The Bank has established systems, policies and procedures for the control and monitoring of interest rate, credit, liquidity, capital, foreign currency, market and operational risks, which are approved and endorsed by the Board of Directors and reviewed regularly by the Bank’s management, Credit Risk Management Committee, Asset and Liability Management Committee, Operational Risk Management Committee and other designated committees or working groups. Material risks are identified and measured by designated committees and/or working groups before the launch of new products or services or business activities, and monitored, documented and controlled against applicable risk limits after the implementation of new products or services or business activities. The internal auditors of the Bank also perform regular audits to ensure compliance with the policies and procedures.
Interest Rate Risk
Interest rate risk is the risk that the Bank’s position may be adversely affected by a change of market interest rates. The Bank’s interest rate risk arises primarily from the timing difference in the maturity and the repricing of the Bank’s interest bearing assets, liabilities and off-balance sheet commitments. The primary objective of interest rate risk management is to limit the potential adverse effects of interest rate movements in net interest income by closely monitoring the net repricing gap of the Bank’s assets and liabilities. The interest rate risk is managed by the Bank’s Treasury Department and monitored and measured monthly by the Asset and Liability Management Committee against limits approved by the Board of Directors.
Interest rate risk exposure in banking book:
The relevant principal interest rate risk arises from repricing risk and basis risk.
Repricing risk is one of sources of interest rate risks which arises from timing differences in interest rate changes and cash flows that occur in the repricing and maturity of fixed and floating rate assets, liabilities and off-balance sheet financial instruments.
Basis risk is one of sources of interest rate risks which arises from imperfect correlation between changes in the interest rates earned and paid on different financial instruments with similar repricing characteristics.
Interest rate risk exposure in banking book:
The relevant principal interest rate risk arises from repricing risk and basis risk.
Repricing risk is one of sources of interest rate risks which arises from timing differences in interest rate changes and cash flows that occur in the repricing and maturity of fixed and floating rate assets, liabilities and off-balance sheet financial instruments.
Basis risk is one of sources of interest rate risks which arises from imperfect correlation between changes in the interest rates earned and paid on different financial instruments with similar repricing characteristics.
Currency Risk
Currency risk is the risk that the holding of foreign currencies will affect the Bank’s position as a result of a change in foreign currency exchange rates. The Bank’s foreign exchange risk positions arise from foreign exchange dealing, commercial banking operations and structural foreign currency exposures. All foreign exchange positions are managed by the Bank’s Treasury Department within limits approved by the Board of Directors. The Bank’s assets and liabilities are mainly denominated in Hong Kong dollars and United States dollars.
Price Risk
Price risk is the risk to the Bank’s earnings and capital due to changes in the prices of securities including commodities, debt securities and equities.
The Bank monitors market risk principally by limits established for transactions and open positions. These limits are reviewed and approved by the Board of Directors and are monitored on a daily basis.
The Bank does not actively trade in financial instruments and in the opinion of the Board of Directors, the price risk related to trading activities to which the Bank is exposed is not material.
The Bank monitors market risk principally by limits established for transactions and open positions. These limits are reviewed and approved by the Board of Directors and are monitored on a daily basis.
The Bank does not actively trade in financial instruments and in the opinion of the Board of Directors, the price risk related to trading activities to which the Bank is exposed is not material.
Credit risk is the risk that a customer or counterparty in a transaction may default. It arises from the lending, trade finance, treasury and other activities undertaken by the Bank.
The Bank has a credit risk management process to measure, monitor and control credit risk. Its Credit Policy Manual defines the credit extension and measurement criteria, the credit review, approval and monitoring processes, and the loan classification and provisioning systems. It has a hierarchy of credit authority which approves credit in compliance with the Bank’s credit policy. Credit risk exposures are measured and monitored against credit limits and other control limits (such as connected exposures, large exposures and risk concentration limits set by the Credit Risk Management Committee and approved by the Board of Directors). Segregation of duties in key credit functions is in place to ensure separate credit control and monitoring. Management and recovery of problem credits is handled by an independent work-out team.
The Bank manages its credit risk within a conservative framework. Its credit policy is regularly revised, taking into account factors such as prevailing business and economic conditions, regulatory requirements and its capital resources. Its policy on connected lending exposures defines and states connected parties, statutory and applicable connected lending limits, types of connected transactions, taking of collateral, capital adequacy treatment detailed procedures and controls for monitoring of connected lending exposures. In general, interest rates and other terms and conditions applying to connected lending should not be more favourable than loans granted to non-connected borrowers under similar circumstances. The terms and conditions should be determined on normal commercial terms at arm’s length and in the ordinary course of business of the Bank.
Credit and compliance audits are periodically conducted by the Internal Audit Department to evaluate the effectiveness of the credit review, approval and monitoring processes and to test the compliance of the established credit policies and procedures.
The Credit Committee of the Bank monitors the quality of financial assets which are neither past due nor impaired by financial performance indicators (such as loan-to-value ratio, debts servicing ratio, financial soundness of borrowers and personal guarantee) through meeting discussions, management information systems and reports. Those loan borrowers subject to legal proceedings, negative comments from other counterparties and rescheduled arrangements are put under watch lists or under “special mention” grade for management oversight.
The Credit Committee of the Bank monitors the quality of past due or impaired financial assets by internal grading of “substandard”, “doubtful” and “loss” through the same meeting discussions and management information systems and reports. The impaired financial assets include those subject to personal bankruptcy petitions, corporate winding-up and rescheduled arrangements.
The Credit Risk Management Committee of the Bank is responsible for establishing the framework for identifying, measuring, monitoring and controlling credit risk of existing and new products, and approving credit risk management policies and credit risk tolerable limits as and when necessary.
The Bank mitigates credit risk by credit protection provided by guarantors and by loan collaterals such as cash, properties, taxi licenses and cabs and securities.
The Bank has a credit risk management process to measure, monitor and control credit risk. Its Credit Policy Manual defines the credit extension and measurement criteria, the credit review, approval and monitoring processes, and the loan classification and provisioning systems. It has a hierarchy of credit authority which approves credit in compliance with the Bank’s credit policy. Credit risk exposures are measured and monitored against credit limits and other control limits (such as connected exposures, large exposures and risk concentration limits set by the Credit Risk Management Committee and approved by the Board of Directors). Segregation of duties in key credit functions is in place to ensure separate credit control and monitoring. Management and recovery of problem credits is handled by an independent work-out team.
The Bank manages its credit risk within a conservative framework. Its credit policy is regularly revised, taking into account factors such as prevailing business and economic conditions, regulatory requirements and its capital resources. Its policy on connected lending exposures defines and states connected parties, statutory and applicable connected lending limits, types of connected transactions, taking of collateral, capital adequacy treatment detailed procedures and controls for monitoring of connected lending exposures. In general, interest rates and other terms and conditions applying to connected lending should not be more favourable than loans granted to non-connected borrowers under similar circumstances. The terms and conditions should be determined on normal commercial terms at arm’s length and in the ordinary course of business of the Bank.
Credit and compliance audits are periodically conducted by the Internal Audit Department to evaluate the effectiveness of the credit review, approval and monitoring processes and to test the compliance of the established credit policies and procedures.
The Credit Committee of the Bank monitors the quality of financial assets which are neither past due nor impaired by financial performance indicators (such as loan-to-value ratio, debts servicing ratio, financial soundness of borrowers and personal guarantee) through meeting discussions, management information systems and reports. Those loan borrowers subject to legal proceedings, negative comments from other counterparties and rescheduled arrangements are put under watch lists or under “special mention” grade for management oversight.
The Credit Committee of the Bank monitors the quality of past due or impaired financial assets by internal grading of “substandard”, “doubtful” and “loss” through the same meeting discussions and management information systems and reports. The impaired financial assets include those subject to personal bankruptcy petitions, corporate winding-up and rescheduled arrangements.
The Credit Risk Management Committee of the Bank is responsible for establishing the framework for identifying, measuring, monitoring and controlling credit risk of existing and new products, and approving credit risk management policies and credit risk tolerable limits as and when necessary.
The Bank mitigates credit risk by credit protection provided by guarantors and by loan collaterals such as cash, properties, taxi licenses and cabs and securities.
Liquidity risk is the risk that the Bank cannot meet its current obligation. To manage liquidity risk, the Bank has established the liquidity management policy which is reviewed by management and approved by the directors. The Bank measures its liquidity using the statutory liquidity ratio, loan-to-deposit ratio, maturity mismatch ratio and other relevant performance measures.
The Asset and Liability Management Committee of the Bank monitors the liquidity position as part of the ongoing assets and liabilities management, and sets up trigger limits to monitor liquidity risk. It also closely monitors the liquidity of the subsidiaries on a periodic basis to ensure that the liquidity structure of the subsidiaries’ assets, liabilities and commitments can meet the funding needs, and that internal liquidity trigger limits are complied with. Standby facilities are maintained to provide liquidity to meet unexpected and material cash outflows in the ordinary course of business.
The Asset and Liability Management Committee of the Bank monitors the liquidity position as part of the ongoing assets and liabilities management, and sets up trigger limits to monitor liquidity risk. It also closely monitors the liquidity of the subsidiaries on a periodic basis to ensure that the liquidity structure of the subsidiaries’ assets, liabilities and commitments can meet the funding needs, and that internal liquidity trigger limits are complied with. Standby facilities are maintained to provide liquidity to meet unexpected and material cash outflows in the ordinary course of business.
The operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
The Bank has operational risk management function in place to identify, measure, monitor and control operational risk. Its Operational Risk Management Policy Manual defines responsibilities of various committees, business units and supporting departments, highlights key operational risk cause factors and categories with loss event types to facilitate measurement and assessment of operational risks and potential impact. The operational risk exposures are monitored by appropriate key risk indicators for tracking and escalation to management for providing early warning signals of increased operational risk or a breakdown in operational risk management. Regular operational risk management reports are received and consolidated from various parties and reported to the Operational Risk Management Committee for monitoring and control of operational risk.
Capital of the Bank for regulatory and risk management purpose include share capital, share premium, reserves, profit and loss, regulatory reserve and sub-ordinated debts, if any. The Finance and Control Department is responsible for monitoring the amount of capital base and capital adequacy ratio against trigger limits and for risk exposures, ensuring compliance with relevant statutory limits taking into account business growth, dividend payout and other relevant factors.
The Bank’s policy is to maintain a strong capital base to support the development of the Bank’s businesses and to meet the statutory capital adequacy ratio and other regulatory capital requirements. Capital is allocated to the various business activities of the Bank depending on the risk taken by each business division and in accordance with the requirements of relevant regulatory bodies, taking into account current and future activities within a time frame of three years.
The Bank’s policy is to maintain a strong capital base to support the development of the Bank’s businesses and to meet the statutory capital adequacy ratio and other regulatory capital requirements. Capital is allocated to the various business activities of the Bank depending on the risk taken by each business division and in accordance with the requirements of relevant regulatory bodies, taking into account current and future activities within a time frame of three years.
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