THE RESOLUTION OF BOARD OF THE AGENCY OF THE REPUBLIC OF KAZAKHSTAN ON REGULATION AND SUPERVISION OF THE FINANCIAL MARKET AND THE FINANCIAL ORGANIZATIONS

of April 15, 2006 No. 94

About approval of Methodical recommendations about the organization of risk management systems and internal control in bank holdings

For the purpose of forming in bank holdings of adequate risk management system and internal control the Board of the Agency of the Republic of Kazakhstan on regulation and supervision of the financial market and the financial organizations (further - the Agency) DECIDES:

1. Approve the enclosed Methodical recommendations about the organization of risk management systems and internal control in bank holdings.

2. This resolution becomes effective from the date of its acceptance.

3. To department of strategy and analysis (Edenbayev E. S.) in seven-day time from the date of acceptance to bring this resolution to the attention of the interested divisions of the Agency, banks of the second level, Consolidation of legal entities "Association of financiers of Kazakhstan".

4. To department of the international relations and public relations (Pernebayev T. Sh.) take measures to the publication of this resolution in mass media of the Republic of Kazakhstan.

5. To impose control of execution of this resolution on the vice-chairman of the Agency Bakhmutova E. L.

Approved by the Resolution of Board of the Agency of the Republic of Kazakhstan on regulation and supervision of the financial market and the financial organizations of April 15, 2006 No. 94

Methodical recommendations about the organization of risk management systems and internal control in bank holdings

These Methodical recommendations are developed according to the Law of the Republic of Kazakhstan "About banks and banking activity in the Republic of Kazakhstan" and are intended for preparation by persons wishing to become bank holding of the documents confirming availability of risk management systems and internal control including concerning the risks connected with activities of the affiliated organization.

Chapter 1. General provisions

1. The purpose of these Methodical recommendations is forming in bank holdings of the adequate risk management system and internal control providing application by bank holdings of control methods of the risks providing effective determination, assessment and restriction of risks of bank holdings taking into account type and amount of the operations performed by them.

2. The main types of risks arising when implementing of the activities by bank holding:

1) currency risk - the risk of emergence of expenses (losses) connected with change of the foreign exchange rates when implementing of the activities by bank holding;

2) investment risk - risk of emergence of expenses (losses) owing to impairment of the capital investments connected with changes of their profitability;

3) credit risk - risk of emergence of expenses (losses) owing to violation by the client of initial terms of the contract (contract) on execution of the undertaken monetary commitments by it when carrying out bank loan, leasing, factoring, forfaiting, transactions on issue of bank guarantees and other transactions;

4) operational risk - risk of emergence of expenses (losses) as a result of shortcomings or mistakes during implementation of internal processes made from employees, functioning of information systems and technologies and also owing to external events;

5) legal risk - risk of emergence of expenses (losses) owing to violation of requirements of the legislation of the Republic of Kazakhstan by bank holding or discrepancies of activities of bank holding to its internal documents, and in the relations with nonresidents of the Republic of Kazakhstan - legislations of other states;

6) industrial hazard - the risk of emergence of expenses (losses) connected with production, realization and postrealizable servicing of products (services);

7) interest risk - risk of emergence of expenses (losses) owing to adverse change of rates of remuneration;

8) reputation risk - risk of emergence of expenses (losses) owing to negative public opinion or decrease in trust to bank holding;

9) risk of loss of liquidity - the risk connected with possible failure to carry out or untimely accomplishment of the obligations by bank holding;

10) the market risk - represents possibility of the losses connected with adverse movements of the financial markets. The market risk has the macroeconomic nature, that is sources of market risks are macroeconomic indicators of financial system;

11) risk management system is the process including four basic elements: risk assessment, risk measurement, risk control and monitoring of risk;

12) internal control system - set of the procedures and the politician of internal control providing realization of long-term goals of profitability by bank holding and maintenance of reliable system of the financial and management reporting promoting compliance with law of the Republic of Kazakhstan, policy of bank holding, internal regulations and procedures, decrease in risk of losses or reputation of bank holding;

13) service of internal audit - the division of bank holding performing objective assessment and consulting activities for the purpose of enhancement of activities of bank holding, providing the organization and implementation of internal audit in bank holding. Internal audit in bank holding promotes achievement of particular purposes by submission of recommendations about enhancement of processes of risks assessment, risk management and internal control;

14) country (transfer) risk - risk of emergence of expenses (losses) owing to insolvency or unwillingness of foreign state or resident of foreign state to answer for obligations to bank holding for the reasons which are not connected with financial risks;

15) price risk - the risk of emergence of expenses (losses) owing to change in value of portfolios of financial instruments arising in case of change of conditions of the financial markets influencing market value of financial instruments.

Chapter 2. Organization of risk management systems

3. The purpose of risk management system for bank holdings is:

availability in bank holding the politician, the practician and the procedures providing decision making, answering to the purposes of bank holding and its affiliated organizations;

implementation in bank holding of identification, assessment, control and tracking of all types of risks to which the bank holding and its affiliated organizations is subject;

ensuring integrity and functionality of risk management system with way:

implementation of strategy of bank holding;

enhancement the politician, determining admissible risks and providing their compatibility with strategic objectives of bank holding;

ensuring interrelation and compliance between the strategy of bank holding and admissible risks;

ensuring enhancement and functionality of the systems of management information promoting compliance of the specified systems to criteria of timeliness, reliability and pithiness.

4. Risk management system of bank holding includes three basic elements:

risk management policy;

organizational structure;

procedures of risk management.

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