Risk managment

General information  

Risk management at OJSC Kapital Bank is carried out in accordance with the Guidelines for the Implementation of Corporate Management Standards at Banks and Risk Management Standards issued by the Central Bank of Azerbaijan Republic, the Basel Committee recommendations on risk management at credit institutions, the Bank's Articles of Incorporation, its Strategic Plan, the applicable laws and regulations, the Bank’s Risk Management Policy and Risk Management Methods, and other relevant internal guidelines and procedures.

Structure of Risk Management

I defence II defence III defence
Board of Directors Shareholders' meeting
CRO
Business divisions Executive committes Internal Audit
  Risk Management Department Audit Committee
  Risk Committee Supervisory Board

Supervisory Board honors monitoring function on risk management of bank in general: confirms risk appetite statement, risk tolerance report, risk strategy, policy and limits and other strategic reports and norms. In addition, SB performs monitoring function on activities of Board of Directors regarding risks.   

Board of Directors manages bank’s operations by implementing objectives and duties pertaining to  Enterprise Risk Management (ERM) compliant with risk policy and strategy adopted by Supervisory Board.     Moreover, BoD provides the structural units with necessary resources and supports establishment and improvement processes of emergency response plan, risk appetite statement and other ratios.

Risk Management Committee stipulates ERM policy, risk limits, risk management models, risk tolerance level and probability scales as well as provides suggestions. RMC provides the production of suggestions regarding enhancement of risk management practices, challenges and new opportunities.

CRO coordinates activities of relevant units with Board of Directors and provides accurate and timely reporting besides, monitoring risk management operations. Moreover, CRO controls risk exposure status, the level of corporate risk limits and risk minimization strategies. CRO ensures adoption of decisions concerning the distribution of resources (investment) based on the most accurate and complete information and preciseness and appropriateness of methods used in the decision-making processes. 

Risk Management Department establishes, implements and controls ERM programme:

  • Identifity corporate level reported risks 
  • Consent Risk management processes and procedures, tools, information systems and other issues with risk owners 
  • Quality of portfolio, anomalies and etc. are tracked 
  • Analyze and optmise risk in business processess
  • Report risks pertaining to Bank and portfolio at risk to RMC 
  • Provide suggestions for improvement of risk management capacity practices through communication and trainings 
  • Provide feedback in terms of the recognition and management of risks in the banking activities covering all processes, new products released and services and etc.

Classification of risk

Credit risk:

A credit risk is the risk of default on a debt or credit line that may arise from a borrower failing to make required payments. The dishonorement of debt obligation comprises the deliquency of payments, restructuring and rescheduling and default of borrower cases.

  • Regulatory framework on credit risk management is established, enhanced and ongoing performance is controlled
  • Assessment of acceptance limits for Credit risk is considered prior to the new product release
  • New control tools (red flag, scoring, stop loss etc.) and reporting system depending on the characteristics of loan products are produced 
  • The credit portfolio is analyzed with the use of risk management tools:
    • Portfolio at Risk
    • Expected Loss (EL) and its components: Probability of Default, Loss Given Default
    • Vintage Analysis
    • Stress Test models
    • Scenario Analysis / “What-if?” analysis
    • Transition matrices
    • Analysis of debt collection system
    • Retrospective modeling, predictions and etc.
  • Special provisions to cover potential losses on assets are measured and incurred (IFRS + CBAR)

Operational risk:

Operational risk concerns with losses caused by inadequate or failed internal processes, people and systems or by external events. 

  • Models and methods for operational risk management are identified and implemented  
  • Risk affected divisions, organizational activities and processes are defined 
  • Information regarding human factors, risks and losses related with technology used in banking operations are collected, classified and managed in accordance with Basel standards  
  • Assessment of Business Processes (new producst as well)  
  • Implementation of internal bank policies and procedures in banking operations is being monitored 
  • Key Risk Indicators and limits are being analyzed:
    • Mistakes during credit issuance (numbers)
    • Customer complaints (numbers)
    • Interruptions and interferences in IT provision (numbers)
    • By Employees: accidents (numbers), breaches of deadlines (numbers)
    • Open issues in Internal Control/Audit  (numbers) and etc.
    • Sending surveys to people encountered with risk in purpose of identification and analysis of complicated risk cases etc.

    Liquidity risk:

    Liquidity risk highlights the risks regarding the storage of liquid assets at appropriate levels to implement strategic objectives and to meet  operational demands.

    • Methods and models for liquidity risk management are identified and implemented
    • Analysis of risk indicators reflecting the occurance of risks due to the external and internal factors:  
      • Analysis of Stress tests and Liquidity shocks
      • Identifying concentration in funding sources
      • Assessment and analysis of Liquidity Coverage Ratio , current liquidity and other related ratios 
      •  Distribution of maturities and liqudity gap analysis
      •  Analysis of liqudity and payments in different currencies and etc.

      Market risk:

      Market risk concerns with changes in value of portfolio (investment or trading) due to the market volatility.

      • Potential changes that may occur in the economy and in the banking sector are studied and  the possible impacts to lending and to asset-liablity management are identified 
      • Interest rate risk, changes in interest rates and suspected violations in estimated variability are monitored
      • Repricing Gap Analysis   
      • Security risks: Volatility of value of bonds and stocks, protifability curves and etc are stipulated
      • The impacts of  risks born from the volatility of foreign currencies and commodity price to the assets of bank are monitored
        - Implementation of Stress tests
        - Scenario analysis and etc.

      Strategic risk:

      Risks arising from improperly implementation of strategic decisions and holding negative impact on access to capital.

      • Consideration of complicance to long-term strategic road-map of the Bank 
      • Follow of economic, political and social trends concerning the transformation to new business environment.
        •  New competetions in market
        •  New products relased
        •  New technologies, practices and etc.
      • Effective assessments of alternative business areas are being monitored.
      • Efficient use of resources is being monitored
      • Effective implementation of strategic decisions is being controlled and etc.

      Reputation risk:

      Reputation risk concerns the risk of formation of negative public opinion regarding the bank.

      • Monitoring the cases that can cause the deterioretaion of external public image of bank.
        • Deterioration of image of the sector in which Bank operates
        • Deterioration of image of bank’s partners
        • Deviations from accepted norms by Bank 
        • Spread of misinformation and rumors about the Bank
      • Improving communication channels 
      • Continuous education for Bank’s employees and etc.