PrintMarket risk management encompasses all activities in connection with Bank Austria Creditanstalt’s treasury operations and management of the balance sheet structure in Vienna and at Bank Austria Creditanstalt’s subsidiaries. Risk positions are aggregated at least daily, analysed by the independent risk management unit and compared with the risk limits set by the Managing Board and the committees (including MACO) designated by the Managing Board. At Bank Austria Creditanstalt, market risk management includes ongoing reporting on the risk position, limit utilisation, and the daily presentation of results of treasury operations.
The Managing Board of Bank Austria Creditanstalt sets risk limits for market risk activities of the entire Bank Austria Creditanstalt Group at least once a year. MACO, which holds a meeting every week, makes limite decisions at the operational level and analyses the risk and earnings positions of the bank’s treasury units. ALCO performs analyses and makes decisions with regard to business activities closely connected with customer business (in particular, balance sheet structure, liquidity, operational risk, and risk management issues arising between sales units and overall bank management). The decisions and results of these committees are reported directly to the bank’s full Managing Board. Strategic Risk Management, an independent unit separate from the business units up to Managing Board level, is in charge of preparing analyses and monitoring compliance with limits. In 2005, the bank successfully completed the Rulebook project. The objective of this project was to redesign and complement the entire set of rules for treasury operations and market risk. The INM Rulebook is divided into three parts (General Part, Specific Part and Unit Parts) and is binding on all units of the BA-CA Group. The Rulebook was put on a new technological platform with an access control system. Only authorised risk-takers are permitted to enter into risk positions.
Bank Austria Creditanstalt uses uniform risk management procedures throughout the Group. These procedures provide aggregate data and make available the major risk parameters for the various trading operations at least once a day. Besides Value at Risk (VaR; for internal risk measurement on the basis of a one-day holding period and a confidence interval of 99%), other factors of equal importance are stress-oriented volume and position limits. Additional elements of the limit system are loss-warning level limits and options-related limits applied to trading and positioning in non-linear products.
Bank Austria Creditanstalt’s risk model (“NoRISK”) was developed by the bank and has been used for several years. The model is applied and further refined by the Strategic Risk Management unit. In 2004, the variance-covariance approach of the system was extended to include a simulation approach; in July 2005, the bank adopted the simulation approach also for regulatory capital resources reporting. Ongoing refinement work includes reviewing the model as part of backtesting procedures, integrating new products, implementing requirements specified by the Managing Board and by MACO, and adjusting the system to general market developments. In this context a product introduction process has been established in which the risk management unit plays a decisive role in approving a new product.
Regular and specific stress scenario calculations complement the information provided to MACO/ALCO and the Managing Board. Such stress scenarios are based on assumptions of extreme movements in individual market risk parameters. The bank analyses the effect of these fluctuations and a liquidity disruption in specific products and risk factors on the bank’s results and net asset position. These assumptions of extreme movements are dependent on currency, region and liquidity and are set by Strategic Risk Management on a discretionary basis. The results of these stress tests are taken into account in establishing limits.
In addition to the risk model results, income data from market risk activities are also determined and communicated on a daily basis. These data are presented over time and compared with current budget figures. Reporting covers the components reflected in IFRS-based net income and the marking to market of all investment positions regardless of their recognition in the IFRS-based financial statements (“total return”). The results are available to Bank Austria Creditanstalt’s trading and risk management units via the access-protected Intranet application “ERCONIS”, broken down by portfolio, income statement item and currency.
In Vienna, Bank Austria Creditanstalt uses the “MARCONIS” system developed by the bank itself to completely and systematically review the market conformity of its trading transactions. This tool is also used by the units in Hungary and Bulgaria. The units in the Czech Republic and in Slovakia as well as CA-IB London started to use the system in 2005.
Since 1998 Bank Austria Creditanstalt has used its “NoRISK” risk model, which was approved by the supervisory authorities. In contrast to the internal risk management process, the computation of capital requirements takes into account the statutory parameters (confidence interval of 99%, 10-day holding period) and additionally the multiplier determined as part of the model review is applied. In July 2005, the bank switched from the covariance approach to the simulation approach for its regulatory reports. This means that the internal “NoRISK” system now also covers specific interest rate risk in the reporting of capital resources. Thus the system comprises the categories interest rate risk and equity position risk (both general and specific risk) and exchange rate risk.
The results of the internal model based on VaR (1 day, confidence interval of 99%) for 2005 were again significantly lower than the previous year’s results, with minor fluctuations during the year. The VaR for the Bank Austria Creditanstalt Group ranged between € 13 m and € 23 m, the average was € 16.8 m (2004: € 24.6 m, 2003: € 33.8 m). As in the previous year, the risk report includes the non-trading driven equity positions of the bank’s investment books and the hedge-fund positions; since 12 January 2005, these positions have been calculated in a joint report on a completely correlated basis. Spread risk and interest rate risk continued to account for most of the total risk of the Bank Austria Creditanstalt Group.
| VaR of the Bank Austria Creditanstalt Group by risk category (in € m) | ||||
| Risk category | Minimum | Average | Maximum | Year-end |
| Interest rate risk | 3.8 | 7.8 | 15.1 | 7.4 |
| Credit spread | 8.9 | 11.1 | 15.5 | 12.0 |
| Exchange rate risk | 0.4 | 2.0 | 5.1 | 2.4 |
| Equity risk/trading | 2.4 | 3.7 | 5.7 | 2.5 |
| Emerging markets/high yield | 2.2 | 3.0 | 4.4 | 2.7 |
| Hedge funds | 3.2 | 4.0 | 4.9 | 4.2 |
| Equity risk/investment | 4.2 | 5.2 | 6.3 | 5.0 |
| TOTAL 2005 | 13.2 | 16.8 | 22.7 | 17.1 |
| Total 2004 | 18.2 | 24.6 | 43.0 | 21.8 |
| Total 2003 | 23.4 | 33.8 | 49.8 | 25.1 |
In addition to VaR, risk positions of the Bank Austria Creditanstalt Group are limited through volume limits. As part of daily risk reporting, detailed “Trader Reports” are prepared for about 300 portfolios, with updated and historical information made available to all risk-takers and the respective heads of divisions via the Intranet. The comprehensive statistical data on VaR made available in addition to limit-relevant 99% quantile figures include the average of scenario results beyond the 99% quantile mark, providing an indication of the magnitude of events for which the probability of occurrence is very low. In addition to limit-relevant overall simulation runs, the results of about 30 partial simulation runs are recorded daily in the risk database. Partial simulation runs simulate specific risk classes while keeping others constant. The combination of portfolios and partial simulation runs enables the bank to analyse all major risk components on a daily basis and over time; analyses of the most important components are shown in the daily Trader Reports and are partly also visualised by means of QQ plots (the illustrations below show an extract from the results made available as at 30 December 2005).
| Trader Reports: VaR details | ||||||
| Simulation type | 2.33 standard deviation |
99 % quantile | Error near Quantile |
Average beyond 99% |
Skew | Kurtosis |
| All major risk categories | 16,523,080 | –15,637,196 | 1,557,182 | –19,102,529 | 0.16 | 0.67 |
| Interest rate risk | 6,587,078 | –7,443,772 | 1,450,181 | –10,074,313 | –0.06 | 2.61 |
| Credit spread | 12,535,939 | –11,963,076 | 911,857 | –13,956,871 | 0.21 | 1.04 |
| Exchange rate risk | 2,948,342 | –2,368,423 | 203,270 | –2,738,457 | 0.72 | 1.30 |
| Equity risk/trading | 2,263,874 | –2,511,866 | 190,453 | –3,192,799 | 0.13 | 2.27 |
| Emerging markets/high yield | 2,583,053 | –2,658,901 | 254,596 | –3,255,868 | 0.10 | 1.13 |
| Hedge funds | 4,566,270 | –4,183,806 | 288,907 | –4,605,959 | 0.21 | –0.15 |
| Equity risk/investment | 4,758,645 | –5,043,006 | 441,618 | –5,863,593 | 0.06 | 0.73 |
| Vega | 1,550,212 | –1,451,979 | 84,347 | –1,969,217 | 1.11 | 8.45 |
| Major risk categories + vega | –17,089,175 | |||||
“QQ plots” visualise the distribution of net-present-value results per simulation run. The simulated profits/losses are plotted on the x-axis, the related cumulative probabilities (quantiles) on the y-axis. The red straight line helps to make a comparison with the normal distribution (e.g. fat-tail deviations from this line show where simulation results of a specific magnitude occur with disproportionately low/high frequency compared with the normal distribution).
Apart from VaR figures, daily reporting shows details of volume-oriented sensitivities which are compared with the respective limits. The most important detailed presentations include: basis point results (interest rate / spread changes of 0.01%) by maturity band, FX sensitivities and sensitivities in equities and emerging-market/high-yield positions (by issue, issuer and market). Risk management is performed with details varying according to the risk-takers. In the interest rate sector, for example, basis point limits per currency and maturity band, basis point totals per currency and/or per maturity segment (total of absolute basis point values) are used for risk management.
As at 30 December 2005, the entire interest rate position of the Bank Austria Creditanstalt Group (trading and investment) for major currencies was composed as follows (the table below shows basis point values > € 500):
| Basis point values of the Bank Austria Creditanstalt Group | ||||||||||
| As at 30 December 2005 | Annual average, minimum/maximum | |||||||||
| in € | Up to 1 month |
1month to 3 months |
3 months to 1 year |
1 year to 5 years |
Over 5 years |
Total | Maxi- mum |
Mini- mum |
Absolute average | |
| Western | EUR | –48,447 | –63,146 | –576,384 | –189,661 | 54,602 | –823,037 | 348,060 | –1,661,259 | 680,127 |
| Europe | CHF | 6,788 | 45,133 | –45,388 | –41,754 | –18,697 | –53,917 | –39,155 | –519,589 | 238,809 |
| DKK | –610 | 72 | 11,328 | –2,754 | – | 8,036 | 8,120 | –23,852 | 10,011 | |
| GBP | –1,941 | –11,691 | –2,716 | 15,945 | –1,816 | –2,220 | 16,890 | –89,591 | 35,228 | |
| NOK | –300 | 2,041 | 125 | 32 | – | 1,898 | 3,791 | –25,934 | 9,981 | |
| SEK | 641 | 1,541 | 3,420 | –1,742 | – | 3,833 | 3,833 | –19,178 | 8,369 | |
| New EU | CZK | 3,087 | –4,586 | –49,449 | –423 | 30,627 | –20,743 | 112,232 | –74,879 | 24,449 |
| countries | HUF | 92 | –6,165 | 2,055 | –10,655 | –28,210 | –42,884 | 28,666 | –108,792 | 35,648 |
| PLN | –2,232 | –52,324 | 20,069 | –2,031 | 46,974 | 10,455 | 25,354 | –186,003 | 100,888 | |
| SIT | –750 | –1,354 | 5,610 | –20,480 | –23,853 | –40,826 | –27,001 | –80,281 | 41,814 | |
| SKK | –385 | –3,525 | –7,191 | 6,789 | 73,352 | 69,040 | 108,564 | 1,242 | 48,100 | |
| Central and | BAM | –68 | –161 | –1,146 | –581 | – | –1,957 | 616 | –4,605 | 1,867 |
| Eastern | BGN | 130 | –966 | –452 | –7,592 | –18,121 | –27,001 | 16,032 | –35,308 | 12,298 |
| Europe | CSD | –147 | –125 | –503 | – | –2 | –778 | –28 | –820 | 277 |
| incl. Turkey | HRK | –91 | 1,173 | –1,374 | –2,941 | –8,182 | –11,416 | 6,161 | –19,683 | 3,376 |
| LTL | 1 | –3 | – | – | – | –2 | 975 | –964 | 428 | |
| RON | –168 | –4,422 | –1,375 | –1,033 | –668 | –7,637 | 17,849 | –48,410 | 6,968 | |
| TRY | 379 | – | –565 | –16,820 | – | –17,006 | –123 | –17,393 | 5,825 | |
| UAH | – | –7 | –718 | –2,921 | – | –3,646 | – | –7,284 | 4,034 | |
| Overseas – | AUD | –178 | –325 | 1,936 | –140 | 922 | 2,215 | 2,555 | –1,662 | 727 |
| highly | CAD | 272 | –8,406 | 18,211 | 329 | –49 | 10,357 | 14,425 | –1,284 | 7,015 |
| developed | JPY | –3,440 | 12,962 | 42,558 | 11,647 | –2,809 | 60,919 | 123,473 | –3,327 | 71,198 |
| countries | NZD | 59 | –79 | 451 | –1 | – | 429 | 531 | –2,550 | 354 |
| USD | 38,506 | 40,151 | –171,354 | –54,143 | 27,188 | –119,652 | 141,808 | –290,189 | 84,284 | |
| Other | SAR | – | – | – | – | – | – | – | –1,010 | 371 |
| countries | XAU | 78 | 272 | –399 | – | – | –49 | 665 | –569 | 299 |
| BPV<500 | 492 | –411 | 461 | |||||||
| Total | –8,745 | –54,007 | –753,156 | –320,636 | 131,268 | –1,005,277 | 1,433,208 | |||
In 2005, the Bank Austria Creditanstalt Group’s positions again focused on EUR and CHF. Positions in Central, South and East European currencies reflect the Group’s steadily increasing activities in this region, with basis-point utilisation levels highest in the new EU countries (especially Poland), and significantly lower, yet also growing, positions in currencies of non-EU countries. Overall, while new markets are gaining in significance, basis point exposures are in line with the importance of our activities in the respective countries and remain significantly lower than for EUR.
By analogy to the detailed presentation of basis point positions in the interest rate sector, daily reporting presents details of credit spread by curve and maturity band (the bank currently uses about 180 credit spread curves for its risk calculations).
| Spread basis-point values of the Bank Austria Creditanstalt Group | ||||
| Annual average, minimum/maximum | ||||
| in € | Sector | Maximum | Minimum | Absolute average |
| Main sectors | Financial services | –2,204,722 | –2,940,387 | 2,554,669 |
| ABS and MBS | –994,121 | –1,630,634 | 1,353,076 | |
| Corporates | Industrial | –24,119 | –399,300 | 260,426 |
| Automobiles | 6,229 | –147,338 | 47,402 | |
| Consumer goods | –20,844 | –165,716 | 69,948 | |
| Merchandising | 27,555 | –87,661 | 30,045 | |
| Pharmaceutical | –931 | –24,353 | 5,340 | |
| Telecommunications | 13,101 | –110,719 | 52,543 | |
| Energy & utilities | –7,179 | –182,953 | 99,495 | |
| Treasury-near | Treasuries – EU | –1,190,005 | –1,684,621 | 1,444,257 |
| Treasuries – new EU countries | –388,224 | –893,955 | 715,636 | |
| Treasuries – CEE & emerging markets | –30,757 | –106,926 | 66,226 | |
| Treasuries – developed countries overseas | 72,936 | –41,005 | 21,765 | |
| Treasuries – agencies & supranationals | –7,990 | –91,890 | 14,472 | |
| Municipals & German Jumbo | –919,671 | –1,216,340 | 1,045,043 | |
Corporates and financials of investment grade account for the largest part of the Bank Austria Creditanstalt Group’s credit spread positions. Within investment grade positions, financial services companies with comparatively good ratings and ABS and MBS positions with excellent ratings predominate. In Treasury-near sectors, core EU countries and municipals (including German Jumbo issues) account for the highest proportion, followed by Treasuries of the new EU member states.
Trading in high-yield bonds, which has been part of the International Markets business segment (INM) for several years, is not included in the above table. Trading in high-yield bonds comprises emerging markets investments and corporate high-yield bonds below investment grade. Trading in these two portfolios is managed through general VaR limits and a multi-stage limit system limiting positions in individual corporates, industries, rating classes and countries.
At the end of 2005, Russia (and neighbouring CIS countries) accounted for 36% of the emerging markets portfolio, Latin America represented 34% of the total volume, CEE countries (incl. Turkey) 23%, Asia 4% and Africa 2%.
As at 30 December 2005, the high-yield portfolio was dominated by positions in rating category B (59%).
Bank Austria Creditanstalt has invested in hedge funds through its subsidiary Bank Austria Cayman Islands since 1999. In the years before 2005, apart from equity investments and debt finance, more than half of these investments were convertible arbitrage strategies. In 2005, investments were more widely diversified, at the expense of convertible arbitrage. However, market-neutral and event-driven strategies still account for the highest proportion of total volume. The proportion of directional strategies is low compared with the industry average, and the applied leverage is also limited at a comparatively low level. The investment guidelines, which define major risk parameters, are an important management tool in this sector. Compliance with the investment guidelines and daily reviews of valuation results are ensured by the risk management unit at Bank Austria Cayman Islands within central risk management guidelines laid down in Vienna.
In 2005, in addition to the hedge fund activities on Cayman Island, Bank Austria Creditanstalt again invested in hedge funds as part of its equity trading operations. With these investments, which were primarily driven by equity long/short strategies, the BA-CA Group aims to better diversify equity-related activities, thereby complementing the focal areas in Austria and the CEE countries. Investment decisions are prepared by a hedge fund research team of CA IB. This business is conducted within guidelines defining standards in respect of maximum investment, investment diversification, relative size of holding in the fund, and strategy. The positions are integrated in the risk calculations of Bank Austria Creditanstalt and are monitored on an ongoing basis.
Capital requirements for market risk
Bank Austria Creditanstalt’s risk model is subjected to daily backtesting in accordance with regulatory requirements. The model results are compared with changes in value on the basis of actually observed market fluctuations. As the number of backtesting excesses (negative change in value larger than model result) has been within the “green zone” ever since the model was introduced, the multiplier need not be adjusted. In 2005, one backtesting excess was recorded.
Market risk management in the Group
At Bank Austria Creditanstalt, market risk management covers the activities in Vienna and the positions at the bank’s subsidiaries, especially in Central and Eastern Europe. These subsidiaries have local risk management units with a reporting line to Strategic Risk Management. Uniform processes, methods and limit systems ensure consistent Group-wide risk management adjusted to local market conditions.
The “NoRISK” risk model has been implemented locally at major units (Poland, Czech Republic, Slovakia, Hungary, Bulgaria, Croatia), and a daily risk report is made available to the other units. The web application “ERCONIS” records the daily business results of treasury activities in CEE. In line with a total-return approach, measurements of the performance of subsidiaries include income generated by the subsidiaries and the valuation results of the banking book.
To avoid risk concentrations in the market risk position, especially in tight market conditions, Bank Austria Creditanstalt has implemented at its subsidiaries Value-at-Risk limits and position limits for exchange rate risk, interest rate risk and equity risk, which are monitored daily. The monitoring of income trends at subsidiaries by means of stop-loss limits provides an early indication of any accumulation of position losses.
The timely and continuous analysis of market risk and income is the basis for integrated risk-return management of Treasury units at subsidiaries.
| VaR 2005 of Treasury units in CEE | ||||
| in € m | Value at Risk 2005 | |||
| Minimum | Average | Maximum | Limit | |
| Bosnia | 0.0 | 0.1 | 0.1 | 0.3 |
| Bulgaria | 0.4 | 0.7 | 1.2 | 1.4 |
| Croatia | 0.1 | 0.7 | 1.4 | 1.5 |
| Czech Republic | 0.5 | 1.2 | 2.5 | 2.5 |
| Hungary | 0.6 | 1.3 | 2.2 | 2.2 |
| Poland | 1.4 | 2.5 | 4.9 | 7.5 |
| Romania | 0.1 | 0.3 | 0.9 | 1.1 |
| Serbia | 0.0 | 0.1 | 0.2 | 0.7 |
| Slovakia | 0.2 | 0.8 | 1.7 | 1.7 |
| Slovenia | 0.1 | 0.2 | 0.4 | 1.2 |
Market risk limit utilisation in CEE remained moderate in 2005. On average, the CEE subsidiaries utilised their Value-at-Risk limits to the extent of 22%, which corresponded to about one-fifth of the Group’s market risk. The budgeted figure for income from treasury activities in CEE was exceeded by about 18% in 2005.
In addition, short-term and medium-term liquidity management is performed centrally for subsidiaries through position limits. On the whole, the restrictions placed on liquidity transformation at subsidiaries were observed in 2005. Liquidity management of subsidiaries and of the Group is supported by “ALVIS”, a web application introduced in 2005.
Steady business expansion and the acquisition of additional banks in CEE require the permanent adjustment of processes, systems and methods. In 2005, the integration of Eksimbanka (Serbia) was completed and essential aspects of the integration of market risk positions of Hebros Bank (Bulgaria) and Banca Tiriac (Romania) were ensured. The integration of Nova banjalucka banka (Bosnia and Herzegovina), a bank acquired at the end of 2005, has started.
The Bank Austria Creditanstalt Group has gained strong integration expertise through numerous integration projects carried out over the past years. Integrated market risk systems enable BA-CA to integrate additional units within the BA-CA Group’s risk management framework in the future.
Management of balance sheet structure
Interest rate risk and liquidity risk from customer transactions is attributed to Bank Austria Creditanstalt’s treasury operations through a matched funds transfer pricing system applied throughout the Group. This makes it possible to attribute credit, market and liquidity risk and contribution margins to the bank’s business divisions in line with the principle of causation. ALCO ensures that the bank’s overall maturity structure is optimised, with the results from maturity transformation being reflected in the INM division. Factors taken into account in this context include the costs of compensation for assuming interest rate risk, liquidity costs and country risk costs associated with foreign currency financing.
Products for which the material interest-rate and capital maturity is not defined, such as variable-rate sight and savings deposits, are modelled in respect of investment period and interest rate sensitivity by means of analyses of historical time series, and taken into account in the bank’s overall risk position. Interest rate sensitivities are determined and taken into account in hedging activities, which results in a positive contribution to profits from customer business.
To assess its balance sheet structure, the bank uses the Value-at-Risk approach, complemented by a scenario analysis covering subsequent quarters and years. In addition to the banking book in Austria, such scenario calculations are performed for the larger subsidiaries in Poland, the Czech Republic, Slovakia and Hungary. The bank thus also follows the Basel II recommendation concerning the simulation of future net interest income under different interest rate scenarios (“earnings perspective”).
In the earnings perspective analysis, simulations of the future development of net interest income and of the market value of the banking book are based on assumptions regarding volume and margin developments under different interest rate scenarios. Parallel interest rate shocks as well as inversions and low-interest-rate scenarios are analysed to identify their possible impact on the bank’s net interest income and market value. Such analyses focus on modelling customer behaviour in respect of products for which the material interest-rate and capital maturity is unclear. The existing hedge of customer business against interest rate risk significantly reduces the volatility of the bank’s net interest income.
A strong decline in the EUR yield curve would have the strongest impact on the bank’s net interest income. A downward interest rate shock of 2 percentage points would thus depress net interest income in the first year by about € 50 m if all other factors (volume, margins, maturities) remain constant.
The future New Basel Capital Accord (“Basel II”) will be effective from 2007. For the first time, the new rules establish a relation between “interest rate risk in the banking book” and the bank’s capital by comparing a change in the market value of the banking book after a 2% interest rate shock with the bank’s net capital resources. In the event that such an interest rate shock absorbs more than 20% of a bank’s net capital resources, the bank supervisory authority could require the bank to take measures to reduce risk.
The complete and automated integration of the Group’s risk position means that Bank Austria Creditanstalt is already well prepared to meet this requirement with its “NoRISK” risk measurement system. A 2% interest rate shock would absorb about 3.9% of the Group’s net capital resources; this calculation also includes the current investment of equity capital as an open risk position. This means that the figure for Bank Austria Creditanstalt is far below the outlier level of 20%.
Preliminary consultations with
Austrian Financial Market Authority and Austrian central bank
Preliminary consultations with the Austrian Financial Market Authority (FMA) and the Austrian central bank (Oesterreichische Nationalbank – OeNB) took place in February and March 2005 with a view to recognition of our credit risk tools as compliant with Basel II requirements for the advanced internal ratings-based approach Bank Austria Creditanstalt seeks to use. The bank presented its models and methods for rating/scoring, credit risk mitigation and estimation of parameters. In this context the bank also entered into an intensive process of discussion and sharing of experience with the competent authorities. Feedback from the FMA and from OeNB was highly encouraging, confirming us in our determination to pursue the chosen course.