Annual Report - VÚB banka

(b) Market risk
Market risk is the risk that changes in market prices,
such as interest rate, equity prices, foreign exchange
rate will affect the Group’s income or the
value of its holdings of fi nancial instruments. The
objective of market risk management is to manage
and control market risk exposures within acceptable
parameters, while optimizing the return on risk.
Management of market risk
The Bank separates its exposures to market risk
between trading and non-trading portfolios. Trading
portfolios are held by the Trading department
and include positions arising from market-making
and proprietary position taking. All foreign exchange
risk within the Bank is transferred each day to
the Trading department and forms part of the trading
portfolio for risk management purposes. The
non-trading portfolios are managed by the ALM department,
and include all positions, which are not
intended for trading.
Overall authority for market risk is vested in ALCO.
The Risk Management Division is responsible for
the development of detailed risk management policies
(subject to review and approval by ALCO) and
for their implementation and day-to-day risk monitoring
and reporting.
Exposure to market risk – trading portfolios
The principal tool used to measure and control market
risk exposure within the Bank’s trading portfolio
is Value at Risk (VaR). The VaR of a trading portfolio
is the estimated loss that will arise on the portfolio
over a specifi ed period of time (holding period)
from an adverse market movement with a specifi ed
probability (confi dence level). The VaR model used
by the Bank is based upon a 99 percent confi dence
level and assumes a 1-day holding period. The VaR
model used is based on historical simulation. Taking
account of market data from the previous year,
and observed relationships between different markets
and prices, the model generates a wide range
of plausible future scenarios for market price movements.
The model was approved by the NBS as
a basis for the calculation of the capital charge for
market risk of the trading book.
The VUB Group uses VaR limits for total market risk
in the trading book, foreign exchange risk and interest
rate risk. The overall structure of VaR limits is
subject to review and approval by ALCO and Intesa
Sanpaolo. VaR is measured on a daily basis. Daily
reports of utilization of VaR limits are submitted to
the trading unit, the head of the Risk Management
division and the head of the Finance and Capital
Markets division. Regular summaries are submitted
to Intesa Sanpaolo and ALCO.
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A summary of the VaR position of the Bank’s trading portfolios at 31 December and during the period is as
follows:
Sk million 2007 2006
Balance Avg Max Min Balance Avg Max Min
Foreign currency risk 1.61 1.74 6.01 0.24 3.61 1.37 4.84 0.17
Interest rate risk 4.58 4.72 9.46 1.95 3.37 4.10 8.17 2.00
Overall 4.15 5.18 9.95 1.94 6.19 4.31 10.11 2.19
The limitations of the VaR methodology are recognized
by supplementing VaR limits with other position
limit structures. In addition, the Bank uses a
wide range of stress tests to model the fi nancial impact
of a variety of exceptional market scenarios on
the Bank´s position.
VUB, a bank of Intesa Sanpaolo group