Annual Financial Statements 2011 of Bank Austria

Management Report of UniCredit Bank Austria AG
Funding plan and liquidity costs in pricing
Financing that part of credit growth which is not covered by
deposits and funding the CEE subsidiaries is one of the main
functions of the Group’s liquidity management. Financing
requirements for the coming year and the short-term and long-term
funds made available to the subsidiaries for their business are
defined on the basis of a funding plan, and a strategy for raising
the required funds is drawn up. As financial markets in Central and
Eastern Europe were under greater strain, closer attention was
given in 2011 to the financial independence of the CEE
subsidiaries. The focus is on a well-balanced financial position,
which reduces dependence on financial markets.
Part of the country risks in connection with financing the CEE
subsidiaries out of Austria is covered by MIGA or SACE
guarantees (MIGA: Multilateral Investment Guarantee Agency, a
member of the World Bank Group; SACE: a leading Italian credit
insurer).
To ensure the correct settlement of liquidity premiums payable by
the Bank Austria Group to external market participants, liquidity
costs are charged. Liquidity costs are part of the reference rate
system. The applicable alternative costs are debited or, on the
basis of an opportunity cost approach, credited to the various
products on the assets side and the liabilities side which have an
effect on liquidity. In the current controlling process this ensures
the proper pricing of our business.
Counterparty risk
UniCredit Bank Austria AG has made further efforts to refine the
risk management model for derivatives, securities lending and
repurchase agreements. The model was refined especially with
regard to validation and backtesting. 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 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%.
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.
Sovereign debt
The assessment of country risk, reflected in country limits and
counterparty risk, and for the sovereign of a country, reflected in
counterparty limits, is in both cases performed via a groupwide risk
process. The sovereign counterparty limits are assessed by the
FIBS CRO risk team (FIBS: Financial Institutions, Banks and
Sovereigns) and assigned to UniCredit subsidiaries according to
business needs. Impairment losses are recognised, if necessary,
according to accounting standards. In general, countries which are
presumed less risky – e.g. the US, Japan, core EU – have no
country limit assigned for cross-border business, but sovereign risk
(direct state risk, e.g. bonds) is limited via counterparty limits. The
overall bond exposure is monitored via nominal credit risk limits
and additionally via market risk limits. The country risk for all other
countries is limited by the assigned country limit.
Greek bond exposure has been impaired based on a conservative
approach and impairment losses will be further recognised using
applicable accounting standards. Business with Greek banks has
been reduced to an absolute minimum and is restricted via a watch
list strategy.
Bank Austria – Annual Financial Statements 2011 199