Annual Financial Statements 2011 of Bank Austria

Consolidated Financial Statements in accordance with IFRSs
E – Risk report (CoNTINuED)
E.4 – Counterparty risk
UniCredit Bank Austria AG has made further efforts to refine the risk management model for derivatives, securities lending and repurchase agreements.
For the purposes of portfolio management and risk limitation in the derivatives and security financing business with banks and customers,
the bank uses an internal counterparty risk model (IMM) based on a Monte Carlo path simulation to estimate the potential future exposure at portfolio
level for each counterparty.
The counterparty risk model (NORISK CR), which was approved by the Austrian supervisory authority in 2009, was extended in 2011 to include
further CEE countries for risk management aspects; special mention should be made of the subsidiaries in Croatia and Russia because of their
size. In this context the focus is on risk management and not yet on regulatory approval. The bank took account of the growing importance of
counterparty risk by creating a separate unit for this purpose within Market Risk and Risk Integration at the beginning of 2010.
The calculations are based on market volatility, correlations between specific risk factors, future cash flows and stress considerations. Netting
agreements and collateral agreements are also taken into account for simulation purposes.
The simulation calculations are performed for all major types of transactions, e.g. forward foreign exchange transactions, currency options, interest
rate instruments, equity/bond-related instruments, credit derivatives and commodity derivatives. Other transactions are taken into account with an
add-on depending on factors such as maturity. The bank applies a confidence interval of 97.5%.
At the end of 2011, derivative transactions, repurchase agreements and securities lending transactions resulted in the following exposures:
Exposures (€ bn)
Austria 3.05
CEE 3.56
tOtal 6.61
In addition to further refinement of the model, which is currently in conformity with Basel 2 standards, we are now concentrating on preparations
for adjusting the existing model to the new Basel 3 rules concerning counterparty credit risk. A project was initiated in Market Risk and Risk Integration
for this purpose. Separate reporting on counterparty risk was introduced with a view to informing UniCredit Bank Austria AG’s Market Risk
Committee and Derivative Committee (DECO) of current exposure trends and providing additional information relevant to risk management. Moreover,
backtesting is performed at regular intervals, at the level of individual counterparties and at overall bank level, in order to check the quality of
the model on an ongoing basis.
Line utilisation for derivatives and security financing business of customers is available online in WSS (“Wallstreet”), the central treasury system,
on a largely group-wide basis. In addition to determining the potential future exposure, the path simulation also enables the bank to calculate the
average exposure and the modified average exposure pursuant to Basel 2 (exposure at default), as well as the effective maturity of the exposure to
each counterparty. This makes it possible to integrate counterparty risk in an internal model compliant with Basel 2.
UniCredit Bank Austria AG additionally limits the credit risk arising from its derivatives business, repurchase agreements and securities lending
business through strict use of master agreements, the definition and ongoing monitoring of documentation standards by legal experts, and through
collateral agreements and break clauses. Management takes proper account of default risk, especially because the relevance of this risk category
has increased and on the basis of experience gained in the international financial market crisis, despite the good average credit rating of our business
partners.
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