ADCB

Annual Report and Accounts 2011 |

	Risk Management Strategy
	Governance Structure by Risk Type
	Responsibilities and Stress Testing
	Risk Factors

Risk Management

Risk Factors
The risk factors which the Bank believes could cause its future performance to differ materially from expectations are described below. However, other factors could also adversely affect the Bank’s performance and so the risks discussed in this report should not be considered to be a complete set of all potential/emerging risks and uncertainties.

The Bank’s approach to identifying, assessing, managing and reporting risks is documented in various policies, processes and standard operating procedures (SOPs).

Risk Category	Description	Risk Management
Credit Risk (Retail and Wholesale)	Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Bank attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. In addition to monitoring credit limits, the Bank manages the credit exposure relating to its trading activities by entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances, and limiting the duration of exposure. Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographic location.	The Board and management have set up committees to review credit risk management, approve overall Bank credit policy, and address all significant credit policy issues. These comprise: Board Risk & Credit Committee (BRCC), Board Audit & Compliance Committee, Board Corporate Governance Committee, Assets and Liabilities Management Committee, Management Risk & Credit Committee, Management Recoveries Committee. ADCB regularly reviews its concentration in a number of areas, i.e. industry sectors, geographic locations, and counterparties as well as groups. Diversification is achieved through setting maximum exposure limits to individual counterparties, groups, sectors, and countries, with excesses reported to the BRCC/MRCC.
Market Risk	Market risk is the risk that the Bank’s income and/or value of a financial instrument will fluctuate because of changes in market risk factors such as interest rates, foreign exchange rates, equity prices, commodities prices, and options’ volatilities. Market price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual security, or its issuer, or factors affecting all securities traded in the market.	The Bank is exposed to market risk with respect to its investments in marketable securities and other financial instruments like derivatives. The Bank limits market risks by maintaining a diversified portfolio through the use of VAR and other market risk limits, by the continuous monitoring of developments in the market. In addition, the Bank actively monitors the key factors that affect stock and market movements, including analysis of the operational and financial performance of investees.
Operational Risk	Operational risk is the risk of loss arising from system failure, human error, fraud, or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss.	The Bank cannot expect to eliminate all operational risks, but through a control framework and by monitoring and responding to potential risks, the Bank is able to manage the risks. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, including the use of internal audit.
Liquidity Risk	Liquidity risk is the risk that the Bank will be unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn.	The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation.
Capital Risk	Capital risk is the risk that the Bank has inadequate capital resources: to ensure capital requirements set by the Central Bank of United Arab Emirates; to safeguard the Bank’s ability to continue as a going concern and increase the returns for the shareholders; and to maintain a strong capital base to support the development of its business.	Capital adequacy and the use of regulatory capital are monitored on a regular basis by the Bank’s management, employing techniques based on the guidelines developed by the Basel Committee and the Central Bank of United Arab Emirates. The required information is filed with the regulators on a monthly basis.
HR Risk	Human Resource (HR) risk is the risk that people do not follow the Bank’s procedures, practices and/or rules, i.e., that they deviate from expected behaviour including lack of appropriate people resource, failure to manage performance and reward, unauthorised or inappropriate employee activity, and failure to comply with employment-related requirements.	People risk is mitigated through the operation of various HR policies. The policies essentially cover the following aspects: Staff code of conduct Recruitment Pre-employment screening Employment agreements Performance management & reward Grievances Exit management Employee feedback
Legal & Compliance Risk	Legal and compliance risk may emanate from non-compliance with legal or regulatory provisions, which regulate the Bank’s activities wherever carried out, and which govern the legality of the Bank’s activities and their validity and enforceability against third parties, mainly borrowers and guarantors. If these risks are not covered effectively, ADCB may face a number of litigation claims, sanctions, fines/ penalties, or reputational damage.	Legal risk is managed by the Legal Department, while Compliance is owned by the Compliance Division.
Regulatory Risk	Regulatory risk is the risk to earnings, capital, and reputation associated with a failure to comply with regulatory requirements and expectations.	Regulatory risk is owned and managed by the Compliance Function. The primary focus is on adherence to the regulatory requirements currently in place.