GB00_erste lage_E - Erste Group

In March 2000 Erste Bank launched a project in collaboration with internationally recognised consultants
to define and measure operational risk throughout the entire bank for the first time. After
completing the initial phase of the project for Erste Bank AG at the end of the first quarter of
2001, this approach is to be gradually implemented throughout the Group.
This project will lay the groundwork for rational cost-benefit decisions on measures to reduce,
limit and mitigate operational risks (e.g. for possible insurance solutions). This will allow Erste
Bank to integrate operational risks into risk-adjusted performance measurement based on Valueat-Risk.
Risk-absorbing capacity and risk-adjusted performance measurement
The overall measure of risk applied at bank as well as Group level is the Economic Capital that
a bank has to hold in order to cover risk. This amount is defined as the annual loss which, with
a very high probability, will not be exceeded. The level of probability is determined on the basis
of capital market default analyses. The objective of calculating this figure is to determine the
amount of capital needed in order to secure solvency of Erste Bank even in extreme loss scenarios.
Furthermore, this figure enables comparative measurement and aggregation of all risks.
The central instrument for securing the Bank’s solvency is risk-absorbing capacity. In this calculation,
a multiple-stage process is used to compare the Economic Capital to the resources (earning
power, reserves and equity) available to cover potential losses. Aside from the risk actually
measured, a safety buffer and the existing risk limits are taken into account. Risk-absorbing capacity
thus serves as a limit for all risk activities in Erste Bank.
Economic Capital is also a substantial component used in calculating the risk-adjusted return on
capital (RAROC). This figure compares returns with the risks that are taken in order to achieve
them, using Economic Capital as risk measure. Full implementation of RAROC will allow the entire
bank to be managed on the basis of risk/return ratios. Thus, Economic Capital and RAROC combine
risk limitation aimed at preserving the Bank’s solvency and active risk and capital management
geared towards increasing enterprise value.
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