Mahruf's Helpline for The Banking Professional Examination 1

S. M. Mahruf Billah

The Institute of Bankers, Bangladesh (IBB)

98th Banking Professional Examination, 2024
AIBB
Risk Management in Financial Institutions (RMFI)
Subject Code: 2 0 1
Time-3 hours
Full Marks-100
Pass marks-45
[N.B. The figures in the right margin indicate full marks. Answer any Five Questions.]
1. (a) Explain the ‘Risk’ considering activities of a financial institution. 6
(b) What is financial and non-financial risk? What are the financial risks in 7
banking business?
(c) Discuss the methods of identification of risk. 7
2. (a) What is Enterprise Risk Management (ERM)? 7
(b) How does ERM differ from traditional risk management? 5
(c) Discuss the steps of ERM implementation. 7
3. (a) Discuss the key elements of credit risk management? 8
(b) What are the 5Cs in analyzing credit risk and why are these important? 6
(c) Discuss the role of Credit Information Bureau (CIB) and Credit Rating 7
Agencies in Credit Risk Management?
4. (a) What is risk diversification? 5
(b) What are the benefits of risk diversification? 7
(c) Discuss the role of supervisory activities of Bangladesh Bank in controlling 8
risks of a bank.
5. (a) What is risk appetite? 5
(b) Discuss the objectives of risk appetite. 7
(c) Discuss the relationship between risk appetite and risk response strategy of 8
a bank.
6. (a) Discuss the role of Asset Liability Committee (ALCo) in risk management of 7
a bank.
(b) Discuss the importance of ‘Three Lines of Defense (3LoD)’ in operational 7
risk management.
(c) How can effective corporate governance help to mitigate risk in a bank? 6
7. (a) “Systemic risk cannot be mitigated through risk diversification.”- Please 7
explain.
(b) Discuss the functions of Risk Management Division (RMD) of your bank. 7
(c) Discuss your role in risk management considering the risks of your bank. 6

8. (a) Define the leverage ratio. What are the objectives of maintaining leverage 8
ratio?
(b) Based on the following information of ‘A’ Bank please calculate the Liquidity 6
Coverage Ratio (LCR) for 2019 and 2020, and make your comment on the
adequacy of the ratios as per Basel III Accord.
(in crore Taka)
Description 2019 2020
High Quality Liquid Asset 1265 1430
Average Monthly Withdrawal 594 550
Expected Monthly Net Outflow in a 1100 1320
stress scenario
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(c) Based on the following information of ‘A’ Bank please calculate the Leverage 6
Ratio for 2019 and 2020 and make your comment on the adequacy of the
ratios:
(in crore Taka)
Particulars 2019 2020
Tier-1 Capital 3,500 2,750
Total asset 50,000 45,000
Total Leverage Ratio Exposure 65,000 60,000

9. Based on the given information below of ‘X’ Bank answer the following questions: 5×4=20
(in crore Taka)
Total Risk Weighted Asset (RWA) 45,500
Paid-up Capital 1,890
Retained Earnings 550
Non-repayable share premium account 150
Statutory Reserve 1,300
General Provision 1,100
General Reserve 300
Perpetual Bond 500
(a) Calculate Minimum Capital Requirement (MCR) with Capital Conservation
Buffer (CCB).
(b) Calculate total Capital to Risk Weighted Asset Ratio (CRAR).
(c) Calculate CRT-I, Tier-I and Tier-II Capital Ratio.
(d) Interpret the results above against minimum regulatory requirements of
Bangladesh Bank.

10. Write short notes (any five) 4×5= 20

(a) Interest Rate Risk
(b) Capital Conservation Buffer (CCB)
(c) Risk Mapping
(d) Recovery Plan for Banks
(e) Risk Treatment
(f) Key Risk Indicator (KRI)
(g) Executive Risk Management Committee (ERMC)
(h) CAMELS

Comprehensive Books for preparing

The Banking Professional Examination (JAIBB & AIBB)
Written and AIBB Credit Operations and Management
Compiled by Published by Risk Management in Financial Institutions
Trade Finance and Foreign Exchange
S. M. Mahruf Billah Mullick Brothers
Treasury Management in Financial Institutions
Joint Director
Bangladesh Bank Monetary and Financial System
JAIBB
Business Communication in Financial
Institutions
Collect your Copy from: www.rokomari.com
Or
Mullick Brothers Book shop located at Banglabazar, New Market & Nilkhet, Dhaka
 Mahruf's Helpline for The Banking Professional Examination 3
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1. (a) Explain the ‘Risk’ considering activities of a financial institution. 6

Risks in a financial institution are defined as the possibility of loss that can arise due to various
uncertainties. In the banking domain, the uncertainties in the banking operations may affect the profits
of a banking organization in an adverse manner. Some of the most eminent risks arising in the banking
sector include credit risks, market risks, operational risks, liquidity risks, business risks, reputational, and
systematic risks.
A fundamental and basic idea in finance is the relationship between the risks and return. As risks are
directly proportional to returns, if a bank takes more risks, there is a greater chance for it to make more
money.
2. (b) What is financial and non-financial risk? What are the financial risks 7
in banking business?
Financial risks are reflected in the financial positions on banks’ balance sheets and result from their risk-
taking activity. Nonfinancial risks arise from the bank’s operations (processes and systems) and are
similar to risks faced by companies outside the financial sector (“corporates”). Financial risks originate
from financial markets and might arise from changes in share prices or interest rates. Non-financial risks
emanate from outside the financial market environment and could be consequences of environmental
or regulatory changes or an issue with customers or suppliers.
Financial risks include in banking business are:
 Credit Risk: The failure of a counterparty such as a customer, supplier, or investor to meet their
contractual obligation such as defaulting on the repayment of a loan.
 Liquidity Risk: The ability or inability of an organization to meet immediate and or short-term
obligations.
 Market Risk: Systemic risks such as equity market risk, interest rate risk, exchange rate risk, and
commodity risk.
 Operational Risk: The failure of internal processes, people, or systems.
1. (c) Discuss the methods of identification of risk. 7
Risk identification methods in banking refer to systematic processes employed to identify potential
hazards that could adversely affect its assets, reputation, and operations. These methods aim to uncover
risks stemming from various sources, including market fluctuations, credit risks, operational failures, and
regulatory changes.
Effective risk identification is vital for maintaining the stability and integrity of banking institutions. By
recognizing risks early, banks can develop mitigation strategies that reduce vulnerabilities. This proactive
approach not only enhances a bank’s resilience but also fosters a culture of risk awareness.
Here is an overview of the best risk identification methods:
a) Probability and Impact Matrix: The Probability and Impact Matrix is a foundational tool used in
risk management. It evaluates and prioritizes risks based on their likelihood of occurrence and
potential impact on project objectives.
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Features
 Categorization of risks into a grid
 Prioritization based on predefined criteria
 Visual representation of risk severity
Pros
 Simplifies complex risk data
 Enhances decision-making
 Facilitates communication among stakeholders
Cons
 Requires subjective judgments
 May oversimplify complex risks
b) Risk Data Quality Assessment: Risk data quality assessment evaluates the reliability and
credibility of risk data, ensuring that risk management decisions are based on accurate and high-
quality information.
Features
 Assessment of data source reliability
 Evaluation of data accuracy
 Identification of data limitations
Pros
 Improves the quality of risk analysis
 Reduces uncertainty in decision-making
 Identifies gaps in risk data
Cons
 Can be time-consuming
 Requires expertise to assess data quality
c) SWOT Analysis: SWOT Analysis is a strategic planning tool for identifying Strengths,
Weaknesses, Opportunities, and Threats related to business competition or project planning.
Features
 Examination of internal and external factors
 Strategic insights into business or project
 Facilitation of strategic planning
Pros
 Simple and versatile
 Promotes strategic thinking
 Identifies opportunities and threats
Cons
 May not prioritize issues
 Lacks detailed risk management
d) Risk Register: A Risk Register is usually a document that contains all information about
identified risks, including their status and mitigation plans.
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Features
 Comprehensive list of risks
 Risk descriptions, impacts, and mitigation strategies
 Tracking of risk ownership and status
Pros
 Centralizes risk information
 Facilitates monitoring and control
 Enhances transparency and accountability
Cons
 Requires regular updating
 It may become unwieldy with large projects
e) Root Cause Analysis: Root Cause Analysis is a problem-solving method that aims to identify the
main cause of risk or issues rather than merely addressing their symptoms.
Features
 Use of tools like the 5 Whys and Fishbone Diagram
 Identification of the primary cause of risk
 Implementation of long-term solutions
Pros
 Prevents recurrence of issues
 Encourages deep understanding of problems
 Focuses on corrective actions
Cons
 Time-consuming
 Requires experienced facilitators
f) Brainstorming: Brainstorming is a creative group problem-solving technique that generates a
wide range of ideas for risk identification and mitigation strategies.
Features
 Facilitation of open and uninhibited discussion
 Generation of a large number of ideas
 Encouragement of innovative thinking
Pros
 Promotes team involvement and creativity
 Uncovers unique insights and solutions
 Enhances stakeholder engagement
Cons
 May produce a large volume of unfeasible ideas
 Requires effective facilitation to be productive
g) Checklists: Checklists are simple yet effective tools to ensure the organization considers all
potential project risks and necessary risk management steps.
Features
 Comprehensive lists of common risks and responses
 Customizable to project or industry needs
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 Easy to use and understand

Pros
 Provides a systematic approach to risk identification
 Ensures no critical step is overlooked
 Facilitates quick reviews
Cons
 It may not cover all unique project risks
 This can lead to a false sense of security

2. (a) What is Enterprise Risk Management (ERM)? 7

Enterprise Risk Management (ERM) is a holistic approach employed across the entire organization to
identify, assess, and manage various risks that an organization may encounter in pursuit of its
objectives. Enterprise risk management can include financial, strategic and operational risks as well as
risks associated with accidental losses. ERM is designed to manage and identify risks across an
organization and its extended networks. An effective ERM framework should achieve the following
objectives:
 Promote a strong risk culture within a bank so that employees at every level understand their
roles and responsibilities in protecting the bank from risk.
 Support the bank’s strategy by embedding risk considerations into the bank’s planning, both
day-to-day or operationally and longer-term or strategically.
 Develop an appropriate risk governance structure. Risk governance describes a bank’s general
rules and standards for risk management.
 Protect the bank’s reputation from significant risks.
 Comply with laws and government regulations in the jurisdictions the bank operates in.
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2. (b) How does ERM differ from traditional risk management? 5

Traditional Risk Management Enterprise Risk management
Reactiveness Reactive — tends to respond to Proactive — looks forward to prevent risk
incidents that have occurred and occurring
focus on preventing reoccurrence
Scope Focuses on insurable andEncompasses both insurable and non-
financially tangible risks insurable risks, and those where the cost is
hard to define — for instance, risks that
damage brand or reputation
Adaptability Standardized, prescribed Fluid, adaptable, agile
approaches
Effort Focused on business units or Holistic and enterprise-wide; minimizes
departments; siloed; can create duplication
duplicatory activity
Alignment Limits risk prioritization andEnables risks that impact multiple
alignment across teams departments to be prioritized and tackled in
an integrated way
Integration Approach, metrics and reporting Approach, metrics and reporting consistent
inconsistent between teams, sites and integrated across the business
or departments
Identification Identifies and tackles risks on a Focuses on root-cause risks common to
case-by-case basis every silo
Mitigation Risk mitigation focuses on impact Risk mitigation takes into account impact on
on individual business units or entire organization
teams
Mindset Risk averse: focuses on mitigation Risk tolerant: takes an enterprise-wide risk
culture
Connection Standards and approaches are Aligns with recognized standards like the
business-specific and can be COSO Framework to ensure your risk
simplistic management approach is in line with best
practice
Prominence Keeps risk conversations to team Elevates risk discussions to board level
or department level
Responsiveness A static checklist of risks and A real-time, responsive approach to the
responses changing organization and risk landscape
2. (c) Discuss the steps of ERM implementation. 7
The steps of Enterprise Risk Management (ERM) Implementation:
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a) Identify Risks: The first step in the ERM process is to identify the potential risks (and
opportunities) that may affect the organization’s objectives. This step involves recognizing
internal and external risks that may arise from various sources such as operations, financial,
regulatory, legal, reputational and strategic risks. Identifying new risks is the key to managing
what is on the horizon.
b) Assess Risks: After identifying the risks, the next step is to assess their likelihood and potential
impact on the organization’s objectives. This step involves analyzing the risks in terms of their
probability of occurrence, potential impact, the speed (or velocity) that the risk might affect the
organization and the adequacy of the organization’s current controls to mitigate those risks.
c) Prioritize Risks: Based on the risk assessment, the next step is to prioritize the risks based on
their level of importance to the organization’s objectives. This step involves determining which
risks require immediate attention and which risks can be managed over the long term.
d) Develop Risk Mitigation Strategies: After prioritizing the risks, the next step is to develop risk
management strategies that align with the organization’s objectives. This step involves
developing a risk management plan that outlines how the organization will mitigate, avoid,
transfer or accept each risk.
e) Implement Risk Mitigation Strategies: The next step is to implement the risk mitigation
strategies identified in the previous step. This step involves putting in place the necessary
processes, policies and procedures to manage the risks identified.
f) Report, Monitor and Review: The final step in the ERM process is to report, monitor and review
the effectiveness of the risk management strategies implemented. This step involves
continuously monitoring the risks, evaluating the effectiveness of the risk management
strategies, adjusting the strategies as necessary and reporting the results in a timely manner to
be useful in strategic planning.
3. (a) Discuss the key elements of credit risk management? 8
Lenders typically gauge the following parameters while trying to keep their lending risks at a
minimum:
a) KYC: KYC or Know Your Customer is a streamlined process across all banking and Non-Banking
Financial Companies (NBFCs) that allows them to filter out wrongful funding and money
laundering cases. It involves a set of important documents that provide all the required
information of a borrower or customer to the financing company to verify their background and
identity.
b) Creditworthiness Assessment: Once the KYC is done, the lenders assess the creditworthiness of
a potential customer or borrower to determine if they are capable of paying back their debts or
dues on time. This step is crucial as it allows lending institutions to ensure that the credit
background of those they are lending to checks out.
c) Quantification of Risk: Quantification of risk means figuring out the risk probability or the
chances of a borrower defaulting on their loan. This element is crucial as it further establishes
the overall pricing and credit terms of the loan. The process involves determining the probability
of default, the loss given default, and the risk-adjusted return on capital.
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d) Decision-making: The final decision on credit lies with the bank, lender, or lending institution.
This is important as borrowers applying for funds via loan may require them quickly, leaving a
very small window for financing establishments to approve and disburse funds within a short
period. However, several banking and non-banking financial companies (NBFCs) nowadays have
an automated process that makes the entire experience quick and hassle-free.
e) Calculation: The total loan amount and interest rate are calculated based on the
creditworthiness of the borrower and their ability to fulfill the terms of credit as laid out by the
lender or lending institution.
f) Monitoring and Reviewing: After the loan pay-out is done, it is still essential for banks and
financing companies to monitor and review the financial growth and repayment activities of the
borrower. Also, they ensure that borrowers repay the loan within the stipulated time. Doing so
also allows lenders to identify any chances of default and alert the borrower before it happens.
All of these six elements of credit risk management ensure an efficient credit collection process that
benefits both the lender and borrower in the long run.
3. (b) What are the 5Cs in analyzing credit risk and why are these 6
important?
The 5Cs of credit analysis represent:
1) Character: Character refers to the profile of the borrower. If you are applying for a Personal
Loan, lenders would like to know your personal and financial background and your credit
history. In the case of businesses or firms, lenders will look for the credibility or reputation of
the company.
2) Capacity: Capacity refers to the ability of the borrower to take and repay the debt or loan
received from the lender or lending institution within the stipulated terms. In the case of a
commercial borrower or a business entity, it refers to its capacity to repay the debt that will
depend on its ability to generate steady cash flow and profits.
3) Capital: Capital determines a borrower's overall financial strength or ‘wealth’, which further
establishes their ability to repay a loan. Lenders also check if the borrower has alternate sources
of funds to pay back their debt.
4) Conditions: Conditions refer to the purpose as well as the circumstances or external forces that
may pose some risk, threat, or opportunity for the borrower. Conditions for business entities
could be industry-related challenges or technological developments.
5) Collateral: Collateral is any asset a borrower holds that can be used or used as security against a
secured loan.
The 5 Cs of credit form the foundation for extending the credit limit for a customer. These factors help
lenders assess the level of risk involved in lending to a particular business, which ultimately affects the
interest rates, loan terms, and amount of credit extended to the borrower.
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3. (c) Discuss the role of Credit Information Bureau (CIB) and Credit Rating 7
Agencies in Credit Risk Management?
Credit Information Bureau (CIB) was set up in Bangladesh Bank (BB) on 18 August 1992 with the
objective of minimizing the extent of default loans. CIB has been providing its online services since 19
July, 2011. The New CIB Online Solution developed by BB's internal resources started its live operation
on 01 October, 2015. With the adoption of highly sophisticated ICT facilities the performance of the CIB
services has been improved significantly in terms of efficiency and quality. The Online system of CIB is
playing an important role to maintain a risk free lending procedure in the banking industry.
Role of CIB:
 Collection of credit information (including credit cards irrespective of positive or negative data)
having outstanding balance of Tk. 1(one) and above from all scheduled banks and non-bank
financial institutions.
 Prepare a database after validating and processing of that credit information.
 Update credit information (contract data) of borrowers according to demand by Banks/NBFIs
during interim period of monthly batch contributions.
 Correct credit information (subject data) of borrowers according to the demand by Banks/NBFIs.
 Provide default information on bank loans of the candidates who participate in National/Local
Elections to the election commission whenever it seeks.
 Provide credit information to the national Parliament, different ministries, different government
bodies and different departments of BB.
 Implement stay order passed by Honorable Court on borrowers, owners/directors/guarantors.
 Development of collateral information system with a view to preparing collateral database
which is isolated from the existing CIB online system.
 Collection of credit information on immovable collaterals such as land, flat, building, capital
machineries that is mortgaged against sanctioned loans/advances by different banks/FIs.
 Supervise/monitor the practices of stakeholders in relation to the services offered by CIB.
 Credit Information Bureau is assisting Microcredit Regulatory Authority (MRA) to establish a
new credit information bureau (MF-CIB) for Micro-Finance Institutions.
Credit Rating Agencies can give a credit risk rating to individual companies, stocks, government,
corporate or municipal bonds, mortgage-backed securities, credit default swaps and collateralized debt
obligations. Credit risk shows how likely a borrower is to default on their obligations to repay a loan.
Credit rating agencies play a crucial role in credit risk reporting by providing independent and unbiased
assessments of creditworthiness. Their ratings serve as a reliable source of information for investors and
lenders, enabling them to make informed decisions.
The specific roles of credit rating agencies in credit risk management can be summarized as follows:
1) Assessment of Creditworthiness: credit rating agencies assess the creditworthiness of entities
by evaluating various factors, as discussed earlier. They assign ratings that reflect the level of
credit risk associated with the entity, allowing investors and lenders to gauge the risk.
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2) Standardization of Ratings: credit rating agencies provide standardized ratings that enable
investors and lenders to compare the credit risk of different entities. The ratings serve as a
benchmark, facilitating the evaluation of investment opportunities and loan applications.
3) Information Dissemination: Credit rating agencies disseminate information about credit risk
through their ratings. They publish reports, opinions, and analysis related to creditworthiness,
providing investors and lenders with valuable insights.
4) Regulatory Compliance: Credit rating agencies play a critical role in regulatory compliance by
providing assessments that conform to regulatory requirements. They ensure that entities meet
the necessary criteria to access capital markets and financial services.
4. (a) What is risk diversification? 5
Risk diversification is a strategy that involves investing in a variety of financial assets, so you can reduce
your exposure to any one specific type of risk. The basic principle behind diversification is that by
including a mix of asset types in your portfolio, rather than concentrating on just one, you can reduce
the negative effects of market volatility or poor performance by one specific asset.
4. (b) What are the benefits of risk diversification? 7
Diversification has several benefits for you as an investor, but one of the largest is that it can actually
improve your potential returns and stabilize your results. By owning multiple assets that perform
differently, you reduce the overall risk of your portfolio, so that no single investment can hurt you too
much.
 Because assets perform differently in different economic times, diversification smoothens your
returns. While stocks are falling, bonds may be rising, and CDs remain stable.
 In effect, by owning various amounts of each asset, you end up with a weighted average of the
returns of those assets. Although you won’t achieve the startlingly high returns from owning just
one rocket-ship stock, you won’t suffer its ups-and-downs either.
 While diversification can reduce risk, it can’t eliminate all risk. Diversification works well for
asset-specific risk, but is powerless against market-specific risk.
4. (c) Discuss the role of supervisory activities of Bangladesh Bank in 8
controlling risks of a bank.
The process of bank supervision takes two forms. One is the regulatory or off-site monitoring process,
while the other is on-site inspection or bank examination process. Bank regulation usually deals with
the formulation and implementation of specific rules and regulations for the conduct of banking
business, including the monitoring of the compliance with such rules. Bank examination, on the other
hand, ensures compliance with the rules and regulations and assesses the soundness of individual
institutions.
Sometimes, the function of bank regulation and examination are centered in one department, while in
some central banks, such as Bangladesh Bank, they are separated into different departments as a matter
of policy.
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1) The Bank Regulation Process or Off-site Monitoring Process

The regulatory process can begin even before a bank or deposit-taker commences business. The
licensing process (called sometimes anti-competitive regulations to limit entry into banking)
usually involves the following:
 Minimum capital requirements
 "Fit and proper persons"
 Ownership limits
After a bank satisfies the pre-operating requirements, the regulatory process then involves the
monitoring and control over the activities of the bank according to laid-down rules and
regulations. These may be divided into the following categories:
a) Information Disclosure
b) Restrictions of Business Activities
c) Controls Over Changes in Operations
d) Risk Control Limits
e) Liquidity Requirements
f) Capital Adequacy Requirements
g) Information Pooling and Coordination
h) Moral Suasion
i) Preventive Measures
j) Policy and Legal Development
Currently 6 departments of Bangladesh Bank namely Department of Off-site Supervision (DOS), Banking
Regulation and Policy Department (BRPD), Foreign Exchange Policy Department (FEPD), Foreign
Exchange Operation Department (FEOD), Financial Stability Department (FSD) and Department of
Financial Institutions and Market (DFIM) conduct off-site supervision activities. DOS is endowed with
responsibility of continuous monitoring and assessment of Key Performance Indicators of banks on the
basis of various returns and statements. In addition, DOS helps to promote soundness and stability of
the banking system through CAMELS rating, liquidity and Capital Adequacy monitoring, etc. along with
other key tools.
2) The Bank Examination Process or On-site Supervision
In general, the examination process involves frequent on-site examination of bank operations to
ascertain that the bank is operating in a sound manner, to determine the accuracy of financial
reports to the regulator and the public and to ascertain compliance with the law and
regulations. Bank examinations are usually conducted on a surprise basis (without prior notice
to the bank concerned) and at random, on either selected branches or aspects of the operations
of a bank. The examination could either be a routine inspection or a special in-depth
investigation to uncover fraud or risk exposure.
Most bank examination activities would cover the following:
a) Determine financial position of bank and quality of operations
This includes assets and cash counts, verification of internal control procedures, their
documentation and compliance.
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b) Assessment of management quality

 covers integrity, training and experience level of bank staff.
 monitor show tightly management is supervised by the Board.
 examines the degree of discretionary powers given to management
 staff and the nature how powers are exercised.
 adequacy of staff and staff training.
 management succession and dual controls.
c) Ascertain compliance with laws and regulations
Includes tests of documentation and compliance with laid down laws and procedures.
d) Testing accuracy of books, accounts and records
Verifies that transactions are properly and accurately documented and that audit trails
and authorizations are properly maintained.
e) Verification of asset quality
This includes a complete review of credit policy laid down by the Board to cover areas
such as proportion of loans to sectors and individuals
 types of securities acceptable to the bank
 procedures to be followed in valuation
 margin of advance
 credit appraisal methodology
 credit monitoring and recovery
 aging of loans, suspension of interest and loans provisioning.
f) Assessing solvency of bank
After all provisions have been made, the solvency of the bank would be assessed, and
the truth and fairness of the financial statements of the bank commented on. This
usually involves detailed discussions with the banks' top management and auditors.
Currently 11 departments of Bangladesh Bank namely Department of Banking Inspection-1 to 8 (DBI),
Department of Foreign Exchange Inspection (DFEI), Financial Integrity and Customer Services
Department (FICSD) & Financial Institutions Inspection Department (FIID) and Bangladesh Financial
Intelligence Unit (BFIU) conduct on-site inspection.
5. (a) What is risk appetite? 5
Risk appetite can be defined as 'the amount and type of risk that an organization is willing to take in
order to meet their strategic objectives'. Organizations will have different risk appetites depending on
their sector, culture and objectives. A range of appetites exist for different risks and these may change
over time. Organizations define their risk appetite first by identifying key risk categories relevant to their
strategy and operations. From there, they set upper and lower limits for each risk and design strategies
to manage these risks.
5. (b) Discuss the objectives of risk appetite. 7
A business’s risk strategy is a crucial component of its success. It’s essential to have an understanding of
how much risk your organization can take and what risks are worth taking. Organizations with a clearly
defined appetite for risk are better equipped to:
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 Make informed decisions about future investments, business strategies, and initiatives
 Identify internal and external vulnerabilities
 Assess their competition from all angles
 Prioritize risks that require extensive resources or immediate attention
 Take calculated risks that lead to innovation and growth
Having a well-defined risk appetite also helps businesses establish a consistent approach to managing
risk and facilitates communication among stakeholders. It ensures everyone is on the same page about
what level of risk is acceptable and aligns all efforts towards achieving a common goal.
5. (c) Discuss the relationship between risk appetite and risk response 8
strategy of a bank.
Risk response strategies: Risk response strategies are the actions you take to deal with risks, based on
their impact and probability. There are four main types of risk response strategies: avoid, reduce,
transfer, and accept.
Risk appetite: Risk appetite is the amount and type of risk that you are willing to take or tolerate in
pursuit of your objectives. Risk appetite can vary depending on your context, goals, values, and
preferences. Risk appetite can be expressed qualitatively or quantitatively, using measures such as
expected return, volatility, or loss tolerance.
The relationship: The relationship between risk response strategies and risk appetite is that they should
be aligned and consistent. Your risk response strategies should reflect your risk appetite, and your risk
appetite should guide your risk response strategies.
For example, if you have a high risk appetite, you may choose to accept or transfer some risks that offer
high rewards, rather than avoid or reduce them. Conversely, if you have a low risk appetite, you may
prefer to avoid or reduce risks that pose high threats, rather than accept or transfer them.
Aligning your risk response strategies and risk appetite can have several benefits for your risk
management.
i. First, it can help you prioritize and allocate your resources effectively, by focusing on the risks
that matter most to you.
ii. Second, it can help you communicate and collaborate with your stakeholders, by clarifying your
expectations and boundaries.
iii. Third, it can help you monitor and evaluate your performance, by providing a basis for
measuring and reporting your results.
6. (a) Discuss the role of Asset Liability Committee (ALCo) in risk 7
management of a bank.
According to the ALM Guidelines issued by Bangladesh Bank, the major responsibilities of Asset Liability
Committee (ALCo) are defined as follows:
 Ensure that bank’s measurement and reporting systems accurately convey the degrees of
liquidity and market risk
 Monitor the structure and composition of bank’s assets and liabilities and identify balance
sheet management issues that are leading to underperformance
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 Decide on the major aspects of balance sheet structure, such as maturity and currency mix
of assets and liabilities, mix of wholesale versus retail funding, deposit mix , etc.
 Decide on how to respond to significant, actual and expected increases and decreases in
required funding
 Review maturity profile and mix of assets and liabilities
 Articulate interest rate view of the bank and decide on balance sheet strategy
 Approve and periodically review the transfer pricing policy of the bank
 Evaluate market risk involved in launching of new products
 Review deposit-pricing strategy, and
 Review contingency funding plan for the bank.
Balance sheet risk management is not limited to collection of data only. ALCO is required to understand
the implications of the numbers generated from analyses and formulate appropriate responses and
strategies for the bank.
6. (b) Discuss the importance of ‘Three Lines of Defense (3LoD)’ in 7
operational risk management.
The three lines of defense is a risk governance framework that splits responsibility for operational risk
management across three functions. Individuals in the first line own and manage risk directly. The
second line oversees the first line, setting policies, defining risk tolerances, and ensuring they are met.
The third line, consisting of internal audit, provides independent assurance of the first two lines.

The importance of ‘Three Lines of Defense (3LoD)’:

The 3LOD model is a structured approach to risk management that helps ensure accountability,
transparency, and efficiency in managing an organization’s risks. By clearly defining the roles and
responsibilities of each line, it aims to prevent or detect issues early and improve decision-making
related to risk and control. This model is widely used in various industries, including finance, healthcare,
and compliance-driven sectors.
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6. (c) How can effective corporate governance help to mitigate risk in a 6

bank?
Effective corporate governance is critical to the proper functioning of the banking sector and the
economy as a whole. Banks perform a crucial role in the economy by intermediating funds from savers
and depositors to activities that support enterprise and help drive economic growth. Banks’ safety and
soundness are keys to financial stability, and the manner in which they conduct their business,
therefore, is central to economic health. Governance weaknesses at banks that play a significant role in
the financial system can result in the transmission of problems across the banking sector and the
economy as a whole.
The primary objective of corporate governance should be safeguarding stakeholders’ interest in
conformity with public interest on a sustainable basis. Among stakeholders, particularly with respect to
retail banks, shareholders’ interest would be secondary to depositors' interest.
Corporate governance determines the allocation of authority and responsibilities by which the business
and affairs of a bank are carried out by its board and senior management, including how they:
 set the bank’s strategy and objectives;
 select and oversee personnel;
 operate the bank’s business on a day-to-day basis;
 protect the interests of depositors, meet shareholder obligations, and take into account the
interests of other recognized stakeholders;
 align corporate culture, corporate activities and behavior with the expectation that the bank
will operate in a safe and sound manner, with integrity and in compliance with applicable
laws and regulations; and
 establish control functions.
This is how effective corporate governance help to mitigate risks in a bank.
7. (a) “Systemic risk cannot be mitigated through risk diversification.”- 7
Please explain.
Systematic risk is defined as the inherent risk that affects the market, not just one sector of the market.
This type of risk is uncontrollable by any company and is usually derived from macroeconomic factors.
Systematic risk can't be diversified away since it affects the entire market. It is both unpredictable and
impossible to completely avoid.
Because of the far-reaching scope of systematic risk—wherein the entire economy is placed in a
vulnerable position—portfolio diversification cannot mitigate this risk. Systemic risk is caused by factors
that are external to the organization. All investments or securities are subject to systematic risk and,
therefore, it is a non-diversifiable risk. Systematic risk cannot be diversified away by holding a large
number of securities.
7. (b) Discuss the functions of Risk Management Division (RMD) of your 7
bank.
Banks must have an independent full-fledged risk management department/division. The Risk
Management Division/Department (RMD) shall be headed by the Chief Risk Officer (CRO). It should have
 Mahruf's Helpline for The Banking Professional Examination 17
S. M. Mahruf Billah

separate desks within the risk management department for overseeing each key risk area. The main
functions of the department include, but not limited to, the followings:
 managing the process for developing risk policies and procedures;
 coordinating with business users/units to prepare functional specifications;
 preparing and forwarding risk reports; and
 assisting in the implementation of all aspects of the risk function
The risk management function shall be functionally and hierarchically independent from business and
other operation functions. The officials who take and own risks should not be given responsibility for
monitoring and evaluating their risks. Safeguards against conflict of interest should be put in place to
maintain independence of the risk management function. Sufficient resources should be provided to
Risk Management Department where the personnel possess needed experience and qualifications,
including market and product knowledge and command of risk discipline. Likewise, adequate budget
should be allocated to this function to enable it carry out its crucial function effectively.
According to the business size and nature of activity, the bank will form various desks under the Risk
Management Department to perform its assigned activities. However, necessary desks under the
division should be as follows:
1) Credit Risk
2) Market Risk
3) Liquidity Risk
4) Operational Risk
5) Risk Research and Policy Development
It is noted that there is a negative relationship between capital and bank risk, i.e. when the capital
increases, the bank risk decreases. Hence, there must be a close relationship and communication
between Basel Implementation Unit (BIU) and RMD.
7. (c) Discuss your role in risk management considering the risks of your 6
bank.
Banking risk management is the process of a bank identifying, evaluating, and taking steps to mitigate
the chance of something bad happening from its operational or investment decisions. This is especially
important in banking, as banks are responsible for creating and managing money for others.
My role under a Risk Management job should be the following:
 Designing and implementing an overall risk management process for the bank, which includes
an analysis of the financial impact on the bank when risks occur.
 Performing a risk assessment: Analyzing current risks and identifying potential risks that are
affecting the bank.
 Performing a risk evaluation: Evaluating the bank’s previous handling of risks, and comparing
potential risks with criteria set out by the bank such as costs and legal requirements.
 Establishing the level of risk the bank is willing to take.
 Preparing risk management and insurance budgets.
 Risk reporting tailored to the relevant audience (Educating the board of directors about the
most significant risks to the business; ensuring business heads understand the risks that might
 Mahruf's Helpline for The Banking Professional Examination 18
S. M. Mahruf Billah

affect their departments; ensuring individuals understand their own accountability for individual
risks).
 Explaining the external risk posed by corporate governance to stakeholders
 Creating business continuity plans to limit risks.
 Conducting policy and compliance audits, which will include liaising with internal and external
auditors.
 Reviewing any new major contracts or internal business proposals.
 Building risk awareness amongst staff by providing support and training within the company.
8. (a) Define the leverage ratio. What are the objectives of maintaining 8
leverage ratio?
A leverage ratio is a financial measurement of debt. It puts an entity's debt into better context by
showing it as a ratio relative to another financial metric like equity or earnings. A leverage ratio can help
determine the financial health of an entity.
A bank's leverage ratio is calculated by dividing its Tier 1 capital by its total leverage ratio exposure
measure, which includes its assets and off-balance-sheet items, irrespective of how risky they are.
𝑻𝒊𝒆𝒓 𝑰 𝑪𝒂𝒑𝒊𝒕𝒂𝒍
𝑳𝒆𝒗𝒆𝒓𝒂𝒈𝒆 𝑹𝒂𝒕𝒊𝒐 = 𝑻𝒐𝒕𝒂𝒍 𝒆𝒙𝒑𝒐𝒔𝒖𝒓𝒆 (𝒐𝒏+𝒐𝒇𝒇 𝒃𝒂𝒍𝒂𝒏𝒄𝒆 𝒔𝒉𝒆𝒆𝒕)

Total exposure is equal to the Depository Institution’s total assets plus off-balance-sheet exposure. For
off-balance-sheet credit (loan) commitments, a conversion factor of 100 percent is applied unless the
commitments are immediately cancelable.
The objectives of maintaining leverage ratio:
 The leverage ratio measures a bank's core capital to its total assets. The ratio uses tier 1 capital
to judge how leveraged a bank is in relation to its consolidated assets. Tier 1 assets are ones that
can be easily liquidated if a bank needs capital in the event of a financial crisis. So, it is basically a
ratio to measure a bank's financial health.
 The higher the tier 1 leverage ratio, the higher the likelihood of the bank withstanding negative
shocks to its balance sheet.
 The leverage ratio is used as a tool by central monetary authorities to ensure the capital
adequacy of banks and place constraints on the degree to which a financial company can
leverage its capital base.
 Basel III established a 3 percent minimum requirement for the leverage ratio while it left open
the possibility of making the threshold even higher for certain systematically important financial
institutions.
8. (b) Based on the following information of ‘A’ Bank please calculate the 6
Liquidity Coverage Ratio (LCR) for 2019 and 2020, and make your
comment on the adequacy of the ratios as per Basel III Accord.
(in crore Taka)
Description 2019 2020
High Quality Liquid Asset 1265 1430
Average Monthly Withdrawal 594 550
Expected Monthly Net Outflow in a 1100 1320
stress scenario
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Solution:
𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝐻𝑄𝐿𝐴 (𝐻𝑖𝑔ℎ 𝑄𝑢𝑎𝑙𝑖𝑡𝑦 𝐿𝑖𝑞𝑢𝑖𝑑 𝐴𝑠𝑠𝑒𝑡)
𝐿𝐶𝑅 = ≥ 100%
𝑇𝑜𝑡𝑎𝑙 𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤𝑠 𝑜𝑣𝑒𝑟 𝑡ℎ𝑒 𝑛𝑒𝑥𝑡 30 𝑐𝑎𝑙𝑒𝑛𝑑𝑒𝑟 𝑑𝑎𝑦𝑠
1265
∴ 𝐿𝐶𝑅 𝑓𝑜𝑟 2019 = = 1.15 = 115%
1100
1430
𝐿𝐶𝑅 𝑓𝑜𝑟 2020 = = 1.0833 = 108.33%
1320
As Per the Basel III accord, the minimum Value of LCR should be 100%.Bank A fulfills the minimum
requirement of LCR both Year. LCR on 2019 is better position than LCR on 2020.
8. (c) Based on the following information of ‘A’ Bank please calculate the Leverage 6
Ratio for 2019 and 2020 and make your comment on the adequacy of the
ratios:
(in crore Taka)
Particulars 2019 2020
Tier-1 Capital 3,500 2,750
Total asset 50,000 45,000
Total Leverage Ratio Exposure 65,000 60,000
Solution:
𝑇𝑖𝑒𝑟 𝐼 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑜𝑠𝑢𝑟𝑒 (𝑜𝑛 + 𝑜𝑓𝑓 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 𝑠ℎ𝑒𝑒𝑡)
3,500
𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 𝑓𝑜𝑟 2019 = = 0.0538 = 5.38%
65,000
2,750
𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 𝑓𝑜𝑟 2020 = = 0.0458 = 4.58%
60,000
As per the BASEL III accord, the minimum value of LR should be 3%. Bank A fulfills the minimum
requirement of LR both years. LR on 2019 is better position than LR on 2020.
9. Based on the given information below of ‘X’ Bank answer the following 5×4=20
questions:
(in crore Taka)
Total Risk Weighted Asset (RWA) 45,500
Paid-up Capital 1,890
Retained Earnings 550
Non-repayable share premium account 150
Statutory Reserve 1,300
General Provision 1,100
General Reserve 300
Perpetual Bond 500
(a) Calculate Minimum Capital Requirement (MCR) with Capital Conservation Buffer
(CCB).
(b) Calculate total Capital to Risk Weighted Asset Ratio (CRAR).
(c) Calculate CET-I, Tier-I and Tier-II Capital Ratio.
(d) Interpret the results above against minimum regulatory requirements of Bangladesh
Bank.
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Solution:
Reference: Guidelines on Risk Based Capital Adequacy: Revised Regulatory Capital Framework for
banks in line with Basel III, Bangladesh Bank, December 2014.
a)
`𝑋’ 𝑏𝑎𝑛𝑘’𝑠 𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 (𝑀𝐶𝑅)𝑤𝑖𝑡ℎ 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑜𝑛𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛 𝐵𝑢𝑓𝑓𝑒𝑟(𝐶𝐶𝐵)
= 12.5% 𝑜𝑓 𝑇𝑜𝑡𝑎𝑙 𝑅𝑖𝑠𝑘 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 = 45,500 × 0.125 = 5,687.5 𝐶𝑟𝑜𝑟𝑒 𝑇𝑘.
b)
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝐶𝑅𝐴𝑅 =
𝑇𝑜𝑡𝑎𝑙 𝑅𝑖𝑠𝑘 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
(1,890 + 550 + 150 + 1,300 + 1,100 + 300 + 500) 5,790
∴ 𝐶𝑅𝐴𝑅 = = = 0.1272 = 12.72%
45,500 45,500
As Per the Basel III accord, the minimum Value of CRAR should be 10.00%
c)
(𝑃𝑎𝑖𝑑 𝑢𝑝 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + 𝐺𝑒𝑛𝑒𝑟𝑎𝑙 𝑅𝑒𝑠𝑒𝑟𝑣𝑒 + 𝑆𝑡𝑎𝑡𝑢𝑡𝑜𝑟𝑦 𝑅𝑒𝑠𝑒𝑟𝑣𝑒 +
𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 + 𝑁𝑜𝑛 𝑟𝑒𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 +
𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑒𝑞𝑢𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑅𝑒𝑠𝑒𝑟𝑣𝑒 + 𝑀𝑖𝑛𝑜𝑟𝑖𝑡𝑖𝑒𝑠 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑠𝑢𝑏𝑠𝑖𝑑𝑒𝑟𝑖𝑒𝑠)
𝐶𝐸𝑇 𝐼 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑅𝑊𝐴
(1,890 + 300 + 1,300 + 550 + 150 + 0 + 0)
∴ 𝐶𝐸𝑇 𝐼 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑎𝑡𝑖𝑜 =
45,500
4,190
= = 0.0921 = 9.21%
45,500

As Per the Basel III accord, the minimum Value of CET-1 Capital Ratio should be 4.5%.
𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑇𝑖𝑒𝑟 𝐼 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑎𝑡𝑖𝑜
𝐼𝑛𝑠𝑡𝑟𝑢𝑚𝑒𝑛𝑡𝑠 𝑖𝑠𝑠𝑢𝑒𝑑 𝑏𝑦 𝑡ℎ𝑒 𝑏𝑎𝑛𝑘𝑠 𝑡ℎ𝑎𝑡 𝑚𝑒𝑒𝑡 𝑡ℎ𝑒 𝑞𝑢𝑎𝑙𝑖𝑓𝑦𝑖𝑛𝑔 𝑐𝑟𝑖𝑡𝑒𝑟𝑖𝑎 𝑓𝑜𝑟 𝐴𝑇1 +
( )
Minority Interest
=
𝑇𝑊𝑅𝐴
(500 + 0)
= = 0.0109 = 1.09%
45,500

As Per the Basel III accord, additional Tier-1 capital can be admitted maximum up to 1.5%.

(𝐶𝐸𝑇 𝐼 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑎𝑡𝑖𝑜 + 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑇𝑖𝑒𝑟 𝐼 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑎𝑡𝑖𝑜)

∴ 𝑇𝑖𝑒𝑟 𝐼 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑊𝑅𝐴
(4,190 + 500) 4,690
= = = 0.1031 = 10.31%
45,500 45,500

As per the Basel III accord, the minimum Value of Tier-1 Capital Ratio should be 6%.
∴ 𝑇𝑖𝑒𝑟 𝐼𝐼 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑎𝑡𝑖𝑜
(𝐺𝑒𝑛𝑒𝑟𝑎𝑙 𝑃𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛 + 𝑆𝑢𝑏𝑜𝑟𝑑𝑖𝑛𝑎𝑡𝑒 𝑑𝑒𝑏𝑡 𝑜𝑟 𝑖𝑛𝑠𝑡𝑟𝑢𝑚𝑒𝑛𝑡 𝑖𝑠𝑠𝑢𝑒𝑑 𝑏𝑦 𝑡ℎ𝑒 𝑏𝑎𝑛𝑘 𝑔𝑜𝑛𝑒 𝑐𝑜𝑛𝑐𝑒𝑟𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙)
=
𝑇𝑊𝑅𝐴
(1,100 + 0)
= = 0.0242 = 2.42%
45,500
As Per the Basel III accord, Tier-2 capital can be admitted maximum up to 4.0%
 Mahruf's Helpline for The Banking Professional Examination 21
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d)
As Per Basel-III accord, to be adequately capitalized, the minimum value of CET-1 capital ratio, Tier-1
Capital ratio, CRAR is 4.5%, 6%, 10% respectively. Additional Tier-1 capital and Tier-2 Capital can be
admitted maximum up to 1.5% & 4% respectively. Bank X has more than adequate Capital under all
those requirements.

10. Write short notes (any five) 4×5= 20

(a) Interest Rate Risk
Interest rate risk is the exposure of a bank’s current or future earnings and capital to adverse changes in
market rates. This risk is a normal part of banking and can be an important source of profitability and
shareholder value; however, excessive interest rate risk can threaten banks’ earnings, capital, liquidity,
and solvency. Therefore, it is important to effectively identify, measure, monitor, and control interest
rate risk exposure through effective policies and risk management processes.
(b) Capital Conservation Buffer (CCB)
A capital buffer refers to extra capital required by regulators for financial institutions to ensure a more
resilient global banking system.
The capital conservation buffer was introduced to ensure that banks have an additional layer of usable
capital that can be drawn down when losses are incurred. The buffer was implemented in full as of 2019
and is set at 2.5% of total risk-weighted assets. It must be met with Common Equity Tier 1 (CET1) capital
only, and it is established above the regulatory minimum capital requirement.
(c) Risk Mapping
Risk mapping involves identifying potential risks, evaluating them, and prioritizing them to enable the
organization to take appropriate measures to manage them. Risk mapping will help you reduce costs
associated with risks, improve decision-making, and ensure the safety and stability of your organization.
(d) Recovery Plan for Banks
The recovery plan sets forth the strategies that will be used to achieve financial recovery. It helps the
recovery leadership crystallize, focus, and summarize strategic direction and key turnaround strategies
and tactics. Recovery plans ensure that banks are prepared to restore their viability in a timely manner
even in periods of severe financial stress. Banks should develop recovery plans that identify credible
options to survive a range of severe but plausible stressed scenarios.
(e) Risk Treatment
Risk treatment refers to the options and choices available to handle a specific risk. Risk treatment
involves developing a range of options for mitigating the risk, assessing those options, and then
 Mahruf's Helpline for The Banking Professional Examination 22
S. M. Mahruf Billah

preparing and implementing action plans. The highest rated risks should be addressed as a matter of
urgency.
(f) Key Risk Indicator (KRI)
KRIs are clearly defined metrics that identify and predict potential risk. They help banks and other
financial institutions understand and evaluate risk levels across the organization, a line of business, or a
department. Key risk indicators are a bank’s early warning system. These carefully selected metrics serve
as a barometer for risk, signaling changes in risk exposure throughout the institution. They help identify
when a risk is trending in the wrong direction and act as an alert system.
(g) Executive Risk Management Committee (ERMC)
According to Risk Management Guideline for banks issued by Bangladesh Bank, bank shall form ERMC
comprising of CRO (as the Chairman), Head of ICC, CRM/CAD, Treasury, AML, ICT, ID, Operation,
Business, Finance, Recovery and Head of any other department related to risk if deemed necessary.
RMD will act as secretariat of the committee. The ERMC, from time to time, may invite top management
(CEO, AMD, DMD, Country heads or senior most executives), to attend the meetings so that they are
well aware of risk management process.
(h) CAMELS
CAMELS is a recognized international rating system that bank supervisory authorities use in order to rate
financial institutions according to six factors represented by its acronym: capital adequacy, asset quality,
management, earnings, liquidity, and sensitivity.
Supervisory authorities assign each bank a score on a scale for each factor. A rating of 1 is considered
the best, and a rating of 5 is considered the worst.
C = Capital Adequacy
A = Asset Quality
M = Management Efficiency
E = Eraning Quality
L = Liquidity Management
S = Sensitivity to Market Risk