CASE STUDY: OPERATIONAL RISK REPORTING

Background

The purpose of a risk report is to inform a bank's stakeholders about its performance for a reporting period and address the various compliance reporting requirements. The information below regarding $2021($one year after the COVID$-19$ pandemic$)$ is provided for consideration for a risk report for Region Bank.

Reporting structure

The Region Bank's reporting structure entails the following reports:

$$ Governance report

Discusses the Bank's governance approach and priorities.

$$ Environmental, Social and Governance $($ESG$)$ report

Provides an overview of the Bank's processes and governance structures relating to social and environmental matters.

$$ Annual financial statements

Entails the Bank's full audited annual financial statements.

$$ Risk and capital management report

Sets out the Bank's approach to risk management.

$$ Climate$-$related financial report

Provides information on how the Bank is managing the risks and responding to the opportunities presented by climate change.

The Board of Directors $($hereafter$,$ Board$)$ plays a crucial role in the management and reporting process of the Bank. For the reporting period, the Board must be satisfied that:

$$ The Bank's risk, compliance, treasury, capital management, and internal audit processes were operating effectively.

$$ The Bank's business activities were managed within the approved risk appetite.

$$ The Bank is adequately funded and capitalised to support the execution of the approved strategy.

$$ Appropriate remedial actions were taken for instances that incurred losses, led to a breach in the risk appetite or actions that incurred fines$/$penalties by the regulators.

The Chief Risk Officer made the following general comments:

A focus area during the year was operational risk management to enhance the banks performance and address the various compliance reporting requirements. The risk report was reliable in simplifying and supporting management decisions and risk data. A more robust approach was followed to enhance the level of implementation of risk management and the requirements of the code of ethics within the Bank. The environmental, social, and governance $($ESG$)$ risks and their impact on operational risk management remain a focus area. A climate policy was developed to set certain climate$-$related targets aligned with the government's overall approach. The Bank continues to embed a risk management culture to ensure risk$-$taking to support the strategic objectives. The Bank remains committed to complying with the minimum regulatory requirements and operates within the internally approved risk appetite. In addition, the following information was reported for $2021($post$-$COVID$-19$ year$),$ which may be relevant for drafting the operational risk management report.

Economic environment

The continent and the world have experienced multiple COVID$-19$ issues, leading to inconsistent economic recovery. Severe infection rates hindered this despite high vaccination rates in some countries. While recovery continues, some central banks allowed inflation to exceed targeted ranges to promote economic growth. The increased liquidity from the COVID$-19$ pandemic has kept debt levels high, exposing high risks to the banking sector and credit ratings. Growth continued to benefit technological businesses, while conventional businesses were slower to recover. This status is also relevant to developing countries, resulting in unrest and affecting investor confidence, emphasizing the importance of risk management.

Environment and Social

Climate change is negatively impacting all continents, including Africa. For example, Africa faces an increased risk of floods and drought, which affect food production and health and lead to instability and illegal migrations. The COVID$-19$ pandemic also resulted in many social consequences, such as increased poverty, higher unemployment rates, digital inequality and unavailability of certain health support and facilities.

Main enterprise risks

The main enterprise risks that will have to be managed are as follows:

$$ Climate change and extreme weather incidents. Severe extreme weather incidents will deplete resources, and the impact of drought or flooding on agriculture$-$reliant economies may increase the number of refugees across borders.

$$ After$-$effects of the COVID$-19.$ Post$-$pandemic stress on employees, customers and third parties may result in low productivity, misconduct and business closures.

$$ Environmental, Social and Governance issues. A shortfall of dedicated resources to lead the Bank in managing ESG risks and limited customer ESG data sources results in the inability to demonstrate a commitment to sustainable financing for ESG initiatives.

$$ Technology. Technology is one of the main risk areas for most banks, which were affected by the following:

o Cyber$-$attacks

o Ransomware attacks

o Technological instability

o Technological fraud

o Unskilled staff