Market risk management
This section describes the market risks that are inherent in the Treasury books for which economic capital is calculated based on a market risk treatment. NIBC defines market risk as the current and prospective threat to its earnings and capital as a result of movements in market prices. Market risk, therefore, includes price risk, interest rate risk and foreign exchange risk, both within and outside the Trading book. For fixed-income products, market risk also includes credit spread risk, which is the risk due to movements of underlying credit curve. The predominant market risk drivers for NIBC are interest rate risk and credit spread risk. Currency risk at NIBC is minimal, since all activities in foreign currencies are either funded in the same currency or hedged via cross-currency swaps.
Interest rate and credit spread risk parameters
Interest Basis Point Value (BPV), credit BPV, interest Value at Risk (VaR), and credit VaR measures are calculated on a daily basis for the major currencies and reviewed by the Market Risk department:
- Interest and credit BPV measure the sensitivity of the market value for a change of one basis point in each time bucket of the interest rate and credit spread, respectively;
- The interest VaR, credit spread VaR and total VaR measure the threshold value, which daily marked-to-market losses with a confidence level of 99% will not exceed, based upon 4 years of historical data for weekly changes in interest rates, credit spreads and both simultaneously. For the Trading portfolio additional VaR scenarios based upon daily historical market data and a 10-day holding period are used, both for limit-setting as well as for the calculation of the capital requirement; and
- As future market price developments may differ from those that are contained by the 4-year history, the risk analysis is complemented by a wide set of scenarios, including scenarios intended as stress testing and vulnerability identification, both based on historical events and on possible future events.
Limits are set on all the indicators (BPV and VaR, interest, credit and total) and on various portfolio, aggregated department, and operating segment levels. A more defined limit framework within several portfolios is in place, e.g. consisting of limits per currency (interest and credit BPV), per group of securities in a specific industry segment, or per group of securities with similar maturities.
Total VaR forms the basis for economic capital calculations for a significant part of the portfolios. Within those calculations, the confidence level is scaled to 99.9%. A broader insight into economic capital methodologies is given in the section Economic Capital, within this Risk Management section.
Interest rate risk
Interest rate risk within NIBC is predominantly present in the Trading portfolio and in the Mismatch portfolio. At the beginning of 2009, portfolios that had a regulatory market risk treatment consist of the interest rate trading portfolios and are henceforth referred to as the Trading portfolio.
Interest rate risk in the Trading portfolio
Trading positions change daily. However, graph 19 shows that the average level of risk during 2008 was maintained in 2009.
During 2009, this portfolio consisted solely of interest rate-driven exposures. Activities comprise short-term (up to two years) interest position taking, money market and bond futures trading and swap spread position taking. The interest rate spread risk between positions in swaps and bond futures is also taken into account in the VaR. The portfolio is also used for facilitating derivative transactions with corporate clients.
Graph 19 Trading portfolio VaR
Interest rate risk in the Mismatch portfolio
NIBC concentrates its strategic interest rate risk position in the Mismatch books. Next to the USD Mismatch portfolio, which was reported in 2008, a EUR Mismatch portfolio was set up in 2009. These portfolios exclusively contain swap positions, with which a view on future interest rate developments is taken.
Interest rate risk in other portfolios
Apart from the Trading portfolio and the Mismatch portfolio, interest rate risk is also contained in the following portfolios (henceforth collectively referred to as Banking book):
- Debt Investments portfolio;
- Residential Mortgage portfolio; and
- Residual Interest Rate Risk portfolio.
The interest rate risk in these portfolios is significantly below the risk contained in the Mismatch portfolio, as it is the policy of NIBC to hedge the interest rate risk in these portfolios. Detailed information about the interest rate risk in the Banking book can be found in note 55 to the consolidated financial statements.
Credit spread risk
Within Treasury, credit spread risk is mainly concentrated in the Debt Investments portfolio and comprises investments in financial institutions and sovereign entities, securitised products and enhanced investments. NIBC’s total credit spread sensitivity at 31 December 2009 has not changed much compared to 31 December 2008. However, the allocation of credit spread risk over the different portfolios has shifted more from the Securitisation portfolio to the portfolios containing investments in financial institutions and state-guaranteed bonds.
Tables 20 and 21 present an overview of the development in credit spread sensitivity over 2009 and 2008.
|
Table 20 Credit spread BPV, Debt Investments portfolio, 31 December 2009 |
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|
in EUR thousands |
Credit spread BPV |
|||||
|
End-of-Year |
Average |
Min1 |
Max 2 |
|||
|
Financial institutions & sovereign entities |
(225) |
(182) |
(114) |
(231) |
||
|
Corporate credits |
0 |
0 |
0 |
0 |
||
|
Securitisations |
(143) |
(147) |
(104) |
(185) |
||
|
Enhanced investments |
(47) |
(68) |
(38) |
(101) |
||
|
Total |
(414) |
(397) |
(358) |
(433) |
||
|
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|
Table 21 Credit spread BPV, Debt Investments portfolio, 31 December 2008 |
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|
in EUR thousands |
Credit spread BPV |
|||||
|
End-of-Year |
Average |
Min1 |
Max 2 |
|||
|
Financial institutions & sovereign entities |
(116) |
(90) |
(52) |
(181) |
||
|
Corporate credits |
0 |
(7) |
2 |
(32) |
||
|
Securitisations |
(177) |
(279) |
(177) |
(398) |
||
|
Enhanced investments |
(108) |
(155) |
(97) |
(234) |
||
|
Total |
(401) |
(614) |
(401) |
(934) |
||
|
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Currency risk
Apart from some investments by NIBC in funds managed by Investment Management, all of NIBC’s positions in foreign currencies, including those of subsidiaries, are hedged by either funding these investments in the appropriate foreign currency or by hedging the exposures using cross-currency swaps or foreign-exchange contracts. The most relevant exposures in foreign currencies for NIBC are USD, GBP and JPY. As a result of this policy, NIBC does not actively maintain open currency positions other than translation exposures arising from future income in foreign currencies. NIBC’s Finance department determines on a monthly basis NIBC’s currency positions and reports to NIBC’s Risk Management. When currency positions exceed NIBC’s small facilitating foreign currency exposure limits for that currency, NIBC reduces its positions by FX spot or FX forward transactions. The total foreign currency position, by nominal amount, is generally under EUR 25 million, in accordance with historical figures over the last few years.
