Sberbank - Annual Report 2010 - Market Risk

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# Market Risk

The Bank classifies market risk as follows:

- Interest rate risk for non-trading positions, which is the risk of a decrease/increase in interest income/expenses occurring because of yield curve changes resulting from a mismatch of investment and borrowing maturities (interest rate repricing).
- Market risk for trading positions, including:
  - Interest rate risk for the debt securities portfolio which is the risk arising from an adverse change in the market value of debt securities.
  - Equity risk which is the risk arising from an adverse change in the market value of ordinary and preferred shares.
  - Currency risk which is the risk arising from an adverse change in foreign exchange rates and precious metals prices.

Interest rate risk for non-trading positions is assessed using gap analysis. Assets and liabilities with fixed interest rates are arranged according to their remaining contractual maturities; those with flexible interest rates are arranged by time remaining to repricing. Russian rouble and foreign currency gaps are analysed separately. This involves analysing the net profit sensitivity to a 100 basis point increase/decrease.

Market risk for trading positions (interest rate risk for the debt securities portfolio, equity and currency risk) is assessed based on the VaR methodology. The VaR that the Bank measures is an estimate, using a specified confidence level, of the potential financial loss that it does not expect to exceed over a certain time period. The Bank measures the VaR using the historical simulation method with a 99% confidence level. Changes in financial market indices are measured for a 10-day holding period, i.e. an average period to liquidate and/or hedge risk positions. To monitor the level of market risk arising from trading positions, the Bank also analyses its daily risk positions and their sensitivity to changes in market indices. In order to obtain more detailed information on market risk, VaR measurements are complemented with other techniques such as scenario analysis and stress-testing.

In 2010, the Bank actively expanded investments in securities. Conversely, the level of market risk arising from trading positions was lower for the following reasons:

- On instructions from the Bank’s Assets and Liabilities Committee, a portion of investments in government and sub-federal bonds was reclassified from available-for-sale to held-to-maturity securities.
- From the fourth quarter of 2010, the effects of the peak changes in market indices observed in the fourth quarter of 2008 had less impact on VaR measurements since these are limited to a two-year observation period (500 trading days).

To mitigate market risk, the Assets and Liabilities Committee sets the following limits and restrictions:

- Interest rate risk for non-trading positions is mitigated using marginal interest rates on borrowed and invested corporate funds and by setting limits on long-term lending amounts (the investment instrument which entails the greatest risk).
- Market risk for trading positions:
  - Interest rate risk for the debt securities portfolio is mitigated by setting limits on investments by type of issuer and currency; restricting the share of investment per bond issue; limiting international investments to certain countries and currencies; setting limits on duration; and the use of stop-loss limits.
  - Equity risk is mitigated by setting limits on the equity portfolio and investments by equity investee; and the use of stop-loss limits.
  - Market risk arising from currency and money market transactions is mitigated by limits on intra-day and end-of-day open positions by type of transaction and currency; the use of sensitivity limits; limits on the maximum term of transaction; and the use of stop-loss limits.

- Credit Risk
- Liquidity Risk
- Market Risk
- Operational Risk

## History

- Liquidity Risk
- Recommend Page
- Risk Management
- Credit Risk
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