UBI Banca Group

one day VaR limit for the UBI Group trading book €18.21 million
early warning on VaR 80% VaR
Observance of the limits set for each portfolio is monitored daily.
The summary measurement used to assess the exposure of the Bank to financial risks is value at
risk (VaR). It is a statistical measurement used to estimate the loss that might occur following
adverse changes in risk factors.
The VaR of the UBI Banca Group is measured using a confidence interval of 99% and a holding
period of one day. This value is defined in terms of limits consistent with the time horizon for the
possible disinvestment of the portfolios. The VaR gives the “threshold” of the daily loss which, on the
basis of probability hypotheses could only be exceeded in 1% of cases.
The method used for calculating VaR is that of historical simulation. With this approach the portfolio
is revalued by applying all the changes in risk factors recorded in the two previous years (500
observations). The values thus obtained are compared with the present value of the portfolio to give a
hypothetical series of gains or losses. The VaR corresponds to the sixth worst result (confidence
interval of 99%) of those obtained.
The Group employs a stress testing programme to identify events or factors which could have a
significant effect on positions to supplement the risk indicators obtained from the use of VaR.
Stress tests are by nature both quantitative and qualitative and they consider not just market risks
but also the effects on liquidity generated by market turbulence. They are based on both specially
created theoretical shocks and market shocks actually observed in a predetermined historical period.
The predictive power of the model adopted for risk measurement is currently monitored using daily
backtesting analysis, which uses an actual P&L calculated by the front office systems of the Group.
Retrospective tests consider changes in the value of the portfolio resulting from the front office
systems of the Group, determined on day t with respect to positions present at t-1. The actual P&L is
generated from all the transactions opposite in sign to the initial position for a total amount less than
or equal to the total of the position t-1 without considering transactions of the same sign as the initial
position that may have arisen during the day.
The risk of losses caused by unfavourable changes in the price of traded financial instruments due to
factors related to the issuer can be the result of daily trading activity (idiosyncratic risk) or of a
sudden change in price with respect to general market trends (event risk, such as the risk of default
by the issuer caused by a change in the market’s expectation that an issuer itself will default).
The UBI model for monitoring specific risk for debt securities is capable of detecting the first of the
two components (idiosyncratic risk) because it considers spread curves by economic sector and rating
as risk factors.
Total risk on equity instruments (and OICR – collective investment instruments) is measured by
considering single shares as risk factors and it includes both the generic risk component (i.e. the risk
of losses caused by unfavourable trends in the prices of the financial instruments traded in general)
and a specific component relating to the situation of the issuer.
416