Market risks

The exposure of the bank to market risk is related to open positions in currency, rates and debt instruments that are sensitive to unfavourable changes in market prices. The market risk management system includes the establishment of limits on the level of exposure to such risks and daily control over compliance with the same.

The Management Board and the Assets and the Liabilities Management Committee (the ALMC) are responsible for the management of risks on a regular basis. The Treasury calculates, controls and manages market risks on a daily basis. The limits of individual risk per issuer are established by the Credit and Investment Committee, based on the proposal of the Treasury and on approval of the Management Board. The activities of the Treasury on risk management are also controlled by the Internal Control and Audit Service.

Regular stress-testing of market risk is conducted, which allows assessment of the sustainability of the portfolio of the bank’s assets to extreme events that could lead to abnormally large losses. The bank uses the methodology of the Bank of Russia #387-P dated September 28, 2012 “On the calculation of the market value of risk procedure of credit institutions” for the purpose of market risk calculations.
Market risk includes securities, currency and interest rate risks.

Securities Risk

While the bank is involved in operations with securities (including Russian issued shares and their ADRs and GDRs), this activity is not a priority. The applied system of restricting securities related risk includes limits on the security portfolio (including REPO operations) as well as individual sub-portfolios, as well as active limits on the trading portfolio. Given the limited size of exposure to securities risk, we believe that the methodology of the Bank of Russia #387-P dated September 28, 2012 “On the calculation of the market value of risk procedure of credit institutions” is a sufficient one for assessment of the bank’s securities related risk.

Structure of the securities portfolio

Currency Risk

The main method of assessing and controlling currency risk is the calculation of the open currency positions. To assess the risk associated with maintaining open positions in foreign currencies, we use the methodology of the Bank of Russia.

The bank adheres to a conservative currency policy, seeking to limit currency risk by minimizing open positions. Special attention is paid to the quality of assets denominated in foreign currency, and, above all, the quality of the loan portfolio.

The bank manages currency risk by ensuring maximum possible consistency between the currency of its assets and the currency of its liabilities by currency within established limits. The Assets and Liabilities Management Committee sets limits on the level of exposure by currency and in total for both overnight and intra-day positions.
The assessment of the impact of currency risk on the bank’s capital is based on the methodology set forth in the Regulations of the Bank of Russia # 387-P dated September 28, 2012 “On the calculation of the market value of risk procedure of credit institutions”, and on the internal Regulations “On the procedure of calculating the size of market risks of Vozrozhdenie Bank”.

We estimate the bank’s exposure to currency risk in 2013 as low, since the total value of open currency positions in selected foreign currencies, as well as selected precious metals, did not exceed 2% of core capital, which is significantly below the limits set by the Bank of Russia (20%).

Interest rate risk

The bank’s Financial Plan for the year defines the general parameters of interest rate risk management. The Management Board and the ALMC are responsible directly for the management of interest rate risk. The key methods for reducing interest rate risk include balancing assets and liabilities according to interest re-pricing dates, maturities, as well as regular (no less frequent than quarterly) review of rates. The Management Board of the bank makes decisions on the revisions of interest rates.

Regular stress-testing is conducted to assess interest rate risks, which allows the estimation of potential losses in the case of unfavourable changes in the conditions of the key risk factors.

Gap analysis is used to assess the potential interest rate risk on client operations relating to loans and deposits; for the trading portfolio of securities, the methodology of the Bank of Russia #387-P dated September 28, 2012 “On the calculation of the market value of risk procedure of credit institutions” is used.