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Part - IV

The final point is the measurement of liquidity risk. There are several traditional ratios for liquidity risk measurement, viz., loans to total assets, loans to core deposits, ratio of large liabilities to earning assets and loan losses to net loans. In addition, prudential limits are placed on various liquidity measures like inter-bank borrowings and core deposits vis-à-vis core assets.

Several points need to be tackled as regards positioning appropriate risk management strategies. Worldwide, there is an increasing trend towards centralizing risk management with integrated treasury management to benefit from information synergies on aggregate exposure, as well as scale economies and easier reporting to top management. The primary responsibility of understanding the risks run by the bank and ensuring that such risks are appropriately addressed should be vested with the Board of Directors. At organisational level, overall risk management needs to be vested with an independent Risk Management Committee or Executive Committee of the top Executives entrusted with the responsibility of identifying, measuring and monitoring the risk profile of the bank that reports directly to the Board of Directors. The Committee should develop policies and procedures, verify the models used for pricing complex products and identify newer risks impacting the banks' balance sheet. Finally, adherence to risk parameters of the various operating departments of the bank should also be overseen by the Committee.

Observers are by now unanimous in their view that developing sound and healthy financial institutions, especially banks, is a sine qua non for maintaining overall stability of the financial system. Keeping this in view, the Reserve Bank has issued broad guidelines for risk management systems in banks last year. This has placed the primary responsibility of laying down risk parameters and establishing the risk management and control system on the Board of Directors of the bank. However, the implementation of the integrated risk management could be assigned to a risk management committee or alternately, a committee of top executives that reports to the Board. The risk management guidelines also require banks to constitute a high level credit policy committee to deal with issues pertaining to credit sanction, disbursement and follow-up procedures and to manage and control credit risk for the bank as a whole. The Reserve Bank has further advised banks to concurrently set up an independent credit risk management department to enforce and monitor compliance of the risk parameters and prudential limits set by the Board or Credit Policy Committee. The present set of guidelines are purported to serve as a benchmark to the banks, which are yet to establish an integrated risk management system.

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* This is the keynote address delivered by Shri. Jagdish Capoor, Deputy Governor, Reserve Bank of India, at One Day Seminar on Risk Management in Financial System at a Mumbai-based Management Institute.