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Last update on 06/06/2017 14:52:35

   
 

 

Market Risk

Interest rate risk - Supervisory trading portfolio

General aspects and processes for the management and methods of measurement of interest rate risk

The guidelines for the assumption and monitoring of financial risk in the UBI Banca Group are defined in the policy for financial risk management, with particular reference to market risk on the trading book and to interest rate, exchange rate and liquidity risk on the banking book. The Parent Bank intervenes in the process of managing and monitoring financial risk as follows:

  • definition of methods for measuring financial risks. These methods are approved by the Management Board of the Parent Bank and are submitted to the Boards of Directors of individual Group member companies for implementation;
  • definition of strategic guidelines and of the target range for the total ALM positioning of the Group and individual companies (ordinarily when budgets are formulated). This positioning is approved by the UBI Management Board on the proposal of the Finance Committee and is submitted to the Boards of Directors of individual Group member companies for implementation;
  • definition of the type of investments, risk limits and quantification of these for the Group as a whole and for each Group member company in respect of investment portfolios. These limits are approved by the UBI Management Board on the proposal of the Finance Committee and are submitted to the Boards of Directors of individual Group member companies for implementation;
  • monitoring, co-ordination and strategic control by the Finance Committee on developments in the management of financial risks. Reports on portfolios subject to credit risk must be systematically forwarded also to the Credit Area;
  • in the presence of particular conditions, it makes proposals for urgent intervention and corrective action if necessary to Group risk assumption centres;
  • design and management of the system of internal controls, in accordance with the relative specific regulations.



Interest rate risk - Banking portfolio

General aspects and processes for the management and methods of measurement of interest rate risk

Interest rate risk is generated by imbalance between the maturities (repricing) of assets and liabilities in the banking book. The latter consist of all those financial instruments, assets and liabilities, not included in the trading portfolio in accordance with supervisory regulations.


The monitoring and management of structural interest rate risk - from fair value and from cash flow - is performed by the Risk Management Area of the Parent Bank and extends to include all interest rate sensitive banks and companies in the Group.


The internal risk management process includes all activities designed to identify, measure and monitor risk at  Group level. Activities designed to ensure effective application of the model and compliance with the regulations and procedures adopted also form part of that process. The assessment is performed on a monthly basis using a static approach: in other words it is assumed that the sensitive quantities and mixes remain constant throughout the reference period (12 months).


The methods employed for measuring interest rate risk consist mainly of gap analysis and sensitivity analysis. Sensitivity analysis of economic value is flanked by sensitivity analysis of net interest income which focuses on changes in profits in the following twelve months. The two measurement approaches are integrated in a single, total return, risk indicator. The Management Board of the Parent Bank defines, on proposal of the Finance Committee, the strategic policies and the positioning range, expressed in terms of sensitivity, for interest rate risk, for both the Group as a whole and for individual companies.


A policy of basic equilibrium in terms of exposure to interest risk is defined at individual company level, although there are some specific exceptions. In addition to the exposure limits, early warning thresholds are also set.


In detail:

                                                                                                Limits                    Early Warning



Positioning range at consolidated level Min -45 mln

Sensitivity +/- 100 bp Max -180 mln -130 mln


For the purposes of full information, the limits defined for the trading book are also used for some of the portfolios in the banking book containing assets classified as available-for-sale for IAS purposes (Centrobanca corporate portfolio, IW Bank portfolio). At the end of December the total VaR for the banking portfolios of the UBI Group amounted to 6,79 million euro (5,78 million as at 30th June 2007) with an NAV of 8.847,78 million euro (9.467,86 million as at 30th June 2007).




Price risk - Supervisory trading portfolio

General aspects

This is the risk of changes in price as a function of fluctuations in market variables and specific factors relating to issuers or counterparties. Information on general and organisational aspects is given in the section "interest rate risktrading portfolio", which may be consulted.


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 itself issuer will default).




Price risk - Banking portfolio

General aspects, management processes and methods of measuring price risk

The management of price risk for the banking book forms part of the activities described in the information given for the trading book; the financial instruments other than those included in that information are not subject to price risk.




Exchange rate risk

General aspects, management processes and methods of measuring exchange rate risk

Exchange rate risk is calculated on the basis of mismatches existing between assets and liabilities in foreign currency (spot and forward), relating to each currency other than euro. Exposure to exchange rate risk is calculated starting from the net exchange rate position using a method based on supervisory regulations.


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