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2018 Pillar 3 Disclosures
Annex
independent analyst valuation, which combines the
perception of the credit rating of those counterparties
with which operations are intended.
Credit Risk Control and Monitoring
The monitoring of credit risk is performed by means of
active portfolio management. The fundamental aim is to
detect sufficiently in advance any counterparties which
may register some impairment in their credit quality
or weakening of guarantees. As an integral part of the
monitoring process, a list is kept of all counterparties
requiring special monitoring. They are identified and kept
on so-called FEVE (signings under special monitoring) or
FRO (signings with operating restrictions) lists.
As in the analysis process, ratings are an additional strand
in the risk monitoring process, in addition to the country
and business type, among other variables.
In addition, and as a part of the monitoring of credit
risks incurred by market operations, in collaboration with
Legal Consultancy active management is performed, and
the adequacy of the contractual documentation on which
the operations are based is monitored.
The control process comprises all activities connected
with the permanent verification of compliance with
all settlement, counterparty and credit risk limits
established, the management and reporting of surpluses,
and the maintenance and updating of the parametrisation
of products, clients, countries, economic groups, ratings,
contractual netting agreements and financial guarantees
in the control tools.
Risk limit structure
The general credit risk limit structure (lying within the Risk
Tolerance Framework and the General Risk Management
Framework) is divided into two major groups.
On the one hand, there are the limits granted individually
to a counterparty. On the other, there is a series of limits
associated with certain activities: country risk limits
and operational limits for private fixed income and for
variable income activities, among others.
Credit risk measurement methodology
The methodology applied for the calculation of credit
risk exposure is the standard set out in the Solvency
Regulation. In addition, in the case of products subject
to counterparty risk, the bank applies the position
valuation method to the market prices of the various
operations, with the addition of certain add-ons or
coefficients which, when applied to the notional value,
incorporate the measurement of the potential risk
of each operation until maturity. Management tools
provide information on the consumption of limits in
real time for each counterparty and economic group,
allowing for the application of ongoing monitoring of
any modification and/or excess in the limits.
The existence of guarantees and collateral is taken
into consideration with regard to reduced credit risk
consumption in operations covered thereby, and also
in accordance with the criteria established in the
applicable regulations.
Counterparty risk
It is the risk that the counterparty could default upon
payment before the final cash flow settlement of any
of this operation. It includes, the following types of
operations, among others: derivative instruments,
operations with a buy-back commitment, security loan
operations.
Depending on the nature of the specific transactions,
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.
Managing wrong-way risk forms part of the process
of accepting and monitoring risk. Given Cecabank’s
activities, these cases are exceptional, which means they
can be treated on an individual basis; usually through a
reduction of the exposure to the operation in question.
With respect to correlation between the guarantee
and the guarantor, because cash is mainly received
as collateral in the world of derivatives, there is
almost no risk of adverse effects due to the existence
of correlation. Any potential adverse effects due to
correlations in non-cash collateral are not significant.
Concentration risk
Concentration risk, within the scope of credit risk,
represents an essential element for management. The
degree of concentration of credit risk is continuously
monitored in accordance with various relevant
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