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RISK CONTROL AND CAPITAL MANAGEMENT

Banco BOCOM BBM has a long tradition of excellence in risk management, including continuous development of proprietary risk management methodologies in the last 20 years, always at the cutting edge of the industry.

 
STRONG RISK MANAGEMENT CULTURE PERMEATES THE INSTITUTION, ITS PEOPLE AND PROCESSES
 

Assuming suitably quantified risks with prudence as the key element is the most important principle of Banco BOCOM BBM’s business philosophy. The main aim of its risk management structure is therefore protection and efficient allocation of capital. Its approach to risk management is grounded in the continuous development and application of proprietary methodologies and models at the cutting edge of the financial industry, adapted to the business environment in Brazil. Its risk management tools and guidelines are fully integrated with its corporate governance structure and decision-making processes, not least in the cases of lending and liquidity management.

Banco BOCOM BBM’s credit risk management framework comprises the following agents and functions: (a) the Credit Committee, responsible for setting credit limits for economic groups, for consolidated portfolio monitoring and assessment, including concentration and risk, and for stipulating the time frame for solving problems relating to delinquent loans or credit transactions with deteriorating guarantees, including the start of judicial collection, if necessary; (b) the Board of Directors, responsible for approving risk policies and limits at least once a year; (c) Credit Risk, which reports to the Risk Director and is responsible for centralizing and evaluating information relating to individual credit risk management per transaction as well as consolidated credit portfolio risk, in order to ensure compliance with operational limits, for issuing reports to support decision making on the credit limits set by the Credit Committee, and for prior analysis of new modes of operation with regard to credit risk; (d) Credit Analysis, responsible for assessing the credit risk of economic groups with which the bank has or is planning to have credit relations; (e) Internal Auditing, which performs regular audits of the bank’s business units and credit processes; (f) Legal, which is responsible for analyzing the covenants entered into by the bank with clients and for coordinating measures to recover debts and protect the bank’s rights; and (g) Contract Control, responsible for ensuring that operations comply with the parameters established in Credit Limit Proposals and that guarantees are correctly constituted, as well as writing the covenants entered into by the bank with clients.

Banco BOCOM BBM was one of the pioneers of market risk quantification in Brazil. As long ago as 1997 it developed a proprietary system that became a benchmark for the industry. The bank’s market risk management framework comprises the following agents and functions: (a) the Executive Committee, responsible for reviewing policies and proposing operational limits for risk management for approval by the Board of Directors at least once a year; (b) the Board of Directors, responsible for approving risk policies and limits at least once a year; (c) Market Risk, which reports to the Risk Director and is responsible for identifying, measuring and monitoring market risk, as well as for reporting it online to the Executive Committee, overseeing effective implementation of the market risk management policy, and assuring compliance with operational limits; (d) Pricing, which among other functions defines the pricing models and sources used in marking products to market independently of management areas; and (e) Internal Auditing, responsible for assuring the adequacy of procedures and consistency between market risk management policies and the structure actually implemented.

Market risk is monitored by daily calculation of Value at Risk (VaR), a statistical tool that measures the institution’s potential loss within a given confidence interval and assuming a specific investment horizon. A limit is set for VaR that can be allocated by the Treasury Director among the various risk factors. The VaR calculation model is regularly backtested. Stress scenarios defined each quarter by the Risk Committee independently of management areas are analyzed on a daily basis.

 

Banco BOCOM BBM’s liquidity target is to ensure that at all times its free cash flow is sufficient to discharge all liabilities and other commitments. Liquidity Risk is responsible for monitoring free cash flow in order to guarantee business continuity in a severe stress scenario, in accordance with limits and guidelines set by the Risk Committee and approved by the Board of Directors.

Liquidity risk management is based on projections of cash flow under a range of scenarios for the evolution of funding, lending and treasury. The analysis of cash flow takes into account (a) each client’s implicit risk, (b) any additional cash needed to comply with reserve requirements, (c) marking to market for derivatives, and (d) other obligations. The overall principle is to ensure that the bank’s commitments can be met in accordance with its net worth and the policies in place for funding, lending and treasury.

Banco BOCOM BBM’s operational risk management framework is aligned with best practice for the industry and complies with the applicable legislation. The framework is formalized in the document ”Operational Risk Management Policy”, which defines the management methodology and process, roles, responsibilities and categories, documentation and information storage procedures, and disclosure to guarantee the transparency of risk management activities. Operational Risk is segregated from Internal Auditing as an organizational unit and reports to the Director of Risk & Internal Controls. The unit is responsible for working with the other components of the framework to assure compliance with the guidelines established in the policy mentioned above.

 

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