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					Market Risk Management in
        KBC Bank

Investor Relations conference
         2 July 2001

     Maurits Verherstraeten
      Global Risk Manager
              Risk management
            Key success factors
            Risk profile ALM
                Core deposits : savings accounts
Topics

                ALM : evolution of BPV
                Tracking equity portfolio
            Risk profile FX/MM trading
                Trading interest rate risk
                Trading FX risk
            Risk profile equity trading
            Credit risk
                Preparing for Basel-2
                Time axis expected loss models
            Summary
                                                    2
           Key success factors
Active involvement of senior management

   Market Committee (trading risks) and Investment
    Committee (ALM risks) with representation
    by 3 members of Executive Committee
   Executive Committee: 5 out of 8 have been/are
    member of Market and Investment Committees
     deep understanding and active dialogue
   Audit Committee:
    at least quarterly presentation of risk profile
   Board of Directors: yearly approval of limits


                                                      3
                 Key success factors
     Strong risk management at bank group level
   Independent Risk Management Division
    reporting to CEO
       “Global framework” sets out principles of risk management
        organization on groupwide basis with focus on functional
        authority of central Risk Management Division and common
        methodology
       Everybody knows what he/she can or cannot do

   Active committees:
       Weekly meetings Market and Investment Committees with
        members senior management and ad hoc specialists
       Alco abolished
       Pro-active involvement and strong cultural impact


                                                                    4
Institutional framework
                     Board of                 Audit
                     Directors              Committee

                    Executive
                    Committee

                                                     I
    C                                                N   C
M            Risk Management Division
    O                                                V   O
A   M                                                    M
R       Market risk Credit risk Metho- Market risk   E
    M    Trading                dology ALM           S   M
K   I                                                    I
E                                                    T
    T                                                M   T
T   T                                                    T
                                                     E
    E                                                N   E
        Global         Credit           Investment       E
    E   Treasury                                     T
                      Divisions          Division



                                                             5
                    Key success factors
              Methodology, systems and people
   Methodology:
       Linear trading risks: Value-at-Risk (var/covar, 99%,10 d holding),
        gaps, BPV, maturity restrictions, stop-losses
       Options: scenario analysis and Greeks. From fixed to
        probability based shifts in underlying and volatility and
        finally towards historical VAR?
       ALM: interest rate sensitivity, BPV, duration, VAR

   Limits:
       Hard limits
       As low as possible without hindering strategic positioning
       Since 2 years limits reduced by 40% accompanied with
        increase in quality of profits


                                                                             6
                 Key success factors
          Methodology, systems and people
   Systems:
       Implementation Algorithmics expected 30/7/2001
       Towards internal model for FX/MM and KBC FP Brussels
       Market data project
       Savings of 600 mln EUR in regulatory capital
       Active daily follow-up of various risk measures on basis of
        intranet application (eRIS) with info on exposures, various
        risk measures, limit systems, simulations, capital
        requirements, market data, book structure, etc….
       Continuous investment

   People:
       35 people centrally and some 60 decentrally
        (esp. Central Europe)

                                                                      7
8
                      Risk profile: ALM
   Centralization of all structural market risks (esp. interest rate
    risk) from the retail network into head-office

   Investment of „free‟ capital and reserves and core deposits in
    (mainly) bond and (limited) equity investment portfolio

   Disciplined use of benchmarking philosophy for non-maturity
    accounts:
       define core deposits
       define appropriate maturity
       cyclical investment philosophy
       used for risk measurement and internal transfer pricing
   Equity holdings: BEL-20 portfolio and Eurostoxx-tracking
    portfolio: passive and longer term

                                                                        9
               ok                         (in bln. EUR)
                    t/9




                              0
                                  2
                                      4
                                          6
                                               8
                                                     10
                                                          12
                                                               14
                                                                    16
                                                                         18
                          8
               de
                    c/
                      98
               fe
                    b/
                      99
               ap
                    r/9
                         9
               ju
                    n/
                         99
               au
                 g/
                     99




Core 1
               ok
                    t/9
                          9
               de
                    c/
                      99




Core 2
               fe
                    b/
                      00
               ap
                    r/0
                         0
               ju




Volatile
                    n/
                         00
               au
                 g/
                     00
               ok
                    t/0
                          0
               de
                    c/
Total volume


                      00
               fe
                                                                              Core deposits: savings accounts




                    b/
                      01
               ap
                    r/0
                         1
   10
                                                  (in mln. EUR)




                              15
                                   20
                                        25
                                             30
                                                   35
                                                          40
                                                                  45
                                                                       50
                                                                            55
                                                                                 60
                     okt-98

                     dec-98

                     feb-99

                     apr-99

                     jun-99

                     aug-99

                     okt-99




Risk
                     dec-99

                     feb-00

                     apr-00

                     jun-00



Quarterly averages
                     aug-00

                     okt-00
                                                                                      ALM: Evolution of BPV




                     dec-00

                     feb-01

                     apr-01

                     jun-01
     11
                                            (in mln. EUR)




                              0
                                  10
                                       20
                                                 30
                                                            40
                                                                 50
                                                                      60
                     okt-98

                     dec-98

                     feb-99

                     apr-99

                     jun-99

                     aug-99

                     okt-99




Risk
                     dec-99

                     feb-00

                     apr-00

                     jun-00



Quarterly averages
                     aug-00

                     okt-00

                     dec-00
                                                                           Tracking equity portfolio: VAR




                     feb-01

                     apr-01

                     jun-01
          Risk profile: FX/MM trading

   Concentration of limits and risks in Brussels
    dealingroom
   Dealingrooms in branches and subs: focus on local
    funding, sales and niches
   Concentration on linear interest rate risk in EUR,
    USD and GBP
   Small exposure in FX risks and in FX- or IR-options
   Central Europe: marginal increase in VAR-limits
    (+4%) to include our Central European subs


                                                          13
                           Trading interest rate risk: VAR

                45

                40

                35

                30
(in mln. EUR)




                25

                20

                15

                10

                5

                0
                okt 98   jan 99   apr 99   jul 99   okt 99   jan 00   apr 00   jul 00   okt 00   jan 01   apr 01


                                    Risk                     Quarterly averages                                    14
                                  Trading FX risk: VAR


                8

                7

                6
(in mln. EUR)




                5

                4

                3

                2

                1

                0
                okt 98 jan 99 apr 99 jul 99 okt 99 jan 00 apr 00 jul 00 okt 00 jan 01 apr 01

                                  Risk                   Quarterly averages                    15
         Risk profile: Equity trading

   Who and where:
       KBC Securities: Brussels, Paris, Amsterdam
       KBC FP: Brussels, London, New York, Tokyo,
        Hong Kong
       Peel Hunt (London)
       Central Europe: Patria (Prague), K&H Investment
        (Hungary)
   Relative importance of various centers: FP,
    Securities, Peel Hunt, Central Europe
   Predominantly non-linear equity risks

                                                          16
Equity trading: global scenario analysis


        Vol       Vol shift   = +/ - 5% * SQR (T)
               Down              0              Up
Stock
15%               -31              7                 56
 0%                -3                                25
-15%               11              -3                -6

(in mln EUR)




                                                          17
                    Credit risk
   Development of various internal rating models,
    based on building blocks such as probability of
    default, exposure at default and recovery rates
   Segmentation of the credit portfolio and
    choice of appropriate tools
   Internal rating models, verbal definitions,
    external ratings, KMV
     internal rating classes (9 performing)
   Establishment broad credit risk database
   Anticipating Basel-2: we can just continue
    what we had already planned
                                                      18
        Time axis Expected Loss models

    2000           2001     2002          2003         2004

Large corporates
                                                      Central Europe
     US
     corporates                             Other segments

        Banks                           Extensions
                                        behavioural
                                        scoring
             SME

                          Real estate



                                                                       19
                       To summarize
   Creating risk awareness throughout the organization:
    risk management is a „key function‟ and is explicitly
    mentioned in the strategy statement of the Group
   Setting up appropriate control and committee
    structures
   Continuous investment in methodology, systems and
    people
   Contributing to strategic positioning the bank
    (ALM, internal model, Basel-2)

              Add shareholder value through higher
               quality of profits and capital savings
                                                            20
   Risk Management in
        KBC Bank

Investor Relations conference
         2 July 2001

     Maurits Verherstraeten
      Global Risk Manager

				
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