Annual Report - VÚB banka

35. Financial risk management (continued)
Exposure to interest rate risk – non-trading
portfolios
The principal risk to which non-trading portfolios
are exposed is the risk of loss from fl uctuations
in the future cash fl ows or fair values of fi nancial
instruments because of a change in market interest
rates. Interest rate risk is managed principally
through monitoring interest rate gaps. Financial instruments
are mapped to re-pricing gaps either by
their maturity, i.e. fi xed rate instruments, or by next
re-price date, i.e. fl oating rate instruments. The assets
and liabilities that do not have contractual maturity
date or are not interest bearing are mapped
according to internal model for their maturity.
Risk management division is responsible for monitoring
these gaps at least on a monthly basis.
The management of interest rate risk is supported
by monitoring the sensitivity of the Bank’s fi nancial
assets and liabilities to various standard and nonstandard
interest rate scenarios. Standard scenarios
that are considered on monthly basis include a
1 basis point parallel rise in all yield curves worldwide
and the same for 200 basis point shift.
An analysis of the Bank’s sensitivity to an increase in market interest rates is as follows:
Sk million 2007 2006
1 basis point increase (8) (11)
106
Overall non-trading interest rate risk positions are managed by Asset and Liability Management, which uses
different balance and off balance sheet instruments to manage the overall positions arising from the Bank’s
non-trading activities.
The interest rate risk is comprised of the risk that the value of a fi nancial instrument will fl uctuate due to
changes in market interest rates and the risk that the maturities of interest bearing assets differ from the
maturities of the interest bearing liabilities used to fund those assets. The length of time for which the rate
of interest is fi xed on a fi nancial instrument therefore indicates the extent to which it is exposed to interest
rate risk.
Model applied for calculation of interest rate gap
Each item is mapped to the gap based on contractual or behavioural re-pricing day.
Contractual
This category includes items, where the Bank knows exactly when the maturity or next re-pricing takes
place. This treatment is applied mainly to: securities bought and issued, loans and term deposits.
Behavioral
These are items for which it is not exactly known when the maturity or next re-pricing will take place (e.g.
current accounts). In this case, it is necessary to make certain assumptions to refl ect the real behavior of
these items. This group also includes items such as fi xed assets, equity, provisions, etc., which have an
indefi nite maturity and have to be modelled as well.
Based on statistical methods a core portion of cash is calculated and this portion is amortized on a linear
basis over 10 years and the remaining amount is classifi ed as an overnight item. For current accounts the
non-sensitive core portion of some clients categories is calculated and is mapped to the gap as a linearly
amortized item from 1 to 10 year. The remaining amount is classifi ed in the overnight segment.
Annual Report 2007