Risk management

The Bank’s risk management strategy is based on the no loss principle and aimed at ensuring optimumcorrelation between specific business lines and the levels of the risks which the Bank assumes when undertaking specific transactions.

The risk management process involves the Supervisory Council, Management Board, Internal Audit Unit and a special organizational unit – the Risk Management Department. The Management Board of the Bank is responsible for the functioning of the internal risk management and control system. The Supervisory Council systematically monitors the risk management situation, and influences the management Board’s tendency towards risks. The Internal Audit Unit checks and tests the internal risk management and control system. The key functions of the Risk Management Department include quantitative and qualitative assessment of risks facing the Bank; development of a risk management methodology; creation of a system of automatic maintenance and management of a risk-related database; identification and monitoring of unauthorized limits overriding; analysis of possible scenarios; reports on risk positions and recommendations to the Management Board as regards their admissible levels; participation in the lending process in the part involving assessment of the financial status of borrowers and liquidity of offered security; and analysis of credit products and processes.


Classification of risks by the degree of their influence on the Bank

credit risk,

liquidity risk,

operational risk,

interest rate change risk,

currency risk, and

market risk.

Committees and commissions participating in the risk management process:

Credit Council;

Credit Committee;

Retail Credit Committee;

Credit commissions of branches/directorates/outlets;

Retail credit commissions of branches/directorates;

Credit Portfolio Quality Control Commission;

Assets and Liabilities Management Committee (ALMC);

Task Commission of the ALMC; and

Operating Risks Management Committee (ORMC).


Main Components of the Management Policy for Specific Types of Risks

Credit risk is an existing or potential risk to incomes and capital, which occurs due to a default of the party which assumed obligations to meet the requirements of any financial agreement with the Bank (an organization unit of the Bank), or otherwise fails fulfill its obligations. The credit risk is present in all types of activity where the result depends on the contractor, securities issuer or borrower. The main credit risk management body in the Bank is the Management Board whose powers include the development of the credit policy, approval of credit policies and procedures, and approval of key financial parameters of the lending activity. The Credit Council, Credit Committee, and Retail Credit Committee are the executive bodies of the Management Board, the membership of which includes the heads of the organizational units which take part in the lending process, i.e. the Customer Policy Department, Risk Management Department, Legal Department, Banking Security Department etc.


The credit risk reduction methods practiced in the Bank:

limiting;

review of loan requests by the Bank’s services which make independent project evaluation (Risk Management Department, Legal Department, Banking Security Department);

selection of an appropriate structure for a specific loan agreement;

security (pledge, financial guarantee);

continuous analysis of the financial status and cash inflows to current accounts; and

monitoring of offered loan security.

The main credit risk management instrument is the system of limits, which consists of three types of limits: personal credit risk limits, portfolio risk limits, and authorization limits.

Personal credit risk limits are set on the basis of analysis of the borrower’s financial status, loan project, loan security, agreement structure, the borrower’s reputation, and legal expert examination of the submitted documents.

To ensure monthly monitoring of the loan portfolio, the Risk Management Department studies the existing investment concentrations of the Bank by economic branches, geographic regions, and specific programs, analyzes the level of doubtful debts for each organizational unit of the Bank and sufficiency of the existing backup reserves. The Loan Portfolio Quality Control Commission has been created in the Bank to continuously monitor the loan portfolios of the Bank’s organizational units. The Doubtful Assets Unit detects doubtful assets at their early stages and carries out the work to recover overdue payments.

The authorization limits are a system of limits set for credit committees/ credit commissions/ officials with regard to standard and non-standard credit products and concerning the permitted amount in loans extended to one borrower and the overall portfolio of outstanding loans. Authorization limits are set depending on the quality of the existing loan portfolio, management quality, professional qualifications of the staff, region etc. The Risk Management Department, Internal Audit Unit, and Doubtful Assets Unit may revise downward or close the set limits, if the loan portfolio worsens. The set authorization limits may be increased no more often than once per quarter.   


Liquidity Risk is an existing or potential risk to incomes and capital, resulting from the Bank’s inability to fulfill its obligations within the schedule without inadmissible losses. The main liquidity risk management body is the Management Board whose powers include development of the liquidity management policy and approval of relevant policies and procedures. The Assets and Liabilities Management Committee (ALMC) is an executive committee of the Management Board whose functions include implementing the liquidity management policy, current decision-making as regards liquidity management, and approval of internal limits for the Bank. The Bank’s liquidity management is made up of three components: daily liquidity management, current liquidity management, and long-term liquidity management. Immediate liquidity is managed by the Bank’s Treasury through analysis of correspondent account balances as of the start of the day, payment schedule data reflecting cash inflows and outflows, plans of the organizational units of the Head Office and branches as regards transactions completed over the day, and information about cash movements on customer accounts. Current liquidity (up to one month) is managed by the Risk Management Department through assessing the Bank’s needs for liquid funds, using the money source and application method which determines the scale of liquidity gap for a given period which equals the difference between the expected cash inflows and potential cash outflows. Long-term liquidity (over one month) is managed by the Risk Management Department using the resource gap method (by measuring the degree of discrepancy between the maturity structures of assets and liabilities). 


Operational Risk is a potential risk to the existence of the Bank, resulting from shortcomings of the corporate management and internal control system, or discrepancies between information technologies and the information processing processes from the viewpoint of controllability, universality, reliability and continuance of operation. The key manager of operational and technological risks is the Management Board, whose powers include the development of the operational and technological risk management policy and approval of relevant policies and procedures. The Operational Risks Management Committee(ORMC) is an executive body of the Management Board, whose functions include implementing the operational and technological risk management policy, improvement of business processes, and implementation of internal control systems. The Risk Management Department organizes efforts to minimize operational risks and controls the fulfillment of ORMC decisions. Control over operational risks is a responsibility of the Internal Audit Unit in the part related to recommendations to organizational units of the Bank at the stage of development and implementation of new products, processes and systems, and audit of the Bank’s organizational units; a responsibility of the IT Department in the part related to ensuring proper operation of the software systems used in the Bank and creation of a comprehensive IT security system in the Bank; and a responsibility of the Operation Support Department in the part related to developing accounting arrangement and management methodologies and ensuring that organizational units of the Bank meet the requirements of the bank’s accounting and reporting policy.


Interest Rate Change Risk is an existing or potential risk to incomes and capital, resulting from unfavorable changes in interest rates. The main interest rate change risk management body is the Management Board. The implementation of the interest rate change risk management policy, including decisions related to changes in interest rates, arrangement of monitoring and revision of interest rates for specific currencies, product maturities and types, control over the admissible interest rate levels and control over observance of the permitted levels of interest rate change risk and fulfillment of appropriate decisions by organizational units of the Bank are functions of the ALMC. The Risk Management Department assesses the value of liabilities and profitability of assets, correspondence between maturities of assets and liabilities, profitability of the Bank’s assets, net interest margin and spread; and gives recommendations to the Assets and Liabilities Management Committee as regards changes in interests rates for deposit and credit products.


Currency Risk is a result of the potential risk to incomes and capital due to unfavorable fluctuations in currency exchange rates and prices for banking metals. Currency risk management is based on the chosen currency risk management strategy which includes the following elements: centralization of currency risk management, utilization of every available prevention measure against the risk threatening the most serious losses, control and minimization of losses, if the risk is unavoidable, and currency risk hedging, if the risk proves unavoidable. The main currency risk management instrument for the Bank is limiting. The Bank uses this instrument by setting limits on the general open currency position for the Bank in general, for each organizational unit of the Bank and specific transaction; estimates the amount of potential losses from currency rate changes; and treasury transactions (arbitration conversion transactions, Treasury non-trade transactions with foreign cash, and transactions with banking metals).


Market Risk is an existing or potential risk to incomes and capital, resulting from unfavorable fluctuations in the values of securities, goods and foreign currency rates related to the instruments in the trading portfolio of the Bank. This risk arises out of market-making, dealing, acceptance of offers related to debt and share securities, currencies, goods and derivatives. The Bank employs the following instruments to manage the market risk: setting limits on the amount of specific purchase and sale agreements, if such an agreement is based on conditions depending on market price fluctuations, setting limits on the total amount of the currency position and limits on the total amount of the investment portfolio, assessment of quotations volatility, calculation of limits of investment in securities based on calculated Stop Loss limits and scale of changes in securities quotations, unscheduled revision of the set limits in the event of unexpended and abrupt changes in the market situation or a significant decrease in the Bank’s resource base, and creation of backup reserves against possible losses.