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Risk management in Kapital Bank OJSC is based on the Standards and Regulations on Risk Management of the Central Bank of the Republic of Azerbaijan, Basel Committee documents, international standards and principles, as well as other internal bank documents.

Risk Management Process

Risks are classified as very low, low, moderate, high and critical by the probability of occurrence and by their impact. The Bank chooses one of the following 4 methods of risk management, depending the risk level:
1.    Risk avoidance – taking action until the risk is reduced, for example, stopping a risky product (service);
2.    Risk acceptance – although the risk level is acceptable as it is low (or very low), keeping it under control by the risk holder; 
3.    Risk reduction – drafting an action plan to reduce the probability of occurrence and consequences of a risk;
4.    Risk transfer – insurance against a risk or transfer of a risk to a contractor/partner.

Supervisory Board (SB) generally supervises the risks of the Bank and of its structural units and subsidiaries, drafts a framework and policy related to risk management, approves the Bank's risk appetite statement, risk strategy, risk limits, contingency plan and other strategic reports and norms, and performs the function of controlling the activities of the Board of Directors on risks.

Board of Directors (BoD)
-    According to the risk policy and strategy approved by the Supervisory Board, manages the Bank's activities by implementing the objectives and tasks of Enterprise Risk Management (ERM). 
-    Supports the development and improvement of the contingency plan, risk appetite and other indicators.

Risk Management Committee (RMC) 
- Reviews the risk management framework and policy, risk limits, risk management model and risk appetite statement, impact and probability scales and other such documents, and makes related suggestions.
- Determines appropriate methods and tools for risk detection and assessment and their frequency of application. 
- Reports to the Supervisory Board (SB) on the risk status and effectiveness of risk management and makes proposals regarding the Bank's risk management system.

Chief Risk Officer (CRO) monitors the risk management activity and coordinates the activities of the relevant structural units and the Board of Directors in this field, ensures proper and timely reporting, and monitors the risk exposure status, risk limits and risk minimization strategies. 

Structural units performing the risk management function
The purpose of the structural units performing the function of risk management is to ensure the Bank's long-term business activity and financial stability, and to reduce the pressure on the capital through the management of the risks to which the Bank is exposed. 
The functions of the unit:
•    Develops, implements and manages the ERM program:
•    Creates and manages the risk map (risk control matrix);
•    Identifies and evaluates risks, participates in the minimization of the detected risks together with the relevant structural units.
•     Prepares risk reports by summarizing risks and submits them to the RMC;
•    Takes measures to improve the risk culture in the Bank.
Collects, registers the Bank's risk cases, assesses them for actual and possible losses, as well as ensures the preparation of appropriate reporting on this;
•    Determines, applies and analyzes the key risk indicators; 
•    Makes suggestions on determining the risk appetite according to the Bank's strategic goals and develops tools for timely detection of risk appetite limit violations, as well as monitors these limits;

Classification of risks by type

Credit Risk:
Credit risk arises as a result of the failure of the debtor to fulfill his/her obligation to the Bank timely or completely. The failure to fulfill an obligation includes delay in payments, restructuring of the debtor's payment, and etc. 
•A regulatory framework for credit risk management is drafted, improved and its implementation is monitored
•Before launching new products, it is assessed whether credit risks are within acceptable limits
• New control tools and reporting system (red flag, scoring, stop loss, etc.) are created depending on the characteristics of credit products.
•The portfolio is analyzed using risk management tools:
- A 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
-  Tracking system analysis.
-  Retrospective Modeling and Forecasting
•Special reserves are created for the purpose of compensation for possible losses of assets (based on IFRS + CBA standards)

Transaction Risk:

Transaction risk is the risk of loss due to gaps, human and system errors, as well as cases outside the Bank, caused by improper organization of internal processes. This risk includes legal risk, but  strategic and reputational risks are not part of transaction risks.

There are the following sub-categories of the transaction risk:
•    Human Resource Risk - the risk arising from the violation of existing legal regulations, making mistakes and omissions during the implementation of banking transactions by the personnel of the Bank intentionally or unintentionally;
•    IT Risk – the risk arising due to problems in the bank's information system or technologies;
•    Legal Risk - the risk arising as a result of violation of the requirements of legal regulations, including legal regulations of the control authority and tax authorities, failure to fully, timely or properly apply legal regulations, failure to adopt internal regulations of the bank, as well as contradictions and gaps in internal regulations;
•    External Risk — risk caused by damage caused by a third party or nature;

The Bank works on transaction risks by the following methods:
-    Detection, prevention and minimization of risks of transactions of changes to newly created products and services, business processes, motivational systems, as well as existing products, services, motivational systems, projects and business;
-    Implementation of the risk and control self-assessment survey (RCSA);
-    For management of the division of authority in information systems, assessment of role matrices in systems and changes made to them in terms of the transaction risk;
-     During banking transactions, gathering information about risks and losses on human factors, technology, and etc., and classifying and managing them based on Basel standards;
-     Determining and monitoring Key Risk Indicators and ensuring reporting;

Liquidity Risk:

Liquidity risk management in the bank is conducted in the following directions:

•    Liquidity risk methods and models are selected and applied;
•    Risk indicators reflecting the internal and external causes of risks are analyzed:
-    Liquidity Stress Tests and Shock Cases Analysis
-    Determining concentration in funding
-    Calculation and analysis of Instant Liquidity, Liquidity Coverage Ratio, Net Stable Funding Ratio and other indicators
-    Breakdown of payment periods and liquidity gap analysis
-    Analysis of liquidity and payments by currencies, and etc.

Market Risk: 

Market risk management in the bank is conducted in the following directions:

-    Potential changes that may occur in the economy and the banking sector are studied, their possible effects on lending and asset-liability management are determined; 
-    Interest rate risk, changes in interest rates and/or possible volatility disruption are checked:
•    Economic value of capital approach
•    Net interest income approach
-    Repricing Gap Analysis is conducted;
-    Investment Risks: Changes in the value of Stocks and Bonds, profitability curves and etc. are reviewed; the Risk-exposed value of securities, caused by market risks is calculated;
-    Potential negative effects of market risks on financial institutions are reviewed;
-    The impact of risks arising from changes in foreign exchange rates and commodity prices on bank assets is checked:
•    Stress testing
•    Scenario analysis, and etc.

Strategic Risk:

Strategic risk is caused by incorrect selection of strategic goals. For strategic risk management:
•Compliance with the Bank's long-term roadmap is monitored
• The economic, political, social, and etc. trends that determine the transition to a new business environment (new competition in the market, products, technologies, experiences, and etc.) are monitored
• Effective evaluation of alternative business directions is controlled
• Effective use of resources is monitored
• Effective implementation of strategic decisions is monitored, and etc.

Reputation Risk:

Reputation risk - this risk arises as a result of a decrease in trust in the Bank and negative public opinion. The key indicators that may cause the reputation risk are the following:

-    Customer complaints
-    Negative news about the Bank published in the mass media.
By the Bank against the reputation risk:
•    Situations that may worsen the external image of the Bank are monitored
•     Communication channels are improved
•     Bank employees are educated, and etc.

Updated: 21.07.2023