BIMB Integrated Annual Report 2019

48 FINANCIAL RISK MANAGEMENT POLICIES (CONTINUED) 48.4 Market risk Overview All the Group’s businesses are subject to the risk that market prices and rates will move, resulting in profit or losses to the Group. The following are the main market risk factors that the Group is exposed to: • Profit Rate Risk: also known as the Rate of Return Risk is the potential impact on the Group’s profitability caused by changes in the market rate of return, either due to general market movements or due to issuer/borrower specific reasons; • Foreign Exchange Risk: the impact of exchange rate movements on the Group’s currency positions; • Equity Investment Risk: the profitability impact on the Group’s equity positions or investments caused by changes in equity prices or values; • Commodity Inventory Risk: the risk of loss due to movements in commodity prices; • Liquidity Risk: the potential inability of the Group to meet its funding requirements at a reasonable cost (funding liquidity risk) or its inability to liquidate positions quickly at a reasonable price (market liquidity risk). The key features of the Group’s market risk management practices and policies are represented by the Banking and Takaful segments. (a) Banking Bank Islam separates the market risk exposures into either trading book or banking book portfolios. Trading book portfolios include those positions arising from market making, proprietary position taking and other marked-to- market positions as per the Bank’s Board approved Trading Book Policy Statements. Banking book portfolios primarily arise from the Bank’s profit rate management of the Bank’s assets and liabilities and investment portfolio mainly for liquidity management. Market risk governance The management of market risk is principally carried out by using sets of policies and guidelines approved by the Bank’s Asset and Liability Management Committee (“ALCO”) and/or BRC, guided by the Bank’s Board’s approved Risk Appetite Statement. The ALCO is responsible under the authority delegated by the Bank’s BRC for managing market risk at strategic level. Management of market risk The objective is to manage market risk exposures in order to optimise return on risk while maintaining a market risk profile consistent with the Bank’s approved risk appetite. Bank Islam’s market risk exposures are managed by its Treasury, who have the necessary skills, tools, management and governance to manage such risks. The management of market risk is guided by comprehensive limits, policies and guidelines which are periodically reviewed. The Bank’s Market Risk Management Department (“MRMD”) is the independent risk control function that is responsible for the implementation of market risk management framework. The Bank’s MRMD is also responsible for developing and reviewing the Bank’s market risk management guidelines and policies, monitoring tools, behavioural assumptions and limit setting methodologies. Escalation procedures are documented and approved by the ALCO and/or BRC. In addition, the market risk exposures and limits are reported to the Bank’s ALCO and BRC. Other controls to ensure market risk exposures remain within tolerable levels include regular stress testing, adhoc simulations and rigorous new product approval procedures. Stress test results are produced regularly to determine the impact of changes in profit rates, foreign exchange rates and other risk factors on the Bank’s profitability, capital adequacy and liquidity. The stress test provides the Bank’s Management and the BRC with an assessment of the financial impact of identified extreme events on the market risk exposures of the Bank. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2019 (CONTINUED) 283 BIMB HOLDINGS BERHAD 199701008362 (423858-X) Shareholders’ Information Financial Statements Additional Information Disclosure Summary