41. FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Market risk Overview Market risk is the risk of adverse impact to the Group’s and the Bank’s arises from fluctuations of market prices and rates. The following are the main market risk factors that the Group and the Bank are exposed to: • Profit Rate Risk: also known as the Rate of Return Risk, is the potential impact on the Group’s and the Bank’s profitability caused by changes in the rate of return due to general market movements or issuer/customer specific reasons; • Foreign Exchange Risk: the impact of exchange rate movements on the Group’s and the Bank’s currency positions; and • Equity Instrument Risk: the profitability impact on the Group’s and the Bank’s equity positions or investments caused by changes in equity prices or values. The Group and the Bank separates the market risk exposures into either trading book or banking book portfolios. Trading book portfolios include those positions arising from market making, proprietary position taking and other marked-to-market positions as per the Board-approved Trading Book Policy Statements. Banking book portfolios primarily arise from the Group’s and the Bank’s profit rate management of the Bank’s assets and liabilities and investment portfolio mainly for liquidity management. Market risk governance The management of market risk is principally carried out by using sets of policies and guidelines approved by the ALCO and/or BRC, guided by the Board-approved Risk Appetite Statement. The ALCO is responsible under the authority delegated by the BRC for managing market risk at strategic level. Management of market risk The objective is to manage market risk exposures in order to optimise return on risk while maintaining a market risk profile consistent with the Group’s and the Bank’s approved risk appetite. All market risk exposures are managed by Treasury, who has the necessary skills, tools, management and governance to manage such risks. The management of market risk is guided by comprehensive limits, policies and guidelines which are periodically reviewed. The Market Risk Management Department (“MRMD”) is the independent risk control function that is responsible for the implementation of market risk management framework. MRMD is also responsible for developing and reviewing the Group’s and the Bank’s market risk management guidelines and policies, monitoring tools, behavioural assumptions and limit setting methodologies. Escalation procedures are documented and approved by the ALCO and/or BRC. In addition, the market risk exposures and limits are reported to the ALCO and the BRC. Other controls to ensure that market risk exposures remain within tolerable levels include regular stress testing, adhoc simulations and rigorous new product approval procedures. Stress test results are produced regularly to determine the impact of changes in profit rates, foreign exchange rates and other risk factors on the Group’s and the Bank’s profitability, capital adequacy and liquidity. The stress test provides the Management and the BRC with an assessment of the financial impact of identified extreme events on the market risk exposures of the Group and the Bank. 370 Notes to the Financial Statements for the financial year ended 31 December 2023 Bank Islam Malaysia Berhad ◆ Integrated Annual Report 2023
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