The risk management policy is controlled by the Supervisory Board and is implemented by the Management Board through the Risk Management Department, which is responsible for limits determining on certain operations, contract parties, countries of contract parties, and on balance structure according to the resolutions taken by the Management Board in respect of the Bank’s risk and profit policy. The Risk Management Department consists of units that deal with credit risks of corporate and retail business, collateral appraisal, market and operational risks.
— Liquidity Risk Management Techniques
Looking to avoid liquidity risks the Bank continuously monitors and analyses factors critical for its liquidity. The ones deserving particular attention include:
- current economic climate and its forecasted near-term development;
- current state of money market (interbank market of credit resources);
- actual and forecasted monetary policy of the National Bank of Ukraine (including accessibility of central bank refinancing mechanisms for commercial banks);
- quality of the Bank’s credit and investment portfolio;
- status of the Bank’s resource base (from the maturity and diversification perspective);
- level of public confidence in the Ukrainian banking system in general and in the Bank in particular;
- the Bank’s reputation with counterparty banks, customers and financial market players.
Liquidity risk minimisation is achieved through the following mechanisms:
- compliance with liquidity ratios:
- instant liquidity ratio N4;
- current liquidity ratio N5;
- short-term liquidity ratio N6;
- fulfilment of the central bank’s mandatory reserve requirements;
- net liquidity position optimisation (both for all currencies in general and individually for each major currency in which the Bank operates) through imposition of gap limits based on GAP reports;
- maintenance of adequate Bank payment position (both for all currencies in general and individually for each major currency in which the Bank transacts);
- credit risk diversification (to avoid concentration of credit risk immediately related to liquidity risk), including through imposition of credit limits;
- diversification of funding sources (to avoid dependence on depositors) and overall analysis of the Bank’s resource base;
- regular assets inventory control.
— Currency Risk Management Techniques
These techniques are based on external data, such as financial market macroeconomic indicators (currency exchange rates and volatility indexes), as well as on in-house information regarding open currency positions of the Bank (including their development pattern and structure by currency) and actual exchange rates for separate transactions.
Evaluation and assessment of currency risk is structured as the following sequence:
- calculation of Bank’s balance sheet from the currency perspective to identify size of open currency positions;
- collection and processing of data (on currency exchange dynamics) to find exchange rates volatility index;
- calculation of value at risk (VaR) for each individual currency as well as for the portfolio in general (with account for mutual correlation of currencies);
- back testing to verify actual results versus assessments and assumptions.
— Interest Rate Risk Management Techniques
These techniques are based on external data, such as financial market macroeconomic indicators (interest rates and volatility indexes), as well as on in-house information regarding gaps between interest sensitive assets and liabilities (for different time perspectives and different currencies), duration, yield curves, spread, net interest margin, and net interest income.
Evaluation and assessment of interest rate risk is structured at the following sequence:
- calculation of interest sensitive assets and liabilities variation from currency perspective in order to identify size of gaps (for different time intervals) and indicators of balance sheet sensitivity to interest rate;
- development of yield curves separately for transactions on the assets and liabilities sides;
- calculation of spread, net interest margin and net interest income.
— Credit Risk Management
The bank defines credit risk as any actual or potential risk for revenues and capital arising out of failure of a party undertaking a liability to perform under any financial arrangement with the Bank (or any unit thereof) or in any other way to perform its obligations. This includes risk of non-performance by a borrower (Bank’s counterparty) under any credit obligation (that is, the risk that payment by a borrower of accrued income and principal under such obligation will not be in line with a loan agreement or another relevant arrangement or will be failed entirely). Decisions on acceptance or avoidance of credit risks are a prerogative of the Supervisory Board, the Management Board, Credit Committees, Chairman of the Management Board and other competent divisions of the Bank within their respective authority.
Essentials of credit risk management at VAB Bank are set forth in its Credit Policy that provides for:
- regular analysis of credit resource market;
- identification of principal instruments/products and customer categories for the bank to work with that may secure maximum profitability of credit transactions at a set level of credit risk;
- optimisation of Bank’s credit portfolio management in order to diversify credit risk and sustain the required liquidity level.
The core principle governing credit activity of the Bank is the assurance of adequate income required for normal operation at minimum risk. This is achieved by means of diversification of credit portfolio by financial instruments, products, sectors and business lines, as well as coordination of the scope and structure of credits (by currency and maturity) with the scope and structure of bank liabilities.
From the perspective of each individual credit transaction with a Bank counterparty/client credit risk is managed by:
- introduction of limits/bans for certain activities and identification of priority activities and transactions to fund;
- implementation of special lending terms for different customer segments and lenders/customers with different financial position assessments and credit histories;
- introduction of minimum scope of information disclosure regarding a customer or a group of affiliated persons;
- setting individual terms for certain credit products (as regards limitations on permitted use of borrowed funds, credit maturity, amortisation terms, required collateral etc.).
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