financial statements and management report 2004 commerzbank ag

Apart from complying with the supervisory
requirements, ZRC ensures risk transparency at all
times and provides the Board of Managing Directors
as well as the responsible business-line heads with
prompt, reliable and clear information on the scale
and origin of market risk on the basis of informative
key ratios. Limits for the daily value-at-risk and the
stress test, as well as loss-review triggers, are set.
Reflecting the structure of the business line, these
limits are allocated to sub-portfolio levels. Depending
on the level in question, the limits are approved by
either the head of the business line, the Risk Committee
or the Board of Managing Directors. For 2005,
Commerzbank has used economic capital and RoRaC
for the first time in establishing its market-risk limits
and it will take this as a basis for the risk-based steering
of limits.
The extent to which the limits are used at all relevant
portfolio levels is reported daily to the Board of
Managing Directors and the heads of business lines
in the form of a risk and P&L report. ZRC also provides
the Risk Committee at two-week intervals with
detailed information through its so-called Market Risk
Hotspots on the development of market risk in the
Bank’s trading and banking books. The above-mentioned
data and limit utilizations are complemented
here by extensive scenario analyses. These simulate
the impact of specific movements in interest-rate,
equity, currency and credit markets.
The Risk Committee is the central body in which
there is intensive discussion on the current marketrisk
position of the Bank and the individual business
lines and also on the impact of potential market
scenarios. The divisional heads report their current
strategy and their market expectation to the Risk
Committee. The market-risk limits and their utilization
are then regularly reviewed and adjusted if necessary.
Market-risk methodology
Key requirements to be met in quantifying market risk
are the compatibility of the risk measures used with
those of other types of risk (for example, credit risk)
and also recognition – as far as possible – of all the
positions involving market risk. For complex financial
innovations in particular, sophisticated methods, procedures
and guidelines are needed, which are established
by ZRC and constantly reviewed with the goal
of permanently improving them.
RISK REPORT 17
The calculation of market risk is based on the
value-at-risk method. The value-at-risk (VaR) is the
maximum loss in value of a portfolio during a given
holding period with a given degree of probability
(confidence level), assuming that the composition of
the portfolio remains unchanged. VaR at Commerzbank
is worked out for the trading units ZCM and ZGT.
In view of the persistent uncertainty in the international
financial markets and the management’s farreaching
strategic decisions, the area of market risk
was characterized by risk reduction in 2004.
In line with the supervisory requirements, the
monitoring of market risk by ZRC covers the following
categories:
The general market risk represents the risk of loss
to a portfolio through changes in equity prices,
exchange rates, precious-metal/commodity prices
or interest rates of the market as a whole and the
respective volatilities. The general market risk of
trading portfolios is calculated by means of historical
simulation. For forecasting the changes in
value of individual portfolios, the observed fluctuations
of market prices, such as equity prices and
interest rates, over the past 255 trading days are
used. The advantage is that the individual portfolios
can be easily aggregated and the observed
market movements are taken into account.
The specific market risk covers the risk of loss due
to the change in price of individual interest-rate
and equity-based financial instruments relative to
changes in the respective market indices. A distinction
is made between the specific equity price
risk and the specific interest-rate risk. The specific
interest-rate risk is calculated using the variancecovariance
method. Potential losses are forecast
not through changes in the risk factors themselves
but rather through statistical parameters for the
risk factors.
The interest-rate risk is understood as the risk of
adverse effects from changes in market interest
rates on either the capital invested or current
income. Different fixed-interest periods for claims
and liabilities in on-balance business and derivatives
represent the main source of interest-rate
risk. The interest-rate risk is measured not only
with the market-risk model but also on the basis