Risk Management

- forecasting and evaluation of financial risks together with the identification of procedures to avoid or
minimize their impact
- identification, analysis, assessment, control, and avoidance, minimization, or elimination of unacceptable
risks

CREDIT RISK
- risk of default on a debt that may arise from a borrower failing to make required payments
- potential that a borrower will fail to meet its obligations in accordance with agreed terms
- potential loss of principal
- potential loss of financial reward (interest/fees income)

Signs of potentially higher than normal credit risk:

- Borrower’s unwillingness to disclose full information.
- Payment of amortization is consistently delayed.
- Periodical amortizations are not paid in full.
- External factors are deteriorating (ie. condition of the Economic environment locally and globally; industry
performance; competition, etc)

Credit Risk Management

Main purpose: to mitigate Credit Risk
1. IDENTIFY credit risk wrt to all lending activities (initiation, evaluation, approval,
documentation/administration, repayment, remedial mgt., asset mgt., asset recovery)
2. MEASURE credit risk (qualitative and quantitative) – Credit Risk Rating; Ratios
3. MONITOR risk exposure vs. industry; distribution; follow trends and relate it with the
financial/economic environment; adhere to limits; manage the portfolio; DOSRI.
4. CONTROL: tighter conditions; require collateral, deposits and guarantees; frequently review the
portfolio and loan accounts.
5. DETERMINE the “ALLOWANCE” required to account for estimated losses, aka. Loan Loss
Provision.

How Is Credit Risk Assessed?

Credit risks are calculated based on the borrowers' overall ability to repay. To assess credit risk on a consumer
loan, lenders look at the five C's:
1. Character
 Who is the borrower? Who knows him?
 Where does he live? Where did he study?
 What is the business? What is the industry? What is the track record of the borrower?
 Look at the over-all STABILITY of the client.
2. Capacity
 Does the borrower have the ability to repay the loan? Will his income be able to generate funds
to pay off the loan?
 Evaluate the Financials. Verify the figures.
 Evaluate his Debt-to-Income Ratio.
 The lower the ratio the higher the capacity to repay.
3. Capital
 How much does the borrower own net of how much he owes.
 Assets minus Liabilities
4. Collateral
 Does the borrower have unencumbered assets which may be used to pay his debt if he is unable
to make loan payments as agreed upon?
5. Condition
 Are there external factors which may affect the borrower’s source of income?
  Who are the competitors? What is the financial condition of the industry?
 What is the economic condition?

How Does Credit Risk Affect Interest Rates?

If there is a higher level of perceived credit risk, investors and lenders demand a higher rate of interest
for their capital. For example, if a mortgage applicant has a stellar credit rating and a steady income flow
from a stable job, he is likely to be perceived as a low credit risk and will receive a low interest rate on his
mortgage. In contrast, if an applicant has a lackluster credit history, he may have to work with a subprime
lender, a mortgage lender that offers loans with relatively high interest rates to high-risk borrowers.

Internal Credit Risk Rating System (ICRRS)

 a tool for the assessment and measurement of diverse risk factors of a borrower; and for making credit
decisions, evaluating the credit risk of potential and existing borrowers, and for pricing purposes.
 AUB’s credit risk rating system aims to provide
 Consistent assessment of credit risk across the Bank;
 An accurately rated portfolio of credits; and
 Clear identification of and focus on key credit issues to minimize risk.
 3 factors evaluated: Financial condition, Industry Analysis/ Competitive strategy, Management Quality

How does ICRRS affect the Bank?

- It helps in the assessment of how much allowance shall be provided for each loan account
- It affects the profitability because the riskier the loan, the higher the allowance required. This is a deduction
from the income.

DOSRI (Director, Officer, Stockholder and Related Interests)

Restrictions, Limitations and Requirements
 Sec. X326 – general policy
Dealings of a bank with any of its DOSRI should be in the regular course of business and upon terms not
less favorable to the bank than those offered to others.
 Sec. X330 – individual ceilings
Exposure to an individual DOSRI shall not exceed the individual’s unencumbered deposits and book value
of their paid-in capital contribution in the bank: Provided, however, That unsecured loans, other credit
accommodations and guarantees to each of the bank’s DOSRI shall not exceed thirty percent (30%) of
their respective total loans, other credit accommodations and guarantees.
Restrictions, Limitations and Requirements
 Sec. 331 – aggregate ceilings
Except with the prior approval of the Monetary Board, the total outstanding loans, other credit
accommodations and guarantees to DOSRI shall not exceed fifteen percent (15%) of the total loan
portfolio of the bank or 100% of net worth whichever is lower: Provided, That in no case shall the total
unsecured loans, other credit accommodations and guarantees to said DOSRI exceed thirty percent (30%)
of the aggregate ceiling or the outstanding loans, other credit accommodations and guarantees,
whichever is lower.

eLAM Preparation Reminders

 For DOSRI accounts, Loan Officers should be responsible for asking Financial Control Group (Accounting) if
DOSRI ceiling can still accommodate more exposures of this type.
 Same goes for the Single Borrower’s Limit for related borrowers.
 If Loan Officers feel the need to make a Recasted Financial Statement, put a column beside to state what
client originally said.

I. Client Information
 i. Industry / Nature
ii. DOSRI and Related Party accounts
iii. BSP Classification
II. Credit Facilities
i. Commercial Loans Facilities
ii. Purpose of Facility
III. Terms and Conditions
IV. Collateral / Security
i. REM Collateral details
ii. Third Party Mortgage owned by a Corporation / Partnership
V. Credit Investigation / Personal Checking / NFIS
VI. Existing Business with AUB
i. Account details
ii. Other Services availed
VII. Existing Business with Others
VIII. Client Background
i. Description of Business Activity
ii. Suppliers / Major Clients
iii. Properties, Machinery, etc
iv. Major Recent Business Event
IX. Ownership
X. Management
XI. Financial Highlights
XII. Attachments
XIII. Term Loan Summary Template

Annex A - BSP Circular No. 247

BSP Classification

 Doubtful
 These are loans or portions thereof... that (have) existing facts, conditions, and values
make collection or liquidation in full highly improbable and in which substantial loss
is probable.
 Loan Especially Mentioned
 These are loans that have potential weaknesses that deserve Management’s close
attention
 Loss
  These are loans or portions thereof which are considered uncollectible or worthless
and of such little value that their continuance as bankable assets is not warranted
although the loans may have some recovery or salvage value.
 Substandard
 These are loans or portions thereof which appear to involve a substantial and
unreasonable degree of risk to the institution because of unfavorable record or
unsatisfactory characteristics. Those classified as “Substandard” must have a well-
defined or weaknesses that jeopardize their liquidation.
 Unclassified
 These are loans that do not have a greater-than-normal risk. The borrower has the
apparent ability to satisfy his obligations in full and therefore no loss in ultimate
collection is anticipated.
Annex B - Commercial Loans Facilities
CREDIT FACILITIES

BA LINE
A short-term debt instrument issued by a company that is guaranteed by a commercial bank. Banker's acceptances
are issued as part of a commercial transaction. These instruments are similar to T-Bills (a short-dated government
security, yielding no interest but issued at a discount on its redemption price.), are frequently used in money
market funds and are traded at a discount from face value on the secondary market, which can be an advantage
because the banker's acceptance does not need to be held until it matures.

Banker’s Acceptance and International Trade

Due to their perceived safety, banker's acceptances are regularly used as financial instruments in
international trade dealings. This allows international institutions to complete transactions without the
need to extend credit. An importing business can issue a banker’s acceptance with a date beyond when the
shipment is expected to be delivered, and the exporting business can have a payment instrument in hand
before finalizing a shipment. Additionally, a banking institution will not provide a banker’s acceptance
without a reasonable likelihood that it is able to provide the funds as specified.

A banker's acceptance, or BA, is a promised future payment, or time draft, which is accepted and
guaranteed by a bank and drawn on a deposit at the bank. The banker's acceptance specifies the amount
of money, the date, and the person to whom the payment is due.

BILLS ACCEPTANCE LINE

Bills Acceptance/or Second Endorsed Checks are checks that are acquired or taken into possession by the Bank
payable to a person/individual or entity other than the account holder or depositor for deposit to the latter’s
account.

Acceptability of a check for negotiation by endorsements appearing on the instrument. The following provisions of
law shall apply:
A. The endorsers warrant that they are the legal owners of the check
B. The endorsers transfer their rights on the check to the person or institution who possesses it
C. The last endorser guarantees all previous endorsements
D. Any liability or claim arising from the acceptance of second endorsed checks extend up to ten (10) years
from date of payment

CASH DEPOSIT CERTIFICATE

A savings certificate with a fixed maturity date, specified fixed interest rate and can be issued in any denomination
aside from minimum investment requirements. A CD restricts access to the funds until the maturity date of the
investment. CDs are generally issued by commercial banks and are insured by the FDIC up to $250,000 per individual.

FX COVER LINE

FX SETTLEMENT LINE

REPO LINE FACILITY

http://www.investopedia.com/terms/r/repurchaseagreement.asp
A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. The dealer
sells the government securities to investors, usually on an overnight basis, and buys them back the following day.

CASH ADVANCE REIMBURSEMENT LINE

The facility’s primary objective eligible client/depositor access to cash advance exclusively available to fund inward
clearing check overnight. Checks covered by this facility shall be honoured for payment by the Bank and shall not
be considered returned items pursuant to BSP Circular 681 dated 08 February 2010.

CREDIT LINE CERTIFICATION (Bank Guaranty)

A form of credit accommodation which guarantees a sum of money to a beneficiary. Unlike a line of credit, the sum
is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to
essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.

DOMESTIC BILLS PURCHASED

A facility granted for the outright clearing of trade related checks.

Availing of the Domestic Bills Purchase line will let you replenish your day-to-day working capital
requirement via the outright purchase of your customer’s local checks.

EXPORT BILLS PURCHASED

An asset account whereby the bank advances payment to exporters in Dollars or in Pesos and gets reimbursed by
the opening bank if negotiated under an Export LC or the Collecting Bank through credit to an AUB account abroad
in the same currency as in the draft.

EXPORT PACKING CREDIT

A facility granted via assignment of export proceeds receivables, either Purchase Orders (PO) or Letters of Credit
(LC).

FLOOR STOCK FINANCING

https://www.bdo.com.ph/floor-stock-financing
A facility mainly to vehicles and transport dealers in order to finance their purchase of inventory assets, mainly
motor vehicles, trucks, and heavy equipment, from manufacturers.

IMPORTERS LOAN
A revolving Peso Loan Line available to importers, principally to pay obligations to suppliers abroad.

LOAN
A loan extended to business entities/individuals wherein proceeds are to finance working capital requirements, i.e.
purchase/sale of inventory, bridge finance collection of receivables.

OMNIBUS LINE
www.fcb.com.ph/loans.php?option=omnibus
This credit line is a multi-purpose credit facility, which borrowers can avail depending on the credit requirements
provided it does not exceed the approved credit limit.

PDC DISCOUNTING
A credit facility, wherein the loan proceeds are based on 3rd party post-dated checks presented by the borrower
for discounting.

RECEIVABLE DISCOUNTING
A facility granted to borrowers via assignment of third party trade receivables.

Obtaining a working capital (short-term) loan against the discounted value (usually 80 to 90 percent
of the invoiced amount) of accounts receivable (A/R) that meet the lender's creditworthiness criteria. The lender
does not buy the A/R but only uses them as a collateral. In case of a default, however, the lender has the right to
collect direct from the borrower's debtors.

REMITTANCE CASH ADVANCE LINE

Similar to CARL but is extended to AUB’s Remittance Tie-UP Companies to accommodate/cover remittance
transactions as follows:
 Weekend / Holiday line
 Intra-day exposure
 To be funded by our Remittance Tie-up company on the next banking day

RESTRUCTURED LOAN
Bangko Sentral ng Pilipinas defines restructured loans as ‘loans, the principal terms and conditions of which have
been modified in accordance with a restructuring agreement, setting forth a new plan of payment or a new
schedule of payment on a periodic basis.’ The modification may include, but is not limited to, changes in maturity,
interest rate, collateral, or increase in the face amount of the debt resulting from the capitalization of accrued
interest/accumulated charges. Items in litigation and loans subject of judicially-approved compromise, as those
covered by petitions for suspension or new plans of payment approved by the respective Court or by the Securities
and Exchange Commission (SEC) shall not be classified as restructured loans.

SMALL BUSINESS LOAN LINE

A loan extended to small and medium enterprises or single proprietors for additional working capital to purchase
inventories or machineries and or equipment to increase sales volume.

SUGAR QUEDAN FINANCING LINE

http://www.pnb.com.ph/index.php/corporate-banking/business-loans
A credit facility against acceptable raw/refined sugar quedans available to both sugar millers and traders.

TERM LOAN
A loan extended to business entities/individuals wherein proceeds are used to finance long-term funding needs
such as capital expenditures, i.e. plant expansion, machinery and equipment, project financing.

TERM LOAN – AUTO FLEET FINANCING

http://www.investopedia.com/articles/personal-finance/070915/personal-loans-vs-car-loans-how-they-differ.asp
A consumer loan facility secured against the vehicle you intend to purchase, which means the vehicle serves as
collateral for the loan. The loan is paid off in fixed installments over the period of the loan.

LETTER OF CREDIT
An undertaking, usually on the part of a bank and at the request of one of the bank’s customers, to pay a named
beneficiary a specified amount of money (or to deliver an item of value) if the beneficiary presents documents in
accordance with the terms and conditions specified in the letter of credit.

STANDBY LETTERS OF CREDIT

As opposed to a commercial letter of credit, letters of credit that do not cover the direct purchase of merchandise,
because it is often intended to be drawn on only when the applicant for whom it is issued fails to perform an
obligation.

A standby letter of credit (SLOC) is a guarantee of payment issued by a bank on behalf of a client that is used as
"payment of last resort" should the client fail to fulfill a contractual commitment with a third party.

STANDBY L/Cs are issued for the following purposes:

 Performance Standby – supports an obligation to perform other than to pay money, including for the
purpose of covering losses arising from a default of the applicant in completion of the underlying
transactions.
 Bid Standby - supports an obligation of the applicant to execute a contract if the applicant is awarded a bid.
 Commercial Standby – supports the obligations of an applicant to pay for goods or services in the event of
non-payment by other methods.
 Financial Standby – supports an obligation to pay money, including any instrument evidencing an obligation
to repay borrowing money.
If Standby Letter of Credit is in favor of a beneficiary domiciled locally, a Domestic Standby LC is issued while if the
beneficiary is domiciled outside of the country, Foreign Standby Letter of Credit is issued.

DP/DA/OA/TR
Documents Against Payment (D/P) Commercial and financial documents sent on collection are released to the
drawee/buyer only if payments are effected.

Documents Against Acceptance (D/A) These are importations whereby the remitting bank abroad sends all financial
and commercial documents together with a collection order/letter to ASIA UNITED BANK (the collecting bank).
Documents will be released to the import/client only upon acceptance of the SELLER’S bill of exchange obligating
the importer to pay for the shipment at some future date.

Open Account (O/A) Under an O/A arrangement, the shipping documents are sent and released by the seller
directly to the importer without coursing the documents through the banks, upon the importer’s promise to pay
at some future date of shipment.

TRUST RECEIPT
A credit facility which enables the client to get hold of their importation, for re-sale purposes, without any cash
outlay and is provided title to the goods with a commitment to settle his obligation with the bank after receipt of
proceeds from his sale of the goods.

I. Basic Information
Industry/Nature
a. Briefly explain the borrower’s source of income.
b. For Holding Companies, state all / majority of the businesses.
i. Simply stating Holding Company will not be accepted.
For DOSRI and Related Party accounts (defined in the nest slide), state in the ‘Basis of
Recommendation’ box the relationship of the borrower to the Bank’s DOS.
Who are Related Parties?
 1. DOSRI (upto1st degree relatives)
2. Close family members (upto 2nd degree relatives)
3. Subsidiaries and affiliates of the Bank
4. Any party that the Bank directly/indirectly controls
5. Any party the directly/indirectly exerts control over the Bank
6. Subsidiaries, affiliates of #4 & #5.
7. Employees (Senior VP and up) of Subsidiaries and Affiliated companies
II. Credit Facilities
Type
i. New
ii. Renew , Renew w/ Increase or Renew w/ Decrease
iii. Amend – if changes in terms/conditions, security, etc will be proposed.
iv. Cancel – if credit facility will be discontinued.
v. Reinstatement – if an account which has not been renewed in a year or more will be
presented for approval.
Amount
i. Make sure that totals will tally correctly.
ii. This should show the amount proposed.
iii. For Cancellation, this should be amended to “0”
Outstanding
vi. For Cancellation, this should show the balance of the credit facility at the time of
presentation.
Expiry Date
vii. Standard Availability Period of Term Loans: 90 days
viii. If longer, these should be represented to Crecom.
Remarks
b. All requests for each facility should be placed in this column and justifications in the
‘Basis for Recommendation’ box.
c. Remarks should only show what is being requested at the time of presentation
d. Be brief and concise. For example:
i. Shared line with Borrower A
ii. For renewals w/ increase or decrease and amendments, state
From: old term
To: new term
 If not applicable, Related (for Approval), Total for Related, Total Group Exposure should be
hidden.
 Purpose of Facility
 For Term loans: To finance ___% of ___ project with total cost of ___.
 For land acquisition: To finance ___% of ___ property in ___ with total cost of ___, lot
area of ___, floor area of ___.
 Basis of Recommendation
 Brief discussion of the account’s quality.
 Should include the borrower’s relationship to CSA and DOS, if applicable.
III. Terms and Conditions
CSA cannot be waived for corporations.
IV. Collateral/Security
a. Use the ‘Registered’ Field: yes/no
i. If yes, fill in ‘Registered Amount’
b. Appraiser
i. Put appraiser’s name (internal/external?) and date of appraisal
c. For REM, if properties with various TCT/CCTs are in the same location, consolidate them under
one collateral no.
 i. If area and price per sqm if different, put them in separate rows of the table unders this
collateral no.
d. Notes
i. Put all requests for changes, deferment, etc in this box
e. Third Party Mortgage owned by a Corporation/Partnership
i. Requirement: Endorsement from Atty. Emma Cabochan
1. Articles of Incorporation & By Laws
2. Secretary Certificate
a. Date of Meeting
b. 2/3 vote of shareholders in favor of the mortgage
c. Authorization given to the corporation to mortgage the property to
the bank
V. Credit Investigation/Personal Checking/NFIS
a. 3 years/periods of bank debts unless new.
b. Put the value of collateral/security
c. Put other relevant information in the Notes box
VI. Existing Business with AUB
a. Include the date of account opening.
b. Check other services availed, if none, hide.
c. Notes
1. For those with Salary/Auto/CTS/REM, include total amount and # of accts; and
total past due amount and # of accts.
VII. Existing Business with Others
a. Use this for CASA with Other Banks, put amount.
b. Notes
i. State which is the main bank
ii. If applicable, which provides services such as payroll and salary loans, etc.
VIII. Client Background
a. Description of Business Activity
i. History of the Business
ii. Operations volume (ie. For multiple sources of revenues, what % of revenues is from
what?)
iii. Ownership and management (ie. Who is running the business) – more detailed
discussion of section IX Ownership.
b. No need for the following:
i. Date of registration in SEC
ii. Amount of Authorized Capital Stock
c. Suppliers/Major Clients
i. State if local/foreign suppliers
ii. Volume & frequency
iii. Credit Terms & Mode of payment
d. Properties, Machinery, etc
i. Subtotals only per type.
ii. For properties, include type, size, location and amount.
Major Recent Business Event
 Business Performance
 Should contain brief discussion of In-House and/or Recasted Financial Statements;
and information provided by the client during the interview. Including but not
limited to:
 Sales
 Profit margin
 Import levels
IX. Ownership
 X. Management
a. Brief background information of the owners and the management.
b. Make this as short as possible. Discussion of the management should be in the Client
background.
c. If the principal owner is not in the registered GIS, include his/her name and info
XI. Financial Highlights
a. Notes
i. Include a brief discussion of the audited FS, in bullet form.
ii. If audited FS does not show the true status of the business, make the discussion very
simple just to comply with BSP requirement on this item. Explain the trends in the
following:
1. Revenues
2. Net Income
3. Debt to Equity ratio

OPERATIONS/IT RISK
- Operational losses are the result of inadequate management oversight and weakness of the “control
culture”, absence of segregation between functions, lack of or the failure of internal control systems
- Risk management is the establishment of controls to minimize the possibility of a loss. An effective risk
management system:
o Critical component of bank management
o Foundation of safe and sound bank operations
o Helps ensures complies with internal and external laws and policies
o Decreases risk of unexpected losses and damage to bank’s reputation.

Information Security Organization

RISK MANAGEMENT COMMITTEE

CHIEF RISK OFFICER

IT / OPS RISKS MANAGER

INFORMATION SECURITY OFFICER

Operational Risks are risks of direct or indirect loss from inadequate or failed internal processes, people and
systems or from external events.
Scope:
• Operational Fraud and Loss events
• Covered and Suspicious Transactions
• Key Risk Indicators
− ATM Availability
 − TELCO Availability
− ATM Transaction and Income
− HR Manpower KRIs
− Economic KRIs
• Risk & Control Self-Assessment (RCSA)
• Business Continuity Plan (BCP)
− Business Impact Analysis (BIA)

1. Operational Fraud and Loss Events

• Monitor losses, report the progress of events and ensure that units involved create and
implement corrective actions to avoid repetition of loss event.
• Loss events endorsed to the legal department are also monitored.
2. Covered and Suspicious Transactions
• Covered Transactions (CTR) – Transactions amounting to P500,000.00 and up.
• Suspicious Transactions (STR)
3. Key Risk Indicators
• ATM Availability – Monitor and report whether ATMs are available at least 95% of the time.
• TELCO Availability – Monitor whether our network service providers are up at least 95% of the
time.
• ATM Transaction and Income – Identify which ATMs are not profitable and recommend
corrective actions
• HR Manpower KRIs – Includes employee turnover rates and reasons for resignation
• Economic KRIs – Includes stock market index, exchange rate, inflation rate, CPI (A consumer
price index (CPI) measures changes in the price level of market basket of consumer goods and
services purchased by households.), unemployment rate and interbank rate
4. Risk and Control Self-Assesment (RCSA)
• A quarterly requirement done by specific units and branches
• The unit/branch identifies the specific risks inherent to their processes and systems
• Since RMU is informed of the details of loss events, they validate whether the participating units
and branches assessed themselves correctly
• Ensure that there are corrective actions

Risk and Control Self Assessment (RCSA)

Sample size and Documentation of Testing

• In order to document the samples used for testing when RCSA tests are conducted, the reference
numbers (e.g. LAM no. , LC no., Account no.) of the specific transactions or documents used in tests
should be documented in the "Test Results" column of the RCSA template. Instead of merely stating no
exceptions noted in this column, kindly specify the reference nos. of the documents or transactions used
during testing.
• The unit can attach or embed another document under the Test Results column of the template to
indicate the samples used for testing.
e.g. No exceptions noted based on test done on Loan no. 999999 or Account no. 999999 or LC No. 999999
• If the test step being done relates to a procedure that involves review of a report, a document or a file
that does not have specific reference numbers, kindly indicate the report, document or file reviewed and
the dates the unit reviewed such reports, documents or files during testing under the Test Results column.
e.g. No exceptions noted based on review of check blotters from February 11-15, 2013.
• If the tests step done is more of an observational procedure, e.g. check that legal documents are kept
under lock and key and under dual custody, please include the dates the unit observed the performance
of such procedures in the Test Results column of the RCSA template.
 5. Business Continuity Plan (BCP)
• It is a task of identifying, developing, acquiring, documenting and testing procedures and
resources that will ensure continuity of bank’s operations in the event of an accident, disaster,
emergency and/or threat. It involves (1) Risk Mitigating Planning (reducing possibility of the
occurrence of adverse events), and (2) Business Recovery Planning (ensuring continued
operation in the aftermath of a crisis or disaster).
• Objective: To enable H.O. units and Branches to continue with its operations despite
unforeseeable events or disaster.
• Includes the Call Tree Program
− A telephone procedure which can be used to notify member of an emergency.
• Result of the Business Impact Analysis (BIA)
− Determines the criticality of each unit during a contingency
Information Security
Information security protects information from a wide range of threats in order to ensure business continuity,
minimize business damage & maximize return of investments and business opportunities.

Scope
• Systems Entitlement Review
• Users’ Access Authority Review
• Vulnerability Assessment / Penetration Testing
• Business Process Risk Assessment
• Newly Developed Product/System Risk Assessment
• Systems’ Admin Logs (CASA, LOAN, CLL, Firewall) Monitoring

Credit Risk
- Likelihood of client defaulting
- Loans
Operations Risk
Market Risk
- VAR (Value at Risk) – maximum loss you are willing to accept (main report), measures volatility
- Value at Risk (VaR) is a measure of the risk of investments. It estimates how much a set of investments
might lose, given normal market conditions, in a set time period such as a day. VaR is typically used by
firms and regulators in the financial industry to gauge the amount of assets needed to cover possible
losses.
- A VAR statistic has three components: a time period, a confidence level and a loss amount (or loss
percentage).

Backtesting is the process of testing a trading strategy on relevant historical data to ensure its viability before
the trader risks any actual capital. A trader can simulate the trading of a strategy over an appropriate period of
time and analyze the results for the levels of profitability and risk.

Forward performance testing, also known as paper trading, provides traders with another set of out-of-sample
data on which to evaluate a system. Forward performance testing is a simulation of actual trading and involves
following the system's logic in a live market

Client of risk – board

CAR (capital adequacy ratio)

- capital/assets = 10% limit of BSP, 12.5% internal limit
- modified equity ratio, has risk weights
 - The capital adequacy ratio (CAR) is a measure of a bank's
capital. It is expressed as a percentage of a bank's risk
weighted credit exposures. Also known as capital-to-risk
weighted assets ratio (CRAR), it is used to protect
depositors and promote the stability and efficiency of
financial systems around the world.
HFT held for trading
HTM held to maturity
AFS available for sale

Profitability – spread on

Limits adherence
MCO – maximum cumulative outflow – break balance sheet into time buckets – manages inflow and outflow

Exposure limits – investing limit in non investment grade securities

Book value/face value x 100 = actual price of bonds

Bifurcation
- options to call a bond affect the bond’s price apart from changes in the interest rate
- “plain vanilla” securities with no derivatives, a plain vanilla bond will only change its price due to changing
interest rates
- determine the changes in the price of the bond due to interest and its option – split them
- for accounting – all AFS bonds with options affect the income statement

Impairment – allowance of losses but in terms of price of bonds

Rate (Price Reasonability) – don’t accept prices that aren’t within the acceptable range- buy above asking price,
sell below bid

Stop loss
- stop trading or sell at certain point 3% limit (up to treasury if they should sell)
- An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is
designed to limit an investor’s loss on a position in a security. Although most investors associate a stop-
loss order only with a long position, it can also be used for a short position, in which case the security
would be bought if it trades above a defined price.

Contingency Funding Plan – how to fund bank during emergencies

- stock price drop – pull out – no capital
- non performing loans – 90 days past due – should not be below industry average
- income statement – year to date statement, should be higher than previous year
- deposits – deposit base shouldn’t decrease – CASA (often companies park funds there for loans) /TD (no
rollover)
- peso depreciation and PSEi depreciation – market driven

Trust VAR
- in terms of trust products – volatility shouldn’t exceed a certain limit (10%)
Treasury Holdings
Book date/deal date – value when you agree to transact
Value date – value when you actually transact
ISIN – security ID no
Actual price - PPH