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A Quick Overview Of How Oversea-Chinese Banking Corp Limited Manages Market Risk

Oversea-Chinese Banking Corp Limited (SGX: O39) is one of the three main local banks listed in Singapore.

As a bank, OCBC faces a number of important risks that it has to manage on a daily basis. Failure to do so effectively and efficiently could cause significant damage to its business, and subsequently to its stock price.

Investors or potential investors in OCBC should attempt to understand what risks the bank is facing, and how it intends to manage those risks. Here, we will explore one of OCBC’s main risks – market risk – and how it is handling the issue.

The lowdown on market risk

In simple terms, market risk is the risk of loss of income or market value in financial assets due to fluctuations in factors such as interest rates, foreign exchange rates, credit spreads, equity and commodity prices, and other related factors.

In the case of OCBC, it mentioned in its 2016 annual report that it is exposed to market risk in a few business activities, including “trading, client servicing, and balance sheet management.”

How OCBC is managing market risk

From OCBC’s 2016 annual report, we can see that there are a number of aspects involved in managing market risk.

Firstly, there is the Market Risk Management Committee (MRMC). It is a senior management group that is responsible for supporting OCBC’s chief executive officer, Samuel Tsien, in managing market risk.

The committee is also tasked with establishing OCBC’s market risk management objectives, and the framework and policies governing prudent market risk taking. The Market Risk Management department supports the MRMC in implementing the policies in OCBC’s daily operations.

Secondly, OCBC performs risk management activities that include risk identification, measurement, monitoring, control and reporting. The bank’s risks managers help identify market risks during product inception and from their ongoing interactions with the bank’s various business units.

Thirdly, there is the measurement of risk, which happens through the use of various models such as Value-at-Risk (VaR), Present Value of a Basis Point (PV01), and more. OCBC also performs regular stress testing and scenario analysis when it is trying to measure its exposure to market risk.

Lastly, there is risk monitoring and control. There are limits for the bank’s trading activities, which are monitored. If the limits are breached, they will be reported to senior management. OCBC also undergoes regular model validation exercises and back testing. Recently, the bank completed a multi-year system and infrastructure upgrade to improve its risk reporting and measurement capabilities.

A Foolish conclusion

By understanding the risks OCBC is exposed to, and how it is managing them, investors can have a better grasp of the bank’s future business performance.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.