Risk Management Strategies: Commonwealth Bank vs. Bank of Bhutan

This report provides a comprehensive analysis of risk management within the banking sector, focusing on a comparative study between the Commonwealth Bank and the Bank of Bhutan. It delves into crucial aspects of financial risk, including capital risk, liquidity risk, credit risk, interest rate risk, and reputational risks stemming from ethical practices. The analysis examines key financial metrics such as common equity ratios, capital measurement methodologies, minimum capital requirements, and supervisory review processes. The report also explores market disciplines and regulatory frameworks, drawing upon annual reports and regulatory guidelines, particularly those from APRA. The comparison highlights similarities and differences in risk management approaches, offering insights into the operational strategies employed by both major and smaller banking institutions to mitigate financial vulnerabilities and ensure stability. The report concludes with a summary of findings and recommendations for improved risk management practices.

Risk Management in Banking

Table of contents
Introduction......................................................................................................................................3
Capital risk.......................................................................................................................................3
Introduction..................................................................................................................................3
Analysis........................................................................................................................................4
Conclusion...................................................................................................................................7
Liquidity risks..................................................................................................................................8
Introduction..................................................................................................................................8
Analysis........................................................................................................................................8
Conclusion.................................................................................................................................10
Credit risk......................................................................................................................................10
Introduction................................................................................................................................10
Analysis......................................................................................................................................11
Conclusion.................................................................................................................................12
Interest rate risks............................................................................................................................12
Introduction................................................................................................................................12
Analysis......................................................................................................................................13
Conclusion.................................................................................................................................13
Reputational risks due to ethical practices.....................................................................................14
Introduction................................................................................................................................14
Analysis......................................................................................................................................14
Conclusion.................................................................................................................................15
References:....................................................................................................................................16
Appendices:...................................................................................................................................22

Appendix 1: Bank of Bhutan regulatory capital to risk-weighted assets...................................22
Appendix 2: Commonwealth bank regulatory capital to risk-weighted assets..........................22

Introduction
Protection of assets and limiting the risk based exposure for an organization is considered as risk
management. In terms of the banking industry, availability of constant business risks are a
common phenomenon. The process through which risks are assessed under a banking
organization are significant. These aspects are based on limiting the unconventional losses which
are integrated through a more sustainable form of methodology which is incorporated across the
provided segment. As the increased operations related to banks under business management
process has initiated a major advancement across the available risk ideologies, there must be an
incorporated form of financial analysis integrated with the risk management process (Härle et al.
2016). These analysis help in enhanced usage of the available financial resource for any major
bank to boost is operability across the defined perceptions.
This report explains the basic issues are associated across factors such as capital risk, liquidity
risk, credit risk, interest risk and reputational risk arising due to ethical practices defined through
comparing two banking organizations. Each of the banks are selected from both major as well as
minor banking structure (Petria et al. 2015). Both Commonwealth Bank and the Bank of Bhutan
have been compared in terms of their financial operations in order to establish a better
understanding of the operational aspects.
Capital risk
Introduction
Capital risk in context of a bank is the loss potential which is based on its operations and are
defined by the availability of insignificant banking operations. The loss potential for banks are
defined by the unavailability of capital return which are associated with banks. Recovering of
assets are an important factor which play an important factor in gaining better risk assessment
factor all along the defined possibilities (Waemustafa and Sukri, 2016). This section provides a
comparative analysis of the capital risk factors related to two banking organizations namely,
Commonwealth Bank and Bank of Bhutan. Each of the related aspects are analysed all across

these two banks and their respective operations in order to assess the financial situation of the
banking system (Commbank.com.au, 2019).
Analysis
In order to analyse the capital risk factors for the Commonwealth Bank and Bank of Bhutan,
some common aspects must be analysed. In the following sections a number of important factors
are assessed to examine and evaluate the operational designs which can be used as the basis of
comparison between the two selected banks (Ojeniyi and Abdulhamid, 2019).
Common Equity Ratio
The common equity ratio at a banking structure is the ability of the bank to absorb an unexpected
losses across its system. Under this aspect the assets weighting higher risks are compared with its
core capital. The centralized banking authorities at different countries are liable to establish a set
limit over the common equity ratios (Miah and Sharmeen, 2015). In case of the Australian
banking system, under which the Commonwealth Bank operates requires its subordinate banks to
have a minimum 10.5% of this ratio by 1st January 2020. The Commonwealth Bank has been
evident in maintaining a sound value of its common equity ratio for the year. It has achieved a
common equity ratio of 10.1%. This is a good statistical figure in context of the available
scenario (Rahman and Banna, 2015).
Similarly, the common equity ratio for the Bank of Bhutan is also a majorly important factor for
the respective operations at the organization. The current rate of common equity ratio at the Bank
of Bhutan is 6.89% which is comparatively similar to that of the Commonwealth bank. However,
the future goals for this bank are not significantly higher as the operational dimension is low.
The Bank of Bhutan is a smaller banking system as compared to the Commonwealth Bank
(Commbank.com.au, 2019). But in the defined sections it is a satisfactory condition as compared
to the available occasions. The overall usability factor which has been associated with the
banking system at the Bank of Bhutan is progressive in many segments and are liable to operate
across the defined possibilities (Dong et al. 2017).
Measurement of capital

Capital measurement is an important approach which can be used to identify the needs and
requirements related to the system of banking. Under this segment, the operational factors are
assessed and explained to achieve a better approach towards the illustration of liable needs across
the assets and defines liabilities (Petria et al. 2015). Banks assess their balance sheets to gain an
inner perspective of the capital which is available and that needs to be addressed in order to
comply better rules and regulations for banking system. Both the Bank of Bhutan and
Commonwealth Bank have a significant approach to capital measurement as it defines the
overall operability factor which is integrated across the defined sections. The inclined objectives
and associated responsibilities are examined by each one of them, for improving the functional
needs across the defined sections of operations (Nanda, 2016).
Maintaining a statutory requirement based capital line is the key to maintain a sound processing
of capital system related to the banks are the sole responsibility of this attribute. Both the banks
relay on similar contexts to manage the operational needs and requirements of capital
management to overcome the issues in future operations and define a much improved segment to
initiate development (Fagade and Tryfonas, 2017). At the Bank of Bhutan, the availability of a
structural internal workforce is ideal to initiate much improved and ideal form of design to
address the limitations and accomplish the required form of operation to each of its capital
requirements. The overall operability index which is interrelated to the bank and its capital
management system are based on defining better usage of funds available with the bank
(Rahman and Banna, 2015).
Minimum capital requirements
Minimum capital requirements are the collection of aspects which are associated with the capital
framework and are useful in managing the largely available risk factors all across the system.
Under the minimum capital requirement section of the capital framework, a significant number
of operational factors are associated (Alshatti, 2015). These factors are based on idealizing the
growth potential which is liable to be incorporated with the bank and its operations. In the year
2017, APRA provided the Commonwealth Bank with a grant for advanced Basel II accreditation
for calculation of RWA and capital adequacy assessment. Thus, the Commonwealth Bank uses
AIRB (advanced internal ratings based) process of credit risk calculation. The regulatory capital
calculations for this organization are based on incorporated IRRBB (Commbank.com.au, 2019).

In case of the Bank of Bhutan, these factors are also presented but in a smaller nature. The credit,
market and operational risks are evaluated by the bank based on its regulatory provisions (SM
Mahfuzur and Barua, 2016). It defines the overall usability factor which is influential in guiding
the whole structure of development across the defined system. The Bank of Bhutan employs an
evaluation based credit risk testing to enhance the ideological approach to some of the major
operational variables including, liquidity risk, interest rate risk, capital adequacy, sectorial risk
and non-performing assets (Bromiley et al. 2015). The regulatory capital requirements for the
Bank of Bhutan depends upon ICAAP policy documentation. It simplifies the overall operability
factor that is associated with the BIA method for its operational risk capital management.
Assessing and monitoring of the capital related operations at the Bank of Bhutan are carried out
through a comprehensive internal capital adequacy assessment process (Anghelache et al. 2016).
Supervisory review process
Supervision is the key to risk management in context of any major organizational process. The
overall risk assessment factor is essentially based on the supervisory review process in order to
conduct regulated developments in terms of risk assessment. In context of the Commonwealth
Bank, the supervisory review process is based on several important factors. These include
internal capital adequacy assessment process considering firm wide risk oversight, risk
concentrations, process considers, capital buffers and targets (Srivastav and Hagendorff, 2016).
The internal capital adequacy assessment process is based on the requirements from APRA. This
authority provides detailed information about the organization's regulatory minima, capital
forecast, contingent capital planning and stress testing, a capital forecast for next three years, key
policies for capital management, supporting frameworks and key process details
(Thebhutanese.bt, 2019).
Similarly, in context of the Bank of Bhutan the operational supervision process is largely in
practice for supporting the required framework across the channels. It provides adequate
monitoring and evaluation process to its capital management process through initiating an
organization wide variety of operations. Periodic review of loans and accounting the depreciating
values of collateral securities are some of the important provisions included by the Bank of
Bhutan in order manage its capital requirements (Alshatti, 2015). Adjustment of periodic
depreciation is another major factor which is placed to analyse the operational needs which are

associated with the organization. It strengthens the needs based operations in managing capital
requirements across the provided framework. It is also evident in providing a more impulsive
form of design which can be used to evaluate the capital management strategies put in to place
for further processing (Kazakova et al. 2015).
Market disciplines
Establishment of enhanced transparency across the financial markets and related operations are
an important requirement for the banking organizations. In context of the Commonwealth Bank,
it is guided by the operational regulations in terms of public disclosure of information over the
available risk management practices and adequacy of capital at the organization (Lentner et al.
2015). This process is carried out on the basis of established regulations from the APRA. This
authority is liable to undertake the information driven approaches for each of the process and are
liable to accomplish a better and transparent structure for financial proceedings (De Jonghe and
Öztekin, 2015).
In case of the Bank of Bhutan, the compliance structure is fully functional in context of the
available authorities. The operational dimension to market disciplines are based on structured
form of standards and codes which are evident in promoting better relationships across the
defined channels of banking (Elena et al. 2018). Internal policies at the bank are also constructed
in a manner that these can affect the betterment of capital management process across the
available set of financial operations. The liabilities and assumptions based on regulatory
requirements are associated with providing a more suitable approach to the process (Khan et al.
2017).
Conclusion
In order to conclude it can be said that the capital risks associated with a banking system are
crucial and have large scale importance in order to strengthen the operability factor all across the
defined sections. A major objective which is kept in to accordance with the defined operations
relate the capital risk and its analysis for both the organizations taken in to account. However,
there are specific differences in terms of operational volume and scale of economies. But the
overall framework upon which the entire system of capital management works for both of these
organizations are similar in context. This initiates a more identical form of operational design

and associational possibilities for all of the available set of organizations and their respective
solutions. Different sections of the capital risks and their related factors are assessed in this
analysis to introduce a better framework for managing the requirements of capital management
system across the two diverse banking organizations.
Liquidity risks
Introduction
Liquidity risks are the inability of an organization to meet its financial obligations and
development of due based on financial weaknesses. Under these conditions, the market for debt
securities decrease significantly which is a major issue for an organizational structure. The
overall process of operation which is intended to produce significant results across the
operational segment are liable to incorporate better approaches for the respective financial
operations and their acceptance as a key source to guide future interventions. The availability of
increased financial burden on an organization is the key attribute included under the liquidity risk
factors. Liquidity risks are integrated with providing the organizations with negative market
publicity and lack of expenses across the operational segments (Aiyar et al. 2016). The overall
development process which is intended with these attributes are liable to facilitate a more
intensive form of framework for stabilizing the financial operations and limited liabilities across
the available set of dimensions. The overall usability index which is associated with the
organization are integrated with justified regulatory norms and conditions which is evident in
promoting the feasibility factor all across the operational framework (Dabari and Saidin, 2015).
Analysis
Liquidity risks are the basic financial limitations which many organizations face when they are
not able to meet their financial requirements. Especially, the banking organizations are
responsible for marking the ideal approach to facilitate a limitation over these risk factors. The
overall usability index which is integrated across the structure are evaluated and assessed across
the defined possibilities and assumptions all along the financial operations (Acharya et al. 2016).
In case of the Commonwealth Bank, asset and liability committee is the key management
committee which is responsible for facilitating the process of financial management across the

institution. This committee is the authority which involves and maintains the required form of
regulatory provisions which can be used to facilitate a better approach for liquidity risk
management. Some of the majorly governing policies for this structure is based on the group
liquidity risk and management policy for the Commonwealth Bank (Berger et al. 2016). The
involved group liquidity risk management strategy and policy is operational in context of setting
limits and standard operations across the structure to improvise the operational framework which
is ideal for the system. This framework examines the liquidity coverage ratio, the net stable
funding ratio, test scenarios for market and idiosyncratic stress and tolerance setting for terror
and sources of funding (Butt, 2018). This availability factor is liable to operate on the defined
sections are sufficient to control the overall process of liquidity risk management across the
Commonwealth Bank. The process of scenario analysis used for measurement of liquidity risk
covers ordinary as well as adverse operational circumstances. The CBA board at Commonwealth
Bank is solely responsible for prudent and sound management of the liquidity factor (Stulz,
2015). The asset and liability committee under the organization is responsible for reviewing of
funding strategies and policies, management of assets and liabilities and regulated monitoring of
policy compliance. This is to ensure the overall operability factor which is associated with the
organization in order to control its liquidity risk position. This process is evident in promoting a
more controlled and coordinated set of factors which are to be set across the available operations
and strengthen the risk assessment process based on liquidity possibilities for the organization
(Zhang et al. 2016).
In case of the Bank of Bhutan, the liquidity risk is under the pillar II section of risks
classification. The process of liquidity risk assessment at this bank is based on usage of financial
instruments that are associated with fair value measurement process. The fair valuation
techniques which are essential with the inclusion of models and concepts such as discounted cash
flow models. This model is used to analyse the current state of the bank at any provided interval
of time and the usability of significant monitoring possibilities across the defined channels
(Chiaramonte and Casu, 2017). As establishment of fair value requires a judgemental
considerations based on credit risks, liquidity risks and volatility. All of these factors together
accomplish a more ideal form of design which is evident in promoting and facilitating better
monitoring of assets and liabilities. The financial instruments which are related to an
organization are significantly analysed to facilitate a better design and analysis driven approach

in longer run. The overall usability factor which is associated with this systems are evident in
promoting the liquidity based risk assessment process for this bank (Emmer et al. 2015).
However, the risk factor related to this banking system is less prone to the possibilities of
liquidity risks. The regulations for managing liquidity are also suggested by the Bhutanese
Accounting Standards, which are ideal for eliminating risks across the defined sections of
operational functions (Chen et al. 2018). Fair valuation and ability to manage risks are the main
objectives included under the available set of operations. However, there are a plenty of
similarities across the channel, there are equal number of differences too which remain
operational across the two selected banking organizations (Waemustafa and Sukri, 2015).
Conclusion
In order to conclude, it can be assessed that there are similarities as well as differences across the
two banking organizations selected. The liquidity risk associated with the process of managing
differences across the organizations are based on improvising the needs and responsibilities for
each of the organizational structure across the defined prospects. The overall operability index is
also integrated to facilitate a relativity factor between the selected forms of industry. The sector
or industry specific operability are evident in both the organizations and thus the provided
discussion is archived. This analysis depicts the operational accountability which is liable to two
major banking systems of different operational sizes. The selected framework for each of the
system are integrated with an intensive form of demand from different form of liabilities and
their related liquidity risks.
Credit risk
Introduction
Credit risks are the chances of failed investments from a banking structure. Under this system a
bank borrower is unable to meet the agreement obligations across the defined sections. The
overall usability factor which is associated with the organizations are placed to provide a much
improved form of design that is ideal for managing different approaches all across the system. A
credit risk management system is based on analysing the evidence based approaches for
managing better outcomes across the systems and application of significant changes across the

policies and regulations based on defined risks (Waemustafa and Sukri, 2015). A credit risk
management system is liable to operate and include across the available set of credits made by
the banking system. The analysis carried out in the upcoming sections will analyse the credit risk
factors for two diversely operated banking structures and their respective approaches towards
completion of credit risk management process.
Analysis
In majority of the banks, loans are the most common source of creating credit risks across the
structure. It is one of the most leading sources of problem for the defined segments across the
credit risk prospect. The overall operability index which is associated with the organization are
liable to operate a better information across the selected frameworks (Buch and Goldberg, 2015).
Both the Commonwealth Bank and the Bank of Bhutan have majority of their credit risks
associated to the distributed loans. This is a major similarity across the segments and are liable to
produce better results for the growing issues. This framework of managing the required credit
risk assessment process is diverse across the two banks (DeAngelo and Stulz, 2015). This is due
to the reason that there are significant approaches for a particular framework and its related size.
As there is a major difference between the operational scales of credit risks for both the Bank of
Bhutan as well as the Commonwealth Bank. There will be certain difference based assumptions
which are required to be integrated all across the defined sections. The overall operability
indexes for the organizational structure in terms of examining their efforts for identification,
measurement, monitoring and controlled development of the risk factors across the defined
sections (Tavana et al. 2018). The overall usability index which is associated with the
organizations is also similar in context as the industry and sector are similar. Establishment of an
appropriate credit risk environment is the first priority for both the banks. It helps in gaining a
supportive operational design across the credit risk management segment. It is evident in
promoting the overall feasibility factor which is inclined to the relative loan management and
limitation of defaulters. In addition to this, both the banking organizations must be evident in
promoting the development of a sound credit granting process. This will be established to ensure
the basic operational design and security for credit risk management (Acharya and Mora, 2015).
This process is largely liable to initiate evident promotion in terms of facilitating a better result
across the system and significance across a value based operation. Another major similarity