GENERAL MEETING DRAFT - Bankier.pl

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>> Consolidated Financial Statements
Part E – Information on risks and related risk management policies
The Expected Loss (EL) represents the aggregated average expected loss of the portfolio due to potential
defaults of the obligors. The EL of the portfolio is just the sum of the single obligor ones, which can be
evaluated as the product of PD x LGD x EAD, and is independent from the default correlations in the
portfolio. EL is typically charged as a cost component in the margin.
Value at Risk represents the maximum amount by which, at a given probability, the expected loss might
be exceeded (= Value at Risk at � confidence level which for UniCredit is defined at 99.97%). Such value,
also named Economic Capital, is an input for the definition of the amount of the capital to cover the
potential losses.
VaR is a widely used measure of portfolio risk but it has some intrinsic limitations. In particular it does not
provide information on potential losses in case the VaR limit is exceeded. Such information is provided by
the Expected Shortfall (ES) that represents the expected value of losses that exceed the VaR threshold.
Portfolio Credit VaR and ES strongly depend on default correlation and can be reduced by portfolio
diversification.
The credit portfolio models produce also measures of economic capital reallocated by individual
borrowers within each portfolio and are the basis for risk-adjusted performance measures.
The measures of economic capital (Credit VaR) are also a fundamental input for the design and
application of credit strategies, the analysis of credit limits and risk concentration. The economic capital
calculation engine is also used for the analysis of stress tests of the credit portfolio, starting from macroeconomic
variables that affect the various customer segments, by Country, size, etc.
All the above mentioned risk parameters are subject to a regular monitoring and validation process for
each rating system in all its components: models, processes, IT architecture and data quality. On an
annual basis, a final validation report, which summarizes the outcomes of the validation activities
performed by the Group CRO function, also focusing on the comparison of the different rating systems
within the same segment, is brought to the Board of Directors’ attention.
The aim is to give evidence of the systems compliance even though highlighting improvement areas as
well as possible misalignments in the methodologies, which could limit the full comparability among the
resulting risk measures.
The internal Credit VaR model is also subject to assessment in the context of Pillar II validation.
2.3.4 Credit Risk Strategies
According to Pillar II provisions, credit risk strategies for the Group’s credit portfolio are an advanced
credit risk management tool. Consistent both with the budget process and with Pillar II / Risk Appetite
framework, they are aimed to provide the concrete deployment of risk appetite targets by Strategic
Business Area and Legal Entity, considering the expected vulnerability of the Group credit portfolios to
adverse economic downturns as well as the quantification of the sectorial concentration risk.
Credit risk strategies aim to obtain a threefold goal:
� to define the optimal credit portfolio risk profile by minimizing the overall credit risk impact,
starting from the risk appetite framework, in line with the Group’s capital allocation and value
creation criteria;
� to provide support to the responsible functions and Strategic Business Areas at Holding
Company and Legal Entities level when the latter take measures to optimise the portfolio
reshaping through strategic plans and business initiatives;
� to provide a set of guidelines and support when drafting business and credit risk budgets, in line
with the Group’s strategic vision.