PT BANK MANDIRI PERSERO TBK. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003, and April 30, 2003 Expressed in millions of Rupiah, unless otherwise stated
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56. RISK MANAGEMENT continued
Market Risk Market risk consists of interest rate risk, trading risk, foreign currency exchange risk, derivative
instrument risk and liquidity risk. In managing liquidity risk, the Bank uses an indicator which is known as liquidity red flags that consist
of several liquidity ratios such as primary reserves, secondary reserves, loans to deposits ratio, concentration of fund sources, inter-bank call money, diversification of fund sources and primary
reserves consists of minimum reserves and cash. Bank Indonesia requires banks to maintain a minimum reserve of 8 of third party funds excluding loans from other banks, and a minimum
reserve of 3 out of foreign currency third party funds including loans from other banks. The primary method in managing interest rate risk is repricing gap analysis and duration gap. In
addition, Bank Mandiri also monitors other indicators to measure interest rate risk based on statistical conditions referred to as Interest Rate Risk Red Flags.
In monitoring treasury trading activities, the Bank has established trading risk limits in the form of Value at Risk VaR and dealer limits, and supported by performing Stress Testing, and Back Testing
periodically. The Bank has centralized the operational management of the foreign exchange position within the
Treasury Group, which is required to comply with the policies and procedures approved by the Risk and Capital Committee, and also the overall net open position limit set by Bank Indonesia
regulations. The Bank has also set an internal Net Open Position NOP limit of 5 of core and supplemental capital. The internal policy on NOP limit is determined by the Risk and Capital
Committee RCC taking into account the volatility of foreign exchange movements. The Bank also calculates the minimum capital requirement to cover market risk by using the
prescribed standard method of Bank Indonesia. In addition, for internal use purposes the Bank also calculates the capital requirement by using an internal model.
Operational Risk The main principle in operational risk management is that risk management is the responsibility of all
levels of management, as reflected in their daily activities through risk culture, risk awareness and management style.
Operational Risk Management ORM goals are to effectively improve the quality of the activities of the working units in supporting the Bank’s goals and targets, in order for the Bank to achieve long
term targets and be able to allocate economic capital to each business activity. The operational risk management initiative in Bank Mandiri consists of three major components:
• ORM policies,
• ORM tools, and
• Implementation, including ORM training for all Bank Mandiri employees.
Management of other risks such as legal risk, reputation risk, strategic risk and compliance risk, are coordinated by a risk management unit through the development of policies and risk mitigation
procedures. However, operational activities are still under the responsibility of the unit which managedthe legal, reputation, strategic and compliance activities.
