ALCO and Operational Risk Management at Bank of

China

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 ALCO and Operational Risk Management at Bank of
China

Table of Contents
Introduction.................................................................................................................................................3
Bank of China...............................................................................................................................................4
Interest Rate Risk and ALCO at Bank of China.............................................................................................6
Liquidity Risk Management and ALCO at Bank of China..............................................................................8
Part2:.........................................................................................................................................................10
Operational Risk Management at Bank of China...................................................................................10
Identification of Feasible Operational Dangers.....................................................................................10
Risk and Control Committee..................................................................................................................11
Calculating the Amount of Capital Required..........................................................................................12
Fraud Risk Mitigation at Bank of China..................................................................................................12
References.................................................................................................................................................14

Figure 1: Components of ALCO.............................................................................................................5

Figure 2: ALCO at Bank of China...........................................................................................................6
Figure 3: Risk Management Framework at Bank of China.................................................................6
Figure 4: PARAMETERS OF APPLIED INTEREST RATE RISK SHOCKS.....................................8
Figure 5: Economic value of equity and Net Interest Income Budget................................................9
Figure 6: Liquidity Ratio at Bank of China...........................................................................................10
Figure 7: Liquidity Gap Analysis...........................................................................................................11
Figure 8: Fraud Risk Management Framework..................................................................................15
 ALCO and Operational Risk Management at Bank of
China

Introduction
The Asset/Liability Committee of the Board of Directors (ALCO) of the ("Company") is
tasked with aiding in determining whether this Board of Directors (the "Bank") and
Bancorp, Inc. There are at least three members on the ALCO Board of Directors. The
Board of Directors is in charge of selecting new ALCO members each year. The
Chairperson of the Committee is selected and appointed by the Board of Directors. The
President is responsible for calling meetings of the ALCO. The Committee must have at
least one quarterly meeting and additional sessions whenever appropriate. For a
committee meeting to get forward, a quorum must be present. A quorum in the
Committee will be considered to have been reached when most of its members are
present. During the meeting in which the quorum requirements are met, the action that
the Committee takes will be determined by the motion supported by the majority of
those present (Ahmad, 2021).

To effectively manage interest rates, liquidity, and market risks connected to the Bank's
balance sheet and related operations, ALCO will put a mechanism in place. The
periodic adoption of rules, risk ceilings, and risk levels will be a part of this process. The
committee must ensure that a workable ALM policy is created for the Firm to carry out
its obligations. The Company's overall asset and liability management strategy about
liquidity, interest rate risk management, capital management, investments, hedging, and
derivatives should be established, among other things, in the Common ALM Policy. This
policy will be found using a typical ALM policy. They will all adopt new strategies and
methods of operation (Ahmad, 2021).
Figure 1: Components of ALCO

Bank of China
Bank of China Limited has a financial institution known as Bank of China (CEE) Ltd,
which will be referred to simply as Bank (from now on, Head Office or Owner). As such,
it is a member of the Bank of China Group (hereafter referred to simply as the Group),
which is not only one of the most extensive banking groups in the world but also one of
the most extensive and continually running banks among Chinese financial institutions.
The day he started working there, April 30th, 2002, made a bank, a one-person private
corporation limited by shares. Bank of China Ltd is the only stakeholder in the bank,
giving it a one hundred percent voting ratio (Ho et al, 2022).
Figure 2: ALCO at Bank of China

Figure 3: Risk Management Framework at Bank of China

Interest Rate Risk and ALCO at Bank of China
Interest rate risk is the possibility of a decrease in a banking portfolio's total income and
economic value. The banking portfolio has this risk. The SMC is also in charge of
overseeing the IRRBB's overall administration. The ALCO of the bank is the principal
party responsible for establishing whether or not the institution has enough internal
capital and ensuring that the bank has adequate money to cover its most significant
risks. Any strategies or procedures for managing interest rate risk must be reviewed and
approved by the RMC (Wang et al, 2022). Senior management must take the necessary
steps to monitor and control such risks. ALCO monitors carries out, and evaluates on-
and off-balance sheet risk management operations. FMD establishes and collates
interest-rate sensitivity differentials for the main currencies. In addition to this, the
department does risk profile analysis and delivers its findings to senior management
and HO. The provision of relevant information to the FMD on the part of the various
business sectors helps manage interest rate risk (Wang et al, 2022).

Apart from the money and subordinated debt capital acquired from the owner, the
bank's obligations do not include much more. As a general rule, the Bank will not meet
fixed interest rates for more than three months unless the rate is for a single term. The
interest rate that banks often impose is one that tracks after the movements of the
market. The bank does not model its time deposits in the same way as the majority of
banks do with their financial customers and big enterprises. As their amounts are very
variable and their interest rates are comparable to those of the market, these
instruments are considered to be overnight ones (Wang et al, 2015). Since there are
many extremely big organizations that do not have prepayment alternatives, the bank
does not provide a prepayment model as an option for its customers. The Bank
conducts risk assessments regarding interest rates on a quarterly basis. As a result of
the fact that clients often only maintain their deposits for a short length of time (in many
cases, payments are made solely to a checking account, rather than a term deposit),
the bank has put aside a certain amount of liquid assets for the year 2020 (Wang et al,
2015).
The adverse effect on interest is further offset by lowering the cash received from group
members. According to BankA/GL/2018/02, the Bank applies interest rate shocks that
are 200 basis points or less, parallel up and down, steep and flat, and sharp rate up and
down shocks. The measuring approach adheres to the guidelines above. Assume that a
shock to the bank's book interest rate risk caused by a standard interest rate implies a
greater-than-needed fall in the economic worth of the bank's equity. In this situation, the
Bank must alert the Competent Authorities and work with the Competent Authority to
take action (Dong et al, 2020).

For bank book interest rate risk (IRRBB), the Bank's moderately low-risk appetite is
again reflection of Bank's good management of price differentials and moderate losses
for the Bank in terms of bank profitability due to changes Bank interest rates. The Bank
has a low to medium exposure to vital Bank. All appropriate steps should be taken to
achieve high active risk awareness and establish a rigorous functional risk management
system. Active risk appetite is measured as a percentage of regulatory capital. A group
of operating loss for a given year above a moderate level is considered unacceptable.

Figure 4: PARAMETERS OF APPLIED INTEREST RATE RISK SHOCKS

Figure 5: Economic value of equity and Net Interest Income Budget

Liquidity Risk Management and ALCO at Bank of China

The danger that a viable commercial bank will not be able to get sufficient money or
funds at a cost that is enough to satisfy the risk of expanding assets or repaying loans
at maturity is known as the liquidity risk. Information, both quantitative and qualitative,
on the management of liquidity risk is required to be disclosed by the Bank. The
capacity of the Bank to finance and increase its assets and satisfy payment
commitments without experiencing significant unanticipated losses is what is meant by
the term "liquidity management." As per the material MNB rules, liquidity-related
gambles incorporate the accompanying: mass withdrawals before the asset's
termination date; the chance of restoring reserves; changes in the cost of the asset;
vulnerability in regards to the asset's effect on the climate; and the way of behaving of
other market members (Nayak and Xu, 2021).

The Board of Directors conducts an analysis, has a discussion, and votes on whether or
not the current liquidity strategy is satisfactory. They also define how much of a risk may
be taken with regards to liquidity. Any proposed adjustments to the bank's liquidity
strategy must be approved by the Board of Directors (Liu et al, 2023). The bank's
management is accountable for developing and overseeing the strategy's execution in
light of the institution's tolerance for liquidity risk. In addition, the administration will
construct an organizational structure for managing liquidity risk and specify each
department's duties.

The Liquidity Risk Threshold Indicators are determined by the Finance Department,
which also defines, assesses, and monitors the Bank's Liquidity Risk. Moreover, the
Finance Department is responsible for stress testing and reporting its results to ALCO.
The Bank's foreign currency portfolio is overseen by the Finance Department, which
also conducts stress tests and contributes to the Bank's policy on managing liquidity risk
(Liu et al, 2023).

This line of the defense comprises all of the Bank's commercial departments. The
responsibility for developing standards and procedures for liquidity risk management,
performing planned self-inspections of internal controls over liquidity risks, and
immediately detecting, reporting, and managing all liquidity risks falls on the
departments of frontline defense. The bank's internal auditing division is the institution's
third line of defense in the fight against liquidity risk. The internal audit division is tasked
with independently reviewing the efficiency of the company's primary and secondary
layers of defense, reporting any issues as soon as they arise, and evaluating the quality
and efficiency of the company's approach to managing liquidity risk (Shang et al, 2020).

Figure 6: Liquidity Ratio at Bank of China

Figure 7: Liquidity Gap Analysis

Part2:
Operational Risk Management at Bank of China
The danger of incurring losses due to poor internal processes and systems, external
occurrences, or the poor execution of people's responsibilities is known as operational
risk. Laws, contracts, and procedures that are broken may also lead to operational risk.
The Bank has determined that legal risk is part of operational risk but not strategic risk
or reputational risk under the Code. Hence, operational risk is diversified and varies
from other risk categories in many ways (Ausloos et al, 2020). This is because the
operational risk is generally defined by low-frequency incidents that result in substantial
losses. Because of this, effectively managing operational risks needs the participation
and dedication of every single business member. Every organizational unit contributes
to assessing operational risk and works to reduce risk levels as required. The active risk
management policy is the primary risk management instrument for operational risk
management. Every division, regional office, and overseas affiliate must follow these
guidelines. To ensure this rule is properly integrated into their domestic laws, foreign
firms must comply with the requirements of local law and regulation (Liu et al, 2020).

Identification of Feasible Operational Dangers

The purpose of risk identification is to identify possible threats to the success of the
bank's operations that might result in substantial financial loss. Identifying potential
threats is one method of doing this. Correctly identifying hazards is a crucial first step in
risk management. As a result, the Bank's several departments are each tasked with
keeping an eye on, evaluating, and mitigating any risks associated with their own
specific area of operations. In addition, administrative divisions are accountable for
creating and maintaining any management rules, internal policies, and codes of practice
that may be required (Tang et al, 2020). These tools are intended to cover the whole
range of possible outcomes, including those that are anticipated and those that are not.
There are no mandated risk levels for operational hazards; the only risk thresholds set
are particular risk thresholds for essential indicators, including operational risks. When
determining the amount of risk that a process entails, the Bank first specifies the risks
associated with a specific technique, as well as the possible losses that might be
incurred due to flaws in that process (Acharya et al, 2021).

Moreover, the Bank shows how such losses may be avoided or their severity reduced
by the controls incorporated into the process and other regulations and procedures.
This is a substantial aspect of operational risks that are only partly generated from
contracts that the Bank has engaged in (for acquisitions, among others). When an
operational hazard is caused by an agreement the Bank has engaged in, the possible
risks should be detected as early as the contract preparation stage and excluded from
the warranty (Jiang et al, 2020). This should be done while keeping the cost-benefit
principle in mind. The reason for this is to make sure that all of the criteria are defined
precisely before signing the contract. The cost-benefit concept is facilitated by defining
and strictly enforcing minimum service level requirements. This idea must be
implemented while preparing all key agreements, including the procedure for acquiring
goods and services. Finding a provider that can fulfill your demand parameters will be
easier if you get bids from several vendors and ask for their offerings. By agreeing to
warranty duties and indemnification of damages affecting suppliers in procurement
contracts, a purchaser may reduce the risks inherently associated with the items being
purchased (jiang et al, 2020).

Risk and Control Committee

The RCCO is responsible for operational risk management responsibilities such as
maintaining the bank's operational risk management framework, evaluating its efficacy,
detecting any shortcomings, determining suitable corrective actions, and monitoring
their implementation. It is the responsibility of the board of directors and the board of
supervisors to ensure that management is empowered to properly identify, analyze,
monitor, or control operational risks and that internal audit is familiar with the concept
and how it is used. Each rule is examined often. Newly issued policies are scrutinized
by the internal audit team, and progress toward those policies' goals is tracked and
reported on to the board of directors. Apart from that, the Bank's proactive risk
management policies are examined and evaluated by the Internal Audit Department on
a regular basis (Araz et al, 2020).

Calculating the Amount of Capital Required

The Bank reduces its operational risk using a fundamental indicator-based strategy.
With this method, the fund is required to have at least 15% of its assets be at risk, as
measured by the weighted three-year moving average of the appropriate indexes. While
analyzing end-user data, institutions should determine the average of the relevant
indicators over the last three years for each fiscal year. According to the bank's provided
illustration, the sum was HUF 1,137,000,000 as on December 31, 2020. This
computation has to be completed before the fiscal year closes. The following table
demonstrates the steps for determining the amount of capital needed to cover
operational risk (Zaby and Pohl, 2022).

Fraud Risk Mitigation at Bank of China

The board of directors, senior management, and its special committees have seriously
fulfilled the internal control and monitoring functions. These functions have emphasized
risk prevention and early warning, which has increased the level of compliance
achieved by the Group's operations. The Bank's approach to internal control is called
"Three Lines of Defense," and it's implemented across the board. The commercial bank
division and all retail bank branches are the first line of defense. They are in charge of
handling matters related to local risks and controls since they are the ones who really
own them (Cheng et al, 2020). Throughout business operations, they take initiative to
monitor and mitigate any threats. Among these responsibilities include the creation and
execution of policies, the conduct of business evaluations, the identification and
reporting of control weaknesses, and the management of repair efforts. The internal
control and risk management is in charge of handling administrative issues and
employee misconduct. He acted as the organization's first line of defense in increasing
the usage of the platform for monitoring and analyzing operational risk (Tan and Swan,
2020).

The auditing department of a bank is the third and last safeguard. The audit division is
responsible for evaluating the adequacy and efficiency of the bank's internal controls
and risk management via the performance of internal audits. The Bank has continued to
enhance its vertical orientation of its audit function. The bank undertook these two
actions to strengthen its internal auditing processes. Constantly monitoring audit cycles
and audit functions in order to discover and report major risks; expanding the amount of
IT applications generated; employing IT-based audit processes more robustly; and
building strong audit teams (Niu et al, 2019). There is room for development in all
aspects of the methodology's approach. Bank management switched their attention
from routine checks to in-depth investigations after adopting a problem-based approach.
As a result, the Group and regulators focused their attention and resources on entities
that posed the greatest danger and were of the most interest to the Group. The audit
department takes on systemic, trending, emergent, and urgent issues in order to carry
out its internal audit responsibilities. At the same time, it widened the relevance of audit
results. He pleaded for mistakes to be fixed quickly and efficiently so that the bank's
internal management and control procedures could be enhanced (Hu et al, 2019).

A comprehensive system of financial accounting policies, by all relevant accounting

standards and laws, has been designed and implemented by the Bank. Consequently,
its accounting basis was bolstered, and its financial accounting management
standardization and improvement were enhanced even more. It aimed to build a long-
term approach to accounting foundations and emphasized implementing and reviewing
appropriate accounting standards. It has persistently worked to improve the
management of the quality of the accounting information to guarantee that the internal
control over financial information is functioning effectively. All significant aspects of the
bank's financial health, performance, and cash flow are reflected in these statements.
The Bank takes preventative measures against fraud by proactively detecting,
analyzing, ruling on, and mitigating risks. Preventing the possibility of fraud is its main
concern. During the first six months of 2020, the bank prevented RMB 8.896 million in
fraudulent overseas transfers on 110 separate occasions (Sinha, 2021).

The Bank's operational risk management system has steadily improved over time. Risk
and Control Assessment (RACA), Key Risk Indicators (KRI), and Loss Data Collecting
(LDC) were all recommended as methods for identifying, assessing, and keeping tabs
on operational risk. If you want to become better at managing your worries.
Management Efforts and Efforts By enhancing its functional risk management
information system, the bank increased the support capacity of its information
technology systems. It has upgraded its operating processes to improve operational
sustainability, reinforced its business continuity management system, performed
disaster recovery exercises, aggressively dealt with the COVID-19 pandemic, and
merged the companies that comprise the group (Sinha, 2021).

Figure 8: Fraud Risk Management Framework

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