GB00_erste lage_E - Erste Group

Risks at Erste Bank Market risk
Fluctuations in interest rates, exchange rates, share prices and commodities prices create market
risks. Market risks derive from short-term trading (Trading Book) in instruments whose prices are
fixed daily as well as from the traditional banking business (Banking Book).
Taking into consideration the Bank’s risk-absorbing capacity and projected earnings, the Management
Board as a whole manages the aggregate limits as part of its work on the Risk Committee.
The aggregate limits are then distributed by the responsible Management Board member and Central
Risk Management department based on a recommendation from the decentralised unit for
Market Risk Management in the Market Risk Committee. All market risk limits in Erste Bank are
statistically consistent with the aggregate Value-at-Risk limit covering all market risks in Erste
Bank; limit compliance is checked at several levels: by decentralised local risk management units,
invariably by market risk management and also by the Central Risk Management independent risk
control unit.
A key component in defining the limits is estimating the potential losses that could be caused
by market movements. This so-called Value-at-Risk is calculated at the Group level on a daily basis
and reported to the Management Board via Erste Bank’s electronic management information system
on the basis of an historical simulation using the internationally recognised software KVAR+.
In its analysis Erste Bank uses a 99% confidence interval and a holding period of one or ten days.
Backtesting is used to constantly review the validity of the statistical methods applied.
Unexpected market movements can have a great impact on the value of a trading position and
result in significant losses or gains. Relying on purely statistical methods to measure risk, as is
the case with Value-at-Risk, does not adequately take into account crisis situations and their consequences.
Because of this, in addition to risk measurement applying Value-at-Risk Erste Bank
also performs stress testing according to several methods (historical worst, extreme value theory,
scenario analyses). These analyses are also relayed to the Management Board via the electronic
management information system.
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