Risk Management at ANZ Vision and Strategy ANZ has established a comprehensive risk and compliance management framework. The Board is principally responsible for establishing risk tolerance, approving related strategies and policies, monitoring and assessing the activities of management and overseeing policy compliance and the effectiveness of the risk systems and policies to meet the requirements of applicable regulations and the interests of shareholders, customers and staff. The Risk Committee oversees the Group s risk management policies and controls, and may approve credit transactions and other matters beyond the approval discretion of executive management. On a day-to-day basis, the various risks inherent in ANZ s operations are managed by both Group Risk Management and each business unit. The risk function is independent of the business with clear delegations from the Board and operates within a comprehensive framework comprising: The Board, providing leadership, setting risk appetite/strategy and monitoring progress. A strong framework for development and maintenance of Group-wide risk management policies, procedures and systems, overseen by an independent team of risk professionals. The use of risk tools, applications and processes to execute the global risk management strategy across the Group. Business Unit level accountability, as the "first line of defence", and for the management of risks in alignment with the Group's strategy. Independent oversight to ensure Business Unit compliance with policies, regulations and laws, and to provide regular risk evaluation and reporting. Organisational Control & Board Governance ANZ s Board has ultimate responsibility for risk management. In discharging its governance responsibility for overall risk management and control, the Board has established two key Committees, the Risk Committee (RC) and the Audit Committee. The Audit Committee assists the Board in overseeing internal audit and the adequacy of ANZ s accounting policies and financial reporting. The Risk Committee assists the Board in fulfilling its global responsibilities relating to the oversight of ANZ s risk management strategies, policies and processes that have the potential to impact significantly on earnings performance, reputation and capital protection, and to approve significant credit transactions and other matters beyond the approval discretion of executive management. The Group Asset and Liability Committee (GALCO), Credit and Trading Risk Committee (CTC) and Operational Risk Executive Committee (OREC) support the Risk Committee and are responsible for the co-ordination of risk matters for each of the areas of risk management.
ANZ Board Audit Committee Review the the risk risk control framework and and compliance with with policies polices & regulations and regulations Not owned by Risk Management Group Asset & Liability Committee (GALCO) Non-traded interest rate risk, including the investment of capital Liquidity & funding Balance sheet structure Structural foreign exchange exposures, including capital and revenue flows, excluding traded FX exposures Capital Management Provide assurance to the Board that the ICAAP is working effectively Funds transfer pricing Policy, control, and compliance activities for all balance sheet risks and operations. CEO, CFO(C), CRO, Senior MD, Group Treasurer, Head of Market Risk, Group MDs: Institutional, Personal & Asia Pac, Chief Economist, CEO ANZ National GALCO meets quarterly Risk Management Risk Committee (RMC) Oversees policy, strategy/processes / processes Authorises Group s Limits Framework Authorises Group s Limits framework Authorises limit approvals of the CTC Authorises limit approvals of the CTC Four independent directors, CEO, CFO, CRO, General Counsel Risk RMC Committee meets at meets least four at least times four annually times annually Credit & Trading Risk Committee (CTC) (CTC) Policy Major lending decision Asset writing strategies Asset writing strategies Portfolio Portfolio Traded risk Traded and Non-Traded risk ALCO review/oversight responsibilities (monthly) CEO, CFO(C), between CRO, meetings GM GSD, MD's of IFS, IB, CF&A, Corporate and SME, GM Wholesale Risk CEO, CRO (C), CFO, Senior Managing Director, Chief Wholesale Credit Officer, Chief Retail Credit Officer, at least two Divisional MDs CTC meets weekly Operational Risk Executive Committee (OREC) Operational Risk Compliance Information Security Core members are CFO, Senior MD, CRO (C), GM Human Resources, GM Internal Audit, GM Compliance, Group Head OR and Divisional MDs. Quorum of 6 required. OREC meets six times annually Key: (C) = Chairman (JC) = Joint Chairman monthly ALOC meets bi- monthly At least bi monthly The members, meetings and focus of each Committee are shown below: Board Board of Directors Members 7 Directors + CEO; Meetings At least 8 times/year Risk Focus Leadership; overseeing risk appetite and strategy; ensuring a robust risk and compliance culture Board Committees Risk Committee of the Board Members 3 Directors + Bank Board Chairman (a member of the ANZ Management Board must be in attendance) Meetings At least 4 times/year and more frequently if deemed necessary. Focus The review of risk in all aspects of the business. Overseeing, monitoring and reviewing ANZ s risk management principles and policies, strategies, processes and controls. The Risk Committee may approve credit transactions and other matters beyond the approval discretion of executive management Audit Committee of the Board Members 3 Directors (including one financial expert) + Bank Board Chairman Meetings At least 4 times/year Focus Oversight of ANZ s financial reporting policies and controls, integrity of ANZ s financial statements, the work of Group (internal) Audit, the Audit Committees of the subsidiary companies, prudential returns and compliance with regulatory requirements.
Senior Executives Group Asset and Liability Committee Meetings Quarterly Focus Policy, regulatory capital, balance sheet structure, liquidity and funding, foreign exchange, non-traded market risk, funds transfer pricing and portfolio. Operational Risk Executive Committee Meeting 10 times annually Focus - Approval and monitoring of the effectiveness of Operational Risk and Compliance policies and frameworks; review of Operational Risk and Compliance incidents and monitoring of new and emerging risks. Credit & Trading Risk Committee Meetings Weekly Focus Approval of credit and market risk control frameworks, including portfolio review, credit transaction approval within its discretion, review of controversial and/or environmentally sensitive clients and transactions, policy approval, and model performance oversight The various risks inherent in the operations of the Group may be broadly grouped together under the following major categories: Credit Risk Credit risk is the risk that a customer or counterpart will fail to meet their obligations in accordance with the agreed terms and is the major risk faced by the Group. The Group has an overall lending objective of sound growth for appropriate returns. The credit risk management framework exists to provide a structured and disciplined process to support this objective. The framework is top down, being defined, by Credit Principles and Policies. The effectiveness of the credit risk management framework is validated through various compliance and monitoring processes. These, together with portfolio selection, define and guide the credit process, organization and staff. Market Risk Market risk is the risk to the Group s earnings arising from changes in interest rates, currency exchange rates, credit spreads, or from fluctuations in bond, commodity or equity prices. To facilitate the management, control, measurement and reporting of market risk, ANZ has grouped market risk into two broad categories: a) Traded market risk:- This is the risk of loss from changes in the value of financial instruments due to movements in price factors for both physical and derivative trading positions. Trading positions arise from transactions where ANZ acts as principal with clients or with the market. b) Non-traded market risk (or balance sheet risk):-
This comprises the management of non-traded interest rate risk, liquidity, and the risk to the AUD denominated value of the Group s capital and earnings as a result of foreign exchange rate movements. ANZ has a detailed market risk management and control framework, to support its trading and balance sheet activities, which incorporates an independent risk measurement approach to quantify the magnitude of market risk within the trading and balance sheet portfolios, This approach, along with related analysis, identifies the range of possible outcomes that can be expected over a given period of time, and establishes the likelihood of those outcomes and allocates an appropriate amount of capital to support these activities. Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including legal risk and the risk of reputational loss. Group Operational Risk are responsible for exercising governance over operational risk through the management of the operational risk framework, policy development, framework assurance, operational risk measurement and capital allocation, fraud strategy and reporting of operational risk issues to executive committees Business units are responsible for the identification, analysis, assessment and treatment of operational risks on a day-to-day basis. A Risk Drivers and Controls Approach is used to measure the operational risk profile of individual business units, and to allocate operational risk economic capital. This approach gives business managers a strong and clear incentive to reduce operational risk. Compliance Risk The ANZ Board expects its business to be conducted in accordance with the laws, regulations and adopted codes of the countries in which it operates and has zero tolerance for failure to identify and escalate breaches of these obligations. Group Compliance is accountable for designing a compliance program that allows ANZ to meet its regulatory obligations. Group Compliance has global oversight responsibility for the ANZ Compliance Framework, and each division has responsibility for embedding the Framework into its business operations. Key principles of the Compliance Framework are to foster an integrated approach where staff are responsible and accountable for compliance, either within their job role, or within their area of influence, and to reward correct compliance-related behaviour. Other Risks There are other risks, which are not classified as Market, Credit or Operational Risk or Compliance, that need to be managed effectively and for which ANZ holds economic capital. These include, but are not limited to, items such as investment risk and fixed asset risk. ANZ adopts a prudent approach to allocating capital for these risks. Best practice risk management involves an independent group providing input into key investment decisions, ensuring that all the risks are transparently reflected and properly understood at key decision levels. Business Risk is the risk that value will be lost through the selection of specific business directions or through changes to the Group s overall business model. ANZ has portfolio risk assessment and management teams within Risk Management to monitor the changing risk profile of the group, and to provide independent risk input into investment activity and other key portfolio decisions. This ensures that implications for ANZ s risk profile are identified early, along with assessment of available risk mitigants for all risk types. Where risks cannot be entirely eliminated, confirmation is required that the residual risks fit within ANZ s risk appetite, and where the decisions or residual risks are significant, these risk assessments are submitted to the Board s Risk Committee and/or its subcommittees for their consideration. Risk Management oversight responsibilities for "other risks" are outsourced to other areas of ANZ with more appropriate expertise. Some examples include, but are not limited to: Key person risk Human Resources Tax risk Group Tax Health and Safety risk Human Resources
Most of these other risks would be reported at the Operational Risk Executive Committee (OREC) forum. Risk Policy Architecture ANZ has a clearly defined policy framework that sets out how all material risk activities are managed across ANZ. ANZ Policy is not stationary; it evolves constantly in response to changes in strategy and market conditions. The policy process across the group is consistent for all types of risk. It is organised into levels to reflect applicability to the business units, with each level of policy prescribing the roles and responsibilities of owner and custodian. At the highest level, Risk Committee - approved risk principles define the scope and overarching requirements of ANZ s approach to risk. Executive committees translate the principles into practice by approving risk frameworks and grouplevel policies that provide guidance to business divisions. Within this context and aligned to the risk frameworks, business divisions develop policy to address risk management within their specific areas of activity. Risk operating procedures support divisional policy at the business unit level. Models ANZ has a sophisticated risk modelling capability. Risk models are employed to quantify economic risk and allocate economic capital - the amount of capital needed to support the Group s risk taking activities. Credit risk capital allocation systems are typically based on institutional estimates of credit loss distribution. Economic capital that is allocated to a particular activity reflects that activity s marginal risk contribution to the portfolio, taking into account diversification. Risk models are used to measure ANZ s risk-adjusted profitability and ensure efficient usage of shareholder funds. The setting of limits and reporting of portfolio credit quality also uses risk models to manage risk portfolios. All material risk models used at ANZ are either developed by business units, with independent assessment and authorisation for use by Risk Management, or developed by Risk Management, with independent reviews commissioned as appropriate.