Annual Report 2010 - Muenchener Hypothekenbank eG

>> Worst Case Scenario up to the collapse of Lehman Brothers: this scenario is derived from the Worst Case Scenario. The time period used here starts on January 2, 2007 and ends one banking work day before the collapse of the investment bank. The maximum credit spread vaR for the entire portfolio using a 99.5 percent level of confidence and holding period of one year was € 402 million, the average figure noted in the previ- ous year was about € 355 million. The maximum credit spread vaR for current assets (only third- party securities) using a 90 percent level of confidence and holding period of one year was € 6 million, the average figure noted in the previous year was about € 3.4 million. LiqUidity risks Liquidity risks include the following risks: >> inability to fulfil payment obligations when they come due (liquidity risk in the narrow sense) >> inability to procure sufficient liquidity when needed at anticipated conditions (refinancing risk), or >> inability to terminate, extend or close out a transaction, or only be able to do so at a loss, due to insufficient market depth or market turbulence (market liquidity risk) Münchenerhyp differentiates between short-term solvency protection and mid-term structural liquidity planning. The purpose of short-term liquidity protection is to ensure that the Bank is fully able to meet (payment willingness) its required payment obligations as agreed on a daily basis. in meeting this obligation the Bank fully implements all of the applicable supervisory requirements regarding liquidity reserves that must be held by banks. New requirements have been taken into account in the Bank’s project planning and will be implemented as scheduled. The purpose of structural liquidity planning is to ensure mid- term liquidity and involves the following key liquidity figures as components for determining results across all due dates: >> accumulated total cash flow requirement, >> available potential covered funding included planned new business and prolongations in line with the surplus cover requirements set by Moody’s, a rating agency, >> uncovered refinancing needs, >> additional detailed data for planning and control activities. Callable balance sheet items are taken into account for liquidity outlook scenario analysis as required: by next redemption date, by legal termination date, or weighted with the probability of their being redeemed. Because a mortgage bank’s liquidity management is closely connected to cover requirements for Pfandbriefe, forecasts for liquidity and cover are technically linked by iT systems. Additional stress scenarios are conducted based on structural liquidity planning. An integrated stress test concept was devel- oped in order to achieve the best possible structured and flex- ible measure of risk: >> various liquidity risk factors were identified for the Mün- chener hypothekenbank. These factors are focused on to either market or reputational effects. >> A total of five stress tests were defined on the basis of these risk factors. 1) Reputation scenario (high stress) 2) Market scenario (high stress) 3) Market and reputations scenario (light stress) 4) Market and reputations scenario (high stress) 5) Worst Case scenario >> Complementary to the risk factors and their varying stress test combinations, corresponding measures were defined for simulation purposes to reduce the liquidity risks in the respective cases.