Risks management

The Risk Management in a bank is the combination of quantitative and qualitative target criteria, methods and procedures, integrated into the Bank’s management structure, allowing risk identification, classification, assessment and control of the level of the Bank’s exposure to risks associated with its operational units’ activities.

    The System includes:
  • level of the Bank’s risk tolerance;
  • bank’s “risk appetite
  • list of risks recognized by the Bank, level of their significance;
  • methods of assessment of the basis risks the Bank is exposed to;
  • system of internal constraints (norms and limits);
  • procedures of decision-making and differentiation of authority;
  • limit control;
  • adaptation and implementation of modern financial instruments into Azerbaijan’s financial market

AGBank has identified the most important factors within bank and prepared separate policies to manage each. AGBank ordered those factors by these risk groups:.

1. Credit Risk

2. Liquidity Risk

3. Market Risk

4. Operational Risk

AGBank has defined credit risk as one of the most important risk factor of its business. In the process of managing the credit risk, it was an essential part for us to construct an appropriate limit system. There are limits for products in branches, economic sectors, the related borrowers and etc.. Monitoring process of liquidity risk is occurred by calculation of “liquidity risk indicators”, thus determining the risk appetite. Also, with GAP analysis, bank regulates its payment schedule. Foreign exchange risk, as one of the factors of market risk, is calculated and regulated by VAR (value-at-Risk) method. Operational risk is evaluated and regulated by RCSA (Risk Self-Control and Assessment) method that classifies all present and potential operational risks in a bank. Other risks involve reputational risk, strategic risk, legal risk, systematic risk and etc.. These risks are calculated as a result of market research and further take their part in policy of the bank.

To reduce risks due to foreign currency, Bank used Forvard tools. Value at Risk measures the potential loss in a value of a risky asset or portfolio over a defined period for a given confidence interval. VAR models are used to predict the maximum likely losses in a bank’s portfolio at a specified confidence level and time horizon. Value at Risk is used most often by commercial and investment banks to capture the potential loss in value of their traded portfolios from adverse market movements over a specified period. VaR calculation process is organized in five stages: 1. Identification of current position for the institution. 2. Identification of risk factors related with the valuation of these positions. 3. Identification and assignment of scenario possibilities for these risk factors. 4. Definition of all positions pricing function as a value function for risk factors. 5. Marking of positions in all scenarios using pricing function and obtaining results distribution. There are three basic approaches that are used to compute Value at Risk; I. The historical method II. The variances-covariance method III. The Monte Carlo simulation. Standards of value at risk 99 percents confidence level; No less than 250 working days historical data; Data is reviewed every day; Correlation between market risk categories and out of market risk categories can be applied if bank demonstrates that correlation measurement system is fully implemented; Method encompasses significant risk appearing for option or similar contracts. The Bank classifies interest risks as follows:  Risk of change in net interest income – risk of interest income reduction and/or interest costs growth due to adverse change of interest rates on corresponding items of the Banking Book.  Risk of change in the cost of capital – risk of reduction/growth of value of claims/liabilities sensitive to interest rate change on corresponding items of the Banking Book. The Bank recognizes several types of rate risks depending on effects of various risk factors:  Risk of interest rate change – risk of financial losses resulting from adverse change in the general level of interest rate in the debt instrument market.  Risk of change in the shape of the yield curve – risk of financial losses resulting from adverse change in the temporal structure of interest rates (shape of the yield curve).  Basic risk – risk of financial losses resulting from incompliance of movements in risk factors of claims and liabilities, sensitive to interest rate change.  Option risk – risk of financial losses resulting from execution, on the terms unfavorable for the Bank, of interest-rate-sensitive option contracts and/or option within the financial instrument.

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