Annual Report 2014

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RISK MANAGEMENT SYSTEM

The risk management system employed at Vnesheconombank constitutes a complex
of regulatory, methodological, managerial and IT solutions designed to secure financial sustainability of the Bank.


The procedures applied to risk management concern monitoring of the external environment, risk assessment, including proposals for the structure of limits set on risks, compliance control, and updating the Bank’s management on the risks assumed to ensure timely and adequate managerial decision-making.


To assess the level of the credit risks assumed (both on a single borrower and groups
of related borrowers), the Bank professionals produce expert opinions based on the analysis of the financial position and business record of borrowers and principals, collateral quality and other parameters of lending and guarantee transactions.


Credit risk management also includes a set of measures to monitor and limit both the level of risks assumed with respect to specific operations and the total risk level.


On a daily basis, to manage the risks of its market instruments portfolio, Vnesheconombank monitors the level of market risks, in particular, by calculating Value-at-Risk (VaR). VaR is calculated for individual instruments, portfolios by types of instruments and the overall portfolio of market instruments. On a regular basis, the Bank tests the accuracy of risk assessment models using back-testing. Risk exposure computed based on the VaR methodology is augmented by the results of stress testing.


To reduce market risks, limits are set on the sizes and parameters of positions/portfolios.


Management of structural risks (interest rate, currency and liquidity risks) is carried out within the framework of the Bank’s asset/liability management program and is aimed
at maintaining a balanced structure of assets and liabilities sensitive to interest and foreign exchange rate fluctuations.


In order to assess and control the impact of changes in interest and foreign exchange rates on Vnesheconombank's financial indicators, the Bank regularly carries out scenario modeling, monitors the interest rate gaps in terms of maturities and currencies, the size of open positions for each currency and the Bank's overall open currency position.


In order to control liquidity risks, the Bank continuously monitors the mismatches between the Bank’s assets and liabilities (in terms of maturities and major currencies), the liquidity reserve and the amount of potential sources of market funding in order to identify funds available to cover unexpected liquidity gaps that could occur due to the unforeseen deterioration of market and credit factors. On a regular basis, stress testing of the Bank’s liquidity position is carried out using various scenarios of market and credit risks realisation.


On a monthly basis, reports on the liquidity position specifying the amount and maturity breakdown, amounts of liquid assets and temporarily idle funds are provided to VEB’s management.


Operational risk management is carried out through strict regulation of the Bank’s business processes, as well as through risk insurance.


On an annual basis, Vnesheconombank concludes an agreement on complex insurance against fraud and liability insurance that includes complex insurance of the Bank's assets, cyber and computer crime insurance, as well as professional liability insurance.


In the reporting year, the Bank took various measures to upgrade the regulatory and methodological base of the risk management system. These include the approval
of the VEB Group Risk Management Policies and the preparation of a heat map
for Vnesheconombank's major operational risks.


As part of upgrading the IT base for risk management, the Bank enhanced the procedures
for collecting data on the operational risk events and modernised the application software modules as regards the system of managing Vnesheconombank's market and credit risks.
In order to ensure better risk management at credit institutions of the VEB Group, the Bank modernised the Module for Collecting and Analyzing Financial Statements of the Group’s subsidiaries and associates.