Annual Report 2010 - ProCredit Bank

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Annual Report 2010
Currency Risk Management
ProCredit Bank Romania has a low level of exposure
to market risk because it does not trade in
securities or in commodities, nor does it engage
in derivative transactions except for hedging
purposes. Currency risk is managed in accordance
with the Foreign Currency Risk Management
Policy and Strategy.
The bank continuously monitors exchange rate
movements and foreign currency markets, and
determines its currency positions on a daily basis.
Stress tests are regularly carried out to assess
the impact of exchange rate movements on
open currency positions (OCP) in each operating
currency based on two scenarios: most probable
and worst case.
Group policy forbids the bank to maintain OCPs
for speculative purposes. The bank’s strategy is
to keep its statutory foreign currency position
closed, which results in a long EUR position under
IFRS. As of end-2010, the bank had OCPs of
around 4.41% of Basel II capital. The local currency
depreciated by over 20% against the US
dollar towards the middle of the year; however,
this trend reversed itself in the second half of
the year following EUR/USD evolution on international
markets. The Romanian leu remained
fairly stable against the euro in 2010, occasionally
weakening due to political instability.
Interest Rate Risk Management
The six-month euro interest rate increased in
2010 (from 0.99% to 1.24%) following the recovery
of the euro economies. Maturity gap analysis
and stress testing are used to measure and analyse
the impact of interest rate shifts on interest
income.
Throughout 2010, the bank continued its policy of
decreasing its exposure to interest rate risk from
its banking book. A key policy measure undertaken
in 2010 to mitigate interest rate risk was to develop
the variable interest rate loan portfolio, as
most loans disbursed were priced at market interest
rate plus margin. The bank does not use derivatives
to hedge its interest rate risk positions, and
aims to close its gaps through natural hedging.
Operational Risk Management
The bank’s Operational Risk Management Policy
is in full compliance with Basel II and with Romanian
and German banking legislation. To minimise
operational risk, all processes are precisely
documented and subject to effective control
mechanisms. Job descriptions are comprehensive,
duties are strictly segregated, and dependency
on key individuals is avoided.
When recruiting, the bank pays close attention
to personal integrity, a quality which is reinforced
through the bank’s strictly imposed code
of conduct and through comprehensive training
programmes designed to promote a culture of
transparency and risk-awareness.
The group-wide Risk Event Database (RED) ensures
that operational risks are addressed in a
systematic and transparent manner, with all remedial
and preventive action clearly documented
and accessible to management control. Staff
are required to report all operational risk events
regardless of the actual or potential loss level.
Furthermore, as part of their initial training, all
new staff members are taught how to recognise
and avoid operational risk and how to maintain
information security. The bank also installed an
e-learning platform in December 2010 with training
material on operational and reputational risk
and information security. In 2010, ProCredit
Bank Romania reported 1,221 risk events representing
a total net risk amount of EUR 15,791.
Every year the bank conducts a risk assessment
procedure by completing a group-wide questionnaire
on fraud risk and operational risk. Each of
the risks described here must be mitigated by
appropriate controls, the adequacy of which is
the subject of the assessment. If the controls are
judged to be insufficient, an action plan for remedying
the situation is drawn up. The completed
assessment is sent to the Group Operational
Risk Management Department.
In 2010 the bank introduced the group-wide New
Risk Approval (NRA) process, which is applied to
all materially new or changed products, services
or business processes. Only after the elimination
of any obstacles or deficiencies revealed by the