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Annual Report 2015
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8.
MANAGEMENT OBJECTIVE AND POLICY FOR FINANCIAL RISK
(1)
Overview
The Bank and its subsidiaries earn profits mainly from lending, financial instruments trading and investments. The Bank and its subsidiaries
are supposed to bear and manage any risks from these business activities. These risks include credit risk, market risk, operating risk and
liquidity risk. Among those risks, credit risk, market risk and liquidity risk have greatest impact.
The Bank and its subsidiaries regard any potential factors that might negatively affect earnings and reputation as risks. To maintain steady
profits and good reputation and avoid losses from incidental events, the Bank and it subsidiaries’risk management policies focus on prevention
and reduction of anticipated business risks and increase of capital in response to future anticipated risks. In order to meet the solid operating
requirements by the competent authorities, depositors and other stakeholders for management objectives for risks, business risks are controlled
within the tolerable scope.
(2)
The organization framework of risk management
The Bank and its subsidiaries established risk management policies and guidelines and whole risk tolerance of the Group. Subsidiaries
therefore follow the Bank’s instructions in setting risk management organization, policies, objectives, prdocedures, internal control operation,
risk monitor mechanism and risk limits, and report to the parent company on risk management issues.
The Board of Directors is the highest instruction unit of the Bank and its subsidiaries’ risk management organization structure and is
responsible for establishing risk management system, including risk management policies, organization structure, risk preference, internal
control system and management of significant business cases, and the effective operation of the system. Under the Board of Directors, the
Asset & Liability and Risk Management Committee is established. The risk management committee is responsible for review and monitor of
risk management. The Bank and significant subsidiaries all have risk management unit, being a part of the risk management committee and
responsible for supervising the establishment of risk management mechanism, risk limits setting, risk monitor and reporting.
The Bank has an Asset & Liability and Risk Management Committee established beneath its management, which is responsible for reviewing
risk management tasks and related monitoring tasks. There are also several other committees and other administrative units which are
responsible for assessing and monitoring the related risk of loans, investments, trading of financial products and asset & liability management.
Each business management unit is responsible for identifying possible risks that may be generated within their respective jurisdictions,
establishing internal control procedures and regulations, periodically measuring risk degrees and adopting response measures for possible
negative effects.
Business units follow operating procedures and report to the management units directly. Risk management unit is responsible for monitor
of overall risk positions and concentration and reporting to the management or Board of Directors.
Auditing office examines the operations of business and administration units regularly or irregularly to ensure the three risk management
defense lines operate normally.
The Bank has assigned personnel to sit on the Board of Directors of each subsidiary to monitor the governance of each subsidiary.
(3)
Credit risk
A.
The source and definition of credit risk
Credit risk pertains to the risk of loss that the borrowers, issuers or counterparties might default on contracts due to deterioration in their
finance or other factors.
The Bank and its subsidiaries are exposed to credit risk mainly on businesses of corporate and individual loans, guarantees, trade financing,
interbank deposits and call loans and securities investments.
Credit risk is the primary risk of the Bank and its subsidaries’ capital charge.
B.
Credit risk management policies
The objectives of the Bank and its subsidiaries’ credit risk management are to maintain stable asset allocation strategy, careful loaning
policy and excellent asset quality to secure assets and earnings.
The management mechanism of the Bank and its subsidiaries for credit risk includes:
The establishment of Asset & Liability and Risk Management, Loan and Investment committees which adopt responding measures to
market environment, changes in industry, and capital limits, and review relevant regulations and cases of significant lending and
investments.
Setting careful prior review procedures for lending and criteria of handling subsequent matters, regular post-lending follow-up,
understanding of clients’ operation and capital outflows, and increase in the frequency of review on clients with higher risk.
Classifying credit ratings based on clients’ probability of default or behavior scoring with management put in practice.
Controlling concentration of credit risk by setting credit limits for individuals, corporate groups, industries, areas, and different types of
collaterals.
Setting credit risk limits by reference to external ratings and prospects with attention to changes in market credit spread and risk
concentration of counterparties.
The establishment of credit pre-warning list and reporting system.
Assessing assets quality regularly and setting aside sufficient reserve for losses.
Setting creditor’s rights management unit and advisory committee in charge of accelerating collection of non-performing loans.
The procedures for credit risk management of the Bank and its subsidiaries and related measurement approaches are outlined below: