Risk management basics spelled out to small deposit-takers

The governing body of a non-bank deposit taker should be responsible for the solvency, capital adequacy and liquidity of the institution, according to the Reserve Bank of New Zealand.
 
This is one of the considerations the Reserve Bank has included in its final risk management guidelines issued on Monday, based on which it expects NBDT's to draft their own risk management program.  The deposit takers are required to have such a program by September 1 and at a minimum they are expected to cover the four types of risks typically faced by them: credit risk, liquidity risk, market risk and operational risk.
 
Among other additions made by the central bank to the draft guidelines is that the governing body should monitor the deposit taker's compliance with legal requirements and with its policy and procedures.
 
On managing credit risk, the Reserve Bank has suggested that a deposit taker should consider including procedures for not only managing loans that show signs of deteriorating credit quality but also for identifying potential defaulting loans or adverse trends in its loan book.
 
In case of liquidity risk, the Reserve Bank has pointed out that such risk can increase if there is a high concentration of the deposit taker's loans in a particular area of economic activity. Also, deposit takers should take into account that their funding sources could be adversely affected by a credit rating downgrade.