KB prezent. angl - Komerční banka

032 ➔033
Report of the Board of Directors
Monitoring of the CDO, CDS and CLN portfolio
In 2003, the Bank sought to improve the methods and processes used for assessing CDO, CDS and CLN exposures. The tool
used for the evaluation and for risk measurements of the portfolio is based on methodology that computes Monte-Carlo
simulations of future cash flows depending on estimated credit deterioration of the underlying assets, and estimates the net
present value of simulated (expected) cash flows. This model was also applied in the evaluation and risk assessment of credit
default swaps and credit linked note transactions.
Asset and Liability Management
The process of asset and liability management (ALM) covers the core banking activities defined as the structural book and is
driven by the need to address the potential consequences of any mismatches in the characteristics of assets and liabilities
under management (interest rates, maturities, currency) and to pre-empt them. The rules used, changes to these rules, and
proposed hedging transactions with respect to the interest rate and liquidity risk require the approval of the ALCO committee.
In all its activities, the Bank complies fully with all requirements of the Czech regulatory authorities (the Ministry of Finance of
the Czech Republic, the Czech National Bank), as well as with all international regulations (IAS 39).
Liquidity risk
The management of liquidity risk is primarily designed to ensure that the Bank can, at any time, meet its funding requirements.
This includes the maintenance of adequate volumes of cash, and balances on nostro accounts and on the account of minimum
mandatory reserves while keeping the Bank’s costs of liquidity low and not hindering business activities. Liquidity is maintained
by consistent diversification of sources and cash-flow management as it reduces the occurrence of unforeseen requirements
for additional funding in the period in question. This primary objective is achieved by way of managed coverage of the
Bank’s cash-out with a very high confidence level (97.5%) over a sufficiently long future period (one year).
A liquidity snapshot broken down by currency – CZK, USD, EUR and other currencies – is monitored on two levels of market
behaviour: normal and stressed liquidity. The management of short-term inter-day liquidity is carried out using a series of
indicators on a daily basis. Sufficient liquidity is controlled by means of a set of limits – in order to achieve these, the Bank
uses on-balance sheet instruments (bond issues, loans taken, etc.) and off-balance sheet instruments (cross currency swaps,
foreign exchange swaps).
Structural interest rate and exchange rate risk
Structural interest rate and exchange rate risks are risks of a potential loss arising from positions held in the Bank’s Structural
Book as a result of a fluctuation in the market price (interest rate and exchange rate changes).
Structural exchange rate risk is measured and managed on a daily basis. The Bank’s position is controlled by a system of
limits (the Bank’s internal limits and limits required by the external regulator – the CNB). Foreign exchange positions are
hedged by standard instruments (FX spot and FX forward operations).
The Bank manages its structural interest rate risk using standard methods (gap analysis, interest rate sensitivity) and a more
sophisticated method called Earnings at Risk, which is based on a stochastic evaluation of the volatility of future interest
income. The Bank has implemented Convergence – an asset and liability management system supplied by SUNGARD.
The system is used by ALM to apply methods for interest rate risk measurement combined with the goal of further
reductions in risks. Standard market instruments for hedging against interest rate risk, such as interest rate swaps (IRS),
forward rate agreements (FRA), and to a lesser degree investing in securities, are used by the Bank.