Market risks
Definition
Market risk is the potential loss arising from changes in market data. It comprises interest rate risks, CVA risks from derivatives, and spread and other market risks. The latter include currency risks and volatility risks. Spread risks are differentiated into credit spread risks, cross-currency basis spread risks and tenor basis spread risks.
Risk assessment and management
Interest rate risks
Interest rate risks are measured from a present-value perspective and from an earnings perspective by shifting yield curves.
Present-value calculation and monitoring are carried out daily for the “Treasury Management” and “Promotional Activity” segments and monthly at overall bank level. The earnings-based measurement of interest rate risks is performed in the stress scenarios under the normative approach over a three-year horizon on the basis of the gap structure in the interest rate scenarios considered.
In addition, six supervisory interest rate shock scenarios prescribed by the supervisory authorities are calculated. At the reporting date, the supervisory interest rate coefficient (Supervisory Outlier Test [SOT]) based on Economic Value of Equity [EVE]) for rising interest rates was 10.4%. Rentenbank’s coefficient (SOT NII) for falling interest rates was 0.4%.
Generating material income through the assumption of interest rate risk is not one of Rentenbank’s strategic objectives. Interest rate risk is limited through the use of derivatives on the basis of micro hedges or macro hedges, the latter for special promotional loans.
Spread risks
Spread risks are calculated using a value-at-risk (VaR) model based on historical simulation. Credit spread risks for securities, promissory notes and all registered bonds, as well as basis spread risks, are quantified and limited on this basis. Credit spread risks are managed on the basis of the buy-and-hold strategy, in particular through the requirements of the credit risk strategy.
Other market risks
Even with closed foreign currency positions, the market values of the underlying transactions and hedging transactions may differ because of different valuation parameters, primarily spreads. When translated into euros, this results in exchange rate-related present-value differences, which are taken into account as currency risk. Apart from immaterial positions in clearing accounts, there are no open foreign currency positions. Volatility risk describes the risk that the value of an option changes as a result of changes in volatility. Rentenbank holds only interest rate-related options, and embedded options are also taken into account, particularly in the case of loans with termination rights. Currency and volatility risks are measured and limited through scenario-based changes in exchange rates and in cap/floor and swaption volatilities.
Other market risks, such as equity price risks and commodity risks, are not relevant due to the business model.
CVA risk
CVA risk is the risk of potential fair value losses on derivatives resulting from a deterioration in the counterparty’s credit quality. In addition to probability of default, which is derived from credit default swaps, the calculation also incorporates counterparties’ loss given default and potential future exposure at the level of the netting pools. CVA risk is limited through the conclusion of collateral agreements and through limits.
Risk buffer
A risk buffer is used to additionally take account of imprecision and simplifications in risk modelling.