceeding the established limits are brought to the attention of the Risk Manageme
9 Setting of limits shall encompass the following:
a) transaction/product limit;
b) currency limit;
c) turnover limit;
d) open position limit;
e) loss limit;
f) intraday limit;
g) individual borrower and counterparty limit;
h) related parties limit;
i) industry/economic sector and geographic limit.
10 Limits shall be set by the Risk Management Unit or other collective body (asset – liability management comm
11 Establishment of limits shall take account of applicable laws and normative acts of Georgia, including but not
12 In the event of any exceeding of limits, the Bank shall make immediate adjustments and anticipate these exce
13 Any exceeding of a limit shall be immediately identified and followed up by the Board of Directors, and actions
14 The Bank shall put into place a backup system and effective procedures to prevent disruption to risk monitorin
 15 The risk management information system constitutes part of the management information system that shall be
a) that risk exposures are measured accurately, with proper information and on a timely basis, both for aggregat
b) compliance with application of risk management in respect of policy, procedures, and establishment of Risk lim
c) results (progress) in application of risk management compared to targets set by the Bank in accordance with
16 The risk exposure report, comprising one of the outputs of the risk management information system, shall be
17 Reports to management levels outside the relevant Board members and the Risk Management may be subm
18 The risk management information system shall be capable of translating risks measured in a quantitative tech
19 In developing any new information system technology and software, the Bank shall ensure that the application
20 If a Bank decides to outsource the development of software and upgrading of its system, the Bank shall ensu
21 Before applying a new management information system, the Bank shall conduct testing to ensure that the pro
22 If the Bank develops a new system/software, the functioning and design of the system shall be such that it ca
23 The Bank shall administer and update its system documentation, covering hardware, software, databases, pa
24 Risk control processes shall be instituted by the Bank to manage certain risks, and most importantly any risks
25 The Bank may control risks through measures that include hedging and other risk mitigation methods such as
26 In implementing the control functions for interest rate risk, foreign exchange risk, and liquidity risk, the Bank s
27 The Bank shall prepare and document the policies, procedures, and setting of limits that affect the ALMA perf
a) identification of interest rate risk arising from Bank transactions and products;
b) adoption of a system for measurement of interest rate risk;
c) authorizations and mechanism for exceptions to policy.
28 The scope of ALCO policy shall cover the following:
a) description of responsibilities, frequency of ALCO meetings, and membership of
ALCO;
b) description of the reporting lines between ALCO and the Board of Directors;
c) description of the fund placements strategy;
d) hedging strategy;
e) funding strategy;
f) pricing strategy;
g) interest rate risk management, namely establishment of limits on specific exposures; measurement of risks us
29 The scope of responsibilities of ALCO includes the following:
a) development, review, and modification of ALMA strategy;
b) evaluation of the interest rate risk position of the Bank and ALMA strategy to ensure that the outcome of the B
c) review of the assets and liabilities pricing strategy to ensure that pricing achieves optimum results in fund plac
d) review of deviations between actual results and the budget projections and business plan of the Bank; and
e) inform the Board of Directors of any developments in relevant legal provisions and regulations affecting ALMA
30 ALCO meetings may be convened monthly or quarterly, as appropriate to changes in the economy, condition
31 The ALCO regular meetings shall review:
a) decisions for (short-term) placements, pricing, and other funding decisions, trends in funds and actual outcom
b) implications of interest rate risk on the assets and liabilities of the Bank.
c) The results of the ALCO meetings shall then be documented and submitted as recommendations to the Board
32 The quarterly ALCO meetings shall at least conduct a full review of interest rate risk, liquidity risk and foreign
33 All reports presented to the Board of Directors shall be focused and adequately documented to enable easy a
a) ALCO minutes, including minutes from the previous period concerning discussed issues;
b) profit/loss statement, presenting data in comparison with the previous year;
c) balance sheet, presenting data in comparison to the previous period;
d) budget projection;
e) new credit report;
f) margin analysis report;
g) list of securities portfolios accompanied by transactions conducted during the latest month or quarter;
h) liquidity analysis report, in particular analysis of sources and use of funds;
i) pricing data report, reflecting the prices or costs of a product;
j) model simulation (if the Bank uses a model) or gap report for presenting the interest rate risk profile;
k) hedging report, if the Bank employs a hedging strategy.
34 The system, plans, and underlying assumptions in ALCO policy and decisions shall be subject to regular revie
35 The models used by the Bank for measurement of major Bank risks, such as credit risk, market risk, and oper
36 If the Bank conducts back-testing of internal models, such as Credit Scoring Tools, Value at Risk (VAR), and s
37 In the event that the model is put into application, the relevant data requirements shall also be adjusted to the
38 Banks using internal models for measurement of risk shall take into consideration at least the following:
a) accurate statistical results complying with standards;
b) management information system in place that allows the system to retrieve appropriate and accurate data an
c) create system to capture risk data (particularly for market risk) for all positions of the Bank;
d) documentation of data sources used to support risk measurement processes;
e) the database and data storage processes shall constitute part of the system design to prevent any disruption
39 To overcome any weaknesses that may arise from the use of certain risk measurement models, the Bank sha
40 Model validation is a process of:
a) evaluation of the internal logic of a particular model by verification of mathematical accuracy;
b) comparison of model predictions with subsequent events;
c) comparison of one model with another existing model, whether internal or external, if available.
41 Validation shall also be conducted for new models, whether developed in-house or purchased from a vendor.
42 The risk measurement process shall clearly set out the validation process, frequency of validation, data and in
43 Stress Testing is designed to complement the application of risk measurement by estimating the potential eco
44 In conducting Stress Testing, the risk measurement system shall be sufficiently flexible to facilitate the operati
45 The Stress Testing analysis shall be capable of quantifying potential for loss and thus enable the Bank to asse
46 As part of this Stress Testing, qualitative analysis shall also be made of the actions and decisions taken by the

Article 7. Internal Control in the Application of Risk Management

1 The scope of the internal control system in the application of risk management shall cover at least the followin
a) appropriateness of the internal control system to the type and level of inherent risk in the business operations
b) establishment of powers and responsibilities for monitoring of compliance with policy, procedures, and limits;
c) establishment of reporting lines and clear segregation of functions between operating units and units perform
d) organizational structure that clearly depicts the business activities of the Bank;
e) adequacy of procedures to ensure the compliance of the Bank with prevailing laws and normative acts;
f) effective, independent, and objective review of the procedures for assessment of Bank operations;
g) adequate testing and review of the management information system;
h) complete and adequate documentation of the scope, operating procedures, audit findings, and response of B
i) regular and ongoing verification and review of the handling of material weaknesses in the Bank and actions o
 2 Review of application of risk management shall encompass at least the following:
a) application of risk management shall be subject to regular review and evaluation at least once each year by th
Compliance officers and Internal Auditors in the internal audit unit;
b) the review and evaluation may be intensified in frequency and extended in scope according to developments
c) review shall also be conducted by an external auditor or other qualified party understanding the techniques of
d) review and evaluation of risk measurement in particular shall cover at least the following:
d.a) the methods, assumptions, and variables used to measure risk and determine risk exposure limits;
d.b) comparison between the results obtained from risk measurement methods using simulations or forward projec
d.c) comparison between the assumptions used in the method and actual conditions;
d.d) comparison between established limits and actual exposures;
d.e) determination of the suitability of risk measurement and exposure limits in relation to past performance and cu

Article 8. Risk Management for New Products and Activities

1 In order to manage inherent risks in a new product and activity, the Bank shall have a written policy and proce
2 The policy and procedures for risk management for a new product and activity shall state at least the following
a) standard operating procedure and powers in management of the new product and activity;
b) identification of all risks inherent in the new product and activity;
c) trial period for the methods of measuring and monitoring inherent risks in the new product and activity to ensu
d) the accounting information system for the new product and activity, presenting at least the risk profile and leve
e) legal analysis of the new product and activity, covering the possibility of legal risks that may arise and a comp
3 If the Bank is a member of a business group, and especially a financial group with centralized risk manageme
4 In the event of inter-unit transfers (among business lines) and inter-branch operations that give rise to certain
a) clearly identify the internal transactions;
b) reconcile internal deals in an accounting process aimed at putting together the consolidated financial stateme
c) ensure that risk positions arising from internal transactions can be measured, monitored, and controlled by the
d) ensure that limits are established on a consistent basis;
5 The Bank shall reconcile on a regular basis, at least each month, the variances arising between the profit and
6 In the event that inter-company transactions are conducted within a business group, the Bank shall also ensu

Article 9. The Role of Supervisors in Evaluation of Bank’s Risk Management Processes

1 In the course of implementing the supervisory policy, the National Bank of Georgia shall focus special attentio
2 Use of Risk Management for bank supervision purposes will expedite evaluation of Bank’s potential losses, w
and submit the respective report, along with financial statements on risk profile, to the National Bank of Georgia.
3 This report shall encompass comparison with the previous quarter. It shall also reflect level and dynamics for
4 Commercial Bank shall also be required to submit report to the NBG on a new product or activity within 7 (sev
5 Bank shall be required to submit other reports to the National Bank if the bank’s position may cause significan
a) Bank is under intense or special supervision of the National Bank;
b) Bank is facing the largest market and liquidity risks;
c) External (market) condition is fluctuating and goes beyond the Bank’s control.
6 Frequency and format of submitting reports defined under this Article shall be determined on the basis of cons
7 In the course of CAMEL or limited scope examination of Banks special attention shall be focused on fulfillmen
a) how management and quality of all nine risks recognized at international level are ascertained in the course o
b) What tangible (capital, liquidity) and intangible (management quality and control systems) resources are in the
c) Whether the volume of revealed resources is sufficient to balance risk.

8 Inspectors shall determine whether the Bank’s approach towards risk management, including its subsidiaries,
9 Inspectors shall request that banks have right effective system to Identify, measure, manage and control risks
foreign exchange operations, liquidity management and etc. Given the fact that currently banking activities are determined by c
10 Inspectors shall evaluate individual banks on-site for the purpose of identification, measurement, managemen
11 Inspectors shall ascertain whether the Bank’s management recognizes problem loans at early stage and take
12 When reviewing adequacy of credit risk management process examiners shall determine whether this proces
a) Only at individual business line or legal entities;
b) For a wide range of activities and branches and consolidated bank.

13 After evaluating credit risk management process examiners, in concert with managers, shall direct their efforts

14 Supervisors shall take into account set prudential limits (e.g. limits for large exposure) concerning all banks re
15 If examination finds the Bank’s risk management to be inadequate or efficient for special risk profile of the Ban

Chapter II.
Credit Risk
Article 10. Concept of Credit Risk, Responsibilities of the Supervisory Board and Board of Directors for Implementation of Credi
1 Credit risk is the risk of default by counterparty. Credit risk may arise from various business lines of the Bank
2 The Supervisory Board shall be responsible for approvals and regular review, at least annually, of the credit ri
a) reflect the Bank’s tolerance of risk and probability of sustained earning of expected revenues, taking into acco
b) take account of domestic and international economic cycles and changes that may affect the composition and
c) be designed to meet long-term needs with adjustments as may be necessary.
3 The Board of Directors shall be responsible for implementing the credit risk strategy and policy and developin
4 The Bank shall identify and manage the inherent credit risk in all new products and activities and ensure that

Article 11. Policies, Procedures, and Establishment of Limits

1 The Bank shall have sufficient information to assist it in the comprehensive assessment of debtor risk profiles
b) up to date risk profile of the debtor and collateral, and sensitivity to changes in economic and market condition
c) analysis of repayment ability, both historical and future based on financial history and cash flow projection und
d) capacity and stability of the debtor’s business and condition of the economic sector/ business of the borrower
e) terms and conditions of the credit applied for, including any agreement designed to limit changes in the debto
2 Selection of credit transactions in taking on risk exposures shall take into account the level of profitability, whic
3 Pricing of credit facilities shall be consistent with the calculation of the risk level of the transaction concerned,
4 At least every quarter, the Board of Directors shall obtain the profitability analysis of lending transactions. If n
5 Decision making procedures for loans and/or commitments, particularly when operating through delegation of
6 In the working framework or mechanism for compliance with delegation procedures in decision making on ext
7 The review process shall be conducted at least each quarter and cover classification of credit risk exposures,
8 In developing the credit administration system, the Bank shall ensure:
a) efficiency and effectiveness of credit administration, including monitoring of documentation, contractual terms
b) accuracy and timeliness of information provided for the management information system;
c) proper segregation of duties;
d) viability of control of all back office procedures; and
e) compliance with internal written policy and procedures and applicable legal provisions.
9 The Bank shall administer and document all quantitative and qualitative information and material evidence in
10 The Bank shall ensure the completeness of records in the credit file at least every quarter for debtors in arrea
11 In its procedures for establishing limits on credit risk, the Bank shall among others present the factors that ma
12 The Bank shall establish limits for all customers or counterparties before entering into transactions with those
13 Limits for credit risk shall be for the purpose of mitigating risks from concentrated lending. The limits establish
a) exposure to customers or counterparties;
b) exposure to connected parties;
c) exposure to certain economic sectors or geographical areas.
14 A limit for a single customer or counterparty may be based on analysis of quantitative data obtained from info
15 Establishment of credit risk limits shall be fully documented in writing to facilitate the audit trail for the purpose
16 In addition to requirements set by the National Bank of Georgia, the Bank shall observe internal policy, proced

Article 12. Identification, Measurement, and Monitoring Processes and the Management Information System for Credit Risk

1 The Bank shall identify the credit risk inherent in all of its products and activities. This identification of credit ri
2 For credit operations and trade financing services, assessment of credit risk shall take into account the financ
3 For treasury and investment activities, assessment of credit risk shall take into account the financial condition
4 The Bank shall have written procedures for conducting risk measurement that enable:
a) centralization of on balance sheet and off balance sheet exposures carrying credit risk from each debtor or by
b) assessment of differences in categories of credit risk ratings using a combination of qualitative aspects and qu
c) distribution of complete information on the results of risk measurement for monitoring by relevant units.
5 The system for measurement of credit risk shall take into account at least the following:
a) the characteristics of each type of transaction involving credit risk, the financial condition of the debtor/counte
b) gap profile in regard to potential changes in the market;
c) collateral and/or guarantee;
d) potential for default;
e) ability of the Bank to absorb potential default.
6 Banks using risk measurement techniques through the internal risk rating approach shall verify data on a regu
7 Parameters used in measuring credit risk shall include but not be limited to the following: a) non performing lo
b) concentration of lending by borrower and economic sector;
c) adequacy of collateral;
d) lending growth;
e) non-performing treasury and investment (non-credit) portfolios;
f) composition of treasury and investment portfolios (inter-bank securities, and equity participation);
g) adequacy of reserves;
h) trade financing transactions in default;
i) concentration in provision of trade financing facilities.

8 The Bank may use a system and statistical/probability methodology to measure risk pertaining to certain type
 9 In using this system, the Bank shall:
a) conduct regular review of the accuracy of the model and assumptions used for projection of defaults;
b) adjust assumptions in keeping with changes in internal and external conditions.
10 In the event of large risk exposures or relatively complex transactions, the decision making process for credit
11 The Bank shall document such credit information as assumptions, data, and information used in the system, i
a) support decision making processes and ensure compliance with provisions concerning delegation of authority
b) be independent of any possibility of engineering of score-outputs, through use of appropriate and effective se
c) be reviewed by a unit or party independent of the unit applying the system.
12 For the purpose of monitoring of credit risk:
a) The Bank shall develop and apply an information system and procedures to monitor the condition of each deb
b) The credit risk monitoring system shall state at least measurements for the purpose of:
b.a) ensuring that the Bank is informed of the latest financial condition the debtor or counterparty;
b.b) monitoring compliance with the terms and conditions of the loan agreement or contract for the credit risk trans
b.c) assessing the adequacy of collateral relative to the liabilities of the debtor or counterparty;
b.d) identify any delay in payments and classify problem loans on a timely basis;
b.e) take quick action to deal with problem loans.
c) The Bank shall also monitor credit risk exposures in comparison with the established limits on credit risk, inclu
d) Monitoring of these credit risk exposures shall be conducted on a regular and ongoing basis by the Risk Mana
e) For the purpose of monitoring credit risk exposures, the Risk Management Unit shall prepare regular reports o
13 The key principles for use of internal risk rating are as follows:
a) The procedure for use of the internal risk rating system shall be formalized and documented.
b) The system shall be capable of early identification of any changes in risk profile brought about by potential or
c) The internal risk rating system shall be regularly evaluated by a party independent of the unit applying the inte
14 The reports generated by internal risk rating, such as reports on the condition of the credit portfolio, shall be s
15 To improve the effectiveness of credit risk measurement processes, the Bank shall have a management inform
16 The management information system shall:
a) Generate reports or information for monitoring of actual exposures against established limits and any exceedi
b) Provide accurate and timely data on total credit exposure of individual borrowers and counterparties, the cred
c) Enable the Board of Directors to identify any risk concentrations in its credit portfolio.

Article 13. Control of Credit Risk

1 The Bank shall establish a system for independent and ongoing internal credit reviews in regard to the effectiv
2 The review shall be conducted by a unit or officer independent of units conducting credit risk transactions. Th
3 The Bank shall ensure that the units in charge of credit and other credit risk transactions are adequately mana
4 The Bank shall establish and apply internal control to ensure that any exceptions to policy, procedures, and lim
5 When conducting internal audit, the Internal Audit Unit shall test the effectiveness of internal control to ensure
6 The Bank shall have procedures for management of problem loans, including a written system for detection o

Chapter III
Market and Interest Rate Risks
Article 14. Concepts of Market and Interest Rate Risks
1 Market Risk is the risk arising from change in market price by Bank’s balance sheet and offbalance sheet pos
 2 Market risk consists of interest rate, fund, foreign exchange and commodity position risks. The present docum
3 Market risk may arise in business lines such as investment in securities and money market, equity participatio
4 Interest rate risk is the potential loss incurred from change in market interest rates.
5 Foreign exchange risk is the risk of devaluation of Bank’s assets formed in foreign currency determined by flu

Article 15. Responsibilities of Supervisory Board and Board of Directors over Interest Rate Risk Strategy and Policy Implementa
1 The Supervisory Board of a Bank shall have adequate understanding of the types and levels of interest rate r
2 In the course of approving this policy and strategy, the Supervisory Board of the Bank shall link this approval t
3 The Supervisory Board of the Bank shall approve the policy and strategy pertaining to management of interes
4 The Supervisory Board of the Bank shall be informed regularly by the Board of Directors on interest rate risk e
5 The Board of Directors of the Bank shall be responsible to ensure that the Bank has adequate policy and proc
6 The Board of Directors of the Bank shall also be responsible for maintenance of: a) interest rate risk limits;
b) standards and systems for measurement of interest rate risk;
c) standards for assessment of position and measurement of outcome from interest rate risk exposures;
d) reporting of interest rate risk and review process for management of interest rate risk;
e) internal control for application of interest rate risk management.

Article 15. Policy, Procedures, and Establishment of Limits

1 The Bank shall have a comprehensive, written policy and procedures for management of interest rate risk.
2 The policy and procedures shall establish and describe the lines of responsibility and accountability beyond d
3 The interest rate risk policy shall also set out quantitative parameters obtained from the use of methods for m
4 All policy and procedures for interest rate risk shall be reviewed on a regular basis and revised if necessary b

Article 17. Identification, Measurement, and Monitoring Processes, and the Management Information System for Interest Rate R
1 The Bank is required to make precise identification of interest rate risk in assets, derivative transactions, and
2 Assets, liabilities, and off-balance sheet accounts to be marked to market shall be grouped in the trading book
3 The marked to market process represents one technique that reflects the value of assets, derivative transacti
4 The adequacy and accuracy of the marked to market process shall be verified by a party independent of the o
5 Banks developing internal models for internal purposes may use Value at Risk (VAR) to measure the maximu
6 In order to prevent irregularities in statistical results and treatment of interest rates, the Bank shall use its own
7 In assessing inherent interest rate risk exposures in a number of business lines, the Bank shall at least be cap
b) interest rate volatility by maturity.
8 If necessary, the Bank may make corrections or improvements to the pricing criteria and pricing process with
9 The Bank shall at least evaluate and perform comprehensive calculations for each transaction to ensure that
10 The Bank shall monitor compliance with limits on a daily basis and any exceeding of limits and follow up actio
11 The information system shall be capable of monitoring daily changes in interest rates and the influence of the
12 A Bank active in derivative transactions and trading of other financial instruments shall have a system capable
13 The Risk Management Unit shall be responsible for formulating and distributing accurate, timely reports on:
a) gains and losses on assessment of marked to market, classified by product, transaction, or type of exposure;
b) sensitivity of exposures to losses from impact of changes of market interest rates;
c) potential loss that may arise from changes in market interest rates.
14 The Risk Management Unit shall regularly study trends in interest rate movements or possibilities for emergen
Article 18. Control of Interest Rate Risk
1 Risk control and operational management responsibility for positions managed until maturity (balance sheet it
a) reconciliation of positions managed and recorded in the management information system;
b) control of accuracy of profit and loss and compliance with applicable legal provisions and accounting standard
c) classification and formation of appropriate provisioning according to applicable legal provisions.
2 For securities and bonds listed or traded on the Capital Market, the Bank shall apply an internal control proce
3 Disregarding the legal criteria for provisioning if the Bank deems that the credit spread is widening, the Bank s
4 If increased likelihood of default is ascertained, the Bank shall strictly monitor securities and bonds and take n
5 For securities and bonds not listed or traded on the market, the Bank shall conduct a regular review of the con
6 If the Bank engages in derivatives contracts such as interest rate swaps, the Bank shall ensure as part of hed
7 If the transactions are conducted for hedging purposes, the Bank shall establish clear responsibilities and inte
a) ensuring that the accounting standards used do not give rise to irregularities in recognition of revenue;
b) check that the transactions have been effectively conducted according to the instructions or recommendation
c) assess regularly whether hedging is effective, particularly in the calculation of the hedging ratio and comparis
d) ensure that the transaction contracts are managed until maturity and will not be transferred to a trading positio
e) check that the contractual terms and conditions of internal deals within the Bank organization have been fulfill
f) reassess the credibility of counterparts and prevent concentration of placements for the reason that in the eve

Article 19. Control of Foreign Exchange Risk by the Supervisory Board and Board of Directors
The Board of Directors of the Bank shall ensure that Bank operating units engaged in trading of products and transactions carry
a. the risk-taking philosophy in market transactions;
b. factors affecting foreign exchange risk;
c. other risks incurred as a result of conducting market transactions.

Article 209. Policy, Procedures, and Establishment of Limits for Managing the Foreign Exchange Risk

1 The Bank shall have a comprehensive, written policy and procedures for management of foreign exchange ris
2 The policy and procedures shall stipulate and describe the lines of responsibility and accountability that exten
3 The foreign exchange risk policy shall also identify the quantitative parameters that represent the risk toleranc
4 All policies and procedures for foreign exchange risk shall be subject to regular review and revision if necessa
5 The procedures applied by the Bank shall be adequate for consolidating open positions on both net and gross
6 The Bank shall establish consistent internal limits on the Net Open Position (NOP) in order to prevent any exc
7 The limits established in the course of FX currency transactions and FX currency denominated instruments sh

Article 21. Identification, Measurement, and Monitoring Processes, and the Management Information System for Foreign Excha
1 The Bank shall conduct precise identification of assets, derivative transactions, and other financial instrument
2 In assessing the inherent foreign exchange risk exposure across several business lines, the Bank shall at lea
a) coverage potential loss due to exchange rate fluctuations on the funds placements side, including off balance
b) potential loss due to exchange rate fluctuations on the funds mobilization side, including commitments in off b
3 In addition to the above parameters, the Bank when measuring foreign exchange risk shall also take account
a.a) level of Bank capital, taking account of foreign exchange risk as required under applicable legal provisions;
a.b) potential volatility in Bank capital ratios based on calculation of exchange rates against accounts/positions de
a.c) foreign exchange risk exposure, such as: volume and stability of portfolios carrying foreign exchange risk; rev
b.a) effectiveness of hedging in controlling foreign exchange risk, such as matching of cash flow, hedging of projec
b.b) volume and maturity of positions denominated in foreign currencies;
b.c) volume and maturity of cross currency mismatches;
b.d) impact of changes in the business strategy of the Bank.
c) External Factors, such as impact of economic conditions, regulatory changes, and market competition and etc.
4 The Bank shall at least conduct a thorough evaluation and calculation of each transaction to ensure that the o
5 The bank shall monitor compliance with limits on a daily basis, any exceeding of limits, and follow up for resol
6 The information system shall be capable of daily monitoring of exchange rate movements and the impact of th
7 Any Bank active in derivative transactions and trading in other financial instruments denominated in foreign cu
8 The Risk Management Unit shall be responsible for preparation and distribution of accurate and timely reports
a) gain and loss from foreign exchange risk exposures;
b) sensitivity of exposures to losses resulting from changes in market foreign exchange
rates;
c) potential loss that may arise from changes in market foreign exchange rates.
9 The Risk Management Unit shall conduct a regular review of trends in exchange rate movements or possibilit

Article 22. Control of Foreign Exchange Risk

1 The Bank shall institute control of foreign exchange risk for the purpose of:
a) hedging FX-denominated gains and/or FX-denominated expenses and losses against adverse movement in F
b) taking account of prudential principles and selection of appropriate hedging strategy for provision of funds and
c) provisioning in FX currencies equivalent to amounts in the domestic currency.
2 Business lines or Bank units without limits in FX currency positions shall not be permitted to conduct transacti
3 Appropriate control of foreign exchange risk shall be instituted and effectively applied for the purpose of comp

Chapter IV
Liquidity Risk
Article 23. Definition of Liquidity Risk
1 Liquidity risk is risk caused among others by the inability of the Bank to settle liabilities at due date. Liquidity r
a) Market Liquidity Risk, namely risk arising from the inability of the Bank to offset certain positions at market pric
b) Funding Liquidity Risk, namely risk arising from the inability of the Bank to convert assets to cash or obtain fu
2 Liquidity Risk may be inherent in the business lines of credit, (provision of funds), treasury and investment, fu
3 Liquidity management is extremely important, given that any liquidity shortage may be disruptive not only to th

Article 24. Oversight of Liquidity Risk by the Supervisory Board and Board of Directors
1 The Supervisory Board and Board of Directors of the Bank shall understand liquidity risk and work actively to
2 The liquidity risk policy and strategy shall consider risk tolerance and its impact on capital, taking into account
3 The Board of Directors shall elaborate and communicate the policy and strategy for liquidity risk to all relevan
4 The Board of Directors shall ensure the deployment of human resources and development of their competenc
5 The Board of Directors shall actively measure the liquidity position of the Bank not only on the basis of curren

Article 25. Policy, Procedures, and Establishment of Limits for Liquidity Risk Management
1 The liquidity risk management policy shall be formulated in accordance with the mission, business strategy, ca
 2 The liquidity risk management policy shall be periodically evaluated and updated in keeping with changes in l
3 The liquidity and funding strategy shall assign and provide powers to a specific unit for determining markets, i
4 The liquidity management policy and procedures approved by the Board of Directors shall be communicated t
5 The policy and management of Bank liquidity and funding shall establish limits that are implemented on a con
6 The limits established shall be consistent and appropriate to the contingency funding plan to ensure that the c
7 Establishment of limits shall at least take account of the following:
a) regular funding needs or surplus liquidity;
b) consistency with positions taken on interest rate risk;
c) overall liquidity on the inter-bank money market and potential for liquidity shortages based on past experience
d) movement in market interest rates and availability of liquidity.
e) The established limits shall be reviewed and adjusted in the event of any significant change in overall market
8 The policy, procedures, and processes for establishments of liquidity risk limits shall be fully documented in w

Article 26. Identification, Measurement, and Monitoring Processes and the Management Information System for Liquidity Risk

1 The Bank shall accurately identify and analyze the banking products and transactions and business lines that
2 The Bank shall analyze the possibility of any impact from the application of various different scenarios on the
3 The Bank may employ various scenarios that are used to assess:
a) cash flow and liquidity position of the Bank under normal conditions;
b) individual Bank scenario under crisis, among others reflected in inability to extend most of the liabilities of the
c) scenario of banking system in crisis, among others reflected in most or all of the banking system facing liquidi
d) In applying these scenarios, the Bank shall prepare assumptions on future liquidity needs, both short term an
4 The scope of measurement of liquidity risk includes:
a) funding structure, namely assessment of the deposit structure by type, maturity, currency, interest rate, owner
b) expected cash flow, namely assessment of all incoming and outgoing cash flow including funding needs to me
c) market access, namely assessment of the ability of the Bank to raise liquidity on the market under both norma
d) asset marketability, namely assessment of liquid assets that may be converted into cash, particularly under ab
5 Liquidity may be calculated by putting together a maturity ladder for each scenario, by preparing cash flow on
6 If the cash flow forecast is prepared on the basis of estimated statistical data, the accuracy of the estimation s
7 For Monitoring of Liquidity Risk the Bank shall assess the stability and trends in depositor funds and prepare
8 The Bank shall collect data and monitor the liquidity position on a regular basis (daily, weekly, monthly, and ot
9 The Bank shall conduct a regular review of the factors responsible for liquidity risks and their linkage to losses
10 For the purpose of monitoring liquidity risk exposure, the Risk Management Unit shall prepare reports on loss
11 The management information system for liquidity risk shall be capable of providing accurate, timely informatio
12 The Risk Management Unit shall analyze the reports produced and thereafter communicate the findings of thi
13 The Bank shall take immediate action to resolve weaknesses in an automatic capturing process by means of
14 Reports generated by the information system shall undergo regular testing for effectiveness and reliability acc

Article 27. Control of Liquidity Risk

1 The Bank shall have a contingency funding plan to avoid any possible shortfall in liquidity that could cause the
2 The contingency funding plan shall include assumptions and accurate estimates on:
a) establishment of stability in deposit funds and outgoing cash flow based on statistical estimates;
b) reasonable price levels for securities, in the event that the securities are sold;
c) liquidity reserves and assets that can be used as collateral in the event that the Bank raises borrowings, such
d) possibility of default by debtors or borrowers (other parties) in meeting obligations on a timely basis;
e) possibility of outflow of funds against off balance sheet transactions.
3 The Bank shall conduct regular testing of the contingency funding plan to establish the amount of funds that m
4) The Bank shall conduct a review of its customer relations strategy, diversification of deposits, and ability of the Bank to sell liq

Chapter V
Legal Risk

Article 28. Definition of Legal Risk

Legal risk is the risk arising from legal weaknesses, among others resulting from legal actions, absence of supporting provision
Article 29. Active Oversight of Legal Risks by the Supervisory Board and Board of Directors

1 The Supervisory Board and Board of Directors shall understand the inherent legal risks in business lines that
2 The Board of Directors shall identify and control legal risks inherent in any new products and activities and en
3 The Board of Directors shall ensure that the Bank has a policy for calculating the impact of legal risk on Bank
4 The Board of Directors shall continually instill a culture of compliance and concern over legal risk among all e
5 The Board of Directors shall involve the officers and employees of the Bank in communicating issues of legal

Article 30. Policy and Procedures for Controlling Legal Risk

1 The Bank shall have a written policy and procedures for control of legal risk, adjusted to the business strategy
2 The procedures for control of legal risk shall be approved by the Board of Directors and communicated to all l
3 The Bank shall have in place and implement procedures for analysis of legal risk of new products and activitie
4 The Bank shall have a unit or group of officers functioning as “legal watch” for those providing legal analysis/a
5 The legal unit/department, Risk Management Unit, and risk-taking units shall jointly assess the impact of chan
6 The Bank shall have a code of ethics applied to all employees at every level of the organization to improve co
7 The Bank shall impose sanctions on a consistent basis on officers and employees proven to have committed
8 The Bank shall conduct regular evaluation and update its policy and procedures for control of legal risk in acc

Article 31. Identification, Measurement, Monitoring and Management Information System for Legal Risk
1 The Bank shall identify the inherent legal risk in the various business lines, such as credit (provision of funds)
2 The Bank shall record and administer all events pertaining to legal risk, including the total potential loss result
3 In the process of measuring legal risk, the Bank may use a combination of qualitative and quantitative approa
4 The Bank shall monitor legal risk on a regular basis in accordance with past experience with losses arising fro
5 The management information system shall be capable of providing complete, accurate reports on legal risk ex

Article 32. Control of Legal Risk

 1 The legal department shall conduct a regular review of contracts and agreements between the Bank and othe
2 In the event that the Bank issues guarantees such as netting agreement, collateral pledges, these guarantees
3 The Bank shall improve its control of legal risk to ensure:
a) compliance of operations, organization, and internal control with applicable legal provisions, code of ethics, an
b) compliance with internal procedures;
c) quality of financial statements;
d) effectiveness and efficiency of the risk management information system; and
e) effective application of communications pertaining to the impact of legal risk on all employees at every level o

Chapter VI
Reputation Risk
Article 33. Definition of Reputation Risk and its Oversight by Supervisory Board and Board of Directors
1 Reputation risk is risk brought about among others by negative publicity concerning the operations of the Ban
2 The Supervisory Board and Board of Directors shall understand the inherent reputation risks in specific activit
3 The Board of Directors shall ensure that the Bank has a policy for calculating the impact of reputation risk on
4 The Bank shall have a unit with powers and responsibility for providing comprehensive information to custome

Article 34. Policy, Procedure, and Establishment of Limits for Reputation Risk
1 The Bank shall have a written policy and procedures complying with the principles of transparency and improv
2 The Bank shall have and implement an appropriate communications policy for dealing with negative media re
3 The Bank shall implement procedures for control of reputation risk pertaining to experience with reputation ris
4 The Bank shall communicate its policy and procedures for control of reputation risk to all employees at every

Article 35. Identification, Measurement, Monitoring and Management Information System for Reputation Risk
1 The Bank shall identify the inherent reputation risk in specific business lines such as credit (provision of funds
2 The Bank shall record and administer all events pertaining to reputation risk, including the total potential loss
3 In the process of measuring reputation risk, the Bank may use a combination of qualitative and quantitative ap
4 The Bank shall monitor reputation risk on a regular basis in accordance with past experience with losses caus
5 The management information system shall be capable of providing complete, accurate, and timely reports on

Article 36. Control of Reputation Risk

1 The Bank shall improve compliance with applicable laws and normative acts as part of the control of reputatio
2 The Bank shall take immediate action to resolve any customer complaints and legal actions that may increase
3 The Bank may cooperate with third parties, to control reputation risk.

Chapter VII
Strategic Risk
Article 37. Definition of Strategic Risk and its Oversight by the Supervisory Board and Board of Directors
1 Strategic risk is risk among others brought about by poor setting and implementation of the Bank strategy, poo
2 The Supervisory Board and Board of Directors shall understand the inherent strategic risk in certain activities
3 The Supervisory Board and Board of Directors shall put together and approve a corporate plan and business
4 The Board of Directors shall monitor the internal condition (strengths and weaknesses of the Bank) and devel
 1 The Board of Directors shall ensure that strategy adopted for achievement of the business objectives of the B
2 The Bank shall have a unit possessing powers and responsibilities that support the formulation of strategy an
Article 38. Strategic Risk Policy and Procedures
1 The Bank shall establish a written corporate plan and business plan with a time frame of no less than 3 (three
2 The corporate plan and business plan shall be adopted by the Board of Directors and approved by the Superv
3 The corporate plan and business plan shall have alternative assumptions for the event of any deviation from s
4 The Bank shall have procedures in place to track progress against budget outcome and performance against

Article 39. Identification, Measurement, Monitoring and the Management Information System for Strategic Risk
1 The Bank shall identify the inherent strategic risks in specific major business lines, such as credit (provision o
2 The Bank shall record and administer changes in performance resulting from failed or ineffective implementat
3 In the process of measuring strategic risk, the Bank may use a combination of qualitative and quantitative app
4 The Bank shall monitor strategic risk on a regular basis according to past experience with losses caused by s
5 The management information system shall be capable of providing complete, accurate, and timely reports on
Article 40. Control of Strategic Risk
1 The Bank shall institute financial control processes aimed at monitoring progress against targets and ensuring
2 The Bank shall have a unit that is assigned powers and responsibilities for analysis of actual vs. target reports
3 The Bank shall conduct regular testing and review of the management information system for strategic risk.

Chapter VIII
Compliance Risk
Article 41. Definition of Compliance Risk and Major Requirements Related with Managing Such Risk
1 Compliance Risk is the risk arising from failure of the Bank to comply with or implement laws, regulations, and
2 The Bank shall identify and analyze factors that may increase exposure to compliance risk and quantitatively
a) business activities of the Bank, namely the type and complexity of Bank operations, including new products a
b) non-compliance of the Bank, namely volume and materiality of Bank non-compliance with internal policies and
c) litigation, namely the amount and materiality of litigation claims and customer complaints.
3 The Bank shall ensure the effective application of compliance risk management, with use of adequate policy
a.a) appropriate setting of the established risk limits;
a.b) consistency of risk management policy with the direction and business strategy of the
Bank;
a.c) application of compliance and regulation of responsibilities and accountability at all levels of the organization;
a.d) policy for waivers in case of irregularities;
a.e) application of policy for regular, procedural checks on compliance.
b) With respect to procedures
b.a) timeliness in communication of policy to all employees at every level of the organization;
b.b) adequacy of control for development of new products;
b.c) adequacy of reports and data systems;
b.d) adequacy of oversight by the Supervisory Board and Board of Directors of the Bank;
b.e) adequacy of the internal control of the Bank, including segregation of functions and dual control;
b.f) timely operation and appropriate level of sophistication of the management information system;
b.g) effectiveness of control in regard to accuracy, completeness, and integrity of data;
b.h) adequacy of processes for interpreting applicable laws and regulations;
b.i) commitment of the Bank to ensure proper allocation of Bank resources for employee training and promotion o
b.j) timely identification and corrective actions in regard to any effect of irregularities and non-compliance with app
b.k) adequacy of integration of compliance into each stage of the Bank’s corporate planning.
c) with respect to human resources
c.a) appropriateness of the compensation program and performance management for Bank employees and office
c.b) turnover rate (rotation) of Bank employees and officers holding strategic positions in the Bank (high risk-taking
c.c) adequacy of the training program;
c.d) adequacy of competence for the Supervisory Board and Board of Directors of the Bank;
c.e) level of understanding and alignment of the business strategy to risk tolerance. d) with respect to control syste
d.a) effectiveness and independence of the audit function, quality assurance unit (if any), and
Risk Management Unit;
d.b) accuracy, completeness, and integrity of reports and management information system;
d.c) system in place for monitoring irregularities, capable of identifying and measuring any increase in frequency a
d.d) responsiveness of the Bank to irregularities in regard to the internal policy and procedures of the Bank;
d.e) responsiveness ofObligation of bank in terms of compliance risk
For the purposes of Article 41 of this regulation each bank shall be obliged to establish compliance function, and ensure and pr

Chapter IX
Preparation and Reporting of Application of Risk Management
Article 43. Efficiency of Risk Management
1 Risk Management for Commercial Banks shall be implemented according to the schedule set forth in the actio
2 National Bank of Georgia may request that the Bank make adjustments to its Action Plan if the Action Plan is
3 The Bank shall submit report on its risk management to the NBG, within not later than 10 calendar days follow
4 During the period from issuance of the present Regulation by the National Bank of Georgia to its application f
a) conduct a comprehensive diagnosis and analysis of risk management policies, procedures, organization, syst
b) assess, examine, and compare these with reference to these Guidelines,
c) identify existing weaknesses and ineffective risk management requiring immediate resolution to ensure that th
5 Assign a staff member or officer or a project team responsible for the process of formulating the Action Plan.
6 Familiarize all (relevant) employees with the minimum standards for application of Risk Management to ensur
7 Report, on progress of implementing the Action Plan as referred to above , shall be reported to the Board of D
8 Ensure that the Internal Audit Unit is involved in the diagnostic process and in the formulation and monitoring
9 The Board of Directors shall be provided with regular reports from the project manager on the progress achiev
10 The diagnostic report, Action Plan, and progress report shall be made available to the Internal Audit Unit and/

Article 44. Risk Profile Report

1 The Bank shall submit a risk profile report to the NBG on a quarterly basis for the positions of March, June, Se
2 The risk profile report submitted by the Risk Management Unit shall contain the same substance as the risk p

Article 45. New Product and Activity Report

1 Upon the launching of each new product and activity, the Bank shall be required to deliver a new product and
2 The scope of the new product and activity report shall cover at least data, information, and explanations on:
a) standard operating procedures (SOP) for the new product and activity;
b) organization and powers for implementing the new product and activity;
c) results of the Bank’s identification of the inherent risk in the new product and activity;
d) results of testing the method for measurement and monitoring inherent risk in the new product and activity;
e) accounting information system for the new product and activity, including explanation of the relationship betwe
f) legal analysis for the new product and activity.
3 The Bank shall be required to deliver other reports to the NBG in the event that the condition of the Bank may
a) the Bank is placed by the NBG under the status of Intensive or Special
Supervision;
b) the Bank has highly significant market risk and liquidity risk exposures; and
c) external (market) conditions undergoing sharp fluctuation largely beyond the control of the Bank.

Chapter X Operational Risk

Article 46. Definition of Operational Risk

1 Operational risk is the risk of loss caused by inadequacy of internal processes, human error, system failure, o
2 Operational risk may be defined as the risk of incurring losses, determined by inadequate or unsuccessful inte
3 Operational risk may bring about direct and indirect financial losses and potential loss of opportunity to earn p
4 Operational risk may be inherent in any business line of the Bank, such as lending (provision of funds), treasu

Article 47. Active Oversight of Operational Risk by the Supervisory Board and Board of Directors
1 The Board of Commissioners and Board of Directors of the Bank shall understand operational risk and work a
2 The Board of Directors shall elaborate and communicate the policy and strategy for operational risk to all rele
3 The Board of Directors shall be able to identify and manage operational risk inherent in a new product and ac
4 The Board of Directors shall ensure adequate deployment and development of competency and integrity of hu

Article 48. Policy, Procedures, and Establishment of Limits

1 The Bank shall have an operational risk management policy appropriate to its mission, business strategy, cap
2 The Bank shall establish and apply procedures for assessment of operational risk and conduct regular monito
3 The Bank shall evaluate and update its policies and procedures for operational risk management in accordan
4 The Bank shall establish operational risk limits (reserves) taking account of risk exposures and experience wi
5 The policy, procedures, and process for establishment of operational risk limits shall be fully documented in w
6 The Bank shall have procedures to measure settlement risk exposure, particularly if the risk originates from fo
7 The Bank shall conduct an assessment of the stages in the transaction settlement process, particularly conce
8 The Bank shall have a procedure for monitoring the settlement of new transactions or cases of transactions n
9 The Bank shall have in place a procedure for settlement of transactions brought on by deteriorating liquidity c
10 The Bank shall promptly confirm transactions according to established procedures and monitor these transac
11 The Bank shall ensure that the use of accounting methods complies with prevailing accounting standards with
a) conduct a regular review to ensure the suitability of the method used to assess transactions;
b) conduct a regular review of the suitability of the accounting method used in regard to applicable financial acco
c) conduct regular reconciliation of transaction data;
d) identify and analyze any anomaly in transactions;
e) maintain all documents and files pertaining to accounts, sub-ledgers, general ledgers, administration of asset
12 The Bank shall maintain accounting data and details of third party assets placed in the custodianship.
 13 The Bank shall obtain adequate information on the authenticity of asset safekeeping/custodianship to ensure
14 The Bank shall conduct regular checking of the data of assets in safekeeping against the agreements/contrac
15 The Bank shall apply Know Your Customer Principles (KYC) on a consistent basis appropriate to its exposure
16 In applying KYC, the Bank shall comply with all requirements and guidelines stipulated in the applicable legal
17 The Bank shall have and apply a policy on the responsibilities, powers, and access of officers/employees to c

Article 49. Identification, Measurement, and Monitoring Processes, and the Management Information System for Operational Ri
1 The Bank shall identify and analyze factors that give rise to operational risk inherent in all business lines, prod
2 The Bank shall have an adequate system for assessment of operational risk inherent in new products and act
3 The results from the identification shall then be used by the Bank to develop a database on loss events cause
4 Methods that may be used by a Bank to identify operational risk include:
a) self risk assessment in the form of checklists to identify strengths and weaknesses in the Bank’s operational r
b) risk mapping by type of risk in respect of business lines, organizational structure, and transaction process flow
c) key risk indicators in the form of statistics or a matrix providing data on the operational risk position of the Ban
d) scorecards that provide a method for translating assessments/ qualitative criteria into a quantitative matrix tha
5 After the Bank has identified the operational risks inherent in certain business lines, it shall assess the param
a) system failure and errors;
b) administration system;
c) failed customer relations;
d) accounting errors;
e) delays and errors in payment settlements;
f) fraud;
g) falsified accounting;
h) strategic failure.
6 In the application of operational risk management, the primary source is validated and verified historical data
7 Data on losses from operational risk consists of routine events of high frequency events but low impact and o
a) expected, such as events of high frequency but low impact; or
b) unexpected, such as events of low frequency but high impact.
8 The Bank shall have an appropriate methodology for measurement of operational risk, competent human reso
9 The Bank shall record and administer all events, including amounts of potential loss arising from these events
10 The Bank shall conduct ongoing monitoring of operational risk in regard to all operational risk exposures and
11 The Bank shall conduct a regular review of factors causing operational risk and the impact of losses from thes
12 The Risk Management Unit shall prepare reports on losses from operational risk and the results of review of i
13 The Bank shall have an adequate information system and technology appropriate to the nature and volume o
14 The management information system shall be capable of:
a) generating complete and accurate reports that are used in risk monitoring for the purpose of timely detection
b) providing complete, accurate reports on operational risk exposures on a timely basis to support the decision-m
15 The Bank shall have a policy, procedures, and processes in place for control or mitigation of operational risk,
16 In the application of operational risk control, the Bank may develop programs for mitigation of operational risk
17 In the event that the Bank develops security for information technology processes, the Bank shall ensure the
18 Control of the information system shall ensure:
a) regular assessment of information system security, accompanied by corrective measures if necessary;
b) availability of a back up procedure to ensure the continuity of Bank operations and prevent any significant dis
c) availability of a back up procedure and contingency plan tested on a regular basis;
d) regular provision of information to the Board of Directors on the issues referred to in letters a) through c);
e) availability of storage of information and documents pertaining to analysis, programming, and implementation
19 The Bank shall have support systems that cover at least the following:
a) early identification of errors;
b) efficient, accurate, and timely processing and settlement of all transactions;
c) confidentiality, integrity, and security of transactions.
20 The Bank shall follow up internal and external audit findings and thereafter proceed with a series of corrective
21 The Internal Audit Unit shall inform the Board of Directors of any audit findings not followed up or only partially
22 The Bank shall conduct a regular review of procedures, documentation, data processing system, contingency
 t and internal situation, followed by increasing complexity of the risk of banking operations. Risk undertaking itself is not a negative step an
d a growing need for good corporate governance that encompasses active oversight of Bank management, policies, procedures and establ
bank supervising authorities. Through effective governance of risks commercial bank (hereinafter-bank) management can improve asset va
ite assessment of the likelihood of Bank losses that may affect Bank capital and provide one basis for assessment in adoption of strategy a
nd methodology for risk management to ensure that Bank operations are manageable within acceptable limits and are profitable for the Ban
unanticipated, that may negatively impact the revenues and capital of the Bank. To put risk management process into place, a Bank shall f
d with measurement, monitoring, and control of risks in that order. Measurement of risk is intended to enable a Bank to calculate the inhere
uation of these risk exposures, will be used by the decision makers in a Bank and in any follow up that may be needed. Furthermore, based

nst those threats which may create obstacles for the Bank in achievement of specific goals. Effective risk management necessarily implies m
the following:
r at a higher frequency in the event of any change in factors significantly affecting the business activities of the Bank;
f the above-mentioned risk management policy, at least on a quarterly basis;
of Directors, and thus requiring approval from the Supervisory Board.
the following:
y, including the establishment and approval of overall risk limits, limits on specific types of risk, and limits per business line of the Bank, as w
year or at a higher frequency in the event of any changes in factors significantly affecting the business activities of the Bank;
isk exposures taken on by the Bank, including evaluation and provision of guidance for the risk management strategy based on reports sub
structural units or transactions requiring approval by Board of Directors under the applicable internal policies and procedures;
pe including adequate communications to all levels of the organization on the importance of effective internal control;
plication of risk management, including but not limited to ways of conducting ongoing education and training programs, especially those con
s, reflected among others by segregation of functions between the Risk Management Unit (which conducts the identification, measurement,
f the Bank to obtain assurance of:

he Bank risk management unit;

prudential principles, the Bank shall strengthen the competency and integrity of its officers and particularly of the head of operational units a
pment and training, and remuneration to ensure adequate numbers of employees competent in risk management;
Unit in accordance with the nature, size, and complexity of the business operations of the Bank;
e following skills:
 products/business lines of the Bank, and the ability to estimate the impacts of any changes in these factors on the survival of the Bank;
e Bank’s risk exposures to the Board of Directors and the risk management committee on a timely basis.

nit conducting a particular transaction (risk-taking unit) is independent of the unit performing the internal control function (internal audit unit
prepare an organizational structure appropriate to the objectives and business policies, size, complexity, and capability of the Bank. This un
mbers and shall consist of at least a majority of the Board of Directors and relevant Executive Officers.
nt committee may be staffed with General Director and line management Director (Credit &

ct an agreement reached among the Committee members.

the Board of Directors who are in charge of an operational unit and Risk Management.
e appropriate to the issues discussed in the Risk Management Committee, such as Treasury and Investment, Credit, and Operations and e
vide recommendations to the General Director within a scope covering at least the following:
cluding the risk management strategy and contingency plan in the event of any abnormal external conditions. This formulation shall be con
ular basis as a result of any change in the external and internal condition of the Bank affecting its capital adequacy and risk profile and the o
om normal procedure (irregularities), such as decisions for significant business expansion beyond the previously established business plan
e to the size and complexity of Bank operations and the inherent risks of the Bank. This means that each Bank may determine the appropr
ss operations, the organizational structure of the Risk Management Unit shall reflect the business characteristics of the Bank. For a relative
officer in charge of the Risk Management Unit may be equivalent to or not equivalent to that of a head of an operational unit (risk taking un
treasury and investment, credit, funding, accounting, and the internal audit unit.

by the Risk Management Committee and approved by the Board of Directors;

d by business line;
management policy and strategy on the performance of each risk - taking unit;
by a specific unit within the Bank. The study shall focus mainly on the ability of the Bank to implement the new activity and/or product, incl
nd Risk Management Committee on a regular basis or at least quarterly. In the event of any sudden changes in market conditions, the repo
posure within their own units to the Risk Management Unit on a regular basis.

agement and shall be consistent with the vision, mission, and strategic plan of the Bank and focused more on the risks relevant to the busin
her a Risk Management Strategy that ensures that:

ce, and expertise in risk management, as appropriate to the complexity and business opportunities of the Bank;
sis of the Bank’s analysis of inherent risk in each banking product and transaction that has and will be made in accordance with the nature
formation system for precise calculation of risk exposure for each banking product and transaction and the business lines of the Bank, in ad
tential risk that can be absorbed by the capital of the Bank and development of a tool for monitoring developments in the risk exposure of th
nt in order to ensure compliance with external and internal legal provisions (compliance risks), availability of management and financial info
some aspects of banking products and operations and risk management policy and procedures;
rnal factors) to ensure the survival of the Bank.
ancial condition of the Bank, the Bank organization structure, and risks arising from changes in external factors and internal factors.
ount risk appetite based on its experience in managing Risks. Procedures and establishment of risk limits shall cover at least the following:

e review and the audit trail;

r frequency, commensurate to the type of risk and the needs and development of the Bank.
mit by specific business line involving risk exposure.

monitoring and limits, risk management information systems, risk control, asset and liability management and use of stress testing for risk
h business line that may potentially incur losses for the Bank. Points to be taken into account in the application of risk identification include,

nk in order to obtain a picture of the effectiveness of application of risk management. The approach shall be capable of measuring:
normal conditions and abnormal conditions;
ast, and correlations;

egrated into the management information system of the Bank.

, the simplest approach for measurement of risk is the standard method recommended by the Bank for International Settlements, while the
nd use an internal model. However, the use of the internal model shall be only for internal purposes commensurate to the needs of the Ban
scale, and complexity of business operations, the capacity of the data gathering system, and the ability of the Board of Directors and releva
oncerned with risk control, including but not limited to the treasury manager, Risk Management Committee, Risk Management Unit, and Dir
least as follows:
s that may arise, and the extent of the Bank’s risk exposures;

attention of the Risk Management Unit, the risk management committee, and the Board of Directors.

et – liability management committee, credit committee, Board of Directors) according to their respective powers.
cts of Georgia, including but not limited to regulations on the Minimum Capital Requirement, Lending Limit, and Net Open Position and etc.
ments and anticipate these exceeding of limits to ensure that they do not affect the previously determined total allocation of capital for the r
e Board of Directors, and actions in excess of limits may only proceed upon authorization by the Board of Directors or an authorized officer
event disruption to risk monitoring processes and perform regular checks and reviews of the backup system.
t information system that shall be in place and developed in accordance with the needs of the Bank for effective application of risk managem
a timely basis, both for aggregate/composite risk exposure and risk exposure by type of inherent risk in the business activities of the Bank,
res, and establishment of Risk limits;
by the Bank in accordance with the policy and strategy for application of risk management.
ent information system, shall be prepared on a regular basis by the Risk Management Unit or a group of authorized officers independent of
Risk Management may be submitted less often, but shall nevertheless provide adequate information for these parties to enable them to ass
s measured in a quantitative technical format into a qualitative format easily understood by the Board of Directors and Bank officers.
k shall ensure that the application of the new information system and technology will not create any disruptions.
its system, the Bank shall ensure that the decision to appoint the third party is made on an objective and independent basis. The outsourc
uct testing to ensure that the processes and output have followed effective and accurate processes of development, testing, and review. Th
e system shall be such that it can automatically and effectively meet the reporting requirements stipulated by the competent authorities.
rdware, software, databases, parameters, process stages, assumptions used, data sources, and outputs to facilitate built-in controls and th
s, and most importantly any risks that may endanger the survival of the Bank.
risk mitigation methods such as issuance of guarantees, securitization of assets and credit derivatives, and reinforcing of Bank capital to a
isk, and liquidity risk, the Bank shall at the minimum apply asset – liability management (ALMA). To support the effective implementation of
f limits that affect the ALMA performance of the Bank. The ALMA policy shall clearly present the responsibilities and powers in:

osures; measurement of risks using gap analysis, duration analysis, or simulation model.

ensure that the outcome of the Bank’s risk taking position is consistent with the objectives of interest rate risk management;
eves optimum results in fund placements, minimizes cost of funds, and maintains the balance sheet structure of the Bank in accordance with
usiness plan of the Bank; and
s and regulations affecting ALMA strategy and policy.
anges in the economy, condition of the Bank, and the interest rate risk and liquidity risk profiles.

ends in funds and actual outcomes against budget plan. If necessary, the ALMA strategy shall be adjusted to the latest developments. ALC

s recommendations to the Board of Directors.

ate risk, liquidity risk and foreign exchange risk analysis, make adjustments to the strategy for management of interest rate risk, adopt chang
ely documented to enable easy assessment by the Board of compliance with the set limits. The scope of ALCO reports includes but is not li
sed issues;
 latest month or quarter;

nterest rate risk profile;

s shall be subject to regular review, particularly in regard to external changes such as applicable legal provisions, market conditions, and co
credit risk, market risk, and operational risk, shall be adjusted to the needs of the Bank, the size and complexity of Bank operations, and th
Tools, Value at Risk (VAR), and stress testing for exposures carrying certain risks, the Bank shall use historical data/parameter series and a
ents shall also be adjusted to the data reporting system required by the National Bank of Georgia (hereinafter – National Bank).
ation at least the following:

ppropriate and accurate data and information on a timely basis;

s of the Bank;

design to prevent any disruption of statistical data series.

asurement models, the Bank shall validate the model. Validation process shall be conducted by an internal or external party independent of

atical accuracy;

ernal, if available.
use or purchased from a vendor. Models developed in-house shall undergo more intensive evaluation, particularly if there are significant cha
equency of validation, data and information documentation requirements, and requirements for evaluation of assumptions used, before a mo
nt by estimating the potential economic loss to the Bank under abnormal market conditions in order to ascertain the sensitivity of Bank perfo
ly flexible to facilitate the operation of various kinds of scenarios. The assumptions used in the Stress Testing shall be carefully developed
and thus enable the Bank to assess the worst impact that may arise from various changes in Bank revenues and capital. The Stress Testing
ctions and decisions taken by the Board of Directors or relevant officers in anticipation of the worstcase scenario.

nt shall cover at least the following:

nt risk in the business operations of the Bank;
h policy, procedures, and limits;
perating units and units performing control functions;

laws and normative acts;

nt of Bank operations;

audit findings, and response of Bank management on the basis of audit results;
esses in the Bank and actions of the Bank management in correcting any irregularities that may occur.
 ion at least once each year by the Risk Manager or officers in the Risk Management Unit,

ope according to developments in Bank risk exposures, market changes, and the method for measurement and management of risk;
understanding the techniques of risk management;
e following:
e risk exposure limits;
sing simulations or forward projections against actual outcomes;

ation to past performance and current position of Bank.

l have a written policy and procedures.

y shall state at least the following:
t and activity;

new product and activity to ensure that the method is tested from the aspect of prudential banking and other aspects;
g at least the risk profile and level of profit or loss in regard to the new product and activity;
risks that may arise and a compliance analysis of the new product and activity in regard to prevailing laws and regulations;
with centralized risk management processes, the Bank shall ensure that the techniques for measurement and exposure of risk can be accu
perations that give rise to certain risk positions, the Bank shall:

e consolidated financial statement;

monitored, and controlled by the Risk Management Unit;

es arising between the profit and loss statement and internal transactions due to differences in the accounting standards used and immedia
group, the Bank shall also ensure that the transactions are properly recorded so that business group accounts are accurately portrayed in

orgia shall focus special attention on adequacy of risk management in commercial banks, so that these systems give the opportunity for pru
ion of Bank’s potential losses, which may negatively influence its capital. In this regard Banks shall be required to assess risk management
Bank of Georgia.
o reflect level and dynamics for all respective risks in correspondence with the complexity of the Bank’s business activities. Report on risk p
w product or activity within 7 (seven) working days following their implementation.
k’s position may cause significant financial losses, or due to other reasons, which are deemed significant by the National Bank. In this regar

determined on the basis of consultations between the Bank and the National Bank, as they are based on the Bank’s current position and th
on shall be focused on fulfillment of requirements stipulated in this regulation. Respectively, examination program of supervisors for each b
 l are ascertained in the course of work;
rol systems) resources are in the Bank’s possession to manage the given risk;

ement, including its subsidiaries, is sufficient for conducting their activities and they implemented risk management discipline for risks inhere
asure, manage and control risks faced by the Bank. They shall carry out independent assessment of Bank’s strategies, policies, procedures
ng activities are determined by credit and foreign exchange operations, in the course of on-site inspections special attention shall be focuse
tion, measurement, management and control of credit risk. This shall include evaluation of any measurement instrument used by the Bank
em loans at early stage and takes respective measures. They have to perform monitoring of those trends which are presented within the loa
ll determine whether this process is effective:

managers, shall direct their efforts for elimination of any weakness, grown concentrations in the system and problem loans as well as for set

xposure) concerning all banks regardless their credit risk management quality. Such limits shall contain limited bank risks for separate borro
for special risk profile of the Bank, the National Bank of Georgia shall exercise intensive or special supervision over such bank.

ctors for Implementation of Credit Risk Strategy and Policy

rious business lines of the Bank with its clients (below referred to as debtors) such as provision of funds, treasury and investment, and trade
at least annually, of the credit risk strategy and policy of the Bank. The strategy and policy shall:
ected revenues, taking into account economic cycles and changes in economic conditions.
t may affect the composition and quality of all credit portfolios.

rategy and policy and developing procedures for identification, measurement, monitoring, and control of credit risk. The policy and procedu
s and activities and ensure that the risks from new products and activities have passed through a proper risk control process before introdu

ssessment of debtor risk profiles. Factors that shall be taken into account include but are not limited to: a) purpose of loan and source of re
n economic and market conditions;
tory and cash flow projection under a variety of scenarios;
sector/ business of the borrower and the position of the borrower within a specific industry;
ned to limit changes in the debtor’s future risk exposure.
ount the level of profitability, which shall be performed at least by ensuring that the analysis of expenses and revenues has been made on a
el of the transaction concerned, particularly the overall condition of the debtor and the quality and marketability of collateral pledged as gua
ysis of lending transactions. If necessary, the pricing of credit transactions shall be corrected and all necessary corrective actions shall be t
operating through delegation of authority, shall be clearly formalized in keeping with the characteristics of the Bank (size, organization, type
edures in decision making on extension of credit and/or commitments, the Bank shall ensure segregation of functions between those involve
fication of credit risk exposures, assessment of marketability of collateral, and setting of fees. The results of the review shall constitute an i

ocumentation, contractual terms and conditions, loan agreements (legal aspects), and binding of collateral;
tion system;

mation and material evidence in a credit file used for assessment and review.
very quarter for debtors in arrears or classified loans and also debtors exposing the credit portfolio of the Bank to high risks (large exposure
thers present the factors that may affect the setting of credit risk limits and the processes for decision making/establishment of credit risk lim
ring into transactions with those customers.
ated lending. The limits established shall cover at least the following:

ntitative data obtained from information in financial statements and analysis of qualitative information that may be obtained from interviewin
ate the audit trail for the purposes of internal and external auditors.
all observe internal policy, procedures and set limits.

ation System for Credit Risk

es. This identification of credit risk comprises the result of study of the characteristics of credit risk inherent in specific business lines, such
shall take into account the financial condition of the debtor and particularly prompt repayment ability, in addition to the collateral or guarantee
o account the financial condition of the counterparty, rating, characteristics of instruments, types of transactions made, market liquidity, and

credit risk from each debtor or by special group of debtors and/or counterparties;
tion of qualitative aspects and quantitative data and selection of specific criteria;
onitoring by relevant units.

al condition of the debtor/counterparty, and the terms and conditions of the loan agreement, such as term and interest rate and etc.

proach shall verify data on a regular basis.

e following: a) non performing loans (NPLs);

equity participation);

ure risk pertaining to certain types of credit risk transactions, such as credit scoring tools.
or projection of defaults;

cision making process for credit risk transactions shall be based not only on this system, and shall therefore be supported by other credit ris
nformation used in the system, including any changes thereto, and this documentation shall be subsequently updated on a regular basis. In
oncerning delegation of authority;
e of appropriate and effective security procedures;

monitor the condition of each debtor or counterparty in all credit portfolios of the Bank.

or counterparty;
r contract for the credit risk transaction;
counterparty;

ablished limits on credit risk, including the ability to repay the loan or internal risk rating.
ongoing basis by the Risk Management Unit by comparing actual credit risk against the established credit risk limits.
nit shall prepare regular reports on developments in credit risk, including underlying factors, for the Risk Management Committee and Board

nd documented.
ile brought about by potential or actual reduction in credit risk.
ndent of the unit applying the internal risk rating;
of the credit portfolio, shall be submitted to the Board of Directors on a regular basis.
shall have a management information system that provides accurate, timely reports and data to support decision making by the Board of D

tablished limits and any exceeding of risk exposure limits that needs to be brought to the attention of the Board of Directors.
ers and counterparties, the credit portfolio, and a report on exceptions to limits of credit risk.

t reviews in regard to the effectiveness of application of the credit risk management process. The review shall include at least evaluation o
cting credit risk transactions. The results of the review shall then be reported directly in full to the Internal Audit Unit, Compliance Director, o
ansactions are adequately managed and that credit risk exposures are consistently held within the set limits and comply with prudential sta
ons to policy, procedures, and limits are report on a timely basis to the Board of Directors or a relevant officer for corrective action.
ness of internal control to ensure that the internal control system is effective, secure, and in compliance with applicable legal provisions and
a written system for detection of problem loans, and apply these procedures on an effective basis. If the Bank has a significant level of pro

e sheet and offbalance sheet positions.

 osition risks. The present document will cover only such components of market risk as interest rate risk and foreign exchange risk.
money market, equity participation in other financial institutions, provision of funds (loans and similar forms), funding and issuance of debt in

reign currency determined by fluctuations in foreign exchange rate.

Strategy and Policy Implementation

ypes and levels of interest rate risk exposures.
he Bank shall link this approval to the overall objectives of the business conducted by the Bank.
aining to management of interest rate risk and ensure that the Board of Directors of the Bank take the necessary measures for monitoring a
of Directors on interest rate risk exposures as part of conducting this monitoring and control.
nk has adequate policy and procedures for management of interest rate risk, most importantly the daily operating procedures.
of: a) interest rate risk limits;

rest rate risk exposures;

nagement of interest rate risk.

ility and accountability beyond decisions in management of interest rate risk and shall clearly cover the authorized instruments, hedging str
d from the use of methods for measurement of interest rate risk, such as interest rate sensitivity, Earnings at Risk, and Economic Value of E
basis and revised if necessary by the Risk Management Unit, the internal audit unit, or an external auditor competent in the application of in

mation System for Interest Rate Risk

ets, derivative transactions, and other financial instruments, both in specific business lines and in the activities of the Bank as a whole.
all be grouped in the trading book, while transactions and positions not marked to market shall be grouped in the banking book. As a genera
ue of assets, derivative transactions, and other financial instruments, while also serving as a suitable method for measuring the risk position
d by a party independent of the operational unit and possessing the relevant competence, such as the Risk Management Unit.
k (VAR) to measure the maximum estimated loss from a particular position or portfolio from any change in market interest rate indicators (re
rates, the Bank shall use its own data sources, figures, and criteria developed on its own, not based on data sources obtained from other pa
es, the Bank shall at least be capable of measuring a number of parameters including the following: a) potential loss due to interest rate fluc

criteria and pricing process with the aim of precise assessment of credit risk (banking book) by adjusting the applied interest rate spread to
each transaction to ensure that overall interest rate exposure can be monitored in real time.
ding of limits and follow up actions for resolution of these excesses shall be reported to the Board of Directors or the relevant officers in acc
est rates and the influence of these changes on Bank revenues and capital.
ents shall have a system capable of monitoring interest rate exposures (trading book) and interest rate movements on a daily basis and dev
ng accurate, timely reports on:
ransaction, or type of exposure;

ments or possibilities for emergence of market pressures. The results shall thereafter be communicated to the Risk Management Unit and th
 d until maturity (balance sheet items) shall be stipulated in the Bank organization. These responsibilities include but are not limited to:
ation system;
ovisions and accounting standards, particularly in regard to recognition of discounts, booking of premiums, and etc;
e legal provisions.
ll apply an internal control process aimed at monitoring the credit spread of these securities and bonds by comparing the yield of these port
dit spread is widening, the Bank shall conduct an analysis of the condition and prospects of issues of the securities and bonds. If the conclu
securities and bonds and take necessary steps for reduction of losses.
nduct a regular review of the condition, credibility, and repayment ability of the issuers. The review shall be conducted by collecting and an
Bank shall ensure as part of hedging and application of the ALMA strategy that the accounting standards used comply with the applicable le
ish clear responsibilities and internal control for the purpose of:
n recognition of revenue;
instructions or recommendations of the assets and liabilities committee (ALCO) and that the transactions reduce overall interest rate expos
the hedging ratio and comparison of this ratio over time;
be transferred to a trading position;
ank organization have been fulfilled;
nts for the reason that in the event of default, the hedging strategy would be rendered ineffective.

f products and transactions carrying foreign exchange risk are staffed with personnel who understand:

nagement of foreign exchange risk.

lity and accountability that extend beyond decisions on foreign exchange risk management and shall clearly cover the authorized instrumen
s that represent the risk tolerance of the Bank.
ar review and revision if necessary, whether by the Risk Management Unit or the internal audit unit, or by a competent external party for app
n positions on both net and gross basis for each position held, and enable accurate calculation of the open position on daily basis.
NOP) in order to prevent any exceeding of limits established in the applicable legal provisions, particularly in the event that all internal estab
ncy denominated instruments shall be consistent with the overall risk management policy, shall enable consolidation and cover all units of t

mation System for Foreign Exchange Risk

s, and other financial instruments containing foreign exchange risk, both in specific business lines and in the overall activities of the Bank.
ness lines, the Bank shall at least be able to measure a number of parameters including but not limited to:
ments side, including off balance sheet transactions;
e, including commitments in off balance sheet transactions.
nge risk shall also take account of the following structural and strategic factors: a) Structural Factors, cover the following:
er applicable legal provisions;
es against accounts/positions denominated in foreign currencies;
rrying foreign exchange risk; revenue and expense accounts denominated in foreign currencies; mismatching between assets and liabilities
ng of cash flow, hedging of projected revenues, and use of financial contracts such as futures and options;

ompetition and etc.

h transaction to ensure that the overall foreign exchange risk exposure can be monitored at all times.
g of limits, and follow up for resolution of these exceeding of limits, with the exceeding of limits and follow up actions reported on a daily bas
movements and the impact of these movements on Bank revenues and capital.
ments denominated in foreign currencies shall at the minimum have a system capable of daily monitoring of foreign exchange risk exposure
on of accurate and timely reports on:

nge rate movements or possibility of market pressures. The results of this review shall thereafter be conveyed to the Risk Management Com

s against adverse movement in FX currency rates;

trategy for provision of funds and transactions involving credit risk exposure in FX currencies;

be permitted to conduct transactions involving FX currency risk, enabling any unauthorized positions to be immediately identified and the pro
applied for the purpose of compliance with limits and requirements stipulated in applicable legal provisions.

liabilities at due date. Liquidity risk can be categorized as follows:

et certain positions at market prices due to poor conditions of market liquidity or market disruptions;
nvert assets to cash or obtain funding from other sources of funds.
ds), treasury and investment, funding activities, and debt instruments.
e may be disruptive not only to the Bank itself, but also the banking system as a whole.

iquidity risk and work actively to approve and evaluate policy and strategy for liquidity risk on a regular basis.
ct on capital, taking into account external and external changes.
egy for liquidity risk to all relevant units and evaluate the application of this policy and strategy.
development of their competency, with particular focus on the treasury and investment business line.
k not only on the basis of current adequacy but also evaluate the application of the funding strategy particularly under adverse market cond

he mission, business strategy, capital adequacy, human resources, and the risk appetite of the Bank.
ated in keeping with changes in liquidity condition, mission, business strategy, and overall capital strength. The Bank shall also have clear p
ic unit for determining markets, instruments, and transactions with eligible counterparties. This policy shall also cover the handling of proble
irectors shall be communicated to and duly implemented by units in charge of business lines carrying liquidity risk exposure.
s that are implemented on a consistent basis to prevent liquidity shortages, gap concentrations, and dependence on any specific counterpa
funding plan to ensure that the contingency funding plan can be applied effectively. The Bank shall specifically establish short term funding

rtages based on past experience;

nificant change in overall market conditions.

s shall be fully documented in writing to facilitate the audit trail.

ation System for Liquidity Risk

sactions and business lines that carry liquidity risk.

arious different scenarios on the liquidity position, for the reason that the liquidity condition of the Bank depends on cash flow under varied c

tend most of the liabilities of the Bank; and

he banking system facing liquidity problems.
uidity needs, both short term and long term, and the ability of the Bank to raise liquidity on the money market.

ty, currency, interest rate, owners of funds, and concentration of fund ownership;
ow including funding needs to meet commitments in off-balance sheet items in order to identify any possibility of future funding shortage;
on the market under both normal and abnormal conditions;
d into cash, particularly under abnormal conditions (crisis), when the Bank is unable to meet all liabilities from its own positive cash flow and
nario, by preparing cash flow on the basis of maturity or estimates using assumptions based on the past experience of the Bank.
the accuracy of the estimation shall be subject to regular review. In addition, the assumptions and variables used in the forecast shall be r
in depositor funds and prepare a worst-case scenario based on observations of trends in the highest rate of withdrawals during the observa
is (daily, weekly, monthly, and other intervals), and the potential for losses resulting from liquidity risk, among others by managing the gap o
y risks and their linkage to losses that could be incurred.
Unit shall prepare reports on losses caused by liquidity risk factors for the Risk Management Committee and Board of Directors.
viding accurate, timely information and reports on the condition of liquidity, maturity profile, and projected cash flow. The information system
r communicate the findings of this analysis to the Board of Directors, risk management committee, internal audit unit, and treasury unit on a
capturing process by means of an adequate and timely process of internal communication with the treasury unit, particularly in order to be
r effectiveness and reliability according to the latest liquidity gap position, whether long or short.

all in liquidity that could cause the Bank to default on its obligations to other parties.

tatistical estimates;
he Bank raises borrowings, such as repo transactions and currency swaps;
tions on a timely basis;

ablish the amount of funds that may be raised from regular borrowers (or parties) or the market, under a scenario of no guarantee, without o
, and ability of the Bank to sell liquid assets, and shall know the amount of funds that will be received from the market under normal conditio

absence of supporting provisions in laws and regulations, or weakness of legally binding provisions, such as failure to comply with legal req

legal risks in business lines that may affect the financial condition of the Bank, and work actively to issue approvals and conduct policy eval
w products and activities and ensure that the risk of the new product and activity has passed a risk management process prior to introductio
the impact of legal risk on Bank capital.
ncern over legal risk among all employees at every level of the organization.
n communicating issues of legal risk to the legal department or relevant unit to ensure that legal risk can be immediately prevented and con

adjusted to the business strategy of the Bank.

ectors and communicated to all levels of the organization to enable the procedures to be effectively applied.
risk of new products and activities.
r those providing legal analysis/advice to all employees at every level of the organization.
jointly assess the impact of changes in certain legal provisions or regulations on legal risk exposure.
of the organization to improve compliance with internal and external regulations.
yees proven to have committed irregularities and offences against external and internal regulations and the internal code of ethics of the Ba
res for control of legal risk in accordance with external and internal developments, such as changes in the provisions of applicable laws and

uch as credit (provision of funds), treasury and investment, operations and services, trade financing services, information technology and MI
ding the total potential loss resulting from these events, in a data administration system. The recording and administration of this data shall
alitative and quantitative approaches.
experience with losses arising from legal risk.
accurate reports on legal risk exposure on a timely basis to support the decision-making processes of the Board of Directors.
ents between the Bank and other parties, including but not limited to a review of the effectiveness of enforceability processes, in order to ch
ateral pledges, these guarantees shall be supported by the effectiveness and enforceability of legal documents.

gal provisions, code of ethics, and business strategy;

on all employees at every level of the organization.

erning the operations of the Bank or negative perceptions of the Bank.

reputation risks in specific activities of the Bank, particularly those that may significantly affect the financial condition of the Bank. Managem
the impact of reputation risk on Bank capital.
rehensive information to customers and other Bank stakeholders as part of the control of reputation risk.

iples of transparency and improvement of service quality to customers and other stakeholders for control of reputation risk. The policy shal
r dealing with negative media reporting/publicity or prevention of information with counterproductive tendencies, including but not limited to
to experience with reputation risk that has materially affected the financial condition of the Bank.
on risk to all employees at every level of the organization.

eputation Risk
such as credit (provision of funds), treasury and investment, operations and services, trade financing (if any), information technology and MI
including the total potential loss incurred by these events, in a data administration system. The recording and administration of this data sh
of qualitative and quantitative approaches.
past experience with losses caused by reputation risk.
accurate, and timely reports on reputation risk exposures to support the decision-making processes of the Board of Directors.

as part of the control of reputation risk.

d legal actions that may increase its exposure to reputation risk, including but not limited to continuous communication with the customer or

entation of the Bank strategy, poor business decision-making, or lack of responsiveness of the Bank to external changes.
strategic risk in certain activities of the Bank, particularly those that may significantly affect the financial condition of the Bank, and work acti
e a corporate plan and business plan covering matters as stipulated in the applicable legal provisions.
aknesses of the Bank) and developments in external factors/conditions that directly or indirectly affect the established business strategy of t
 the business objectives of the Bank has taken account of the impact of strategic risk on Bank capital.
ort the formulation of strategy and monitoring of implementation, including the corporate plan and business plan.

me frame of no less than 3 (three) years and implement this policy.

tors and approved by the Supervisory Board, and communicated to Bank officers and/or employees at every level of the organization.
the event of any deviation from set targets as a result of significant external and internal changes.
tcome and performance against schedule.

r Strategic Risk
lines, such as credit (provision of funds), treasury and investment, operations, and services.
failed or ineffective implementation of the adopted corporate plan and business plan, particularly those changes having significant influence
f qualitative and quantitative approaches.
erience with losses caused by strategic risk.
accurate, and timely reports on strategic risk exposure to support the decision-making processes of the Board of Directors.

ess against targets and ensuring that the risks taken remain within tolerable limits.
alysis of actual vs. target reports concerning the business plan and regular communication of this analysis to the Board of Directors.
ation system for strategic risk.

mplement laws, regulations, and other applicable legal provisions. In practice, compliance risk is inherent in Bank risks pertaining to applic
mpliance risk and quantitatively affect the profit and loss and capital of the Bank, such as:
ations, including new products and activities;
mpliance with internal policies and procedures, applicable laws and regulations, and sound business practices and ethical standards; and
complaints.
ent, with use of adequate policy and respective procedures, as well as of qualified human resources and good controlling system, covering:

at all levels of the organization;

ns and dual control;

formation system;
mployee training and promotion of a culture of compliance;
es and non-compliance with applicable laws and regulations;

t for Bank employees and officers;

ions in the Bank (high risk-taking units);

e. d) with respect to control system

(if any), and

uring any increase in frequency and size of risk exposures;

d procedures of the Bank;

nce function, and ensure and protect its independent functioning.

the schedule set forth in the action plan. In this regard, following the issuance of these regulations and guidelines, the Bank shall take imme
s Action Plan if the Action Plan is deemed not to comply fully with the minimum requirements stipulated in the NBG Regulation and in these
ater than 10 calendar days following completion of each stage.
nk of Georgia to its application for risk management the Bank may observe the following guidelines:
s, procedures, organization, systems, and processes at the Bank;

diate resolution to ensure that the Bank is able to meet the deadline for effective implementation of risk management.
of formulating the Action Plan. The Bank shall inform the NBG of name of the staff, officer, and project manager designated as contact per
on of Risk Management to ensure that the employees have sufficient understanding of risk management practices.
hall be reported to the Board of Directors of the Bank for decision and approval. The Board of Directors shall bear full responsibility for achie
n the formulation and monitoring of the Action Plan. Thereafter the Internal Audit Unit shall adapt its audit planning process to the results of
manager on the progress achieved by the project team towards the realization and effective implementation of the Action Plan and shall als
ble to the Internal Audit Unit and/or the NBG for the purpose of evaluating preparatory measures during the transitional period.

the positions of March, June, September, and December, no later than 10 (ten) calendar days after the end of the reporting month. This re
he same substance as the risk profile report submitted by the Risk Management Unit to the Director and the Risk Management Committee.

red to deliver a new product and activity report to the NBG no later than 7 (seven) working days after the new product and activity is effectiv
ormation, and explanations on:
 the new product and activity;
lanation of the relationship between this accounting information system and the overall accounting information system for the Bank;

at the condition of the Bank may potentially lead to significant financial losses or for other reasons deemed important by the NBG. In this re

control of the Bank.

s, human error, system failure, or external problems.

y inadequate or unsuccessful internal processes, personnel and systems or external factors.
ntial loss of opportunity to earn profits.
nding (provision of funds), treasury and investment, operations and services, trade financing, funding and debt instruments, information tech

stand operational risk and work actively to approve and evaluate the policy and strategy for operational risk on a regular basis. The policy an
egy for operational risk to all relevant units and evaluate the implementation of this policy and strategy.
nherent in a new product and activity and ensure that the risk of any new product and activity has passed through an adequate internal con
of competency and integrity of human resources for all business lines of the Bank.

s mission, business strategy, capital adequacy, and adequacy of human resources.

risk and conduct regular monitoring of operational risk exposure in a number of major business lines.
al risk management in accordance with the operational risk exposure, risk profile, and risk culture of the Bank.
sk exposures and experience with past losses brought about by operational risk. The established limits shall be reviewed and adjusted in th
s shall be fully documented in writing to facilitate the audit trail.
ularly if the risk originates from foreign exchange transactions and trade financing activities.
ment process, particularly concerning the deadline for payment orders, deadline for receipt, and time for recording payment of funds.
ctions or cases of transactions not settled for payment.
ght on by deteriorating liquidity conditions at the Bank.
dures and monitor these transactions on a consistent basis.
vailing accounting standards with attention to the following:
ss transactions;
egard to applicable financial accounting standards.

ledgers, administration of asset classification, and documentation of loan loss provisioning in order to facilitate the audit trail.
ced in the custodianship.
keeping/custodianship to ensure that the assets placed in safekeeping are not encumbered by any legal problems.
against the agreements/contracts for these assets.
basis appropriate to its exposure to operational risk. KYC shall be supported by an effective internal control system, and particularly by the
stipulated in the applicable legal provisions concerning Know Your Customer Principles (KYC).
ccess of officers/employees to certain information systems. This policy shall be supported by procedures for access to the management in

mation System for Operational Risk

nherent in all business lines, products, processes, and the information system, whether caused by internal or external factors that negatively
nherent in new products and activities, including the process and system for this assessment.
a database on loss events caused by operational risks.

esses in the Bank’s operational risk environment, such as the role of the Supervisory Board and Board of Directors, organizational structure
ure, and transaction process flows;
perational risk position of the Bank, such as total canceled transactions, employee turnover, and frequency of errors and etc;
eria into a quantitative matrix that may be used for allocating the capital requirement for each business line.
s lines, it shall assess the parameters that affect operational risk exposure, including the number and frequency of:

ated and verified historical data on Bank losses caused by operational risk.
ncy events but low impact and of low frequency but high impact on the profit and loss position of the Bank. This data on losses is:

onal risk, competent human resources, and adequate system infrastructure for identification and collection of data on operational risk.
al loss arising from these events, in a data administration system. The recording and administration of the data shall be put together in the
operational risk exposures and loss events that may arise from major business lines, including but not limited to ways of applying internal c
nd the impact of losses from these risks.
risk and the results of review of internal audit compliance and convey these reports to the Risk Management Committee and Board of Direc
riate to the nature and volume of transactions.

the purpose of timely detection and correction of irregularities in order to minimize potential for loss events.
y basis to support the decision-making processes of the Board of Directors.
or mitigation of operational risk, commensurate to the complexity of Bank operations.
for mitigation of operational risk, including security of information technology processes, insurance, and retrieval of data on some bank ope
sses, the Bank shall ensure the level of security of electronic data processing.

e measures if necessary;
s and prevent any significant disruption;
ed to in letters a) through c);
ogramming, and implementation of data processing.

oceed with a series of corrective measures.

s not followed up or only partially corrected. If these findings are significant, the Board of Directors shall set a deadline for corrective measu
processing system, contingency plan, and other operational practices to minimize the possibility of human error leading to operational risk.
 g itself is not a negative step and it may be related with receipt of additional profit.
policies, procedures and establishment of risk limits, identification, measurement, and monitoring processes, implementation of information
nagement can improve asset value, obtain picture of likelihood of future Bank losses, improve the methods and processes for systematic d
ssment in adoption of strategy and focus in bank supervision.
its and are profitable for the Bank. Nevertheless, in view of differences in market conditions and structures, the size and complexity of Ban
process into place, a Bank shall first undertake an accurate identification of risks by recognizing and understanding all inherent risks and risk
ble a Bank to calculate the inherent risk exposure in its business activities so that the Bank is able to estimate the impact of the risk on the c
be needed. Furthermore, based on these findings, the Bank will take measures to control risks, among others by adding capital, taking ou

anagement necessarily implies management of all risks. This can be achieved if close cooperation and open communication are establishe

r business line of the Bank, as well as powers of collective bodies accountable to the Directorate defining risks and / or separate persons.
vities of the Bank;
nt strategy based on reports submitted by the Risk Management Unit and submission of the quarterly reports to the Supervisory Board;
es and procedures;

g programs, especially those concerned with risk management processes and systems;
the identification, measurement, monitoring, and control of risks) and units that conduct and settle banking operations;

of the head of operational units and the Risk Management Unit. This should take into account such factors as knowledge, track record, skill
s on the survival of the Bank;

ntrol function (internal audit unit and compliance functions) and also independent of the Risk Management Unit.
nd capability of the Bank. This unit shall necessarily cover risk management committee and structural unit (risk management unit, internal a

nt, Credit, and Operations and etc.

s. This formulation shall be conducted jointly by the heads of operating units and the head of the Risk Management Unit;
equacy and risk profile and the outcome of evaluation of the effectiveness of this application;
ously established business plan of the Bank or taking of positions/risk exposures in excess of established limits. These justifications shall b
Bank may determine the appropriate organizational structure according to its own condition, including financial condition and human resourc
ristics of the Bank. For a relatively small bank in terms of total assets with less complex business operations, the Bank may appoint a group
n operational unit (risk taking unit). In addition, head of risk management unit shall be directly responsible to the General Director or respec

new activity and/or product, including the system and procedures used and the resultant impact on the overall risk profile of the Bank;
ges in market conditions, the report shall be made at more frequent intervals. For relatively slow risk exposures, such as credit risk, the repo

on the risks relevant to the business lines of the Bank.

e in accordance with the nature and complexity of the Bank’s business operations;
business lines of the Bank, in addition to establishment of reporting of data and information pertaining to risk exposures for use as input in m
pments in the risk exposure of the Bank;
f management and financial information, effectiveness and efficiency of operations, and effectiveness of the risk culture at each level of the
 tors and internal factors.
hall cover at least the following:

and use of stress testing for risk measurement models.

tion of risk identification include, the following: a) be proactive (anticipative), not reactive;

e capable of measuring:

rnational Settlements, while the approaches used by practitioners are referred to as alternative models. Application of an alternative model
ensurate to the needs of the Bank and in anticipation of future banking policy.
the Board of Directors and relevant executive officers to understand the limitations of the end results of the risk measurement system used.
Risk Management Unit, and Directors in charge of relevant line management.

and Net Open Position and etc.

otal allocation of capital for the risk.
Directors or an authorized officer in accordance with the internal rules and procedures of the Bank.
ctive application of risk management. As part of the risk management process, the Bank shall have a risk management information system
business activities of the Bank, as well as for risk exposure by business line of the Bank;

thorized officers independent of any unit involved in operations. Frequency of reporting to the relevant members of the Board of Directors a
se parties to enable them to assess changes in the risk profile of the Bank.
ectors and Bank officers.

ndependent basis. The outsourcing agreement/contract shall state the terms and conditions of maintenance and upgrade, and anticipatory
elopment, testing, and review. The Bank shall also ensure that historical data for accounting and management can be properly accessed by
by the competent authorities.
o facilitate built-in controls and the audit trail.

d reinforcing of Bank capital to absorb potential losses.

t the effective implementation of ALMA, the Bank shall establish an Assets and Liabilities Committee (ALCO), with the size of the committee
lities and powers in:

sk management;
e of the Bank in accordance with the Bank’s ALMA strategy;

to the latest developments. ALCO shall also develop a hedging strategy without neglecting flexibility in the day-to-day ALMA decisions by o

of interest rate risk, adopt changes in strategy, and establish the policy direction for ALCO concerning fund placements.
LCO reports includes but is not limited to:
sions, market conditions, and consumer behavior.
exity of Bank operations, and the benefits obtained by the Bank.
cal data/parameter series and assumptions prepared by the Bank itself and/or assumptions as requested by the National Bank of Georgia (
er – National Bank).

or external party independent of the unit applying the model. If necessary, the validation shall be conducted or supplemented by review by

cularly if there are significant changes in market conditions.

f assumptions used, before a model is put into application by the Bank.
tain the sensitivity of Bank performance to changes in risk factors and to identify influencing factors that significantly impact the Bank’s port
ng shall be carefully developed to test trends in the condition of the Bank’s portfolios. The Bank needs to conduct Stress Testing on the ba
s and capital. The Stress Testing results, including use of assumptions by the Risk Management Unit, shall be communicated to the Board
t and management of risk;

and regulations;
and exposure of risk can be accurately consolidated. The processes for consolidated monitoring and measurement of risks shall establish c

ng standards used and immediately examine and correct these variances.

unts are accurately portrayed in the financial statement of the Bank.

stems give the opportunity for prudential management and timely identification, adequate assessment, effective monitoring and control of ris
ired to assess risk management on a quarterly basis

siness activities. Report on risk profile, submitted to the National Bank shall be identical to the one submitted to Director and Risk Managem

y the National Bank. In this regard, such condition of the Bank may be the following:

he Bank’s current position and those risks that may arise in front of the Bank.
ogram of supervisors for each bank among other issues shall cover:
gement discipline for risks inherent in their activities.
s strategies, policies, procedures and practice related with extension of credits and portfolio management, implementation of
special attention shall be focused on management of risks related with such activities.
nt instrument used by the Bank (such as internal ratings for risks and credit risk models). In addition, they have to determine whether Board
hich are presented within the loan portfolio and judge about deterioration of market conditions along with executive management. Superviso

problem loans as well as for setting additional reserves.

ted bank risks for separate borrowers or group of partners related with them. Special attention shall be focused on payment of credits of tho
sion over such bank.

easury and investment, and trade financing and etc.

edit risk. The policy and procedures, properly developed and implemented, shall be capable of supporting sound lending standards, monito
sk control process before introduction or operation. Approval from the Board of Directors or recommendation from the Risk Management Co

purpose of loan and source of repayment;

d revenues has been made on a comprehensive basis, covering operating expenses, cost of funds, costs pertaining to estimated default by
bility of collateral pledged as guarantee.
sary corrective actions shall be taken to prevent any worsening of the financial condition of the Bank.
he Bank (size, organization, type of activities, and complexity of transactions) and supported by the systems in place at the Bank.
functions between those involved in approval, analysis, and administration of credit.
of the review shall constitute an integral part of the credit file.
ank to high risks (large exposures and loan concentration).
ng/establishment of credit risk limits.

may be obtained from interviewing the customer.

in specific business lines, such as credit (provision of funds), treasury and investment, and trade financing.
tion to the collateral or guarantee that is provided. For debtor risk, the assessment shall include analysis of the debtor environment, charac
ions made, market liquidity, and other factors that may affect credit risk.

nd interest rate and etc.

e be supported by other credit risk measurement tools.
tly updated on a regular basis. In application, the system shall:

nagement Committee and Board of Directors.

ecision making by the Board of Directors and other officers.

oard of Directors.

hall include at least evaluation of the credit administration process, assessment of the accuracy of application of internal risk rating or use o
Audit Unit, Compliance Director, other relevant members of the Board of Directors, and the Revision Commission.
s and comply with prudential standards.
er for corrective action.
h applicable legal provisions and the policy, guidelines, and internal procedures of the Bank. Any incidence of ineffectiveness or inaccuracy
Bank has a significant level of problem loans, the Bank shall segregate the problem loan resolution function from the function responsible for
d foreign exchange risk.
, funding and issuance of debt instruments, and trade financing and etc.

essary measures for monitoring and control of this risk.

erating procedures.

horized instruments, hedging strategy, and opportunities for taking positions.

at Risk, and Economic Value of Equity, in order to present the tolerable level of interest rate risk for the Bank.
competent in the application of interest rate risk management.

es of the Bank as a whole.

n the banking book. As a general rule, these banking book positions, such as securities or bonds in the investment portfolio, are not intende
d for measuring the risk position of these assets and financial instruments.
Management Unit.
market interest rate indicators (reference interest rate) at a set interval. Measurement using the VAR method may be made using various st
a sources obtained from other parties.
ntial loss due to interest rate fluctuations;

e applied interest rate spread to the reference (market) interest rate.

ors or the relevant officers in accordance with internally assigned authorities on a daily basis.

ements on a daily basis and develop that system to the extent that these changes can be monitored on a real time basis.

he Risk Management Unit and the Board of Directors as material for evaluation for review of existing interest rate exposures and establishe
 clude but are not limited to:

comparing the yield of these portfolio positions with Government Bonds.

curities and bonds. If the conclusion from the analysis and market sentiment points to increased likelihood of default, the Bank shall take im

e conducted by collecting and analyzing financial statements, cash flow projections, and all relevant documents concerning the issuers. Thi
sed comply with the applicable legal provisions and international accounting standards.

educe overall interest rate exposure;

y cover the authorized instruments, hedging strategy, and opportunities for taking positions.

competent external party for application of interest rate risk management, in respect of any possibility of increased activity driven by overal
position on daily basis.
n the event that all internal established limits have been used.
solidation and cover all units of the Bank holding risk positions in FX currencies.

e overall activities of the Bank.

the following:

ng between assets and liabilities in foreign currencies. b) Strategic Factors

p actions reported on a daily basis to the Board of Director or relevant officials in accordance with internally stipulated powers.

f foreign exchange risk exposure and movements in exchange rates, and develop the system to enable monitoring on a real time basis.

yed to the Risk Management Committee and Board of Directors as material for evaluation in order to review existing foreign exchange risk e

mmediately identified and the problem resolved.

larly under adverse market conditions.

The Bank shall also have clear policies on the responsibilities for funding, reporting, and liquidity pricing.
also cover the handling of problems with concentration of liquidity risk and prevention of Bank dependency on any one or a number of instr
ity risk exposure.
dence on any specific counterparty, instrument, or market segment.
cally establish short term funding limits, particularly in regard to overnight borrowings raised on the market.

ends on cash flow under varied conditions.

ty of future funding shortage;

om its own positive cash flow and borrowings on the money market.
perience of the Bank.
es used in the forecast shall be reviewed in the light of changes in market conditions, inter-bank competition, and changes in customer beha
of withdrawals during the observation period, especially if the Bank has experienced a rush to withdraw funds in the past.
g others by managing the gap of liquidity positions.

Board of Directors.
sh flow. The information system shall be designed and developed in accordance with significant changes in internal and external condition
audit unit, and treasury unit on a regular basis according to the needs of the Bank. The frequency of reporting may be increased if the anal
y unit, particularly in order to be informed of large-scale, unexpected flows of funds.
enario of no guarantee, without overnight facilities, and without reducing the Bank credit spread on the market.
he market under normal conditions or otherwise.

s failure to comply with legal requirements for contracts and etc.

pprovals and conduct policy evaluation for control of legal risk.

ement process prior to introduction to customers.

immediately prevented and controlled.

e internal code of ethics of the Bank.

provisions of applicable laws and regulations.

s, information technology and MIS, and human resources management.

administration of this data shall be put together in the form of statistical data that can be used to project potential loss over a period and for

Board of Directors.
eability processes, in order to check the validity of rights in such contracts and agreements.

condition of the Bank. Management shall work actively to approve and evaluate the policy for control of reputation risk.

f reputation risk. The policy shall also be consistent with the applicable laws and regulations on consumer protection.
cies, including but not limited to ways of applying effective media strategies for countering negative media reporting.

), information technology and MIS, and human resources management.

nd administration of this data shall be put together in the form of statistical data that can be used to project potential loss over a period and

Board of Directors.

munication with the customer or counterparty and holding bilateral negotiations with the customer to avoid litigation and legal claims.

rnal changes.
dition of the Bank, and work actively to approve and evaluate the policy for control of strategic risk.

stablished business strategy of the Bank.

ry level of the organization.

nges having significant influence on Bank capital.

oard of Directors.

to the Board of Directors.

n Bank risks pertaining to applicable laws, regulations, and other legal provisions, such as credit risk pertaining to the Minimum Capital Req

es and ethical standards; and

ood controlling system, covering: a) With respect to policy

elines, the Bank shall take immediate steps to prepare for application of Risk Management, including but not limited to diagnosis and identi
e NBG Regulation and in these guidelines.

nager designated as contact person.

all bear full responsibility for achievement of the targets set out in the Action Plan during the transition period.
anning process to the results of the evaluation of the Action plan and progress achieved.
n of the Action Plan and shall also be provided with information on the steps necessary to meet the target for effective implementation durin
transitional period.

d of the reporting month. This report shall be presented in comparison with the previous quarter. The Risk Profile report shall present the le
e Risk Management Committee.

ew product and activity is effectively implemented. For the first time, the new product and activity report shall be delivered after the Bank ha
ion system for the Bank;

important by the NBG. In this regard, such condition of the Bank may be understood as:

ebt instruments, information technology and the management information system, and human resources management.

on a regular basis. The policy and strategy for operational risk shall take account of its impact on capital, while keeping watch on external a

hrough an adequate internal control process before launching or operation.

all be reviewed and adjusted in the event of any significant change in operational risk exposure.

cording payment of funds.

tate the audit trail.

l system, and particularly by the Bank’s preventive measures against internal fraud.

or access to the management information system, accounting information system, risk management system, security in the dealing room, a

or external factors that negatively impact the achievement of the objectives of the Bank.

irectors, organizational structure, human resources, and information and communications flows in the Bank;

of errors and etc;

This data on losses is:

of data on operational risk.

data shall be put together in the form of statistical data that may be used to project potential losses over a period and activity in a specific b
ed to ways of applying internal control system and providing regular reports on losses caused by operational risk.

nt Committee and Board of Directors.

rieval of data on some bank operations from the system.

t a deadline for corrective measures and assign the Internal Audit Unit to monitor the effectiveness of the corrective measures taken.
error leading to operational risk.
es, implementation of information systems, risk control, and internal control systems.
and processes for systematic decision making based on availability of information, use a more accurate basis for measuring Bank perform

, the size and complexity of Bank operations, and the absence of any single universal risk management system for all Banks, each Bank sh
tanding all inherent risks and risks that may arise from a new business conducted by the Bank, including any risks from connected compan
te the impact of the risk on the capital that should be maintained to support these business activities. Alongside this, as part of its risk mon
hers by adding capital, taking out hedging, and other risk mitigation techniques.

n communication are established among supervisory board, directorate, internal audit, compliance functions, external audit and internal un

sks and / or separate persons.

ts to the Supervisory Board;

operations;

as knowledge, track record, skills, and adequate education in risk management;

risk management unit, internal audit and compliance functions).

nagement Unit;

mits. These justifications shall be conveyed in the form of recommendations on the basis of business considerations and analysis related to
cial condition and human resources.
s, the Bank may appoint a group of officers in a unit/group to perform the function of the Risk Management Unit.
to the General Director or respective Director.

rall risk profile of the Bank;

ures, such as credit risk, the reporting frequency shall be at least every quarter.

sk exposures for use as input in making profitable business decisions;

e risk culture at each level of the Bank organizational structure;

plication of an alternative model necessitates that various quantitative and qualitative requirements are met to ensure the accuracy of the m

risk measurement system used.

management information system capable of ensuring:

mbers of the Board of Directors and Risk Management Committee shall be increased in the event of any sudden changes in market conditio

e and upgrade, and anticipatory measures to prevent any disruptions that may occur during operation.
ent can be properly accessed by the new system/software.

O), with the size of the committee adjusted to the volume and complexity of banking transactions pertaining to the implementation of ALMA.

day-to-day ALMA decisions by officers and staff.

placements.
y the National Bank of Georgia (NBG).

d or supplemented by review by an external party possessing technical competence and expertise in development of risk measurement mo

nificantly impact the Bank’s portfolios.

onduct Stress Testing on the basis of the highest loss recorded in past experience (large historical market moves).
be communicated to the Board of Directors on a regular basis.
urement of risks shall establish clear limits that are met at each level of consolidation.

ctive monitoring and control of risks.

d to Director and Risk Management Committee.

mplementation of

ave to determine whether Board of Directors effectively manages credit risk and risk positions and examine compliance with respective pol
xecutive management. Supervisors shall assess Bank’s capital along with security and reserves, whether it is adequate compared to credit

sed on payment of credits of those partners who are “related” with the banks or each other.

sound lending standards, monitoring and control of credit risk and identifying and dealing with problem loans.
n from the Risk Management Committee shall be obtained in advance.

pertaining to estimated default by debtors until receipt of payment in full, and calculation of the capital requirement.

s in place at the Bank.

the debtor environment, characteristics of partners in business dealings, quality of shareholders and management, condition of the latest f
on of internal risk rating or use of other monitoring tools, and working effectiveness of the unit or officers monitoring the quality of individual

of ineffectiveness or inaccuracy or any important findings in the system shall be immediately reported and brought to the attention of the Bo
from the function responsible for lending decisions. Each strategy and effective outcome for resolution of problem loans shall be administe
estment portfolio, are not intended for short-term gain, but will be held to maturity.

d may be made using various statistical methods such as variance/covariance, historical simulation, and the Monte Carlo simulation.

eal time basis.

st rate exposures and established limits.

of default, the Bank shall take immediate action to establish loan loss provisioning.

ents concerning the issuers. This regular review of securities and bonds shall be documented and conducted at least every 6 (six) months.

creased activity driven by overall market conditions, and especially in the event of any prohibition by the supervisory authority on conducting
 stipulated powers.

onitoring on a real time basis.

existing foreign exchange risk exposures and established limits.

 on any one or a number of instruments, counterparties, or a particular market segment.

n, and changes in customer behavior.

ds in the past.

n internal and external conditions. The risk management information system shall be capable of meeting the reporting requirements of the N
ing may be increased if the analysis shows that the Bank has potential for experiencing significant liquidity difficulties.
tential loss over a period and for specific business lines.
utation risk.

potential loss over a period and for a specific business line.

litigation and legal claims.

ning to the Minimum Capital Requirement (CAR), Earning Assets Quality, Formation of Allowance for Earning Assets Losses, and the Legal
ot limited to diagnosis and identification of the internal condition of the Bank, the results of which may be used as material for preparation of

or effective implementation during the transitional period.

Profile report shall present the level and trend of all relevant Risk exposures, according to the complexity of the business of the Bank.

ll be delivered after the Bank has completed the Action Plan described above.
anagement.

hile keeping watch on external and internal changes.

m, security in the dealing room, and data processing room.

period and activity in a specific business line.

orrective measures taken.
asis for measuring Bank performance, assess inherent risk in relatively complex instruments or business activities of the Bank, and create a

stem for all Banks, each Bank shall develop a risk management structure and risk management system appropriate to the Bank.
ny risks from connected companies and other affiliates.
gside this, as part of its risk monitoring, the Bank shall evaluate its risk exposure and especially any that are material and/or may impact Ba

s, external audit and internal units of risk management. Thus the bank has to define clear powers and liabilities for each job level pertaining
derations and analysis related to the specific transactions or business operations of the Bank that require a departure from the procedures
t to ensure the accuracy of the model used;
dden changes in market conditions.

to the implementation of ALMA.

opment of risk measurement models.
e compliance with respective policies. For the purpose of assessing credit risk systems quality, the supervisors shall use series of analytical
is adequate compared to credit risk level identified and inherent to bank’s activities.
agement, condition of the latest financial statement, cash flow projection, quality of business plan, and other documents that may be useful i
onitoring the quality of individual credit.

brought to the attention of the Board of Directors and the Risk Management Unit for immediate corrective action.
problem loans shall be administered in documentation of data that will thereafter be used as input for the purposes of units with the functions
e Monte Carlo simulation.
ed at least every 6 (six) months.

pervisory authority on conducting transactions in a specific currency.

e reporting requirements of the NBG, including the obligation of the Bank to provide special reports.
ng Assets Losses, and the Legal Lending Limit (LLL), market risk pertaining to the Net Open Position (NOP), strategic risk pertaining to the
ed as material for preparation of the action plan for application of Risk Management as required under those provisions. The Bank shall ma

f the business of the Bank.

tivities of the Bank, and create a robust risk management infrastructure that will strengthen the competitiveness of the Bank.

propriate to the Bank.

e material and/or may impact Bank capital.

ities for each job level pertaining to application of risk management.

departure from the procedures established by the Bank.
ors shall use series of analytical methods. Major element of such assessment is determination by supervisors that the bank uses sound ass
documents that may be useful in supporting a comprehensive analysis of the condition and credibility of a debtor.
rposes of units with the functions of disbursing or restructuring credit.
), strategic risk pertaining to the provisions of the Annual Work Plan and Budget of the Bank, and other risks concerned with specific provisi
se provisions. The Bank shall manage risks in stages or without them.
ness of the Bank.
ors that the bank uses sound asset evaluation procedures.
s concerned with specific provisions.
BASEL - PILLAR 3 DISCLOSURES (CONSOLIDATED) AT September 30, 2018

Reserve Bank of India (RBI) issued Basel III guidelines applicable with effect from April 1, 2013. The guidelines provide a transi

As per the transitional arrangement, at September 30, 2018, ICICI Bank (the Bank) is required to maintain minimum CET1 CRA

The Basel III framework consists of three-mutually reinforcing pillars:

(i) Pillar 1: Minimum capital requirements for credit risk, market risk and operational risk
(ii) Pillar 2: Supervisory review of capital adequacy
(iii) Pillar 3: Market discipline

Market discipline (Pillar 3) comprises set of disclosures on the capital adequacy and risk management framework of the Bank. T

Table DF-1: Scope of Application

a. Group entities considered for consolidation

The following table lists ICICI Bank’s financial and non-financial subsidiaries, associates, joint ventures and other entities conso

Name of the entity

[Country of incorpIncluded under

accounting scope Method of accountIncluded under
regulatory scope oMethod of regulatReasons for difference in
the method of conReasons for consolidation
under one of the
scope of consolidation
ICICI Bank UK P Yes Consolidated as pYes Consolidated as pNot applicable
Name of the entity

[Country of incorpIncluded under

accounting scope Method of accountIncluded under
regulatory scope oMethod of regulatReasons for difference in
the method of conReasons for consolidation
under one of the
scope of consolidation
[United Kingdom]
ICICI Bank
Canada
[Canada] Yes Consolidated as pYes Consolidated as pNot applicable
ICICI Securities
Limited
[India] Yes Consolidated as pYes Consolidated as pNot applicable
ICICI Securities
Holdings Inc.1
[USA] Yes Consolidated as pYes Consolidated as pNot applicable
ICICI Securities
Inc.1
[USA] Yes Consolidated as pYes Consolidated as pNot applicable
ICICI Securities
Primary
Dealership
Limited
[India] Yes Consolidated as pYes Consolidated as pNot applicable
ICICI Venture
Funds
Management
Company
Limited
[India] Yes Consolidated as pYes Consolidated as pNot applicable
ICICI Home
Finance
Company
Limited
[India] Yes Consolidated as pYes Consolidated as pNot applicable
ICICI
Trusteeship
Services Limited
[India] Yes Consolidated as pYes Consolidated as pNot applicable
ICICI Investment
Management
Company
Limited
[India] Yes Consolidated as pYes Consolidated as pNot applicable
ICICI
International
Limited
[Mauritius] Yes Consolidated as pYes Consolidated as pNot applicable

Name of the entity

[Country of incorpIncluded under

accounting scope Method of accountIncluded under
regulatory scope oMethod of regulatReasons for difference in
the method of conReasons for consolidation
under one of the
scope of consolidation
ICICI Prudential
Pension Funds
Management
Company
Limited2
[India] Yes Consolidated as pYes Consolidated as pNot applicable
ICICI Prudential
Life Insurance
Company
Limited
[India] Yes Consolidated as pNo Not applicable Not applicable
Investment in this entity is deducted from capital for
capital
adequacy computation
ICICI Lombard
General
Insurance
Company
Limited
[India] Yes Consolidated as pNo Not applicable Not applicable
Investment in this entity is deducted from capital for
capital
adequacy computation
ICICI Prudential
Asset
Management
Company
Limited [India] Yes Consolidated as pYes Consolidated as pNot applicable
ICICI Prudential
Trust Limited
[India] Yes Consolidated as pYes Consolidated as pNot applicable
ICICI Strategic I Yes Consolidated as pYes Consolidated as pNot applicable

Name of the entity

[Country of incorpIncluded under

accounting scope Method of accountIncluded under
regulatory scope oMethod of regulatReasons for difference in
the method of conReasons for consolidation
under one of the
scope of consolidation
Fund
[India]
I-Process
Services (India)
Private Limited3
[India] Yes Accounted as perNo Not applicable Not applicable
Investment in this entity is risk weighted for
capital
adequacy computation
NIIT Institute of Finance Banking and Insurance
Training
Limited3
[India] Yes Accounted as perNo Not applicable Not applicable
Investment in this entity is risk weighted for
capital
adequacy computation
ICICI Merchant
Services Private
Limited3
[India] Yes Accounted as perNo Not applicable Not applicable
Investment in this entity is risk weighted for
capital
adequacy computation
India Infradebt
Limited3
[India] Yes Accounted as perNo Not applicable Not applicable
Name of the entity

[Country of incorpIncluded under

accounting scope Method of accountIncluded under
regulatory scope oMethod of regulatReasons for difference in
the method of conReasons for consolidation
under one of the
scope of consolidation

capital
adequacy computation
India Advantage
Fund-III3
[India] Yes Accounted as perNo Not applicable Not applicable
Investment in this entity is risk weighted for
capital
adequacy computation
India Advantage
Fund-IV3
[India] Yes Accounted as perNo Not applicable Not applicable
Investment in this entity is risk weighted for
capital
adequacy computation
Arteria
Technologies
Private Limited Yes Accounted as perNo Not applicable Not applicable
Investment in this entity is risk weighted for
capital
adequacy computation

1 ICICI Securities Holding Inc. is a wholly owned subsidiary of ICICI Securities Limited. ICICI Securities Inc. is a
2 ICICI Prudential Pension Funds Management Company Limited is a wholly owned subsidiary of ICICI Pruden
3 These entities are accounted as per the equity method as prescribed by AS 23 on ‘Accounting for Investment

b. Group entities not considered for consolidation both under the accounting and regulatory scope of consolidation

Sr.
No. Name of the entit Reasons
1 Falcon Tyres LimiNot consolidated, as the investment in the entity is temporary in nature.
2 Commtrade ServiNot consolidated, as the investment in the entity is temporary in nature.

c. Group entities considered for regulatory scope of consolidation

The following table lists the group entities considered under regulatory scope of consolidation at September 30, 2018
` in million
Name of the entity

[Country of incorp] Principal activity oTotal equity capital and reserves &
surplus (as
stated in the accounting
balance sheet
of the legal entity)Total assets
(as stated in the
accounting
balance sheet
of the legal entity)
ICICI Bank UK PLC [United Kingdo Banking 35,685.50 293,186.50
ICICI Bank Canada [Canada] Banking 31,629.20 356,521.10
ICICI Securities Limited [India] Securities brokin 9,520.10 28,128.00
ICICI Securities Holdings Inc.
[USA] Holding company 130.6 130.7
ICICI Securities Inc. [USA] Securities broking 225.7 339.4
Name of the entity

[Country of incorp] Principal activity oTotal equity capital and reserves &
surplus (as
stated in the accounting
balance sheet
of the legal entity)Total assets
(as stated in the
accounting
balance sheet
of the legal entity)
ICICI Securities Primary
Dealership Limited
[India] Securities investm 8,770.40 163,370.60
ICICI Venture Funds
Management Company
Limited
[India] Private equity/venture capital fund
management 2,118.90 2,968.60
ICICI Home Finance
Company Limited
[India] Housing finance 16,381.00 111,031.30
ICICI Trusteeship Services
Limited
[India] Trusteeship servi 6.7 6.8
ICICI Investment
Management Company
Limited
[India] Asset managemen 113.2 113.5
ICICI International Limited [MauritiuAsset managemen 112.3 113
ICICI Prudential Pension
Funds Management
Company Limited
[India] Pension fund ma 253 262.6
ICICI Prudential Asset
Management Company
Limited
[India] Asset managemen 9,772.10 12,157.60
ICICI Prudential Trust
Limited
[India] Trustee company 14.1 14.3

Name of the entity

[Country of incorp] Principal activity oTotal equity capital and reserves &
surplus (as
stated in the accounting
balance sheet
of the legal entity)Total assets
(as stated in the
accounting
balance sheet
of the legal entity)
ICICI Strategic Investments
Fund
[India] Unregistered venture capital
fund 243.4 287.9

d. Capital deficiency in subsidiaries

Majority owned financial entities that are not consolidated for capital adequacy purposes and for which the investment in equity

e. Bank’s interest in insurance entities

Following table gives the details of the Bank’s interest in insurance entities at September 30, 2018.
` in million
Name of the entityPrincipal activity oTotal equity capital (as
stated in the
accounting balance
sheet of the legal entity)
% of
Bank’s holding in tQuantitative impact on regulatory capital of using risk
weighting method
versus using the full deduction method
ICICI Prudential
Life Insurance
Company Life insurance 14,355.70 54.88% 37 bps positive impact on CRAR
Name of the entityPrincipal activity oTotal equity capital (as
stated in the
accounting balance
sheet of the legal entity)
 % of
Bank’s holding in tQuantitative impact on regulatory capital of using risk
weighting method
versus using the full deduction method
Limited [India]
ICICI Lombard
General
Insurance
Company
Limited [India] General insuranc 4,540.60 55.90% 16 bps positive impact on CRAR

f. Restrictions or impediments on transfer of funds or regulatory capital within the group

Transfer of funds and regulatory capital are subject to local laws and regulation of host countries as applicable.

Table DF-2: CAPITAL ADEQUACY

Qualitative disclosures

a. Capital management

Objective

The Bank actively manages its capital to meet regulatory norms and current and future business needs considering the risks in

Organisational set-up

The capital management framework of the Bank is administered by the Finance Group and the Risk Management Group (RMG

Regulatory capital

ICICI Bank

RBI issued Basel III guidelines applicable with effect from April 1, 2013. The guidelines provide a transition schedule for Basel I

As per the transitional arrangement, at September 30, 2018, the Bank is required to maintain minimum CET1 CRAR of 7.525%

Subsidiaries

Each subsidiary in the Group assesses the adequate level of capitalisation required to meet its respective host regulatory requi
Internal assessment of capital

The Bank’s capital management framework includes a comprehensive internal capital adequacy assessment process (ICAAP)

The capital management framework is complemented by the risk management framework, which covers the policies, processes

Stress testing, which is a key aspect of the ICAAP and the risk management framework, provides an insight on the impact of ex

Based on the ICAAP, the Bank determines the level of capital that needs to be maintained by considering the following in an int

• Bank’s strategic focus, business plan and growth objectives;

• regulatory capital requirements as per the RBI guidelines;
• assessment of material risks and impact of stress testing;
• perception of shareholders and investors;
• future strategy with regard to investments or divestments in subsidiaries; and
• evaluation of options to raise capital from domestic and overseas markets, as permitted by RBI from time to ti

Monitoring and reporting

The Board of Directors of the Bank maintains an active oversight over the Bank’s capital adequacy levels. On a quarterly basis,
Further, the ICAAP which is an annual process also serves as a mechanism for the Board to assess and monitor the Bank’s an

Quantitative disclosures

Capital requirements for various risk areas (September 30, 2018)

The Bank is subject to the capital adequacy norms stipulated by the RBI guidelines on Basel III. The total capital adequacy ratio

As required by RBI guidelines on Basel III, the Bank’s capital requirements (at Group level) have been computed using the Stan
` in million
Amount
b. Capital required 663,886.70
- for portfolio su 659,952.90
- for securitisatio 3,933.80
c. Capital required 70,456.40
- for interest rate 50,389.60
- for foreign excha 2,083.70
- for equity positio 17,983.10
d. Capital required 79,104.40
Total capital requ 813,447.50
Total capital fund 1,264,024.40
Total risk weighte 7,378,208.40
Capital adequacy 17.13%
 1 Includes capital required of ` 3,210.9 million for securitisation exposure.
2 Includes all entities considered for Basel III capital adequacy computation.
3 Includes revaluation reserve except revaluation reserve on leasehold property at September 30, 2018.

e. Common Equity Tier 1, Tier 1 and Total CRAR

The CRAR of the Bank and its banking subsidiaries at September 30, 2018 are given below.
CRAR ICICI Bank Ltd (c ICICI Bank Ltd (s ICICI Bank
UK PLC1,2 ICICI Bank
Canada1,3
CET1 CRAR 13.59% 14.01% 13.40% 16.74%
Tier-1 CRAR 14.81% 15.38% 13.40% 16.74%
Total CRAR 17.13% 17.84% 17.60% 17.26%
1 Computed as per capital adequacy guidelines issued by regulators of respective jurisdictions.
2 As per UK Prudential Regulation Authority (PRA) Basel III guidelines.
3 As per Office of the Superintendent of Financial Institutions (OSFI) Basel III guidelines.
4 Excludes retained earnings for H1-2019.

RISK EXPOSURE AND ASSESSMENT

As a financial intermediary, the Bank is exposed to various types of risks including credit, market, liquidity, operational, legal, co

The key principles underlying the risk management framework at the Bank are as follows:

1 The Board of Directors has oversight on all the risks assumed by the Bank. Specific Committees of the Board
2 Policies approved from time to time by the Board of Directors/Committees of the Board form the governing fra
3 Independent groups and sub-groups have been constituted across the Bank to facilitate independent evaluati

The risk management framework forms the basis of developing consistent risk principles across the Bank including its overseas

Material risks are identified, measured, monitored and reported to the Board of Directors and the Board level Committees.

Measurement of risks for capital adequacy purposes

Under Pillar 1 of the extant RBI guidelines on Basel III, the Bank currently follows the standardised approach for credit risk, stan

CREDIT RISK

Table DF-3: Credit risk: General disclosures for all banks

The Bank is exposed to credit risk in its lending operations. Credit risk is the risk of loss that may occur from the failure of any c
Policies and processes

All credit risk related aspects are governed by Credit and Recovery Policy (Credit Policy). Credit Policy outlines the type of prod

The delegation structure for approval of credit limits is approved by the Board of Directors. The delegation is based on the level

• Credit facilities with respect to retail products are provided as per approved product policies. All products and

• Program lending involves lending to individuals/business entities which comply with certain laid down parame

• For certain products including dealer funding, builder finance and loan against securities up to certain thresho

Structure and organisation

RMG is responsible for rating of the credit portfolio, tracking trends in various industries and periodic reporting of portfolio-level

The overseas banking subsidiaries of the Bank have also established broadly similar structures to ensure adequate risk manag

Credit risk assessment process

There exists a structured and standardised credit approval process including a comprehensive credit risk assessment process,

The credit rating process involves assessment of risk emanating from various sources such as industry risk, business risk, finan

In respect of retail advances, the Bank's credit officers evaluate credit proposals on the basis of the product policy reviewed by

Credit approval authorisation structure

The Board of Directors has delegated the approving authority to committees such as the Credit Committee (CC) (comprising a
Executives/Presidents and select Senior General Managers and General Managers), the Committee of Executives (COE), the R

In respect of retail loans, all exposures are approved under operating notes or programs approved by the COED. The norms va

Credit risk monitoring process

For effective monitoring of credit facilities, the Bank has laid down a credit supervision mechanism which includes monitoring to

For corporate, small enterprises and rural and agriculture linked banking business, Credit Middle Office Group (CMOG) verifies

The Bank has established centralised operations to manage operating risk in the various back-office processes of its retail asse

Reporting and measurement

Credit exposure for the Bank is measured and monitored using a centralised exposure management system. The analysis of th

The Bank complies with the norms on exposure stipulated by RBI for both single borrower as well as borrower group at the con

Credit concentration risk

Credit concentration risk arises mainly on account of concentration of exposures under various categories including industry, pr

Limits have been stipulated on single borrower, borrower group and industry. Exposure to top 10 borrowers and borrower group

Definition and classification of non-performing assets (NPAs)

The Bank classifies its advances (loans and credit substitutes in the nature of an advance) into performing and non-performing

An NPA is defined as a loan or an advance where:

i) interest and/or installment of principal remain overdue for more than 90 days in respect of a term loan. Any am

ii) if the interest due and charged during a quarter is not serviced fully within 90 days from the end of the quarter

iii) the account remains ‘out of order’ in respect of an overdraft/cash credit facility. An account is treated as ‘out o
• the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days; or
• where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing pow
• credits in the account are not enough to cover the interest debited during the accounting period; or
• drawings have been permitted in the account for a continuous period of 90 days based on drawing power com
borrower's financial position is satisfactory; or
• the regular/ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/date of a
iv) a bill purchased/discounted by the Bank remains overdue for a period of more than 90 days;

v) interest and/or installment of principal in respect of an agricultural loan remains overdue for two crop seasons

vi) In respect of a securitisation transaction undertaken in terms of the RBI guidelines on securitisation, the amou

vii) In respect of derivative transaction, if the overdue receivable representing positive mark-to-market value of a

Irrespective of payment performance, the Bank identifies a borrower account as an NPA even if it does not meet any of the abo

• loans availed by a borrower are classified as fraud;

• project does not commence commercial operations within the timelines permitted under the RBI guidelines in
• the borrower’s loans are restructured by the Bank. However, loans given for the purpose of implementing a pr
• any security in nature of debenture/bonds/equity shares issued by a borrower and held by the Bank is classifi

Further, NPAs are classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI. A sub-standard
An Non Performing Investment (NPI), similar to NPA, is one where:

(i) Interest/ installment (including maturity proceeds) is due and remains unpaid for more than 90 days.

(ii) The above would apply mutatis-mutandis to preference shares where the fixed dividend is not paid. If the divi
(iii) In the case of equity shares, in the event the investment in the shares of any company is valued at `1 per com
(iv) If any credit facility availed by the issuer is NPA in the books of the Bank, investment in any of the securities, i
(v) The investments in debentures/bonds, which are deemed to be in the nature of advance, would also be subje
(vi) In case of conversion of principal and/or interest into equity, debentures, bonds, etc., such instruments should

For loans held at the overseas branches, identification of NPAs is based on the home country regulations (RBI guidelines) or th

RBI issued a revised framework for resolution of stressed assets on February 12, 2018. This framework replaced, with immedia

In the case of ICICI Home Finance Company Limited, the Bank’s housing finance subsidiary, loans and other credit facilities are

In the case of the Bank’s overseas banking subsidiaries, loans are stated net of allowance for credit losses. Loans are classified

Restructured assets

Restructured loans can be upgraded to standard category only after satisfactory performance during the specified period, that i

Restructuring in respect of loans for PUI involving deferment of the date of commencement of commercial operations would con

Credit risk exposures

Credit risk exposures (excluding specific risk on available-for-sale and held-for-trading portfolio) include all credit exposures as

The following table sets forth the details of credit exposure at September 30, 2018.
` in million
Category Credit exposure
Fund-based facilit 9,117,584.40
Non-fund based fac 2,736,241.60
Total2 11,853,826.00
1 Includes investment in government securities held under held-to-maturity category.
2 Includes all entities considered for Basel III capital adequacy computation.
a. Geographic distribution of exposures at September 30, 2018
` in million
Category Fund-based facilitNon-fund based
facilities
Domestic 7,656,855.90 2,335,149.70
Overseas 1,460,728.50 401,091.90
Total2 9,117,584.40 2,736,241.60
1 Includes investment in government securities held under held-to-maturity category.
2 Includes all entities considered for Basel III capital adequacy computation.

b. Industry-wise distribution of exposures at September 30, 2018

` in million
Industry Fund-based facilitNon-fund based
facilities
Retail finance1 4,007,023.50 36,380.70
Banks2 595,250.10 247,487.50
Services-finance3 706,278.30 128,867.20
Electronics and e 128,576.40 627,464.40
Crude petroleum/r 103,764.20 406,854.70
Road, port, telecom, urban development and other infra
257,646.80 187,124.80
Power 315,038.10 96,221.20
Wholesale/retail t 235,744.90 152,496.10
Services-non fina 233,630.80 135,148.00
Construction 92,836.60 188,814.60
Iron/steel and pro 143,658.30 98,799.70
Mutual funds 182,850.00 2,241.60
Chemical and ferti 108,652.50 59,890.20
Metal and products 63,125.10 84,410.10
Automobiles 72,266.80 66,306.70
Industry Fund-based facilitNon-fund based
facilities
Mining 82,918.20 39,853.10
Food and bevera 99,297.10 17,924.00
Cement 64,348.10 20,906.00
Manufacturing pro 49,215.80 21,025.80
Drugs and pharma 39,816.50 23,600.30
Textile 41,701.90 17,230.00
Gems and jewelle 43,558.80 8,639.20
Shipping 19,642.80 16,718.60
FMCG 16,842.20 11,474.90
Venture capital fu 3,410.00 -
Other industries4 1,410,490.60 40,362.20
Grand Total5 9,117,584.40 2,736,241.60
1 Includes home loans, commercial business loans, automobile loans, business banking, credit cards, personal
2 Includes balances with banks.
3 Includes fund-based and non-fund based credit risk exposure to NBFCs, HFCs, broker companies, SIDBI, NH
4 Other industries include investment in government securities held under held-to-maturity category and develo
5 Includes all entities considered for Basel III capital adequacy computation.

The following table sets forth, the exposures to industries (other than retail finance) in excess of 5.00% of total exposure at Sep
` in million
Industry Fund-based facilitNon-fund based
facilities
Banks 595,250.10 247,487.50
Services-finance 706,278.30 128,867.20
Electronics and e 128,576.40 627,464.40
Total 1,430,104.80 1,003,819.10

c. Maturity pattern of assets1

The following table sets forth, the maturity pattern of assets at September 30, 2018.
` in million
Maturity buckets Cash & balances Balances with
banks &
money at
call and short notiInvestments Loans & advance Fixed assets Other assets Total
Day 1 106,338.10 235,149.40 404,588.00 16,897.20 -
2 to 7 days 9,926.90 24,549.80 202,487.00 50,150.40 -
8 to 14 days 6,542.70 9,412.40 66,121.50 51,478.40 -
15 to 30 days 7,011.00 6,821.50 124,271.90 123,240.80 -
31 days upto 2 m 6,356.50 4,206.70 35,618.70 258,487.60 -
More than
2 months and upt 5,686.10 9,022.90 36,635.20 271,965.30 -
More than
3 months and upt 14,724.10 10,482.80 108,360.80 439,216.30 -
More than
6 months and upto 21,431.60 8,431.20 151,284.60 656,544.50 -
More than
1 year and upto 3 29,140.70 5,025.20 211,448.90 1,540,807.30 -
More than
3 year and upto 5 62,689.80 0 307,275.30 1,113,611.90 -
Above 5 years 61,530.80 825.1 423,045.10 1,522,342.60 79,860.40
Total 331,378.30 313,927.00 2,071,137.00 6,044,742.40 79,860.40
1. Consolidated figures for the Bank and its banking subsidiaries, ICICI Home Finance Company Limited, ICICI Securities Prim

d. Amount of non-performing loans (NPLs) at September 30, 2018

` in million
NPL classificationGross NPLs Net NPLs
Sub-standard 67,226.40 44,424.90
Doubtful 490,236.70 192,046.40
- Doubtful 11 193,483.30 99,901.40
- Doubtful 21 224,607.90 89,503.30
- Doubtful 31 72,145.50 2,641.70
Loss 19,690.00 -
Total2, 3 577,153.10 236,471.30
NPL ratio4 9.03% 3.91%
1 Loans (other than direct agri) classified as NPLs for 456-820 days are classified as Doubtful 1, 821-1,550 day
2 Identification of loans as non-performing/impaired is in line with the guidelines issued by regulators of respect
3 Represents advances portfolio of the Bank and its banking subsidiaries, ICICI Home Finance Company Limite
4 Gross NPL ratio is computed as a ratio of gross NPLs to gross advances. Net NPL ratio is computed as a rati

e. Movement of NPLs during the six months ended September 30, 2018
` in million
Gross NPL Net NPL
Opening balance a 567,038.00 292,920.00
Additions during t 78,103.10 37,951.00
Reduction/write-of -67,988.00 -94,399.70
Closing balance a 577,153.10 236,471.30
1. Includes advances portfolio of the Bank and its banking subsidiaries, ICICI Home Finance Company Limited and ICICI Secur

f. Movement of provisions during the six months ended September 30, 2018
` in million
Specific provisionGeneral provision
Opening balance a 274,746.10 28,053.70
Provisions made d 107,805.20 1,789.50
Write-off during t -32,752.10 -
Specific provisionGeneral provision
Write-back of excess provisions/reversals during the period/year
-8,822.50 -241.9
Adjustments (including transfers between provisions)
- 625.7
Closing balance a 340,976.70 30,227.00
1 Includes advances portfolio of the Bank and its banking subsidiaries, ICICI Home Finance Company Limited a
2 Specific provision relating to NPAs and restructured loans.

g. Details of write-offs and recoveries booked in income statement for the six months ended September 30, 2018
` in million
Write-off that hav 1,467.60
Recoveries that h 943.9

h. Amount of non-performing investments (NPIs) in securities, other than government and other approved securities at Septemb
` in million
Amount1
Gross NPIs 48,071.30
Total provisions h -41,234.10
Net NPIs2 6,837.20
1 Excludes amount outstanding under application money.
2 Includes NPIs of the Bank and its banking subsidiaries.

i. Movement of provisions for depreciation on investments1 during the six months ended September 30, 2018
` in million
Amount2,3
Opening balance a 51,589.90
Provision/deprecia 9,886.50
Write-off/write-ba -943.2
Closing balance a 60,533.20
1 After considering movement in appreciation on investments.
2 Includes all entities considered for Basel III capital adequacy computation.
3 Excludes amount outstanding under application money.
4 Includes provisions for depreciation on investments of the Bank and its subsidiaries.

j. Top five industries based on total credit risk exposure (other than banks) at September 30, 2018
` in million
Gross NPAs Specific provisionGeneral provisionSpecific provision
during the period/Write-off during the period/year
Top 5 Industries 120,763.80 79,852.70 17,496.60 13,847.80 2,936.70
1. Specific provision relating to NPAs and restructured loans.

k. Geography-wise breakup of gross NPAs, specific provision and general provision at September 30, 2018
` in million
Category Gross NPAs Specific provisionGeneral provision
Domestic 349,257.10 217,604.40 23,445.00
Overseas 227,896.00 123,372.30 6,782.00
Total 577,153.10 340,976.70 30,227.00
1. Specific provision relating to NPAs and restructured loans.

CREDIT RISK: PORTFOLIOS SUBJECT TO THE STANDARDISED APPROACH

Table DF-4: Credit risk: Disclosures for portfolios subject to the standardised approach

a. External ratings

The Bank uses the standardised approach to measure the capital requirements for credit risk. As per the standardised approac
The key aspects of the Bank’s external ratings application framework are as follows:

• The Bank uses only those ratings that have been solicited by the counterparty.

• Foreign sovereign and foreign bank exposures are risk-weighted based on issuer ratings assigned to them.

• The risk-weighting of corporate exposures based on the external credit ratings includes the following:

i. The Bank reckons external ratings of corporates either at the credit facility level or at the borrower (issuer) lev

ii. The Bank ensures that the external rating of the facility/borrower has been reviewed at least once by the ECA

iii. When a borrower is assigned a rating that maps to a risk weight of 150%, then this rating is applied on all the

iv. Unrated short-term claim on counterparty is assigned a risk weight of at least one level higher than the risk we

• The RBI guidelines outline specific conditions for facilities that have multiple ratings. In this context, the lower

b. Credit exposures by risk weights

The following table sets forth, the credit exposures subject to the standardised approach after adjusting for credit risk mitigation
` in million
Exposure categorAmount1,2
Less than 100% ri 6,202,721.30
100% risk weight 4,763,501.00
More than 100% ri 1,027,998.00
Total 11,994,220.30
1 Credit risk exposures include all exposures, as per RBI guidelines on exposure norms, subject to credit risk a
2 Includes all entities considered for Basel III capital adequacy computation.

CREDIT RISK MITIGATION

DF-5: Credit risk mitigation: Disclosures for standardised approaches

a. Collateral management and credit risk mitigation

The Bank has a Board approved policy framework for collateral management and credit risk mitigation techniques, which includ

Collateral management

Overview

The Bank defines collateral as the assets or rights provided to the Bank by the borrower or a third party in order to secure a cre

Collateral valuation

As stipulated by the RBI guidelines, the Bank uses comprehensive approach for collateral valuation. Under this approach, the B

The Bank adjusts the value of any collateral received to adjust for possible future fluctuations in the value of the collateral in line

Types of collateral taken by the Bank

The Bank determines the appropriate collateral for each facility based on the type of product and risk profile of the counterparty

For retail products, the security to be taken is defined in the product policy for the respective products. Housing loans and autom

The Bank also offers products which are primarily based on collateral such as shares, specified securities, warehoused commo

The Bank extends unsecured facilities to clients for certain products such as derivatives, credit cards and personal loans. The li

The decision on the type and quantum of collateral for each transaction is taken by the credit approving authority as per the cre

Credit risk mitigation techniques

The RBI guidelines on Basel III allow the following credit risk mitigants to be recognised for regulatory capital purposes:

• Eligible financial collateral, which include cash (deposited with the Bank), gold (including bullion and jewellery

• On-balance sheet netting, which is confined to loans/advances and deposits, where banks have legally enforc

• Guarantees, where these are direct, explicit, irrevocable and unconditional. Further, the eligible guarantors wo

 Sovereigns, sovereign entities stipulated in the RBI guidelines on Basel III, banks and primary dealers with a
 Other entities, which are rated better than the entities for which the guarantee is provided.

The Bank reckons the permitted credit risk mitigants for obtaining capital relief only when the credit risk mitigant fulfills the cond
Concentrations within credit risk mitigation

Currently, the Bank does not have any concentration risk within credit risk mitigation. The RBI guidelines, among its conditions f

b. The following table sets forth, the portfolio covered by eligible financial collateral at September 30, 2018
` in million
Amount1
Exposures fully cov 387,892.70
Exposure that is c 32,799.40
1. Includes all entities considered for Basel III capital adequacy computation.

The processes for capital computation and credit risk mitigation based on Basel III guidelines are consistent across subsidiaries

SECURITISATION

Table DF-6: Securitisation exposures: Disclosure for standardised approach

a. Securitisation objectives, roles played by the Bank and the risks

Objectives

The Bank’s primary objective of securitisation activities is to increase the efficiency of capital and enhance the return on capital

Roles played by the Bank

In securitisation transactions backed by assets, either originated by the Bank or third parties, the Bank plays the following majo

• Underwriter: allowing un-subscribed portions of securitised debt issuances, if any, to devolve on the Bank, wit

• Investor/trader/market-maker: acquiring investment grade securitised debt instruments backed by financial as

• Structurer: structuring appropriately in a form and manner suitably tailored to meet investor requirements, whi

• Provider of liquidity facilities: addressing temporary mismatches on account of the timing differences between

• Provider of credit enhancement facilities: addressing delinquencies associated with the underlying assets, i.e.

• Provider of collection and processing services: collecting and/or managing receivables from underlying obligo

Risks in securitisation

The major risks inherent in the securitised transactions are:

• Credit risk: Risk arising on account of payment delinquencies from underlying obligors/borrowers in the assign

• Market risk:

i) Liquidity risk: Risk arising on account of lack of secondary market to provide ready exit options to the investor

ii) Interest rate: Mark-to-market risks arising on account of interest rate fluctuations.

• Operational risk:

i) Co-mingling risk: Risk arising on account of co-mingling of funds belonging to investor(s) with that of the origin

ii) Performance risk: Risk arising on account of the inability of a collection and processing agent to collect monie

iii) Regulatory and legal risk: Risk arising on account of

 non-compliance of the transaction structures with the extant applicable laws which may result in the transactio
 conflict between the provisions of the transaction documents with those of the underlying financial facility agre
 non-enforceability of security/claims due to imperfection in execution of the underlying facility agreements with

• Reputation risk: Risk arising on account of

 rating downgrade of a securitised instrument due to unsatisfactory performance of the underlying asset pool;
 inappropriate practices followed by the collection and processing agent.
In addition to the above, securitised assets are exposed to prepayment and pipeline and warehousing risks. Prepayment risk ar

Processes in place to monitor change in risks of securitisation exposures

The Bank has established appropriate risk management processes to monitor the risks on securitisation exposures, which inclu

i) Monitoring credit risk

The Bank, in the capacity of collection and processing agent, prepares monthly performance reports which are circulated to inv

ii) Monitoring market risk

The Bank ascertains market value of the securitisation exposures based on extant norms, which is compared with their book va

Bank’s policy governing the use of credit risk mitigation to mitigate the risks retained through securitisation exposures

The Bank has not used credit risk mitigants to mitigate retained risks.

b. Summary of the Bank’s accounting policies for securitisation activities

Transfer and servicing of assets

The Bank transfers commercial and consumer loans through securitisation transactions. The transferred loans are de-recognise

In accordance with the RBI guidelines for securitisation of standard assets, with effect from February 1, 2006, the Bank accoun

In accordance with RBI guidelines, in case of non-performing/special mention account-2 loans sold to securitisation company (S

Methods and key assumptions (including inputs) applied in valuing positions retained or purchased

The valuation of pass-through certificates (PTCs) wherever linked to the Yield-to-Maturity (YTM) rates, is computed with a mark

The retained/purchased interests in the form of subordinate contributions are carried at book value.

There is no change in the methods and key assumptions applied in valuing retained/purchased interests from previous period.

Policies for recognising liabilities on the balance sheet for arrangements that could require the Bank to provide financial suppor

The Bank provides credit enhancements in the form of cash deposits or guarantees in its securitisation transactions. The Bank

c. Rating of securitisation exposures

Ratings obtained from ECAIs stipulated by RBI (as stated above) are used for computing capital requirements for securisation e

d. Details of securitisation exposures in the banking book

i. Total outstanding exposures securitised by the Bank and the related unrecognised gains/(losses) at September 30, 2018
` in million
Exposure type Outstanding1 Unrecognised gains/(losses)
Vehicle/equipment- -
Home and home eq 1,643.90 -
Personal loans - -
Corporate loans 198.3 -
Mixed asset pool - -
Total 1,842.20 -
1. The amounts represent the total outstanding principal at September 30, 2018 for securitisation deals and include direct assig

ii. Break-up of securitisation gains/(losses) (net) at September 30, 2018

` in million
Exposure type ###
Vehicle/equipment 4.1
Home and home eq 7.6
Personal loans 4
Corporate loans -
Mixed asset pool -
Total 15.7

ii. Assets to be securitised within a year at September 30, 2018

` in million
Particulars Amount
Amount of assets i 41,782.50
Of which: amount o 41,782.50

iv. Securitisation exposures retained or purchased at September 30, 2018

` in million
Exposure type1 On-balance sheetOff-balance sheetTotal
Vehicle/equipment 120 - 120
Home and home eq 4,377.50 357.4
4,734.90
Personal loans - - -
Corporate loans 2,029.70 4,775.10 6,804.80
Mixed asset pool - - -
Total 6,527.20 5,132.50 11,659.70
1. Securitisation exposures include but are not restricted to liquidity facilities, other commitments and credit enhancements such

v. Risk weight bands break-up of securitisation exposures retained or purchased at September 30, 2018
` in million
Exposure type1 <100%
risk weight 100% risk weight >100%
risk weight Total
Vehicle/equipment- - 120 120
Home and home eq 2,322.60 - 2,412.30 4,734.90
Personal loans - - - -
Corporate loans 5,173.70 1,631.10 - 6,804.80
Mixed asset pool - - - -
Total 7,496.30 1,631.10 2,532.30
Total capital char 264.1 179.8 3,489.90
1. Includes direct assignments in the nature of sell-downs.
vi. Securitisation exposures deducted from capital at September 30, 2018

Securitisation exposure which had been considered for deduction as per Basel II guidelines is now being risk-weighted for the p

e. Details of securitisation exposures in the trading book

i. Aggregate amount of exposures securitised for which the Bank has retained some exposures subject to market risk at Septem
` in million
Exposure type Total1
Vehicle/equipment-
Home and home eq 414.2
Personal loans -
Corporate loans -
Mixed asset pool -
Small enterprise l -
Micro credit -
Total 414.2
1. The amounts represent the outstanding principal at September 30, 2018 for securitisation deals.
ii. Securitisation exposures retained or purchased at September 30, 2018
Exposure type1 On-balance sheetOff-balance sheetTotal
Vehicle/equipment 92,725.90 - 92,725.90
Home and home eq 23,204.50 - 23,204.50
Personal loans - - -
Corporate loans 242.8 - 242.8
Mixed Asset - - -
Small enterprise l 473.1 - 473.1
Micro credit - - -
Total 116,646.30 - 116,646.30
` in million
1. Securitisation exposures include PTCs originated by the Bank as well as PTCs purchased in case of third party originated se

iii. Risk weight bands break-up of securitisation exposures retained or purchased and the related capital charge at September 3
` in million
Exposure Capital charge1
<100% risk weigh 113,609.10 2,780.90
100% risk weight - -
>100% risk weigh 351 430
Total 113,960.10 3,210.90
1. Represents capital required to be maintained at 11.025%.
iv. Securitisation exposures deducted from capital at September 30, 2018

Securitisation exposure which had been considered for deduction as per Basel II guidelines is now being risk-weighted for the p

MARKET RISK IN TRADING BOOK

Table DF-7: Market risk in trading book

a. Market risk management policy

Risk management policies

Market risk is the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market v

Risk management objectives

The Bank manages its market risk with the broad objectives of:

1 Compliance with regulatory requirements

2 Effective internal control on the operation/execution of the investment, forex and derivatives transactions and
3 Management of market risk such as interest rate risk, currency risk, equity risk and credit spread risk arising f
4 Proper classification, valuation and accounting of investments, forex and
derivatives portfolio
5 Adequate and proper reporting of investments, forex and derivatives products
6 Taking position by various treasury groups to benefit from price movements. These positions are taken within

Structure and organisation of the market risk management function

The Market Risk Management Group (MRMG), which is an independent function reports to the Head - RMG. MRMG exercises

• Trading i.e. front office; and

• Reporting, control, settlements and accounting i.e. Treasury Control and Services Group (TCSG)

Strategies and processes

Internal control system

Treasury operations warrant elaborate control procedures. Keeping this in view, the following guidelines are followed for effectiv

1 Tracking utilisation of limits

TCSG is responsible for an independent check of the transactions entered into by the front office. It also reports utilisation of all

MRMG reports the value-at-risk (VaR), price-value of basis point (PV01) and stop loss limit utilisations to the ALCO as a part of

2 System controls

The system used for recording, processing, monitoring and accounting of treasury transactions have adequate data integrity co

3 Delegation and exception handling processes

Keeping in view the size of the investment portfolio and the variety of securities that the Bank deals in, authority for investment

The Investment Policy sets out deal-size limits for various products. Various coherence checks have been inserted in the system

The Investment Policy lists limits such as notional, stop loss, Greeks and VaR. It also defines the approval mechanism in case o

Scope and nature of risk reporting and/or measurement systems

Reporting

The Bank periodically reports on the various investments and their related risk measures to the senior management and the co

Measurement

The Bank has devised various risk metrics for different products and investments. These risk metrics are measured and reporte

Hedging and mitigation

Limits on positions that can be maintained are laid out in the relevant policies. All business groups are required to operate within

Frameworks in overseas banking subsidiaries

Frameworks that are broadly similar to the above framework have been established at each of the overseas banking subsidiarie

b. Capital requirements for market risk

The following table sets forth, the capital requirements for market risk (general and specific) at September 30, 2018.

Amount1
Capital required 70,456.40
- for interest rate 50,389.60
- for foreign excha 2,083.70
- for equity positio 17,983.10
1. Includes all entities considered for Basel III capital adequacy computation. 2. Includes capital required of ` 3,210.9 million for

OPERATIONAL RISK

Table DF-8: Operational risk

a. Operational risk management framework

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external ev

Objectives

The objective of the Bank’s operational risk management is to manage and control operational risks in a cost effective manner w

• Define Bank-level operational risk appetite;

• Establish clear accountability and responsibility for management and mitigation of operational risk;
• Develop a common understanding of operational risk across the Bank, to assess operational risk of business,
• Help business and operations to improve internal controls throughout the Bank, thereby reducing the probabil
• Minimise losses and customer dissatisfaction due to failure in processes;
• Develop comprehensive operational risk loss database for effective mitigation;
• Meet regulatory requirements as set out in the guidance note on management of operational risk issued by th
• Compute capital charge for operational risk as per the guidelines issued by the RBI;
• Disclosing the operational risk management framework in a manner that will allow stakeholders to determine
• Focusing on flaws in products and their design that can expose the Bank to operational risk related losses.

Operational risk management governance and framework

The Bank has a comprehensive operational risk governance structure, in line with corporate governance requirements from the

The Board-level committees that undertake supervision and review of operational risk aspects are the Risk Committee, the Frau

The executive-level committees that undertake supervision and review of operational risk aspects are the Operational Risk Man
The Board and the Risk Committee review the operational risk level and direction and the material operational risk exposures. T

In line with the RBI guidelines, an independent Operational Risk Management Group (ORMG) was set up in the year 2006. The

The Policy also specifies the composition, roles and responsibilities of Operational Risk Management Committee. ORMC is res

The key elements in the operational risk management framework as defined in the Policy include:

• Identification and assessment of operational risks and controls;

• New product and processes approval framework;
• Measurement through incident and exposure reporting;
• Monitoring through key risk indicators; and
• Mitigation through process and controls enhancement and insurance.

The Bank has implemented Outsourcing Policy approved by the Board of Directors, which specifies the composition, roles and

• Evaluation of the risks and materiality of outsourced activities;

• Approval of new outsourced activities;
• Ensuring that periodic review of outsourcing arrangements is conducted by the business/operations group; an
• Putting in place a central database on outsourcing.
Identification and assessment

Operational risks and controls across the Bank are documented and updated regularly. Each business and operations group in

Measurement, monitoring, mitigation and reporting

Operational risk incidents are reported regularly and transactions resulting in losses are routed through operational risk accoun

The Bank has been estimating operational value at risk (OpVaR) for the purpose of internal capital adequacy assessment proce
For facilitating effective operational risk management, the Bank has implemented a comprehensive operational risk manageme
The Bank has received a “parallel run” approval for migration to the standardised approach (TSA) on a standalone basis for cal

Operational risk management in overseas branches and banking subsidiaries

Operational Risk Management policy of the Bank along with the additional guidelines enclosed as addendum to the ORM policy
Operational risk management in other subsidiaries
The Bank has designed Group Operational Risk Management Policy. The Policy document describes the approach towards the

b. Capital requirement for operational risk at September 30, 2018

As per the RBI guidelines on Basel III, the Bank has adopted Basic Indicator approach for computing capital charge for operatio

INTEREST RATE RISK IN THE BANKING BOOK (IRRBB)

Table DF-9: Interest rate risk in the banking book (IRRBB)

a. Risk management framework for IRRBB

Interest rate risk is the risk of potential variability in earnings and capital value resulting from changes in market interest rates. IR

Organisational set-up

ALCO is responsible for management of the balance sheet of the Bank with a view to manage the market risk exposure assume
The ALM Policy of the Bank contains the prudential limits on liquidity and interest rate risk, as prescribed by the Board of Direct

TCSG is an independent group responsible for preparing various reports to ensure adherence to the prudential limits as per the

Risk measurement and reporting framework

The Bank proactively manages impact of IRRBB as a part of its ALM activities. ALM policy defines different types of interest rate

• Gap analysis: The interest rate gap or mismatch risk is measured by calculating gaps over different time interv

• EaR: The Bank monitors the EaR with respect to net interest income (NII) based on a 100 basis points advers

For some of the products, Bank provides its depositors and borrowers an option to terminate the deposit/loan pre-maturely. The

• DoE: Change in the interest rates also have a long-term impact on the market value of equity of the Bank, as

• Stress test for basis risk: The assets and liabilities on the balance sheet are priced based on multiple benchm

MRMG reports the utilisation of DoE, EaR and basis risk measures to the ALCO as a part of the ALM risk profile presentation a

Marked-to-market (MTM) on the trading book

In addition to the above, the price risk of the trading book is monitored through measures such as notional, stop loss, Greeks an

Hedging policy

Depending on the underlying asset or liability and prevailing market conditions, the Bank enters into hedge transactions for iden

Frameworks in overseas banking subsidiaries

Frameworks that are broadly similar to the above framework have been established at each of the overseas banking subsidiarie

b. Level of interest rate risk

The following table sets forth, one possible prediction of the impact on the net interest income of changes in interest rates on in
2018, assuming a parallel shift in the yield curve.
` in million
Change in interest rates1
Currency -100 basis points #ERROR!
INR -8,790.70 8,790.70
USD 1,471.20 -1,471.20
Others -876.5 876.5
Total -8,196.00 8,196.00
1. Consolidated figures for the Bank and its banking subsidiaries, ICICI Home Finance Company Limited, ICICI Securities Prim

The following table sets forth, one possible prediction of the impact on economic value of equity of changes in interest rates on
` in million
Change in interest rates1, 2
Currency -100 basis points #ERROR!
INR -8,013.50 8,013.50
USD 1,768.20 -1,768.20
Others -1,198.30 1,198.30
Total -7,443.60 7,443.60
1 For INR currency, primarily coupon and yield of Government of India securities along with relevant spreads an
2 Consolidated figures for the Bank and its banking subsidiaries, ICICI Home Finance Company Limited, ICICI

LIQUIDITY RISK

Liquidity risk is the risk of inability to meet financial commitments as they fall due, through available cash flows or through sale o

The goal of liquidity management is to ensure that the Bank is always in a position to efficiently meet both expected and unexpe

Organisational set-up

The Asset Liability Management Group (ALMG) at the Bank monitors and manages the liquidity risk under the supervision of AL
The Bank manages liquidity risk in accordance with its ALM Policy. This policy is framed as per the extant regulatory guidelines

Risk measurement and reporting framework

The Bank proactively manages liquidity risk as a part of its ALM activities. The Bank uses various tools for measurement of liqu

The SSL is used as a standard tool for measuring and managing net funding requirements and assessment of surplus or shortf

The Bank also prepares dynamic liquidity cash flow statements, which in addition to scheduled cash flows, also considers the li
Further, the Bank has a Board approved liquidity stress testing framework, as per which the Bank gauges its liquidity position un

The Bank has also framed a Liquidity Contingency Plan (LCP), which serves as a framework for early identification and calibrat

Liquidity management

The Bank has diverse sources of liquidity to allow for flexibility in meeting funding requirements. For the domestic operations, cu

For domestic operations, the Bank also has the option of managing liquidity by borrowing in the inter-bank market on a short-te
For the overseas operations too, the Bank has a well-defined borrowing program. The US dollar is the base currency for the ov

Frameworks that are broadly similar to the above framework have been established at each of the overseas banking subsidiarie

In summary, the Bank has in place robust governance structure, policy framework and review mechanism to ensure availability

COUNTERPARTY CREDIT RISK

Table DF-10: General disclosure for exposures related to counterparty credit risk

The Bank stipulates limits as per the norms on exposure stipulated by RBI for both, fund and non-fund based products, includin

Credit exposure for the Bank is measured and monitored using a centralised exposure management system. The analysis of th

In view of the margin rules for non-centrally cleared derivative transactions issued by the Basel Committee on Banking Supervis

In respect of overseas operations, generally, the collateral requirements are applicable for the banks having outstanding borrow

An assessment of possible wrong way risk is carried out on a case-to-case basis at the time of credit assessment as part of the

The following table sets forth, the derivative exposure calculated using Current Exposure Method (CEM) and the balance outsta
` in million
Particulars Notional Amount Current Exposure
Interest rate swap 15,710,235.90 186,120.00
Currency swaps 441,164.30 74,717.50
Forward rate agr 17,034.00 85.7
Currency futures 9,027.30 180.5
Caps/floors 70,752.10 726
Options 663,016.70 13,065.50
Foreign exchange 4,492,183.90 137,648.50
Interest rate futur - -
Total 21,403,414.20 412,543.70

DF-16: Equities – Disclosure for banking book positions

Investments are classified at the time of purchase into Held for trade (HFT), Available for
Sale (AFS) and Held to Maturity (HTM) categories in line with the RBI master circular- Prudential Norms for Classification, Valua

As per the RBI guidelines, investments classified under HTM category need not be marked to market and are carried at acquisi
Equity shares under the banking book are the Bank’s investments in equity shares of its insurance subsidiaries. The book value

LEVERAGE RATIO

DF-17: Summary Comparison of accounting assets and leverage ratio exposure

The Basel III leverage ratio is defined as the capital measure (Tier-1 capital of the risk based capital framework) divided by the
` in million
Sr. No. Particulars Amount
1 Total consolidated 11,369,422.80
2 Adjustment for inv -46,465.50
3 Adjustment for fi -
4 Adjustments for de 336,144.00
5 Adjustment for securities financing transactions (SFTs) (i.e.
repos and similar 10,695.10
6
Adjustment for off 1,375,444.50
7 Other adjustment -1,747,170.20
8 Leverage ratio ex 11,298,070.70
DF-18: Leverage ratio common disclosure template

The following table sets forth, the leverage ratio at September 30, 2018.
` in million
Sr. No. Leverage ratio fr Amount
On-Balance sheet exposure
1 On-balance sheet i 9,501,783.30
2 (Asset amounts deducted in determining Basel III Tier 1 capital)
-52,672.00
3 Total on-balance s 9,449,111.30
Derivative exposure
4 Replacement cost associated with all
transactions (i.e. 134,892.10
5 Add-on amounts for 299,523.70
6 Gross-up for deri -
7 (Deductions of rec-
8 (Exempted CCP leg
-
9 Adjusted effective-
10 (Adjusted effectiv -
11 Total derivative e 434,415.80
Securities financing transaction exposures
12 Gross SFT assets ( 28,403.90
13 (Netted amounts o-
14 CCR exposure for SFT assets
 10,695.10
15 Agent transaction-
16 Total securities f 39,099.00
Other off-balance sheet exposures
Sr. No. Leverage ratio fr Amount
17 Off-balance sheet 3,985,440.70
18 (Adjustments for conversion to credit equivalent amounts)
-2,609,996.20
19 Off-balance sheet 1,375,444.50
Capital and total exposures
20 Tier 1 capital1 1,092,324.20
21 Total exposures (s 11,298,070.60

Leverage ratio
22 Basel III leverage 9.67%
1 Tier 1 capital at December 31, 2017, March 31, 2018 and June 30, 2018 was ` 995,200.6 million, ` 1,096,563.
2 Total exposures at December 31, 2017, March 31, 2018 and June 30, 2018 were ` 10,488,181.2 million, ` 11,1
3 Leverage ratio at December 31, 2017, March 31, 2018 and June 30, 2018 was 9.49%, 9.83% and 10.04%, re

The following table sets forth the reconciliation of total published balance sheet size and on-balance sheet exposure at Septem
` in million
Sr. No. Leverage ratio fr Amount
1 Total consolidated 11,369,422.80
2 Replacement cost associated with all
transactions, i.e. net of eligible cash variation margin
-98,271.90
3 Adjustment for securities financing transactions (i.e. repos and similar secured lending)
-28,403.90
4 Adjustment for entities outside the scope of regulatory consolidation
-1,742,582.70
5 On-balance sheet 9,500,164.30

3. COMPOSITION OF CAPITAL

Disclosure pertaining to main features of equity and debt capital instruments, terms and conditions of equity and debt capital ins
. The guidelines provide a transition schedule for Basel III implementation till March 31, 2019. Upon full implementation of Basel III guidelin

to maintain minimum CET1 CRAR of 7.525%, minimum Tier-1 CRAR of 9.025% and minimum total CRAR of 11.025%. The minimum capita

gement framework of the Bank. These disclosures have been set out in the following sections.

entures and other entities consolidated for preparation of consolidated financial statements and their treatment in consolidated capital adeq

Not applicable

Not applicable
Not applicable

Not applicable

Not applicable

Not applicable

Not applicable

Not applicable

Not applicable

Not applicable

Not applicable
Not applicable

This is an insurance enti not required to be consolidated for regulatory reporting.

This is an insurance enti not required to be consolidated for regulatory reporting.

Not applicable

Not applicable
Not applicable
This is a nonfinancnot required to be consolidated for regulatory reporting.

This is a nonfinancnot required to be consolidated for regulatory reporting.

The consolidation of this entity is done by equity method.

The consolidation of this entity is done by equity method.

Investment in this entity is risk weighted for

The consolidation of this entity is done by equity method.

 The consolidation of this entity is done by equity method.

This is a nonfinancnot required to be consolidated for regulatory reporting.

Limited. ICICI Securities Inc. is a wholly owned subsidiary of ICICI Securities Holding Inc.
wned subsidiary of ICICI Prudential Life Insurance Company Limited.
3 on ‘Accounting for Investments in Associates in Consolidated Financial Statements’.

scope of consolidation

ry in nature.
ry in nature.

at September 30, 2018

or which the investment in equity and other instruments eligible for regulatory capital status are deducted from capital, meet their respective
 s as applicable.

s needs considering the risks in its businesses, expectation of rating agencies, shareholders and investors, and the available options of rais

Risk Management Group (RMG) under the supervision of the Board and the Risk Committee.

a transition schedule for Basel III implementation till March 31, 2019. Upon full implementation of Basel III guidelines, the minimum CRAR w

minimum CET1 CRAR of 7.525%, minimum Tier-1 CRAR of 9.025% and minimum total CRAR of 11.025%. The minimum capital requiremen

respective host regulatory requirements and business needs. The Board of each subsidiary maintains oversight over the capital adequacy
y assessment process (ICAAP) conducted annually which determines the adequate level of capitalisation for the Bank to meet regulatory n

ch covers the policies, processes, methodologies and frameworks established for the management of material risks.

es an insight on the impact of extreme but plausible scenarios on the Bank’s risk profile and capital position. Based on the stress testing fra

onsidering the following in an integrated manner:

s permitted by RBI from time to time.

acy levels. On a quarterly basis, an analysis of the capital adequacy position and the risk weighted assets and an assessment of the variou
ssess and monitor the Bank’s and the Group’s capital adequacy position over a four- year time horizon.

. The total capital adequacy ratio of the Bank at a standalone level at September 30, 2018 as per the RBI guidelines on Basel III is 17.84%

e been computed using the Standardised approach for credit risk, Standardised Measurement method for market risk and Basic Indicator a
y at September 30, 2018.

ive jurisdictions.

et, liquidity, operational, legal, compliance and reputation risks. The objective of the risk management framework at the Bank is to ensure th

pecific Committees of the Board have been constituted to facilitate focused oversight of various risks. The Risk Committee reviews the risk
the Board form the governing framework for each type of risk. The business activities are undertaken within this policy framework.
to facilitate independent evaluation, monitoring and reporting of various risks. These control groups function independent of the business gr

s the Bank including its overseas branches and overseas banking subsidiaries.

e Board level Committees.

sed approach for credit risk, standardised measurement method for market risk and basic indicator approach for operational risk.

ay occur from the failure of any counterparty to abide by the terms and conditions of any financial contract with the Bank, principally the failu
it Policy outlines the type of products that can be offered, customer categories, target customer profile, credit approval process and limits. T

delegation is based on the level of risk and the quantum of exposure, to ensure that the transactions with higher exposure and level of risk

roduct policies. All products and policies require the approval of the Committee of Executive Directors/Committee of Senior Management. T

ly with certain laid down parameterised norms. The approving authority as per the Board approved authorisation lays down these paramete

t securities up to certain threshold limits and for facilities fully collateralised by cash and cash equivalents, the delegation structure approve

riodic reporting of portfolio-level changes. The group is segregated into subgroups for corporate, banks, sovereign and financial institutions,

s to ensure adequate risk management, factoring in the risks particular to the respective businesses and the regulatory and statutory guideli

credit risk assessment process, which encompasses analysis of relevant quantitative and qualitative information to ascertain credit rating o

industry risk, business risk, financial risk, management risk, project risk and structure risk.

f the product policy reviewed by the Credit Risk Management Group and approved by the Committee of Executive Directors.

Committee (CC) (comprising a majority of independent Directors), the Committee of Executive Directors (COED) (comprising wholetime D
mittee of Executives (COE), the Regional Committee, and Retail Credit Forums (RCFs) (comprising designated executives) and also to indiv

ved by the COED. The norms vary across product segments/customer profile, but typically include factors such as the borrower’s income, th

sm which includes monitoring tools such as stock audits, unit visits, risk based asset quality reviews (AQRs), etc. As per the risk based revi

e Office Group (CMOG) verifies adherence to the terms of the approval prior to commitment and disbursement of credit facilities. The Bank

office processes of its retail assets business except for a few operations, which are decentralised to improve turnaround time for customers
ement system. The analysis of the composition of the portfolio is presented to the Risk Committee on a periodic basis.

ell as borrower group at the consolidated level. Limits have been set as a percentage of the Bank’s consolidated capital funds and are regu

categories including industry, products, geography, sensitive sectors, underlying collateral nature and single/group borrower exposures.

0 borrowers and borrower groups, exposure to capital market segment and unsecured exposures for the Group (consolidated) are reported

performing and non-performing loans in accordance with the extant RBI guidelines.

in respect of a term loan. Any amount due to the Bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the Bank

days from the end of the quarter;

y. An account is treated as ‘out of order’ if:

mit/drawing power for 90 days; or
the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of the balance sheet; or
accounting period; or
ays based on drawing power computed on the basis of stock statements that are more than three months old even though the unit may be w

days from the due date/date of ad hoc sanction.

ns overdue for two crop seasons for short duration crops and one crop season for long duration crops;

elines on securitisation, the amount of liquidity facility remains outstanding for more than 90 days;

sitive mark-to-market value of a derivative contract, remains unpaid for a period of 90 days from the specified due date for payment.

it does not meet any of the above mentioned criteria, where:

tted under the RBI guidelines in respect of the loans extended to a borrower for the purpose of implementing a project;
he purpose of implementing a project and which are restructured because of a change in the documented date of commencement of comm
r and held by the Bank is classified as non-performing investment.

ipulated by RBI. A sub-standard asset is one, which has remained an NPA for a period less than or equal to 12 months. An asset is classifie
 for more than 90 days.

d dividend is not paid. If the dividend on preference shares (cumulative or non-cumulative) is not declared/paid in any year it would be treat
company is valued at `1 per company on account of the non-availability of the latest balance sheet, those equity shares would also be reck
estment in any of the securities, including preference shares issued by the same issuer would also be treated as NPI and vice versa. Howev
of advance, would also be subjected to NPI norms as applicable to investments.
ds, etc., such instruments should be treated as NPA ab initio in the same asset classification category as the loan if the loan's classification

egulations (RBI guidelines) or the host country regulations (overseas branch regulator’s guidelines), whichever is more stringent.

amework replaced, with immediate effect, RBI’s extant instructions on resolution of stressed assets such as the framework for revitalising di

ans and other credit facilities are classified as per the NHB guidelines into performing and non-performing assets. Further, NPAs are classif

credit losses. Loans are classified as impaired and impairment losses are incurred only if there is objective evidence of impairment as a resu

during the specified period, that is, date by which at least 20% of the outstanding principal debt as per the resolution plan and interest capita

commercial operations would continue as per the instructions contained in the guidelines on income recognition, asset classification and pro

) include all credit exposures as per RBI guidelines on exposure norms and investments in the held-to-maturity category. Exposures to regu
s banking, credit cards, personal loans, rural loans, loans against FCNR(B) deposits, loans against securities and dealer financing portfolio.

Cs, broker companies, SIDBI, NHB, NABARD, clearing corporations and other financial intermediaries.
-to-maturity category and developer financing portfolio.

f 5.00% of total exposure at September 30, 2018

99,123.40 862,096.10
12,634.80 299,748.90
13,339.40 146,894.40
34,291.10 295,636.30
8,954.40 313,623.90

8,494.80 331,804.30

32,924.90 605,708.90

27,415.50 865,107.40
 82,266.00 1,868,688.10

86,289.40 1,569,866.40
370,213.20 2,457,817.20
775,946.80 9,616,991.90
ny Limited, ICICI Securities Primary Dealership Limited and ICICI Securities Limited and its subsidiaries. The maturity pattern of assets for

ed as Doubtful 1, 821-1,550 days as Doubtful 2 and above 1,550 days as Doubtful 3.

s issued by regulators of respective subsidiaries.
I Home Finance Company Limited and ICICI Securities Limited.
t NPL ratio is computed as a ratio of net NPLs to net advances.

ompany Limited and ICICI Securities Limited.

ome Finance Company Limited and ICICI Securities Limited.

September 30, 2018

r approved securities at September 30, 2018

mber 30, 2018

ber 30, 2018

As per the standardised approach, regulatory capital requirement for credit risk on corporate exposures is measured based on external cred

suer ratings assigned to them.

s includes the following:

vel or at the borrower (issuer) level. The Bank considers the facility rating where both the facility and the borrower rating are available, given

viewed at least once by the ECAI during the previous 15 months and is in force on the date of its application.

n this rating is applied on all the unrated facilities of the borrower and risk weighted at 150%.

one level higher than the risk weight applicable to the rated short-term claim on that counterparty.

atings. In this context, the lower rating, where there are two ratings and the second-lowest rating where there are three or more ratings are

adjusting for credit risk mitigation by risk weights at September 30, 2018.

re norms, subject to credit risk and investments in held-to-maturity category.

tigation techniques, which includes, among other aspects, guidelines on acceptable types of collateral, ongoing monitoring of collateral inclu

ird party in order to secure a credit facility. The Bank would have the rights of secured creditor in respect of the assets/contracts offered as

ation. Under this approach, the Bank reduces its credit exposure to counterparty when calculating its capital requirements to the extent of ri

n the value of the collateral in line with the requirements specified by RBI guidelines. These adjustments, also referred to as ‘haircuts’, to pro

nd risk profile of the counterparty. In case of corporate and small and medium enterprises financing, fixed assets are generally taken as secu

oducts. Housing loans and automobile loans are secured by the property/automobile being financed. The valuation of the properties is carri

d securities, warehoused commodities and gold jewellery. These products are offered in line with the approved product policies, which includ

cards and personal loans. The limits with respect to unsecured facilities have been approved by the Board of Directors.

pproving authority as per the credit approval authorisation approved by the Board of Directors. For facilities provided as per approved produ

ulatory capital purposes:

d (including bullion and jewellery, subject to collateralised jewellery being benchmarked to 99.99% purity), securities issued by Central and S

where banks have legally enforceable netting arrangements, involving specific lien with proof of documentation.

urther, the eligible guarantors would comprise:

anks and primary dealers with a lower risk weight than the counterparty; and
e is provided.

edit risk mitigant fulfills the conditions stipulated for eligibility and legal certainty by RBI in its guidelines on Basel III.
guidelines, among its conditions for eligible credit risk mitigants, require that there should not be a material positive correlation between the c

re consistent across subsidiaries of the Bank.

nd enhance the return on capital employed by diversifying sources of funding. The Bank also invests in third party originated securitisation tr

e Bank plays the following major roles:

any, to devolve on the Bank, with the intent of selling at a later stage.

struments backed by financial assets originated by third parties for purposes of investment/ trading/ market-making with the aim of developin

meet investor requirements, while being compliant with extant regulations.

f the timing differences between the receipt of cash flows from the underlying performing assets and the fulfillment of obligations to the ben

d with the underlying assets, i.e., bridging the gaps arising out of credit considerations between cash flows received/collected from the unde

ceivables from underlying obligors, contribution from the investors to securitisation transactions, making payments to counterparties/approp
g obligors/borrowers in the assigned pool.

ready exit options to the investors/participants.

investor(s) with that of the originator and/or collection and processing servicer, when there exists a time lag between collecting amounts du

rocessing agent to collect monies from the underlying obligors as well as operational difficulties in processing the payments.

which may result in the transaction(s) being rendered invalid;

e underlying financial facility agreements; and
nderlying facility agreements with the borrower(s).

ce of the underlying asset pool; and

ousing risks. Prepayment risk arises on account of prepayment of dues by obligors/borrowers in the assigned pool either in part or full. Pipe

uritisation exposures, which include:

ports which are circulated to investors/assignees/rating agencies and continuously monitors the securitised pool. The risk assessment of th

h is compared with their book value to assess the mark-to-market impact of these exposures, on a monthly basis.

ecuritisation exposures
ansferred loans are de-recognised and gains/losses are accounted for only if the Bank surrenders the rights to benefits specified in the und

bruary 1, 2006, the Bank accounts for any loss arising from securitisation immediately at the time of sale and the profit/premium arising from

sold to securitisation company (SC)/reconstruction company (RC), the Bank reverses the excess provision in profit and loss account in the

) rates, is computed with a mark-up (reflecting associated credit risk) over the YTM rates for government securities published by Fixed Inco

interests from previous period.

Bank to provide financial support for securitised assets

itisation transactions. The Bank makes appropriate provisions for any delinquency losses assessed at the time of sale as well as over the li

al requirements for securisation exposures. Where the external ratings of the Bank’s investment in securitised debt instruments/PTCs are at

ses) at September 30, 2018

on deals and include direct assignments in the nature of sell-downs. Credit enhancements and liquidity facilities are not included in the abov
s and credit enhancements such as interest only strips, cash collateral accounts and other subordinated assets as well as direct assignmen

11,659.70
3,933.80
now being risk-weighted for the purpose of capital adequacy computation as per Basel III guidelines.

subject to market risk at September 30, 2018

case of third party originated securitisation transactions.

ed capital charge at September 30, 2018

now being risk-weighted for the purpose of capital adequacy computation as per Basel III guidelines.

s a result of changes in market variables such as interest rates, exchange rates, credit spreads and other asset prices. The Bank currently

and derivatives transactions and correct recording thereof

k and credit spread risk arising from the investments and derivatives portfolio

These positions are taken within approved limits.

Head - RMG. MRMG exercises independent control over the process of market risk management and recommends changes in risk policies

vices Group (TCSG)

uidelines are followed for effective control of the treasury operations:

ce. It also reports utilisation of all the limits laid down in the Investment Policy.

sations to the ALCO as a part of the review of treasury positions. A market risk dashboard covering detailed aspects of market risk is presen

have adequate data integrity controls. The process for enabling/disabling role-based access is also documented.

eals in, authority for investment decisions has been delegated to various dealers depending on business requirements.

have been inserted in the system for ensuring that the appropriate deal size limits are enforced to minimise exceptions.

he approval mechanism in case of breach of these limits.

senior management and the committees of the Board. The Bank also periodically submits the reports to the regulator as per the regulatory

etrics are measured and reported to the senior management independently by TCSG. Some of the risk metrics adopted by the Bank for mo

ups are required to operate within these limits. Hedge transactions for banking book are periodically assessed for hedge effectiveness.

the overseas banking subsidiaries of the Bank to manage market risk. The frameworks are established considering host country regulatory

September 30, 2018.

` in million
l required of ` 3,210.9 million for securitisation exposure.

or systems, or from external events. Operational risk includes legal risk but excludes strategic and reputation risk. Operational risk is inher

risks in a cost effective manner within targeted levels of operational risk consistent with the Bank’s risk appetite as specified in the Operatio

on of operational risk;
ess operational risk of business, operation and support groups, and take appropriate actions;
nk, thereby reducing the probability and potential impact of losses from operational risk;

nt of operational risk issued by the RBI;

allow stakeholders to determine whether the Bank identifies, assesses, monitors and controls/mitigates operational risk effectively; and
perational risk related losses.

vernance requirements from the RBI guidelines, Companies Act and Sarbanes-Oxley Act (USA). Further, the guideline issued by Securities

are the Risk Committee, the Fraud Monitoring Committee, the Audit Committee and the Information Technology Strategy Committee.

cts are the Operational Risk Management Committee (ORMC), the Outsourcing Committee, the Committee of Executive Directors (COED),
rial operational risk exposures. The Fraud Monitoring Committee reviews the fraud risk aspects. The Information Technology Strategy Com

was set up in the year 2006. The Bank’s operational risk management governance and framework is defined in the Policy. While the Policy

ement Committee. ORMC is responsible for overseeing all material operational risks, responses to risk issues and the adequacy and effect
cifies the composition, roles and responsibilities of Outsourcing Committee. The Outsourcing Committee is responsible for:

he business/operations group; and

usiness and operations group in the Bank has business operational risk managers within the group. The business and operations groups ca

through operational risk account. Root cause analysis is carried out for the significant operational risk incidents reported and corrective acti

pital adequacy assessment process (ICAAP). The OpVaR is estimated based on the principles of loss distribution approach (LDA) by using
sive operational risk management system. The application software comprises five modules namely incident management, risk and control
SA) on a standalone basis for calculating operational risk capital charge since June 30, 2013. Further, the Bank has also made an applicatio

as addendum to the ORM policy and the Branch Operational Risk Manual of each branch would govern the operational risk management o

cribes the approach towards the management of operational risk within ICICI Group. While the common framework is adopted, suitable mo

puting capital charge for operational risk. The capital required for operational risk at September 30, 2018 was ` 79,104.4 million.

anges in market interest rates. IRRBB refers to the risk of deterioration in the positions held on the banking book of an institution due to mo

the market risk exposure assumed by the Bank within the risk parameters laid down by the Board of Directors/Risk Committee. The Structu
 rescribed by the Board of Directors/Risk Committee/ALCO. Any amendments to the ALM Policy can be proposed by business group(s), in c

to the prudential limits as per the ALM Policy. The utilisation against these limits is computed on a regular basis at various levels of periodici

nes different types of interest rate risks that are to be monitored, measured and controlled. ALCO decides strategies for managing IRRBB at

ng gaps over different time intervals at a given date for domestic and overseas operations. Gap analysis measures mismatches between ra

sed on a 100 basis points adverse change in the level of interest rates. The magnitude of the impact over a one year period, as a percentag

e deposit/loan pre-maturely. These products may or may not provide for a penalty for pre-mature termination. In case of pre-mature termina

t value of equity of the Bank, as the economic value of the Bank’s assets, liabilities and offbalance sheet positions is impacted. DoE is a me

priced based on multiple benchmarks and when interest rates fluctuate, all these different yield curves may not necessarily move in tandem

e ALM risk profile presentation and to the Risk Committee as part the Risk dashboard.

as notional, stop loss, Greeks and VaR. The management of price risk of the trading book is detailed in the Investment Policy.

s into hedge transactions for identified assets or liabilities. The Bank has a policy for undertaking hedge transactions. These hedges are per

the overseas banking subsidiaries of the Bank to manage interest rate risk in the banking book. The frameworks are established considerin

of changes in interest rates on interest sensitive positions at September 30,

ny Limited, ICICI Securities Primary Dealership Limited and ICICI Securities Limited and its subsidiaries.

y of changes in interest rates on interest sensitive positions at September 30, 2018, assuming a parallel shift in the yield curve.

s along with relevant spreads and for other currencies, primarily coupon and yield of currency-wise Libor/swap rates along with relevant spr
inance Company Limited, ICICI Securities Primary Dealership Limited and ICICI Securities Limited and its subsidiaries.

able cash flows or through sale of assets at fair market value. It is the current and prospective risk to the Bank’s earnings and equity arising

meet both expected and unexpected current and future cash flow and collateral needs without negatively affecting either its daily operation

y risk under the supervision of ALCO. Further, the Asset Liability Management (ALM) groups in overseas branches manage the risk at the re
the extant regulatory guidelines and is approved by the Board of Directors. The ALM Policy is reviewed periodically to incorporate changes

us tools for measurement of liquidity risk including the statement of structural liquidity (SSL), dynamic liquidity cash flow statements, liquidity

assessment of surplus or shortfall of funds in various maturity buckets in the future. The cash flows pertaining to various assets, liabilities a

cash flows, also considers the liquidity requirements pertaining to incremental business and the funding thereof. The dynamic liquidity gap
nk gauges its liquidity position under a range of stress scenarios. These scenarios cover the Bank-specific, market-wide and combined stre

r early identification and calibrated action in the event of tight liquidity conditions. The LCP includes various indicators which are monitored

. For the domestic operations, current accounts and savings deposits payable on demand form a significant part of the Bank’s funding and

e inter-bank market on a short-term basis. The overnight market, which is a significant part of the inter-bank market, is susceptible to volatile
 r is the base currency for the overseas branches of the Bank, apart from the branches where the currency is not freely convertible. In order

the overseas banking subsidiaries of the Bank to manage liquidity risk. The frameworks are established considering host country regulatory

mechanism to ensure availability of adequate liquidity even under stressed market conditions. The Bank is subject to liquidity coverage ratio

on-fund based products, including derivatives. Limits are set as a percentage of the capital funds and are monitored. The utilisation against

ement system. The analysis of the composition of the portfolio is presented to the Risk Committee on a quarterly basis. TCSG reports the cr

Committee on Banking Supervision and discussion paper issued by the RBI, derivative transactions would be subject to margin reset and c

banks having outstanding borrowings or derivative transactions that are subject to margin reset and consequent collateral deposits are gove

credit assessment as part of the rating process.

od (CEM) and the balance outstanding at September 30, 2018.

al Norms for Classification, Valuation and Operation of Investments Portfolio by Banks. In accordance with the RBI guidelines, investments

market and are carried at acquisition cost. Any diminution, other than temporary, in the value of equity investments is provided for. Any loss o
nce subsidiaries. The book value of the equity investments under banking book is ₹ 45,787.4 million as per the regulatory scope of consolid

apital framework) divided by the exposure measure, expressed as a percentage. The following table sets forth, the disclosures required for l

derivatives
 ` 995,200.6 million, ` 1,096,563.0 million and ` 1,091,692.6 million, respectively.
were ` 10,488,181.2 million, ` 11,159,400.4 million and ` 10,877,739.4 million, respectively.
as 9.49%, 9.83% and 10.04%, respectively.

ance sheet exposure at September 30, 2018.

derivatives

ons of equity and debt capital instruments along with the reconciliation requirements have been disclosed separately on the Bank’s website
plementation of Basel III guidelines, the minimum capital to riskweighted assets ratio (CRAR) would be 11.65%, minimum Common Equity T

of 11.025%. The minimum capital requirement includes capital conservation buffer (CCB) of 1.875% and additional CET1 capital surcharge

ment in consolidated capital adequacy computations.

tory reporting.

tory reporting.
om capital, meet their respective regulatory capital requirements at all times. There is no deficiency in capital in any of the subsidiaries of the
, and the available options of raising capital.

guidelines, the minimum CRAR would be 11.65%, minimum CET1 CRAR ratio would be 8.15% and minimum Tier-1 CRAR ratio would be 9

The minimum capital requirement includes capital conservation buffer (CCB) of 1.875% and additional CET1 capital surcharge of 0.15% on

sight over the capital adequacy framework for the subsidiary either directly or through separately constituted committees.
or the Bank to meet regulatory norms and current and future business needs, including under stress scenarios. The ICAAP is formulated at

n. Based on the stress testing framework, the Bank conducts stress tests on its various portfolios and assesses the impact on its capital ade

and an assessment of the various aspects of Basel III on capital and risk management as stipulated by RBI, are reported to the Board. Furt

guidelines on Basel III is 17.84% with a Tier-1 capital adequacy ratio of 15.38%. The total capital adequacy ratio of the Group (consolidated)

market risk and Basic Indicator approach for operational risk. Capital required for credit, market and operational risks given below is arrived
 work at the Bank is to ensure that various risks are understood, measured and monitored and that the policies and procedures established

Risk Committee reviews the risk management policies, the Bank’s compliance with risk management guidelines stipulated by the RBI and th
this policy framework.
n independent of the business groups/sub-groups.

ch for operational risk.

with the Bank, principally the failure to make required payments as per the terms and conditions of the contracts.
dit approval process and limits. The Credit Policy is approved by the Board of Directors.

higher exposure and level of risk are put up to correspondingly higher forum/committee for approval. All credit proposals other than retail pro

mittee of Senior Management. The individual credit proposals are evaluated and approved by executives on the basis of the product policie

ation lays down these parameters.

he delegation structure approved by the Board of Directors may permit exemption from the stipulation pertaining to internal rating, up to a c

vereign and financial institutions, small enterprises, rural and agri-linked business group and retail businesses.

e regulatory and statutory guidelines. The risk heads of all overseas banking subsidiaries have a reporting relationship to the Chief Risk offic

mation to ascertain credit rating of the borrower.

ecutive Directors.

COED) (comprising wholetime Directors), the Committee of Senior Management (COSM) (comprising wholetime Directors, Group
ated executives) and also to individual executives (under joint delegation). RCFs and individual executives can approve proposals under pro

uch as the borrower’s income, the loan-to-value ratio and demographic parameters. The individual credit proposals are evaluated and appr

s), etc. As per the risk based review framework, AQRs are done on quarterly, half-yearly or annual basis based on the rating and exposure o

ment of credit facilities. The Bank has formed a dedicated Credit Monitoring Group (CMG), distinct from the client relationship and risk mana

e turnaround time for customers. A separate team under the Credit and Policy Group undertakes review and audits of credit quality and pro
dated capital funds and are regularly monitored. The utilisation against specified limits is reported to the COED and Credit Committee on a

e/group borrower exposures.

roup (consolidated) are reported to the senior management committees on a periodic basis. Limits on countries and bank counterparties ha

n the due date fixed by the Bank;

balance sheet; or

ld even though the unit may be working or the

ed due date for payment.

ng a project;
date of commencement of commercial operations (DCCO) are not classified as non-performing, subject to certain conditions being fulfilled;

o 12 months. An asset is classified as doubtful if it has remained in the sub-standard category for more than 12 months. A loss asset is one
paid in any year it would be treated as due/unpaid in arrears and the date of balance sheet of the issuer for that particular year would be rec
equity shares would also be reckoned as NPI.
ed as NPI and vice versa. However, if only the preference shares are classified as NPI, the investment in any of the other performing securit

e loan if the loan's classification is substandard or doubtful on implementation of the restructuring package and provision should be made a

ever is more stringent.

the framework for revitalising distressed assets in the economy, corporate debt restructuring scheme, flexible structuring of existing long-te

assets. Further, NPAs are classified into sub-standard, doubtful and loss assets based on criteria stipulated by NHB. Additional provisions a

evidence of impairment as a result of one or more events that occurred after the initial recognition on the loan (a loss event) and that loss ev

esolution plan and interest capitalisation sanctioned as part of the restructuring, if any, is repaid or one year from the commencement of the

ition, asset classification and provisioning.

urity category. Exposures to regulatory capital instruments of subsidiaries that are deducted from the capital funds have been excluded.
es and dealer financing portfolio.
he maturity pattern of assets for the Bank is based on methodology used for reporting positions to the RBI on assetliability management. Th
measured based on external credit ratings assigned by external credit assessment institutions (ECAIs) specified by RBI in its guidelines on B

rower rating are available, given the more specific nature of the facility credit assessment.

re are three or more ratings are used for a given facility.

oing monitoring of collateral including the frequency and basis of valuation and application of credit risk mitigation techniques.

the assets/contracts offered as security for the obligations of the borrower/obligor. The Bank ensures that the underlying documentation for

l requirements to the extent of risk mitigation provided by the eligible collateral as specified in the Basel III guidelines.

so referred to as ‘haircuts’, to produce volatilityadjusted amounts for collateral, are reduced from the exposure to compute the capital charge

ssets are generally taken as security for long tenure loans and current assets for working capital finance. For project finance, security of the

aluation of the properties is carried out by an empanelled valuer at the time of sanctioning the loan.

ed product policies, which include types of collateral, valuation and margining.

of Directors.

provided as per approved product policies, collateral is taken in line with the policy.

ecurities issued by Central and State Governments, Kisan Vikas Patra, National Savings Certificates, life insurance policies with a declared
positive correlation between the credit quality of the counterparty and the value of the collateral being considered. The risks associated with

party originated securitisation transactions, primarily for priority sector requirements, in accordance with the Investment Policy of the Bank.

making with the aim of developing an active secondary market in securitised debt.

fillment of obligations to the beneficiaries.

received/collected from the underlying assets and the fulfillment of repayment obligations to the beneficiaries.

yments to counterparties/appropriate beneficiaries, reporting the collection efficiency and other performance parameters and providing othe
g between collecting amounts due from the obligors and payment made to the investors.

ng the payments.

ed pool either in part or full. Pipeline and warehousing risks refer to the event where originating banks are unable to off-load assets, which

d pool. The risk assessment of the pools is done continuously by the rating agencies based on ammortisation level, collection efficiency, cred
s to benefits specified in the underlying securitised loan contract. Recourse and servicing obligations are accounted for net of provisions.

d the profit/premium arising from securitisation is amortised over the life of the securities issued or to be issued by the special purpose vehic

in profit and loss account in the year in which amounts are received. Any shortfall of sale value over the net book value on sale of such ass

ecurities published by Fixed Income Money Market and Derivatives Association FIMMDA.

ime of sale as well as over the life of the securitisation transactions in accordance with the RBI guidelines.

ed debt instruments/PTCs are at least partly based on unfunded support provided by the Bank, such investments are treated as unrated.

ities are not included in the above amounts. During the period/year ended September 30, 2018, the Bank had not securitised any assets as
ssets as well as direct assignments in the nature of sell-downs. The amounts are net of provisions. Credit enhancements have been stated
asset prices. The Bank currently follows the standardised approach for computation of market risk capital on interest rate related instruments

ommends changes in risk policies, controls, processes and methodologies for quantifying and assessing market risk. There is clear function
 aspects of market risk is presented to the Risk Committee on a quarterly basis.

equirements.

e exceptions.

e regulator as per the regulatory reporting requirements.

trics adopted by the Bank for monitoring its risks are VaR, PV01 and stop loss amongst others. Limits are placed on various risk metrics, wh

ed for hedge effectiveness.

sidering host country regulatory requirements as applicable.

 on risk. Operational risk is inherent in the Bank's business activities in both domestic as well as overseas operations and covers a wide spe

etite as specified in the Operational Risk Management (ORM) policy (the Policy) approved by the Board of Directors. The Policy aims to:

rational risk effectively; and

he guideline issued by Securities and Exchange Board of India (SEBI) on outsourcing of activities with respect to bankers to the issues, dep

logy Strategy Committee.

of Executive Directors (COED), the Information Security Committee, the Business Continuity Management Steering Committee, the Inform
mation Technology Strategy Committee reviews IT risk aspects. The Audit Committee supervises the audit and compliance related aspects. I

d in the Policy. While the Policy provides a broad framework, detailed standard operating procedures for operational risk management proc

es and the adequacy and effectiveness of controls within a given operational risk control area.
 esponsible for:

siness and operations groups carry out risk and control selfassessments which is reviewed by ORMG. The periodicity of risk and control se

ents reported and corrective actions are incorporated back into respective processes. The Bank has implemented incident reporting system

bution approach (LDA) by using historical internal loss data. The OpVaR is stress tested on a quarterly basis to ensure adequacy of the cap
nt management, risk and control self-assessment, key indicators, scenario analysis and issues and action.
ank has also made an application to RBI for parallel run approval for migration to Advanced Measurement Approaches (AMA) on May 22, 2

e operational risk management of the overseas branches of the Bank. ORMG exercises oversight through the process of periodic review of

amework is adopted, suitable modifications in the processes are carried out depending upon the requirements of the regulatory guidelines o

as ` 79,104.4 million.

book of an institution due to movement in interest rates over time. The Bank holds assets, liabilities and off balance sheet items across var

ors/Risk Committee. The Structural Rate Risk Management Group (SRMG) at the Bank monitors and manages IRRBB under the supervisio
posed by business group(s), in consultation with the market risk and compliance teams and are subject to approval from ALCO/Risk Comm

asis at various levels of periodicity. Breaches, if any, are duly reported to ALCO/Risk Committee/Board of Directors, as may be required und

trategies for managing IRRBB at the desired level. Further, ALCO periodically gives direction for management of interest rate risk on the ba

easures mismatches between rate sensitive liabilities (RSL) and rate sensitive assets (RSA) (including off-balance sheet positions). The rep

one year period, as a percentage of the NII of the previous four quarters gives a fair measure of the earnings risk that the Bank is exposed

n. In case of pre-mature terminations, the Bank faces a risk of re-pricing of the assets/liabilities at the current rates and the resultant impac

ositions is impacted. DoE is a measure of interest rate sensitivity of assets, liabilities and also equity. It may be defined as the percentage ch

not necessarily move in tandem exposing the balance sheet to basis risk. Therefore, over and above the EaR, the Bank measures the impa

Investment Policy.

nsactions. These hedges are periodically assessed for hedge effectiveness as per the applicable accounting guidelines.

works are established considering host country regulatory requirements as applicable.

ft in the yield curve.

wap rates along with relevant spreads have been assumed across all time buckets that are closest to the mid-point of the time buckets.
subsidiaries.

ank’s earnings and equity arising out of inability to meet the obligations as and when they become due. It includes both, the risk of unexpect

affecting either its daily operation or financial condition.

anches manage the risk at the respective branches, in coordination with the Bank’s ALMG at Head Office. ALMG also focuses on the implem
riodically to incorporate changes as required by regulatory stipulation or to re-align with changes in the economic landscape. The ALCO of t

ity cash flow statements, liquidity ratios and stress testing through scenario analysis.

ing to various assets, liabilities and off-balance sheet items are placed in different time buckets based on their contractual or behavioral ma

ereof. The dynamic liquidity gap statements are prepared in close coordination with the business groups, and cash flow projections based o
market-wide and combined stress situations for domestic and overseas operations of the Bank. The potential impact on the Bank’s financia

s indicators which are monitored regularly, and lays down the mechanism for escalation, remedial action and crisis management until return

t part of the Bank’s funding and the Bank is working with a concerted strategy to sustain and grow this segment of deposits along with retai

market, is susceptible to volatile interest rates. To limit the reliance on such volatile funding, the ALM Policy has stipulated limits for borrowi
 s not freely convertible. In order to maximise the borrowings at reasonable cost, liquidity in different markets and currencies is targeted. The

nsidering host country regulatory requirements as applicable. Besides, as per local regulatory requirements, ICICI Bank UK PLC has implem

ubject to liquidity coverage ratio (LCR) requirement in a phased manner as per the RBI guidelines from January 1, 2015. LCR was introduc

monitored. The utilisation against specified limits is reported to the Committee of Executive Directors and the Credit Committee on a periodic

rterly basis. TCSG reports the credit excess (MTM including treasury overdues exceeding sanctioned limit, margin and provisions held) for c

be subject to margin reset and consequent collateral exchange would be as governed by Credit Support Annex (CSA). The margin rules ar

uent collateral deposits are governed by Global Master Repurchase Agreement (GMRA)/CSA, respectively. In addition, there are certain CS

the RBI guidelines, investments in equity of subsidiaries and joint ventures (a joint venture will be one where the Bank, along with its subsid

tments is provided for. Any loss on sale of investments in HTM category is recognised in the profit and loss statement. Any profit on sale of
the regulatory scope of consolidation. The cumulative realised gain/(loss) arising from sale and liquidation of these securities in the reportin

rth, the disclosures required for leverage ratio for the Bank at the consolidated level as per RBI guidelines at September 30, 2018.
eparately on the Bank’s website under ‘Regulatory Disclosures Section’. The link to this section is http://www.icicibank.com/regulatorydisclo
5%, minimum Common Equity Tier-1 (CET1) CRAR ratio would be 8.15% and minimum Tier-1 CRAR ratio would be 9.65%. This includes c

dditional CET1 capital surcharge of 0.15% on account of the Bank being designated as a Domestic Systemically Important Bank (DSIB).
al in any of the subsidiaries of the Bank at September 30, 2018. The Bank maintains an active oversight on its subsidiaries through its repre
m Tier-1 CRAR ratio would be 9.65%. This includes CCB and additional CET1 capital surcharge on account of the Bank being designated a

1 capital surcharge of 0.15% on account of the Bank being designated as a D-SIB.

d committees.
rios. The ICAAP is formulated at both standalone bank level and the consolidated group level. The ICAAP encompasses capital planning fo

ses the impact on its capital adequacy ratio and the adequacy of capital buffers for current and future periods. The Bank periodically asses

, are reported to the Board. Further, the capital adequacy position of the banking subsidiaries and the non-banking subsidiaries based on th

ratio of the Group (consolidated) at September 30, 2018 as per the RBI guidelines on Basel III is 17.13% with a Tier-1 capital adequacy rati

onal risks given below is arrived at after multiplying the risk weighted assets by 11.025%.
cies and procedures established to address these risks are strictly adhered to.

ines stipulated by the RBI and the status of implementation of the advanced approaches under the Basel framework. It reviews the risk das
dit proposals other than retail products, program lending and certain other specified products are rated internally by the Risk Management G

n the basis of the product policies. The sourcing and approval are segregated to achieve independence. The Credit Risk Management Grou

aining to internal rating, up to a certain loan amount. Credit approval limits with respect to such products are laid out in the delegation struct

elationship to the Chief Risk officer, in addition to reporting to the Chief Executive Officer of the respective subsidiary.

etime Directors, Group

can approve proposals under program norms approved by the COED. The above authorities can approve financial assistance within certain

roposals are evaluated and approved by executives on the basis of the product policies.

sed on the rating and exposure of the borrower. The AQR framework ensures that borrowers with higher exposure and level of risk are revie

client relationship and risk management teams, to further enhance and strengthen the monitoring of the corporate and SME portfolio. This g

d audits of credit quality and processes across different products. The Bank also has a Debt Services Management Group (DSMG) structur
OED and Credit Committee on a periodic basis.

tries and bank counterparties have also been stipulated. In addition, a framework has been created for managing concentration risk. It spec

certain conditions being fulfilled;

12 months. A loss asset is one where loss has been identified by the Bank or internal or external auditors or during RBI inspection but the
 that particular year would be reckoned as due date for the purpose of asset classification.

y of the other performing securities issued by the same issuer will not be classified as NPI and any performing credit facilities granted to tha

and provision should be made as per the norms.

ble structuring of existing long-term project loans, strategic debt restructuring scheme (SDR), change in ownership outside SDR and the sch

by NHB. Additional provisions are made against specific non-performing assets over and above what is stated above, if in the opinion of th

an (a loss event) and that loss event (or events) has an impact on the estimated future cash flows of the loans that can be reliably estimated

from the commencement of the first payment of interest or principal on the credit facility with longest period of moratorium under the terms

funds have been excluded.

on assetliability management. The maturity pattern of assets for the subsidiaries is based on similar principles.
fied by RBI in its guidelines on Basel III. As stipulated by RBI, the risk weights for resident corporate exposures are assessed based on the
gation techniques.

he underlying documentation for the collateral provides the Bank appropriate rights over the collateral or other forms of credit enhancement

ure to compute the capital charge based on the applicable risk weights.

or project finance, security of the assets of the borrower and assignment of the underlying project contracts is generally taken. In addition, in

surance policies with a declared surrender value issued by an insurance company, which is regulated by the insurance sector regulator, ce
dered. The risks associated with collateral concentration and residual risk in credit risk mitigation are assessed as a part of the annual intern

e Investment Policy of the Bank.

e parameters and providing other services relating to collections and payments as may be required for the purpose of the transactions.
unable to off-load assets, which were originated with an intention of selling thus potentially exposing them to losses arising on declining valu

on level, collection efficiency, credit enhancement utilisation levels and credit cover available for the balance deal tenure. In the pools, where
 counted for net of provisions.

ued by the special purpose vehicle to which the assets are sold. With effect from May 7, 2012, the RBI guidelines require the profit/premium

book value on sale of such assets is recognised by the Bank in the year in which the loan is sold.

ments are treated as unrated.

had not securitised any assets as an originator.

nhancements have been stated at gross levels and not been adjusted for their utilisation.
n interest rate related instruments in the trading book, equities in the trading book and foreign exchange risk (including gold and other precio

arket risk. There is clear functional separation of:

laced on various risk metrics, which are monitored on a periodic basis.
perations and covers a wide spectrum of issues.

Directors. The Policy aims to:

ect to bankers to the issues, depository participants, merchant bankers, etc. is also considered in the management of operational risk.

Steering Committee, the Information Technology Steering Committee and the Product and Process Approval Committee (PAC).
nd compliance related aspects. Internal Audit Department carries out audit according to the risk-based audit plan and reports the findings to

perational risk management processes have been established. For the purpose of robust quality of operational risk management across the
 periodicity of risk and control selfassessments is determined as per the plan approved by the ORMC. Risk mitigation plans are monitored

mented incident reporting systems, which facilitate capturing of operational risk incidents by the employees of the Bank. The operational risk

s to ensure adequacy of the capital provided for operational risk and is compared with trends of actual losses.

Approaches (AMA) on May 22, 2015 after receiving approval from the Board.

he process of periodic review of operational risk management in the international locations.

nts of the regulatory guidelines of the respective companies.

f balance sheet items across various markets with different maturity or re-pricing dates and linked to different benchmark rates, thus creatin

ges IRRBB under the supervision of ALCO. SRMG-India and SRMG-IBG are primarily responsible for management of interest rate risk on t
approval from ALCO/Risk Committee/Board of Directors, as per the authority defined in the Policy. The amendments so approved by ALCO

irectors, as may be required under the framework defined for approvals. Upon review of the indicators of IRRBB and the impact thereof, AL

ent of interest rate risk on the basis of its expectations of future interest rates. Based on the guidance, SRMG primarily manages the IRRBB

balance sheet positions). The report is prepared by grouping rate sensitive liabilities, assets and off-balance sheet positions into time bucket

gs risk that the Bank is exposed to. The EaR computations include the banking book as well as the trading book.

nt rates and the resultant impact on the NII (adjusted for the penalty). The Bank carries out behavioural studies for estimation of pre-mature

be defined as the percentage change in the market value of an asset or liability (or equity) for a given change in interest rates. Thus, DoE is

aR, the Bank measures the impact of differential movement in interest rates across benchmark curves. For the domestic operations, various

g guidelines.
 id-point of the time buckets.

cludes both, the risk of unexpected increase in the cost of funding an asset portfolio at appropriate maturities as well as the risk of being un

ALMG also focuses on the implementation of medium-term and long-term balance sheet management strategies as decided by Board of Dir
nomic landscape. The ALCO of the Bank formulates and reviews strategies and provides guidance for management of liquidity risk within th

heir contractual or behavioral maturity. For non-maturity assets/liabilities, e.g. working capital facilities on the assets side and current accoun

nd cash flow projections based on the same are presented to ALCO periodically. As part of the stock and flow approach, the Bank also mon
tial impact on the Bank’s financial position for meeting the stress outflows under these scenarios is measured and is subject to a stress tole

d crisis management until return to normalcy.

ment of deposits along with retail term deposits. These deposits are augmented by wholesale deposits, borrowings and through issuance of

y has stipulated limits for borrowing and lending in the inter-bank market.
s and currencies is targeted. The wholesale borrowings are in the form of bond issuances, syndicated loans from banks, money market bor

, ICICI Bank UK PLC has implemented its Internal Liquidity Adequacy Assessment Process (ILAAP) framework, which stipulates the level o

nuary 1, 2015. LCR was introduced to ensure that a bank has an adequate stock of unencumbered high quality liquid assets (HQLA) to surv

e Credit Committee on a periodic basis.

margin and provisions held) for corporate clients on a daily basis. Further, RMG reports the credit exposure of derivatives as part of the risk

nnex (CSA). The margin rules are applicable for both, the domestic and overseas operations of the Bank. The Bank has entered into CSAs

. In addition, there are certain CSAs/GMRAs at the overseas banking subsidiaries which require exchange of variation margin based on mo

e the Bank, along with its subsidiaries, holds more than 25 percent of the equity) are required to be classified under HTM category. For cap

statement. Any profit on sale of investments under HTM category is recognised in the profit and loss statement and is then appropriated to
of these securities in the reporting period is nil. Total latent revaluation gain of these outstanding securities, based on quoted market value a

at September 30, 2018.

ww.icicibank.com/regulatorydisclosure.page
would be 9.65%. This includes capital conservation buffer (CCB) and additional CET1 capital surcharge on account of the Bank being desig

cally Important Bank (DSIB).

its subsidiaries through its representation on their respective Boards. On a periodic basis, the capital adequacy/solvency position of subsidi
nt of the Bank being designated as a D-SIB.
encompasses capital planning for a four-year time horizon, identification and measurement of material risks and the relationship between ris

ds. The Bank periodically assesses and refines its stress testing framework in an effort to ensure that the stress scenarios capture material

banking subsidiaries based on the respective host regulatory requirements is also reported to the Board on a periodic basis. In line with RB

ith a Tier-1 capital adequacy ratio of 14.81%.

amework. It reviews the risk dashboard covering areas such as credit risk, interest rate risk, liquidity risk, foreign exchange risk, operationa
nally by the Risk Management Group (RMG) prior to approval by the appropriate forum.

e Credit Risk Management Group, Credit and Policy Group and credit teams are assigned complementary roles to facilitate effective credit

e laid out in the delegation structure approved by the Board of Directors.

nancial assistance within certain individual and group exposure limits set by the Board of Directors. The authorisation is based on the level

posure and level of risk are reviewed more frequently.

porate and SME portfolio. This group is responsible for day-to-day monitoring of the portfolio, as well as providing structured inputs for proa

agement Group (DSMG) structured along various product lines and geographical locations, to manage debt recovery. The group operates u
naging concentration risk. It specifies various single borrower exposure thresholds along with authorisation matrix that must be followed in c

or during RBI inspection but the amount has not been written off fully. Further, an asset where the realisable value of security is less than 10
ming credit facilities granted to that borrower need not be treated as NPA.

nership outside SDR and the scheme for sustainable structuring of stressed assets (S4A). The Joint Lenders’ Forum (JLF) as an institutiona

ated above, if in the opinion of the management, such additional provisions are necessary.

ns that can be reliably estimated. An allowance for impairment losses is maintained at a level that management considers adequate to abso

d of moratorium under the terms of the RP whichever is later. In addition to satisfactory performance during the specified period, accounts ab
ures are assessed based on the external ratings assigned by domestic ECAI and the risk weights for non-resident corporate exposures are
her forms of credit enhancement including the right to liquidate, retain or take legal possession of it in a timely manner in the event of defau

is generally taken. In addition, in some cases, additional security such as pledge of shares, cash collateral, charge on receivables with an e

he insurance sector regulator, certain debt securities, mutual fund units where daily net asset value is available in public domain and the mu
sed as a part of the annual internal capital adequacy assessment process.

purpose of the transactions.

o losses arising on declining values of these assets. The Bank does not follow the “originate to distribute” model in the domestic securitisatio

deal tenure. In the pools, where the Bank is an investor, the underlying portfolio is monitored on an ongoing basis for delinquency rates, pr
delines require the profit/premium arising from securitisation to be amortised over the life of the transaction based on the method prescribed
k (including gold and other precious metals) in both trading and banking books. The market risk for the Bank is managed in accordance with
gement of operational risk.

val Committee (PAC).

t plan and reports the findings to the Audit Committee.

nal risk management across the Bank, the operational risk management processes of the Bank have been certified for ISO 9001:2008 stan
 mitigation plans are monitored to ensure timely mitigation of risks. Internal controls are tested by Internal Audit Group in the Bank. The test

of the Bank. The operational risk losses and incidents analysis are submitted to the ORMC, the Asset Liability Committee, the Risk Committ

nt benchmark rates, thus creating exposure to unexpected changes in the level of interest rates in such markets.

agement of interest rate risk on the domestic and the overseas banking books, respectively, by assuming risks within the interest rate risk lim
 ndments so approved by ALCO are presented to the Board of Directors/Risk Committee for information/approval.

RRBB and the impact thereof, ALCO may suggest necessary corrective actions in order to re-align the exposure with the current assessmen

G primarily manages the IRRBB with the help of various tools i.e. gap analysis, earnings at risk (EaR), duration of equity (DoE) and stress t

sheet positions into time buckets according to residual maturity or next re-pricing period, whichever is earlier. For non-maturity loans & adv

dies for estimation of pre-mature termination of wholesale term deposits, retail term deposits, wholesale term loans and retail loans and app

ge in interest rates. Thus, DoE is a measure of change in the market value of equity of a firm due to the identified change in the interest rate

the domestic operations, various scenarios of interest rate movements (across various benchmark yield curves) are identified and the wors
es as well as the risk of being unable to liquidate a position in a timely manner at a reasonable price.

egies as decided by Board of Directors and ALCO.

agement of liquidity risk within the framework laid out in the ALM Policy. The Risk Committee of the Board has an oversight on the ALCO.

e assets side and current account and savings account deposits on the liabilities side, grouping into time buckets is done based on the assu

w approach, the Bank also monitors various liquidity ratios, and limits are laid down for these ratios under the ALM Policy.
ed and is subject to a stress tolerance limit specified by the Board. Further, the liquidity stress testing is also carried out for a protracted peri

rowings and through issuance of bonds including subordinated debt from time to time. Loan maturities and sale of investments also provide
s from banks, money market borrowings, inter-bank bilateral loans and deposits, including structured deposits. The Bank also raises refinan

work, which stipulates the level of liquidity required to meet the UK regulatory requirements and the liquidity commensurate with the risks ide

ality liquid assets (HQLA) to survive a significant liquidity stress lasting for a period of 30 days. The Bank computes LCR on a daily basis for

of derivatives as part of the risk dashboard to the Risk Committee, periodically. The Bank does not take any netting benefits for counterpar

he Bank has entered into CSAs which would require maintenance of collateral due to valuation changes on transactions under the CSA fra

of variation margin based on movement in MTM of underlying derivative/forex forwards & swaps/repo transactions. From December 2016, I

ed under HTM category. For capital adequacy purpose, as per the RBI guidelines, equity securities held under HTM category are classified

ment and is then appropriated to capital reserve, net of taxes and statutory reserve.
based on quoted market value at September 30, 2018 is ₹376,923.7 million. The book value of equity investments in insurance subsidiarie
account of the Bank being designated as a Domestic Systemically Important Bank (DSIB).
uacy/solvency position of subsidiaries (banking, non-banking and insurance subsidiaries), as per the applicable regulations, is reported to th
and the relationship between risk and capital.

tress scenarios capture material risks as well as reflect market conditions and operating environment. The business and capital plans and th

a periodic basis. In line with RBI requirements for consolidated prudential report, the capital adequacy position of the Group (consolidated)
oreign exchange risk, operational and outsourcing risks and the limits framework, including stress test limits for various risks. The Risk Comm
roles to facilitate effective credit risk management for retail assets.

horisation is based on the level of risk and the quantum of exposure, to ensure that the transactions with higher exposure and level of risk a

oviding structured inputs for proactive portfolio monitoring, leveraging analytics and developing predictive models and parameters for early w

recovery. The group operates under the guidelines of a standardised recovery process. The Bank has established the Financial Crime Pre
matrix that must be followed in case exposures exceed the stipulated thresholds. It also specifies, limits on exposure to internally lower rate

e value of security is less than 10% of the loan outstanding or it has been continuously classified as non-performing for more than seven yea
rs’ Forum (JLF) as an institutional mechanism for resolution of stressed accounts has been discontinued. All accounts, including such accou

ment considers adequate to absorb identified credit related losses as well as losses that have occurred but have not yet been identified.

the specified period, accounts above a specified threshold shall also require their credit facilities to be rated investment grade (BBB- or bett
esident corporate exposures are assessed based on the external ratings assigned by international ECAI. For this purpose, at September 30
ely manner in the event of default by the counterparty. The Bank also endeavours to keep the assets provided as security to the Bank unde

charge on receivables with an escrow arrangement and guarantees is also taken.

ble in public domain and the mutual fund is limited to investing in the instruments listed above.
model in the domestic securitisation market and hence is not exposed to the pipeline and warehousing risks in the domestic market. In the ov

g basis for delinquency rates, prepayment rates, available collateral and so on. The Bank also performs periodic stress tests for the securiti
based on the method prescribed in the guidelines.
k is managed in accordance with the Investment Policy and Derivatives Policy, which is approved by the Board. The policies ensure that ope
certified for ISO 9001:2008 standard.
Audit Group in the Bank. The testing results are incorporated in the operational risk assessment. The Bank has a comprehensive Product an

ity Committee, the Risk Committee, the Audit Committee and to the Board on a periodic basis. Operational risk exposures (risk and control

sks within the interest rate risk limits specified in the ALM Policy.
sure with the current assessment of the markets.

ation of equity (DoE) and stress testing for basis risk which are monitored on a fortnightly basis. These tools are as follows:

er. For non-maturity loans & advances such as floating rate cash credit or other working capital facilities, the amount is bucketed based on

m loans and retail loans and applies the same while computing the interest rate sensitivity statement and EaR.

ntified change in the interest rates. The Bank uses DoE as a part of framework to manage IRRBB for its domestic and overseas operations

rves) are identified and the worst-case impact is measured as a percentage of the aggregate of Tier-1 and Tier-2 capital. These scenarios ta
 as an oversight on the ALCO.

ckets is done based on the assumptions/behavioral studies. The SSL for domestic operations as well as overseas operations of the Bank is

he ALM Policy.
o carried out for a protracted period of three months for domestic and overseas operations of the Bank. The results of liquidity stress testing

sale of investments also provide liquidity. The Bank holds unencumbered, high quality liquid assets to protect against stress conditions.
sits. The Bank also raises refinance from banks against the eligible trade assets. The loans that meet the criteria of the Export Credit Agenc

commensurate with the risks identified in its portfolio and strategic plans.

omputes LCR on a daily basis for the Bank and the Group. The LCR disclosure is based on simple average of daily observations.

ny netting benefits for counterparty credit risk exposure for non-centrally-cleared derivative transactions.

n transactions under the CSA framework. Changes in or withdrawal of the Bank’s credit rating will not increase the amount of collateral that

actions. From December 2016, ICICI Bank UK PLC has also commenced central clearing (through London clearing house) of all its prospec

der HTM category are classified under banking book.

estments in insurance subsidiaries is deducted from capital as per the transition arrangement provided by RBI in the master circular on Bas
able regulations, is reported to their respective Boards as well as to the Board of the Bank.
business and capital plans and the stress testing results of certain key group entities are integrated into the ICAAP.

tion of the Group (consolidated) is reported to the Board on a quarterly basis.

for various risks. The Risk Committee also reviews the risk profile of the overseas banking subsidiaries and certain other key subsidiaries. T
gher exposure and level of risk are put up to correspondingly higher forum/committee for approval.

odels and parameters for early warning signals.

ablished the Financial Crime Prevention Group (FCPG), as a dedicated and independent group, overseeing/handling the fraud prevention, d
exposure to internally lower rated borrowers and limits on exposures to borrower groups. These limits are in addition to the prudential limits

rforming for more than seven years is also classified as a loss asset.
ll accounts, including such accounts where any of the schemes have been invoked but not yet implemented, would be governed by the revi

have not yet been identified.

d investment grade (BBB- or better) at the end of specified period by credit rating agencies accredited by RBI for the purpose of bank loan ra
or this purpose, at September 30, 2018, the domestic ECAI specified by RBI were CRISIL Limited, Credit Analysis & Research Limited, ICR
ed as security to the Bank under adequate insurance during the tenure of the Bank’s exposure. The collateral value is monitored periodical
in the domestic market. In the overseas markets, where the Bank executes certain transactions on a “originate to distribute/syndicate” mod

riodic stress tests for the securitisation exposures.

ard. The policies ensure that operations in securities, foreign exchange and derivatives are conducted in accordance with sound and accep
has a comprehensive Product and Process Approval framework along with the detailed operating guidelines for effective new product and p

risk exposures (risk and control self-assessment results, operational risk incidents analysis, key risk indicators and open risks) are monitore
 are as follows:

e amount is bucketed based on expected re-pricing interval of receivable cash flows. Balances maintained in current account with banks ar

mestic and overseas operations and DoE is computed for the overall Bank and banking book separately. The ALM Policy stipulates a limit o

Tier-2 capital. These scenarios take into account the magnitude as well as the timing of various interest rate movements (across various be
erseas operations of the Bank is prepared on a periodic basis. The utilisation against gap limits laid down for each bucket is reviewed by AL

results of liquidity stress testing are reported to ALCO on a monthly basis.

ct against stress conditions.

iteria of the Export Credit Agencies are refinanced as per the agreements entered with these agencies. Apart from the above, the Bank also

of daily observations.

ase the amount of collateral that the Bank is required to post with counterparties. The Bank engages in collateralised borrowing from the RB

clearing house) of all its prospective interest rate swaps transactions with financial counterparties.
RBI in the master circular on Basel III regulations.
d certain other key subsidiaries. The Credit Committee reviews developments in key industrial sectors and the Bank’s exposure to these sec
/handling the fraud prevention, detection, investigation, monitoring, reporting and awareness creation activities. Critical functions of FCPG i
n addition to the prudential limits prescribed by the regulator.
d, would be governed by the revised framework, which takes away all dispensations/standstill provided to loan classification under various s

BI for the purpose of bank loan ratings.

nalysis & Research Limited, ICRA Limited, India Ratings and Research, SME Rating Agency of India Limited and Brickwork Ratings India P
ral value is monitored periodically.
nate to distribute/syndicate” model, the Bank has established an appropriate risk management and mitigation framework to assess and man
ccordance with sound and acceptable business practices and are as per the extant regulatory guidelines, laws governing transactions in fina
s for effective new product and process risk management. As per the framework, the Bank has constituted a Product and Process Approval

ors and open risks) are monitored by the ORMC on a regular basis and reported to the business heads in the form of dashboard on a perio
in current account with banks are non-sensitive except for balance with Federal Reserve Bank which is bucketed in “1-28 days” bucket. For

he ALM Policy stipulates a limit on the overall DoE of the Bank and the banking book separately in order to monitor and manage IRRBB. Th

e movements (across various benchmark curves such as wholesale and retail deposit rates, benchmark lending rates, GOI Sec, CDs and co
or each bucket is reviewed by ALCO of the Bank/overseas branch.
art from the above, the Bank also mobilises deposit liabilities at overseas branches, in accordance with the regulatory framework at the host

ateralised borrowing from the RBI and through Clearing Corporation of India Ltd. (CCIL). When the Bank borrows from the RBI, collateral is
he Bank’s exposure to these sectors and various portfolios on a periodic basis. The Audit Committee provides direction to and also monitor
ties. Critical functions of FCPG include addressing fraud risk at the customer acquisition stage, investigation of reported or suspected fraud
an classification under various schemes, other than that for projects under implementation (PUI).
d and Brickwork Ratings India Private Limited, INFORMERICS and international ECAIs specified by RBI were Standard & Poor’s, Moody's
n framework to assess and manage any risks associated with such transactions. Further, the Bank is not involved in sponsorship of off-bala
ws governing transactions in financial securities and the financial environment. The policies contain the limit structure that governs transact
a Product and Process Approval Committee (PAC). The role of PAC is to assess the processes pertaining to products or product variants fro

he form of dashboard on a periodic basis.

cketed in “1-28 days” bucket. For non-maturity liabilities such as current account deposits, the bucketing is as per the behavioral study. The

monitor and manage IRRBB. The utilisation against these limits is computed for appropriate interest rate movements and monitored period

ding rates, GOI Sec, CDs and corporate bonds benchmark). Currently, the scenarios provide for differential movements in each yield curve
regulatory framework at the host countries.

rrows from the RBI, collateral is primarily statutory liquidity ratio eligible investments. The haircut for all such sovereign securities is stipulate
des direction to and also monitors the quality of the internal audit function. The Asset Liability Management Committee provides guidance fo
n of reported or suspected frauds, monitoring of debit/credit card and internet banking transactions, compliance with regulatory requirement
ere Standard & Poor’s, Moody's and Fitch. Further, the RBI’s Basel III framework stipulates guidelines on the scope and eligibility of applica
nvolved in sponsorship of off-balance sheet vehicles.
it structure that governs transactions in financial instruments. The policies are reviewed periodically to incorporate changed business requir
o products or product variants from the business and operational perspective, examine the feasibility of system requirements for supporting
as per the behavioral study. The study reckons outflows at certain percentile confidence level. For non-maturity liabilities such as savings ba

ovements and monitored periodically.

movements in each yield curve but the movement in each curve is assumed to be parallel. Further, for the domestic foreign currency opera
h sovereign securities is stipulated by the RBI and is not based on the credit rating of the borrower. Similarly, CCIL’s margin requirement is b
Committee provides guidance for management of liquidity of the overall Bank and management of interest rate risk in the banking book with
ance with regulatory requirements relating to fraud reporting, vulnerability assessment reviews in banking operations like branch banking, op
e scope and eligibility of application of external ratings. The Bank reckons the external rating on the exposure for risk weighting purposes, i
porate changed business requirements, financial environment and revised policy guidelines.
em requirements for supporting the product/process and ascertain that adequate risk mitigation and legal & compliance measures are cons
urity liabilities such as savings bank deposits in INR currency, bucketing upto 12 months is as per the liquidity gap bucketing and the residua

domestic foreign currency operations and overseas operations of the Bank, assets and liabilities are primarily linked to LIBOR and the basi
y, CCIL’s margin requirement is based on maturity and certain other factors but not on the credit ratings of the borrower. In addition, the Ban
rate risk in the banking book within the broad parameters laid down by the Board of Directors/ the Risk Committee.
perations like branch banking, operations, treasury, cards, electronic channels and international branches and subsidiaries. Investigation ac
ure for risk weighting purposes, if the external rating assessment complies with the guidelines stipulated by RBI.
& compliance measures are considered based on the detailed product note.
ty gap bucketing and the residual portion is bucketed in “1-3 year” bucket. Savings deposits in other currencies are bucketed as per the RB

rily linked to LIBOR and the basis risk is computed for a parallel shift in LIBOR as well as the spread over LIBOR. The basis risk for the ove
he borrower. In addition, the Bank does not engage in derivative or swap transactions that require the Bank to increase its collateral if the B
nd subsidiaries. Investigation activity covers reported/suspected frauds in various areas including internal frauds, which are handled by a S
cies are bucketed as per the RBI guidelines. The difference between RSA and RSL for each time bucket signifies the gap in that time bucke

IBOR. The basis risk for the overall Bank is a summation of the basis risk arising from domestic rupee and overseas (including domestic for
to increase its collateral if the Bank’s credit rating is downgraded. As such, any reduction or withdrawal of the Bank’s credit ratings will not i
rauds, which are handled by a Special Investigation Unit. Awareness creation activities cover various stakeholders including customers and
gnifies the gap in that time bucket. The direction of the gap indicates whether net interest income is positively or negatively impacted by a ch

overseas (including domestic foreign currency) operations.

he Bank’s credit ratings will not impact the collateralised borrowing operations. At September 30, 2018, the Bank did not have any borrowin
holders including customers and employees.
ly or negatively impacted by a change in the direction of interest rates and the extent of the gap is used for approximating the change in net
e Bank did not have any borrowing linked to credit downgrade covenants which would require the Bank to pay an increased interest rate on
approximating the change in net interest income for a given interest rate shift. The ALM Policy of the Bank stipulates bucket-wise limits on r
ay an increased interest rate on the borrowing.
stipulates bucket-wise limits on rupee interest rate sensitive gaps for the domestic operations of the Bank, linked to the domestic balance sh
inked to the domestic balance sheet size of the Bank.
CAPITAL REQUIREMENTS DIRECTIVE

ABBREVIATIONS 3
INTRODUCTION 4
PART 1 DEFINIT 7
PART 2 MANAGE 24
PART 3 MANAGE 62
PART 4 MANAGE 75

Abbreviations
AT1 Additional Tier 1 Capital
BOG The Bank of Ghana
The BSDI Act Banks and Specialised Deposit-taking Institutions Act 2016 (Act 930)
CAR Capital Adequacy Ratio
CCB2 Countercyclical Buffer
CCF Credit conversion factor
CCR Counterparty credit risk
CEM Current exposure method
CET1 Common Equity Tier 1 Capital
CMP Capital Management Plan
CRM Credit risk mitigation
CRD Capital Requirements Directive or ‘the Directive’
D-SIBs Domestic-Systemically Important Banks
CCB1 Capital Conservation Buffer
DTA / DTL Deferred tax assets / Deferred tax liability
DvP / PvP Delivery-versus-payment / Payment-versus-payment
ECA Export credit agency
ECAI External credit assessment institution (Rating Agency)
ICAAP Internal Capital Adequacy Assessment Process
IFRS International Financial Reporting Standards
LCR Liquidity Coverage Ratio
MDB Multilateral development bank
MRCC Market Risk Capital Charge
MtM Mark-to-market
MV Market value
ORCC Operational Risk Capital Charge
PFCE Potential Future Credit Exposure
PSE Public sector entity
RMF Risk Management Framework
RW Risk weight
RWA Risk weighted assets
SFT Securities financing transaction
SM Standard method
SME Small- and medium-sized entity
SPV Special purpose vehicle
T2 Tier 2 Capital
TCR Total Capital Ratio
INTRODUCTION
Authority
1. The Capital Requirements Directive (CRD or ‘the Directive’) is issued under Section 92(1) of the Banks and Specialised Depo
Scope of Application
2. This framework shall apply to banks licensed and operating under the BSDI Act. Section 29(1) of the BSDI Act mandates the
Effective date
3 The Directive shall be implemented from 1 July 2018. The effective date by which banks are to comply with th
4 The CRD consists of four parts:
Part 1 – Definition of Regulatory Capital;
Part 2 – Management and Measurement of Credit Risk with three sub-sections;
Part 3 – Management and Measurement of Operational Risk; and
Part 4 – Management and Measurement of Market Risk.
Introduction
5 The CRD sets the requirement by which banks will calculate the CAR under the BSDI Act. The requirements h
6 The Board of a bank is responsible under the requirements of the CRD to determine both the:
a. availability of eligible capital; and
b. measurement of risks to capital in the Basel II framework, in line with minimum risk management standards f
7 The CRD recognises for capital adequacy purposes that sound risk measurement is best achieved where the
8 BOG has power to increase the CAR for any bank not operating to minimum risk standards under Section 29(
9 Any bank operating outside the minimum standards in regard to its risk based capital requirement, eligible reg
Principles for Risk Management
10 Capital is the cornerstone of a bank’s financial strength and its ability to absorb unexpected losses. A bank mu
11 The Board of a bank is the author and driver of the bank’s corporate culture including its risks management pr
12 The Board must establish a risk management strategy that defines the risk culture and governs a robust proc
a. defines the business activity/appetite in quantitative and qualitative terms;
b. explains the risk management methodology, all associated governance and functional responsibilities in respe
c. dictates and ensures accountability for risks through organisational structures, monitoring and reporting of risk
13 The Board should define all material risks in the business, and manage the risks through risk management fra
14 Risk management frameworks must be embedded in the business units and be used with good evidence of s
Accepted best practice is generally a ‘three lines of defence’ model that ensures:
a. active and competent risk ownership by the business, including the risk management framework (first line);
b. effective oversight and challenge of the risk positions and of the framework by risk management (second line)
c. an independent, tertiary line of review capable of strengthening lines 1 and 2, and of the overall functionality o
In respect of the ‘three lines of defence’ the risk management framework must state explicitly their independence and their repo
The function of BOG in its supervision, or similarly of any Government authority, is not part of the ‘three lines of defence’ model

PART 1 DEFINITION OF REGULATORY CAPITAL

15 This part provides the principles for capital management and the constituents of capital eligible in determining
16 This risk based capital requirement applies on a standalone licensed entity basis for banks, and a consolidate
17 A bank must ensure any component of capital it considers eligible as regulatory capital satisfies, in both form
18 A bank must submit to BOG all supporting documents including a self-assessment against the criteria for rele
19 Any variation in the terms and conditions of an instrument deemed eligible regulatory capital requires the writt
20 BOG may, in writing, require a bank to:
a. exclude from its regulatory capital any component of capital that in the opinion of BOG does not represent a g
b. reallocate to a lower category of capital any component of capital that in the opinion of BOG does not fully sat
21 Unrealized gain or losses on financial instruments recognised through accumulated other comprehensive inco
a. the requirements of International Financial Reporting Standards (IFRS) relating to the use of fair values are sa
b. its use of fair values and associated valuations are reasonable and reliable; and
c. the bank has risk management systems and related risk management policies, procedures and controls cove
22 All regulatory adjustments to capital are required to be made to the standalone and consolidated regulatory ca
23 In the context of group relationships, a related entity can include a parent company, a sister company, a subsi
Principles for Capital Management
24 The Board is the author and driver of the bank‟s corporate culture and must ensure, at all times, the bank has
25 A Board must to establish a capital management framework and to provide oversight of capital for the bank co
26 A Capital Management Framework should cover all relevant activities and controls relating
to:
a. Board‟s strategy, appetite and regular oversight of regulatory capital as defined in the CRD;
b. Functional roles and responsibilities for capital management in the organisation and business lines, risk owne
c. Integration and alignment of the Capital Management Plan (CMP) with the annual strategic and risk planning
d. Development and integration of the Internal Capital Adequacy Assessment Process (ICAAP) with the strategy
e. Consistent and reliable use of fair values in reporting – the principles and qualitative criteria, operational proce
27 The Board must develop and approve annually a CMP that sets the appetite for capital and aligns current and
28 The CMP will include three-year rolling projections of capital necessary to support the bank‟s strategic growth
Definition and Composition of Capital
29 The definition and constituents of regulatory capital consists of „tiers‟ as follows:
a. Tier 1 Capital or „going-concern capital‟ - capital that supports the bank‟s operations and can absorb losses a
i. Common Equity Tie
Additional Tier 1 („AT1‟)
b. Tier 2 Capital or „gone-concern capital‟ – capital to absorb losses or convert to equity if a bank is wound up.
30 Each tier of capital has qualifying criteria which a capital instrument issued by the bank must satisfy to be incl
31 Banks must submit to BOG copies of documentation associated with the issue of Additional Tier 1 and Tier 2 c
Common Equity Tier 1 Capital
32 CET1 capital consists of the following elements:
a. Ordinary (common) shares issued by the bank that meet the criteria for classification as ordinary shares for re
b. Income Surplus (Retained Earnings);
c. Statutory Reserves;
d. Ordinary (common) shares issued by consolidated subsidiaries of the bank and held by third parties (i.e. mino
e. Regulatory adjustments to CET1.
33 The criteria for the eligibility of ordinary shares as regulatory capital are:
a. All ordinary shares should ideally be voting shares. However, in rare cases, where banks need to issue non-v
b. Represents the most subordinated claim in liquidation of the bank.
c. Entitled to a claim on the residual assets that is proportional with its share of issued capital, after all senior cla
d. Principal is perpetual and never repaid outside of liquidation (except discretionary repurchases or other mean
e. The bank does nothing to create an expectation at issuance that the instrument will be bought back, redeeme
f. Distributions are paid out of distributable items (income surplus included). The level of distributions is not in an
g. There are no circumstances under which the distributions are obligatory.
Non-payment is therefore not an event of default.
h. Distributions are paid only after all legal and contractual obligations have been met and payments on more se
i. It is the issued capital that takes the first and proportionately greatest share of any losses as they occur. With
j. The paid-up amount is recognised as equity capital (i.e. not recognised as a liability) for determining balance
k. The paid-up amount is classified as equity under the relevant accounting standards.
l. It is directly issued and paid up and the bank cannot directly or indirectly have funded the purchase of the inst
m. The paid-up amount is neither secured nor covered by a guarantee of the issuer or related entity (refer paragr
n. Paid up is only issued with the approval of the owners of the issuing bank, either given directly by the owners
o. Paid up is clearly and separately disclosed on the bank‟s balance sheet. Income Surplus
34 This refers to profit and loss accounts at the end of the previous financial year. Banks may reckon the profits i
Minority Interest / Non-controlling Interest
35 Minority interests in consolidated groups may only be recognised as eligible regulatory capital for a given tier
a. the subsidiary that issues instruments with minority interests is a bank or a regulated other financial institution
b. the instruments satisfy the criteria for the tier of regulatory capital to which it is to be included (i.e. CET1, AT1
36 Generally, the contribution to regulatory capital from minority interests includes all minority interests except for
37 Any CET1, Additional Tier 1 or Tier 2 capital instrument issued by a consolidated subsidiary of a bank to mino
38 The amount of capital recognised as AT1 or Tier 2 capital will exclude amounts recognised in any higher tier o
39 The contribution of minority interest in a subsidiary that satisfies paragraph 35 is determined separately for ea
a. Total minority interest less the surplus capital (in each of CET1, AT1 or Tier 2) attributable to minority shareho
b. Surplus capital is the available capital for that tier (in each of CET1, Tier 1 or Total Capital) less the lower of:
i. the minimum capital requirement of the subsidiary plus the capital conservation buffer (CCB1) as a per cent o
ii. the portion of the consolidated minimum capital requirements (for either CET1, Tier 1 or Total Capital) plus CC
40 The amount of the surplus capital (for either CET1, Tier 1 or Total Capital) attributable to the minority shareho
Additional Tier 1 Capital
41 Additional Tier 1 capital (AT1) consists of the sum of the following elements:
a. Instruments issued by the bank that meets the criteria for inclusion in AT1 (and are not included in CET1);
b. Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for
c. Regulatory adjustments applied in the calculation of AT1.
42 The criteria for eligibility and inclusion as AT1 in regulatory capital are:
a. Issued and paid-up
b. Subordinated to depositors, general creditors and subordinated debt of the bank
c. Is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally
d. Is perpetual, i.e. there is no maturity date and there are no other incentives to redeem
e. May be callable at the initiative of the issuer only after a minimum of five years:
i. To exercise a call option a bank must receive prior supervisory approval; and
ii. A bank must not do anything which creates an expectation that the call will be exercised; and iii. A bank must
1 The called instrument is replaced with capital of the same or better quality under conditions sustainable for th
2 The bank demonstrates its capital position is well above the minimum capital requirements after the call optio
f. Any repayment of principal (e.g. through repurchase or redemption) must be with prior supervisory approval a
g. Dividend/coupon discretion:
i. the bank must have full discretion to cancel distributions/payments at any time;
ii. cancellation of discretionary payments must not be an event of default;
iii. the bank must have full access to cancelled payments to meet obligations as they fall due; and
iv. cancellation of distributions/payments must not impose restrictions on the bank except in relation to distributio
h. Dividends/coupons must be paid out of distributable items.
i. The instrument cannot have a credit sensitive dividend feature, that is a dividend/coupon that is reset periodic
j. Instruments classified as liabilities for accounting purposes must have principal loss absorption through either
i. Reduce the claim Reduce
of the amount
Partially or fully reduce coupon/dividend payments on the instrument.
k. Neither the bank nor a related party over which the bank exercises control or significant influence can have pu
l. The instrument cannot have any features that hinder recapitalization, such as provisions that require the issue
m. If the instrument is not issued out of an operating entity or the holding company in the consolidated group (e.g
Tier 2 capital
43 Tier 2 capital consists of the sum of the following elements:
a. Instruments issued by the bank that meet the criteria for inclusion in Tier 2 capital (and are not included in Tie
b. Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for
c. Accumulated other comprehensive income and other reserves separately disclosed as per IFRS may include
d. Regulatory adjustments applied in the calculation of Tier 2 Capital.
44 Tier 2 provides loss absorption to capital on a gone-concern basis. The criteria for eligibility and inclusion as t
a. Issued and paid-up
b. Subordinated to depositors and general creditors of the bank
c. Neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or
d. Maturity:
i. minimum original maturity of at least five years
ii. recognition in regulatory capital in the remaining five years before maturity will be amortized on a straight-line
e. May be callable at the initiative of the issuer only after a minimum of five years:
i. To exercise a call option a bank must receive prior supervisory approval;
ii. A bank must not do anything that creates an expectation that the call will be exercised; and iii. A bank must no
1 The called instrument is replaced with capital of the same or better quality under conditions sustainable for th
2 The bank demonstrates its capital position is well above the minimum capital requirements after the call optio
f. The investor must have no rights to accelerate the repayment of future scheduled payments (coupon or princ
g. The instrument cannot have a credit sensitive dividend feature, that is a dividend/coupon that is reset periodic
h. Neither the bank nor a related party over which the bank exercises control or significant influence can purcha
i. If the instrument is not issued out of an operating entity or the holding company in the consolidated group (e.g
Regulatory Adjustments
 45 The following items shall be deducted from CET1 unless another tier of regulatory capital is specified.
46 In the case of investments, the deduction is a corresponding deduction in that it applies to the same tier of ca
I. Asset impairment
47. A bank must deduct any identified impairment of an asset where the impairment has not already been recognised in profit a
II. Goodwill and other intangible assets
48. A bank must deduct the following net of any associated deferred tax liability which would be extinguished if the relevant ass
a. Goodwill and any other intangible assets arising from an acquisition, net of adjustments to profit or loss reflec
b. Other intangible assets net of adjustments to profit or loss reflecting amortization and impairment. Intangible a
III. Equity holdings and other capital support provided to banking, financial and insurance entities (collectively „other financial in
49 A bank must deduct from capital direct, indirect and synthetic equity exposures, guarantees and other forms o
a. ordinary shares, guarantees and other forms of capital support held in the banking book;
b. net long positions in equity held in the trading book;
c. underwriting positions only held for more than five working days;
d. Investments in non-consolidated financial institutions irrespective of the size of the shareholding; and
e. Intra-group transactions that do not represent a genuine contribution to financial strength of the bank (paragra
50 A financial institution includes affiliates of a bank. An affiliate is a company that controls, or is controlled by, or
51 BOG may exclude for a time investments made in the context of resolving or providing financial assistance to
IV. Intra-group transactions for capital or funding purposes
52 Intra-group transactions (i.e. to/from subsidiaries, parent companies or related entities through the parent) mu
53 The factors BOG may consider in assessing whether a component of capital resulting from an intra-group tran
a. Is clearly supplied from debt raised by other group members;
b. Results from intra-group transactions with no economic substance;
c. Is contributed by a member of the group using funding sourced, directly or indirectly, from the bank itself; or
d. Is controlled by a group member and the funding of which contains cross-default clauses that would be trigge
54 If a facility, including a guarantee, represents a form of capital support to a related entity such that it is conside
55 Investments in non-financial institutions or commercial entities are deducted from CET1.
V. Investments in own shares (Treasury Shares)
56 A bank‟s investments in its own ordinary shares, whether held directly or indirectly, will be deducted from CET
57 Similarly, if a bank holds other forms of its own capital (e.g. AT1 or T2), they must be deducted at that same ti
58 Any own stock which the bank could be contractually obliged to purchase should be deducted from CET1, an
59 If the bank holds index/mutual fund securities that include a bank‟s own shares, they are to be deducted from
VI. Deferred Tax Assets (DTAs)
60 Deferred tax assets (DTAs) that rely on the future profitability of the bank are deducted from CET1.
61 DTA may be netted with associated deferred tax liabilities (DTLs) only if the DTAs and DTLs relate to taxes lev
62 DTLs used to offset DTAs must exclude amounts that have been netted against the deduction of goodwill, inta
63 DTAs relating to temporary differences such as credit losses are not to be netted with other DTAs and are ded
64 All other such assets, e.g. those relating to operating losses, such as the carry forward of unused tax losses,
65 An over-installment of tax, or current year tax losses carried back to prior years may give rise to a claim or rec
VII. Pledged Assets
66 A capital deduction of 100% of the outstanding balance of pledged assets from CET1 will apply with the excep
VIII. Cash flow Hedge Reserve
67. The amount of the cash flow hedge reserve that relates to the hedging of items that are not fair valued on the balance shee
IX. Gain on sale related to securitization transactions
68. Increases in equity capital resulting from securitization transactions (e.g. capitalized future margin income resulting in a gain
X. Defined benefit pension fund assets and liabilities
69 Defined benefit pension fund liabilities, as included on the balance sheet, must be fully recognised in the calc
70 For each defined benefit pension fund that is an asset on the balance sheet, it should be deducted from CET1
should become impaired or derecognised under the relevant accounting standards. Assets in the fund to which the bank has un
Composition of Regulatory Capital
71 A bank is required to maintain a risk based capital ratio of at least 10%.
72 The regulatory capital ratios applied to each tier of regulatory capital as follows:
CET1 ratio
Tier 1 capital ratio
Total capital ratio
73 The components of regulatory capital will be divided into different components as described below:
a. CET1 must be at least 6.5% of RWAs i.e. for credit risk + market risk + operational risk on an ongoing basis.
b. Tier 1 capital must be at least 8.0% of RWAs on an ongoing basis. Thus, within the minimum Tier 1 capital, Ad
c. Total Capital (Tier 1 Capital plus Tier 2 Capital) must be at least 10.0% of RWAs on an ongoing basis. Thus, w
d. If a bank has complied with the minimum CET1 and Tier 1 capital ratios, then the excess Additional Tier 1 cap
74 In addition to the minimum CET1:
a. banks are required to maintain additional CET1 as a capital conservation buffer (CCB1) as at paragraphs 80 t
b. banks may be required to hold a countercyclical buffer (CCB2) as at paragraphs 84 to 86; and
c. any bank BOG deems to be Domestic Systemically Important Banks (DSIBs) may be required to hold addition
75 The full complement of capital ratio requirements across the components of capital are summarized in the Tab
Regulatory CapitaRWAs
(%)
1 Minimum CET1 6.5
2 Capital Conservat 3
3 CET1 Ratio plus 9.5
4 Maximum AT1 1.5
5 Minimum Tier 1 Ca 8
6 Maximum T2 2
7 Minimum Capital 10
8 Minimum CAR plu 13
9 Countercyclical B 0
10 DSIB Buffer 0
11 Minimum CAR plu 13
Internal Thresholds above the Minimum Ratios
76 The Board‟s appetite for capital must include thresholds as internal targets ratios above the minimum capital
77 The purpose of the thresholds above the minimum requirement is to assist in the management of the bank. A
78 A bank must act to correct any single breach of its minimum CAR as required by the bank‟s capital managem
Capital Conservation Buffer
79 A bank is required to hold a capital conservation buffer (CCB1) to ensure capital is accumulated in good times
80 If a bank‟s risk based capital ratio is, or risks falling, below the CCB1 a bank must enact plausible options it h
81 The CCB1 (3.0%) is above the risk based capital requirement (10%) and banks are required to manage their
82 Any bank below the total capital requirement by 1 January 2019 must sustain a prudent policy to retain suffici
Minimum capital conservation standards
CET1 Ratio Minimum Capital Conservation to Earnings (CCR%)
>6.5% - 7.25% 100%
>7.25% - 8.00% 80%
>8.00% - 8.750% 60%
>8.750 – 9.50% 40%
>9.5% 0%
Countercyclical Buffer
83 A countercyclical buffer (CCB2) is a cyclical requirement for banks to build up a buffer of capital in good times
84 CCB2 recognises that losses incurred in the banking sector may be higher in a downturn that follows a period
85 BOG will review and consider the local macroprudential settings for a CCB2. The CCB2 is zero until other ele
Systemically Important Banks
86 BOG may deem a bank to be systemically important to Ghana‟s economy by pre-determined characteristics.
87 The characteristics BOG may consider important are: a bank‟s the size, complexity, interconnectedness, its n
Leverage Ratio
88 The leverage ratio is a non-risk-based leverage ratio that complements the risk-based capital requirements. It
89 On a wider industry basis, the leverage ratio will monitor asset growth relative to capital, and assist as a macr
90 The leverage ratio is based on a Tier 1 definition of capital and should be a minimum of 6% for all banks. The

APPENDIX TO PART 1 DEFINTION OF CAPITAL

For regulatory capital purposes, minority interest in banking subsidiaries that is issued to third parties is shown in the example f
With respect to subsidiary Bank S, Bank P owns 70% of ordinary shares, 80% of additional Tier 1 capital and 25% of the Tier 2
Bank P Balance Sheet Bank S Balance Sheet
Assets Assets
Loan to Customer 100 Loan to Customer 150
Investment in CE 7
Investment in AT1 4
Investment in the 2
Total 113 Total 150
Liabilities and Equity Liabilities and Equity
Depositors 70 Depositors 127
Tier 2 10 Tier 2 8
Additional T1 7 Additional T1 5
Common Equity 26 Common Equity 10
Total 113 Total 150
Therefore, ownership of Bank S is:
Capital Issued by Bank S
Amount issued to Amount issued to Total
t
Common Equity 7 3 10
Additional Tier 1 4 1 5
Tier 1 11 4 15
Tier 2 2 6 8
Total Capital 13 10 23
The consolidated balance sheet of the banking group is:
Consolidated Balance Sheet
Assets
Loan to customer 250
Liabilities and Equity
Depositors 197
Tier 2 capital issu 6
Tier 2 capital iss 10
AT1 capital issued 1
AT1 capital issued 7
CET1 issued by subs 3
CET1 issued by P 26
Total Capital 250
For illustrative purposes, Bank S is assumed to have RWAs of 100 against the assets valuing 150. In this example, the minimum
Minimum and surplus capital of Bank S
Minimum plus capiCapital Available Surplus
CET1 (4.5+2.5=7. 7
(=7.0% of 100) 10 3
(=10-7.0)
Tier 1 8.5
(=8.5% of 100) 15 (=10+5) 6.5
(=10+5-8.5)
Total Capital 10.5
(=10.5% of 100) 23
(=10+5+8) 12.5
(=10+5+8-10.5)
The following table illustrates how to calculate the amount of capital issued by the Bank S is to be included in consolidated capi
Bank S: amount of capital issued to third parties included in consolidated capital
Total amount
issued
(a) Amount
issued to third parties
(b) Surplus
(c) Surplus attributable to third parties (i.e. amount excluded from consolidated capital)
(d) =(c) * (b)/(a) Amount
included in consolidated capital
(e) = (b) – (d)
CET1 10 3 3 0.9 2.1
Tier 1 15 4 6.5 1.73 2.27
Total Capital 23 10 12.5 5.43 4.57
The following table summarizes the components of capital for the consolidated group based on the amounts calculated in the ta
Total amount issueAmount issued byTotal
s amount issued by Parent and subsidiary to be included in consolidat
CET1 26 2.1 28.1
AT1 7 0.17
(=2.27-2.10) 7.17
Tier 1 33 2.27 35.27
Tier 2 10 2.3
(=4.57-2.27) 12.3
Total
Capital 43 4.57 47.57

PART 2 MANAGEMENT AND MEASUREMENT OF CREDIT RISK

91. Banks will manage and measure credit risk by the Standardised Approach (SA) and the measurement of credit risks consist
Part 2A – on-balance sheet exposures; Part 2B – off-balance sheet exposures; and
Part 2C – credit risk mitigation.
Principles for Credit Risk Management
92 The Board, as the author and driver of the bank’s corporate culture, is responsible to show how its organisatio
93 A Board must establish a systematic Credit Risk Management Framework (CRMF) throughout a bank which p
94 The CRMF should cover the whole credit management approach and at a minimum include:
a. Board’s appetite, strategy and oversight of credit risk;
b. all policies for credit necessary for organisation functionality and resources, risk ownership, delineation of duti
c. operational procedures for credit management life cycle from credit
origination through to repayment or recovery;
d. reporting of credit to management and to the Board covering individual and portfolio managed facilities, troub
e. any other material services to credit such as information technology and HR support.
95 A sound assessment of credit risk relies on an exchange of reliable and accurate information concerning a po
96 The risk weights designated herein work on the basis that a bank has obtained, verified and retains records o
a. a bank cannot demonstrate that procedures have been followed as above, BOG may increase the risk weight
b. a bank has misclassified an exposure, BOG may increase the risk weight of the exposure in line with the char
At all times, BOG can increase the bank’s risk based capital requirement if it is warranted by the higher risk profile of the bank.
Part 2A ON-BALANCE SHEET EXPOSURES
97 This section specifies the rules for calculating the risk-weighted amounts of a bank’s on-balance sheet exposu
98 The risk-weighted amount of a credit exposure shall be determined by multiplying the total outstanding expos
99 A credit exposure secured by a qualifying collateral, guarantee or credit derivatives may be reduced for capita
100 A risk weight add-on of 20% will apply to a credit exposure to a counterparty that has a currency mismatch, ex
Recognised External Credit Assessment Institutions
101 Only External Credit Assessments Institutions (ECAIs) approved by BOG may be used to allocate risk weights
102 BOG may approve an ECAI provided it satisfies the criteria of objectivity, independence, international access
103 BOG recognises ECAIs issued by ratings agencies: Standard and Poor’s (S&P), Moody's Investors Service (M

Table - ERG for ECAIs

ERG S&P Moody’s Fitch
1 A-1 / AAA to AA- P-1 / Aaa to Aa3 F-1 / AAA to AA-
2 A-2 / A+ to A- P-2 / A1 to A3 F-2 / A+ to A-
3 A-3 / BBB+ to BB P-3 / Baa1 to BaaF-3 / BBB+ to BBB-
 4 Below A-3 / BB+ tBelow P-3 / Ba1 t Below F-3 / BB+ to BB-
5 N/A / B+ to B- N/A / B1 to B3 N/A / B+ to B-
6 N/A / below B- N/A / below B3 N/A / below B-
104 If there are two assessments by ECAIs chosen by a bank which map into different risk weights, the higher risk
105 If there are three or more assessments with different risk weights, the assessments corresponding to the two
Risk-weights on Counterparties by Type
Government of Ghana and the Bank of Ghana
106 Claims on the Government of Ghana and BOG denominated and funded in the domestic currency will be 0%
107 Claims on the Government of Ghana and BOG in foreign currency will be 20% risk weighted.
Sovereigns and Central Banks
108 Claims on a sovereign (or central bank) where a bank or its parent is incorporated, and denominated in the lo
109 Claims on other sovereigns and central banks if not in their local currency shall be assigned risk weights in th
ERG 1 2 3 4 5
RW 0% 20% 50% 100% 100%
110 Claims on the Bank for International Settlements, the International Monetary Fund, the European Central Ban
Multilateral Development Banks (MDBs)
111 Claims on MDBs are based on their external credit assessments, similar to banks at paragraph 124 except fo
112 A risk weight of 0% shall apply to claims on highly rated MDBs that satisfy all the following criteria:
a. very high quality long-term issuer ratings, i.e. a majority of an MDB’s external assessments must be AAA;
b. shareholder structure is comprised of a significant proportion of sovereigns with long-term issuer credit asses
c. strong shareholder support demonstrated by the amount of paid-in capital contributed by the shareholders; th
d. adequate level of capital and liquidity (a case-by-case approach is necessary to assess whether each MDB’s
e. strict statutory lending requirements and conservative financial policies, which would include among other con
113 Highly rated MDBs eligible for 0% risk weight are:
a. World Bank Group comprising the International Bank for Reconstructions and
Development (IBRD) and the International Finance Corporation (IFC);
b. Asian Development Bank (ADB),
c. African Development Bank (AfDB);
d. European Bank for Reconstruction and Development (EBRD);
e. Inter-American Development Bank (IADB);
f. European Investment Bank (EIB);
g. European Investment Fund (EIF);
h. Nordic Investment Bank (NIB);
i. Caribbean Development Bank (CDB);
j. Islamic Development Bank (IDB); and
k. Council of Europe Development Bank (CEDB).
Public Sector Entities (PSEs)
114 For credit risk assessment generally, claims to all public-sector entities (PSEs) must be assessed as if they ar
115 Claims on central government public sector entities (PSEs), such as the Metropolitan, Municipal and District A
a. 0% if guaranteed by the Government of Ghana and have specific revenue raising powers;
b. 20% if not guaranteed by the Government of Ghana, but have specific
revenue raising powers; or
c. A risk weight in the table below (similar to banks) if not guaranteed by the Government of Ghana, and have no
ERG 1 2 3 4 5
RW 20% 50% 50% 100% 100%
Non-central government public sector entities (PSEs)
116 Claims on non-central government PSEs in the domestic currency guaranteed by the Government of Ghana i
117 Claims on non-central government PSEs (institutions) that are non-profit making shall be risk weighted at 50%
118 Claims on non-central government PSEs (enterprises) that are profit making shall be risk weighted at 100%.
119 Claims on non-central government PSEs in foreign currency shall attract a risk add-on of 20%.
Foreign PSEs
120 Claims on foreign PSEs in its local currency that are guaranteed by their sovereign shall be risk weighted equ
121 Claims on foreign PSEs in its local currency shall be risk weighted at ECAI for the sovereign.
122 Claims on foreign PSEs not in its local currency shall be risk weighted at ECAI for the sovereign with a risk ad
Banks
123 Claims on banks shall be risk weighted on the external credit assessments specified in the Table, with unrated
124 Claims on banks in the domestic currency where the original maturity is 3 months or less will be risk weighted
Table – Risk weights for claims on banks
ERG 1 2 3 4 5
RW 20% 50% 50% 100% 100%
RW if original mat 20% 20% 20% 50% 50%
Other Financial Sector and Regulated Institutions
125 Claims on specialised deposit-taking institutions regulated by BOG except microfinance institutions, shall be r
126 Claims on microfinance, other institutions regulated by BOG, insurance companies regulated by the National
127 Claims on other financial sector regulated institutions not in the domestic currency shall attract a risk add-on o
Retail Lending
128 Claims on retail exposures shall be risk weighted at 75% if the claims satisfy all the criteria below, and are not
a. Orientation – a claim on salaried employees of the Central Government, BOG, PSEs, banks or highly rated M
b. Product – Personal loans to salaried employees appropriately verified where the employer (defined in 129a) u
c. Granularity ─ diversified loan portfolio such that no single loan exceeds 0.2% of retail portfolio; and
d. Low value - maximum aggregated exposures to a single borrower, including any joint facilities the borrower m
129 In addition to paragraph 129, a qualifying retail exposure must be subject to a credit risk assessment within th
130 Any claims on the retail portfolio in foreign currency will attract a risk add-on of 20%.
Residential - Mortgage Loans
131 Claims fully secured by mortgages on residential property that is, or will be, owned and occupied by the borro
a. Loan-to-value ratio (LVR), defined as the total loan exposure divided by the property market value net of realiz
b. The loan amount in domestic currency shall be fully secured by a mortgage on the residential property that is
c. The mortgage must be enforceable in all jurisdictions which are relevant at the time of execution of the credit
d. The residential property must be occupied by the borrower or rented by the borrower to a third party.
e. The bank must be satisfied that the risk of the borrower is not dependent on the performance of the underlyin
f. The property is valued at origination by a Qualified Certified Valuator and thereafter revalued every three year
g. The property must be adequately insured by a licensed insurance company.
132 Claims secured by mortgage that do not satisfy requirements of paragraph 132 are non-qualifying mortgage l
133 All residential mortgage loan with a currency mismatch will attract a risk add-on of 20%.
134 As part of the supervisory review process, BOG will periodically evaluate the quality of residential mortgage p
Commercial Real Estate
 135 Claims secured by a registered mortgage on commercial real estate that satisfy qualifying conditions in parag
136 Non-qualifying claims on commercial real estate and facilities extended for financing the buying and selling of
137 Claims on commercial real estate in foreign currency will attract a risk add-on of 20%.
Corporates
138 Claims on corporates shall be risk weighted at 100%, and if in foreign currency, a risk add-on of 20% applies.
Small and Medium Enterprises
139 Claims on Small and Medium Enterprises (SMEs) including business orientated exposures to individuals or gr
Past Due Claims
140 A facility is past due when the scheduled repayment or instalment is outstanding for more than 90 days.
141 Higher risk weights specified herein apply to past due facilities in the domestic currency. A risk add-on for claim
Past Due Claims on Unsecured Facilities
142 Any unsecured facility that is past due for more than 90 days, net of specific provisions (by BOG Guide for Re
a. 150% if classified as loss without full provision for the outstanding loan;
b. 150% if classified as substandard and specific provisions are no less than 25% of the outstanding loan;
c. 100% if classified as doubtful and specific provisions are no less than 50% of the outstanding amount of the lo
d. 0% if classified as loss and full provisions for the outstanding loan and any administrative costs.
143 Eligible collaterals securing past due facilities will not be considered and claims shall be risk weighted as past
Past Due Claims on Mortgage Loans
144 A residential mortgage loan that is past due for more than 90 days will be risk weighted as follows:
a. 100% for qualifying mortgage (original risk weight 35%) if classified as substandard or doubtful; or
b. 150% for a non-qualifying mortgage (original risk weight 100%) if classified as substandard or doubtful; or
c. 0% if full provision is made on the outstanding loan and any legal or administrative costs for realizing the secu
145 A commercial mortgage loan that is past due for more than 90 days will be risk weighted as:
a. 150% on claims on qualifying mortgages for commercial real estate (original risk weight 100%) if classified as
b. 200% on claims on non-qualifying mortgages for commercial real estate (risk weight at origination 150%) if cla
c. 0% if full provision is made on the outstanding loan and any legal or administrative costs for realizing the secu
Higher Risk Categories
146 Claims on higher risk categories will be risk weighted at 150% on claims on sovereigns and all other PSEs, ba
Other On-Balance Sheet Assets
147 Exposures in cash and other cash items in the process of collection shall be risk weighted at 0% and 20% res
148 All other on balance sheet assets will be risk weighted at 100%, such as investments in premises, plant and e
PART 2B OFF-BALANCE SHEET EXPOSURES
149 This section outlines the requirements for the calculation of risk weighted assets on off-balance sheet credit e
150 The credit exposure to off-balance sheet items is comprised of market and nonmarket transactions.
151 The risk weighted amount of an off-balance sheet transaction is calculated by:
a. converting the notional amount of the transaction using a credit conversion factor (CCF) into an on-balance sh
b. multiplying the CEA by the risk weight applicable to the counterparty or type of exposure.
152 Where the transaction is secured by eligible financial collateral, guarantee or credit derivative, the credit risk m
153 A risk weight add-on of 20% will apply to an off-balance sheet credit exposure to a counterparty that has a cu
Non-market off-balance sheet transactions
154 Non-market related off-balance sheet transactions are classified as commitments, direct credit substitutes, len
155 Off-balance sheet items receive the CCF as specified in the table below.
Nature of transactCCF (%)
1. Direct credit su 100
2. Performance-re 50
3. Trade-related c 20
4. Lending of secur 100
5. Assets sold wit 100
6. Forward asset 100
7. Partly paid sha 100
8. Placements of 100
9. Note issuance a 50
10. Other commitments
(a) Commitments with certain drawdown
(b) Commitments (e.g. undrawn formal standby facilities and credit lines) with an original maturity of:
(i) one year or less; or
(ii) more than one year
(c) Commitments that can be unconditionally cancelled at any time without notice (e.g. undrawn overdraft and cre
100

20
50

0
11. Irrevocable s 0
Commitments
156 The type of commitment depends on its terms and maturity as per paragraph 156 and the appropriate CCF m
a. A commitment with certain drawdown is distinguished from a commitment that may or may not be drawn by th
b. The maturity of a commitment is the date the customer accepts the facility in writing (i.e. its original maturity) u
c. The maturity of a renegotiated commitment is the date of renegotiation until the end of the period as renegotia
i. A full credit assesThe lender's right, without notice, to withdraw the commitment.
d. A commitment to provide a loan (or purchase an asset) which has a maturity of over one year but must be dra
e. A commitment to provide a loan (or purchase an asset) to be drawn down in several tranches, some up to one
f. Where a commitment has a facility limit that varies during its term, the exposure is the maximum amount that
g. The original maturity of a forward commitment is the date the commitment is entered into until the final date b
157 Rolling and undated (i.e. open-ended) commitments (e.g. overdrafts or unused credit card lines) shall be inclu
158 An undertaking to provide an off-balance sheet commitment may be associated with more than one CCF. For
a. commitment, based on its original maturity and whether it can be cancelled at any time unconditionally, or
b. type of on-balance sheet exposure that arises when the commitment is drawn.
For the example above the applicable CCF is the lower of the two options: the documentary letter of credit with 20% CCF.
Direct Credit Substitutes
159 Direct credit substitutes may comprise general guarantees of indebtedness and including standby letters of cr
Sale and Repurchase Agreement
 160 A sale and repurchase agreement (repo) is an arrangement where a bank sells an instrument and commits to
161 A bank that purchases a repo (i.e. reverse repo) shall report the transaction as a collateralized loan for the du
162 Where a bank, acting as an agent, arranges a repurchase/reverse repurchase or securities lending/borrowing
163 Sale and repurchase agreements and asset sales with recourse, where the credit risk remains with the bank w
Performance-Related Contingent liabilities
164 Performance-related contingent liabilities involve a payment to a third party if the principal fails to perform a no
a. Performance bonds, warranties and indemnities;
b. Bid or tender bonds;
c. Advance payment guarantees;
d. Customs and excise bonds; and
e. Standby letters of credit for particular contracts and non-financial transactions.
165 Note-issuance Facilities (NIFs) and Revolving Underwriting Facilities (RUFs) are arrangements where a borro
166 Trade-related contingent liabilities are obligations secured against an underlying shipment of goods for both th
a. Short-term self-liquidating trade letters of credit arising from the movement of goods where the credit agreeme
b. Shipping guarantees issued by a bank;
c. Acceptances on trade bills; and
d. Other trade-related contingent items.
Market Off-balance Sheet Transactions
167 Risk weighted assets are calculated for counterparty credit risk (CCR) on market off-balance sheet transactio
168 The SA covers CCR only in respect of Securities Financing Transactions (SFTs) and Over-the-Counter (OTC)
169 Securities, commodities, and foreign exchange transactions are to be processed through a delivery-versus-pa
170 Netting is permitted for market off-balance sheet transactions where exposures to a counterparty satisfy requi
171 Market off-balance sheet exposures must have the following characteristics:
a. Transactions generate a current exposure or market value.
b. Transactions have an associated random future market value based on market variables.
c. Transactions generate an exchange of payments or an exchange of a financial instrument (including commod
d. There is an identified counterparty to transaction who may be assigned probability of default.
172 Typical market off-balance sheet transactions include the following:
a. Interest rate contracts: single currency interest rate swaps, basis swaps, forward rate agreements, interest rat
b. Foreign exchange contracts or gold: cross currency swaps (including cross currency interest rate swaps), forw
c. Equity contracts: swaps, forwards, purchased options and similar derivative contracts based on individual equ
d. Precious metal contracts (not gold): swaps, forwards, purchased options and similar derivative contracts base
e. Other commodity contracts (not precious metals): swaps, forwards,
purchased options and similar derivative contracts based on energy contracts, agricultural contracts, base metals (such as alum
f. Other market related contracts: any other contracts with market values giving risk to CCR.
173 Foreign exchange rate contracts with an original maturity of 14 calendar days or less are excluded for CCR.
174 Only the current exposure method is used to convert the notional amounts to a CEA. Current Exposure Meth
175 The current exposure method is the replacement cost for all contracts with a positive value and the add-on fo
a. Replacement Cost (RC): mark-to-market all contracts with positive value.
b. Add-on: Notional principal of the contract multiplied by a CCF for the type and maturity of the contract
Table - CCFs Current Exposure Method
Residual Maturity in years Type of Contract
Interest Rate (%) Forex/Gold (%) Equity (%) Precious Metals ( Commodity / Other (%)
< /= 1 0 1 6 7 10
> 1 up to 5 0.5 5 8 7 12
Over 5 1.5 7.5 10 8 15
176 The following rules shall be observed in applying the current exposure method:
a. If a contract has multiple exchanges of principal, CCF is multiplied by the number of remaining payments in th
b. A contract where payments are settled at specified dates – and the terms are reset so the market value is zer
c. Forwards, swaps, purchased options and similar derivative contracts not covered by any of the columns (Tabl
d. No potential exposure shall be calculated for single currency floating-tofloating interest rate swaps. The CEA o
e. The notional principal may be enhanced by the structure of the transaction. In such a case the effective notion
Netting of Transactions
177 A bank may net market-related transactions to a counterparty where there is a legally enforceable bilateral ne
178 A bank seeking to use netting arrangements must obtain specific approvals from BOG in respect of:
a. the legal certainty pertaining to the netting arrangement (e.g. agreement conforms with international best prac
i. specific legal obli an event of defaultrestrictions on walkaway clauses;
b. the complete suite of instruments approved for use and the relevant expertise of persons managing the transa
c. expertise and financial standing of the counterparty;
d. the governance, systems and valuation methods for use of fair values and adherence to IFRS;
e. the accurate measurement of counterparty credit exposures both individually and on a portfolio basis; and
f. overall quality of management of counterparty credit exposures and the strength of risk management framewo
PART 2C CREDIT RISK MITIGATION (CRM)
Operational Requirements
179 This section sets out the general approach to credit risk mitigation and the techniques banks may apply when
180 Credit risk mitigation permits a bank to reduce its credit exposure to a counterparty for capital purposes becau
181 In principle, the CRM techniques recognised herein are:
a. Collateralized transactions;
b. Guarantees;
c. Credit derivatives; and
d. Netting agreements.
182 The acceptability of CRM techniques rest on their effectiveness in reducing risk to counterparty. The use of a
183 Banks should consider the principles and inform BOG about present range of use of credit risk mitigation tech
184 BOG will review the range of credit risk mitigation approaches in use by individual banks in the industry, and a
185 A CRM technique must be distinct and separable to the credit exposure. It is not permitted to double count the
186 Specific operational requirements are provided in the relevant sections. Where these risks are not adequately
187 In the case where a bank has multiple CRM techniques covering a single exposure (e.g. a bank has both coll
Collateralized Transactions
188 Collateral must be pledged for at least the life of the exposure, marked to market and revalued with a minimum
189 A collateralized transaction is where the bank hedges a credit exposure or potential credit exposure by eligible
190 A capital requirement applies to each side of the collateralized transaction. For example, repos and reverse re
191 Banks must apply the simple approach to on-balance sheet assets and off-balance sheet exposures on the b
192 For trading book transactions, only the comprehensive approach is used for OTC derivatives and repo-style tr
193 Only eligible collateral may be used to reduce counterparty credit risk. The simple approach allows eligible fin
a. Cash on deposit with the bank incurring the counterparty exposure;
b. Debt securities issued by the Government of Ghana, or BOG;
c. Securities guaranteed by Government of Ghana, and/or enacted by law with a definite revenue stream for a g
d. Debt securities rated by a recognised ECAI:
i. at least BB- when issued by sovereigns or PSEs treated as sovereigns by the national supervisor; or
ii. at least BBB- when issued by other entities (including banks and securities firms); or
iii. at least A-3/P-3 for short-term debt instruments.
e. Equities (including convertible bonds) listed on the Ghana Stock Exchange.
194 In addition, (to paragraph 194) the comprehensive approach permits eligible collateral as:
a. Equities (including convertible bonds) not included in a main index but are listed on a recognised exchange; a
b. Units of listed funds that may include equities in paragraph 195a.
195 A third party to a collateralized transaction must be acceptable to BOG, or a core market participant defined a
a. Sovereigns, central banks and PSEs;
b. Banks; or
c. Other financial institutions regulated by BOG, insurance companies regulated by NIC, pension funds regulate
196 There must be a formal written contractual agreement between the bank as lender and the party lodging the c
197 The legal mechanism by which collateral is pledged or transferred must allow the bank the right to liquidate or
198 In the event of default, any requirement on the lender to serve notice on the party lodging the collateral must n
199 Collateral in the form of securities issued by the counterparty to the credit exposure (or by any person or entit
200 Collateral must be held by an independent custodian, except when cash, or an equally independent third part
Simple Approach
201 The simple approach substitutes the risk weight of the collateral to a floor of 20% in place of the risk weight of
202 Eligible collateral that meet any one of conditions below may receive a lower risk weight of either: - 0% risk w
a. The exposure and collateral are denominated in the same currency, and the collateral is cash on deposit with
b. the exposure and the collateral are denominated in the same currency, the collateral is security issued by sov
c. Repo-style transactions that fulfil the criteria outlined at paragraph 215 and the counterparty is a core market
d. OTC derivative transactions subject to daily mark-to-market, collateralized by cash and where there is no curr
OR 10% risk weight if:
a. the collateral is backed by a sovereign who is not a core market participant, the collateral is in the sovereign’s
b. Repo-style transactions that fulfil the criteria outlined at paragraph 215 and the counterparty is a non-core ma
c. OTC derivative transactions collateralized by sovereign or PSE securities qualifying for a 0% risk weight in the
203 Collateral must be pledged for at least the life of the exposure, marked to market and revalued with a minimum
Comprehensive Approach
204 The comprehensive approach on a collateralized transaction is the RWAs on the net exposure adjusted for po
205 Each side of collateralized transaction is volatility adjusted using standard haircuts in paragraph 210 and the f
• Increases for counDecreases for the collateral.
An exception arises if both sides are cash.
206 The comprehensive approach determines the adjusted exposure as:
E* = max { 0 , [E0 ×(1+He)−C0×(1−Hc− Hfx)] } Where:
E* #ERROR! Adjusted Exposure (after CRM).
E0 #ERROR! Exposure
C0 = Collateral
He #ERROR! Haircut to the Exposure
Hc #ERROR! Haircut to the Collateral.
Hfx = Haircut for currency mismatch between the collateral and exposure.
Thereafter the adjusted exposure is assigned the risk weight of the counterparty.
207 For OTC derivatives, E×(1+He) is replaced by the CEA of the OTC derivative calculated using the current exp
208 Where the collateral is a basket of assets, the haircut on the basket shall be:
H   aiHi (i = 1, 2, 3,.……, n)
i
Where:
ai = proportion of the asset in the basket (as measured by value)
Hi = haircut applicable number of assets in the basket
For example: assets A1 and A2 represent 40% and 60%, with haircuts 5% and 8%, respectively; i.e.
Asset Haircut Weight
A1 5%
A2 8%
The haircut (H) for the basket will be calculated as follows:
H = (0.4 * 0.05) + (0.6 * 0.08)
0.068
#ERROR!
209. The standard exposure and collateral haircuts (H), expressed as percentages, are in the Table below. These standard hair
Table - Standard supervisory haircuts (assumptions paragraph 212)
ERG Residual Maturity Sovereigns (%) Other (%)
1
T/Bills, Notes & #ERROR! 0.5 1
> 1 year, =/< 5 ye 2 4
> 5 years 4 8
2,3
Unrated bank secu
#ERROR! 1 2
> 1 year, =/< 5 ye 3 6
> 5 years 6 12
4 All 15
Main index equitie 15
Other equities (e 25
Units in listed trusHighest haircut that applies to any security the trust can invest in
Cash – same curr 0
Cash – different c 8
210 If the exposure and collateral are in different currencies, an 8% haircut applies for currency mismatch in the fo
Adjustments to Standard Haircuts for different holding periods and non-daily markto-market or remargining
211 The minimum conditions and holding periods for securities financing transactions (SFT), other capital-market-
Transaction type Minimum holding Condition
Repo-style transa5 business days Daily remargining
Other capital mark10 business days Daily remargining
Secured lending 20 business days Daily revaluation
212 When the remargining or revaluation is not performed daily as per the table in paragraph 212, the standard su
below. H  HM
Where:
 H #ERROR! Adjusted haircut.
HM = Haircut under the minimum conditions, (i.e. the standard supervisory haircuts).
TM = Minimum holding period by type of transaction by paragraph 212.
NR = Actual business days between remargining for capital market transactions or revaluation for secured exposure
213 Where an adjustment is made for volatility in the minimum holding period (TM) to obtain a new holding period
TM
HM  HN
TN
Where:
HN #ERROR! Haircut based on the holding period TN
TN #ERROR! Holding period used by the bank for deriving HN
214 For securities financing transactions, where the counterparty is a core market participant in paragraph 196, a
a. both the exposure and the collateral are cash, a sovereign security or PSE security, qualifying for a zero per c
b. both the exposure and the collateral are denominated in the same currency;
c. either the transaction is overnight, or both the exposure and the collateral are marked-to-market daily and are
d. following a counterparty’s failure to remargin, the time between the last markto-market before the failure to rem
e. the transaction is settled across an established settlement system for that type of transaction;
f. the documentation for the transaction is standard market documentation;
g. the documentation for the transaction specifies that if the counterparty fails to satisfy an obligation to deliver c
h. upon any default event, regardless of whether the counterparty is insolvent or bankrupt, the bank has an uneq
Maturity Mismatch and Measurement of Maturity
215 A maturity mismatch exists where the residual maturity of the collateral is less than the maturity of the underly
216 The effective maturity of the underlying exposure is the longest possible remaining time before the counterpar
217 The effective maturity of the collateral is its shortest possible maturity considering any embedded options that
Guarantees
218 Credit exposures secured by a qualifying guarantee may receive a lower risk weighting for an eligible guarant
219 A guarantee that does not fully cover the exposure is permitted as risk mitigant even though it is not well secu
220 A guarantee or counter-guarantee must:
a. represent a direct claim on guarantor with the extent of the cover clearly defined and incontrovertible.
b. be irrevocable such that there must be no clause in the contract that would allow the guarantor to cancel unila
c. be unconditional; there should be no clause in the guarantee outside the direct control of the bank that could
to pay out in a timely manner in the event that the original counterparty fails to make the due payment(s).
221 Credit insurance may be an acceptable form of guarantee. Credit insurance providers must be acceptable to
222 The acceptability of the guarantor or credit insurer will be subject to a minimum criterion where applicable:
a. a credit insurer must be regulated by the relevant supervisory authority.
b. Legal certainty requiring the willingness and ability to pay and the form of assurance in relation to scheduled c
c. Guarantor or credit insurer is deemed to have credible business model, has managed its business profitability
d. Guarantor or credit insurer has a verifiable history and quantity of claims demonstrating its ability to pay.
223 Guarantees given by the following entities may be recognised to the extent they satisfy the conditions in para
a. sovereign entities, PSEs and banks with a lower risk weight than the
counterparty; or
b. other entities with ERG 2 or better. This would include credit protection provided by parent and affiliate compa
224 Claims guaranteed or counter guaranteed by the sovereign (or central bank) denominated and funded in loca
a. The sovereign counter-guarantee covers all credit risk elements of the claim;
b. Both the original guarantee and the counter-guarantee meet all operational requirements for guarantees, exce
c. The bank is able to satisfy BOG the cover is robust and that no historical evidence suggests that the coverage
225 Letters of comfort do not qualify as eligible guarantors for CRM purposes. The guarantee is an explicitly docu
226 A guarantee may be recognised if the following conditions are satisfied:
a. On the qualifying default/non-payment of the counterparty, the bank has capacity to pursue in a timely manne
b. The guarantee covers all types of payments the underlying obligor is expected to make under the documenta
227 Materiality thresholds on payments below which no payment is made in the event of loss are equivalent to ret
Proportional Cover
228 Where the credit protection value held is less than the amount of the exposure, and the secured and unsecur
Tranched Cover
229 Where the bank transfers a portion of the risk of an exposure in one or more tranches to a protection seller(s)
Currency Mismatch
230 A currency mismatch exists where the guarantee is denominated in a currency different to the currency of the
GA = G × (1 - HFX)
Where:
GA is guaranteed value of the exposure
G is nominal value of the guaranteed exposure with the currency mismatch
HFX is the standard haircut for currency mismatch that is 8% if daily mark-to-market in paragraph 211. Haircuts must be adjuste
Maturity Mismatch and Measurement of Maturity
231 The guarantee is not eligible if there is a maturity mismatch with the exposure. A maturity mismatch exists wh
232 The effective maturity of the underlying exposure is the longest possible remaining time before the counterpar
233 The effective maturity of the guarantee is its shortest possible maturity considering any clauses that may redu
Credit Derivatives
234 Banks should consider the principles herein and notify BOG of their current use of credit derivatives and what
235 A bank that intends to sell credit protection must obtain BOG’s written approval to transact this business and r
236 It is a prerequisite condition that a bank is functioning in a well-defined and appropriate risk culture, as determ
237 Only total return swaps, credit default swaps and credit-linked notes that provide credit protection equivalent t
238 The International Swap Dealers Association (ISDA) Master Agreement is the generally accepted contract for O
239 Credit protection purchased from the following entities will be recognised:
a. sovereign entities, PSEs and banks with a lower risk weight than the
counterparty; or
b. other entities with ERG of 2 or better. This would include credit protection provided by parent, and affiliate com
240 The bank must ensure for CRM purposes there is sufficient credit risk transfer under each credit derivative. At
a. the failure to pay the amounts due under terms of the underlying obligation that are in effect at the time of suc
b. bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inab
c. any restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fe
241 When the restructuring of the underlying exposure is not covered by the terms of the credit derivative contrac
242 An asset mismatch exists where the credit derivative purchased covers obligations different to the underlying
243 An asset mismatch may only be permitted if:
a. the reference obligation (or the deliverable obligation) and the obligation specified in the credit derivative cont
b. the underlying obligation and the reference obligation (or the deliverable obligation) and the obligation specifie
244 A bank that has sold credit protection using a credit derivative must, for capital purposes, assume 100% of the
 245 A credit derivative contract may specify thresholds below which credit protection is not provided even if a cred
246 When determining the credit protection purchased, any material threshold in the credit derivative contract, tha
247 When determining the amount of credit protection sold, a bank must assume any materiality thresholds in the
248 The credit derivative contract must explicitly state how settlement will occur in a credit event and set the value
Measurement of Maturity
249 The effective maturity of the underlying exposure is the longest possible remaining time before the counterpar
250 The effective maturity of the credit derivative is its shortest possible maturity considering any embedded optio
251 Where a credit derivative is not prevented from terminating prior to expiration of any grace period required for
252 The following operational requirements for a credit derivative must be satisfied:
a. A credit derivative must represent a direct claim on the protection provider with the extent of the cover being c
i. It must be irrevocable; there must be no clause in the contract that would allow the protection provider to canc
ii. It must also be unconditional; there should be no clause in the protection contract outside the direct control of
b. Cash settlement of credit derivatives must be supported by a robust valuation process to reliably estimate los
c. Where the protection purchaser has an existing credit exposure that is the deliverable obligation under the cre
d. The identity of the parties responsible for determining whether a credit event has occurred must be clearly de
Proportional Cover
253 Where the credit protection value held is less than the amount of the exposure, and the secured and unsecur
Tranched cover
254 Where the bank transfers a portion of the risk of an exposure in one or more tranches to a protection seller or
Credit-default and total-rate-of-return swaps
255 Where credit protection is purchased using a credit-default swap referenced to a single reference entity or a t
Cash funded credit linked notes
256 Where credit protection is purchased using a credit linked note that is funded by cash, the note issued by the
First-to-default credit derivatives
257 A bank may purchase credit protection for a basket of reference names and credit protection is defined and lim
258 A protection purchaser may recognise capital relief for the reference entity with the lowest risk weighted amou
Second-to-default credit derivatives
259 A second-to-default credit derivative contract will pay out on losses after the second credit event as specified
260 A protection purchaser may recognise capital relief for the reference entity with the lowest risk weighted amou
Maturity Mismatch and Adjustments
261 Credit derivatives are not eligible if there is a maturity mismatch with the exposure. A maturity mismatch exists
262 Where a single protection provider provides multiple credit protection with different maturities, the bank must d
Currency mismatch
263 A currency mismatch is only acceptable while the value of the credit derivative is well-secured as per Section
GA = G * (1 - HFX)
By comprehensive formulae at paragraph 207, GA is substituted for C in the expression for E1 above and HFX set at zero.
Where:
G = nominal amount of the credit protection
HFX = haircut appropriate for the currency mismatch that is 8% if daily mark-to-market (refer paragraph 211). Haircuts must be
Credit Derivatives used to acquire credit risk exposure
264 A bank that intends to sell credit protection must obtain BOG’s written approval to transact this business and r
Credit-default Swaps
265 Where credit protection is sold via a credit-default swap referenced to a single reference entity, the bank acqu
Total-rate-of-return swaps
266 Credit protection sold via a total-rate-of-return swap must be included in the trading book.
Cash-funded credit-linked notes
267 Where credit protection is sold via a cash-funded credit-linked note, the bank acquires an exposure to both th
Netting
268 A bank may net or offset the following types of transactions subject to the requirements herein:
a. On balance sheet loans and deposits where:
i. the value of assets and liabilities of the counterparty subject to the netting agreement can be determined at an
ii. deposits meet the criteria for eligible financial collateral;
b. OTC derivative transactions (across the banking and trading books) with a single counterparty;
c. SFT involve transactions where securities are used to borrow cash (or other higher investment grade securitie
Payments netting connected to operational costs of daily settlements is not recognised since gross obligations of the counterpa
269 A bank may only net transactions covered by a netting agreement with a counterparty that complies with requ
270 Netting will only be acceptable to BOG if the contracts conform to international standards reflected in BOG’s R
271 A bank may only net positions across the banking book and trading book if the transactions to be netted:
a. are marked to market daily, where applicable; and
b. any instruments to be used as collateral are eligible financial collateral in the banking book.
Bilateral netting
272 Bilateral netting relates to multiple transactions between same counterparties and allows weighting the net cla
273 A netting arrangement may not be effective in reducing counterparty risk in all circumstances, and especially i
a. Banks may net transactions subject to novation whereby any obligation between a bank and its counterparty
b. Banks may also net transactions subject to any legally valid form of netting not covered in (a), including other
c. In both cases (a) and (b) BOG must be satisfied that the bank has:
i. A netting contract or agreement with the counterparty which creates a single legal obligation, covering all inclu
ii. Written and reasoned legal opinions that, in the event of a legal challenge, the relevant courts and administra
iii. Procedures are in place to ensure that the legal characteristics of netting arrangement are kept under review
d. The contract does not contain a walkaway clause that permits a nondefaulting company to make only limited
Operational Requirements
274 In general, a bank must have a risk management framework for netting with the requisite capacity in-house to
a. Well-founded legally enforceable netting arrangements for loans and deposits (in each relevant jurisdiction) re
b. Risk management framework includes all necessary policy, accountabilities, systems and controls; and
c. Monitoring and reporting on netting arrangements and all relevant exposures.
Calculation of Regulatory Capital
Netting for On-balance sheet transactions
275 A bank netting on-balance sheet exposures shall use the simple approach for banking book transactions and
Netting OTC derivatives - Current Exposure Method
276 The current exposure method for a bilateral netting contract incorporates all transactions to the counterparty.
CEA #ERROR! NRC + ANET
NRC is the net mark-to-market replacement cost of all individual contracts. That is, the sum of all positive and negative mark-to
ANet is the add-on for the potential future credit exposure arising from the notional principal of all underlying contracts and adju
ANET = 0.4 × AGROSS + 0.6 × NGR × AGROSS
And where:
NGR is net to gross ratio for all transactions to a counterparty in a single netting agreement shown as
Where:
NRC is already defined above;
GRC is gross replacement cost being the sum of all positive mark-to-market transactions covered by a netting agreement witho
and;
AGROSS = ∑i (Ai × Pi) such that
Ai is add-ons for all individual transactions; and
Pi is the notional principal for each transaction subject to legally enforceable netting agreements with the same counterparty.
277 NGR may be calculated using one of the following approaches:
a. counterparty-by-counterparty approach – a unique NGR is applied to each counterparty in calculating the CEA
b. aggregate approach – a single NGR is calculated and applied to all counterparties in calculating the CEA for t
278 A bank must consistently use either the counterparty-by-counterparty approach or the aggregate approach to
Netting Securities Financing Transactions (SFT)
279 A bank that uses the comprehensive approach to eligible collateral (paragraph 207) must apply the comprehe
280 A bank may only use the standard haircuts as per paragraph 210 and apply the procedure below for the effec

Where:
E* #ERROR! Value of exposure after risk mitigation
E #ERROR! Current value of exposure
C #ERROR! Value of the collateral received
ES #ERROR! Absolute value of the net position in an instrument
HS #ERROR! Haircut appropriate to ES
Efx = Absolute value of the net position in a currency that is not the settlement currency.
Hfx #ERROR! Haircut for currency mismatch
APPENDIX TO PART 2 – CREDIT RISK
Table 2A - Risk Weight (RW) Categories
Assets Type Ref ERG RW (%)
A Cash & Balances
1 Cash in cedi 149 0
2 Foreign currency 149 0
3 Cash items in the 149 20
B Claims on sovereigns
1 Claims on Govern 107 0
2 Claims on securit 107 0

3 Claims on the Gov 108 20

4 Claims on other sovereigns in their local currency (if authority has not determined a preferential RW).

Claims on other so 109

110 1
2
3
4,5
6
Unrated 0
20
50
100
150
100
5 Claims on the Af 111 0

Assets Type Ref ERG RW (%)

C Claims on Central Banks
1 Claims on BOG in 107 0
2 Claims on securit 107 0

3 Claims on BOG in 108 20

4 Claims on other ce 108 1
2,3
4,5
6
Unrated 2050
100150
100
5 Claims on BIS, I 111 0
D Claims on Multilateral Development Banks (MDBs)
1 Claims on highly 113 0
2 Claims on other 112 1
2,3
4,5
6
Unrated 2050
100150
100
E Claims on Banks
1 Claims on banks 124 1
2, 3
4,5
6
Unrated 20
50
100
150
50
 2 Claims on banks wi 125 1,2,3
4,5
6 2050
150
Unrated 20
I Claims on Other Financial Institutions
Claims on SDIs re 126 70
Claims on microfi 127 100
Risk add-on for c 128 20

Assets Type Ref ERG RW (%)

F Claims on Central Government Public Sector Entities (PSEs)
Claims on domesti116b 20
Claims on domesti116c 1
2,3
4,5
6
Unrated 20
50
100
150
100
G Claims on Non-Central government Public Sector Entities (PSEs)
Claims on PSEs tha 118 50
Claims on domesti 119 100
Risk add-on for c 120 20
H Claims on Foreign PSEs
Claims on foreign 121 RW that applies to the sovereign
Claims on foreign 122 ECAI for sovereign
Claims on foreign 123 ECAI for sovereign +20%

Assets Type Ref RW (%)

J Claims on Non-Retail Lending
Claims on corpora 139 100
Claim on SMEs 140 100
Risk add-on for c 139-40 20
L Claims Retail
Claims on qualifyi 129 75
Risk add-on for c 131 20
M Claims secured by residential property
Qualifying residen 132 35
A non-qualifying r 133 100
Risk add-on for c 134 20
 Assets Type Ref RW (%)
N Claims Secured by Commercial Real Estate
Claims secured by 136 100
Claims secured by n 137 150
development of property for sale.
Risk add-on for c 138 20
O Past Due Claims
Unsecured loans for any claim past due for 90 days or more, which are classified as below with provisions sp
i. Loss without full provisions
ii. Substandard iii. Doubtful
iv. Loss with full provisions
143

150
150
100
0
Loans fully secured by residential mortgage past due for 90 days or more which are classified as below with p
vii. Loss with full provisions
145

100
50
0
Other claims on higher risk categories past due for 90 days or more as below
i. No provision made
ii. Claims on sovereigns, PSEs, banks & securities firms not local to
Ghana rated below B- iii. Claims on qualifying mortgages for commercial real estate iv. Claims on non-qualifying mortgages for
146

150
150150
200
Risk add-on for c 142 20
P Other Assets
Premises, real est 149 100
Any other assets 149 100

Table 2B - Credit Conversion Factors (CCFs) for Off-balance Sheet Exposures

S/N Instrument CCF (%)
A. Commitments
Undrawn commitment 0
 Undrawn commitment 20
Undrawn commitmen 50
Commitment with Certain Draw-down
Any credit facility 100
Risk add-on for c 20
B. Direct Credit Substitutes
General guarantees of indebtedness including:
i. Acceptances and endorsements (including per aval endorsements).
ii. Guarantees and Indemnities.
iii. Commercial letters 100
Risk add-on for c 20
C. Performance-Related Contingent Items
Performance-relate 50
Note-issuance Faci 50
Trade-related conti 20
Risk add-on for c 20
D. Sale and Repurchase Agreements (Repos)
Loans or other as 100
Sale and repurchase agreements and asset sales with recourse
Lending of banks’ securities or the posting of securities as collateral
Risk add-on for c 20
E. Market Related Off-balance Sheet Transactions
Forward Asset Pu 100
Placements of Forward Deposits
Partly-paid Shares and Securities
Risk add-on for c 20
F. Market Related Off-balance Sheet Transactions
Risk add-on for c 20

Determination of CCF
Commitments for off-balance sheet transactions
A distinction is made between a commitment to provide an off-balance sheet facility that may or may not be drawn by the custo

For example:
A 15-month commitment to provide a contingent facility secured with the underlying shipment, which may or may not be drawn

Similarly, a 12-month commitment to provide a direct credit substitute facility where draw-down is uncertain, it shall receive a CC

However, a commitment to provide a trade-related contingent item, where it is certain that the facility would be utilized at some

And, a commitment to issue a guarantee (a direct credit substitute) at a given future date with a sure utilization of the facility wil
 20

50

20

100
ANNEX 2D – Examples of Public Sector Entities (PSEs)

PSE (Institutions)
Social Security and National Insurance Trust
Volta River Authority
Ghana Cocoa Board (Cocobod)
Council for Scientific and Industrial Research PSE (Enterprises)
Tema Oil Refinery (TOR)
Ghana Water Company
Electricity Company of Ghana (ECG)
Ghana Ports and Harbours Authority
Produce Buying Company (PBC)

PART 3 MANAGEMENT AND MEASUREMENT OF OPERATIONAL RISK

281 This part sets out the methodology for determining the operational risk charge a bank must hold in its regulato
282 Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems
283 Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supe
Principles for Operational Risk Management
284 The Board, as the author and driver of the bank’s corporate culture in operational risk, is responsible to demo
285 For this purpose, a Board must establish a systematic Operational Risk Management Framework (ORMF) tha
286 The ORMF should cover the whole of business operations and support structures and at a minimum include:
a. Board’s strategy and appetite for managing operational risks and, if a separate risk area, information technolo
b. all operational risk policies necessary for organisation functionality and resources in business lines, risk owne
c. the methodology and formal review process for operational risk assessment and management, including guid
affecting other risk areas;
d. operational procedures for identifying and classifying types of operational risk events covering losses and/or n
e. reporting of operational risk profile to management and to the Board, which would include, as appropriate, up
f. a strategy for managing the risks of, and quality of outcomes for, all identified material outsourced contracts a
Measurement of Operational Risk
Standardised Approach
287 Banks are required to apply the Standardised Approach (SA) to calculate operational risk capital charge.
288 In the event a bank is not satisfying the minimum standards for operational risk management, BOG may incre
289 Banks are required to divide their activities into eight business lines, namely corporate finance, trading & sale
290 Annex to Part 3 Tables 3A and 3B provide definitions of the business lines, and an example of the type of app
291 The SA applies the gross income from each business line as the indicator or proxy for the scale of business o
292 Banks are required to book income earned or derived from its activities separately, by the respective business
Principles for Mapping Business Lines
293. Mapping of activities into the business lines must be consistent and documented. It should be objective, verifiable and rep
a. All activities of the bank must be mapped into the eight business lines, in a mutually exclusive manner, (i.e. ac
b. Any banking or non-banking activity which cannot be readily mapped into the business line framework, but wh
c. Where an activity can equally be mapped into more than one (1) business lines, it shall be mapped into the bu
d. Banks may use internal pricing methods to allocate gross income between business lines provided that total g
e. The mapping of activities into business lines for operational risk capital purposes must be consistent with the
f. The mapping process used must be clear and documented. Definitions of business lines must be clear and de
g. Processes must be in place to define the mapping of any new activities or products.
h. Senior management shall be responsible for the mapping policy (which is subject to the approval by the Boar
i. Mapping process must be subject to independent review regularly from the internal audit function, and/or by a
Calculation of Capital Requirement
294 The capital charge for operational risk shall be calculated as follows:
a. The capital charge for each business line is calculated by multiplying gross income by a factor (denoted beta)
b. Gross income is that attributed to the business line, not the whole institution, i.e. for commercial banking the in
c. Beta (β) is a fixed percentage relating the level of required capital to the level of the gross income for each of
d. The capital charge for the operational risk KOP, for a business line j, for each year shall be calculated as:
KOPj #ERROR! AGIj * βj
Where,
AGIj #ERROR! Annual gross income for business line j.
βj = The β for a business line j.
295 The β for the respective business lines are as follows:
Business Line Beta Beta Factors
Corporate financeβ1 18%
Trading and salesβ2 18%
Retail banking β3 12%
Commercial bankiβ4 15%
Payment and settβ5 18%
Agency services β6 15%
Assets managemeβ7 12%
Retail brokerage β8 12%
296 The operational risk capital charge for all the business lines, for a given year (KnOP) is calculated as the simp
297 In any given year, negative capital charges (resulting from negative gross income) in any business line may o
298 Hence the operational risk capital charge for all the business lines, for any given year (KnOP) will be the maxi
  8 
KnOP  maxGI j *j ,0 (for j = 1 to 8)
 j1  
299 The total capital charge for operational risk (KtOP) using the SA may be expressed as:
3
 KnOP
KtOP  n1
3
(for n = 1 to 3, or as applicable per paragraph 298)
300 Newly incorporated banks using the SA having fewer than 3 years of audited gross income data shall calculat
Material Changes in the Business
301 When a bank makes a material acquisition, the operational risk capital calculation should be adjusted to reflec
302 For banks using the SA, the gross income from the most recent year for the acquired business must be mapp
303 When an institution makes a divestiture, the gross income calculation may be adjusted, with supervisory appr
Definitions
304. Definitions that apply to this part and examples of activities for business lines is set out in Annex to Part 3 Table 3A.
a. Legal (including regulatory) risk is the risk arising from an institution‟s nonconformance with laws, rules, regul
b. Corporate Finance is all activities relating to assisting clients to raise funds in the capital markets and advising
The activities are classified into four (4) broad categories namely:
 Public Finance (i.e. Government / Municipal Finance);
 Corporate Finance (i.e. activities relating to investment, i.e. resource allocation and financing decisions);
 Merchant Banking (i.e. fee-based business, where the bank originates commercial loans and then sells them
 Advisory Services (i.e. a fee-based business where the bank advises clients on mergers and acquisitions, und
c. Trading and Sales is any activity that relates to the trading books of a bank. That is separate accounts manag
The activities fall into four (4) broad categories namely:
 Sales (as stated above),
 Market making (i.e. where banks quote both a buy (bid) and a sell (offer/ask) price in a financial instrument or
 Proprietary positions (i.e. bulk purchase of stocks, bonds, options, commodities or other items with the bank‟s
 Treasury (buying (i.e. borrowing funds) for sale (i.e. lending) with the aim of making profit from the margin).
d. Retail Banking refers to banking transactions directly with consumers, rather than corporations, SMEs or othe
The activities are classified into three (3) broad categories namely:
 Retail Banking (i.e. Personal Banking),
 Private Banking (i.e. personalised financial and banking services offered to a bank's rich or high net worth ind
 Card services for retail clients
e. Commercial Banking refers to activities of the bank that mostly involve transactions from corporations or large
f. Payment and Settlement is a fees/commission based business involving the transfer of funds or financial asse
g. Agency Services refers to services undertaken for or on behalf of corporate and government entities.
The activities are classified into three (3) broad categories namely:
 Custody or safekeeping of funds (e.g. pension fund custody services) and other valuables,
 Corporate Agency (i.e. banking services performed on an agency basis for corporations and government entit
 Corporate Trust (i.e. the business activity of banks where investors lending to a company appoint the bank, kn
h. Asset Management refers to the bank‟s activities which relate to:
 The management of a client's investments, where the bank invests on behalf of its clients and gives them acc
 A product which offers an all-inclusive account, which combines checking service, credit card, debit card, mar
 Bank‟s subsidiaries that undertake management of pension funds, investment funds, securities and hedge fu
The activities are classified into two (2) broad categories namely:
 Discretionary Funds Management (i.e. where the bank has the authority to buy and sell without obtaining prio
 Non-Discretionary Funds Management.
i. Retail Brokerage refers to all brokerage activities which cater for the average investor or the retail sector of in
j. Gross Income is the net interest income plus all provisions made for interest payments (i.e. all unpaid interest

APPENDIX TO PART 3 - OPERATIONAL RISK

Table 3A - Mapping of Business Lines
Level 1 Beta Level 2 Activity Groups
1 Corporate Financ 18% Corporate Finance
Mergers and acquisitions, underwriting, privatisations,
securitization, research, debt (government, high yield), equity,
syndications, IPO, secondary private placements.

Government/Municipal Finance
Merchant Banking
Advisory Services
2 Trading & Sales 18% Sales
Fixed income trades, equity, foreign exchanges, commodities, credit, funding, own position securities, lending and repos, broke

Market Making
Proprietary Positions
Treasury
3 Retail Banking 12% Personal (or RetaiRetail lending and deposits, banking services, trust and
Private Ban king Private lending and deposits, banking services, trust and
Card Services Merchant/commerc
cards, private labels and retail.
4 Commercial Bank 15% Commercial BankProject finance, real estate, export finance, trade finance
5 Payment and
Settlement 18% External Clients Payments and collections, funds transfer, clearing and settlement (for who
6 Agency Services 15% Custody Escrow, depository receipts, securities lending (custome
Corporate AgencyIssuer and paying agents.
Corporate Trust Acting in a fiduciary capacity for third parties.
7 Assets
Management 12% Discretionary Funds
Management Pooled, segregated, retail, institutional, closed, open, private equity.
Non-Discretionar Pooled, segregated, retail, institutional, closed, open.
8 Retail Brokerage 12% Retail Brokerage Execution and full service.

Annex 3B - Gross Income Mapping

Example: Mapping gross income to eight business lines:
Gross income for retail banking consists of:
• Net interest income on loans and advances to retail customers (individual loans), plus
• Net Fees (and commission) related to traditional retail activities plus
• Net income from swaps and derivatives held to hedge the retail banking book, and
• Income on purchased retail receivables.
• Other Income (including Dividend Income)
To calculate net interest income for retail banking:
A bank takes:
• The gross interest earned on its loans and advances to retail customers less
• The weighted average cost of funding of the loans (from whatever source ─ retail or other deposits).
Similarly, gross income for commercial banking consists of:
• Net interest income on loans and advances to corporates, and SMEs, interbank and sovereign customers and
• Income on purchased corporate receivables,
• Fees related to traditional commercial banking activities including commitments, guarantees, bills of exchange
• Net income (e.g. from coupons and dividends) on securities held in the banking book, i.e. investment in gover
• Profits/losses on swaps and derivatives held to hedge the commercial banking book.
To calculate net interest income for commercial banking:
• Interest earned on loans and advances to corporate, interbank and sovereign customers less:
• Weighted average cost of funding for these loans (from whatever source).
For trading and sales, gross income consists of:
• The profits/losses on instruments held for trading purposes (i.e. in the mark-to-market book), net of funding co
• Fees from wholesale broking.
For the other five business lines, gross income consists primarily of the:
• Net fees/commissions earned in each of these businesses.
Payment and settlement may include:
• Fees to cover provision of payment/settlement facilities for wholesale counterparties.

Annex 3C - Detailed Loss Event Type Classification

Event-Type Catego
Definition Categories (LevelActivity Examples (Level 3)
Internal Fraud Losses due to actsUnauthorized ActivTransactions not reported (intentional)
Transaction type unauthorized (w/monetary loss) Mismarking of position (intentional)
Theft and Fraud Fraud / credit fraud / worthless deposits
Theft / extortion / embezzlement / robbery
Misappropriation of assets
Malicious destruction of assets
Forgery
Check kiting
Smuggling
Account take-over / impersonation / etc.
Tax non-compliance / evasion (wilful) Bribes / kickbacks
Insider trading (not on firm‟s account)
External Fraud Losses due to actsTheft and Fraud Theft/Robbery
Forgery
Check kiting
Systems Security Hacking damage
Theft of information (w/monetary loss)
Employment PractLosses arising froEmployee RelatioCompensation, benefit, termination issues Organized labour activity
Safe EnvironmentGeneral liability (slip and fall, etc.)
Employee health & safety rules events Workers compensation
Diversity and DiscAll discrimination types
Clients, Products Losses arising from
Suitability, Disclo Fiduciary breaches / guideline violations
Suitability / disclosure issues (KYC, etc.)
Retail customer disclosure violations
Breach of privacy

Event-Type Catego
Definition Categories (LevelActivity Examples (Level 3)
suitability requirements), or from th Aggressive sales
Account churning
Misuse of confidential information
Lender liability
Improper BusinessAntitrust
Improper trade / market practices Market manipulation
Insider trading (on firm‟s account)
Unlicensed activity
Money laundering
Product Flaws Product defects (unauthorized, etc.) Model errors
Selection, SponsoFailure to investigate client per guidelines Exceeding client exposure limits
Advisory Activity Disputes over performance of advisory activities
Damage to PhysicLosses arising froDisasters and OthNatural disaster losses
Human losses from external sources (terrorism, vandalism)
Business Disrupti Losses arising froSystems Hardware
Software
Telecommunications
Utility outage / disruptions
Execution, Deliv Losses from failed transaction processing or process management,
from relations with trade counterparties and vendors
Transaction Capture,
Execution, and M Miscommunication
Data entry, maintenance or loading error
Missed deadline or responsibility
Model / system mis-operation
Accounting error / entity attribution error
Other task mis-performance
Delivery failure
Collateral management failure
Reference Data Maintenance

Event-Type Catego
Definition Categories (LevelActivity Examples (Level 3)
Monitoring and ReFailed mandatory reporting obligation
Inaccurate external report (loss incurred)
Customer Intake Client permissions / disclaimers missing Legal documents missing / incom
Customer/Client Unapproved access given to accounts
Incorrect client records (loss incurred)
Negligent loss or damage of client assets
Trade CounterpartNon-client counterparty misperformance
Miscellaneous non-client counterparty disputes
Vendors and SuppOutsourcing
Vendor disputes

PART 4 MANAGEMENT AND MEASUREMENT OF MARKET RISK

305 Participants in the banking system will continue to promote and develop trading activities for the banking indu
306 Market risk is the exposure to losses arising from movements in market prices in respect of on and/or off-bala
307 Market risk positions subject to capital charge include risks pertaining to:
a. interest rate related instruments and equities in the trading book; and
b. foreign exchange risk and commodity risk throughout the bank.
308 Capital charges for interest rate and equity instruments apply to all positions in the trading book.
309 Capital charges for foreign exchange risk and commodity risk apply to all foreign currency and commodity pos
310 Banks shall apply the Standardised Method (SM) to measure market risk for risk based capital requirements.
Principles for Market Risk Management
311 The Board of a bank is the author and driver of the bank‟s corporate culture including its risk management pra
312 The Board must state in its annual Strategic Plan the scope and objectives of its market risk business. It is a p
313 A bank must submit its MRF, as described below including the market risk strategy and trading policy, for revie
314 A MRF should cover all relevant market risk activities and controls relating to:
a. Board‟s strategy and appetite for market risk as defined by the CRD;
b. all market risk policies for business organisation, its functionality and resources, risk ownership, delineation of
c. the principles and qualitative criteria, operational procedures and systems for consistent and reliable use of fa
d. the principles, qualitative criteria and procedures for designating securities in the trading book or the banking
e. the reporting of market risk activities to Management and to the Board; and
f. any other material services to support market risk business such as information technology and HR support.
Qualifying Criteria for Market Risk Business
315 Banks should have a prudential valuation framework to value all trading book positions and specifically less liq
a. Systems and controls
b. Valuation methodologies
c. Independent price verification
d. Valuation adjustments
316 Adequate systems and controls are necessary for valuation estimates that are prudent and reliable. Systems
a. Documented policies and procedures for valuation, including clearly defined functional roles, sources of mark
b. Clear and independent (i.e. independent of front office) reporting lines for the department accountable for the
317 Valuation methodologies may be either marking to market or marking to model.
318 Marking-to-market is at least the daily valuation of positions at readily available closeout prices that are sourc
319 Marking to model may be acceptable if marking-to-market is not possible and where the outcomes can be dem
a. Senior management should be aware of the elements of the trading book which are subject to mark to model
b. Market inputs should be sourced, to the extent possible, in line with market prices. The appropriateness of the
c. Where available, generally accepted valuation methodologies for particular products should be used to the ex
d. Where the model is developed by the bank itself, it should be based on appropriate assumptions, which have
e. There should be formal change control procedures in place and a secure copy of the model should be held an
f. Risk management should be aware of weaknesses in the models used and how best to reflect those in the va
g. The model should be subject to periodic review to determine the accuracy of its performance (e.g. assessing
h. Valuation adjustments should be made as appropriate, for example, to cover the uncertainty of the model valu
320 Independent price verification is distinct from daily mark-to-market. It is the process by which market prices or
321 Independent price verification entails a higher standard of accuracy in that the market prices or model inputs a
322 For independent price verification, where pricing sources are more subjective, e.g. only one available broker q
323 Banks must establish and maintain procedures for the valuation adjustments which should be deducted from
324 In addition, banks shall consider the need for establishing an appropriate adjustment of less liquid positions. T
Classification of financial instruments
325 Banks must classify financial instruments into either the trading book or banking book.
326 Banks must have a trading book policy statement with clearly defined policies and procedures for determining
a. A bank shall use fair value positions, based on marked-to-market or marked-tomodel methodology, to calculat
b. Activities banks consider as trading and what constitute part of the trading book for regulatory capital purpose
c. The extent to which an exposure can be marked-to-market daily by reference to an active, liquid two-way mar
d. For exposures that are marked-to-model, the extent to which the bank can:
i. identify the material risks of the exposure;
ii. hedge the material risks of the exposure and the extent to which hedging instruments would have an active, li
iii. derive reliable estimates for the key assumptions and parameters used in the model.
e. The extent to which the bank can and is required to generate valuations for exposure that can be validated ex
f. The extent to which legal restrictions or other operational requirements would impede bank‟s ability to affect a
g. The extent to which the bank is required to, and can actively risk manage the exposure within its trading oper
h. The extent to which the bank may transfer risk or exposures between the banking and the trading books and
327 These criteria should address the risk management capabilities and practices of the banks. In addition, comp
Definition of Trading Book
328 A trading book consists of positions in financial instruments and commodities held either with trading intent or
 329 Positions held with trading intent are those held intentionally for short-term resale, and/or with the intent of be
330 Eligibility criteria for positions to receive trading book capital treatment shall include the following:
a. Clearly documented overall trading strategy for positions/portfolios contained within the trading book as appro
b. Clearly defined policies and procedures for active management of the positions, which must include requirem
i. management of posi
setting and monitoring of position limits to ensure their appropriateness;
iii. dealers to be given the autonomy to enter into/manage the position within agreed limits and per the agreed st
iv. marking-to-market of positions at least daily and when marking-to-model, relevant parameters (for example vo
v. reporting of positions to senior management as an integral part of the bank‟s risk management process; and
vi. actively monitoring of positions with references to market information sources (assessment should be made o
hedge positions or the portfolio risk profiles). This would include assessing the quality and availability of market inputs to the va
c. Clearly defined policies and procedures to monitor the positions against the bank‟s trading strategy including
331 All other exposures that are not defined as trading book positions should be classified as exposures in the ba
Boundary Restrictions
332. A bank must not reclassify an instrument between the trading book and the banking book after initial designation without th
a. Switching instruments between the banking book and the trading book for regulatory arbitrage is strictly prohi
b. Switching should be rare and will only be allowed by BOG in extraordinary circumstances such as a change in
c. Without exception, a capital benefit as a result of the switching between books is not permitted. Banks must d
d. Market events, change in the liquidity of a financial instrument or change in trading intend alone are NOT to b
e. Any re-designation between the banking book and the trading book must be approved by senior managemen
f. Banks must adopt relevant policies that must be updated at least once a year. The updated policies should in
Definition of Trading Desk
333 A trading desk is a group of traders or trading accounts that implements a well-defined business strategy and
334 Banks are required to define their trading desk which would be subject to regulatory approval (BOG). Key attr
a. A clear reporting line to senior management and a clear formal compensation policy linked to its pre-establish
b. A well-defined and documented business strategy, including annual budget and regular management informa
c. A clear risk management structure which must include clearly defined trading limits based on the business str
335 A bank is required to prepare, evaluate and made available to BOG, the following in respect of its trading des
a. Inventory ageing reports
b. Daily limit reports including exposures, limit breaches and follow-up action
c. Reports on intraday limits and respective utilization and breaches for banks with active intraday trading
d. Reports on the assessment of market liquidity
Counterparty Credit Risk in the Trading Book
336 A counterparty credit risk (CCR) charge applies to OTC derivatives, repo-style and other transactions in the tr
337 The treatment of CCR exposures in the banking book under the SA will apply to trading book exposures.
338 All trading book instruments for repo-style transactions may be used as eligible collateral. Instruments not with
339 The treatment of collateralized OTC derivative transactions in the banking book will apply to the trading book.
a. Factors do not vary for residual maturity.
b. “Qualifying” is the same qualifying category as defined for specific risk.
c. The protection seller of a credit default swap shall only be subject to the add-on factor where it is subject to cl
while the underlying counterparty is still solvent. Add-on should then be capped by unpaid premiums.
d. Where the credit derivative is a first to default transaction, the add-on will be determined by the lowest credit q
Protection Buyer Protection Seller
Total Return Swap
“Qualifying” refer 5% 5%
“Non-qualifying” r 10% 10%
Credit Default Swap
“Qualifying” refer 5% 5% **
“Non-qualifying” r 10% 10% **
Measurement of Market Risk
A. Interest Rate Instruments
340 Interest rate risk is the exposure to adverse movements in interest rates.
341 The instruments covered include all fixed and floating rated securities and instruments that behave like them,
342 The SM applies a “building-block” approach to separately calculate the specific and general market risk arisin
343 The interest rate risk capital charge is the aggregate of:
a. Specific „issuer‟ risk for each instrument (short and long); and
b. General market risk of the portfolio - long and short positions in different securities or instruments may be offs
The use of offsetting varies for general market risk charges and specific risk charges.
Specific Risk
344 Specific risk capital charge provides for an adverse movement in the price of a security due to issuer specific
345 Absolute exposure is multiplied by the risk factors in the table below reflecting characteristics of the obligor an
346 Offsetting is only permitted in specific risk charges for matched positions in identical issue (including positions
Table: Specific Risk Charges for Issuer Risk
Issuer Category ERG (para 105) / Risk Factor (%) Res Term to Maturity
Government / BOG
securities
(Local currency)
Government / BOG Securities (Forei 0

0.25
Foreign Government
Securities 1 / AAA to AA- 0
2,3/ A+ to BBB- 0.25
1
1.6 ≤ 6 months 6 ≤ 24 months >24 months
4,5 / BB+ to B- 8
6 / Below B 12
Unrated 8
Qualifying * PSE with Full Gov‟t Guarantee (Domestic Currency).
PSE with Full Gov‟t Guarantee (Foreign currency).

0.25
PSEs without Gov‟t
Guarantee, MDBs,1 / AAA to AA-
2,3 / A+ to BBB- 0.25 1.00
1.6 ≤ 6 months 6 ≤ 24 months >24 months
Other
4,5 / BB+ to B- 8
6 / Below B 12
Unrated 8
347 Governments includes all forms of government paper including, but not limited to:
a. Bonds;
b. Treasury bills,
c. Other short-term instruments,
d. Debt securities issued by, fully guaranteed by, or fully collateralized by securities issued by the Government o
348 Foreign sovereign securities in the currency of the sovereign are linked to external credit rating of the sovereig
349 Qualifying securities includes debt securities issued by quasi-sovereigns or PSEs (e.g.
regional governments, Municipal, Metropolitan and District Assemblies (MMDAs), and MDBs, plus other securities (corporate) th
a. rated investment grade by at least two ECAIs recognised by BOG; or
b. rated investment-grade by one ECAI and not less than investment-grade by any other ECAI both recognised
c. subject to the approval of BOG, an unrated security deemed to be comparable investment quality by the repo
d. an unrated security but deemed to be of comparable investment quality by BOG.
350 BOG may include within the qualifying category debt securities issued by securities firms deemed to be equiv
351 Other includes all securities issued by parties other than approved governments and multi-national developme
352 Unrated securities may be included in the qualifying category when they are subject to supervisory approval,
353 Non-qualifying securities receives the same specific risk charge as a non-investment grade corporate borrowe
Specific Risk Charges – Credit Derivatives
354 Specific risk charges apply to interest rate positions hedged by credit derivatives subject to the matching of th
355 A full offset is recognised when the values of two legs (i.e. long and short) always move in the opposite directi
a. The two legs consist of completely identical instruments, or
b. A long cash position is hedged by a total rate of return swap (vice versa) and there is an exact match between
In such cases, neither side of the position attracts a specific risk capital charge.
356 An 80% offset of specific risk capital charge applies to the credit derivative contract against the underlying ins
To be eligible for offsetting by 80%, the following conditions must be satisfied:
a. A long cash position is effectively hedged by a credit default swap or credit linked note (or vice versa) and the
i. the reference asset and the underlying instrument (i.e. the cash position);
ii. the maturities of both the reference asset and the underlying instrument; and iii. the currencies of the two offs
b. The key features of the credit derivative contracts (e.g. credit event definitions, settlement mechanism) do not
c. The credit default swap or the credit linked notes transfers credit risk effectively taking account of any restricti
If the above conditions are satisfied, and the transaction effectively transfers risk, an 80% specific risk offset applies to the posit
357 A partial offset will be recognised if the values of the two legs (similar but not identical) usually move in oppos
a. The position is described as in paragraph 356b, but there is an asset mismatch between the reference obliga
b. The position is described as in paragraph 356a or 357, but there is a currency or maturity mismatch between
c. The position is described in paragraph 357, but there is an asset mismatch between the cash position and the
Where the above conditions are satisfied, the specific risk charge for the side of the transaction with the higher charge (higher s
General Market Risk
 358 General market risk is the risk of loss from adverse movements in market interest rates (i.e. not issuer specific
359 General market risk must be calculated by one of two methods: maturity method and a duration method.
360 When a bank selects a method, it must be consistently applied to all exposures and it is not permitted to be sw
a. net short or long positions in the whole trading book;
b. a small proportion of matched positions in each time band (vertical disallowance);
c. a larger proportion of matched positions across different time-bands (the horizontal disallowance); and
d. a net charge for positions in options, where applicable.
361 Any currency where business is material requires a capital charge using a maturity ladder and aggregated wit
362 If business in a currency is not material, a single maturity ladder is used to slot the net currency positions by m
Maturity Ladder Method
363 Long and short positions in debt securities and other sources of interest rate exposures including derivative in
364 Fixed rate instruments should be allocated by residual maturity and floating rate instruments by term to next r
365 Opposite positions of the same amount in the same issues (but not different issues by the same issuer), in ter
a. Less than one month hence: same day;
b. Between one month and one year hence: within seven days
c. Over one year hence: within thirty days.
Example - calculation of General Market Risk
366. Positions are assigned to time-bands and weighted by factors in the table below to reflect the price sensitivity of the positio
Maturity method: time-bands and weights
Coupon 3% or moCoupon less thanRisk weight Assumed
changes in yield
1 month or less 1 month or less 0.00% 1
1 to 3 months 1 to 3 months 0.20% 1
3 to 6 months 3 to 6 months 0.40% 1
6 to 12 months 6 to 12 months 0.70% 1

1 to 2 years 1.0 to 1.9 years 1.25% 0.9

2 to 3 years 1.9 to 2.8 years 1.75% 0.8
3 to 4 years 2.8 to 3.6 years 2.25% 0.75

4 to 5 years 3.6 to 4.3 years 2.75% 0.75

5 to 7 years 4.3 to 5.7 years 3.25% 0.7
7 to 10 years 5.7 to 7.3 years 3.75% 0.65
10 to 15 years 7.3 to 9.3 years 4.50% 0.6
15 to 20 years 9.3 to 10.6 years 5.25% 0.6
Over 20 years 10.6 to 12 years 6.00% 0.6
12.0 to 20 years 8.00% 0.6
Over 20 years 12.50%
Step 2:
367 Offset the weighted long and short positions in each time band to determine a short or long position in each b
For example:
Total Long Position = GH¢100million
Total Short Position = GH¢90 million
Thus, matched position of GH¢90 million
Vertical allowance = GH¢9 million = 10% of GH¢90 million.
Step 3:
368 The above calculation generates two sets of weighted positions, the net long or short positions in each time-b
369 Banks will be allowed to conduct two rounds of “horizontal offsetting” first between the net positions in each o
370 Offsetting is subject to a scale of disallowance charge as a fraction of the matched positions and set out in the
Horizontal disallowances
Zones Time-band Within zone Between adjacentBetween zones 1 and 3
Zone 1 month 1-3 months
3-6 months
6-12 months 40%

40%

40%

100%
Zone 2 1-2 years
2-3 years
3-4 years
4-5 years 30%
Zone 3 5-7 years
7-10 years
10-15 years
15-20 years
Over 20 years 30%
See Appendix to Part 4, Table 4A: Maturity Ladder Approach
Duration Method
371 Duration method calculates the price sensitivity of each position as follows.
a. Calculate the price sensitivity of an instrument for a change in interest rates between 0.6 and 1.0 percentage
b. Slot the resulting sensitivity measures into a duration-based ladder with fifteen time-bands set out in the table
c. Subject long and short positions in each time band to a 5% vertical disallowance designed to capture basis ris
d. Carry forward the net positions in each time-band for horizontal offsetting subject to the disallowances set out
Duration: time-bands and assumed changes in yield
Zone Assumed change in yield
Zone 1
1 month or less
1 month to 3 months
3 months to 6 months
6 months to 12 months
1.00 1.00 1.00
1
Zone 2
to 1.9 years 1.9 to 2.8 years
2.8 to 3.6 years
0.90 0.80
0.75
Zone 3
3.6 to 4.3 years
4.3 to 5.7 years
0.75
0.7
5.7 to 7.3 years
7.3 to 9.3 years
9.3 to 10.6 years
10.6 to 12 years 12 to 20 years
Over 20 years 0.65 0.60 0.60 0.60 0.60
0.6
e. In the case of residual currencies (i.e. where business is insignificant), the gross positions in each time band will be subject to
See Appendix to Part 4, Table 4B: Duration Based Method
Interest Rate Derivatives
372 Capital charges apply to all interest rate derivative and off-balance-sheet instruments in the trading book that
a. FRAs;
b. other forward contracts;
c. bonds, futures, interest rate and cross-currency swaps and foreign exchange positions.
373 Derivative positions should be treated as an exposure to the underlying instrument and apply specific and gen
Futures and Forward contracts.
374 Futures and forward contracts including FRAs are treated as a combination of a long and short position in a n
Swaps
375 Swaps are in effect treated as two notional positions in government securities with relevant maturities. For ins
376 For swaps that pay or receive a fixed or floating interest rate against some other reference price, e.g. stock in
cross currency swaps are to be reported in the relevant maturity ladders for the currencies concerned.
Capital charge for derivatives under Standard Method
Available offsetting of matched positions
377 Banks may exclude matched interest rate instruments where they are identical in every characteristic (i.e. sam
378 A matched position in a future or forward and its corresponding underlying may also be fully offset and thus ex
379 When the future or the forward comprises a range of deliverable instruments offsetting of positions in the futur
380 No offsetting will be allowed between positions of different currencies; the separate legs of cross currency sw
 381 Opposite positions in the same category of instruments can in certain circumstances be regarded as matched
a. For futures: offsetting positions in the notional or underlying instruments to which the futures contract relates m
b. For swaps and FRAs: the reference rate must be identical and the coupon closely matched (i.e. within 15 bas
c. For swaps, FRAs and forwards: the next interest fixing date or, the fixed coupon positions or forwards, the res
i. Less than one mon
Between one month
Over one year hence: within thirty days.
382 Banks with large swap books may use alternative formulae for these swaps to calculate the positions to be in
a. Convert the payments under the swap into present values. Each payment should then be discounted using ze
present value of the cash flows in time bands using procedures that apply to zero coupon bonds as per the framework.
b. Calculate the sensitivity of the net present value (NPV) implied by the change in yield used in the maturity or d
383 Other methods which produce similar results could also be employed by banks provided:
a. BOG is satisfied with the accuracy of the system being used;
b. The positions calculated fully reflect the sensitivity of the cash flows to interest rate changes and time bands
c. The positions are denominated in the same currency.
Specific Risk – Interest Rate Derivatives
384. Interest rate and currency swaps, FRAs, forward foreign exchange contracts and interest rate futures will not be subject to
General Market Risk
385. General market risk is calculated on positions in all derivative products in the same manner as cash positions, subject only
Summary of treatment of interest rate derivatives
Instrument Specific risk char General market risk charge
Exchange-traded future
Government debt security
Corporate debt security
- Index on interest rate (LIBOR)
Yes
Yes
No
Yes, as two positions
Yes, as two positions
Yes, as two positions
OTC forward
Government debt security
Corporate debt security
Index on interest rates
FRAs, Swaps
- Forward foreign exchange
Yes
Yes
No
No
No
Yes, as two positions
Yes, as two positions
Yes, as two positions
Yes, as two positions
Yes – one position per currency
Example (Maturity Method)
386 A bank has a trading portfolio (GH¢) of:
100 million (m-t-m) treasury bills, residual maturity < 1 month
200 million (m-t-m) purchased corporate bonds, residual maturity 8 year, coupon ≥ 3%, + 100 million (m-t-m) purchased bonds,
400 million (m-t-m), outright short position (sold) in m-t-m 400 million zero coupon government bonds, residual maturity 3.6 yea
200 million zero coupon bonds, residual maturity 4.4 years
300 million notional amount, Interest rate swap (IRS), residual maturity-5.8 year receiving 10-year fixed interest, paying 12 mon
100 million short position in 5-year bond index futures, residual maturity 2 months
200 million 1.5 year (residual) forward contract to receive 15-year high yield bonds with a coupon≥ 3%
Working
100 million long in the first bucket
200 million as a long position in the maturity bucket 7-10-year bucket per the row for coupons ≥ 3% and 100 million in the same
400 million short in the 2.8-3.6 year bucket according to the row for coupons < 3%
200 million short in 4.3-5.7 bucket per row for coupons < 3%
300 million long position in the bucket 5-7 year bucket per the row for coupons ≥ 3% and as a short position of 300 million in the
100 million short position with a maturity of 5 years and residual maturity of 2 months (Coupon < 3%)
200 million long, maturity 16.5-year bucket per the row for coupon ≥ 3%.
See Appendix to Part 4, Table 4C: Maturity Ladder Method (for the example above)
B. Foreign Exchange Risk
387 Foreign exchange risk covers the holding of, or taking positions in, foreign currencies and/or gold.
388 A bank will identify its positions for each currency position and the mix of long and short positions across curre
389 Net open position is the aggregate of:
a. Net spot position (i.e. all asset items less all liability items, including accrued interest in each currency);
b. Net forward position (i.e. all amounts to be received less all amounts to be paid under forward foreign exchan
c. Guarantees (and other off-balance sheet commitments) that are certain to be called and likely to be irrecovera
d. Net future income/expenses not yet accrued, and due within one year, but already fully hedged (at the discret
e. Any item representing a profit or loss in foreign currencies.
390 Composite currencies are separately reported but, for measuring banks‟ open positions, may be either treated
391 Exposures to gold, in spot or forward contracts, are aggregated and converted at current spot rates using the
392 Accrued Interest (i.e. earned but not yet received) must be included and similarly accrued expenses. Unearne
393 Forward currency and gold positions are valued at spot rate. The use of forward rates is not permitted. BOG m
Structural Positions
394 A bank may hedge its CAR using short or long positions. Any position taken to hedge partially or totally agains
a. A position is of a structural nature i.e. non-dealing;
b. BOG is satisfied that the “structural” position excluded does no more than protect the bank‟s CAR;
c. Any exclusion of the position needs to be applied consistently, with the treatment of the hedge remaining the
395 If foreign exchange positions relate to items that are deducted from capital, such as investments in non-conso
Calculation of foreign exchange risk and gold
396 Banks will apply the shorthand method to measure foreign exchange risk.
397 The net position in each foreign currency and in gold is converted at spot rates in the domestic currency. The
a. the greater of either sum of net short positions or sum of net long positions; and
b. net position (short or long) in gold regardless of sign.
Example: Shorthand measure of Foreign Exchange Risk
398 The capital charge is 10% of the higher of either the net long currency positions or the net short currency pos
YEN EUR€ GB£
50 100 150
#ERROR! 300 -200
Capital charge is 10% of the higher of either the net long currency positions or the net short currency positions (i.e. 300) and of
See Appendix to Part 4, Table 4D: Foreign Exchange Risk
C. Equity Position Risk
399 Equity position risk covers the holding of, or taking positions in, equities in the trading book.
400 Equity position risk applies to long and short positions in all instruments that exhibit market behaviour like equ
401 Long and short positions to the same issuer may be reported on a net basis. The instruments covered are ord
402 Equity derivatives, or similar, are as described under interest rates. In this light, equity derivatives and off-bala
403 Two risks are covered by capital charges for traded equity positions:
a. Specific risk from a movement in prices for an equity or derivative linked to it (credit-related risk); and
b. General market risk for price movements not related to any specific equity.
Specific Risk
404 Specific risk is charged against the gross position being the sum of all long and all short equity positions. A sp
405 Offsetting is permitted for the same equity issuer.
General Market Risk
406. General market risk is the overall net position in an equity market being the difference between all long equity positions an
Example
Equities Long Short
ADB Ordinary Sha 220
Tullow 120
Ashanti Gold 70
Cocobod 50
CAL 100
370 190
Working
For this portfolio, the gross position is GH¢560 million and the net position, GH¢180 million. The total capital charge, is GH¢74
Equity Derivatives
407. Equity derivatives and off-balance-sheet positions which are affected by changes in equity prices should be included in the
Treatment of equity derivatives
Instruments Specific risk General Market risk
Exchange-traded or
OTC-Future
Individual equity
- Index

Yes
2%
Yes, as underlying
Yes, as underlying
408 Equity derivatives positions are converted into notional equity positions to apply the specific risk and general m
a. Futures and forward contracts on individual equities are reported at current prices.
b. Futures on a stock index is the marked-to-market value of the notional underlying equity portfolio.
c. An equity swap is treated as two notional positions.
409 Matched positions in each identical equity or stock index in each market may be fully offset, resulting in a sing
Market Equity Index
410 In addition to general market risk, a 2% execution risk capital charge will apply to the net long or short position
See Appendix to Part 4, Table 4E: Equity Position Risk
D. Commodity Position Risk
411 Commodity risk covers holdings of, or taking positions in, commodities, including precious metals (except gold
412 Market prices of commodities are complex and more volatile than currencies and interest rates, and the mark
413 When trading spot or underlying asset the directional risk from a change in the spot price is the most importan
a. Basis risk (the risk that the relationship between the prices of similar commodities) alters through time.
b. Interest rate risk (the risk of a change in the cost of carry for forward positions).
c. Forward gap risk (the risk that the forward price may change for reasons other than a change in interest rates
414 In addition, banks may face CCR on OTC derivatives. The funding of commodities positions may expose a ba
415 Commodity position risk by the Standardised Approach is measured using the simplified approach or the matu
416 The simplified approach is the sum of:
a. 15% of net long or short position in each commodity (expressed in the domestic currency as per the standard
b. 3% of gross long or short position in each commodity.
Example
Purchase or Sale Maturity Value (GH¢) Value (GH¢)
Purchase Long 4 months 800 800
Sale Short 5 months 1,000 -1,000
Purchase Long 2.5 years 600 600
Sale Short 7 years 600 -600
Net Position -200
Gross Position 3,000
Working
Capital Charge = 15% * (200) + Capital Charge = 3% * 3,000 =
Total Charge will be -30 + 90 = GH¢60
See Appendix to Part 4, Table 4F: Commodity Position Risk – Simplified Approach
417 Commodity position risk by the maturity ladder approach is the net position in each commodity converted at s
418 The maturity ladder approach is similar to that used for interest rate related instruments in paragraphs 367 to
a. For each time-band, the sum of short and long positions which are matched are converted at the spot price, a
Time-bands and Spread Rates
Time-band Spread Rate
0-1 month 1.50%
1-3 months 1.50%
3-6 months 1.50%
6-12 months 1.50%
1-2 years 1.50%
2-3 years 1.50%
Over 3 years 1.50%
b. carry unmatched positions remaining to another time band where they can be matched, and matching them ti
i. a carry charge equal to the carried position multiplied by the carry rate of 0.6% and the number of time-bands by which the po
c. calculate the outright charge on the remaining positions (which will either be long position or short position) eq
d. sum the capital charge on account of spread rate, carry rate and the outright charge as determined above.
419 Example: Assume that a bank has four forward purchase and sales of aluminium with the following maturities
Purchase or Sale Maturity Value (GH¢)
Purchase 4 months 800
Sale 5 months 1,000
Purchase 2.5 years 600
Sale 7 years 600
Working
a. All positions in the same commodity are converted at current spot rates in Ghana cedi (without double countin
Time Band Position (GH¢) Capital CalculatioCapital Charge
0-1 month
1-3 months
3-6 months Long 800 Short 1 800 matched posit 12
6-12 months
1-2 years
2-3 years Long 600 200 short carried forward three (3) time bands from 3-6 months:
200 * 3 * 0.6% =
200 matched position * 1.5%

3.6
3
Over 3 years Short 600 400 long carried forward one time band from 2-3 years: 400 * 1 * 0.6% =
400 matched position * 1.5% =
Net position of 200: 200 * 15% =

2.4 6
30
b. The total capital charge will be 12 + 3.6 + 3 + 2.4 + 6 + 30 = GH¢57
See Appendix to Part 4, Table 4G: Commodity Position Risk – Maturity Ladder approach
420 Definitions
Basis risk: a change in the relationship between the prices of two similar, but not identical, instruments. For example, basis risk
Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price or as per a pr
Duration: the sensitivity of a bond‟s price (as a percentage of initial price) to a change in yield or the weighted average time to m
Financial instrument: A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial li
Financial asset: Any asset that is cash, the right to receive cash or another financial asset; or the contractual right to exchange
Financial liability: A contractual obligation to deliver cash or another financial asset or to exchange financial liabilities under cond
General market risk: the risk of a loss arising from adverse changes in market prices, for example, a change in interest rates or
Interest rate risk: the risk that changes in market interest rates might adversely affect an institution‟s financial condition.
Investment-grade: securities which are rated at or above Baa by Moody‟s Investors Services or BBB by Standard & Poor‟s Cor
Market risk: the risk of losses in on- and off-balance-sheet positions arising from movements in market prices, including interest
Matched weighted position: the smaller of the sum of the risk weighted long positions or the sum of the risk weighted short posi
Off-balance-sheet Activities: banks‟ business that does not generally involve booking assets or liabilities. Examples include trad
Regulatory capital: this arises when a position attracts a different regulatory capital requirement depending on its classification.
Specific risk: the risk that the price of a given instrument will move out of line with similar instruments, due principally to factors
Trading book: proprietary positions in financial instruments intentionally held for shortterm resale and/or taken with the intention
Long position: a position which gives or may give the institution a right or imposes or may impose an obligation on it to receive a
Short position: a position which gives or may give the institution a right or imposes or may impose an obligation on it to make a
Net position: the excess of the long over the short position in identical securities and derivatives.

Appendix to Part 4 – Market Risk. Table 4A: Maturity Ladder Approach (Interest Rate Risk - Debt Instruments)
zone 1 (in months) zone 2 (in years) zone 3 (in years)
coupon >= 3% <= 1 1-3 3-6 6-12 1-2
coupon < 3% <= 1 1-3 3-6 6-12 1-1.9
Positions
1. Long 100 200 300 400 100
2. Short -50 -100 -400 -300 -200
3. Weighted facto 0 0.2 0.4 0.7 1.25

Weighted position
4. Long 0 0.4 1.2 2.8 1.25
5. Short 0 -0.2 -1.6 -2.1 -2.5

6. Matched 0 0.2 1.2 2.1 1.25

7. Vertical disall 0.1 0.1 0.1 0.1 0.1
8. Capital requirement (6x7) 0.02 0.12 0.21 0.13

9. Remaining position (4-5) 0.2 -0.4 0.7 -1.25

10. Net total weighted long zone 0.9

11. Net total weighted short zone -0.4

12. Matched position 0.4

13. Disallowance factor 40%
14. Capital requirement (12x13) 0.16

15. Remaining position (10-11) 0.5

16. Matched between Z1 and Z2 0.5

17. Disallowance factor 40%
18. Capital requirement (16x17) 0.2
19. Remaining position Z1 and Z2
20. Matched between Z2 and Z3
21. Disallowance factor
22. Capital requirement (20x21)
23. Remaining position
24. Matched between Z2 and Z3
25. Disallowance factor
26. Capital requirement
27. Remaining position Z1 and Z3
28. Total
Appendix to Part 4, Table 4B: Duration Based Method (Interest Rate Risk - Debt Instruments)
zone 1 (in months) zone 2 (in years) zone 3 (in years)
Duration bands <= 1 1-3 3-6 6-12 1-1.9

Positions
1. Long 100 200 300 400 100
2. Short -50 -100 -200 -300 -200
3. Assumed intere 1 1 1 1 0.9
Modified duration 0 0.2 0.4 0.7 1.4

Weighted position
4. Long 0 0.4 1.2 2.8 1.26
5. Short 0 -0.2 -0.8 -2.1 -2.52

6. Matched 0 0.2 0.8 2.1 1.26

7. Vertical disall 0.05 0.05 0.05 0.05 0.05
8. Capital requirement (6x7) 0.01 0.04 0.11 0.06

9. Remaining position (4-5) 0.2 0.4 0.7 -1.26

10. Net total weighted long zone 1.3

11. Net total weighted short zone 0

12. Matched position 0

13. Disallowance factor 40%
14. Capital requirement (12x13) 0

15. Remaining position (10-11) 1.3

16. Matched between Z1 and Z2 1.3

17. Disallowance factor 40%
18. Capital requirement (16x17) 0.52
19. Remaining position Z1 and Z2
20. Matched between Z2 and Z3
21. Disallowance factor
22. Capital requirement (20x21)
23. Remaining position
24. Matched between Z2 and Z3
25. Disallowance factor
26. Capital requirement
27. Remaining position Z1 and Z3
28. Total
Appendix to Part 4, Table 4C: Maturity Ladder Method (Interest Rate Derivatives - Example)
zone 1 (in months) zone 2 (in years) zone 3 (in years)
coupon >= 3% <= 1 1-3 3-6 6-12 1-2
coupon < 3% <= 1 1-3 3-6 6-12 1-1.9
Positions
1. Long 100 200 300 400 100
2. Short -50 -100 -400 -300 -200
3. Weighted facto 0 0.2 0.4 0.7 1.25

Weighted position
4. Long 0 0.4 1.2 2.8 1.25
5. Short 0 -0.2 -1.6 -2.1 -2.5

6. Matched 0 0.2 1.2 2.1 1.25

7. Vertical disall 0.1 0.1 0.1 0.1 0.1
8. Capital requirement (6x7) 0.02 0.12 0.21 0.13

9. Remaining position (4-5) 0.2 -0.4 0.7 -1.25

10. Net total weighted long zone 0.9

11. Net total weighted short zone -0.4

12. Matched position 0.4

13. Disallowance factor 40%
14. Capital requirement (12x13) 0.16

15. Remaining position (10-11) 0.5

16. Matched between Z1 and Z2 0.5

17. Disallowance factor 40%
18. Capital requirement (16x17) 0.2
19. Remaining position Z1 and Z2
20. Matched between Z2 and Z3
21. Disallowance factor
22. Capital requirement (20x21)
23. Remaining position
24. Matched between Z2 and Z3
25. Disallowance factor
26. Capital requirement
27. Remaining position Z1 and Z3
28. Total

Appendix to Part 4, Table 4D: Foreign Exchange Risk

Item No. Position ComponeUSD GBP EUR Other

Amount Nature of PositionAmount Nature of Position
1 Net Assets
2 Liabilities on contingent Credits
3 Net Trading Position (under contracts outstanding)
4 Any Other Item representing a
Profit/Loss in Foreign Currency
5 Net Future Income/ Expense
6 Net Open Position (NOP) (1+2+3+4+5)
-

7 Cedi equivalent (in GH¢) of NOP, in currency

-

8 Exchange Rates NA NA
1
NA
1a Net Long Position
-
2b Net Short Position
-
3c Gold-Absolute Value of Open Position
-
4d Greater of Absolute Value of Net Long and Net Short Position
-
5e Total Foreign Exchange Exposure (Rows 3c+ 4d)
-
6f Total Capital Charge for FX Risk (10%)
-

Appendix to Part 4, Table 4E: Equity Position Risk

(GH¢000s)
A B C D E
Equity InstrumentGross Long Gross Short Gross Equity
Position (Col
A + B) Net Open
Position
(Col A - B) 10% Gross
Position (10% of10% Net
Position (10% of D)
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
 0 0 0
0 0 0
0 0 0
Total Equity Instr 0 0 0 0
Capital Required A 0
Capital Required 0
Total Capital Requ 0
Equity Position R 0
105

Appendix to Part 4, Table 4F: Commodity Position Risk – Simplified Approach

(GH¢000s) A B C D E
Commodity InstruGross Long Gross Short Gross Open Positio
Net Open Position15% of Net Open
Position (15% of 3% of Gross,
Open Position (3% of C)
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
Total Commodity 0 0 0 0 0
Capital Required Against Directional Risks (Total Column E)
Capital Required Against Basis, Interest Rate & Forward Gap Risks (Total Column F)
Total Capital Requirement Against Commodity Position Risk (Total of Rows: 1 + 2)
Commodity Position Risk Equivalent Assets (Total Capital Requirement * CAR Reciprocal)

107
Appendix to Part 4, Table 4G: Commodity Position Risk – Maturity Ladder approach
(GH¢000‟s)
A B
Time Band Gross Long Gross Short Carry Forward
Unmatched PositiTime Bands
Carry
Forward Matched Position Matched
Position *
1.50% Carry Forward
Unmatched
positions * No.
of Time Bands
Jump * 0.6% Outright Charge on Remaining
Position * 15% Capital Charge
0-1 Month
1-3 Months
3-6 Months
6-12 Months
1-2 Years
2-3 Years
Over 3 Years
Total Capital Requirement Against Commodities Risk
Commodities Risk Equivalent Assets (Total Capital Requirement * Reciprocal of CAR
107
 the Banks and Specialised Deposit-taking Institutions Act 2016 (Act 930) (‘the BSDI Act’) and Section 4(d) of the Bank of Ghana Act 2002 (

1) of the BSDI Act mandates the Bank of Ghana (BOG) to prescribe a risk-based capital adequacy requirement, which will be measured as

hich banks are to comply with the CRD shall be 1 January 2019. Structure

he BSDI Act. The requirements herein require banks to hold appropriate capital commensurate for unexpected losses that may arise from b
ermine both the:

m risk management standards for the risks herein.

ment is best achieved where the Board of a bank has established a transparent and robust environment where business risks are well man
risk standards under Section 29(3) of the BSDI Act.
d capital requirement, eligible regulatory capital, risk exposures or operating practices, must notify BOG and take immediate action to rectify

rb unexpected losses. A bank must protect its capital by establishing and operating to minimum risk management standards.
ncluding its risks management practices. A bank must demonstrate to BOG how its organisational behaviours and outcomes achieve minim
ulture and governs a robust process to identify and manage all risks in the business (and the wider group where relevant) - generally referre

unctional responsibilities in respect of people, systems, policies and operational procedures; and
s, monitoring and reporting of risks and activities.
sks through risk management frameworks designed for those risks and the type of business. The CRD provides explicit direction on a selec
be used with good evidence of success in managing risk and enhancing their risk practices.

agement framework (first line);

y risk management (second line); and
and of the overall functionality of the risk management framework (third line).
heir independence and their reporting responsibilities to any of the Board, Executive(s) and/or Executive Management Committees. Individu
he ‘three lines of defence’ model for any bank, nor is it accepted as a ‘fourth line of defence’.

of capital eligible in determining the risk based capital ratios.

asis for banks, and a consolidated basis to all subsidiaries of the licensed entity as per Section 31 of the BSDI Act.
ory capital satisfies, in both form and substance, all applicable requirements prescribed for the capital tier to which it is to be included. A ban
ment against the criteria for relevant tier of regulatory capital in this section.
gulatory capital requires the written approval of BOG before any change takes place.

n of BOG does not represent a genuine contribution to the financial strength of the bank; or
opinion of BOG does not fully satisfy the requirements for the category of capital to which it was originally allocated.
ulated other comprehensive income will not contribute to eligible regulatory capital. For other prudential and/or reporting purposes a bank m
ng to the use of fair values are satisfied;

s, procedures and controls covering use of fair values.

e and consolidated regulatory capital of the bank or financial holding company as indicated. Any item deducted from total capital is not inclu
mpany, a sister company, a subsidiary or any other affiliate. A holding company is a related entity irrespective of whether it forms part of the

ensure, at all times, the bank has sufficient capital above the minimum risk based capital requirement as specified by BOG.
versight of capital for the bank consistent with the Board approved strategy and risk appetite generally.
ntrols relating

ed in the CRD;
on and business lines, risk ownership, delineation of duties, the capital management process and escalation;
nual strategic and risk planning process and outcomes;
rocess (ICAAP) with the strategy and risk management plan /outcomes; and
alitative criteria, operational procedures and systems.
for capital and aligns current and future risk based capital with the budget and strategic plan. The CMP will pre-position steps the bank coul
pport the bank‟s strategic growth objectives. Banks should accordingly submit annually to BOG a 3-year rolling CMP which should be period

erations and can absorb losses as required:

o equity if a bank is wound up.

y the bank must satisfy to be included as regulatory capital for that tier. The criteria are outlined in paragraph 33 for CET1, paragraph 42 for
e of Additional Tier 1 and Tier 2 capital instruments supported by a self-assessment directly referencing how the terms and conditions satisf

fication as ordinary shares for regulatory purposes defined below;

nd held by third parties (i.e. minority interest) that meet the criteria for inclusion in CET1 capital; and

where banks need to issue non-voting ordinary shares as part of CET1 capital, they must be identical to voting ordinary shares of the issuing

ssued capital, after all senior claims have been repaid in liquidation (i.e. has an unlimited and variable claim, not a fixed or capped claim).
nary repurchases or other means of effectively reducing capital in a discretionary manner that is allowable under relevant law as well as gu
ent will be bought back, redeemed or cancelled nor do the statutory or contractual terms provide any feature which might give rise to such a
e level of distributions is not in any way tied or linked to the amount paid in at issuance and is not subject to a contractual cap (except to the

n met and payments on more senior capital instruments have been made. This means that there are no preferential distributions, including
f any losses as they occur. Within the highest quality capital, each instrument absorbs losses on a going concern basis proportionately and
iability) for determining balance sheet insolvency.

e funded the purchase of the instrument. Banks should also not grant advances against its own shares as this would be construed as indire
uer or related entity (refer paragraph 23), or subject to any other arrangement that legally or economically enhances the seniority of the clai
her given directly by the owners or, if permitted by applicable law, given by the Board of Directors or by other persons duly authorized by th
me Surplus
r. Banks may reckon the profits in the current financial year only after appropriate audit, verification or review procedures prescribed by BOG

egulatory capital for a given tier of regulatory capital where:

gulated other financial institution; and
s to be included (i.e. CET1, AT1 or Tier 2).
s all minority interests except for the surplus capital attributable to minority shareholders that is above minimum requirements for the subsid
ted subsidiary of a bank to minority shareholders may be included as that same tier of capital only if the instruments would, if issued by the
ts recognised in any higher tier of capital (i.e. CET1 if AT1 instrument, and/or both of CET1 and AT1 if Tier 2 instrument).
5 is determined separately for each given tier of capital that has instruments issued to minority interests (i.e. CET1, Tier 1/AT1 or Tier 2/ Tota
attributable to minority shareholders.
Total Capital) less the lower of:
on buffer (CCB1) as a per cent of RWAs for each capital tier outlined in paragraph 76 (i.e. CET1 plus CCB1 is 9% of RWAs); and
1, Tier 1 or Total Capital) plus CCB1 that applies to the subsidiary.
ributable to the minority shareholders is the surplus capital as a proportion of the minority shareholders‟ holding in that tier of capital.

d are not included in CET1);

parties that meet the criteria for inclusion in AT1 and are not included in CET1; and
or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors

e exercised; and iii. A bank must not exercise a call unless:

der conditions sustainable for the income capacity of the bank; or
requirements after the call option is exercised.
with prior supervisory approval and banks should not assume or create market expectations that supervisory approval will be given.

they fall due; and

nk except in relation to distributions to ordinary shareholders.

end/coupon that is reset periodically based in whole or in part on the banking organisation‟s credit standing.
al loss absorption through either (i) conversion to ordinary shares at an objective prespecified trigger point or (ii) a write-down mechanism w
payments on the instrument.
significant influence can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument.
provisions that require the issuer to compensate investors if a new instrument is issued at a lower price during a specified time frame.
ny in the consolidated group (e.g. a special purpose vehicle (SPV)), proceeds must be immediately available without limitation to an operati

pital (and are not included in Tier 1 capital);

parties that meet the criteria for inclusion in Tier 2 capital and are not included in Tier 1 capital;
closed as per IFRS may include only 50% of the revaluation reserve for plant, property and equipment; and

a for eligibility and inclusion as tier 2 regulatory capital are:

other arrangement that legally or economically enhances the seniority of the claim vis-à-vis depositors and general bank creditors

ll be amortized on a straight-line basis; and iii. there are no other incentives to redeem.

exercised; and iii. A bank must not exercise a call unless:

der conditions sustainable for the income capacity of the bank; or
requirements after the call option is exercised.
uled payments (coupon or principal), except in receivership, liquidation and other resolution procedures sanctioned by BOG.
end/coupon that is reset periodically based in whole or in part on the banking organisation‟s credit standing.
significant influence can purchase the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument
ny in the consolidated group (e.g. a special purpose vehicle (SPV)), proceeds must be immediately available without limitation to an operati
atory capital is specified.
t it applies to the same tier of capital which the investment would qualify if it was capital issued by the bank itself. If a series of investments

eady been recognised in profit and loss.

extinguished if the relevant assets become impaired or derecognised under IFRS.

djustments to profit or loss reflecting any changes arising from „impairment‟ of goodwill. Negative goodwill shall not be added back to CET1
tion and impairment. Intangible assets are as defined in IFRS and include capitalized expenses, capitalized transaction costs and mortgage
es (collectively „other financial institutions‟)
es, guarantees and other forms of capital support and investments in AT1 and T2 instruments in other financial institutions. This includes:
nking book;

of the shareholding; and

cial strength of the bank (paragraphs 52 to 56).
at controls, or is controlled by, or is under common control with, the bank. Control of a company is as defined in the BSDI Act.
providing financial assistance to reorganize a distressed institution.

d entities through the parent) must be disclosed to BOG as specified in submissions of financial data and may be deducted if they do not re
resulting from an intra-group transaction does not represent a genuine contribution to financial strength include, but are not limited to, wheth

directly, from the bank itself; or

ault clauses that would be triggered due to the bank failing to meet any servicing obligations.
ated entity such that it is considered part of the related entity‟s equity, the facility should be deducted from the bank‟s CET1.

rectly, will be deducted from CET1 (unless already derecognised under the IFRS).
must be deducted at that same tier of capital.
ould be deducted from CET1, and this would apply whether the exposure was held in the banking book or the trading book.
es, they are to be deducted from CET1. However, gross long positions in own shares resulting from holdings of index securities may be net

deducted from CET1.

TAs and DTLs relate to taxes levied by the same taxation authority and offsetting is permitted by the relevant taxation authority. For the avo
nst the deduction of goodwill, intangibles and defined benefit pension assets.
ted with other DTAs and are deducted directly from CET1.
y forward of unused tax losses, or unused tax credits, are to be deducted in full net of deferred tax liabilities and net of valuation allowance.
rs may give rise to a claim or receivable from the government or local tax authority. Such amounts are generally classified as current tax as

m CET1 will apply with the exception of repurchase agreements (repos).

fair valued on the balance sheet (including projected cash flows) shall be derecognised in the calculation of CET1. That is, positive amount
margin income resulting in a gain on sale) should be deducted from CET1.

st be fully recognised in the calculation of CET1. That is, there is no increase to CET1 from derecognising these liabilities.
it should be deducted from CET1 net of any associated DTL which would be extinguished if the asset
he fund to which the bank has unrestricted and unfettered access can, with supervisory approval, offset the deduction. Such offsetting asse

s as described below:
tional risk on an ongoing basis.
in the minimum Tier 1 capital, Additional Tier 1 capital can be admitted maximum at 1.5% of RWAs.
As on an ongoing basis. Thus, within the minimum CAR of 10.0%, Tier 2 capital can be admitted maximum up to 2%.
the excess Additional Tier 1 capital can be admitted for compliance with the minimum CAR of 10.0% of RWAs.

er (CCB1) as at paragraphs 80 to 83;

phs 84 to 86; and
may be required to hold additional capital buffers as at paragraphs 87 to 88.
apital are summarized in the Table:

tios above the minimum capital requirement. The Board appetite for capital will be set out in any significant document relating to capital ma
the management of the bank. A suitable buffer allows Board and management time to assess the cause(s) and to act appropriately to resto
by the bank‟s capital management plan.

ital is accumulated in good times to absorb losses in times of stress. The CCB1 formalizes internal management triggers at levels of capital
must enact plausible options it has identified in its capital management plan that will restore capital to the required level within specified time
ks are required to manage their capital to meet the total capital requirement (13%).
a prudent policy to retain sufficient earnings to meet the CCB1. A basic transition framework in the table below sets a concessional use of e
 a buffer of capital in good times.
a downturn that follows a period of excess credit growth. As the focus is on excess aggregate credit growth banks only deploy the buffer at
The CCB2 is zero until other elements stated in the CRD are embedded in the industry.

pre-determined characteristics. Such a bank is a Domestic-Systemically Important Bank (D-SIB). DSIBs may be required to hold additional
plexity, interconnectedness, its network of branches in Ghana or across jurisdictions, and the absence of readily available substitutes for wh

sk-based capital requirements. It provides transparency on changes in, and the potential build-up of leverage in individual bank‟s on- and of
e to capital, and assist as a macroprudential measure to ensure financial stability.
inimum of 6% for all banks. The ratio is defined as:

parties is shown in the example following of Bank P having controlling ownership of Bank S with minority interest.
r 1 capital and 25% of the Tier 2 capital of Bank S.
150. In this example, the minimum capital requirements of Bank S and the subsidiary‟s contribution to the consolidated requirements are the

be included in consolidated capital, following the calculation procedure set out above.

the amounts calculated in the table above. AT1 is calculated as the difference between CET1 and Tier 1, while Tier 2 is the difference betw
diary to be included in consolidated capital
asurement of credit risks consists in three parts:

sible to show how its organisational behaviours and outcomes in credit risk management demonstrate its commitment to the minimum stan
RMF) throughout a bank which produces sound and reliable measurements of the credit risk for risk based capital.
nimum include:

sk ownership, delineation of duties, and escalation, the process of credit risk assessment and management;

ortfolio managed facilities, troubled assets and credit policy settings, including exceptions and underwriting standards; and

rate information concerning a potential borrower(s) and a bank. The Credit Reporting Act 2007 (Act 726) and the Borrowers and Lenders Ac
ed, verified and retains records of all relevant documentation supporting a credit assessment and the decision to fund a credit exposure. A b
OG may increase the risk weight with a risk add-on of 20% to the risk weight as prescribed.
he exposure in line with the characteristics identifiable.
e higher risk profile of the bank.

bank’s on-balance sheet exposures using the SA. If an exposure does not meet the categories, BOG can prescribe a risk weight as approp
ying the total outstanding exposure net of specific provisions and interest in suspense by its relevant risk weight specified in this section.
atives may be reduced for capital purposes (i.e. risk weighted asset) provided the risk mitigation techniques in Part 2C Credit Risk Mitigation
hat has a currency mismatch, except the Government of Ghana, BOG, central government public sector entities or banks. A currency mism

y be used to allocate risk weights to claims on foreign counterparties based on an external rating grade. Export Credit Agencies (ECAs) cou
pendence, international access and transparency, disclosure, resources and credibility outlined in the Basel framework.
P), Moody's Investors Service (Moody’s) or Fitch Ratings (Fitch). The equivalence of all long and short-term ratings for the rating agencies
erent risk weights, the higher risk weight will apply.
ments corresponding to the two lowest risk weights should be referred to and the higher of those two risk weights will apply.

he domestic currency will be 0% risk weighted.

% risk weighted.

rated, and denominated in the local currency, shall be assigned a preferential risk weight as determined by the relevant supervisory authorit
all be assigned risk weights in the table below.
6 Unrated
150% 100%
Fund, the European Central Bank, European Community and the African Union may receive a 0% risk weight.

anks at paragraph 124 except for preferential treatment of short-term claims.

the following criteria:
assessments must be AAA;
ith long-term issuer credit assessments of AA- or better, or the majority of the MDB’s fund-raising are in the form of paid-in equity/capital an
ntributed by the shareholders; the amount of further capital the MDBs have the right to call, if required, to repay their liabilities; and continue
to assess whether each MDB’s capital and liquidity are adequate); and,
h would include among other conditions a structured approval process, internal creditworthiness and risk concentration limits (per country, s

s) must be assessed as if they are commercial enterprises and the operational requirements for the use of credit risk mitigation techniques i
opolitan, Municipal and District Assemblies, Government Ministries, Departments and Agencies (MDAs), in the domestic currency shall be r
sing powers;

vernment of Ghana, and have no specific revenue raising powers.

 6 Unrated
150% 100%

d by the Government of Ghana in accordance with Part 2C may be risk weighted at 0%.
ing shall be risk weighted at 50%.
shall be risk weighted at 100%.
k add-on of 20%.

ereign shall be risk weighted equivalent to a claim on the sovereign, provided the guarantee satisfies the requirements in Part 2C.
r the sovereign.
AI for the sovereign with a risk add-on of 20%.

pecified in the Table, with unrated banks assigned a risk weight of 50%.
nths or less will be risk weighted as in the table below.

6 Unrated
150% 50%
150% 20%

crofinance institutions, shall be risk weighted at 70%.

anies regulated by the National Insurance Commission (NIC), institutions regulated by the National Pension Regulatory Authority (NPRA) a
ency shall attract a risk add-on of 20%.

all the criteria below, and are not past due loans:
G, PSEs, banks or highly rated MDBs (i.e. risk weight 0%);
the employer (defined in 129a) undertakes to administer payments on the loan directly to the bank on behalf of the employee;
of retail portfolio; and
any joint facilities the borrower may have, is no more than GHc500,000.
a credit risk assessment within the bank’s underwriting standards acceptable to BOG, and all relevant information about the exposure must

wned and occupied by the borrower, or that is rented, is a qualifying residential mortgage loan risk weighted at 35% if it meets all requireme
roperty market value net of realizable costs, is equal to or less than 80%.
n the residential property that is fully developed.
e time of execution of the credit agreement and must be properly filed and registered.
orrower to a third party.
he performance of the underlying property serving as collateral but rather on the capacity of the borrower to repay the debt from other sourc
reafter revalued every three years or more often if there is evidence of impairment.

32 are non-qualifying mortgage loans and shall be risk weighted at 100%.

quality of residential mortgage portfolio held by individual banks, regarding their default experience, and the development of the property m
sfy qualifying conditions in paragraph 132 but for commercial mortgages, shall have a risk weight of 100%.
nancing the buying and selling of residential properties with a profit motive or for the development property for sale shall be risk weighted at

cy, a risk add-on of 20% applies.

ed exposures to individuals or group of persons are risk weighted at 100%, and if in foreign currency the risk add-on of 20% shall apply.

ing for more than 90 days.

c currency. A risk add-on for claims in foreign currency will continue to apply if the facility becomes past due.

provisions (by BOG Guide for Reporting Institutions), will be risk weighted at:

% of the outstanding loan;

the outstanding amount of the loan; or
dministrative costs.
ms shall be risk weighted as past due claims on unsecured facilities.

weighted as follows:
andard or doubtful; or
s substandard or doubtful; or
rative costs for realizing the security.
k weighted as:
risk weight 100%) if classified as substandard or doubtful; or
weight at origination 150%) if classified as substandard or doubtful; or
rative costs for realizing the security.

overeigns and all other PSEs, banks and securities firms not domiciled in Ghana and rated below investment grade (or ERG 6 as per parag

isk weighted at 0% and 20% respectively.

stments in premises, plant and equipment, all other fixed assets and claims on all fixed assets under operating leases.

ets on off-balance sheet credit exposures under the SA.

onmarket transactions.

ctor (CCF) into an on-balance sheet credit equivalent amounts (CEA); and
of exposure.
credit derivative, the credit risk mitigation techniques outlined in Part 2C may result in a lower exposure for capital purposes.
e to a counterparty that has a currency mismatch, except the Government of Ghana, BOG, central government public sector entities or bank

ents, direct credit substitutes, lending of securities or assets sales with recourse.
 original maturity of:

e (e.g. undrawn overdraft and credit card facilities provided any outstanding unused balance is subject to review at least annually) or effectiv

156 and the appropriate CCF may be determined by the following circumstances:
t may or may not be drawn by the counterparty. Appendix to Part 2 provides examples of this.
writing (i.e. its original maturity) until the final date when the facility must be drawn down in full. The original maturity applies regardless of te
he end of the period as renegotiated and the renegotiation is based on:

of over one year but must be drawn down within and up to one year – maturity is up to one year provided any undrawn portion of the facility
several tranches, some up to one year and some over one year – maturity for whole commitment shall be considered as having a maturity o
ure is the maximum amount that can be drawn under the commitment for the remaining period.
entered into until the final date by which the facility must be drawn in full.
ed credit card lines) shall be included in other commitments and appropriately classified by maturity.
ed with more than one CCF. For example, an irrevocable commitment with original maturity of 15 months (i.e. CCF is 50%) to issue a 6-mon
t any time unconditionally, or

ter of credit with 20% CCF.

nd including standby letters of credit serving as financial guarantees for loans and securities, and/or acceptances or endorsements with the
 ls an instrument and commits to repurchase the asset for an agreed price on demand, or after a stated time, or in the event of a contingenc
s a collateralized loan for the duration of the agreement. The reverse repo carries a credit risk and it is an off-balance sheet exposure.
e or securities lending/borrowing transaction between a customer and a third party and provides a guarantee to the customer that the third p
redit risk remains with the bank will receive a CCF of 100%. Asset sales with recourse are to be risk weighted for the asset and not by the t

the principal fails to perform a non-financial commitment as required, such as:

are arrangements where a borrower may drawdown funds up to a prescribed limit over a predefined period by making repeated note issues
ing shipment of goods for both the issuing and confirming bank such as:
goods where the credit agreement allows the bank to retain title to the shipment;

rket off-balance sheet transactions in the banking book. CCR is the risk a counterparty could default before the final settlement of the transa
Ts) and Over-the-Counter (OTC) derivatives.
sed through a delivery-versus-payment (DvP) or payment-versus-payment (PvP) mechanism to avoid counterparty credit risk from unsettled
es to a counterparty satisfy requirements of Part 2C for Credit Risk Mitigation and BOG has approved their use.

et variables.
al instrument (including commodities) against payment.
ability of default.

ard rate agreements, interest rate futures, interest rate options purchased, and any other instruments of a similar nature.
urrency interest rate swaps), forward foreign exchange contracts, currency futures, currency options purchased, hedge contracts and any o
ontracts based on individual equities or equity indices.
similar derivative contracts based on precious metals such as silver, platinum and palladium;

racts, base metals (such as aluminium, copper and zinc) and any other non-precious metal commodity contracts.
risk to CCR.
or less are excluded for CCR.
a CEA. Current Exposure Method
positive value and the add-on for the potential future increase in credit exposure to maturity (Add-on). Individually the components are calcu

d maturity of the contract

modity / Other (%)

mber of remaining payments in the contract.
reset so the market value is zero – has a residual maturity equal to the next reset date. If it is an interest rate contract with residual maturiti
ered by any of the columns (Table paragraph 176) are to be treated as "other commodities".
g interest rate swaps. The CEA of such a contract is evaluated only on current exposure, i.e. replacement cost without an add-on.
n such a case the effective notional principal is to be used to determine potential future exposure. For example, a stated notional amount of

a legally enforceable bilateral netting agreement and the minimum operational requirements in Part 2C for credit risk mitigation techniques a
om BOG in respect of:
orms with international best practice and complies with laws of Ghana), especially in terms of:

e of persons managing the transactions;

herence to IFRS;
and on a portfolio basis; and
gth of risk management frameworks.

chniques banks may apply when calculating credit risk weighted assets on all exposures including off-balance sheet.
rparty for capital purposes because the risk is legally and effectively reduced by certain techniques used.

sk to counterparty. The use of a CRM technique, while reducing credit risk, may increase other risks such as legal, operational, liquidity, stra
use of credit risk mitigation techniques and the types of products. Banks should also provide feedback on the basis for which the banking s
dual banks in the industry, and assess their suitability and whether individual banks satisfy the requirements herein. Operational requireme
not permitted to double count the benefits of a reduction in the risk exposure. A consideration is if a CRM technique was critical in the decis
e these risks are not adequately controlled, BOG may impose additional capital charge or take other supervisory actions under Pillar 2.
osure (e.g. a bank has both collateral and guarantee partially covering an exposure), the bank is required to apportion the exposure accord

rket and revalued with a minimum frequency of six months.

tential credit exposure by eligible collateral of the counterparty or by a third party on behalf of the counterparty.
or example, repos and reverse repos are both subject to capital requirements.
alance sheet exposures on the banking book that are secured by eligible collateral.
OTC derivatives and repo-style transactions.
mple approach allows eligible financial collateral such as:
a definite revenue stream for a given time, which BOG deems to be tradeable;

e national supervisor; or

collateral as:
ed on a recognised exchange; and

core market participant defined as one of the following:

d by NIC, pension funds regulated by NPRA, or securities firms regulated by the SEC.
ender and the party lodging the collateral which establishes the bank’s direct, explicit, irrevocable and unconditional recourse to the collatera
the bank the right to liquidate or take legal possession of the collateral in a timely manner. The bank must take all steps necessary to satisf
party lodging the collateral must not unnecessarily impede the lender’s recourse to the collateral.
posure (or by any person or entity related or associated with the counterparty) is considered to have a material positive correlation with the c
an equally independent third party, or by the bank. Where the collateral is held by an independent custodian or an independent third party, th

20% in place of the risk weight of the counterparty unless paragraph 203 applies.
risk weight of either: - 0% risk weight, if:
collateral is cash on deposit with the bank incurring the counterparty exposure;
ollateral is security issued by sovereign/PSE securities eligible for a 0% risk weight, and its market value has been discounted by 20%;
e counterparty is a core market participant at paragraph 196; or
cash and where there is no currency mismatch;

he collateral is in the sovereign’s domestic currency and its market value is discounted by 20%;
e counterparty is a non-core market participant; or
alifying for a 0% risk weight in the SA.
rket and revalued with a minimum frequency of six (6) months.

the net exposure adjusted for possible price fluctuations on both sides of the transaction. The net exposure after risk mitigation cannot be n
rcuts in paragraph 210 and the formulae at paragraph 207. When applied the haircuts (or rather factors) have the opposite effects on their
 calculated using the current exposure (mark-to-market) method, i.e. replacement cost and potential future exposure.

40%
60%

Table below. These standard haircuts assume daily mark-to-market, daily remargining and a 10-business day holding period.

s for currency mismatch in the formula. The haircut is based on a 10-business day holding period and daily mark-to-market. If the holding p
remargining
ons (SFT), other capital-market-driven transactions (i.e. OTC derivative transactions) and secured lending are detailed in the table below. T

n paragraph 212, the standard supervisory haircuts must be scaled for the difference of business days between the remargining or revaluati
 revaluation for secured exposures.
M) to obtain a new holding period (TN days) which is different from the TM provided in paragraph 212, the haircut under the minimum holding

participant in paragraph 196, a bank may apply a haircut of zero, where the following conditions are satisfied:
ecurity, qualifying for a zero per cent risk-weight by the SA;

marked-to-market daily and are subject to daily remargining;

o-market before the failure to remargin and the liquidation of the collateral is no more than four business days;
e of transaction;

satisfy an obligation to deliver cash or securities or to deliver a margin call or otherwise defaults, the transaction is immediately terminable;
r bankrupt, the bank has an unequivocal, legally enforceable right to immediately seize and liquidate the collateral.

s than the maturity of the underlying exposure. The collateral is not eligible if it has a residual maturity less than maturity of the exposure.
aining time before the counterparty is scheduled to fulfil its obligation, including any grace period that may apply.
ering any embedded options that may reduce the term of the collateral. This includes any clause in the documentation indicating the transac

weighting for an eligible guarantor. The guarantee and the guarantor must satisfy the requirements of this section to be eligible for a lower r
nt even though it is not well secured by Section 62(9) of the BSDI Act. The guarantee must cover the life of the exposure.

ned and incontrovertible.

low the guarantor to cancel unilaterally the cover of the guarantee or that would increase the effective cost of cover due to deteriorating cre
ct control of the bank that could prevent the guarantor from being obliged

providers must be acceptable to BOG and in good standing with the relevant supervisory authority (e.g. NIC, SEC, NPRA, etc).
m criterion where applicable:

urance in relation to scheduled cashflows to the bank from the guarantor or credit insurer.
managed its business profitability over time, and has a record of due diligence as to what it will insure and how it assesses a claim; and
onstrating its ability to pay.
ey satisfy the conditions in paragraphs 221 to 223:

ed by parent and affiliate companies when they have a lower risk weight than the obligor.
denominated and funded in local currency shall receive a preferential risk weight of 0% provided they meet the following requirements:
equirements for guarantees, except that the counter guarantee need not be direct and explicit to the original claim; and
ence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct sovereign guarantee.
e guarantee is an explicitly documented obligation assumed by the guarantor.

acity to pursue in a timely manner the guarantor for any monies outstanding under the documentation governing the transaction. The guaran
d to make under the documentation governing the transaction, for example notional amount, margin payments etc. Where a guarantee cov
vent of loss are equivalent to retained first loss positions and must be deducted in full from CET1.

e, and the secured and unsecured portions are of equal seniority, (i.e. the bank and the credit protection provider share losses on a pro-rata

tranches to a protection seller(s) and retains some level of risk of the loan and the risk transferred and the risk retained are of different senio

y different to the currency of the exposure. The volatility adjusted exposure is that which is deemed to be guaranteed after applying the hair

ph 211. Haircuts must be adjusted depending on the actual frequency of revaluation of the currency mismatch as per the formulas in paragr

e. A maturity mismatch exists where the residual maturity of the guarantee is less than the maturity of the underlying exposure covered by th
aining time before the counterparty is scheduled to fulfil its obligation, including any grace period that may apply.
dering any clauses that may reduce the effective maturity of the guarantee and those that give the bank, at origination of the guarantee a dis

se of credit derivatives and what further evolution in the banking sector may be expected for products of this type. Similarly, a bank contemp
al to transact this business and regarding the appropriate regulatory capital treatment for the transaction.
ppropriate risk culture, as determined by BOG, as well as satisfying the specific operational requirements for use of derivatives.
ide credit protection equivalent to guarantees may be eligible for recognition. Other types of credit derivatives must be approved by BOG.
generally accepted contract for OTC derivative transactions. Banks are expected to undertake appropriate due diligence on necessary form

vided by parent, and affiliate companies when they have a lower risk weight than the obligor.
r under each credit derivative. At a minimum sufficient credit risk transfer requires the credit events specified to cover:
at are in effect at the time of such failure (with a grace period that is closely in line with the grace period in the underlying obligation);
or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and
nement of principal, interest or fees that results in a credit loss event (i.e. charge-off, specific provision or other similar debit to the profit and
s of the credit derivative contract, but the other requirements are met as per paragraph 241(a) and (b), partial recognition of the credit deriv
ations different to the underlying exposure which the bank has purchased the credit derivative to protect.

cified in the credit derivative contract to determine whether a credit event has occurred ranks pari passu with, or is junior to, the underlying o
gation) and the obligation specified in the credit derivative contract to determine whether a credit event has occurred share the same obligor
al purposes, assume 100% of the credit risk that is purchased irrespective of the range of specified credit events. Materiality thresholds
ion is not provided even if a credit event occurs. To be recognised for CRM purposes, a credit derivative contract must not contain significan
he credit derivative contract, that is a ‘first loss position’ to the bank, is deducted from CET1 capital. The deduction is capped at the value o
any materiality thresholds in the credit derivative contact do not reduce the acquired credit risk.
n a credit event and set the value of the credit protection purchased or sold as either equal to the par value of the deliverable obligation (if se

aining time before the counterparty is scheduled to fulfil its obligation, including any grace period that may apply.
considering any embedded options that may reduce the term of credit protection. The bank must consider terms of the arrangement that giv
of any grace period required for default on the underlying exposure to occur as a result of failure to pay, the effective maturity of the credit d

h the extent of the cover being clearly defined and incontrovertible, and:
w the protection provider to cancel unilaterally the credit cover, or to increase the effective cost of cover if credit quality deteriorates in the u
tract outside the direct control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner if the o
n process to reliably estimate losses for the reference obligation specified in the contract and the timing of the post-credit valuation must be
liverable obligation under the credit derivative contract, the terms of the underlying exposure must allow for its transfer to the protection sell
has occurred must be clearly defined. This determination must not be the sole responsibility of the protection seller. The protection buyer m

e, and the secured and unsecured portions are of equal seniority (i.e. the bank and the credit protection provider share losses on a pro-rata

tranches to a protection seller or sellers and retains some level of risk of the loan and the risk transferred and the risk retained are of differe

o a single reference entity or a total-rate-of-return swap, that portion of the underlying exposure protected by the credit derivative (or the va

by cash, the note issued by the bank will be treated for capital adequacy purposes as cash-collateralized transaction and subject to require

redit protection is defined and limited by credit default events. A first to default credit derivative contract will pay out on losses after the first
th the lowest risk weighted amount. The portion of the underlying exposure protected by the credit derivative (or the value of credit protectio

second credit event as specified but thereafter the contract terminates. The credit protection will only be recognised if first-to-default credit p
th the lowest risk weighted amount. The portion of the underlying exposure protected by the credit derivative (or the value of credit protectio

osure. A maturity mismatch exists where the residual maturity of the credit derivative is less than the maturity of the underlying exposure cov
erent maturities, the bank must divide the exposure into separate covered portions for risk weighting purposes.

e is well-secured as per Section 62(9) of the BSDI Act. Where the credit protection arrangement (i.e. credit derivative) is denominated in a c

above and HFX set at zero.

aragraph 211). Haircuts must be adjusted depending on the actual frequency of revaluation of the currency mismatch as per the formulas in

al to transact this business and regarding the appropriate regulatory capital treatment for the transaction. The only eligible products for bank

e reference entity, the bank acquires an exposure to the credit risk of that entity. The risk weight that must be applied to the exposure is the
rading book.

acquires an exposure to both the protection buyer and the entity where the cash collateral is held, with the amount of the exposure being th

uirements herein:

reement can be determined at any time; and

ngle counterparty;
higher investment grade securities) or vice versa, such as reverse repurchase transactions, securities lending and sell/buy-back transaction
ross obligations of the counterparty are not affected.
nterparty that complies with requirements in this section.
al standards reflected in BOG’s Repurchase Master Agreement, the International Global Repurchase Master Agreement (GRMA) or the Inte
e transactions to be netted:

banking book.

and allows weighting the net claims for the full range of forwards, swaps, options and similar derivative contracts, rather than the gross cla
l circumstances, and especially if a failed counterparty subject to liquidation can unilaterally vary transactions. Accordingly, the following con
een a bank and its counterparty to deliver a given currency on a given value date is automatically amalgamated with all other obligations for
ot covered in (a), including other forms of novation.

egal obligation, covering all included transactions, such that the bank would have either a claim to receive or obligation to pay only the net
e relevant courts and administrative authorities would find the bank's exposure to be such a net amount under any of the laws applicable to
ngement are kept under review and current with respect to the evolution in the relevant laws.
g company to make only limited payments, or no payment at all, to the estate of a defaulter, even if the defaulter is a net creditor.

he requisite capacity in-house to manage any and all transactions, to one or many counterparties, in potentially many netting arrangements
s (in each relevant jurisdiction) regardless of whether the counterparty is insolvent or bankrupt,
systems and controls; and

banking book transactions and the comprehensive approach for trading book transactions to calculate its net on-balance sheet exposure f

ransactions to the counterparty. The CEA for market-related off-balance sheet transactions covered by bilateral netting agreement is:

all positive and negative mark-to-market values. Positive values may be offset against negative mark-to-market values, but the net position
all underlying contracts and adjusts for the effects of the netting agreement shown as:
ed by a netting agreement without offsetting for contracts with negative mark-to-market values.

s with the same counterparty.

unterparty in calculating the CEA of transactions with that counterparty; or

arties in calculating the CEA for transactions with each of those counterparties.
ch or the aggregate approach to calculate the NGR and must inform BOG of which approach it intends to use.

h 207) must apply the comprehensive formula for the purposes of calculating the adjusted exposure (E*) amount after netting for SFTs.
he procedure below for the effect of the master netting agreements:

ined a preferential RW).

fied as below with provisions specified:

ch are classified as below with provisions specified in paragraph 140: v. Substandard vi. Doubtful

on non-qualifying mortgages for commercial real estate

r may not be drawn by the customer, and a commitment to provide an off-balance sheet instrument with certain drawdown.

which may or may not be drawn down shall be given a CCF of the lower of 50% and 20%.

is uncertain, it shall receive a CCF of the lower of 50% and 100%.

acility would be utilized at some future date, including multiple draw-downs shall receive a CCF of the lower of 100% and 20%.

a sure utilization of the facility will be assigned a CCF of the lower of 100% and 100%.
e a bank must hold in its regulatory capital for the risk of operational loss.
processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk.
ve damages resulting from supervisory actions, as well as private settlements. Annex to Part 3 Table 3C provides examples of operational r

onal risk, is responsible to demonstrate how its organisational behaviours and outcomes reflect its commitment to minimum standards for so
agement Framework (ORMF) that drives a culture and methodology for assessing, managing and measuring operational risk exposures and
ures and at a minimum include:
e risk area, information technology risk;
rces in business lines, risk ownership, delineation of duties, and escalation;
and management, including guidelines for managing boundary issues

events covering losses and/or near misses, and ensuring the loss database has appropriate causal analysis and feedback mechanisms in
ould include, as appropriate, updates on risk registers such as the operational risk event register; and
 material outsourced contracts and providers of operational support to the bank, including information technology and HR support.

rational risk capital charge.

sk management, BOG may increase the risk based capital requirement for the individual bank under the BSDI Act.
corporate finance, trading & sales, retail banking, commercial banking, payment & settlement, agency services, asset management, and ret
nd an example of the type of approach a bank must develop and employ to map its gross income to the eight business lines.
proxy for the scale of business operations and thus the likely scale of operational risk exposure within a business line.
ately, by the respective business lines, such that the total gross income relating to each of the eight business lines can be clearly identified.

d be objective, verifiable and repeatable to ensure the overall operational risk capital can be consistently mapped over time, and governed b
utually exclusive manner, (i.e. activities must be defined and the definition consistently applied in a way as to avoid overlapping of the busin
business line framework, but which represents an ancillary function to an activity included in the framework, must be allocated to the busin
es, it shall be mapped into the business line with the highest beta, and that same business line shall apply to any associated ancillary activi
usiness lines provided that total gross income for the bank still equals the sum of gross income for the eight business lines.
ses must be consistent with the definitions of business lines used for regulatory capital calculations in other risk categories, i.e. credit and m
siness lines must be clear and detailed enough to allow third parties to replicate the business line mapping. Documentation must, among ot

bject to the approval by the Board of directors).

ternal audit function, and/or by an external reviewer.

come by a factor (denoted beta) assigned to that business line. Beta serves as a proxy for the industry-wide relationship between the opera
i.e. for commercial banking the indicator is the gross income generated in the commercial banking business line.
of the gross income for each of the eight business lines.
year shall be calculated as:

(KnOP) is calculated as the simple summation of the regulatory capital charge for each of the business lines for that year.
ome) in any business line may offset positive capital charges in other business lines without limit. However, where the aggregate capital ch
ven year (KnOP) will be the maximum of zero and the sum of the capital charge for each of the business lines for that year, i.e.
 gross income data shall calculate the operational risk capital charge using available audited gross income data for each business line and t

ation should be adjusted to reflect those activities. Since the gross income calculation is based on a 3-year average, the most recent year o
acquired business must be mapped into the eight Basel business lines. Once an institution has obtained the percentage allocation of the gro
adjusted, with supervisory approval, to reflect this divestiture.

Annex to Part 3 Table 3A.

formance with laws, rules, regulations, prescribed practices, or ethical standards within the jurisdiction in which the institution operates.
the capital markets and advising on mergers and acquisitions, which may include but not limited to financing and investment decisions, und

n and financing decisions);

ercial loans and then sells them to investors rather than hold the loans as portfolio investments to maturity, i.e. the bank assumes market ris
on mergers and acquisitions, underwriting, privatisations, securitisation, research, debt (government, high yield), equity, syndications, IPO, s
hat is separate accounts managed by banks that buy (or underwrite) Government securities and other securities for resale to other banks a

price in a financial instrument or commodity, with the view to make a profit on the turn (i.e. bid/offer spread).
es or other items with the bank‟s own funds at discount and selling in pieces over a period), and
making profit from the margin).
than corporations, SMEs or other banks. Retail banking may include financial services such as instalment loans, residential mortgages, equ

bank's rich or high net worth individuals (HNWIs), and

ctions from corporations or large businesses and SMEs as opposed to individual members of the public (or retail banking). These include d
ransfer of funds or financial asset in exchange for a form of good, service or financial asset or by order (of a counterparty) and the accounti
nd government entities.

her valuables,
orporations and government entities, which may include check clearing, dividend and interest payment, stock registration and redemption, a
a company appoint the bank, known as a "corporate trustee", to be the responsible party for monitoring the company‟s compliance with the

of its clients and gives them access to a wide range of traditional and alternative product offerings that would not be ordinarily available to t
vice, credit card, debit card, margin loan, automatic sweep of cash balance into a money market fund, as well as brokerage service, also re
nt funds, securities and hedge funds and other portfolio products shall classify such activities under Asset Management for purposes of cons

uy and sell without obtaining prior approval of the client on each occasion) and

investor or the retail sector of investors rather than institutional investors.

payments (i.e. all unpaid interests relating to the years under consideration shall be added back) plus gross non-interest income (i.e. net no

urities, lending and repos, brokerage, debt, prime brokerage.

sits, banking services, trust and estates.

osits, banking services, trust and estates, investment advice.
private labels and retail.
ate, export finance, trade finance, factoring, leasing, lending, guarantees, bills of exchange, investment in government bills and bonds, inter

clearing and settlement (for wholesale counterparties).

eipts, securities lending (customers) corporate actions.

acity for third parties.

ail, institutional, closed, open.

etail or other deposits).

nk and sovereign customers and

nts, guarantees, bills of exchange,

ng book, i.e. investment in government bills and bonds, interbank placements, etc held to collect contractual cash flows and similar investm

n customers less:

o-market book), net of funding cost,

s Organized labour activity

Exceeding client exposure limits

Legal documents missing / incomplete

ng activities for the banking industry, and therefore the market risk framework sets the necessary components for calculating market risk ca
s in respect of on and/or off-balance sheet positions.

n the trading book.

ign currency and commodity positions.
risk based capital requirements.

ncluding its risk management practices and outcomes in market risk.

its market risk business. It is a prerequisite condition for any bank seeking to conduct activities exposed to market risk to establish a marke
ategy and trading policy, for review and approval by BOG. Banks should also comply with the Risk Management Guidelines on market risk i

es, risk ownership, delineation of duties, the risk management and financial control process and escalation;
consistent and reliable use of fair values;
the trading book or the banking book;
on technology and HR support.

positions and specifically less liquid positions. At a minimum, the framework should include:

e prudent and reliable. Systems must be integrated with other risk management systems in the bank (e.g. credit analytics). Such systems m
unctional roles, sources of market information and review of their appropriateness, frequency of independent valuation, timing of closing pri
department accountable for the valuation process, which should be ultimately a Board executive director.

le closeout prices that are sourced independently. Examples of readily available close-out prices include exchange prices, screen prices, or
where the outcomes can be demonstrated to be prudent. Marking-to-model is defined as any valuation which has to be benchmarked, extr
ch are subject to mark to model and should understand the materiality of the uncertainty this creates in the reporting of the risk/performanc
rices. The appropriateness of the market inputs for the particular position being valued should be reviewed regularly.
roducts should be used to the extent possible.
opriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process. The
y of the model should be held and periodically used to check valuations.
ow best to reflect those in the valuation output.
its performance (e.g. assessing continued appropriateness of the assumptions, analysis of P&L versus risk factors, comparison of actual clo
the uncertainty of the model valuation.
ocess by which market prices or model inputs are regularly verified for accuracy. While daily marking-to-market may be performed by deale
e market prices or model inputs are used to determine profit and loss figures, whereas daily marks are used primarily for management repo
, e.g. only one available broker quote, prudent measures such as valuation adjustments may be appropriate.
which should be deducted from CET1. The following valuation adjustments shall be formally considered where relevant: unearned credit sp
ustment of less liquid positions. The appropriateness of the adjustments shall be subjected to an ongoing review. Reduced liquidity could ar

s and procedures for determining which exposures to include in, and to exclude from, the trading book for purposes of calculating the requir
omodel methodology, to calculate its market risk capital charge.
ok for regulatory capital purposes;
to an active, liquid two-way market;

ruments would have an active, liquid two-way market;

xposure that can be validated externally in a consistent manner;

impede bank‟s ability to affect an immediate liquidation of the exposure;
exposure within its trading operations; and
nking and the trading books and criteria for such transfers.
s of the banks. In addition, compliance with these policies and procedures must be fully documented and subject to periodic internal audit. T

held either with trading intent or to hedge other elements of the trading book. To be eligible for trading book capital treatment, financial instr
 sale, and/or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits, and/or hedging
nclude the following:
within the trading book as approved by senior management (which would include expected holding horizon etc.).
ns, which must include requirements for:
opriateness;
reed limits and per the agreed strategy;
vant parameters (for example volatility inputs, market risk factors, etc.) to be assessed on regular basis;
risk management process; and
(assessment should be made of the market liquidity or the ability to
ability of market inputs to the valuation process, level of market turnover, size of positions traded in the market, etc.
ank‟s trading strategy including the monitoring of turnover and sale position in the bank‟s trading book.
classified as exposures in the banking book. This will include both on and off-balance sheet positions.

after initial designation without the approval of BOG. It is the responsibility of bank‟s compliance officers, risk managers and/or internal audi
gulatory arbitrage is strictly prohibited.
cumstances such as a change in accounting standards, closure of trading desk, termination of business activity to a particular instrument, e
s is not permitted. Banks must determine their total capital charge (across the banking and trading books) before and immediately after swi
ading intend alone are NOT to be accepted as valid reasons for the redesignation of an instrument to a different book
approved by senior management, thoroughly documented, determined by internal review to comply with the bank‟s policies; subject to prior
r. The updated policies should include all extraordinary events, the process for senior management and regulatory approvals of such switch

ll-defined business strategy and operates within a clear risk management framework.
ulatory approval (BOG). Key attributes of a trading desk are:
policy linked to its pre-established objectives.
nd regular management information reports (including revenue, costs and RWAs).
limits based on the business strategy of the desk and must produce at least on weekly basis, appropriate risk management reports (includi
wing in respect of its trading desk;

with active intraday trading

e and other transactions in the trading book. This charge is calculated separately from the capital charge for general market risk and specific
to trading book exposures.
le collateral. Instruments not within the banking book definition of eligible collateral will received a haircut equivalent to non-main index equi
ok will apply to the trading book. The CCR capital charge for single name credit derivative transactions in the trading book apply the add-on

on factor where it is subject to closeout upon the insolvency of the protection buyer

determined by the lowest credit quality underlying in the basket, i.e. if there are any non-qualifying items in the basket, the non-qualifying re
truments that behave like them, including non-convertible preference shares. Convertible bonds are treated as debt instruments if they trad
ic and general market risk arising from debt positions.

rities or instruments may be offset.

a security due to issuer specific factors.

g characteristics of the obligor and the residual maturity of the instrument.
entical issue (including positions in derivatives). Different issues by the same issuer cannot offset as prices may vary in the short run due to
 ies issued by the Government of Ghana or BOG.
ernal credit rating of the sovereign.

lus other securities (corporate) that are:

any other ECAI both recognised by BOG; or

e investment quality by the reporting bank, and the issuer has the securities listed on a recognised stock exchange; or

urities firms deemed to be equivalent to investment grade quality and subject to supervisory and regulatory arrangements comparable to th
nts and multi-national development banks, that is, debt securities that qualify as neither government nor qualifying securities e.g. private se
subject to supervisory approval, deemed to be of comparable investment quality by the reporting bank and the issuer has securities listed o
estment grade corporate borrower under the Standardised approach for credit risk.

ves subject to the matching of the instruments and their price behaviours. In any of the circumstances of paragraphs 356 to 358, unless oth
ways move in the opposite direction and broadly to the same extent. That is:

there is an exact match between the reference obligation and the underlying exposure (i.e. the cash position).

ntract against the underlying instrument where the values of the two positions (being long and short positions) always move in the opposite

nked note (or vice versa) and there is an exact match between:

iii. the currencies of the two offsetting positions;

s, settlement mechanism) do not cause the price movement of these derivative instruments to materially deviate from the price movement o
ely taking account of any restrictive payment provisions (including fixed pay outs and materiality threshold).
ific risk offset applies to the position with higher specific risk while the specific risk charge for the other potion is zero.
identical) usually move in opposite directions. This would apply in any of the following situations:
ch between the reference obligation and the underlying asset and paragraph 244 is satisfied.
y or maturity mismatch between the credit protection and the underlying asset.
etween the cash position and the credit derivative. However, the underlying asset is included in the (deliverable) obligations in the credit der
with the higher charge (higher specific risk) remains the same but the specific risk charge for the other side of the transaction is zero.
erest rates (i.e. not issuer specific). General market risk allows offsetting of long and short positions of different positions.
hod and a duration method.
es and it is not permitted to be switched unless by written approval from BOG. The general market risk charge of 10% applies to the sum of

zontal disallowance); and

aturity ladder and aggregated without offsets.

ot the net currency positions by maturity and the total position is the capital charge.

exposures including derivative instruments are slotted into the maturity ladder comprising thirteen time bands (or fifteen time bands for low c
ate instruments by term to next re-pricing date.
ssues by the same issuer), in terms of same coupon, currency, maturity and issuer, whether actual or notional, can be omitted from the inte

the price sensitivity of the positions to changes in interest rates. Zero-coupon bonds and deep discount bonds (i.e. bonds with coupon less

a short or long position in each band. Since each band would include different instruments and maturities, a 10% capital charge to reflect ba
or short positions in each time-band (GH¢10 million long in above example) and the vertical disallowances, which have no sign.
ween the net positions in each of three zones, intra-zone (zero to one year, one year to four years and four years and over), and subsequen
tched positions and set out in the table below. This factor called horizontal disallowance is introduced to cover imperfect correlation of price

etween 0.6 and 1.0 percentage points per its maturity in the table below.
n time-bands set out in the table below:
nce designed to capture basis risk
ject to the disallowances set out in the table at paragraph 371:
 each time band will be subject to either the risk weightings set out under the maturity method, if positions are reported using the maturity m

ruments in the trading book that are price sensitive to interest rates:

ument and apply specific and general market risk charges. The market value is based on the principal amount of the underlying instrument,

f a long and short position in a notional government security. The maturity of a future or FRA will be a period until delivery or exercise of the

s with relevant maturities. For instance, an interest rate swap under which a bank is receiving floating rate interest and paying fixed interest
her reference price, e.g. stock index, the maturity category should reflect the interest rate component, with the equity component being inclu

al in every characteristic (i.e. same issuer, coupon, currency and maturity).

ay also be fully offset and thus excluded from the calculation.
offsetting of positions in the future or its underlying is only permissible where there is a readily identifiable underlying security and the price
parate legs of cross currency swaps or forward foreign exchange are to be treated as notional positions in the relevant instruments and inclu
stances be regarded as matched and allowed to offset fully. To qualify for this treatment, the positions must relate to the same underlying ins
hich the futures contract relates must be identical products and mature within seven days of each other;
osely matched (i.e. within 15 basis points) and
on positions or forwards, the residual maturity must correspond within the following limits:

o calculate the positions to be included in the maturity or duration ladder.

ould then be discounted using zero coupon yields, and a single net figure for the
s as per the framework.
e in yield used in the maturity or duration method and allocate these sensitivities into time bands set out under the two methods.
ks provided:

st rate changes and time bands

rate futures will not be subject to a specific risk charge. However, in the case of futures contracts where the underlying is debt security, or an

er as cash positions, subject only to an exemption for fully or very closely matched positions in identical instruments. The various categories
million (m-t-m) purchased bonds, residual maturity 10 year.
bonds, residual maturity 3.6 years

ear fixed interest, paying 12 month floating (12 months - interest fixing date)

≥ 3% and 100 million in the same bucket

short position of 300 million in the 6-12 months bucket

rrencies and/or gold.

and short positions across currencies. The capital charge is 10% of the foreign exchange net open position and 10% of the net position in

nterest in each currency);

id under forward foreign exchange transactions, including currency futures and the principal on currency swaps not included in the spot pos
called and likely to be irrecoverable;
eady fully hedged (at the discretion of the reporting bank); and

n positions, may be either treated as a currency or split into their component parts provided this is consistent.
d at current spot rates using the standard unit of measurement (e.g. dollars per ounce) and then slotted into the maturity ladder.
arly accrued expenses. Unearned but expected future interest and anticipated expenses may be excluded unless the amounts are certain a
ard rates is not permitted. BOG may permit banks with foreign parents that apply NPV on a group basis are expected to use the NPV of eac

o hedge partially or totally against the adverse effect of the exchange rate on its CAR may be excluded from the calculation of net open cur

otect the bank‟s CAR;

ment of the hedge remaining the same for the life of the assets or other items.
uch as investments in non-consolidated subsidiaries, no capital charge is required to apply.

es in the domestic currency. The overall net position is the aggregation of:
ns or the net short currency positions
CA$ US$ GOLD
-20 -180 -35
3 5
rency positions (i.e. 300) and of the net position in gold (35) = 335 x10% = 33.5.

e trading book.
exhibit market behaviour like equities but not to non-convertible preference shares (which are covered under the interest rate risk requireme
The instruments covered are ordinary shares (whether voting or non-voting), convertible securities for which prices move like equities and c
ht, equity derivatives and off-balance sheet positions such as futures and swaps on individual equity or stock indices are also included.

(credit-related risk); and

nd all short equity positions. A specific risk charge of 10% is applied to the gross position.

ween all long equity positions and all short equity positions in an equity market. A general risk charge of 10% is applied to the overall net po

e total capital charge, is GH¢74 million; GH¢56 million against specific risk and GH¢18 million against general market risk.

prices should be included in the measurement system. This includes futures and swaps on both individual equities and on stock indices. T
ply the specific risk and general market risk capital charges:

ying equity portfolio.

be fully offset, resulting in a single net short or long position. Specific risk and general market risk charges apply to the matched positions.

y to the net long or short position in an index contract comprising a diversified portfolio of equities as BOG may determine.

ding precious metals (except gold). A commodity is a physical product which is or can be traded on a secondary market (e.g. agriculture prod
and interest rates, and the markets may be less liquid. Hence changes in supply and demand can have a more dramatic effect on price and
e spot price is the most important risk. However, banks using portfolio strategies involving forward and derivative contracts are exposed to a
ities) alters through time.

er than a change in interest rates)

dities positions may expose a bank to interest rate or foreign exchange movements and if so the relevant positions should be included in th
e simplified approach or the maturity ladder approach. When a bank selects a method, it must be consistently applied to all exposures and i

stic currency as per the standard unit of measurement); and

each commodity converted at spot rates in Ghana cedi. Commodity position risk captures forward gap and interest rate risk within a time-b
struments in paragraphs 367 to 371. A separate maturity ladder will be used for each commodity. Positions in the commodity in the standar
are converted at the spot price, and multiplied by the appropriate spread rate for that band in the table below.
e matched, and matching them till all matching positions are exhausted, calculating;
er of time-bands by which the position is carried; ii. a spread charge equal to the sum of long and short positions; and iii. matched position
ong position or short position) equal to the sum of remaining position (in absolute terms) multiplied by the outright charge of 15%;
charge as determined above.
ium with the following maturities and Ghana cedi values.

ana cedi (without double counting for foreign exchange exposure).

0 * 1 * 0.6% =

uments. For example, basis risk exists on similar instruments of the same maturity.
d conversion price or as per a pre-determined pricing formula.
or the weighted average time to maturity using the relative present value of the cash flows as weights.
set of one entity and a financial liability or equity instrument of another entity. Financial instruments include primary financial instruments (or
he contractual right to exchange financial assets on potentially favourable terms, or an equity instrument.
nge financial liabilities under conditions that are potentially unfavourable.
ple, a change in interest rates or official policy.
ion‟s financial condition.
r BBB by Standard & Poor‟s Corporation.
market prices, including interest rates, exchange rates and equity values. Mark-to-market: the process of revaluing a portfolio based on pre
m of the risk weighted short positions within a time band or a zone or between zones.
liabilities. Examples include trading in swaps, options, futures and foreign exchange forwards, and the granting of standby commitments an
t depending on its classification.
ments, due principally to factors related to its issuer.
e and/or taken with the intention of benefiting from price movements. (Amendment to the capital accord, Basel Committee on Banking Supe
se an obligation on it to receive a payment or an asset. Bought call options and sold put options shall be covered by the definition of a long
se an obligation on it to make a payment or deliver an asset. Sold call options and bought put options shall be covered by the definition of a

Risk - Debt Instruments)

Total
2-3 3-4 4-5 5-7 7-10 10-15
1.9-2.8 2.8-3.6 3.6-4.3 4.3-5.7 5.7-7.3 7.3-9.3

200 300 100 200 300 100

-300 -400 -100 -200 -100 -200
1.75 2.25 2.75 3.25 3.75 4.5

3.5 6.75 2.75 6.5 11.25 4.5

-5.25 -9 -2.75 -6.5 -3.75 -9

3.5 6.75 2.75 6.5 3.75 4.5

0.1 0.1 0.1 0.1 0.1 0.1
0.35 0.68 0.28 0.65 0.38 0.45

-1.75 -2.25 7.5 -4.5

0
-5.25

0
30%
0

-5.25
 -4.75
4.75
40%
1.9

0
100%
0
3.5

1.9-2.8 2.8-3.6 3.6-4.3 4.3-5.7 5.7-7.3 7.3-9.3

200 300 100 200 300 100

-300 -400 -100 -200 -100 -200
0.8 0.75 0.75 0.7 0.65 0.6
2.2 3 3.65 4.65 5.8 7.5

3.52 6.75 2.74 6.51 11.31 4.5

-5.28 -9 -2.74 -6.51 -3.77 -9

3.52 6.75 2.74 6.51 3.77 4.5

0.05 0.05 0.05 0.05 0.05 0.05
0.18 0.34 0.14 0.33 0.19 0.23

-1.76 -2.25 7.54 -4.5

0
-5.27

0
30%
0

-5.27
 -3.97
3.97
40%
1.59

0
150%
0
4.92

2-3 3-4 4-5 5-7 7-10 10-15

1.9-2.8 2.8-3.6 3.6-4.3 4.3-5.7 5.7-7.3 7.3-9.3

200 300 100 300 300 100

-300 -400 -100 -200 -100 -200
1.75 2.25 2.75 3.25 3.75 4.5

3.5 6.75 2.75 9.75 11.25 4.5

-5.25 -9 -2.75 -6.5 -3.75 -9

3.5 6.75 2.75 6.5 3.75 4.5

0.1 0.1 0.1 0.1 0.1 0.1
0.35 0.68 0.28 0.65 0.38 0.45

-1.75 -2.25 3.25 7.5 -4.5

0
-5.25

0
30%
0

-5.25

-4.75
4.75
 40%
1.9

0
100%
0
6.75

Gold
Amount Nature of PositionAmount Nature of PositionAmount (GH¢) Nature of Position

NA
F

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
 0
0
0

F
of Net Open

0
0
0
0
0
0
0
0
0
0
0
0
0

F
of the Bank of Ghana Act 2002 (Act 612).

ment, which will be measured as a percentage of the capital of the bank to the risks of its assets. The risk based capital adequacy ratio (CAR

cted losses that may arise from business through capital transactions, credit, operational and market risks.

ere business risks are well managed. For this reason, each section in the CRD identifies high level principles that a Board must demonstra

d take immediate action to rectify and strengthen its business within a set time acceptable to BOG and/or be subjected to penalty under Sec

ement standards.
rs and outcomes achieve minimum requirements to protect its capital.
here relevant) - generally referred to as a risk management framework. The term ‘framework’ is the comprehensive management approach

vides explicit direction on a selection of core risks to a bank which warrant their own management frameworks.
nagement Committees. Individual leadership, competence and independence of all Senior Management are critical qualities the Board has

which it is to be included. A bank must notify BOG before issuing a new capital instrument and receive written approval before relying on th

d/or reporting purposes a bank may measure its financial instruments at fair value (both banking book and trading book) provided:

cted from total capital is not included in Total Assets when calculating a bank‟s total on-balance sheet risk-weighted assets.
e of whether it forms part of the consolidated banking group.

ecified by BOG.

pre-position steps the bank could take should capital ratios fall to trigger levels reflected in the Board‟s appetite.
ling CMP which should be periodically updated as and when circumstances require it.

h 33 for CET1, paragraph 42 for AT1 and paragraph 44 for Tier 2. The components of capital are characterised by the extent to which they c
w the terms and conditions satisfy the criteria herein.
ng ordinary shares of the issuing bank in all respects except the absence of voting rights.

m, not a fixed or capped claim).

under relevant law as well as guidelines or directives if any issued by BOG).
e which might give rise to such an expectation.
a contractual cap (except to the extent that a bank is unable to pay distributions that exceed the level of distributable items). A dividend on

eferential distributions, including in respect of other elements classified as the highest quality issued capital.
ncern basis proportionately and pari passu with all the others.

his would be construed as indirect funding of its own capital and would contravene Section 61 of the BSDI Act.
nhances the seniority of the claim.
er persons duly authorized by the owners.

w procedures prescribed by BOG have been undertaken by a third party. Dividends should be deducted from CET1 in accordance with app

mum requirements for the subsidiary.

truments would, if issued by the bank, meet all the criteria for classification as that tier of capital.
2 instrument).
. CET1, Tier 1/AT1 or Tier 2/ Total Capital) as:

is 9% of RWAs); and

ding in that tier of capital.

ry approval will be given.

or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger point. The write-down will have the followin

d the purchase of the instrument.

ring a specified time frame.
e without limitation to an operating entity or the holding company in the consolidated group in a form which meets or exceeds all the other c

general bank creditors

nctioned by BOG.

urchase of the instrument

e without limitation to an operating entity or the holding company in the consolidated group in a form which meets or exceeds all the other c
 itself. If a series of investments includes more than one tier of capital (e.g. CET1 and AT1, and/or T2), the deduction applies to each tier of

hall not be added back to CET1.

transaction costs and mortgage servicing rights.

cial institutions. This includes:

d in the BSDI Act.

may be deducted if they do not represent a genuine contribution to financial strength of the bank.
ude, but are not limited to, whether a component of capital;

the bank‟s CET1.

he trading book.
s of index securities may be netted against short positions in own shares resulting from short positions in the same underlying index.

nt taxation authority. For the avoidance of doubt, net DTLs cannot contribute to an increase in CET1.

s and net of valuation allowance. DTAs arising from any other source will be required to be deducted from CET1.
erally classified as current tax assets for accounting purposes. The recovery of such a claim or receivable would not rely on the future profita

f CET1. That is, positive amounts shall be deducted and negative amounts shall be added back. It removes the element that gives rise to a
hese liabilities.

deduction. Such offsetting assets should be given the risk weight they would receive if they were owned directly by the bank.

document relating to capital management planning or policies in the bank, and in the business lines.
and to act appropriately to restore the CAR.

ment triggers at levels of capital to avoid breaches of minimum capital requirements.

equired level within specified timeframes. The bank is restricted from further capital reductions by making payments on its capital. Among o

elow sets a concessional use of earnings to service capital if CET1 ratio is deficient. Such a framework if proposed by a bank may be accep
h banks only deploy the buffer at certain times in the credit cycle.

ay be required to hold additional capital as CET1 to mitigate the risk to the economy.
adily available substitutes for what a bank provides such as the financial infrastructure. The list is not exhaustive and BOG will periodically r

ge in individual bank‟s on- and off-balance sheet and the banking sector.
onsolidated requirements are the same since Bank S does not have any loans to Bank P. This means that it is subject to the following minim

while Tier 2 is the difference between total capital and Tier 1.

ommitment to the minimum standards.

standards; and

d the Borrowers and Lenders Act 2008 (Act 773) are important mechanisms in the industry to improve access and the circulation of informa
on to fund a credit exposure. A bank must make available this information to BOG as part of the supervisory process, and where:

prescribe a risk weight as appropriate.

eight specified in this section.
s in Part 2C Credit Risk Mitigation (CRM) are satisfied.
ntities or banks. A currency mismatch arises where the loan is denominated in a foreign currency that is not the currency of the borrower’s p

port Credit Agencies (ECAs) country risk scores will not apply to claims on foreign counterparties.
el framework.
m ratings for the rating agencies are mapped to external rating grades (ERG) in the table below.
 eights will apply.

the relevant supervisory authority, and subject to the prior written approval of BOG.

form of paid-in equity/capital and there is little or no leverage;

pay their liabilities; and continued capital contributions and new pledges from sovereign shareholders;

ncentration limits (per country, sector, and individual exposure and credit category), large exposures approval by the board or a committee

credit risk mitigation techniques in Part 2C (e.g. guarantees) must be satisfied to recognise a lower credit risk charge for the counterparty.
the domestic currency shall be risk weighted at:
quirements in Part 2C.

n Regulatory Authority (NPRA) and securities firms regulated by the Securities and Exchange Commission (SEC) shall be risk weighted at 1

lf of the employee;

mation about the exposure must be verified from reputable sources as per paragraph 96.

d at 35% if it meets all requirements below:

o repay the debt from other sources.

e development of the property market in Ghana to determine whether the quality of the portfolio across the industry should warrant a higher
or sale shall be risk weighted at 150%.

k add-on of 20% shall apply.

nt grade (or ERG 6 as per paragraph 104).

ting leases.

capital purposes.
ent public sector entities or banks.
view at least annually) or effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness.

maturity applies regardless of terms: whether the commitment is revocable or irrevocable, conditional or unconditional, and whether the fac

ny undrawn portion of the facility is automatically cancelled at the end of the drawdown period.
onsidered as having a maturity of over one year.

e. CCF is 50%) to issue a 6-month documentary letter of credit (i.e. CCF is 20%). In such a case the lower CCF applies from either of the:

ances or endorsements with the character of acceptances.

e, or in the event of a contingency. A repo or a reverse repo may be treated as collateralized transactions. The repo is an irrevocable comm
off-balance sheet exposure.
ee to the customer that the third party will perform on its obligations, the risk to the bank is the same as if the bank had entered into the trans
ted for the asset and not by the type of counterparty with whom the transaction has been entered. Loans or other assets sold under a sale a

by making repeated note issues to the market, and where the issues prove unable to be placed in the market, the unplaced amount is to b

the final settlement of the transaction's cash flows.

terparty credit risk from unsettled transactions. Banks must have policies and systems to track and monitor unsettled transactions as appro

similar nature.
sed, hedge contracts and any other instruments of a similar nature.

dually the components are calculated as:

ate contract with residual maturities greater than one year, the add-on factor is subject to a floor of 0.5%.

cost without an add-on.

ple, a stated notional amount of GH¢1 million with payments indexed to some rate, such as two times BOG rate would have an effective no

credit risk mitigation techniques are satisfied.

s legal, operational, liquidity, strategic and/or market risks. For this reason, banks must ensure policies set the necessary operational condit
the basis for which the banking sector could be expected to move towards fair values, OTC derivatives and the uniformity and legal certaint
s herein. Operational requirements will naturally vary with the type of technique and other factors relevant to its use.
chnique was critical in the decision to approve a credit exposure. In such case the risk mitigant is already part of the risk weight of the coun
visory actions under Pillar 2.
o apportion the exposure according to each type of CRM technique (e.g. portion covered by collateral, portion covered by guarantee) and th
nditional recourse to the collateral. In the case of cash collateral, this may include a contractual right of set-off on credit balances, but a com
take all steps necessary to satisfy the legal requirements applicable to the bank’s interest in the collateral. This would include clear and robu

rial positive correlation with the credit quality of the original counterparty and is therefore not eligible collateral.
or an independent third party, the bank must take reasonable steps to ensure that the custodian or third party segregates the collateral from

s been discounted by 20%;

e after risk mitigation cannot be negative.

ave the opposite effects on their components such that the volatility adjusted value:
y holding period.

mark-to-market. If the holding period is different the haircut must be adjusted for the difference as per paragraph 214.

are detailed in the table below. Table - Minimum holding periods by product

een the remargining or revaluation days using the formula

aircut under the minimum holding period (HM) shall be calculated as:

action is immediately terminable; and

han maturity of the exposure.

umentation indicating the transaction that may reduce its term of lodgement either by the provider of the collateral or the bank taking the coll

section to be eligible for a lower risk weight.

the exposure.

of cover due to deteriorating credit quality in the guaranteed exposure.

, SEC, NPRA, etc).

ow it assesses a claim; and

the following requirements:

l claim; and
ect sovereign guarantee.

ning the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guaranto
ents etc. Where a guarantee covers payment of principal only, interests and other uncovered payments should be treated as an unsecured.

ovider share losses on a pro-rata basis), the protected portion of the exposure shall receive the treatment applicable to eligible guarantees

isk retained are of different seniority, banks may obtain credit protection for either the senior tranches (e.g. second loss portion) or the junio

uaranteed after applying the haircut for the currency mismatch as follows:

tch as per the formulas in paragraphs 212 to 214.

nderlying exposure covered by the guarantee.

origination of the guarantee a discretion and positive incentive for the bank to call the transaction before contractual maturity.

s type. Similarly, a bank contemplating the use of credit derivatives as a credit risk mitigation technique should notify BOG and supply all re

r use of derivatives.
es must be approved by BOG.
due diligence on necessary forms of documentation and the applicability of the laws which enable the terms and conditions in Ghana.

he underlying obligation);

her similar debit to the profit and loss account).

ial recognition of the credit derivative will be allowed. If the amount of the credit derivative is less than or equal to the amount of the underly

h, or is junior to, the underlying obligation; and

occurred share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or crossacceleration clauses are in place.
vents. Materiality thresholds
ntract must not contain significant materiality thresholds that limit the credit protection.
eduction is capped at the value of capital the bank would have to hold against the full value of the underlying exposure.

of the deliverable obligation (if settled in cash or physically) or as a fixed amount or percentage of the notional principal of the contract amo

erms of the arrangement that give the credit provider the capacity to reduce the effective maturity of the credit derivative and those that give
e effective maturity of the credit derivative must be reduced by the amount of the grace period.

redit quality deteriorates in the underlying exposure.

ay out in a timely manner if the original counterparty fails to make the payment(s) due.
he post-credit valuation must be also be clearly specified in the contract.
its transfer to the protection seller. If the protection purchaser’s right and ability to transfer the underlying obligation to the protection seller
on seller. The protection buyer must have the right and ability to inform the protection provider of the occurrence of a credit event.

ovider share losses on a pro-rata basis), the protected portion of the exposure shall receive the treatment applicable to credit derivatives, wi

nd the risk retained are of different seniority, banks may obtain credit protection for either the senior tranches (e.g. second loss portion) or th

by the credit derivative (or the value of credit protection purchased as paragraph 249) is assigned the risk weight of the protection seller.

ransaction and subject to requirements for cash collateral.

pay out on losses after the first credit event as specified but thereafter the contract terminates.
e (or the value of credit protection purchased as paragraph 249) is assigned the risk weight of the protection seller.

ognised if first-to-default credit protection is held or after the first-to-default credit event has occurred for one reference entity in the basket.
e (or the value of credit protection purchased as paragraph 249) is assigned the risk weight of the protection seller.

y of the underlying exposure covered by the credit derivative.

derivative) is denominated in a currency different from that in which the exposure is denominated (i.e. there is a currency mismatch), the am

mismatch as per the formulas in paragraphs 212 to 214.

he only eligible products for banks to consider strategies for sale include credit-default swaps, total-rate-of-return swaps and cash-fund cred

e applied to the exposure is the risk weight that would otherwise apply to the reference entity. The amount of the exposure is the maximum
 amount of the exposure being the face value of the note. Where the credit-linked note is structured such that the protection seller receives

ng and sell/buy-back transactions.

r Agreement (GRMA) or the International Swap Dealers Association (ISDA) Master Agreement. The GRMA should be the standard for repu

ntracts, rather than the gross claims. Any pre-existing netting agreements, including a master netting agreement, must meet the requiremen
ns. Accordingly, the following conditions must be satisfied for capital adequacy purposes:
ated with all other obligations for the same currency and value date and legally substitutes one single amount for previous gross obligations

or obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions in the event a co
der any of the laws applicable to the counterparties wherever they are incorporated, the individual transactions or the contract that effects th

aulter is a net creditor.

ially many netting arrangements. This would include:

net on-balance sheet exposure for capital adequacy purposes. The loans are treated as exposure and liabilities (i.e. deposits) as collateral.

eral netting agreement is:

rket values, but the net position after summation cannot be negative (i.e. it must be positive or zero); and
mount after netting for SFTs.
tain drawdown.

of 100% and 20%.

ategic and reputational risk.
ovides examples of operational risk events.

ment to minimum standards for sound operational risk management.

g operational risk exposures and events in its lines of business.

sis and feedback mechanisms in place to enhance risk controls and practices;
nology and HR support.

ces, asset management, and retail brokerage.

ht business lines.

ss lines can be clearly identified.

apped over time, and governed by the following principles:

to avoid overlapping of the business lines) and jointly exhaustive manner (i.e. every activity must be mapped into one of the business lines)
k, must be allocated to the business line it supports. If more than one business line is supported through the ancillary activity, an objective m
o any associated ancillary activity.
business lines.
risk categories, i.e. credit and market risk. Any deviations from this principle must be clearly motivated and documented.
Documentation must, among other things, clearly indicate any exceptions to the rule or overrides and the reasons.

e relationship between the operational risk loss experience for a given business line and the aggregate level of gross income for that busine

s for that year.

, where the aggregate capital charge across all business lines within a given year is negative, then KnOP for that year will be zero. Also, wh
es for that year, i.e.
data for each business line and the number of years (n) in paragraph 300 adjusted accordingly. An institution in its first year of operation sha

average, the most recent year of gross income for the acquired business should be based on actual audited gross income amounts reporte
e percentage allocation of the gross income from the acquired entity across the eight Basel business lines for the most recent year, it may ap

hich the institution operates.

ng and investment decisions, underwriting debt instruments, subscribing investors to a security issuance, coordinating with bidders, or nego

i.e. the bank assumes market risk but no long-term credit risk); and
ield), equity, syndications, IPO, secondary private placements, etc.).
urities for resale to other banks and to the public at a profit, rather than hold them as investment portfolio. Trading assets are segregated fro

oans, residential mortgages, equity credit loans, deposit services, and individual retirement accounts.

retail banking). These include deposits, lending, guarantees, card services, funds transfer and other payments on behalf of customers, fore
a counterparty) and the accounting processes that record the respective debit and credit positions of the two parties involved in a transfer o

k registration and redemption, and tax collection for government agencies, for a fee income), and
e company‟s compliance with the terms of borrowing thus acting in the interest of the public who have purchased bonds issued by the comp

uld not be ordinarily available to the average investor.

ell as brokerage service, also referred to as an "asset management account" or a "central asset account".
anagement for purposes of consolidated reporting.

non-interest income (i.e. net non-interest income gross of operating expenses, including fees paid to outsourcing service providers). All ex

government bills and bonds, interbank placements and similar assets in the banking book.
al cash flows and similar investments in the banking book, and
nts for calculating market risk capital requirements in such an environment.

market risk to establish a market risk framework (MRF) appropriate for the scale and risks of business it plans to undertake. The MRF mus
ment Guidelines on market risk issued by BOG.
 redit analytics). Such systems must include:
nt valuation, timing of closing prices, procedures for adjusting valuations, end of the month and ad-hoc verification procedures; and

change prices, screen prices, or quotes from several independent reputable brokers. Banks must mark-to-market as much as possible. The
ich has to be benchmarked, extrapolated or otherwise calculated from market input(s). When marking to model, an extra degree of conserv
reporting of the risk/performance of the business.

f the development process. The model should be developed or approved independently of the front office and independently tested. This in

factors, comparison of actual close out values to model outputs).

rket may be performed by dealers, verification of market prices or model inputs should be performed by a unit independent of the dealing ro
d primarily for management reporting in between reporting dates.

here relevant: unearned credit spreads, close-out costs, operational risks, early termination, investing and funding costs, future administrativ
eview. Reduced liquidity could arise from structural and/or market events. In addition, closed out prices for concentrated positions and/ or sta

urposes of calculating the required regulatory capital. The list below provides a minimum list of key points that must be addressed by these

bject to periodic internal audit. This policy statement and material changes to it would be subject to BOG‟s review.

k capital treatment, financial instruments must either be free of any restrictive covenants on their tradability or able to be hedged completely.
arbitrage profits, and/or hedging instruments in the trading book. These positions may include for example, proprietary positions, positions a

sk managers and/or internal auditors to ensure that proper procedures are in place, and items are properly classified into either the trading o

tivity to a particular instrument, etc.

before and immediately after switching. If the capital charge is reduced as a result of the switch, the difference as measured at the time of th

e bank‟s policies; subject to prior approval by BOG based on supporting documentation provided by the bank; and publicly disclosed. Any s
ulatory approvals of such switching between books, publicly disclosed re-designations of the trading book requirement.

isk management reports (including P&L reports).

r general market risk and specific risk.

quivalent to non-main index equities listed on recognised exchanges as per paragraph 210. Consequently, for instruments that count as elig
he trading book apply the add-on factors for potential future credit exposure in the table with the following conditions:

the basket, the non-qualifying reference obligation add-on should be used. For second and subsequent-to-default transactions, underlying a
d as debt instruments if they trade like debt securities, or treated as equity if they trade like equities.

may vary in the short run due to various factors like coupon rates, liquidity, call features etc.
xchange; or

arrangements comparable to those under this framework.

alifying securities e.g. private sector issuers.
the issuer has securities listed on a recognised stock exchange.

ragraphs 356 to 358, unless otherwise specified, the higher of the specific risk capital charges is applied and the specific risk capital charge

ns) always move in the opposite directions but not broadly to the same extent.

viate from the price movement of the position in cash position; and

able) obligations in the credit derivative contract.

e of the transaction is zero.
ent positions.

ge of 10% applies to the sum of:

ds (or fifteen time bands for low coupon instruments).

nal, can be omitted from the interest rate maturity framework. Closely matched swaps, forwards, futures and FRA‟s could also be omitted fr

nds (i.e. bonds with coupon less than 3%) should be slotted by the timebands set out in the second column.

10% capital charge to reflect basis risk and gap risk will be levied on the smaller of the offsetting positions (matched position), whether it is
 which have no sign.
years and over), and subsequently between the net positions in the three different zones (inter-zone).
ver imperfect correlation of price across yield curve effect.
 re reported using the maturity method or assumed change in yield set out in the duration method, if positions are reported using duration m

unt of the underlying instrument, or of the notional underlying instrument, resulting from a prudent valuation in the trading book.

d until delivery or exercise of the contract, plus where applicable, the life of the underlying instrument.

nterest and paying fixed interest rate will be treated as a long position in a floating rate instrument of maturity equivalent to the period until th
he equity component being included in the equity framework. The separate legs of

nderlying security and the price of the future or forward contract should in such cases move in alignment.
he relevant instruments and included in the appropriate calculation for each currency.
relate to the same underlying instruments, be of the same nominal value and denominated in the same currency. In addition:

der the two methods.

underlying is debt security, or an index representing a basket of debt securities, a specific risk charge will apply per the credit risk of the iss

ruments. The various categories of instruments should be slotted into the maturity ladder and treated per the rules explained earlier.
n and 10% of the net position in gold.

waps not included in the spot position);

o the maturity ladder.

unless the amounts are certain and banks have taken the opportunity to hedge them. Future income and expenses may be included if the a
expected to use the NPV of each position, discounted using current interest rates and current spot rates, for measuring their forward curren

m the calculation of net open currency positions, subject to each of the following:
 r the interest rate risk requirement described earlier).
h prices move like equities and commitments to buy or sell equity securities.
k indices are also included.

% is applied to the overall net position.

ral market risk.

equities and on stock indices. The derivatives are to be converted into positions in the relevant underlying. The treatment of equity derivativ
apply to the matched positions.

may determine.

dary market (e.g. agriculture products, minerals, oil, and precious metals).
more dramatic effect on price and volatility.
vative contracts are exposed to a variety of additional risks, which may well be larger than the risk of a change in spot prices. These include

ositions should be included in the measures of interest rate and foreign exchange risk.
tly applied to all exposures and it is not permitted to be switched unless by written approval from BOG.

d interest rate risk within a time-band and matched long and short positions in each time-band will carry a capital charge.
in the commodity in the standard unit of measurement are entered in a maturity ladder and physical stocks are allocated to the first time-ba
sitions; and iii. matched position multiplied by the spread rate of 1.5% ;
utright charge of 15%;

primary financial instruments (or cash instruments) and derivative financial instruments.
evaluing a portfolio based on prevailing market prices

nting of standby commitments and letters of credit.

asel Committee on Banking Supervision, 1996)

vered by the definition of a long position.
be covered by the definition of a short position.

15-20 >20
9.3-10.6 10.6-12 12-20 >20

200 300
-100 -300
5.25 6 8 12.5

10.5 18
-5.25 -18

5.25 18
0.1 0.1 0.1 0.1
0.53 1.8 5.58

5.25

12.75
-4.5

4.5
30%
1.35 1.51

8.25
 0.2

1.9
3.5

3.5
12.69

Total
9.3-10.6 10.6-12 12-20 >20

200 300
-100 -300
0.6 0.6 0.6 0.6
9.75 11

11.7 19.8
-5.85 -19.8

5.85 19.8
0.05 0.05 0.05 0.05
0.29 0.99 2.89

5.85

13.39
-4.5

4.5
30%
1.35 1.35

8.89

0.52
 1.59
4.92

4.92
11.27

Total
15-20 >20
9.3-10.6 10.6-12 12-20 >20

200 300
-100 -300
5.25 6 8 12.5

10.5 18
-5.25 -18

5.25 18
0.1 0.1 0.1 0.1
0.53 1.8 5.58

5.25

16
-4.5

4.5
30%
1.35 1.51

11.5

0.2
 1.9
6.75

6.75
15.94

e of Position
ased capital adequacy ratio (CAR’) shall be calculated on a standalone and a consolidated basis.

es that a Board must demonstrate in its risk culture and its management of the bank.

e subjected to penalty under Section 33(1) of the BSDI Act.

hensive management approach to a specified business risk which achieves a minimum of the following:
e critical qualities the Board has a duty to establish and to demonstrate to BOG.

ten approval before relying on the instrument as part of regulatory capital.

rading book) provided:

weighted assets.

sed by the extent to which they can absorb losses.

stributable items). A dividend on ordinary shares will be paid out of current year‟s profit only.

m CET1 in accordance with applicable accounting standards.

write-down will have the following effects:

meets or exceeds all the other criteria for inclusion in Additional Tier 1 capital.

meets or exceeds all the other criteria for inclusion in Tier 2 Capital.
deduction applies to each tier of capital in proportion to the total investment holdings of the bank. Should a bank not have sufficient capital a

he same underlying index.

ould not rely on the future profitability of the license and would be assigned the relevant sovereign risk weighting.

s the element that gives rise to artificial volatility in common equity, as in this case the reserve only reflects one half of the transaction.
rectly by the bank.

ayments on its capital. Among others, dividend payments, share buybacks and discretionary bonus payments are not permitted until the req

oposed by a bank may be acceptable to BOG depending on the strength of the bank‟s strategy, risk management framework and capital ma
ustive and BOG will periodically review the indicators in line with macroprudential measures.
t is subject to the following minimum (plus capital conservation buffer) requirements and has the following surplus capital.
ess and the circulation of information on borrowers. Banks are expected to comply with existing requirements, but also to advocate for and a
y process, and where:

the currency of the borrower’s primary income. The risk weight add-on is additional to the risk weight for the counterparty.
val by the board or a committee of the board, fixed repayment schedules, effective monitoring of use of proceeds, status review process, an

k charge for the counterparty.

(SEC) shall be risk weighted at 100%.

ndustry should warrant a higher risk weight than that assigned.

creditworthiness.

nconditional, and whether the facility contains a ‘material adverse change’ clause.

CCF applies from either of the:

he repo is an irrevocable commitment and an off-balance sheet exposure.

e bank had entered into the transaction as the principal. In such circumstances, the bank is required to calculate regulatory capital as if it wa
other assets sold under a sale and repurchase agreement (or repo) are reported on balance sheet.

ket, the unplaced amount is to be taken up or funds made available by the bank committed as the underwriter of the facility.

unsettled transactions as appropriate for its business.

 rate would have an effective notional amount of GH¢2 million.

the necessary operational conditions for any technique they employ is robust to achieve this objective.
the uniformity and legal certainty in contracts used for bilateral netting or master netting agreements.

art of the risk weight of the counterparty and no further reduction from this CRM will be recognised.

on covered by guarantee) and the riskweighted assets of each portion must be calculated separately.
off on credit balances, but a common law right of set-off is insufficient on its own to satisfy this condition.
This would include clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declarin

arty segregates the collateral from its own assets.

ateral or the bank taking the collateral.
ation to the bank, or the guarantor may assume the future payment obligations of the counterparty covered by the guarantee. The bank mus
uld be treated as an unsecured.

pplicable to eligible guarantees and the remainder is regarded as unsecured.

second loss portion) or the junior tranche (e.g. first loss portion).

ntractual maturity.

uld notify BOG and supply all relevant supporting documentation.

s and conditions in Ghana.

ual to the amount of the underlying obligation, 60% of the amount of the hedge can be recognised as covered. If the amount of the credit d

cceleration clauses are in place.

g exposure.

nal principal of the contract amount.

dit derivative and those that give the bank at origination of the credit derivative a discretion and positive incentive for the bank to reduce its

bligation to the protection seller is required for settlement, the terms of the underlying obligation must provide that any required consent to s
ence of a credit event.

pplicable to credit derivatives, with the remainder treated as unsecured.

s (e.g. second loss portion) or the junior tranche (e.g. first loss portion).

eight of the protection seller.

e reference entity in the basket.

is a currency mismatch), the amount of the exposure deemed to be protected, i.e. the volatility adjusted value of the credit protection (GA)

return swaps and cash-fund credit-linked notes. First- or second-to-default credit derivatives will not be permitted.

of the exposure is the maximum possible amount payable under the terms of the credit derivative contract if a credit event were to occur.
at the protection seller receives some percentage of the note’s face value if the credit derivative is triggered, the amount of exposure to the

should be the standard for repurchase transactions (‘repos’) conducted with BOG. Banks are expected to undertake appropriate due dilige

ment, must meet the requirements of this section.

unt for previous gross obligations.

ual transactions in the event a counterparty fails to perform due to any of the following: default, bankruptcy, liquidation or similar circumstanc
ons or the contract that effects the netting arrangement; and

ities (i.e. deposits) as collateral. The haircuts will be zero except when a currency mismatch exists. The bank must also apply a 10-busines
 d into one of the business lines).
e ancillary activity, an objective mapping criterion must be used and documented.

documented.

el of gross income for that business line.

or that year will be zero. Also, where the aggregate capital charge across all business lines within a given year is negative or zero, that year
 n in its first year of operation shall annualize the Gross Income for each business line as at each reporting date for that year and the numbe

d gross income amounts reported by the acquired business. Management accounts may be used for the previous 2 years when actual amo
or the most recent year, it may apply this allocation to the previous two years of gross income. Thus, the mapping exercise for the acquired

oordinating with bidders, or negotiating with a merger target.

rading assets are segregated from the investment portfolio and recorded separately when acquired until they are disposed of or sold.

ents on behalf of customers, foreign exchange services, and net income from non-trading books e.g. investment in government bills and bo
o parties involved in a transfer of funds. They include payment services, settlement and clearing services and systems (e.g. Real Time Gros

hased bonds issued by the company).

ourcing service providers). All extraordinary or irregular items (including profit or loss from the sale of assets in the banking books) shall be
ans to undertake. The MRF must produce sound and reliable measurements of market risk for risk based capital.
fication procedures; and

market as much as possible. The more prudent side of bid/offer must be used unless the institution is a significant market maker in a particu
odel, an extra degree of conservatism is appropriate. BOG will consider the following in assessing whether a mark-to-model valuation is pru

nd independently tested. This includes validating the mathematics, the assumptions and the software implementation.

unit independent of the dealing room, at least monthly (or, depending on the nature of the market/trading activity, more frequently). It need n

unding costs, future administrative costs and, if appropriate, model risk.

oncentrated positions and/ or stale positions are more likely to be adverse. Banks shall, at a minimum, consider several factors when determ

hat must be addressed by these policies and procedures for overall management of the trading book. Board and senior management of ban

or able to be hedged completely. In addition, positions should be frequently and accurately valued, and the portfolio should be actively mana
proprietary positions, positions arising from client servicing and market making.

classified into either the trading or banking books. In this regard, banks shall comply with the following:

nce as measured at the time of the switch will be imposed on the bank as a disclosed Pillar I capital charge.

nk; and publicly disclosed. Any such re-designation is irrevocable.

equirement.

for instruments that count as eligible collateral in the trading book, but not in the banking book, the haircuts must be calculated for each ind

default transactions, underlying assets should continue to be allocated to quality of the credit, i.e. the second lowest credit quality will determ
nd the specific risk capital charge for the other position is zero. If the positions are not as described in paragraphs 356 to 358, a specific risk
d FRA‟s could also be omitted from the interest rate maturity framework provided they meet the following conditions:

(matched position), whether it is long or short.

ns are reported using duration method, with no further offsets.

in the trading book.

y equivalent to the period until the next interest fixing life of the swap.
rency. In addition:

apply per the credit risk of the issuer.

e rules explained earlier.

xpenses may be included if the approach is consistent over time and is not done selectively in a way that reduces the position.
or measuring their forward currency and gold positions.
The treatment of equity derivatives is summarized in the table below:
nge in spot prices. These include:

apital charge.
are allocated to the first time-band.
bank not have sufficient capital at the level the deduction is to apply, the shortfall is deducted from the next higher tier of capital (e.g. if dedu

one half of the transaction.

nts are not permitted until the required levels of capital are restored.

ement framework and capital management plan.

urplus capital.
ts, but also to advocate for and act to improve information available for credit management purposes.

e counterparty.
ceeds, status review process, and rigorous assessment of risk and provisioning to loan loss reserve.
ulate regulatory capital as if it was the principal.

ter of the facility.

l conditions required for declaring the default of the counterparty and liquidating the collateral are observed and that the collateral can be liq
by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal actions t

red. If the amount of the credit derivative is larger than that of the underlying obligation, then the amount of eligible hedge is capped at 60%
entive for the bank to reduce its effective maturity.

de that any required consent to such transfer may not be unreasonably withheld.

alue of the credit protection (GA) shall be calculated by the application of a haircut HFX as follows:

f a credit event were to occur.

d, the amount of exposure to the reference entity is the difference between the face value and this percentage amount. To account for this e

undertake appropriate due diligence on the forms of documentation and the applicability of the laws which enable the terms and conditions

liquidation or similar circumstances;

nk must also apply a 10-business day holding period when daily mark-to-market is conducted and satisfy tests of maturity.
ear is negative or zero, that year will be excluded from the numerator and the denominator in paragraph 300.
date for that year and the number of years (n) should be set to 1.

evious 2 years when actual amounts are not available.

apping exercise for the acquired business need only be performed for the most recent year. The mapping results can be applied to the total

ey are disposed of or sold.

tment in government bills and bonds, interbank placements and similar assets in the banking book.
nd systems (e.g. Real Time Gross Settlement System, Ghana Inter-Bank Payment and Settlement System (GhIPSS), Central Securities De
s in the banking books) shall be excluded from both income and expenses.
nificant market maker in a particular position type and it can close out at mid-market.
a mark-to-model valuation is prudent:

ementation.

tivity, more frequently). It need not be performed as frequently as daily mark-to-market, since the objective, i.e. independent, marking of pos

sider several factors when determining whether valuation adjustment is necessary for less liquid items. These factors include the amount of

d and senior management of banks should ensure compliance with the policies and procedures set forth below.

portfolio should be actively managed.

must be calculated for each individual security.

d lowest credit quality will determine the add-on for a second to default transaction etc.
graphs 356 to 358, a specific risk capital charge will be assessed against both sides of the position.
educes the position.
higher tier of capital (e.g. if deduction exceeds amount at AT1, the shortfall is then deducted from CET1).
and that the collateral can be liquidated promptly.
irst having to take legal actions to pursue the counterparty for payment.

eligible hedge is capped at 60% of the amount of the underlying obligation.

ge amount. To account for this exposure, the higher of the risk weights applicable to the protection buyer and the entity where the cash coll

enable the terms and conditions in Ghana.

ests of maturity.
sults can be applied to the total gross income of the acquired business for the previous 2 years to determine the percentage assigned to th

(GhIPSS), Central Securities Depository, VISA, MASTERCARD, SWIFT, E-Money Issuers, remittance service providers etc.)
i.e. independent, marking of positions, should reveal any error or bias in pricing, which should result in the elimination of inaccurate daily m

se factors include the amount of time it would take to hedge out the risks within the position, the average volatility of bid/ offer spreads, the
nd the entity where the cash collateral is held must be applied to the exposure.
e the percentage assigned to the eight Basel business lines.

ice providers etc.)

elimination of inaccurate daily marks.

olatility of bid/ offer spreads, the availability of market quotes (number and identity of market makers), and the average and volatility of tradin
he average and volatility of trading volumes.
ECB Guide to the internal capital adequacy assessment process (ICAAP)
Draft

Contents
1 Introduction 2
1.1 Purpose 3
1.2 Scope and pro 4
2 Principles 5
Principle 1 – The 5
Principle 2 – The ICAAP is an integral part of the overall management
framework 7
Principle 3 – The 11
Principle 4 – All 22
Principle 5 – Inter 26
Principle 6 – ICAAP risk quantification methodologies are adequate,
consistent and in 29
Principle 7 – Regular stress testing is aimed at ensuring capital
adequacy in adve 33
3 Glossary 36
Abbreviations 40

Contents
1 Introduction
1 The depth and severity of financial shocks are often amplified by inadequate and low-quality capital in the ban
2 Accordingly, the ICAAP plays a key role in the risk management of credit institutions. As regards significant in
Supervisory Mechanism (SSM), the ECB expects the ICAAP in accordance with the provisions in Article 73 of the Capital Requ
3 In the ECB’s view, a sound, effective and comprehensive ICAAP is based on two pillars: the economic and th
4 The ICAAP is also an important input factor in the SSM Supervisory Review and Evaluation Process (SREP).
5 In the SREP, it is acknowledged that a good ICAAP reduces an institution’s and its supervisors’ uncertainty co
1.1 Purpose
6 The purpose of this ECB Guide to the ICAAP (the “Guide”) is provide transparency by making public the ECB
7 The Guide deduces from the CRD IV ICAAP provisions seven principles that will be considered, inter alia, in t
8 The Guide does not substitute or supersede any applicable law implementing Article 73 of CRD IV. Insofar as
9 This Guide follows a principles-based approach with a focus on selected key aspects from a supervisory pers
10 In addition to this Guide, and in addition to relevant Union law and national law, institutions are encouraged to
1.2 Scope and proportionality
11 This Guide is relevant for any credit institution which is considered to be a significant supervised entity as refe
12 The ECB, together with the national competent authorities (NCAs), has developed ICAAP principles. The obje
13 The ICAAP is, above all, an internal process, and it remains the responsibility of individual institutions to imple
14 The principles developed in this Guide shall only serve as a starting point in supervisory dialogues with credit
 2 Principles
Principle 1 – The management body is responsible for the sound governance of the ICAAP
(i) In view of the major role of the ICAAP for the institution, all of its key elements are expected to be approved b
(ii) Each year, the management body is expected to provide its assessment of the capital adequacy of the institu
(iii) The management body has overall responsibility for the implementation of the ICAAP, and it is expected to ap
The management body approves key elements of the ICAAP
15 The management body is expected to produce and sign the CAS, and approve the key elements of the ICAAP
• the governance framework;
• internal documentation requirements;
• the perimeter of entities captured, the risk identification process, and the internal risk inventory and taxonomy
• risk quantification methodologies, including high-level risk measurement assumptions and parameters (e.g. ti
• methodologies used to assess capital adequacy (including the stresstesting framework and a well-articulated
16 The management body comprises a supervisory function and a management function that may be performed
key elements of the ICAAP are approved by which function depends on the internal governance arrangements of the institution
Internal review and validation
17 According to Article 73 CRD IV, the ICAAP shall be subject to regular internal review Both qualitative and qua
18 The ECB expects a defined process to be in place in order to ensure proactive adjustment of the ICAAP to an
19 ICAAP outcomes and assumptions are expected to be subject to adequate back-testing and performance me
Capital adequacy statement
20 In the CAS, the management body provides its assessment of the capital adequacy of the institution and expl
21 The authority to sign the CAS on behalf of the management body is expected to be decided by the institution
Principle 2 – The ICAAP is an integral part of the overall
management framework
(i) Pursuant to Article 73 CRD IV, the institution is expected to have in place sound, effective and comprehensive
(ii) In addition to an adequate quantitative framework for assessing capital adequacy, a qualitative framework nee
(iii) The quantitative and qualitative aspects of the ICAAP are expected to be consistent with each other and with
(iv) Institutions are expected to maintain a sound and effective overall ICAAP architecture and documentation of t
(v) The ICAAP is expected to support strategic decision-making and, at the same time, be operationally aimed at
The ICAAP as an integral part of an institution’s management framework
22 In order to assess and maintain adequate capital to cover the institution’s risks, the internal processes and ar
23 This integration may be achieved by using the ICAAP for, for example, the strategic planning process at group
The overall ICAAP architecture
24 The management body is responsible for maintaining a sound and effective overall ICAAP architecture, ensur
25 For this purpose, the institution is expected to maintain as part of its ICAAP documentation a description of th
Management reporting
26 The ICAAP is an ongoing process. The institution is expected to integrate ICAAP outcomes (such as material
27 The ICAAP outcomes regarding risk quantification and capital allocation, when approved, are expected to bec
ICAAP governance framework and architecture as described under Principle 1.
The ICAAP and the risk appetite framework
28 The RAF of the institution is expected to formalise the interplay between the RAF and other strategic process
29 In its risk appetite statement, the institution is expected to set out a clear and unambiguous view on and inten
30 The institution’s overall risk profile is expected to ultimately be constrained and driven by the group-wide RAF
 31 The institution is expected to clearly express how the implementation and monitoring of its strategy and risk a
Consistency between ICAAPs and recovery plans
32 A recovery plan is aimed at ensuring the survival of the institution in times of distress that pose a threat to its v
to be reflected without delay in the recovery plan, and vice versa, to ensure the availability of up-to-date information.
Consistency and coherence across groups
33 The ICAAP is expected to ensure capital adequacy at relevant levels of consolidation and for relevant entities

Principle 3 – The ICAAP contributes fundamentally to the continuity of the institution by ensuring its capital adequacy from differ
(i) The ICAAP plays a key role in maintaining the continuity of the institution by ensuring its adequate capitalisati
(ii) The institution is expected to implement a normative perspective which is a multi-year assessment of the insti
(iii) The normative perspective is expected to be complemented by an economic perspective, under which the ins
(iv) Both perspectives are expected to mutually inform each other and be integrated into all material business act
Objective: to contribute to the continuity of the institution
34 The objective of the ICAAP is to contribute to the institution’s continuity from a capital perspective by ensuring
35 Within these capital constraints, the institution is expected to assess and define management buffers above th
markets, investors and counterparties, possible restrictions on distributions stemming from the maximum distributable amount (
Figure 1
The ICAAP contributes to the continuity of the institution

Normative perspective
36 The normative perspective is a multi-year assessment of the institution’s ability to fulfil all of its capital-related
37 In addition to, for example, leverage ratio, large exposure and minimum requirement for own funds and eligibl
38 The normative perspective is expected to take into account all material risks affecting the relevant regulatory r
39 The institution is expected to maintain a robust up-to-date capital plan which is compatible with its strategies,
Figure 2
Management buffers and other capital constraints under the normative perspective

40. For non-stressed considerations, including baseline projections in capital plans, the institution is expected, in addition to the
Figure 3
Baseline capital ratio projection under the normative perspective

Figures and dimensions are for illustrative purposes only.

41 The institution is expected to aim to meet its TSCR at all times, including under prolonged periods of adverse
42 If the institution assumes management actions in its capital plan, it is expected to also assess the feasibility a
Figure 4
Adverse capital ratio projections under the normative perspective

Figures and dimensions are for illustrative purposes only.

Economic perspective
43 The institution is expected to manage its capital adequacy from the economic perspective by ensuring that its
44 The institution is expected to use its own processes and methodologies to identify, quantify, and cover with int
situation, e.g. potential management actions, changes in the external environment, etc.
45 The institution is expected to use the outcomes and metrics of the economic capital adequacy assessment in
 46 The economic capital adequacy of the institution requires active monitoring and management. For this reason
Figure 5
Management considerations under the economic perspective

It is important to note that the graph is not expected to be understood as a projection of a point-in-time economic situation. It de
47 When the institution identifies a significant downward trend in its economic capital position, it is expected to co
Interaction between the economic and normative perspectives
48 Under the economic perspective, economic risks and losses affect internal capital immediately and to their ful
49 Therefore, the institution is expected to assess under the normative perspective the extent to which the risks
50 More specifically, risks and impacts that are not necessarily apparent when focusing solely on the accounting
51 Conversely, the institution is expected to also use the outcomes of the normative perspective to inform the ec
52 Since the capital definitions and levels, the risk types and their amounts, and the minimum capital ratios usua
Figure 6
Overview of ICAAP perspectives and key features

Normative internal perspective

• Ongoing fulfilment of all relevant regulatory requirements and external constraints.
• Medium-term projections for at least three years:
• Ensures the ongoing fulfilment of OCR plus P2G in the baseline, and TSCR in adverse scenarios.
• Takes into account all material risks (not limited to Pillar 1 risks).
• Considers upcoming changes in the legal / regulatory / accounting frameworks.
• Additional management buffers determined by the institution.

Economic internal perspective

• Risks that may cause economic losses are covered by internal capital.
• Capital adequacy concept based on fair value considerations (e.g. net present value approach).
• Adequate, consistent and independently validated internal risk quantification methods.
• Internal definition of capital.
• Point-in-time risk quantification of the current situation feeding into a mediumterm assessment covering future
• Internal indicators, thresholds and management buffers.

• Sound governance
• Integration in de • Sound data quality, data aggregation and IT architecture
• Subject to regular internal review

Example 3.1:
Management buffers
The weaker the capital base of an institution is, the harder and more expensive it becomes for it to follow its intended business
Another example is dividends and AT1 payments. If the institution’s strategy is based on the issuance of capital instruments in t
Taking such considerations into account, the institution is expected to determine the levels of capital it needs in order to continu
Example 3.2:
The economic perspective informs the normative perspective
The institution is expected to quantify the profit and loss (P&L) impact of interest rate risks in the banking book under the norma
Another example is hidden losses. While assets are conceptually taken into account at fair value/net present value under the ec
If, for example, an institution has a government bond portfolio that is subject to total hidden losses of 100, it is expected to dete
Example 3.3:
The normative perspective informs the economic perspective
The medium-term assessments of the normative internal perspective and the respective underlying scenarios are expected to i
The adverse projections of the normative perspective are expected to simulate institution-specific vulnerabilities. If such project

Principle 4 – All material risks are identified and taken into account in the ICAAP
(i) The institution is responsible for implementing a regular process for identifying all material risks it is or might b
(ii) Taking a comprehensive approach, including all relevant legal entities, business lines and exposures, the inst
(iii) In the case of financial and non-financial participations, subsidiaries, and other connected entities, the institut
(iv) For all risks identified as material, the institution is expected either to allocate capital to cover the risk or to do
Risk identification process
53 The institution is expected to implement a regular process for identifying all material risks and include them in
54 The risk identification is expected to be comprehensive and take both normative and economic perspectives i
55 The risk identification process is expected to follow a “gross approach”, i.e. without taking into account specifi
56 In line with the EBA Guidelines on limits on exposures to shadow banking entities (EBA/GL/2015/20), the inst
57 The management body is responsible for deciding which risk types are to be considered material, and which m
Risk inventory
58 When determining its internal risk inventory, the institution is responsible for defining its own internal risk taxon
59 In its risk inventory, the institution is expected to take into account the underlying risks, where material, stemm
60 In a proportionate way, the institution is expected to look beyond participation risks and identify, understand a
Example 4.1:
Risk inventory
The risk list and mapping between risk types and risk sub-categories presented in this example are not to be considered manda
• Credit risk (including, e.g., country risk, migration risk and concentration risk)
• Market risk (including, e.g., credit spread risk, structural foreign exchange (FX) risk and credit valuation adjus
• IRRBB (including, e.g., repricing risk, yield curve risk and option risk (e.g. from prepayment options))
• Operational risk (including, e.g., business disruption and systems failure, legal risk and model risk)
• Other risks (including, e.g., insurance risk, business risk, step-in risk, pension risk, participation risk, funding c
It remains the institution’s responsibility to determine all of its material risks, and all concentrations between and within those ris
Example 4.2:
Risk identification under the gross approach
Under the gross approach, risks are first identified without taking into account specific techniques designed to mitigate them. A
For example, an institution may identify that, based on the maturity profile of its banking book, the risks arising from changes in
In this case, the yield curve risk is first expected to be identified, assessed and recorded in the risk inventory without taking into
The institution may decide to mitigate the yield curve risk through a combination of derivatives and contractual arrangements, a
Example 4.3:
Risk identification in the case of a non-financial subsidiary
Where an institution acts as a parent company for a non-financial subsidiary, the prudential treatment of that subsidiary is based
For example, the institution may identify that the customer profile and investments of a significant subsidiary need to be taken in
Example 4.4:
Risk identification in the case of outsourcing
Where an institution outsources its operations to a service provider, it is expected to be able to identify, assess and quantify the

Principle 5 – Internal capital is of high quality and clearly defined

(i) The institution is expected to define, assess and maintain internal capital under the economic perspective. Th
(ii) Internal capital is expected to be of sound quality, and determined in a prudent and conservative manner. The
Internal capital definition
61 The purpose of internal capital is to serve as a risk-bearing component under the economic perspective. Ther
62 The institution is expected to recognise that, owing to different valuation methodologies and assumptions for a
63 It is the responsibility of the institution to implement an adequate definition and methodology for its internal ca
64 If the institution uses the regulatory own funds as a starting point for its internal capital definition, it is expecte
that have loss-absorption capacity only in the case of non-continuation of the institution.
65 Where the internal capital definition is disconnected from the regulatory own funds, the risk-bearing capacity o
66 The Institution is expected to be transparent about its internal capital, enabling a reconciliation between own f
Example 5.1:
Internal capital definition starting from regulatory own funds
An institution adopting a regulatory definition as a basis for its internal capital determination needs to adjust the regulatory own
Such adjustments are expected to be addressed in a consistent way in both the internal capital determination and the risk quan
In general, Tier 2 capital instruments, goodwill, deferred tax assets (DTAs) and all other balance sheet items that cannot be dee
Example 5.2:
Internal capital definition based on net present values
An institution may notice that the fair value of its debt decreases together with a downgrade of its own credit worthiness. It woul

Principle 6 – ICAAP risk quantification methodologies are

adequate, consistent and independently validated
(i) The institution is responsible for implementing risk quantification methodologies that are adequate for its indiv
(ii) The key parameters and assumptions are expected to be consistent throughout the group and between risk ty
Comprehensive risk quantification
67 The ICAAP is expected to ensure that risks that the institution is or may be exposed to are adequately quantif
68 Risks are not expected to be excluded from the assessment because they are difficult to quantify or the releva
69 The key parameters and assumptions cover, inter alia, confidence levels, holding periods, and scenario gene
Level of conservatism
70 The risk quantification methodologies and assumptions used under the economic and normative perspectives
71 Instead of mechanically aiming at external credit rating objectives and statistical confidence levels, the institut
72 In order to facilitate the comparison between Pillar 1 and ICAAP risk quantifications, regardless of the Pillar 1
Choice of risk quantification methodologies
73 It is the responsibility of the institution to implement adequate methodologies both to quantify its risks and to d
74 The methodologies used are expected to be consistent with each other, with the perspective considered and
more sophisticated risk quantification methodologies to capture the risks in an adequate manner.
75 However, the institution is not expected to implement risk quantification methodologies that it does not fully un
Data quality
 76 The institution is expected to deploy adequate processes and control mechanisms to ensure the quality of da
Risk diversification effects
77 The institution is expected to take a prudent approach whenever assuming risk diversification effects. The Ins
78 The institution is expected to be fully transparent about assumed risk diversification effects and, at least in the
79 The institution is expected to target diversification effects in its stress-testing framework, involving, for exampl
Independent validation
80 ICAAP risk quantification methodologies are expected to be subject to regular independent validation, respec
81 Depending on the size and complexity of the institution, various organisational solutions may be adopted to e
82 The overall conclusions of the validation process are expected to be reported to senior management and the
Example 6.1:
Organisation of independent validations
In order to ensure the independent and proportionate validation of ICAAP risk quantification methodologies, the institution is ex
Depending on the nature, size, scale and complexity of its risks, the institution may, for example, employ one of the following th
• separation into two different units reporting to different members of the senior management;
• separation into two different units reporting to the same member of the senior management;
• separate staff within the same unit.

Principle 7 – Regular stress testing is aimed at ensuring

capital adequacy in adverse circumstances
(i) The ECB expects the institution to perform a tailored and in-depth review of its vulnerabilities, capturing all ma
(ii) As part of the stress-testing programme, the institution is expected to determine adverse scenarios to be used
(iii) The institution is expected to continuously monitor and identify new threats, vulnerabilities and changes in the
Determination of the stress-testing programme
83 The stress-testing programme is expected to cover both the normative and the economic perspective. When
Severity level of adverse scenarios under the normative perspective
84 In its baseline assessment, the institution is expected to assume developments that it would assume under ex
85 In adverse scenarios under the normative perspective, the institution is expected to assume exceptional, but p
86 The range of adverse scenarios is expected to adequately cover severe economic downturns and financial sh
Coherence versus targeting key vulnerabilities
87 In stress testing, the institution is expected to focus on its key vulnerabilities when attempting to define plausib
88 ICAAP and ILAAP stress tests are expected to inform each other; i.e. the underlying assumptions, stress test
Reverse stress testing
89 In addition to stress-testing activities that assess the impact of certain assumptions on capital ratios, the instit
90 Such reverse stress tests are expected to be used to challenge the comprehensiveness and conservatism of
Example 7.1:
Interaction between ICAAP and ILAAP stress tests
The institution is expected to assess the potential impact of relevant scenarios, integrating capital and liquidity impacts and pote

3 Glossary
Adverse scenario
A combination of assumed adverse developments in internal and external factors (including macroeconomic and financial deve
Baseline scenario
A combination of expected developments in internal and external factors (including macroeconomic and financial developments
Capital adequacy statement
A formal statement from the management body providing its assessment of the capital adequacy of the institution and explainin
Capital adequacy
The degree to which risks are covered by capital. The ICAAP is aimed at maintaining adequate capitalisation on an ongoing ba
Capital planning
A multidimensional internal process resulting in a capital plan presenting a multi-year projection of capital demand and supply o
Diversification effect
A reduction in the overall risk quantification of an institution stemming from the assumption that individually estimated risks will n
Economic capital adequacy concept
An internal concept aimed at ensuring under the economic perspective that the financial resources (internal capital) of the instit
Economic internal perspective
An ICAAP perspective under which the institution manages its economic capital adequacy by ensuring that its economic risks a
Expected and unexpected losses
The expected loss is the statistical mean loss the institution expects over a given period of time. The unexpected loss is the tota
Gross approach in risk identification
The gross approach means that risks are first identified without taking into account specific actions designed to mitigate them.
Hidden losses and reserves
Valuation differences between accounting values and fair values of balance sheet positions.
ICAAP architecture
Different elements of the ICAAP and how they interlink. The ICAAP architecture is expected to ensure that the different elemen
ICAAP outcomes
Any information that results from the ICAAP and adds value to decision-making.
ICAAP
The internal capital adequacy assessment process as defined in Article 73 CRD IV: “Institutions shall have in place sound, effec
Internal review and validation
Internal review covers a broad range of controls, evaluations and reports aimed at ensuring that ICAAP strategies, processes a
Validation, as part of the internal review, encompasses processes and activities assessing whether the risk quantification metho
Limit system
A documented and hierarchical system of limits set in line with the overall strategy and risk appetite of the institution in order to
Management buffer
An amount of capital above the regulatory and supervisory minima and internal capital thresholds that the institution considers n
Material risk
A capital-related downside risk that, based on the institution’s internal definitions, has a material impact on its overall risk profile
Medium-term time horizon
A time horizon which captures the near and medium-term future. It is expected to capture the capital position over at least the u
Normative internal perspective
A multi-year ICAAP perspective under which the institution manages its capital adequacy by ensuring that it is able to fulfil all of
Proportionality
A principle in Article 73 CRD IV which states that the ICAAP shall be proportionate to the nature, scale and complexity of the ac
Recovery plan
A plan drawn up and maintained by an institution in accordance with Article 5 of the Bank Recovery and Resolution Directive (B
Reverse stress test
A stress test which starts from the identification of the pre-defined outcome (e.g. the point of non-viability) and then explores sce
Risk appetite statement
A formal statement in which the management body expresses its views on the amounts and types of risk that the institution is w
Risk horizon / holding period
The assumed period of time over which the risk is assessed.
Risk identification process
A regular process the institution uses to identify risks that are or might be material for the institution.
Risk inventory
A list of identified risks and their characteristics. The risk inventory is the result of the risk identification process.
Risk quantification
The process of quantifying identified risks by developing and using methodologies to determine risk figures and enable a comp
Risk taxonomy
A categorisation of different risk types/factors enabling the institution to assess, aggregate and manage risks in a consistent wa

Abbreviations
AT1 Additional Tier 1
BCBS Basel Committee on Banking Supervision
BRRD Bank Recovery and Resolution Directive
CAS capital adequacy statement
CBR combined buffer requirement
CET1 Common Equity Tier 1
CRD IV Capital Requirements Directive
CVA Credit valuation adjustment
DTA Deferred tax assets
EBA European Banking Authority
ECB European Central Bank
FSB Financial Stability Board
ICAAP Internal capital adequacy assessment process
ILAAP Internal liquidity adequacy assessment process
IRB Internal ratings-based
IRRBB Interest rate risk in the banking book
LSI Less significant institution

© European Central Bank, 2018

MDA Maximum distributable amount

MREL Minimum requirement for own funds and eligible liabilities
NCA National competent authority
OCR Overall capital requirement (TSCR+CBR)
P1R Pillar 1 capital requirement
P2G Pillar 2 capital guidance
P2R Pillar 2 capital requirement
RAF Risk appetite framework
SI Significant institution
SREP Supervisory Review and Evaluation Process
SSM Single Supervisory Mechanism
TREA Total risk exposure amount
TRIM Targeted Review of Internal Models
TSCR Total SREP capital requirement (P1R+P2R)

Postal address 60640 Frankfurt am Main, Germany

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All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknow
and low-quality capital in the banking sector. This was the case in the recent financial crisis, when banks were forced to rebuild their capital
tutions. As regards significant institutions established in the Single
in Article 73 of the Capital Requirements Directive (CRD IV) to be prudent and conservative. The ECB is of the view that sound, effective a
two pillars: the economic and the normative perspectives. Both perspectives are expected to complement and inform each other.
and Evaluation Process (SREP). It feeds into the SREP assessments of business models, internal governance and overall risk managemen
nd its supervisors’ uncertainty concerning the risks that the institution is or may be exposed to, and gives supervisors an increased level of c

rency by making public the ECB’s understanding of the ICAAP requirements following from Article 73 CRD IV. The Guide is aimed at assisti
will be considered, inter alia, in the assessment of each institution’s ICAAP as part of the SREP. These principles will also be referred to in d
Article 73 of CRD IV. Insofar as the Guide is not in line with applicable law, the applicable law prevails. The Guide is intended to be a pract
aspects from a supervisory perspective. It is not meant to provide complete guidance on all aspects relevant for sound ICAAPs. The implem
w, institutions are encouraged to take into account other ICAAP-relevant publications from the EBA and international fora like the Basel Com

nificant supervised entity as referred to in Article2(16) of the SSM Framework Regulation. The ICAAP scope is determined by Article 108 C
oped ICAAP principles. The objective of these principles is to ensure high standards of supervision by fostering the development of commo
of individual institutions to implement it in a proportionate and credible manner. Pursuant to Article 73 CRD IV, ICAAPs have to be proportio
upervisory dialogues with credit institutions. Therefore, they should not be understood as comprehensive covering all aspects necessary to
s are expected to be approved by the management body. The management body, senior management and relevant committees are expecte
e capital adequacy of the institution, supported by ICAAP outcomes and any other relevant information, by producing and signing a clear an
e ICAAP, and it is expected to approve an ICAAP governance framework with a clear and transparent assignment of responsibilities, adheri

ve the key elements of the ICAAP, for example:

nal risk inventory and taxonomy, reflecting the scope of material risks;
umptions and parameters (e.g. time horizon, diversification assumptions, confidence levels, and holding periods), supported by reliable data
ramework and a well-articulated definition of capital adequacy).
function that may be performed by a single body or two separate bodies. Which
e arrangements of the institution, which will be interpreted by the ECB in accordance with national regulations and in line with relevant Unio

review Both qualitative and quantitative aspects, including, for example, the use of ICAAP outcomes, the stress-testing framework, risk cap
e adjustment of the ICAAP to any material changes that occur, such as entering new markets, providing new services, offering new product
ack-testing and performance measurement, covering, for example, capital planning, scenarios, and risk quantification.

equacy of the institution and explains its main supporting arguments, backed by information it considers relevant, including ICAAP outcomes
d to be decided by the institution in the light of national regulations and relevant prudential requirements and guidelines.

nd, effective and comprehensive strategies and processes to assess and maintain capital that it considers adequate to cover the nature an
uacy, a qualitative framework needs to ensure that capital adequacy is actively managed. This includes the monitoring of capital adequacy i
sistent with each other and with the institution’s business strategy and risk appetite. The ICAAP is expected to be integrated into the busine
hitecture and documentation of the interplay between the ICAAP elements and the integration of the ICAAP into the institution’s overall man
e time, be operationally aimed at ensuring that the institution maintains adequate capitalisation on an ongoing basis, thereby promoting an a

s, the internal processes and arrangements are expected to ensure that quantitative analysis of risks, as reflected in the ICAAP, is integrat
ategic planning process at group level, monitoring capital adequacy indicators to identify and assess potential threats in a timely manner, d

verall ICAAP architecture, ensuring that the different elements of the ICAAP fit coherently together and that the ICAAP is an integral part of
ocumentation a description of the overall ICAAP architecture, for example an overview of the key elements of the ICAAP and how they wor

AAP outcomes (such as material evolution of risks, key indicators, etc.) into its internal management reporting at an appropriate frequency. T
n approved, are expected to become a key performance benchmark and target against which each (risk-taking) division’s financial and othe

RAF and other strategic processes, such as the ICAAP, the ILAAP, the recovery plan and the remuneration framework, in accordance with t
unambiguous view on and intended actions with regard to its risks in line with its business strategy. In particular, the statement is expected
d driven by the group-wide RAF and its implementation. Furthermore, the RAF is a critical element of the institution’s strategy development
 nitoring of its strategy and risk appetite are supported by its ICAAP, and how this effectively allows it to comply with the agreed risk bounda

distress that pose a threat to its viability. Since insufficient capitalisation is one of the key threats to business continuity/viability, there is a na
p-to-date information.

olidation and for relevant entities within the group, as required by Article 108 CRD IV. In order to be able to effectively assess and maintain c

g its capital adequacy from different perspectives

ensuring its adequate capitalisation. In order to ensure this contribution to its continuity, the institution is expected to implement a proportion
multi-year assessment of the institution’s ability to fulfil all of its capital-related regulatory and supervisory requirements and demands and to
perspective, under which the institution is expected to identify and quantify all material risks that may cause economic losses and deplete in
ed into all material business activities and decisions as outlined under Principle 2.

a capital perspective by ensuring that it has sufficient capital to bear its risks, absorb losses and follow a sustainable strategy, even during a
ne management buffers above the regulatory and supervisory minima and internal capital needs that allow it to sustainably follow its strateg
maximum distributable amount (MDA), and the reliance of the business model on the ability to pay out bonuses, dividends and payments o

ty to fulfil all of its capital-related quantitative regulatory and supervisory requirements and demands, and to cope with other external financi
rement for own funds and eligible liabilities (MREL) requirements, the institution is expected to take into account, in particular, Pillar 1 and P
affecting the relevant regulatory ratios, including own funds and risk exposure amounts, over the planning period. Therefore, although its ou
s compatible with its strategies, risk appetite and capital resources. The capital plan is expected to comprise baseline and adverse scenario

on is expected, in addition to the total SREP capital requirement (TSCR), to account for its combined buffer requirement (CBR), i.e. the ove

er prolonged periods of adverse developments that imply a serious CET 1 depletion. In sufficiently adverse scenarios, it might be acceptab
d to also assess the feasibility and the expected impact of such actions under the respective scenarios, and it is expected to be transparen

perspective by ensuring that its risks are adequately covered by internal capital, taking into account the expectations of Principle 5. Econo
entify, quantify, and cover with internal capital the expected losses (as far as these are not considered in the determination of internal capita

capital adequacy assessment in its strategic and operational management and when reviewing its risk appetite and business strategies. In
nd management. For this reason, the institution is expected to prepare and plan procedures and management actions to be taken to addres

-in-time economic situation. It depicts the deterioration of economic capital levels that may occur over time beyond normal business cycle d
apital position, it is expected to consider measures to maintain adequate capitalisation, reverse the trend, and review its strategy and risk ap

apital immediately and to their full extent. Hence, the economic perspective gives a very comprehensive view of risks. Some of those risks,
ve the extent to which the risks identified and quantified under the economic perspective may impact on its own funds and total risk exposu
ocusing solely on the accounting/regulatory capital framework, but could materialise and affect future regulatory own funds or the TREA, are
tive perspective to inform the economic perspective risk quantifications and adjust or complement the latter if they do not adequately captu
the minimum capital ratios usually differ between the two perspectives, and since – over time and across institutions – one is not systemati

n adverse scenarios.

nt value approach).

term assessment covering future developments.

IT architecture

t to follow its intended business model. For example, if lower capital levels are perceived by investors, counterparties and customers as inc
uance of capital instruments in the capital market, lower capital levels may lead to lower investor confidence. This may impede the institutio
apital it needs in order to continue its operations. In its capital planning, the institution is expected to ensure that it can maintain its managem
 e banking book under the normative perspective, even though they are not considered in Pillar 1 capital requirements. While the impact of i
ue/net present value under the economic perspective, the normative perspective is based on accounting and prudential values. Hidden loss
ses of 100, it is expected to determine what part of those hidden losses would affect its projected regulatory own funds, subject to the respe

ying scenarios are expected to inform the forward-looking view of the economic internal perspective insofar as these changes are not reflec
fic vulnerabilities. If such projections show a material impact stemming from a particular risk type, e.g. migration risk, then the institution is e

g all material risks it is or might be exposed to under the economic and normative perspectives. All risks identified as material are expected
ess lines and exposures, the institution is expected to identify at least annually risks that are material, using its own internal definition of mat
er connected entities, the institution is expected to identify the significant underlying risks that it is or may be exposed to and take them into
capital to cover the risk or to document the justification for not holding capital.

material risks and include them in a comprehensive internal risk inventory. Using its internal definition of materiality, it is expected to ensure th
ive and economic perspectives into account. In addition to its current risks, the institution is expected to consider in its forward-looking capit
ithout taking into account specific techniques designed to mitigate the underlying risks. The institution is then expected to assess the effecti
ities (EBA/GL/2015/20), the institution is expected to, as part of its risk identification approach, identify its exposures to shadow banking en
considered material, and which material risks are to be covered with capital. This includes a justification of why a certain risk the institution i

efining its own internal risk taxonomy. It is expected not to simply adhere to a regulatory risk taxonomy.
ying risks, where material, stemming from its financial and non-financial participations, subsidiaries and other connected entities (for exampl
risks and identify, understand and quantify significant underlying risks, and take them into account in its internal risk taxonomy, regardless

are not to be considered mandatory or exhaustive. There may be risks in this list that are not material for some institutions, and this is expe

X) risk and credit valuation adjustment (CVA) risk)

m prepayment options))
al risk and model risk)
risk, participation risk, funding cost risk, etc.)
ons between and within those risks, irrespective of whether they are listed here or not.

es designed to mitigate them. A risk could be regarded as material if its materialisation, omission or misstatement would significantly change
he risks arising from changes in the slope and the shape of the yield curve (yield curve risk) should be considered material.
risk inventory without taking into account any management actions designed to mitigate risks. Then, the management body is expected to b
and contractual arrangements, and not to cover the risk with capital. Although it is hedged in this case, the IRRBB is expected to still be con

atment of that subsidiary is based on its risk exposure amounts. In the ICAAP, the institution is expected to establish and apply consistent an
 nt subsidiary need to be taken into account in group-level concentration and dependency assumptions. Furthermore, the institution may ide

identify, assess and quantify the underlying risks in the outsourcing arrangement as if the institution itself still performed the operations. Suc

er the economic perspective. The definition of internal capital is expected to be consistent with the economic capital adequacy concept and
nt and conservative manner. The institution is expected to show clearly, assuming the continuity of its operations, how its internal capital is a

the economic perspective. Therefore, the definition of internal capital is expected to be in line with the economic capital adequacy concept
hodologies and assumptions for assets, liabilities and transactions, the available internal capital under the economic perspective may differ s
d methodology for its internal capital. This Guide neither prescribes nor restricts the use of any definition or methodology per se. The institu
al capital definition, it is expected that a large part of internal capital components will be expressed in Common Equity Tier 1 (CET1) own fu

unds, the risk-bearing capacity of the internal capital is still expected to be generally consistent with the loss-absorption capacity of CET1 c
g a reconciliation between own funds under the normative perspective and available internal capital under the economic perspective insofa

eds to adjust the regulatory own funds where balance sheet positions do not reflect the fair value concept underlying the economic perspec
determination and the risk quantification. The institution could, for example, deduct the hidden loss from both the internal capital and the ris
e sheet items that cannot be deemed available to cover losses, assuming the continuation of the institution, are expected to be deducted fro

ts own credit worthiness. It would not be considered prudent for the institution to increase available internal capital accordingly.

es that are adequate for its individual circumstances under both the economic and normative perspectives. In addition, the institution is exp
out the group and between risk types. All risk quantification methodologies are expected to be subject to independent internal validation. Th

xposed to are adequately quantified. The institution is expected to implement risk quantification methodologies that are tailored to its individu
e difficult to quantify or the relevant data are not available. In such cases, the institution is expected to determine sufficiently conservative r
ding periods, and scenario generation assumptions.

omic and normative perspectives are expected to be robust, sufficiently stable, risk-sensitive, and conservative enough to quantify losses th
cal confidence levels, the institution is expected to calibrate its risk quantification methodologies on the basis of its own risk appetite. For thi
ations, regardless of the Pillar 1 approach chosen (e.g. standardised or internal ratings-based (IRB) approach for credit risk), the institution

both to quantify its risks and to determine projections. This Guide does not set out any expectation regarding using or not using any quantif
the perspective considered and with the definition of capital. They are expected to capture the risks to which the institution is exposed in an

odologies that it does not fully understand and which, consequently, are not used for its own internal risk management and decision-making
nisms to ensure the quality of data. The data quality framework is expected to ensure reliable risk information that supports sound decisionm

sk diversification effects. The Institution is expected to be aware that, in line with the EBA SREP guidelines, supervisors as a matter of princ
cation effects and, at least in the case of inter-risk diversification, report gross figures in addition to net figures. The institution is expected to
framework, involving, for example, intra-risk and inter-risk correlations and diversification between group entities.

r independent validation, respecting, in a proportionate way, the principles underlying the respective standards established for Pillar 1 intern
al solutions may be adopted to ensure independence between the development and validation of risk quantification methodologies. Howeve
to senior management and the management body, used in the regular review and adjustment of the quantification methodologies, and take

ethodologies, the institution is expected to take into consideration the ECB Guide for the Targeted Review of Internal Models (TRIM).
e, employ one of the following three organisational arrangements to ensure the independence of the validation function from the methodolog
management;
management;

s vulnerabilities, capturing all material risks on an institution-wide basis that result from its business model and operating environment in the
ne adverse scenarios to be used under the normative perspective, taking into account other stress tests it conducts. The application of sev
ulnerabilities and changes in the environment to assess at least quarterly whether its stress-testing scenarios remain appropriate and, if no

e economic perspective. When defining the set of internal stress scenarios and sensitivities, the institution is expected to use a broad set o

ts that it would assume under expected circumstances, taking into account its business strategy, including credible assumptions regarding
cted to assume exceptional, but plausible developments with an adequate degree of severity in terms of their impact on its regulatory capita
omic downturns and financial shocks, relevant institution-specific vulnerabilities, exposures to major counterparties, and plausible combina

when attempting to define plausible adverse scenarios.

erlying assumptions, stress test results and projected management actions are expected to be mutually taken into account.

ptions on capital ratios, the institution is expected to conduct reverse stress-testing assessments. These assessments are expected to start
ensiveness and conservatism of the ICAAP framework assumptions, under both the normative and the economic internal framework. Moreo

tal and liquidity impacts and potential feedback loops, taking into account, in particular, losses arising from the liquidation of assets or increa

croeconomic and financial developments) that is used to assess the resilience of the capital adequacy of the institution to potential adverse
omic and financial developments) that is used to assess the impact of those expected developments on the capital adequacy of the institutio

cy of the institution and explaining its main supporting arguments.

capitalisation on an ongoing basis, from both the economic and normative perspectives, contributing to the continuity of the institution over

of capital demand and supply of the institution, taking into account its scenarios, strategy and operational plans.

individually estimated risks will not materialise to the full extent at the same time (lack of perfect correlation).

ces (internal capital) of the institution will enable it to cover its risks and maintain the continuity of its operations on an ongoing basis. Econo

nsuring that its economic risks are sufficiently covered by available internal capital.

. The unexpected loss is the total loss exceeding the mean loss, stemming from a downside tail event.

ons designed to mitigate them.

ensure that the different elements of the ICAAP fit together coherently and that the ICAAP is an integral part of the institution’s overall mana

s shall have in place sound, effective and comprehensive strategies and processes to assess and maintain on an ongoing basis the amount

t ICAAP strategies, processes and methodologies remain sound, comprehensive, effective and proportionate.
ther the risk quantification methodologies and risk data of the institution adequately capture relevant aspects of risk. In a proportionate way,

etite of the institution in order to ensure that risks and losses can be limited effectively in line with the capital adequacy concept. The limit sy

ds that the institution considers necessary in order to sustainably follow its business model and to remain flexible regarding possible busine

l impact on its overall risk profile, and thus may affect the capital adequacy of the institution.

apital position over at least the upcoming three years.

suring that it is able to fulfil all of its capital-related legal requirements and supervisory demands and cope with other internal and external c

e, scale and complexity of the activities of the institution concerned.

very and Resolution Directive (BRRD).

 n-viability) and then explores scenarios and circumstances that might cause that outcome to occur.

pes of risk that the institution is willing to take in order to meet its strategic objectives.

fication process.

e risk figures and enable a comparison between the risks and the available capital of the institution.

manage risks in a consistent way through a common risk language and mapping.
ovided that the source is acknowledged.
ere forced to rebuild their capital bases at the point when it was most difficult to do so. On the other hand, many risks were not appropriately

of the view that sound, effective and comprehensive ICAAPs comprise a clear assessment of the risks to capital, and have well-structured ri
and inform each other.
nce and overall risk management, and into the risk control assessments for risks to capital and the Pillar 2 capital determination process.
upervisors an increased level of confidence in the institution’s ability to continue by maintaining adequate capitalisation and by managing its

IV. The Guide is aimed at assisting institutions in strengthening their ICAAPs and at encouraging the use of best practises by explaining in g
ciples will also be referred to in discussions with individual institutions in the supervisory dialogue.
e Guide is intended to be a practical tool that is updated regularly to reflect new developments and experience. Consequently, the principles
nt for sound ICAAPs. The implementation of an ICAAP that is adequate for an institution’s particular circumstances remains the responsibili
ernational fora like the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB). Furthermore, institutions s

pe is determined by Article 108 CRD IV. This means in particular that a parent institution in a Member State and institutions controlled by a p
ering the development of common methodologies in this important supervisory area.
D IV, ICAAPs have to be proportionate to the nature, scale and complexity of the activities of the institution.
overing all aspects necessary to implement a sound, effective and comprehensive ICAAP. It is the responsibility of the institution to ensure
 relevant committees are expected to discuss and challenge the ICAAP in an effective way.
producing and signing a clear and concise statement, the capital adequacy statement (CAS).
nment of responsibilities, adhering to the segregation of functions. The governance framework is expected to include a clear approach to th

riods), supported by reliable data and sound data aggregation systems;

ns and in line with relevant Union law and EBA guidelines.

tress-testing framework, risk capture and the data aggregation process, are expected to be considered by this regular internal review, inclu
w services, offering new products, or changes in the structure of the group or financial conglomerate.

evant, including ICAAP outcomes. The ECB is of the view that a sound CAS demonstrates that the management body has a good understan
d guidelines.

adequate to cover the nature and level of the risks to which it is or might be exposed.
monitoring of capital adequacy indicators to identify and assess potential threats in a timely manner, drawing practical conclusions and takin
d to be integrated into the business, decisionmaking and risk management processes of the institution. The ICAAP is expected to be consis
P into the institution’s overall management framework.
ng basis, thereby promoting an appropriate relationship between risks and rewards. All methods and processes used by the institution to ste

eflected in the ICAAP, is integrated into all material business activities and decisions.
tial threats in a timely manner, drawing practical conclusions and taking preventive action, determining capital allocation, and ensuring the o

t the ICAAP is an integral part of the institution’s overall management framework. The institution is expected to have a clear view of how the
of the ICAAP and how they work together, explaining how the ICAAP is integrated and how its outcomes are used in the institution. This IC

ng at an appropriate frequency. The frequency of reporting is expected to be at least quarterly, but, depending on the size, complexity, busin
king) division’s financial and other outcomes are measured. This is expected to be supported by the implementation of a sound

framework, in accordance with the SSM supervisory statement on governance and risk appetite. A well-developed RAF, articulated through
cular, the statement is expected to include motivations for taking on or avoiding certain types of risks, products or regions.
nstitution’s strategy development and implementation process. In a structured manner, the RAF links risks taken to the institution’s capital ad
mply with the agreed risk boundaries set out in the risk appetite statement. In order to facilitate sound and effective risk management, the ins

s continuity/viability, there is a natural connection between the ICAAP, which supports the continuity of operations from the capital perspecti

effectively assess and maintain capital adequacy across entities, the strategies, risk management processes, decisionmaking and the meth

ected to implement a proportionate ICAAP that is prudent and conservative and integrates two complementary internal perspectives.
quirements and demands and to cope with other external financial constraints on an ongoing basis over the medium term. This includes the
e economic losses and deplete internal capital. In accordance with this economic perspective, the institution is expected to ensure that its ris

stainable strategy, even during a prolonged period of adverse developments. The institution is expected to reflect this continuity objective in
it to sustainably follow its strategy. When aiming for sufficient management buffers over the medium-term horizon, the institution is expecte
uses, dividends and payments on Additional Tier 1 (AT1) instruments, etc. In addition to such external constraints, the management buffers

o cope with other external financial constraints, on an ongoing basis.

count, in particular, Pillar 1 and Pillar 2 capital requirements, the CRD IV buffer framework and the Pillar 2 capital guidance, as illustrated in
eriod. Therefore, although its outcomes are expressed in regulatory metrics, the normative perspective is not limited to the Pillar 1 risks rec
e baseline and adverse scenarios and to cover a forward-looking horizon of at least three years. The institution is expected to also take into

requirement (CBR), i.e. the overall capital requirement (OCR), and the Pillar 2 guidance (P2G). The institution is expected to take the abov

scenarios, it might be acceptable that the institution does not meet its P2G and combined buffer requirements. However, the institution is e
d it is expected to be transparent about the quantitative impact of each action on projected figures. Where relevant, the assumptions used a

pectations of Principle 5. Economic capital adequacy requires the internal capital of the institution to be sufficient to cover its risks and supp
e determination of internal capital) and unexpected losses that it might be subject to, taking into account the principle of proportionality. The

etite and business strategies. In addition to prudent internal capital definition and risk quantification, the institution is expected to present an
ent actions to be taken to address situations that would lead to insufficient capitalisation.

beyond normal business cycle developments. The institution is expected to have a strategy for addressing such deteriorations and it is expe
nd review its strategy and risk appetite, as indicatively illustrated in Figure 5. Accordingly, when the institution falls below its internal capital a

w of risks. Some of those risks, or risks related to them, may also partially or fully materialise later under the normative perspective via acco
own funds and total risk exposure amount (TREA) in the future. Hence, the projections of the future capital position under the normative pe
tory own funds or the TREA, are expected to be considered.
r if they do not adequately capture the risks arising from the adverse scenario(s) considered. Thus, the normative and economic perspectiv
nstitutions – one is not systematically more stringent than the other, effective risk management requires the implementation of both perspect

nterparties and customers as increasing the default risk of the institution, they will demand higher risk premia, which will negatively affect the
e. This may impede the institution’s capital market access and, consequently, its ability to pursue its business strategy.
that it can maintain its management buffers under both baseline and adverse conditions. Management buffers can vary greatly from institu
quirements. While the impact of interest rate changes for banking book positions is immediately visible to the full extent under the economic
d prudential values. Hidden losses become apparent when comparing accounting values and fair values. Having determined the total volum
own funds, subject to the respective underlying medium-term scenarios. In this example, the institution may conclude that accounting loss

as these changes are not reflected in the point-in-time risk quantification at the respective reference date. Management actions, e.g. capita
ation risk, then the institution is expected to ensure that this risk is adequately quantified in the point-in-time calculation under the economic

ntified as material are expected to be addressed in all parts of the ICAAP in accordance with an internally defined risk taxonomy.
its own internal definition of materiality. This risk identification process is expected to result in a comprehensive internal risk inventory.
e exposed to and take them into account in its ICAAP.

eriality, it is expected to ensure that the risk inventory is kept up to date. In addition to regular updates (at least yearly), it is expected to adju
nsider in its forward-looking capital adequacy assessments any risks, and any concentrations within and between those risks, that may arise
en expected to assess the effectiveness of these mitigating actions.
xposures to shadow banking entities, all potential risks arising from those exposures, and the potential impact of those risks.
why a certain risk the institution is exposed to is not considered material.

er connected entities (for example, step-in and group risks, reputational and operational risks, risks stemming from letters of comfort, etc.).
ernal risk taxonomy, regardless of whether the entities concerned are included in the prudential perimeter or not. The depth of the analysis

ome institutions, and this is expected to be explained. At the same time, there will be usually risks not mentioned in the list that are material

ement would significantly change or influence the capital adequacy, profitability, or continuity of the institution from an economic perspective
sidered material.
anagement body is expected to be responsible for deciding whether the IRRBB (including yield curve risk) is indeed deemed material, and w
RRBB is expected to still be considered a material risk and included in the risk inventory, and the institution is expected to assess the effect

establish and apply consistent and coherent processes throughout the group in order to look beyond the accounting values and risk exposu
rthermore, the institution may identify that the legal risks of the subsidiary add to the operational risk profile of the institution. As a result, the

ill performed the operations. Such identification, assessment and quantification is expected to take place before the outsourcing is impleme

ic capital adequacy concept and internal risk quantifications of the institution.

tions, how its internal capital is available to cover risks, thereby ensuring that continuity.

nomic capital adequacy concept of the institution and the definition is expected to follow the fair value considerations of its assets and liabil
conomic perspective may differ significantly from the own funds under the normative perspective. The institution is expected to take a prude
methodology per se. The institution could use, for example, a fully-fledged net present value model, or use the regulatory own funds as a s
mon Equity Tier 1 (CET1) own funds. In addition, certain adjustments are conceptually necessary to arrive at the capital that is in line with th

s-absorption capacity of CET1 capital. In particular, institutions applying a model-based net present value approach are expected to only us
the economic perspective insofar as possible.

nderlying the economic perspective. For example, the government bond portfolio introduced in Example 3.2, which is subject to a total (net)
oth the internal capital and the risk exposure or maintain the amount in the internal capital and quantify the risk as an expected loss. Similar
are expected to be deducted from regulatory own funds. In addition, it is expected to be recognised that equity in subsidiaries held by third

capital accordingly.

In addition, the institution is expected to use adequate methodologies for quantifying the potential future changes in own funds and TREA i
dependent internal validation. The institution is expected to establish and implement an effective data quality framework.

ies that are tailored to its individual circumstances, (i.e. they are expected to be in line with its risk appetite, market expectations, business m
ermine sufficiently conservative risk figures, taking into consideration all relevant information and ensuring adequacy and consistency in its c

tive enough to quantify losses that occur rarely. In the view of the ECB, in a sound ICAAP the overall level of conservatism under the econo
is of its own risk appetite. For this purpose, the institution is expected to consider possible losses it is willing and able to absorb over time. B
ach for credit risk), the institution is expected to take into account what is set out in the ECB document “Technical implementation of the EBA

ng using or not using any quantification methodology per se. This means that there is no predetermination as to whether, for example, the in
h the institution is exposed in an adequate and sufficiently conservative manner, taking into account the principle of proportionality. This me

anagement and decision-making. The Institution is expected to be able to demonstrate the adequacy of the methodologies for its individual
on that supports sound decisionmaking, and it is expected to cover all relevant risk data and data quality dimensions.

supervisors as a matter of principle will not take into account inter-risk diversification in the SREP. The institution is expected to take this in
res. The institution is expected to ensure that risks are adequately covered by capital, even in times of stress when diversification effects ma

rds established for Pillar 1 internal models, taking into account the materiality of the risks quantified and the complexity of the risk quantifica
ification methodologies. However, the concepts underlying the various lines of defence are expected to be respected; i.e. the independent v
ification methodologies, and taken into account when assessing capital adequacy.

f Internal Models (TRIM).

ion function from the methodology development process (i.e. design, development, implementation and monitoring of the risk quantification

and operating environment in the context of stressed macroeconomic and financial conditions on a yearly basis and more frequently, when
conducts. The application of severe, but plausible macroeconomic assumptions and a focus on key vulnerabilities are expected to result in a
os remain appropriate and, if not, adapt them to the new circumstances. The impact of the scenarios is expected to be updated regularly (e

is expected to use a broad set of information on historic and hypothetical stress events, including supervisory stress tests. However, althou

credible assumptions regarding revenues, costs, risk materialisations, etc.

ir impact on its regulatory capital ratios, in particular the CET1 ratio. The level of severity is expected to correspond to developments that ar
erparties, and plausible combinations of these.

ken into account.

sessments are expected to start from the identification of the pre-defined outcome (e.g. a breach of its TSCR or management buffers).
nomic internal framework. Moreover, reverse stress testing in the ICAAP context could be seen as a starting point for developing recovery p

the liquidation of assets or increases in funding costs during periods of stress.

he institution to potential adverse developments over a medium-term horizon. It is expected to cover at least three years. The assumed deve
 capital adequacy of the institution over a medium-term horizon. The baseline scenario is expected to be consistent with the basis of the ins

e continuity of the institution over the medium term.

ions on an ongoing basis. Economic capital adequacy takes into account fair value considerations.

rt of the institution’s overall management framework. The institution is expected to maintain, as part of its ICAAP documentation, a descriptio

on an ongoing basis the amounts, types and distribution of internal capital that they consider adequate to cover the nature and level of the

s of risk. In a proportionate way, the validation of risk quantification methodologies is expected to be conducted independently and respect

al adequacy concept. The limit system is expected to lay down effective boundaries for risk taking for, for example, different risk types, busin

exible regarding possible business opportunities, without endangering its capital adequacy.

with other internal and external capital constraints on an ongoing basis.

many risks were not appropriately covered by a commensurate amount of capital, owing to weaknesses in banks’ risk identification and asse

apital, and have well-structured risk governance and risk escalation processes based on a well-thought out and thorough risk strategy which

capital determination process.

apitalisation and by managing its risks effectively. This requires the institution, in a forward-looking manner, to ensure that all material risks a

best practises by explaining in greater detail the ECB’s expectations on the ICAAP, leading to more consistent and effective supervision.

ce. Consequently, the principles and expectations laid out in this Guide will evolve over time. It will be reviewed in the light of the ongoing d
stances remains the responsibility of the institution. The ECB assesses institutions’ ICAAPs on a case-by-case basis.
FSB). Furthermore, institutions should take into account all ICAAP-related recommendations addressed to them, e.g. recommendations res

and institutions controlled by a parent financial holding company or a parent mixed financial holding company in a Member State shall mee

bility of the institution to ensure that its ICAAP is sound, effective and comprehensive duly taking into account the nature, scale and comple
 to include a clear approach to the regular internal review and validation of the ICAAP.

his regular internal review, including proportionate validation processes for internal risk quantification methodologies used. For this purpose

ment body has a good understanding of the capital adequacy of the entity, its main drivers and vulnerabilities, the main ICAAP inputs and o

ng practical conclusions and taking preventive action to ensure that both own funds and internal capital remain adequate.
ICAAP is expected to be consistent and coherent throughout the group.

sses used by the institution to steer its capital adequacy, as part of the operational or strategic capital adequacy management process, are

tal allocation, and ensuring the ongoing effectiveness of the risk appetite framework (RAF). ICAAP-based risk-adjusted performance indica

d to have a clear view of how these elements are consistently integrated into an effective overall process that allows it to maintain capital ad
re used in the institution. This ICAAP architecture description is expected to explain the highlevel structure of the ICAAP, how its outcomes

ng on the size, complexity, business model and risk types of the institution, reporting might need to be more frequent to ensure timely mana
mentation of a sound

veloped RAF, articulated through the risk appetite statement, is expected to be an integral part of the ICAAP architecture and a cornerstone
ucts or regions.
aken to the institution’s capital adequacy and strategic objectives. As part of the RAF, the institution is expected to determine and take into a
fective risk management, the institution is expected to use the ICAAP outcomes when setting up an effective risk monitoring and reporting s

ations from the capital perspective, and the recovery plan, which is aimed at restoring viability when an institution has entered into a distres

es, decisionmaking and the methodologies and assumptions applied when quantifying capital need to be coherent across the relevant perim

tary internal perspectives.

medium term. This includes the assessment of a credible baseline scenario and adequate, institution-specific adverse scenarios, as reflect
is expected to ensure that its risks are adequately covered by internal capital in line with its internal capital adequacy concept.

reflect this continuity objective in its RAF (as specified under Principle 2) and use the ICAAP framework to reassess its risk appetite and tole
horizon, the institution is expected to take into account, for example, the expectations of
raints, the management buffers are expected, for example, to cushion uncertainties around projections of, and possibly resulting fluctuation

apital guidance, as illustrated in Figure 2.

ot limited to the Pillar 1 risks recognised by the regulatory capital requirements. When assessing its capital adequacy under the normative p
ution is expected to also take into account the impact of upcoming changes in legal, regulatory, and accounting frameworks and make an in

tion is expected to take the above into account to determine appropriate management buffers and implement capital plans that allow it to co

ents. However, the institution is expected to determine adequate management buffers on top of the TSCR to take into account the above co
elevant, the assumptions used are expected to be consistent with the recovery plan.

ficient to cover its risks and support its strategy on an ongoing basis. Under this perspective, the institution’s assessment is expected to cov
principle of proportionality. The institution is expected to perform a point-in-time risk quantification of the current situation as at the referenc

titution is expected to present an economic capital adequacy concept that enables it to remain economically viable and follow its strategy. T
such deteriorations and it is expected to actively manage capital adequacy. Most importantly, the quantifications of risks and available intern
n falls below its internal capital adequacy threshold, it is expected to be able to take necessary measures and explain how the capital adeq

e normative perspective via accounting losses, own funds reductions or prudential provisions.
l position under the normative perspective are expected to be duly informed by the economic perspective assessments.

mative and economic perspectives are expected to mutually inform each other.
implementation of both perspectives.

a, which will negatively affect the institution’s profitability, potentially threatening its continuity, even though its capital levels are still above re
ss strategy.
fers can vary greatly from institution to institution; they may depend on external developments, as reflected in different scenarios, and they
e full extent under the economic perspective, it can take several years for the full impact of P&L effects on Pillar 1 capital ratios to show und
aving determined the total volume of hidden losses, the institution needs to decide the extent to which those hidden losses may also mater
ay conclude that accounting losses of 10 and 20 would occur in years 1 and 2, respectively, owing to haircuts on the nominal value of the un

Management actions, e.g. capital measures, dividend payments, acquisitions or sales of business lines, are expected to also be considered
calculation under the economic perspective.

defined risk taxonomy.

sive internal risk inventory.

ast yearly), it is expected to adjust the inventory whenever it no longer reflects the risks that are material, e.g. because a new product has b
tween those risks, that may arise from pursuing its strategies or from relevant changes in its operating environment.

act of those risks.

ng from letters of comfort, etc.).

or not. The depth of the analysis of the underlying risks is expected to be commensurate with the business activity and the risk managemen

ioned in the list that are material. Each institution is expected to decide internally whether and how it combines risk types and risk sub-categ

on from an economic perspective, irrespective of the accounting treatment applied.

s indeed deemed material, and whether it should be covered with capital.

is expected to assess the effectiveness of these actions and identify any new risks emerging (e.g. legal, counterparty or residual risks).

counting values and risk exposure amounts. In particular, the institution is expected to apply proportionate methodologies to identify whethe
 of the institution. As a result, the institution may conclude that, through reputational and step-in risks and increased concentration, the unde

efore the outsourcing is implemented, taking into account the specificities connected with having the services performed outside of the instit

iderations of its assets and liabilities. Taking a prudent and conservative approach, the definition is expected to allow the institution to produ
ution is expected to take a prudent approach when defining its available internal capital. This prudence applies to all underlying assumption
e the regulatory own funds as a starting point.
at the capital that is in line with the fair value concept underlying the economic perspective. Adjustments are expected, for example, for hidd

pproach are expected to only use methodologies and assumptions which are understandable, clearly outlined and justified, and following a

2, which is subject to a total (net) hidden loss of 100, is expected to result in a deduction of 100 from regulatory own funds.
risk as an expected loss. Similarly, if an institution decides to include hidden reserves – which is expected to be done only in a cautious and
quity in subsidiaries held by third parties (minority interests) is generally only able to cover risks within that subsidiary.

hanges in own funds and TREA in its adverse scenarios under the normative perspective. The institution is expected to apply a high level of
y framework.

market expectations, business model, risk profile, size and complexity).

dequacy and consistency in its choice of risk quantification methodologies.

of conservatism under the economic perspective is generally at least on a par with the level underlying the risk quantification methodologies
g and able to absorb over time. Based on this analysis, the institution is expected to establish and maintain risk quantification methodologies
hnical implementation of the EBA Guidelines on ICAAP and ILAAP information collected for SREP purposes”. If there are differences betwe

as to whether, for example, the institution is expected to use (amended) Pillar 1 methodologies (e.g. to take into account concentration risks
nciple of proportionality. This means, for example, that larger or more complex institutions, or institutions that have more complex risks, are

methodologies for its individual situation and risk profile. In the case of vendor models, this includes the expectation that such models are n
titution is expected to take this into account, and be cautious when applying inter-risk diversification in its ICAAP.
ss when diversification effects may disappear or behave in non-linear ways (even reinforcing each other in an extreme scenario).

e complexity of the risk quantification methodology.

respected; i.e. the independent validation is expected to not be conducted by the internal audit function.

onitoring of the risk quantification methodologies):

asis and more frequently, when necessary, depending on the individual circumstances. On the basis of this review, the institution is expecte
bilities are expected to result in a material impact on the institution’s internal and regulatory capital, for example with regard to the CET1 rat
ected to be updated regularly (e.g. quarterly). In the case of material changes, the institution is expected to assess their potential impact on

ory stress tests. However, although it is expected to take supervisory stress tests into consideration, it is the institution’s own responsibility t

respond to developments that are plausible, but as severe from the institution’s perspective as any developments that could be observed du

R or management buffers).
g point for developing recovery plan scenarios. Reverse stress tests are expected to be conducted at least once a year. More details can be

t three years. The assumed developments in internal and external factors are expected to be combined in a consistent way and be severe b
onsistent with the basis of the institution’s business plans and budget, and cover a time horizon of at least three years.

AAP documentation, a description of the overall ICAAP architecture which explains how the ICAAP is integrated and how its outcomes are

over the nature and level of the risks to which they are or might be exposed.”

cted independently and respect the principles underlying the respective standards established for Pillar 1 internal models.

ample, different risk types, business areas, products and group entities.
anks’ risk identification and assessment. It is therefore of paramount importance to raise the resilience of individual credit institutions in per

and thorough risk strategy which is translated into an effective risk limit system.

to ensure that all material risks are identified, effectively managed (using an appropriate combination of quantification and controls) and cov

tent and effective supervision.

wed in the light of the ongoing development of European banking supervision practice and methodologies, international and European regu

them, e.g. recommendations resulting from the SREP, such as those related to sound governance, to risk management and to controls.

ny in a Member State shall meet the ICAAP obligations set out in Article 73 CRD IV on a consolidated basis or on the basis of consolidated

unt the nature, scale and complexity of its activities.

odologies used. For this purpose, the institution is expected to have in place adequate policies and processes for internal reviews.

es, the main ICAAP inputs and outputs, the parameters and processes underlying the ICAAP, and the coherence of the ICAAP with its strate

ain adequate.

uacy management process, are expected to be approved, thoroughly reviewed, and properly included in the ICAAP and its documentation.

isk-adjusted performance indicators are expected to be used in the decision-making process and, for example, when determining variable r

at allows it to maintain capital adequacy over time.

of the ICAAP, how its outcomes are used in decision-making, and the connections between, for example, business and risk strategies, capi

e frequent to ensure timely management action.

P architecture and a cornerstone of sound risk and capital management.

cted to determine and take into account its management buffers.

ve risk monitoring and reporting system and an adequately granular limit system (including effective escalation procedures) that allocates sp

itution has entered into a distressed situation. Accordingly, the institution is expected to ensure consistency and coherence between its ICA

herent across the relevant perimeter. The institution is expected to also assess possible impediments to capital transferability within the gro

ific adverse scenarios, as reflected in the multi-year capital planning and in line with the overall planning objectives of the institution.
adequacy concept.

eassess its risk appetite and tolerance thresholds within its overall capital constraints, taking into account its risk profile and vulnerabilities.

and possibly resulting fluctuations in, capital ratios, to reflect the institution’s risk appetite and to allow some flexibility in its business decisio

adequacy under the normative perspective, the institution is expected to take into account all relevant risks it has quantified under the econ
ing frameworks and make an informed and reasoned decision on how to address them in the capital planning.

nt capital plans that allow it to comply with the OCR plus the P2G over the medium term under expected baseline conditions (for an illustrat

o take into account the above considerations, and implement them in capital plans, which would allow it to stay above its TSCR and to fulfil,

s assessment is expected to cover the full universe of risks that may have a material impact on its capital position, taking into account fair v
rrent situation as at the reference date. This is expected to be complemented by an assessment of the impact of material future developme

y viable and follow its strategy. This includes management processes to identify in a timely manner the need for action to overcome emergin
tions of risks and available internal capital are expected to feed into the projections under the normative perspective.
nd explain how the capital adequacy will be ensured over the medium term.

ssessments.

its capital levels are still above regulatory and supervisory minima.

in different scenarios, and they may vary over time.

Pillar 1 capital ratios to show under the normative perspective. Consequently, the institution is expected to consider potential losses stemmi
e hidden losses may also materialise in the balance sheet/P&L account, and this is expected to be taken into account in the normative pers
ts on the nominal value of the underlying bonds. These losses would need to be taken into account in the projections produced under the n

e expected to also be considered in the forward-looking view of the economic internal perspective. By contrast, expected changes in interes

.g. because a new product has been introduced or certain business activities have been expanded.

activity and the risk management approach.

nes risk types and risk sub-categories.

ounterparty or residual risks).

methodologies to identify whether the operations and exposures of the subsidiary pose risks exceeding its accounting value or participation
creased concentration, the underlying risks of the subsidiary significantly exceed its accounting value.

es performed outside of the institution. In general, the outsourcing of an activity cannot relieve the institution from its obligation to manage th

d to allow the institution to produce a consistent and meaningful assessment of its economic capital adequacy over time, as described unde
lies to all underlying assumptions and methodologies used for the quantification of internal capital.

expected, for example, for hidden losses and for capital items

ned and justified, and following a prudent approach. Capital items that have loss-absorption capacity only in the case of noncontinuation of t

tory own funds.

o be done only in a cautious and conservative manner, if at all – the risk exposure is expected to be increased in line with the inclusion of hi

expected to apply a high level of conservatism under both perspectives.

isk quantification methodologies of the Pillar 1 internal models. Rather than one-by-one, the overall level of conservatism is determined by
risk quantification methodologies, including the assessment of stress events, that provide it with sufficient confidence that possible losses s
s”. If there are differences between the two quantifications, the institution is expected to explain the main drivers for them.

into account concentration risks), economic capital models, stress test results or other methodologies, such as multiple scenarios, to quant
at have more complex risks, are expected to use

pectation that such models are not expected to be imported mechanistically, but rather they are expected to be fully understood by the insti
an extreme scenario).

review, the institution is expected to define an adequate stress-testing programme for both normative and economic perspectives.
mple with regard to the CET1 ratio. In addition, the institution is expected to conduct reverse stress testing in a proportionate manner.
assess their potential impact on its capital adequacy over the course of the year.

e institution’s own responsibility to define scenarios and sensitivities in the manner that best addresses its individual situation and to translat

ments that could be observed during a crisis situation in the markets, factors or areas that are most relevant for the institution’s capital adeq

once a year. More details can be found in the relevant EBA guidelines and BCBS guidance.

a consistent way and be severe but plausible from the institution’s perspective, reflecting the risks and vulnerabilities that are assessed as re
hree years.

rated and how its outcomes are used in the institution.

nternal models.
ndividual credit institutions in periods of stress by seeking improvements in their forward-looking internal capital adequacy assessment proc

antification and controls) and covered by a sufficient amount of high-quality capital.

international and European regulatory developments and, for example, new authoritative interpretations of relevant directives and regulatio

management and to controls.

s or on the basis of consolidated situation of that financial holding company or mixed financial holding company. Given that Article 73 CRD I
ses for internal reviews.

rence of the ICAAP with its strategic plans.

e ICAAP and its documentation.

ple, when determining variable remuneration or when discussing business and risks at all levels of the institution, including, inter alia, in ass

usiness and risk strategies, capital plans, risk identification processes, the risk appetite statement, limit systems, risk quantification methodo
 on procedures) that allocates specific limits to, for example, individual risks, sub-risks, entities and business areas, promoting the risk appe

and coherence between its ICAAP and recovery planning in terms of early warning signals, indicators, escalation procedures following bre

pital transferability within the group in a conservative and prudent manner and take them into account in its ICAAP.

jectives of the institution.

s risk profile and vulnerabilities.

e flexibility in its business decisions.

it has quantified under the economic perspective and assess to what extent those risks may materialise over the planning period, dependin

aseline conditions (for an illustration, see Figure 3).

stay above its TSCR and to fulfil, for example, market expectations even under adverse conditions over the mediumterm horizon (for an illus

osition, taking into account fair value considerations for its current assets, liabilities and risks. The institution is expected to manage econom
act of material future developments that are not incorporated in the assessment of the current

d for action to overcome emerging internal capital deficiencies and to take effective measures (e.g. capital increase, risk reduction).
onsider potential losses stemming from risks not considered by Pillar 1 in the adverse projections of the normative perspective.
to account in the normative perspective.
rojections produced under the normative perspective.

ast, expected changes in interest rate curves are usually taken into account in the short-term point-in-time assessment under the economic

accounting value or participation risk.

n from its obligation to manage the associated risks and thus result in a delegation of responsibility to the outsourcing provider.

acy over time, as described under Principle 3.

the case of noncontinuation of the institution are expected to be treated as liabilities in such net present value approaches.

ed in line with the inclusion of hidden reserves in internal capital.

f conservatism is determined by the combination of underlying assumptions and parameters.

onfidence that possible losses stemming from rare tail events or severe future developments are addressed in its strategies and risk appeti
vers for them.

h as multiple scenarios, to quantify the risks it is or may be exposed to.

o be fully understood by the institution and well-suited for, and tailored to, its business and its risk profile.
economic perspectives.
n a proportionate manner.

ndividual situation and to translate them into risk, loss and capital figures.

nt for the institution’s capital adequacy.

erabilities that are assessed as representing the most pertinent threats to the institution.
pital adequacy assessment processes (ICAAPs), including comprehensive stress testing and capital planning.

relevant directives and regulations by the Court of Justice of the European Union.

pany. Given that Article 73 CRD IV is a minimum harmonisation provision, and its transposition has therefore been dealt with in different way
tution, including, inter alia, in asset-liability committees, risk committees and meetings of the management body.

ems, risk quantification methodologies, the stress-testing programme, and management reporting.
s areas, promoting the risk appetite statement of the group.

alation procedures following breaches of these thresholds and potential management actions. Moreover, potential management actions in

ver the planning period, depending on the scenarios applied.

mediumterm horizon (for an illustration, see Figure 4).

n is expected to manage economic risks and adequately assess them in its sensitivity analysis and its monitoring of capital adequacy.

ncrease, risk reduction).

rmative perspective.

assessment under the economic perspective.

utsourcing provider.

alue approaches.

d in its strategies and risk appetite, and that these losses will not exceed the quantified risk.
e been dealt with in different ways in different Member States, a wide variety of ICAAP practices and requirements for the supervision of SIs
otential management actions in the ICAAP are expected

itoring of capital adequacy.

ements for the supervision of SIs exist in participating Member States.