Annual Financial Statements 2011 of Bank Austria

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Consolidated Financial Statements in accordance with IFRSs E – Risk report (CoNTINuED) Implementation of disclosure requirements pursuant to Sections 26 and 26a of the Austrian Banking Act (regular disclosure of information on the organisational structure, risk management and risk capital position pursuant to Sections 2 to 15 of the Austrian Disclosure Regulation) Within UniCredit Group, comprehensive disclosure (under the Pillar 3 disclosure requirements) is carried out by the parent company UniCredit on its website, based on the consolidated financial position in its function as EEA parent bank of Bank Austria. Bank Austria is a significant subsidiary pursuant to Section 26 (4) of the Austrian Banking Act and therefore discloses its supervisory capital structure (Section 4 of the Austrian Disclosure Regulation) and its capital adequacy requirement (Section 5 of the Austrian Disclosure Regulation); furthermore, the bank discloses information regarding the use of own estimates for volatility adjustments (comprehensive method) for credit risk mitigation techniques to take account of financial collateral pursuant to Section 17 of the Austrian Disclosure Regulation and in accordance with the approval by the Austrian Financial Market Authority (FMA). The disclosure by Bank Austria is available at its website www. bankaustria.at/Investor Relations/Basel II Disclosure Pillar 3. Current status of Basel 2.5/Basel 3 implementation in the Bank Austria Group Market risk in the trading book: The EU rules in the Capital Requirements Directive (CRD III) – which have been adapted in respect of their first-time application, postponing it to the end of 2011 – have imposed significantly stricter capital requirements on European banks. The main changes relating to the trading book are the new concepts of stressed VaR, incremental risk charge (IRC) and the new requirements concerning structured securitisations (the latter are not applied in UniCredit Bank Austria for lack of relevant positions in the trading book). As at year-end 2011, capital requirements for “stressed VaR” and “incremental risk charge” were for the first time calculated and covered as part of market risk for the Bank Austria Group. A reporting procedure for these new parameters was set up in MACO, which meets once a week. Moreover, separate IRC limits were introduced for the relevant risk-takers in the Bank Austria Group. At the global level, besides detailed VaR limits, an S-VaR limit was also implemented for the regulatory trading book Counterparty risk: Changes will also take place in the area of counterparty credit risk; from a current perspective, these changes will need to be implemented by the end of 2012. Key changes include the calculation of a stressed counterparty exposure, comparable to the stressed VaR in market risk. Other new features are the capital backing for market risk in respect of credit valuation adjustments (CVA market risk charge), stricter standards for collateral management and margining. The treatment of central counterparties, which act as clearing centres, is also regulated in the Basel Committee proposals and/or was set out in more detail in the course of 2011 in CAD IV, which is now available. This applies, for example, to the implementation of stress analyses and regular reviews of model quality as part of backtesting. Liquidity: Basel 3 sets liquidity standards under stressed conditions in the short-term maturity range (liquidity coverage ratio = 100%) and in the structural sector (net stable funding ratio = 1). Although compliance with these rules will not be mandatory before 2015 and 2018, respectively, Bank Austria made the necessary extensions to the liquidity monitoring system in the course of 2011 and integrated the new regulatory standards in the current management information process. E.2 – Market risk Market risk management encompasses all activities in connection with our Markets & Investment Banking operations and management of the balance sheet structure in Vienna and at Bank Austria’s subsidiaries. Risk positions are aggregated at least daily, analysed by the independent risk management unit and compared with the risk limits set by the Management Board and the committees (including MACO) designated by the Management Board. At Bank Austria, market risk management includes ongoing reporting on the risk position, limit utilisation, and the daily presentation of results of all positions associated with market risk. Most of the positions held in Bank Austria are attributable to the banking book as Bank Austria continued to reduce positions attributable to the trading book in the course of 2011. Market risk of the banking book is an important factor also in other Divisions (the CEE banking subsidiaries, in particular). UniCredit Bank Austria uses uniform risk management procedures for all market risk positions throughout the Group. These procedures provide aggregate data and make available the major risk parameters for the various trading operations once a day. Besides Value at Risk (VaR), other factors of equal importance are stress-oriented sensitivity and position limits. Additional elements of the limit system are loss-warning and stress-warning levels. In April 2011, Bank Austria AG was granted permission by the Austrian supervisory authorities to use the new IMOD model, which is applied within the entire UniCredit Group, for the purpose of limiting market risk. The new model has been used for reporting regulatory capital requirements since the end of April 2011. The new model is based on historical simulation with a 500-day market data time window for scenario generation. It is currently used on a uniform basis by many UniCredit Group subsidiaries. The model is applied by Market Risk and Risk Integration within Bank Austria and is being further developed in cooperation with the UniCredit holding company. Further development includes reviewing the model as part of backtesting procedures, integrating new products, implementing requirements specified by the Management Board and the Market Risk Committee, and adjusting the model to general market developments. Bank Austria · Annual Financial Statements 2011 138
Consolidated Financial Statements in accordance with IFRSs In 2011, the new CRD III rules for the trading book were implemented in Bank Austria in cooperation with UniCredit. This included, in particular, the implementation of “stressed VaR” and “incremental risk charge” (IRC) in the Bank Austria Group. The college of supervisors (Italy, Germany and Austria) gave its regulatory approval in December 2011. The values for “stressed VaR” and “IRC” are included in regulatory reporting as at the end of 2011. A product introduction process has been established for the introduction of new products in the area of market risk in which risk managers play a decisive role in approving products. When the new model was approved by the college of supervisors (Italy, Germany and Austria) in April 2011, a multiplier of 3.5 was set and this is used for calculating the capital requirement.The new model is used for UniCredit Bank Austria AG, as until now, and for the Bank Austria Group. The risk model covers all major risk categories: interest rate risk and equity risk (both general and specific), currency risk and commodity position risk. The structure of the standard risk report presented at MACO’s weekly meetings covers (stress) sensitivities in addition to VaR figures, and utilisation levels in the areas of IRC and S-VaR (both for the regulatory trading books). Regular and specific stress scenario calculations complement the information provided to MACO/ALCO and the Management Board. Macro scenarios show the potential adverse impacts of global developments with specific effects on the respective risk categories, while stress sensitivities of individual risk factors or groups of risk factors show the potential adverse impacts on partial market segments. Stress scenarios are based on assumptions of extreme movements in individual market risk parameters. The bank analyses the effect of such fluctuations and a liquidity disruption in specific products and risk factors on the bank’s results. These assumptions of extreme movements are dependent on currency, region, liquidity and the credit rating, and are set by Market Risk on a discretionary basis after consultation with experts in other areas of the bank (e.g. research, trading, Market Risk UniCredit holding company). The Widespread Contagion Scenario is an example of a scenario which is also used by the UniCredit holding company on a Group-wide basis. In addition to the risk model results, income data from market risk activities are also determined and communicated on a daily basis. These data are presented over time and compared with current budget figures. Reporting covers the components reflected in IFRS-based profit and the marking to market of all investment positions regardless of their recognition in the IFRS-based financial statements (“total return”). The results are available to UniCredit Bank Austria’s trading and risk management units via the access-protected Intranet application “ERCONIS”, broken down by portfolio, income statement item and currency. The regulatory approach to prudent valuation in the trading book is implemented primarily by Market Risk and further developed on an ongoing basis through cooperation within UniCredit Group in the same way as “independent price verification”, which establishes valuation processes and verification procedures on a harmonised Group-wide basis. In Vienna, Bank Austria uses the “MARCONIS” system developed by the bank itself to completely and systematically review the market conformity of its trading transactions. The scope of application of this tool has been further extended to include all CEE banking subsidiaries with market risk activities. Since 2010 the MARCONIS system has been extended to include another module, and the tool is also used to address the topic of price transparency (determining minimum margins and maximum hedging costs for Corporate Treasury Sales). The chart below shows the VaR in 2011 calculated on the basis of the new market risk model, which has also been used since the end of April 2011 for regulatory reporting of capital requirements for market risk. VaR of the Bank Austria Group in 2011 calculated on the basis of the new IMOD market risk model (€ m) –120 –110 –100 –90 –80 –70 –60 –50 –40 –30 –20 –10 0 IMOD-VaR Jan. 11 Feb. 11 March 11 April 11 May 11 June 11 July 11 Aug. 11 Sept. 11 Oct. 11 Nov. 11 Dec. 11 IMOD-VaR Trading IMOD-VaR Limit scope At the end of 2011, market risk of the Bank Austria Group (top line) was about € 90 m (confidence interval of 99%; 1-day holding period). The decline in the first quarter of 2011 was mainly due to the fact that the time window (500 days) for historical simulations no longer included extreme scenarios. The renewed increase in the third quarter of 2011 was caused by increasing credit spread volatility (triggered by the mounting Bank Austria · Annual Financial Statements 2011 139
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Annual Financial Statements 2011 of Bank Austria

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