Ársskýrsla Landsbankans - Landsbankinn

Notes to the Consolidated Financial Statements
Market risk
70. Market risk
Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market prices. Market risk
arises from open positions regarding currency, equity and interest rate products, all of which are exposed to general and specific market movements
and changing volatility levels in market rates and prices, for instance in interest rates, credit spreads, foreign exchange rates and equity prices. Other
price risk is defined as equity price risk, inflation risk and commodity price risk, each of which is disclosed in the Notes below (except for commodity
risk as the Group is not exposed to such risk).
71. Market risk management
The Group separates its exposure to market risk into trading and non-trading portfolios, managing each of them separately. Trading portfolios
include all of the positions arising from investment banking operations of the Finance Division, such as positions arising from market-making and
proprietary position-taking (i.e. bonds classified as held for trading, equities, unsettled securities trading, derivatives and short positions). Nontrading
portfolios include positions arising from the Group’s retail and commercial banking operations (i.e. loans and advances, deposits and bonds
designated as at fair value through profit or loss or classified as loans and receivables). The overall authority for market risk management has been
vested by the Board of Directors in the CEO and the Risk and Finance Committee. The Asset, Liability and Market Risk Unit is responsible for
developing detailed risk management policies (which are subject to review and approval by the Risk and Finance Committee) and for reviewing their
implementation from day to day. The objective of market risk management is to identify, locate and monitor market risk exposures and analysing and
reporting to appropriate parties.
Market risks arising from trading and non-trading activities are monitored by two separate teams within the Risk Management Division, which
submit daily, weekly and monthly reports to the head of each business unit along with detailed input to a comprehensive quarterly risk report. The
Group‘s market risk is thereby measured on a daily basis, and the detailed limits set by the Risk and Finance Committee are monitored by the Asset,
Liability and Market Risk Unit within the Risk Management Division. Several indicators are used, including daily profits and losses as well as net
positions across different attributes such as the currency and issuer. Market risk in the trading and non-trading portfolios is managed separately by
Treasury and monitored by the Asset, Liability and Market Risk Unit.
Risk-weighted assets are determined by applying specific risk weights to Group assets, following methodology developed by the Basel Committee on
Banking Supervision. The following table summarises the Group's exposure to market risk at year-end 2010 and 2009:
2010 2009
Market risk factor % of RWA % of RWA
Equity price risk 4.8% 3.4%
Interest rate risk 2.5% 5.1%
Foreign exchange risk 8.5% 13.7%
Total 15.8% 22.1%
The currency risk in the Group’s trading portfolios is disclosed together with that in its non-trading portfolios in Notes 76-80, along with the related
sensitivity analysis.
72. Interest rate risk
The interest rate risk is the risk that the fair value or future cash flow of financial instruments will fluctuate due to changes in market interest rates.
Changes in interest rates for the Group's assets and liabilities, other than those in its trading portfolios, have an impact on its interest rate margin.
This risk results primarily from duration mismatch between assets and liabilities.
Interest rate risk is managed principally by monitoring interest rate gaps. Interest rate risk is managed centrally within the Group by the Treasury
Department, and is monitored by the The Asset, Liability and Market Risk Unit of the Risk Management Division. In the current economic
environment, the Group has no access to derivative instruments and other tools for managing interest rate risk.
NBI hf. Consolidated Financial Statements 2010 67
All amounts are in ISK million
Allar upphæðir eru í milljónum króna Ársreikningur 2010 167