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Bank Risk Management: A Critical Component of Prudent Banking
In an effort to promote stability and transparency in the banking industry, regulatory bodies have emphasized the importance of robust risk management frameworks. In Australia, the Financial Services Council (FSC) has set out clear guidelines for banks to maintain a risk management strategy (RMS) that addresses key risks.
A Bank’s Risk Management Strategy: Key Elements
According to FSC regulations, an RMS must include several critical components:
- A description of each key risk and the bank’s approach to managing these risks
- A list of policies and procedures related to risk management
- A summary of the role and responsibilities of the risk management function
- An outline of the governance relationship between the Board, board committees, and senior management
- A plan for ensuring all personnel are aware of the risk management framework and instilling a culture of risk awareness
Designated Risk Management Function
Each bank is required to have a designated risk management function that reports directly to the Board. This function must be staffed by experienced professionals who possess the necessary qualifications and have clear roles and responsibilities.
Risk Governance and Compliance
The FSC emphasizes the importance of effective risk governance, requiring banks to engage external service providers only if they can demonstrate that their internal risk management function meets regulatory requirements. Additionally, all outsourcing arrangements must comply with the Banking Prudential Statement on Outsourcing.
Compliance Function
Banks are also required to have a designated compliance function that assists senior management in managing compliance risks. This function must be staffed by appropriately trained and competent personnel who have sufficient authority to perform their role effectively.
Risk Management Declaration
Each year, the Board or Senior Overseas Officer must submit a risk management framework declaration to the FSC, certifying that the bank’s systems are compliant with prudential requirements and its internal control systems are operating effectively. This declaration must be signed by the chairperson of the Board and the chairperson of the board risk committee or audit committee.
Internal Audit
A robust internal audit function is also a critical component of a bank’s risk management framework. The FSC requires banks to have an independent and adequately resourced internal audit function that evaluates the adequacy and effectiveness of financial and risk management frameworks. Internal auditors must have unfettered access to all business lines and support functions, and their scope must include reviews of policies, processes, and controls related to compliance with prudential requirements.
By implementing these measures, banks can ensure a robust risk management framework that promotes stability, transparency, and compliance with regulatory requirements.