OUR RISK APPETITE FRAMEWORK

The Bank’s risk appetite is defined by a risk appetite framework set by the Board. It aids to emphasise its strong risk culture and helps define thresholds, processes and controls to manage aggregate risks through an acceptable scale.

In line with Bank of Mauritius Guidelines on Credit Concentration, Country Risk Management and Cross-Border Exposures, the Board has established a set of policies and procedures in respect of cross-border activities, which clearly translate to the Bank’s strategic goals within approved risk parameters.

Stress-Testing

Stress-testing (“ST”) is an integral part of the Bank’s risk management process as it consists of both sensitivity analysis and scenario analysis.

Stress testing is a fundamental tool to

  • facilitate a view of the organisation’s forward risk profile as a result of portfolio effects and/or changes in macroeconomic conditions;
  • Identify potential vulnerability to unprecedented but plausible events; and
  • Determine appropriate management actions or contingency plans to limit the impact of such events on the entity

Results of stress testing must impact decision making, including strategic business decisions via

  • Strategic planning and budgeting;
  • Internal Capital Adequacy Assessment Process (“ICAAP”), including capital planning and management, and the setting of capital buffers;
  • Informing the setting of risk appetite statements;
  • Liquidity planning and management; and
  • Identifying and proactively mitigating risks through actions such as reviewing and changing risk limits, limiting exposures and hedging.

The various type of scenario analysis performed at ABL are as follows:

Scenario analysis

  • Changing multiple risk inputs simultaneously with the source of the stress event being well defined;
  • Macroeconomic stress testing involves the creation of a severe but plausible macroeconomic scenario and assessing the impact of key macroeconomic risk drivers (e.g. GDP, interest rates, inflation) on key risk inputs (e.g. PD, LGD and EAD);
  • Other hypothetical or historical scenarios: “what-if”; and
  • Assessing the impact on statement of profit or loss and other comprehensive income, statements of financial position and capital ratios. Sensitivity analysis
  • Adjusting of a risk parameter, or a small number of very closely related risk parameters to understand the impact on a risk position; and
  • It is important to note that the event that gives rise to the movements in the parameters is hypothetical.

Reverse stress testing

  • Assessing scenarios and circumstances that would render its business model unviable, thus identifying potential business vulnerabilities:
  • Starts from the point of failure of the Bank’s business model and then working backwards to identify circumstances or scenarios under which this might occur; and
  • Point of failure is considered as significant financial losses that impact the Bank’s capital or lack of liquidity to such an extent that the existing business model would no longer be viable or where material supervisory intervention would result.

Universal Perspective on Stress-Testing in COVID-19 context

Both the local and global economies were severely impacted since the outbreak of the COVID-19 pandemic and this impacted the capital adequacy and stress test requirements of banks. In this current economic environment, similar to other banks, it was quite challenging for ABL to conduct stress-tests and estimate provisions under the IFRS 9 standard; as forward-looking judgement on possible losses from loans remains very challenging and uncertain. Notwithstanding the above challenges, the Bank has been guided by its Board in designing and implementing solutions and also conducting a number of “Stress-Test Scenarios” or “What-If Scenarios” in order to assess potential balance sheet and profit or loss impact in the current environment. The mitigations are in line with the regulatory Internal Capital Adequacy Assessment Process (“ICAAP”) mitigation plan. ICAAP is an internal review requirement that evaluates capital adequacy, capital management and planning at banks with a specific focus on core risk factors.

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