Page 185 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Derivatives & Risk Management

Notes 4. The board of directors has responsibility for setting the bank's tolerance for risks.
5. Board should ensure that the management establishes a framework for assessing the
various risks, develops a system to relate risk to the bank's capital levels, and establishes
a method for monitoring compliance with internal policies.
6. All material aspects of the rating and estimation process must be approved by the bank's
board of directors or a designated committee thereof and senior management.
7. The above-mentioned parties must possess a good understanding of the rating system's
design and operations and must approve material differences between established
procedures and actual practice.
8. Senior management should ensure on an on-going basis that the rating system is operating
properly.
In addition, the RBI guidance note says in respect of the risk governance structure that each type
of risk function i.e. credit market and operational risk, be managed as an independent function
and accordingly have corresponding risk management committees and risk management
departments.

An illustration of a risk governance structure for a bank in keeping with the above guidelines is
given below:

Figure 13.5

13.4.2 Risk Management Policy

As illustrated in the implementation roadmap, let us begin with the integrated risk management
policy. This policy document should be developed to serve the following objectives:
1. Adhere to guidelines/policies concerning risk management specified by the Reserve Bank
of India, Government of India and other binding regulatory authorities.
2. Adhere to Basel II guidelines in respect of risk management (RBI's version of Basel II
adopted for implementation by Indian Banks or in absence of RBI's directions, a version
which is not in conflict with extant binding regulations)

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