FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Kuwait

The supervisory and regulatory framework in Kuwait consists of one main body :

• Central Bank of Kuwait (CBK)

FRSGlobal in Kuwait

The economy of Kuwait was affected by a downturn triggered by the global ‘credit crunch’. In 2008, the Central Bank of Kuwait (CBK) had to step in and assist the one of the largest banks in the country. This move, along with a number of announcements from firms stating that they were struggling to weather the financial storm, sent shock waves throughout the country that unsettled investors.

A sharp decline in oil prices and a volatile stock market were also factors that caused the economy to dramatically slow down.

Political pressures have further affected the economic issues and some critics have even said that the CBK have been too slow in implementing important regulatory legislation.

In response to this, the Kuwait regulator has the increased amount of risk management that is required by banks in the region, as well as transparency.

Firms need to implement an integrated approach to risk as apose to the silo‘d approach, incorporating for example liquidity risk, market risk and credit risk. Regulation, risk management and transparency are required from Kuwaiti banks – requirements that are not going to be relaxed as the region and the state rapidly improve the standards of risk management applied in domestic bank operations go away.

Regulatory Environment — Kuwait

Statutory

Balance sheet reporting
Balance sheet reporting provides information on the financial position of a bank and is required by the Central Bank of Kuwait on a monthly and quarterly basis. Under this type of reporting all the banks in Kuwait are required to submit the reports on assets and liabilities as well as all the supplementary information.

Prudential

Capital adequacy reporting
This type of reporting is mainly concerned with risk incurred by banks and is centred around risk reporting. The Central Bank of Kuwait uses the Basel II framework to calculate the capital adequacy requirements. Capital adequacy reporting collects the information on market risk exposures, operational risk as well as the existing credit risk.

Transactional

Balance of payment reporting
The reports generally relate to the requirements that exist on the transactional level and provide detailed information on the key investment position and the balance of payments position of the country and need to be submitted on a quarterly basis.

Suspicious transaction report (STR)
These are standard reports required to be submitted to the central bank of Kuwait to enable the regulator to make observations in case of suspicions transactions that might involve money laundering or terrorist financing.

Asset & Liability Management (ALM)

ALM is being embraced as more than just a tool to monitor and manage interest rate risk in banking books. It is a process for managing balance sheets against other risks that affect earnings and portfolio valuations of banks, shifts in customer behaviour, future balance sheet growth and impact of business strategies (pricing, hedging, growth and planning).

In light of the recent financial crisis, firms of all shapes and sizes are re-evaluating their ALM model. In order to earn an adequate return, the need to assess and mitigate the adverse value and income impact of changes in the market has become even more vital.

So how do different types of financial institutions manage their ALM requirements today?

Large, tier 1 firms typically develop their ALM systems in-house; a luxury few smaller firms can’t afford. These systems typically include sophisticated and finely tuned functionality for Value exposure, Value at risk, Dynamic simulation, Earnings at risk and Treasury view.

In the past, smaller firms have found solutions for meeting ALM requirements to be over-complicated, difficult to integrate with incumbent systems, resource-dependent and cost-prohibitive. For these reasons they have resorted to using alternative methods such as spreadsheets or independent consultants, neither of which is ideal.

Until now the sheer cost of developing and supporting an in-house ALM system has been prohibitive to smaller firms but the need to have accurate visibility into the future position of the firm is critical.

Our heritage and in-depth knowledge of market have enabled the configuration of our solution to be so flexible that it meets the needs of ALL firms; from those with highly complex derivatives to those with a vanilla approach.

Our ALM solution provides a comprehensive range of capabilities that cover the following areas:

• Value exposure / market risk (static)
  For a consistent and comprehensive assessment of the adverse value impact of changes in market risk factors based on common pricing models using gap analysis and analytical/numerical stress testing analysis
• Value at risk / market risk (static)
  To calculate the loss potential of a specific portfolio or the total balance sheet over a given time horizon and confidence level
• Dynamic simulation (“what if” NII analysis)
  To assess and manage income, using a dynamically modelled balance sheet and market environment
• Earnings at risk (interest rate models)
  To calculate the potential to lose income, and to value it in a dynamically modelled balance sheet and market environment
• Treasury view
  To assess the exposure and risk position of Treasury, using the risk management techniques applied by the firm

And for the smaller firm

Our rich ALM solution offers a functionally that require immediate return on investment by taking a ‘compact’ approach with risk management features that absorb complexity. Along with evaluating a mismatch between assets and liabilities, our ALM solution also manages risks arising due to liquidity and interest rate in banking books.

With our ALM solution firms can:

• Quantify the value impact of interest rate changes over the total balance sheet based on regulatory requirements
• Conduct stress testing / value impact of any risk factor change over the total balance sheet
• Benefit from robust processes with audit ability and traceability, reverse processing from results to initial input using modelling (strategies & scenarios)
• Meet processing times / frequency of analysis and reduce manual work
• View Balance Sheet value impacts from interest rate moves in terms of sensitivity, liquidity and margin
• Utilise a simple financial analysis framework
• Make use of a flexible reporting tool and standard export to standard formats (Excel, PDF, HTML, XML)

FRSGlobal 6-step process for ALM

Liquidity Risk Management

Banks are interested in going beyond simple static financial ratios and gap reports as the measures of their liquidity risk. Since the Basel Committee on Banking Supervision issued its final paper on ‘Principles for Sound Liquidity Risk Management and Supervision’ banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheet. By modelling their liquidity contingency plans against such scenarios, a measure of the bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of the bank’s plan against such crisis.