ANNUAL REPORT 2006 - DG Hyp

III) Market risks
For us, the concept of ‘market risks’ comprises the risks
associated with fluctuations in market prices (market risks
in the narrower sense), and liquidity risk. Market risk is the
impact of interest rate fluctuations on the money and
capital markets, and changes in exchange rates. Liquidity
risk comprises the threat that DG HYP is unable to borrow
the funds required to maintain payments, or the risk of
only being able to do so at considerably less favourable
terms.
a) Risks associated with market price fluctuations
DG HYP uses various hedging tools in its dynamic management
of interest rate risk and currency risk for the bank
as a whole. This consists mainly of macro hedge transactions
employing interest-rate swaps and caps; options
on interest-rate swaps (so-called swaptions) are also concluded
occasionally, albeit to a limited extent. In addition,
a number of large-sized transactions, such as granting
promissory note loans to institutional clients, are hedged
regularly through micro hedges against the particular interest
rate risk. Interest-rate swaps and swaptions are also
used for this purpose.
In order to quantify the bank’s market price risk,
DG HYP calculates two VaR figures daily using a variance/
co-variance procedure for all positions in each of the
portfolios. The following parameters are used in the calculations,
in accordance with section 32 of the provisions
governing the use of internal models for the capital ratio
according to the KWG:
• 250-day history;
• ten-day holding period and one-day holding period;
• 99 per cent confidence interval.
The forecasting quality of our internal VaR model is
checked daily. We apply the assumptions in the Basel
Committee publication on market risk as model parameters
for this backtesting process:
• preceding 250-day period;
• one-day holding period;
• 99 per cent confidence interval.
Market Risk Controlling compares the projected
changes in present value that are calculated according to
40 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2006
Management Report
these parameters, with the negative changes in present
value that actually occur the following day. On this basis,
we determine how often the actual negative changes in
the present value exceeded the VaR figures in the risk
model.
Market Risk Controlling informs the Management
Board (as well as the Treasury) on the day-to-day Treasury
performance and utilisation of the VaR limit. The Management
Board decides on the management of the risk structure
for the entire bank at the regular meetings of the
Risk/Return Management Committee.
b) Liquidity risk
The bank’s liquidity situation is determined daily in line
with the regulatory and daily business requirements. For
this purpose, Market Risk Controlling provides Treasury
with a differentiated overview on a daily basis, indicating
future liquidity flows resulting from the individual positions
in the portfolio. At its meetings, the Risk/Return Management
Committee is provided with an overview of the shortand
long-term liquidity projection. Liquidity is managed
on the basis of this overview, with the dual objectives of
securing the bank’s long-term liquidity and achieving
compliance with the liquidity principle in accordance with
section 11 of the KWG (Grundsatz II).
A liquidity controlling system was implemented in
2006, in line with the requirements of Basel II for measuring
and reporting on liquidity risk. On the basis of the
short- and long-term liquidity projection, a limit system
was implemented on a daily basis and integrated in the risk
monitoring process. The results from the scenarios are
included in the presentations.
IV) Operational risks
The Basel Committee defines operational risks as “the
risk of direct or indirect losses resulting from inadequate or
failed internal processes, people and systems, or from
external events”. DG HYP has adopted this definition,
albeit with marginal changes to detail in order to adjust
it to the bank’s own special interests. According to the
Basel II regulations, banks have been subject to capital
requirements for operational risks since 1 January 2007.
DG HYP has adopted the standardised approach for quantification
since 2003, and has notified BaFin accordingly.