The three main pillars of the bank’s risk strategy include its business strategy, risk appetite and risk bearing capacity. The Risk Management Department formulates the risk strategy through a formal process, known as “Risk Strategy Development” which is continuously refined and revised. As part of this process, the Board is required to review and approve the proposed risk strategy during the last quarter of each year, for the next year. All risk-taking units within the Bank are required to report the status of their compliance with their respective risk limits on a regular basis.
Effective implementation of MEB’s Risk Strategy relies on two important concepts:
- Economic Capital
- Risk Adjusted Return on Capital (RAROC)
RAROC measures the economic value of risk bearing activities. As a rule of thumb, the RAROC for any activity must be higher than the cost of capital in order for it to add economic value for the Bank. Hence, economic capital and RAROC provide useful tools for monitoring the adherence of business units with the bank’s risk strategy and measuring their performance to optimize economic value
Following the approval of the Risk Strategy documentation by the Board, the Organization and Methods Department is responsible for effective communication and implementation of all procedures described therein throughout Bank. These procedures outline responsibilities of risk-taking units, classified as the “First Line of Defense”, as well as the responsibilities of the Risk Management Department and the Compliance Department within their capacity as the “Second Line of Defense”. The Risk Strategy documentation also states key risk management responsibilities of senior management and the Board.