COMMERZBANK AKTIENGESELLSCHAFT

Group Financial Statements
354
298 Commerzbank Annual Report 2011
(85) Market risk
Market risk is the risk of financial losses due to changes in
market prices (interest rates, commodities, credit spreads,
exchange rates and equity prices) or in parameters that affect
prices such as volatilities and correlations. The losses may
impact profit or loss directly, e.g. in the case of trading book
positions, or they may be reflected in the revaluation reserve or
in hidden liabilities/reserves in the case of banking book
positions. We also monitor market liquidity risk, which covers
cases where it is not possible for the Bank to liquidate or hedge
risky positions in a timely manner and to the desired extent on
acceptable terms as a result of insufficient liquidity in the
market.
Market risk is managed by means of a sophisticated system
of limits, combined with reliable and optimized methods for
measuring and monitoring. Commerzbank uses economic capital
(risk-taking capability) and business expectations to establish its
market risk limits, which ensures a risk/reward-based
management of market risk. The extent to which the limits are
used, together with the relevant P&L figures, is reported daily to
the Board of Managing Directors and the various heads of
divisions.
For the daily quantification and monitoring of market risk,
especially that arising in proprietary trading, statistical methods
are used to calculate the value at risk (VaR). The underlying
statistical parameters for the regulatory capital adequacy
requirements are based on an observation period of the past 254
trading days, a 10-day holding period and a confidence level of
99%. For internal market risk management the same
observation period is used, with a 1-day holding period and a
confidence level of 97.5%. The value at risk models are being
constantly adapted to the changing environment.
As a result of the takeover of Dresdner Bank and with the
agreement of the German Federal Financial Supervisory
Authority (BaFin) Commerzbank temporarily used two parallel
market risk models which had both been approved by the
supervisory authorities to determine its regulatory capital
adequacy requirements in the first three quarters of 2011. For
the positions of the old Commerzbank general market risk was
calculated on the basis of an historical simulation, while specific
interest rate risk (specific market risk) was calculated by means
of a variance/covariance approach. For the positions of the
former Dresdner Bank we used a VaR model based on historical
data with a stochastic Gaussian normal distribution assumption.
At the end of December 2011 the Federal Financial Supervisory
Authority (BaFin) gave Commerzbank the authorisation to use
the newly developed internal VaR model on the basis of an
historical simulation to calculate both general market risk and
specific interest rate risk. Commerzbank has been using this
model since the fourth quarter of 2011 to calculate market risk
and the capital adequacy requirements. The model includes
methods and processes to calculate additional market risk
indicators (Stressed VaR, Equity Event VaR and Incremental Risk
Charge) to meet the Basel 2.5 regulatory requirements as of
December 31, 2011.
Commerzbank is now using the same market risk model
based on an historical simulation for internal risk management
and for calculating regulatory capital. This ensures that risk
measurement is consistent across the whole Group and will meet
the future requirements of Basel III.
The reliability of the internal model in use at any time is
regularly checked using backtesting methods. Apart from
meeting supervisory requirements, the aim is to assess and
steadily improve forecasting quality. The number of significant
deviations is also used by the supervisory authorities as the
basis for the evaluation of the internal risk models.
The table below shows the group-wide regulatory market risk
of the trading portfolio including the foreign exchange risks of
the banking book, as used for calculating capital requirements.
The value at risk shows the potential losses which will not be
exceeded with a 99% degree of probability for a holding period
of 10 days:
Group
€m 31.12.2011 31.12.2010
Minimum 119.3 165.2
Median 210.1 236.1
Maximum 323.2 320.8
Year-end figure 186.9 250.4