Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information 27. Risk Management continued Introduction continued Management Board The Management Board has overall responsibility for the Bank’s asset, liability and Risk Management activities, policies and procedures. In order to effectively implement the Risk Management system, the Management Board delegates individual Risk Management functions to each of the various decision-making and execution bodies within the Bank. Bank Asset and Liability Management Committee The Bank’s Asset and Liability Management Committee (“ALCO”) is the core Risk Management body that establishes policies and guidelines with respect to capital adequacy, market risks and respective limits, funding liquidity risk and respective limits, interest rate and prepayment risks and respective limits, money market general terms and credit exposure limits, that designs and implements respective Risk Management and stress testing models in practice and regularly monitors compliance with the pre-set risk limits. Internal Audit The Internal Audit department is responsible for the annual audit of the Group’s Risk Management, internal control and corporate governance processes, with the aim of reducing the levels of operational and other risks, auditing the Group’s internal control systems and detecting any infringements or errors on the part of the Group’s departments and divisions. It examines both the adequacy of and the Group’s compliance with those procedures. The Group’s Internal Audit department discusses the results of all assessments with management, and reports its findings and recommendations to the Audit Committee. Risk measurement and reporting systems The Group’s risks are measured using a method which reflects the expected loss likely to arise in both normal circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on different forecasting models. The models make use of probabilities derived from historical experience, adjusted to reflect the economic environment. The Group runs three different basic scenarios, of which one is Base Case (forecast under normal business conditions) and the other two are Troubled and Distressed Scenarios, which are worse and worst case scenarios, respectively, that would arise in the event that extreme events which are unlikely to occur do, in fact, occur. Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits reflect the business strategy and market environment of the Group as well as the level of risk that the Group is willing to accept, with additional emphasis on selected industries. In addition, the Group monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risks types and activities. Information compiled from all the businesses is examined and processed in order to analyse, control and identify early risks. This information is presented and explained to the Management Board, and the head of each business division. The reports include aggregate credit exposures and their limits, exceptions to those limits, liquidity ratios and liquidity limits, market risk ratios and their limits, and changes to the risk profile. Senior management assesses the appropriateness of the expected credit loss on a monthly basis. The Management Board receives a comprehensive credit risk report and ALCO report once a month. These reports are designed to provide all the necessary information to assess and conclude on the risks of the Group. For all levels throughout the Group, specifically tailored risk reports are prepared and distributed in order to ensure that all business divisions have access to extensive, relevant and up-to-date information. A daily briefing is given to the Management Board and all other relevant employees of the Group on the utilisation of market limits, proprietary investments and liquidity, plus any other risk developments. Risk mitigation As part of its overall Risk Management, the Group uses derivatives and other instruments to manage exposures resulting from changes in interest rates, foreign currencies, equity risks, credit risks, and exposures arising from forecast transactions. While these are intended for hedging, they do not qualify for hedge accounting. The Group actively uses collateral to reduce its credit risks (see on for more detail). Annual Report 2018Bank of Georgia Group PLC 255