Credit risk is the risk that a counterparty will not be able to meet its obligations in full when due. The Group is primarily exposed to credit risk through its loan portfolio, securities portfolio, guarantees, commitments and other financial derivative portfolio.
Credit risk management at VTB includes establishing limits in relation to single borrower, groups of borrowers, industries, regions and foreign countries, which are regularly reviewed by VTB Risk Department and approved by the Credit Committee.
The Group takes on exposure to market risks. Market risks arise through its securities portfolio and from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. The ALCO sets VTB`s policies for market risks, with the aim of limiting and reducing the amount of possible losses on open market positions which may be incurred by VTB due to negative changes in currency exchange rates and securities quotations. VTB Risk Department monitors compliance with market risk limits on a daily basis.
VTB Group is exposed to currency risk through mismatch in the currency denomination of assets and liabilities and also through currency positions from transactions in foreign currencies. As the Russian Rouble is the functional currency of VTB, fluctuations in foreign currencies relative to the Russian Rouble could impact VTB`s financial position and results of operation. VTB manages its currency exposure risk by seeking to match the currency of its assets with that of its liabilities on a currency-by-currency basis within certain limits. The ALCO reviews the currency position and sets open currency position limits, which are monitored on a daily basis.
Operational risk is the risk of a loss resulting from the inadequacy or failure of internal processes, people and systems or from external events. VTB Risk Department coordinates the operational risk management function within VTB. VTB operational risk management strategy provides for identification, assessment, monitoring and control of operational risks and allocates operational risk management responsibilities. For the purpose of quantitative analysis of VTB operational risk, in early 2007 some internal regulations were put in place regarding operational risk data capture using the risk event classifications that meet Basel II and the Bank of Russia`s requirements. Risk Department is also responsible for VTB`s insurance coverage. VTB insurance policies include a financial institutiona`s blanket bond, depositary insurance, insurance for cash, securities and precious metals in transit, insurance of ATMs, cash dispensers and currency exchange machines, and bank card fraud insurance.