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2018 Pillar 3 Disclosures
Annex
Below, in accordance with the information advanced
in Title 2 of this document, this Annex includes
detailed information on the management objectives
and policies connected with each of the risks having a
significant impact:
1. Credit risk
Objectives, general policies with regard to
assumption and management of risks
The General Risk Management Framework approved by
the Board, implementing the Risk Tolerance Framework,
contains the policies regarding the assumption and
management of credit risk.
This document is the foundation upon which the
management of internal risk is based, and determines
the governance and monitoring structure. It also
determines the internal limit structure, and processes
for risk admission, assessment, mitigation, and
coverage, as well as pricing.
The policy highlights that the portfolio is made up of,
primarily, exposures with a low level of risk and shows
that other risks with a worse credit rating are rare,
exceptional, and few in number.
Credit Risk Processes and Management
This is one of the basic risks to which Cecabank is
exposed through its various business units.
Credit Risk is defined as the risk which affects or could
affect results or capital as a result of a breach by a
borrower of the commitments set out in any contract,
or the possibility that it might not act as agreed. This
category includes:
1.
Principal risk.
Resulting from a failure to repay the
principal.
2. Substitution or counterparty risk.
This refers to the
capacity and intention of the counterparty to comply
with its contractual responsibilities at the time of
maturity. Credit risk exists throughout the lifespan of
the operation, but may vary from one day to another
because of settlement mechanisms and changes in
the market valuation of operations.
3. Wrong-way risk:
As counterparty risk, depending
on the nature of the specific transactions, OTC
derivative instruments can also have adverse
effects from correlation between exposure to risk
with a specific counterparty and credit quality, in
such a way that when it decreases, exposure to the
counterparty increases. This risk is called wrong-
way risk.
4. Issuer risk.
This risk arises when trading financial
assets of an issuer on primary and/or secondary
markets, and is defined as the risk that a loss in
their value could occur as a result of a change in the
market perception of the economic and financial
strength of the issuer.
5. Settlement or handover risk.
This is the risk that
one of the parties settles the transaction and that
the agreed consideration is not received.
6. Country risk.
This is the credit risk which applies to
the debts of borrowers in another country because of
circumstances beyond the standard commercial risk.
It may take the form of a transfer risk or sovereign
risk, and other risks derived from international
financial activity.
7. Concentration risk.
This measures the degree of
concentration of credit risk portfolios under different
relevant dimensions: geographical areas and countries,
economic sectors, products and client groups.
8. Residual risk.
This incorporates risks derived from
strategies for dynamic hedging, credit risk mitigation
techniques, securitisations, etc.
In order to manage credit risk properly, a number of
procedures are established, the key elements of which
are described below.
Credit Risk Analysis
The process of assessing the credit rating of
counterparties and the assignment of limits are closely
connected. As a result, an internal rating is granted
to the various counterparties with which operations
are desired. This internal rating contributes to the
establishment of the maximum amount of risk allowed
with each entity. It also constitutes the baseline for the
admission and monitoring of the risk.
The rating is the result of the analysis of various
quantitative and qualitative factors, which are assessed
independently and are given a specific weighting for
the calculation of the final rating. The result is an
Risk Management Policies and Objectives
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