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ePaper created 2012-04-20, 15:08:32 | version 1.23.0
46 Management Report – münchener Hypothekenbank eg l annual Report 2011 Ability to bear risks The professional concepts and models used to calculate abili- ties to bear risks are being continuously further developed in accordance with legal supervisory requirements. Münchener Hypothekenbank calculates its ability to bear risks based on the period-oriented approach. The Going Concern scenario is the most important method used for control purposes. This scenario is used to determine if the bank still would have an adequate equity capital ratio exceeding the legally required minimums of 4 percent core capital and total capital of 8 per- cent after the occurrence of risks contained in all of the risk categories. The only cover potential that may be used to cover risks in this scenario is the available regulatory equity capital. The scenario deducts market risks, borrower risks, operational risks, spread and migration risks, participation risks, as well as model risks containing other non-explicitly defined risks. All of these risks are taken into consideration conservatively and with- out diversification effects and using a 100 percent correlation level. MünchenerHyp was continuously able to bear risks through- out the entire 2011 fiscal year. MünchenerHyp is currently en- gaged in revising its risk bearing ability concept in response to the additional requirements ordered by the banking supervisory authority towards the end of the year. Use of finance instruments for hedging purposes We engage in hedging activities – interest rate and currency derivatives – in order to further reduce our risks and to hedge our business activities. We do not employ credit derivatives. In the past, we have only occasionally insured individual loans or portfolios against borrower risk. At the level of individual trans- actions, we used asset swaps as micro-hedges. Structured fun- damental transactions such as callable securities were hedged accordingly with structured asset swaps. (Interest)-currency swaps were used to hedge exchange rate risks. At the portfo- lio level, the main hedging instruments we used were interest swaps and swaptions. Bermudan options on interest swaps (swaptions) and interest options (caps and floors) were used as macro-hedges for embedded legal termination rights or arrange- ments to limit interest rates. Accounting-based internal control and risk management procedures The accounting-based internal control system is documented in organisational guidelines, descriptions of work processes, financial reporting handbooks, and numerous operating instruc- tions. It contains organisational security measures, and ongoing measures and controls that are integrated in the work pro- cesses. These are, in particular, separation of functions, the double-check principle, access limitations, payment guidelines, new product process and balance confirmations. Process inde- pendent measures are, above all, carried out by the internal audit department. The management methods described in the risk report make qualitative and quantitative statements regarding Münchener Hypothekenbank’s economic situation, including, for example, the development of performance. This evaluation involves as- pects of all risk categories. A close coordination procedure exists between the risk con- trolling and accounting departments at MünchenerHyp. This coordination procedure is supervised by the entire Board of Management. The results from the risk management system form the basis for the multi-year planning calculations, year-end projections, and agreement procedures for approving the realised key figures generated by the Bank’s accounting process.