Market risks
Definition
Market risk refers to the potential losses arising from changing market data. It encompasses interest rate risks, CVA risks from derivatives, spread risks, and other market risks. The latter category comprises currency risks and volatility risks. Spread risks are sub-divided into credit spread risks, cross-currency basis spread risks, and tenor basis spread risks.
Risk assessment and management
Interest rate risks
Interest rate risks from the present value perspective (Economic Value of Equity, EVE) and the income-oriented perspective (Net Interest Income, NII) are measured with reference to shifts of yield curves.
Interest rate risks are calculated and monitored from the present value perspective on a daily basis for the Treasury Management and Promotional Activity segments and on a monthly basis at the overall bank level. Applying stress scenarios under the Normative Approach, interest rate risks are measured from the income-oriented perspective over a time horizon of three years on the basis of the gap structure in the interest rate scenarios considered.
Six interest rate shock scenarios specified by the regulatory authority are calculated as well. At the reporting date, the regulatory interest rate coefficient to be applied for simulating an interest rate increase was 10.9%. The extensive new CoRep IRRBB minimum reporting requirements have been implemented.
Generating material income from the assumption of interest rate risks is not one of the Bank’s strategic objective. Interest rate risk is limited through the use of derivatives on the basis of micro-hedges or macro-hedges, the latter being used for the special promotional loans.
Spread risks
Spread risks are calculated with a Value-at-Risk (VaR) model on the basis of an historical simulation. In this process, the credit spread risks of securities, promissory note bonds, all registered securities, and basis spread risks are quantified and limited. Credit spread risks are managed on the basis of the buy-and-hold strategy, particularly in observance of the requirements specified by the credit risk strategy.
Other market risks
Even in the case of closed foreign currency positions, the market values of underlying and hedging transactions can differ from each other by reason of different measurement parameters, mainly the spreads. When converted to euros, these differences lead to present value differences resulting from the exchange rates applied, which are considered as currency risk. Aside from certain immaterial positions in the clearing accounts, there are no open foreign currency positions. Volatility risk refers to the risk that the value of an option could change as a result of changes in volatilities. Rentenbank only holds interest rate-related options, which also include embedded options, particularly in the case of loans with termination rights. Currency risks and volatility risks are measured and limited by means of scenario-based changes in exchange rates, cap floor volatilities, and swaption volatilities.
Other market risks such as equity transaction risks and commodity transaction risks are not relevant to the Bank by reason of its business model.
CVA risk
CVA risk refers to the risk of potential market value losses in derivatives resulting from a deterioration of the counterparty’s credit rating. The parameters applied in the calculation are the business partner’s probability of default, which is derived from credit default swaps, the loss given default, and the potential market value changes (potential future exposure) at the level of netting pools. CVA risk is limited by means of collateral agreements and limits.
Risk buffer
Risk modelling uncertainties and simplifications are additionally accounted for by means of a risk buffer.