Risk management

VTB Bank 's risk management policy is aimed at creating a full-scale integrated risk management system adequate to the nature and scale of the Bank's activities and risk profile, and complying with the Bank 's needs for further development.
 
A major task in risk management policy is encouraging optimal balance between risks taken and the level of yield from banking operations.

Development and improvement of risk management in the Bank is carried out in accordance with the best banking practices, generally recognized international standards and recommendations of the Basel Committee on Banking Supervision. At the same, full compliance with the Russian banking legislation, primarily Bank of Russia regulations, is ensured.

The main risk management principles adopted in JSC VTB Bank are:

Credit risk is the risk of a loss resulting from the debtor's failure to meet its obligations to the Bank in full when due under the terms agreed.

Credit risk has the highest weight among risks taken by the Bank in the course of its banking activities. Credit risk management in the Bank is carried out using the following main procedures:

• putting in place limits for operations to limit credit risk;
• putting in place indicative limits for credit risk concentration and the share of unsecured loan portfolio;
• creation of security for credit operations;
• setting value conditions for operations with respect to payment for risks taken;
• permanent monitoring of risks taken and preparation of management reporting for the Credit Committee, the Bank's management and units concerned;
• evaluation of regulatory and economic capital necessary to cover the risks taken in respect of the Bank's operations and ensuring its sufficiency;
• carrying out hedging operations;
• permanent internal control over the Bank's units in respect of observing regulations on operations procedure and risk assessment and management procedures by independent units.

The Bank's risk management envisages:

1. applying systematic approach to overall Bank's loan portfolio risk management and separate operations with certain borrowers/counterparties (group of related borrowers/counterparties);
2. applying unified methodology for identification and quantitative assessment of credit risk which is adequate to the nature and scale of the Bank's operations; and
3. balanced combination of centralized and decentralized decision-making in respect of operations related to taking credit risk.

The main tool to restrict and control the credit risk taken by the Bank is the credit limit system. The following types of credit risk limits are put in place:

• counterparty limits;
• limits for independent risk-taking by the Bank's branches; and
• credit risk limits by countries/industries/regions.

Credit risk limits are determined by the Credit Committee and approved by the Bank's Management Board (in case the Credit Committee does not have the required authority). A part of authorities for putting credit limits in place is delegated to Branch Credit Committees (for standard credit operations within the special limit for independent credit risk-taking by branches), as well as to the Small Credit Committee and the Moscow Region Credit Committee (for medium-sized and small customer lending).

Along with its internal credit risk limits, the Bank observes the mandatory requirements established by the Bank of Russia in terms of risk size by borrower/group of related borrowers (N6 ratio) and size of large loans (N7).

Assessment of credit risk taken by the Bank for counterparty to determine limits is done on the basis of multifactor analysis with the use of rating system, and comprises analysis of the following aspects:

• specific risks related to the shareholder structure of the counterparty;
• market positioning of the counterparty;
• credit capacity and financial standing of the counterparty;
• possible impact of limit-setting on the financial standing and performance of the counterparty;
• economic acceptability of the proposed security to ensure proper coverage of the counterparty's obligations to the Bank;
• acceptability of value conditions;
• background of the counterparty's relations with the Bank, including operations implying credit risk-taking by the Bank;
• impact of limit-setting for the counterparty on the level of industry, region and country risks taken by the Bank; and
• impact of limit-setting on liquidity risk, market risks (interest risk, currency risk, price risk, if any), and reputation risk.

The most important tool to minimize credit risks taken by the Bank is the creation of security for credit operations. The Bank's policy in this sphere is based on the principle of forming a reliable and liquid security portfolio, sufficient to cover the credit risks taken by the Bank. At the same time, it does not lift the requirement to conduct due diligence of the borrower and does not compensate for the insufficient payment and credit capacity of the borrower or lack of information on its business.

The following items can be accepted as security:

• real estate mortgage, pledge of inventory, equipment, receivables, securities, precious metals;
• guarantees and sureties.

Property is accepted as pledge if there are no legal restrictions determined in the course of liquidity and market value assessment (as a rule, conducted by an independent assessor satisfying the Bank's requirements), as well as verification of its safety. Besides, the Bank usually demands that the items pledged should be insured.

Market risk is the risk of a Bank's loss due to adverse change of market prices for financial assets (primarily, securities), exchange rates and interest rates.

Market risks include:

• equity risk (risk of a loss resulting from change in prices of assets circulating in the securities market);
• currency risk (risk of a loss from change in foreign exchange rates);
• interest risk (risk of a loss from change in interest rates).

The Assets and Liabilities Committee determines VTB's market risks policy to limit and mitigate possible losses caused by adverse changes in foreign exchange rates, interest rates and quotations of securities (i.e. currency risk, interest risk and price risk respectively).

In market risk management, JSC VTB Bank follows the requirements set by the Bank of Russia regulations but also uses internal models complying with the recommendations of the Basel Committee on Banking Supervision.

The key elements of the Bank's market risk assessment and management system are:

1. Quantitative assessment based on Value-at-Risk modern concept.
2. Analysis of the Bank's balance sensitivity to changes in market parameters (primarily, interest rates and/or foreign exchange rates) and assessment of the Bank's stability against violent fluctuations (stress testing).
3. Scenario analysis of the Bank's credit and debit operations, setting target values of asset and liabilities structure by volume, maturity, return/value.
4. Setting limits for market risks taken by the Bank and rigid control over compliance:
• net foreign exchange position limits;
• limits for conversion operations and operations with marketable securities by types of operations and instruments;
• stop-loss limits.
5. Assessment of economic capital necessary to cover market risks.

Liquidity risk the risk that potentially influences the Bank's capability to meet its obligations in full when due arising from imbalanced timing of the Bank's assets and liabilities.

Keeping the balance structure in compliance with all liquidity requirements and ratios (both internal and prudential) with permanent control of units in charge and collegial bodies allows VTB to meet its obligations in full when due.

The Bank separates instant and quick liquidity risk management.

Instant liquidity management is the main task handled by VTB in asset and liability operational management. Its aim is to determine and keep up the minimal amount necessary to ensure cash/non-cash balance settlement by currencies.

Instant liquidity management is carried out by the Bank's Treasury by prompt (intraday) determination of VTB's current payment position and payment position change forecast taking into account the Bank's payment schedule and various scenarios. Instant liquidity management in branches is carried out on a decentralized basis by putting in place limits on balance accounts in regional cash and settlement centres at end-of-day in branches.

The main task in quick liquidity management is the change of VTB maturity assets and liabilities structure to mitigate the liquidity gap to the given level by the maturity date for requirements and obligations. This task is fulfilled by on-the-fly determination of current position for quick liquidity risk by determining current quick liquidity gaps in accordance with internal restrictions and restrictions imposed by the Bank of Russia. Quick liquidity management is carried out by VTB head office and branches in a centralized way.

Operational risk is the risk of a loss resulting from the inadequacy or failure of the Bank's internal processes, employees and systems or from external events not controlled by the Bank (primarily, natural disasters).

To implement the Bank's internal operational risk management strategy, VTB carries out regular procedures for risk identification, assessment, control and limitation. In its operational risk management practices, VTB follows the principles set by the Bank of Russia regulations (including the Letter of May 24, 2006 No. 76-T On Managing Operational Risks Lending Institutions) as well as recommendations of the Basel Committee on Banking Supervision.

The Bank employs a system of collecting and submitting information on identified operational losses by head office and branch structural units with the use of a centralized analytic losses database. The unified nature and level of detail of the information contained in the database ensure:

• possibility to carry out quantitative assessment of operational risk indicators (including by separate risk categories and business lines);
• risk source identification;
• risk limitation measures; and
• creation of management reporting.

The principal measures used in VTB bank to minimize operational risk are:

• regulating the procedure of carrying out all main operations in accordance with internal regulations and guidelines;
• accounting and documentation of bank operations and transactions, regular document and account reconciliation by operations;
• applying the principle of: division and limitation of functions, authorities and responsibilities of employees, use of double control mechanism, taking collegial decisions, setting limits for terms and volumes of operations;
• implementing procedures for administrative and financial internal control (prior, current and follow-up) over business process organization, activities of structural units and carrying out operations by individual employees, observation of legal and internal regulatory requirements by employees, control over observation of limits set for operations, procedure of access to information and the Bank's tangible assets;
• automating bank operations, using bank's internal information systems;
• ensuring information security, information access control, multilevel data protection;
• ensuring physical security of the Bank's premises and valuables and access control;
• insurance of operational risks covering any losses that may arise by insurance indemnity;
• creating necessary organizational and technical conditions to ensure continuity of economic activity related to banking operations (in case of fire, terrorist attacks and other emergencies);
• mitigating the Bank's operational risks related to separate business processes by attracting third parties (outsourcing); and
• mitigating personnel-related risks by establishing selection criteria and conducting preliminary checks, implementation of education, training and further training of personnel.