MAS Seeks Industry Comment on Guidelines on Sound Risk Management Practices
Singapore, 30 October 2002. The Monetary Authority of Singapore (MAS) today issued proposed guidelines on sound risk management practices. Banks, merchant banks, finance companies and insurance companies have been invited to offer comments.
2 The proposed guidelines aim to foster sound risk management practices amongst financial institutions and thereby promote financial stability in Singapore.
3 The guidelines offer best practice in credit, market and liquidity risks, as well as internal controls. Although effective risk management and sound internal controls encompass many facets, three key pillars are emphasised:
adequate Board and senior management oversight;
sound risk management policies and operating procedures; and
strong risk measurement, monitoring and control capabilities which are commensurate with the risk taken.
4 The proposed guidelines are available on MAS' website at . The Executive Summary of the proposed guidelines is attached at Annex 1. Industry participants have until 30 November 2002 to submit their comments on the proposed guidelines. They may send their comments to (389 KB) or write to the Financial Risk Division, Specialist Risk Supervision Department of the MAS.
Annex 1Executive Summary - Proposed Risk Management Guidelines
1.1 This set of guidelines aims to provide banks, merchant banks, finance companies and insurance companies (referred to collectively as "institutions" in these guidelines) under MAS' regulatory purview with guidance on sound risk management practices.
1.2 These guidelines encompass the management of credit, market and liquidity risks and include guidelines on sound internal controls. For effective risk management and sound internal controls, the guidelines emphasise three key pillars, namely, adequate Board and senior management oversight, sound risk management policies and operating procedures, and strong risk measurement, monitoring and control capabilities commensurate with the risk taken.
1.3 The principles recommended in these guidelines, which are based on best practices, are not intended to be exhaustive or to prescribe a uniform set of risk management requirements for all institutions. Institutions should note that the sophistication of the process, and internal controls used to manage risks, depends on the nature, size and complexity of their activities. Nevertheless, in today's world, global interdependencies and market forces result in substantial integration of functions among institutions. This gives rise to a high degree of commonality in the risk management challenges faced. As such, these guidelines are expected to have broad applicability. At the same time, institutions should also take into account relevant regulatory requirements and industry standards where applicable.
1.4 Internal controls are the policies, procedures and processes established by the Board of Directors and/or senior management to provide reasonable assurance of the soundness of an institution's operations, and reliability of financial and management reporting. MAS encourages institutions to consider and adopt the principles set out here and in other applicable guidelines such as the "Framework for Internal Control Systems in Banking Organisations" and "Customer Due Diligence for Banks" issued by the Bank for International Settlements. Sound internal controls can also help institutions comply with corporate and regulatory requirements. Across the world, weak or ineffective internal controls have led to operational losses in some institutions and contributed to the failure of others. Effective internal controls can help institutions enhance stakeholders' value, decrease the possibility and quantum of unexpected losses, and reduce the risk of fraudulent activities.
1.5 Credit risk is defined as the risk of loss arising from the failure of obligor and counterparty to perform their obligation to the institution. These guidelines first outline the policies and processes that help institutions set up a credit risk management system and then go on to list principles by which they can measure, monitor and manage these risks. Sound management of credit risk will improve the asset quality of the institution, which is essential for its long-term profitability.
1.6 Market risk is defined as the potential loss in on- and off-balance sheet positions in an institution's books, resulting from movements in market risk factors such as interest rates, equity prices, foreign exchange rates and commodity prices. Sound management of market risk is essential to ensure the market risk faced by institutions do not reach levels detrimental to their financial condition. It is crucial for institutions to have the necessary processes and systems in place to measure and control market risk, both under normal market conditions and under potential stress scenarios. This is especially important with the advent of new products, business lines or activities, and the modification of existing ones. Failure to understand, measure and control market risk could cause an institution to expose itself to potential losses due to market fluctuations, which could jeopardise its solvency.
1.7 Liquidity risk is the risk of financial loss to an institution arising from its inability to fund increases in assets and/or meet obligations as they fall due without incurring unacceptable cost or losses. To manage liquidity risk, institutions should properly define their liquidity strategy to meet anticipated or potential needs over the short and long-term. The strategy should enunciate specific policies on particular aspects of liquidity risk management. It is important for an institution to measure its liquidity position on an ongoing basis and estimate how much funding requirements are likely to evolve over time under both "business as usual" environments and plausible crisis scenarios. Sound risk measurement and monitoring systems and controls are also necessary to manage an institution's funding concentrations, funding capacity and intra-group liquidity. Each institution should also have a contingency plan for handling plausible liquidity crisis situations that could result in a significant erosion of its funding liquidity. A liquidity crisis can negatively impact on earnings and capital and, in a "worst case" scenario, cause the collapse of an otherwise solvent institution. Sound liquidity risk management practices can reduce the likelihood of a liquidity crisis, while a well-laid contingency plan can reduce its impact.
1.8 While the guidelines are organised by risk type, it is important to note that these risk types and risk arising from lapses of internal controls are often related. It is common for causal relationships to exist between risk types, as well as different risk types manifesting themselves concurrently in a given situation. This inter-linkage of risk is particularly pronounced in stress scenarios and systemic events. Although the overall impact of the different risk types are mitigated by the management of the different risk types separately, the Board and senior management should consider the inter-linkage of risk types at all times and manage it accordingly.