Banks may be exposed to Market Risk in variety of ways. Market risk exposure may be explicit in portfolios of securities / equities and instruments that are actively traded. Conversely it may be implicit such as interest rate risk due to mismatch of loans and deposits. Besides, bank market risk may also arise from activities categorized as off-balance sheet item. Therefore market risk is potential for loss resulting from adverse movement in market risk factors.
Interest rate risk arises when there is a mismatch between positions, which are subject to interest rate adjustment within a specified period. The bank’s lending, funding and investment activities give rise to interest rate risk. The immediate impact of variation in interest rate is on bank’s net interest income, while a long term impact is on bank’s net worth since the economic value of bank’s assets, liabilities and off-balance sheet exposures are affected.
The concern for management of Market risk must start from the top management. CCG Catalyst can assist your institution in setting up effective board and senior management oversight of the bank’s overall market risk exposure.
The board of directors’ responsibilities:
- Approve a market risk strategy for the bank
- Delineate the banks overall risk tolerance in relation to market risk
- Ensure that the bank’s overall market risk exposure is maintained at prudent levels and consistent with the available capital
- Ensure that top management as well as individuals responsible for market risk management possess sound expertise and knowledge to accomplish the risk management function
- Ensure that the bank implements sound fundamental principles that facilitate the identification, measurement, monitoring and control of market risk
- Ensure that adequate resources (technical as well as human) are devoted to market risk management
Senior management responsibilities:
- Develop and implement procedures that translate business policy and strategic direction set by BOD into operating standards that are well understood by bank’s personnel
- Ensure adherence to the lines of authority and responsibility that board has established for measuring, managing, and reporting market risk
- Oversee the implementation and maintenance of Management
- Information System that identify, measure, monitor, and control the bank’s market risk
- Establish effective internal controls to monitor and control market risk