Mega Bank Annual Report 2017

77 Annual Report 2017 -77- C. Transfer between Level 1 and Level 2 On December 31, 2017, the balance of the Bank’s held 2016 Fiscal Year Order 11 Category 1 Central Government Construction Bonds was $1,459,572. Due to the bonds becoming inactive securities in the Index, thus the bonds were transferred from Level 1 to Level 2. On December 31, 2016, the balance of the Bank’s held 2015 Fiscal Year Order 12 and Order 13 Category 1 Central Government Construction Bonds was $797,688 and $608,634, respectively. Due to the bonds becoming inactive securities in the Index, thus the bonds were transferred from Level 1 to Level 2. D. Movements of financial instruments classified into Level 3 of fair value are as follows: (A) Movements of financial assets classified into Level 3 of fair value are as follows: For the year ended December 31, 2017 and 2016: No relevant balance. (B) Movements of financial liabilities classified into Level 3 of fair value are as follows: For the year ended December 31, 2017 and 2016: No relevant balance. E. Fair value measurement to Level 3, and the sensitivity analysis of the substitutable appropriate assumption made on fair value. The Bank and subsidiaries did not hold any Level 3 financial instruments at December 31, 2017 and 2016. 8. MANAGEMENT OBJECTIVE AND POLICY FOR FINANCIAL RISK (1) Overview The Bank and subsidiaries earn profits mainly from lending, financial instruments trading and investments. The Bank and 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 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 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 organisation framework of risk management The Bank and subsidiaries established risk management policies and guidelines and whole risk tolerance of the Bank and subsidiaries. Subsidiaries therefore follow the Bank’s instructions in setting risk management organisation, policies, objectives, procedur es, 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 subsidiaries’ risk management organisation structure a nd is responsible for establishing risk management system, including risk management policies, organisation structure, risk preference, internal control system and management of significant business cases. Under the head office, the Risk Management Committee is established. The Risk Management Committee is responsible for review and monitor of risk management. Under the management, several committees and other administrative units are established. They are responsible for assessing and monitoring the related risk of loans, investments, trading of financial products. The Bank has the Risk Management Committee established beneath its management, which is responsible for supervising the establishment of risk management mechanism, risk limits setting, risk monitoring and reporting. 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 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 subsidiaries’ capital charge. B. Credit risk management policies The objectives of the Bank and 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 subsidiaries for credit risk includes: