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 HNFHC |
| An independent risk management
division is responsible for risk management for
each of HNFHC's subsidiaries. Besides implementing
risk policies, risk control methods and commissioning
risk reports, the Risk Management Department, in
an effort to integrate a risk management mechanism
for subsidiaries, will focus on three areas: quantifying
risk measurements, centralizing risk management
and rationalizing risk returns. The ultimate goal
in risk management for the financial holding companies
is to seek the maximization of shareholders value
via the risk capital/economic capital allocation
among subsidiaries. |
| 1. |
Categories
of Risk Management
HNFHC and its subsidiaries detail risk management
categories for areas of operation within and
outside of its balance sheet, such as credit
risk, market risk, liquidity risk, sovereign
risk, operating risk, legal risk and information
risk. |
| 2. |
Policy
Objectives
The goal of HNFHC's risk management is for
the parent company and subsidiaries to recognize,
measure, monitor and control all risks in
all areas of operation. Risks are to be controlled
within an acceptable level in all areas. HNFHC
intends to rationalize risk return of the
group under the circumstance that the group's
risk capital is maintained at a level greater
than risk assets. |
| 3. |
Methods
to Control Risk
HNFHC and its subsidiaries set operational
rules governing relevant risk factors for
every business according to the risk management
policy and guidelines of the company. These
operational rules are set based on the type
of operation and include risk limits setting,
periodic position review, and risk indicator/alarm
mechanism establishment. Risk measurement
and back-testing are performed in a quantitative
way. |
| 4 |
Risk
Reports
The risk management divisions of HNFHC and
its subsidiaries produce real-time, daily
or regular risk management reports to various
level of managers based on the type of operation.
In addition, the board of directors is regularly
briefed on the state of risk management. By
doing so, managers and board members can determine
whether risk management is within an acceptable
level and taken into consideration when making
decisions. |
| 5.
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Three
Major Objectives for the Future
(1)
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Quantifying Risk
Management
HNFHC will assist subsidiaries in creating
advanced risk measurement techniques.
Value at Risk (VaR) techniques will
be instituted in the risk management
systems of all subsidiaries. In principle,
VaR techniques are easier to implement
in mature capital markets. With consideration
to local conditions, HNFHC's VaR techniques
will be developed in phases. In the
near term, simplified VaR methods will
be established. In the medium and long
term, VaR techniques will be implemented
according to the New Basel Capital Accord
(or Basel II) standard. The methodology
adopted for each subsidiary will vary
based on the different types of risk.
For example, credit risk will focus
on Probability of Default and Recovery
Rate and the estimated VaR related to
such. Market risk will focus on estimated
VaR based on changes in the market price
of various positions and related risk
data. If the holding company encompasses
life insurance operations in the future,
VaR can be applied to insurance policy
risk, including interest rate risk and
underwriting risk. While operations
risk is a quantifiable risk, other risks,
such as strategic risk, liquidity risk,
and legal risk cannot be estimated according
to the VaR technique. In these cases,
other means will be adopted to quantify
risks. |
(2)
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Centralizing Risk Management
Advanced risk measurement techniques
must be established in a rational management
structure in order to be effective.
Advanced risk estimation relies on the
analysis of large amounts of information,
while a rational management structure
depends on the understanding of risk
among managers, who combine this with
company operational strategies. The
concentration of management aids in
reaching this goal. Another purpose
of concentration is to assign risk to
units that have the ability to manage
risk. After risk is estimated precisely
and concentrated in the hands of risk
managers, active management of risk
can be undertaken. Active management
includes the reallocation of assets
to maximize risk returns. |
| (3) |
Rationalization of Risk Returns
The VaR of all operations will be transformed
into risk capital, which will be borne
by the unit that undertakes the risk.
This will directly force each division
to calculate risk costs as a portion
of business costs, and it will impact
decision-making. In addition, it will
gradually improve the return on assets
and return on equity of each subsidiary.
In order to combine the interests of
managers and shareholders, HNFHC is
planning to implement a shareholder
value added management framework to
each subsidiary, which makes the mission
of managers to create shareholder value.
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| Hua
Nan Commercial Bank |
| 1. |
Categories
of Risk Management
Hua Nan Bank institutes risk management for
all operations that are listed both on and
off the balance sheet, including credit risk,
market risk, liquidity risk, operational risk,
legal risk and sovereign risk. |
| 2. |
Methods
of Risk Management
Hua Nan Bank's risk management methods are
based on policies and directives set by the
parent company. Areas that are targeted include
deposits, loans, foreign exchange, international
banking and investment operations, with each
having specific guidelines concerning the
evaluation and management of risks. Risk limitations,
trading limits, risk indicators and an early
warning mechanism have been introduced. In
addition, evaluations and auditing of various
risk positions are undertaken to ensure that
risk is controlled within an acceptable level.
|
| 3. |
Risk
Reports
Hua Nan Bank produces real-time, daily or
regular risk management reports, based on
the type of operation, to various levels of
managers. In addition, the board of directors
is regularly briefed on the state of risk
management. By doing so, managers and board
members can determine whether risk management
is within an acceptable level and can put
into consideration when making decisions.
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| EnTrust
Securities Co., Ltd. |
| EnTrust Securities'
risk management methods are as follows: |
| 1. |
Broking
Division
The risk management office leads efforts.
The auditing office audits all broking units
on their operations, with the focal point
primarily being designated securities and
specific clients. The audits examine the credit
risk, market risk, and liquidity risks associated
with credit trading by clients and with specific
stocks to ensure effective management. On-line
management systems monitor activities during
trading hours, and various reports are printed
after trading hours for review in order to
reduce trading risks. Employees are required
to respect various securities trading laws
and the handling of disputes to prevent the
company from facing any penalization that
would impact normal operations. |
| 2. |
Dealing
Division
Dealing Division supervisors examine market
conditions and propose investment limits to
the Asset and Liability Management Committee.
These reports are given to the president for
review, who then forwards them to the board
of directors for approval. They set daily
net purchase or net sale limits, and limit
the cost associated with a single stock to
no more than 15% of total authorized limit.
A proposal must be made to the president should
these limits need to be expanded. Traders
can buy core holdings only after approval
from the Investment Strategy Committee. Profits
and losses are computed on a daily basis after
the close of trading. Related data is reviewed
once a month. Stop-loss selling must be executed
should losses reach 20% of the cost of a single
stock. Exceptions can be made, but only after
approval from the president. |
| 3. |
Underwriting
Division
Stock that the company has purchased in the
underwriting process must be sold should its
share price fall by 10%. Exceptions can only
be made after approval from the president,
but continued monitoring of the case is carried
out. The amount of stock purchased to underwrite
cannot exceed limits set by securities regulations. |
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Risk Management 
www.hnfhc.com.tw