2008 Annual Report Julius Baer Holding Ltd. - Julius Bär Gruppe

2. Challenges in 2008
2008 was marked by a number of special events,
some with major and some with minor consequences
for the financial markets. The key development was
the unexpected heightening of the financial crisis.
What began as an increase in delinquencies by
borrowers in the US subprime mortgage market gave
rise to an unforeseen worldwide financial crisis, the
effects of which were increasingly visible in the real
economy as 2008 drew to a close. Against this backdrop,
several major international financial firms went
bankrupt or were taken over. The accompanying crisis
of confidence exacerbated the situation. Ultimately,
the governments of leading economic powers felt
compelled to stabilise the financial system by issuing
guarantees for, buying assets from, and even nationalising
troubled financial institutions. At present,
neither the exact consequences nor the end of this
crisis are foreseeable. These events were accompanied
by highly volatile financial markets, which further
fuelled the uncertainty. Due to the flight of investors
into high-quality securities, credit spreads widened to
record levels. As a result, the prices of debt instruments
collapsed and fixed income markets dried up
with the exception of government debt. The provision
of liquidity by the various central banks to ensure
sufficient credit flow within the financial system led to
very low interest rate levels once more as the second
half of the year came to an end. Given the fears
that the global economy might slip into recession,
the demand for commodities also fell significantly,
resulting in sharp price drops in these markets, as
illustrated by the price of oil, which peaked at over
USD 140 per barrel during the year and fell to less
than USD 50 per barrel in the second half of 2008.
Such a combined downturn in essentially every
investment segment represents a very unusual
situation and an extraordinary challenge for financial
institutions.
By consistently executing our very cautious and wellbalanced
risk strategy as well as maintaining broad
diversification of our asset base, we largely succeeded
in protecting the company against direct losses. We
supervise our asset positions closely and monitor
market developments on a daily basis. Measures
deemed necessary, e.g. cancelling or reducing counterparty
limits, were implemented in a timely manner.
Furthermore, we perform periodical stress tests to
elaborate the potential performance of our assets
given extreme market conditions. The results from
these stress tests are discussed with senior management
and are reflected in our risk strategy. We are
convinced that our risk management framework
makes a key contribution to our company’s ability to
successfully deal with the present financial crisis. The
results achieved thus far reinforce our confidence in
this.
3. Strategic and business risk
Following the principles of value- and risk-oriented
management and controlling, an annual strategic
check-up is carried out and the results are consolidated
in a risk landscape. This check-up reviews the
probability and impact of potential strategic and business
risk and defines mitigating actions. The results
are also used as an important input into the strategic
planning process and hence influence the rolling
three-year plan and finally the annual budgets.
4. Credit risk
Notes
Credit or counterparty risk is the risk of non-compliance
with an obligation a counterparty owes to the
Group. Such non-compliance may result in a loss to
the Group.
The Group primarily assumes credit risk with private
clients on a collateralised basis. Such credit risk may
be composed of lending and derivatives exposure
from trading activities in foreign exchange, equity,
interest rate and commodity products. Portfolios are
analysed and rated individually and an advanceable
value is assigned based on the quality of the collat-
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