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2018 Pillar 3 Disclosures
Annex
current or potential risk affecting results or capital and
resulting from adverse movements in exchange rates in
the banking book.
The exposure of the bank to this type of risk is derived
from various financial factors affecting market prices.
These factors include, but are not limited to, the
following:
•
Levels of interest rates in each country and product
type
•
Spread levels above the risk-free curve with which
each instrument is quoted (including the credit and
liquidity spreads)
•
Market liquidity levels
•
Pricing levels
•
Exchange rates
•
Levels of volatility in the above factors
The concept of Value at Risk (VaR) provides an
integrated measurement of market risk, covering the
fundamental aspects of the risk: interest-rate risk,
exchange rate risk, variable income risk, credit spread
risk and the risk of volatility in the preceding factors.
Interest-rate risk
Interest-rate risk is the exposure to market fluctuations
as a result of changes in the general level of interest
rates. Exposure to interest rates can be separated into
the two following elements:
•
Directional, slope and basis risk in the curve
Directional risk is the sensitivity of revenue to
parallel movements in the interest-rate curve, while
the interest-rate curve risk is the sensitivity of
gains to a change in the structure of the rate curve,
either through a change in the slope or in the form
of the curve.
Basis risk is the potential risk caused by unexpected
changes in the margins between the different
interest-rate curves with regard to those maintaining
portfolio positions. Market liquidity conditions, and
also the perception of the specific risk, are typically
the triggers for this type of movement (although
other factors may also exert an influence).
All interest-rate risks described are tracked by
means of the VaR, in which all relevant factors are
included for their measurement, including all of
the different curve time frames and all the relevant
curves (including specific sector curves for each
level of credit rating).
•
Spread and illiquidity risk
The spread risk is derived from holding positions
in private fixed income and credit derivatives, and
is defined as the exposure to the specific risk of
each issuer.
Certain circumstances in the market and/or the issue
itself could increase these spreads because of the
liquidity premium.
Currencies
Given its activities in FX and international capital
markets, the bank is exposed to the two following
currency risk elements.
•
Exchange Rate Risk
Exchange rate risk is derived from the net positions
of a currency against the euro or of one currency
against another. As a result, exchange rate risk is
the potential movement of cash exchange rates
affecting the value of the positions.
•
Interest-Rate Margin Risk
The risk regarding the net interest-rate margin is
derived from the difference between the interest
rates of two different currencies, and its effect on
term positions in foreign currencies.
Both risks are measured by the VaR, incorporating
the foreign currency rate curves and exchange rates
as risk factors.
Equity
This represents the risk of incurring losses as a result
of the variation in share prices.
Volatility risk
Operations on options based on different underlying
assets are typically performed in portfolio management.
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