Risk Management Framework

ECO Trade and Development Bank (ETDB), being an MDB (Multilateral Development Bank), focuses on prudent risk management in its banking operations. The Board of Directors reviews and approves all major risk policies and risk decisions with the support of two committees, namely: the Credit Committee (CC) and the Asset Liability Committee (ALCO). 

Asset Liability Committee of the Bank (ALCO) directly supervises market and liquidity risks. ALCO is responsible for setting specific limits and guidelines for daily treasury operations. The Treasury Department, under the supervision of ALCO, performs its duty in managing market risk. The concept of risk tolerance is followed in the Treasury for risk management. The credit risk in Treasury is monitored separately by RMD. The Treasury Department is responsible for (i) Market risk management and (ii) Liquidity management.

Credit Risk Management:

The Risk Management Department (RMD) is responsible for the analysis, measurement, and mitigation of all aspects of risk pertaining to ETDB’s banking operations. For this purpose, RMD ensures compliance with the Bank’s limits (country, single obligor, single project, sector, etc.) ETDB monitors the credit profile of new transactions in the operations portfolio and conducts risk assessments of new transactions. In addition, ETDB monitors limits and concentrations, sets aside loan loss reserves, provides loan loss provisions under IFRS-9 on a semi-annual basis.

Market Risk Management:

ETDB, unlike commercial banks that may bet on market movements, MDB treasuries generally aim for market neutrality. This principle can be seen in its policies and procedures for managing the following market risks:

i.Currency Risk Management:

The bank calculates and manages its currency positions based on the formula and the limit defined by ALCO. It is monitored daily by the ALM unit (under Treasury) and reports breaches (if any) to ALCO. The aim is to maintain the currency open position as close to zero as possible. Hedging instruments are used to minimize currency risk. The limits of open positions are reviewed and decided by the ALCO.

ii.Interest Rate Risk Management:

The bank’s general policy is to use micro strategies to control interest rate risk. The advantage of micro hedging is that the hedger can reduce yield curve risk by hedging each asset/maturity/duration with an instrument that is priced off a similar point on the yield curve. The ΔNII tool is used for monitoring and managing the interest rate risk with the formula and limit defined by ALCO.

Liquidity management:

The Bank maintains a prudential minimum level of liquidity to ensure that it can meet all its payment obligations for a period of at least 12 months without accessing the capital markets. This ‘Survival Horizon’ is monitored daily. ETDB also extends the calculation to 30 days and 90 days. The key metric (LCR) for 30, 90, and 365 days is calculated and monitored on a daily basis along with the stress scenario.

ETDB Treasury manages a “liquidity buffer” (cash and high-quality investments) efficiently and effectively to ensure that ETDB’s commitments are met on time as well as to earn additional income. The Treasury department manages the liquidity portfolio in two tranches: an Operational Tranche for daily cash flow and a Strategic Tranche invested in high-quality liquid assets (HQLA) to provide a buffer against extreme market stress.

Operational Risk Management:

ETDB mitigates operational risks by maintaining a system of internal controls, monitoring procedures, and processes that are designed to keep operating risks within acceptable levels. To this end, the ETDB takes appropriate measures such as the “four eyes principle” over processes, proper segregation of duties within the departments, purchase of corporate and property insurance policies to achieve a high level of controls and enhance the operational risk management perspective. ETDB protect itself from potential risks by following rigorous anti-money laundering (AML), combating the financing of terrorism (CFT) and anti-corruption policies and training its staff accordingly.