2011 Annual Report Financial Supplements - BDO

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)4.03 Operational RiskOperational risk is the risk of loss due to BDO Unibank Group’s:Failure to comply with defined operational procedures;Inability to address fraud committed internally or externally;Inability to handle system failures; and,Inability to cope with the impact of external events.BDO Unibank Group manages its operational risks by instituting policies to minimize itsexpected losses, allocating capital for the unexpected losses, and having insurance and/or abusiness continuity plan to prepare for catastrophic losses.FrameworkTrue to its commitment to sound management and corporate governance, BDO UnibankGroup considers operational risk management as a critical element in the conduct of itsbusiness. Under BDO Unibank Group’s Operational Risk Management (ORM) framework,the BOD has the ultimate responsibility for providing leadership in the management of riskin BDO Unibank Group. In 2011, the Group adopted a process-driven approach wherebyit focuses on mapping operational risks along critical/key business processes. The businessprocess owners, as risk owners, are responsible for identifying, assessing and limiting theimpact of risk in their businesses/operations. The RMG provides the common risklanguage and management tools across BDO Unibank Group as well as monitors theimplementation of the ORM framework and policies.Alongside the shift to the process-driven ORM approach in 2011, the Group also adoptedthe periodic Risk and Control Self-Assessment (RCSA) process so that business processowners could document both their operational risks and control mechanisms they have putin place to manage those risks. This ORM tool allows the Group to identify risks thebusiness/operation faces, assess the severity of those risks, evaluate the adequacy of keycontrols associated to the identified risks, and take proactive action to address anydeficiencies identified.The BDO Unibank Group also continues to use Key Risk Indicators (KRI) as alerts foroperational risk vulnerabilities.The BDO Unibank Group continues to expand its operational loss database to cover moreloss event categories as defined by Basel II.Operational risks arising from health, safety and environmental issues are appropriatelymanaged through policies and measures that are integrated into the BDO Unibank Group’sday-to-day operations. These include Environmental Consciousness, Occupational Healthand Safety, and Community Health and Safety.