THE BOARD
Our Board of Directors is responsible for maintaining our high standards of corporate governance and promoting ongoing improvements in board effectiveness. The Banks standards of corporate governance are consistent with the Code of Corporate Governance (the Code? established by the Singapore Corporate Governance Committee in April 2001.

The premium which DBS places on corporate governance has not gone unnoticed. Since the establishment of the Best Corporate Governance Award?by the Institute of Certified Public Accountants of Singapore, the Singapore Exchange and the Singapore Institute of Management in 1999, DBS has emerged as the winner each time. We are proud of these achievements.

Responsibilities
The Board has delegated day-to-day operations to management while reserving certain key matters for its approval. Key functions include approving the consolidated financial statements for the DBS Group, strategic planning and acquisitions, the annual budget, major fundraising exercises and all decisions that will have a major impact on the reputation or standing of the DBS Group.

Composition
The Board derives its strength from the background, diversity, qualities, skills and experience of its members. Board members bring with them experience in (among other things) the top echelons of the Singapore government and civil service, the US high-technology industry and a well-respected US think tank. Of the ten Board members, four are non-Singaporeans who bring with them an international perspective to Board deliberations. Board appointments are screened in the first instance by the Nominating Committee, which seeks to select the best and most qualified candidate for the Board.

Independence
Board members have to satisfy various criteria of independence. As required by the Code, at least one third of the Board comprises independent directors. An independent?director has no relationship with DBS, its related companies or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the directors?independent business judgement with a view to the best interests of DBS. For these purposes, the Nominating Committee considers Mr Bernard Chen, Mr Fock Siew Wah, Ms Gail Fosler, Mr Robert Howe, Professor Tommy Koh, Mr Moses Lee and Dr Yeo Ning Hong to be independent. In addition, the Articles of DBS Group Holdings (DBSH) also require the Board to have a majority of directors who are not related to or employed by substantial shareholders of DBSH or who otherwise act in accordance with their instructions and further limit the number of executive directors to two. The Audit Committee, a key Board committee, comprises wholly independent directors.

MANDATES AND ACTIVITIES
The Board delegates certain responsibilities to Board committees. The Audit, Compensation and Nominating Committees are Board committees that are required to be established by statute/regulation, while the Executive and Board Risk Management Committees were set up to assist the Board in certain areas of deliberation.

Audit Committee
The Audit Committee reviews:

and performs any other functions which may be agreed by the Audit Committee and the Board, and/or prescribed by statute/regulation.

Board Risk Management Committee

and performs any other functions as may be agreed by the Board.

Compensation Committee

Executive Committee
The Executive Committee has all the powers of the Board, except those powers that can only be exercised by the Board under law. Nor can the Executive Committee approve the matters referred to under Responsibilities?in the section on Committee also may not charge, mortgage, pledge or in any way encumber any of the properties and assets of DBSH including its uncalled capital and goodwill. In practice, the Executive Committee functions as a discussion forum for Board matters.

Nominating Committee
Identifies and reviews all appointments to the Board, Board committees and top management positions.

In identifying and reviewing candidates, the Nominating Committee applies the following principles:

DBS' APPROACH TO RISK MANAGEMENT
Each new banking instrument, business activity and market cycle changes our view of risk and our approach to managing it. We consider having world-class skills in monitoring, interpreting and forecasting our risk profile a critical internal capability.

Our approach to risk management has several components: comprehensive risk management processes, early identification systems, accurate risk measures, investments in people and technology to interpret and manage risk on a daily basis, stress tests and comprehensive process reviews in conjunction with internal auditors, external auditors and regulatory officials.

Although business units have primary responsibility for managing specific risk exposures, Group Risk is the central resource for quantifying and managing the portfolio of risks taken by the Group as a whole. Group Risk performs the following roles:

As part of corporate governance, the Bank has implemented policies and procedures to identify, mitigate and monitor risk across the firm. These policies and procedures rely on constant communication, judgement, and knowledge of products, markets and controls by business and support units. We view that business and support units have the primary responsibility for managing risk. At the same time, there needs to be independent risk management and oversight.

The risk management process at DBS cascades from the Board of Directors on a macro level down to the individual business and support unit managers at the micro level. To assist the Board in fulfilling its duties, the Board Risk Management Committee oversees matters relating to the management of risk. Management is accountable to the Board for maintaining an effective control environment that reflects established risk appetite and business objectives. Four senior management risk committees provide forums for discussion on specific risk areas: the Risk Management Committee, the Credit Committee, the Asset-Liability Management Committee and the Operational Risk Management Committee.

Credit Risk Management
Credit risk is the potential earnings volatility caused by an obligors inability or unwillingness to fulfil its payment obligations. Exposure to credit risks arises primarily from lending activities and, to a lesser extent, from sales and trading activities, derivatives activities and from participation in payment transactions and securities settlements.

Credit exposure includes current as well as potential credit exposure. Current credit exposure is represented by the notional value or principal amount of on-balance sheet financial instruments and off-balance sheet direct credit substitutes, and by the positive market value of derivative instruments. DBS Group also estimates the potential credit exposure over the remaining term of transactions.

At DBS Group, a disciplined credit risk management process integrates risk management into the business management processes, while preserving the independence and integrity of risk assessment. Policies and procedures, which are communicated throughout the Group, guide the day-to-day management of credit exposure and are an essential part of the business culture. The credit risk management process involves senior management, the Group Risk, Credit Management, Relationship Management, as well as independent credit risk control functions.

DBS Group follows a set of guiding credit principles that encapsulate the Groups lending philosophy and must be applied to all credit decisions. Observance of these principles helps to ensure that the Group operates under a sound, well-defined credit granting process, and promote a credit culture that is strong to withstand market disturbances.

Individual corporate credit risks are analysed and approved by experienced credit managers who consider a number of factors in the identification and assessment of credit risk. Each borrower is assigned a rating under the Counterparty Risk Rating process. For large corporate borrowers, the rating is based on the assessment of all relevant factors including the borrowers financial condition and outlook, industry and economic conditions, market position, access to capital, and management strength. The Counterparty Risk Rating assigned to smaller business borrowers is primarily based on the borrowers?financial position and strength. All ratings are reviewed at least annually and more frequently when conditions warrant. The Counterparty Risk Rating process is further enhanced by the Facility Risk Rating System which takes into consideration facility specific considerations such as credit structuring, collateral, third party guarantees, and transfer risks. These credit risk rating tools are used to assess the credit quality of the portfolio, so that deteriorating exposures are quickly identified and appropriate remedial action is taken.

The credit control functions ensure that credit risks are being taken and maintained in compliance with group-wide credit policies and guidelines. These functions ensure proper activation of approved limits, appropriate endorsement of excesses and policy exceptions, and monitor compliance with guidelines established by management and regulators.

Group Risk conducts regular independent reviews of credit exposures and processes. These reviews provide senior management with objective and timely assessments of the effectiveness of credit risk practices and ensure group-wide policies and guidelines are being adopted consistently across different business units.

Trading Market Risk Management
Trading market risk arises from changes in market rates such as interest rates, foreign exchange rates and equity prices, as well as in their correlation and implied volatilities. DBS Group takes trading market risk in the course of making market to meet customer requirements as well as to benefit from market opportunities.

The trading market risk framework comprises the following elements:

DBS adopts a Daily Earnings at Risk (DEaR) methodology to estimate the Groups trading market risk with a given level of confidence, over a one-day horizon. DEaR is computed using a combination of parametric and historical simulation approaches. It takes into account all pertinent risk factors and covers all financial instruments which expose the Group to market risk, across all geographies. On a daily basis, DBS estimates DEaR for each trading business unit, as well as for the Group. These daily reports estimate DEaR for individual activity and risk type such as foreign exchange, interest rate or equity.

Although DEaR provides valuable insights, no single measure can capture all aspects of trading market risk. For comprehensive risk control, stress limits are also established and monitored on a daily basis. In addition, risk controllers in major business units monitor trading positions against operational limits established for the respective business unit.

Asset and Liability Management
Structural interest rate risk arises from mismatches in the interest rate profile of customer loans and deposits. The structural interest rate risk relates to basis risk arising from different interest rate benchmarks, interest rate repricing risk, yield curve movements and embedded optionality.

In managing structural interest rate risk, the Bank tries to achieve a desired profile given the strategic considerations and market conditions of the various business segments. To monitor the structural interest rate risk, various tools are used including repricing gap reports, sensitivity analysis and income simulations under various scenarios.

The DBS Group attempts to limit the effect of exchange rate movements on its earnings where possible. Its policy is to fund its foreign currency lending with the same foreign currencies. For foreign currency investments, the Groups general policy is to borrow fundable currencies. Non-fundable or illiquid currencies may be hedged using other instruments. Where appropriate for currencies with high hedging costs or lack of liquidity, alternative hedging strategies may be used.

Liquidity Risk Management
Liquidity obligations arise from withdrawals of deposits, repayments of purchased funds at maturity, extensions of credit and working capital needs. DBS seeks to manage its liquidity risk across all classes of assets and liabilities to ensure that even under adverse conditions, DBS has access to funds at a reasonable cost.

The primary tool for monitoring liquidity is the maturity mismatch analysis, which is monitored over successive time bands and across functional currencies. This analysis includes behavioural assumptions on, inter-alia, customer loans, customer deposits and reserve assets. This is tested under normal and adverse market scenario conditions. Guidelines are established for the cumulative negative cash flow over successive time bands.

In addition to reserve assets, DBS maintains a diverse source of funding including customer deposits, domestic and foreign interbank borrowings and through the swap and repurchase markets. Additional foreign currency liquidity is available through foreign currency deposits from overseas branches and subsidiaries.

Operational Risk Management
Operational risk is the potential exposure to financial or other damage arising from inadequate or failed internal processes, people or systems.

An Operational Risk Management Framework has been drawn up by Group Risk to ensure that operational risks within the DBS Group are properly identified, monitored, managed and reported. Key elements of the framework include process mapping, setting risk metrics, risk event management, risk analysis and risk management reporting.

Each new product introduced is subject to a risk review and signoff process where all relevant risks are identified and assessed by departments independent of the risk-taking unit proposing the product. Variations of existing products are also subject to a similar process. Business and support units are responsible for managing operations risk in their respective functional areas. They operate within the Groups operational risk management framework and ensure that risk is being managed within their respective business units. The day-to-day management of operations risk is through the maintenance of a comprehensive system of internal controls, supported by an infrastructure of robust systems and procedure to monitor transaction positions and documentation, as well as maintenance of key backup procedures and business contingency planning.

Group Risk
Key Achievements
2001 saw significant progress made at Group Risk toward reaching key milestones in credit, market, and operational risk initiatives.

Substantial progress has been made in the development of a comprehensive enterprise-wide Core Credit Risk Policy that provides a consistent governing framework for the extension of credit across the entire DBS Group, including subsidiaries. Progress has also included development of a new Country Risk Management Policy and implementation of a credit risk portfolio system. Considerable validation and back-testing of the previously implemented Counterparty Risk Rating frameworks has been conducted.

On the market risk management front, risk controls have been further strengthened through revision of market risk limits in line with new activities. In addition, a market risk control framework for credit derivative trading has been implemented and market risk systems have been enhanced for inclusion of the risk exposures for all new products. A new Pre-settlement Counterparty Exposure (PCE) system was also launched, which measures and captures on an online basis, PCE on derivatives and securities transactions using a refined methodology.

Operational risk management advancements have included the development of a group-wide operational risk management framework, the roll-out of a global insurance programme which covers all DBS Group entities, implementation of a new outsourcing risk policy, and considerable enhancement to the New Product & Services Policy. Additionally, an assessment of the Banks wireless/mobile/internet banking technology risk management framework has been conducted to reaffirm its adequacy and to ensure compliance with the Monetary Authority of Singapore (MAS) guidelines.

Significant progress has also been made towards integration of risk management functions at subsidiaries in Hong Kong including the recently acquired Dao Heng Bank.

Oon Kum Loon is the Managing Director and Head of Group Risk, responsible for developing and implementing a framework to manage the Credit, Market and Operational risks of the Bank. Mrs Oon started her 28-year career with DBS in the Credit Department and managed the capital market activities of the Bank before heading the Treasury Group in 1985. She was appointed to her present position in 1999.

Group Audit
In 2001, Group Audit completed approximately 140 assignments comprising planned audits, Systems Development Life Cycle (SDLC) reviews of major infrastructure projects, and special reviews. The level of consultative and research work increased significantly compared with the previous year, although the bulk of Group Audits activities consists primarily of audit assurance. During 2001, Group Audit completed its harmonisation and integration programme for all its internal audit functions at Head Office, overseas branches and subsidiaries (including newly acquired companies Dao Heng Bank and DBS Vickers Securities).

Key Highlights of Group Audits Global Harmonisation and Integration Programme:

Group Audit is headed by Albert Bonar, Managing Director and Head, who joined the bank in 1999. He is a member of the USA Institute of Internal Auditors.