Risik report

MARKET PRICE RISKS

Market price risks consist of the risks to the value of positions due to changes in market parameters including interest rates, volatility and exchange rates among others. These risks are quantified as potential losses of present value using a present value model that differentiates between risks related to interest rates, options and currency rates.
Interest rate risks are divided into two categories: general and specific interest rate risks. General interest rate risks refer to risks arising from changes in the market value of investments or liabilities that are dependent on the general level of interest rates, and which will react negatively if interest rates change.

Specific interest rate risks are also referred to as (credit) spread risks, and are included under market price risks. Credit Spread is the term used to describe the difference between the yield generated by a risk-less bond and a risky bond. Spread risks take into account the danger that this difference in interest rates can change although creditworthiness ratings remain unchanged. The reasons for altered yield premiums are:

  • varying opinions of market participants regarding positions,
  • the creditworthiness of the issuer actually changes although the issuer’s credit rating does not yet reflect this change,
  • macro-economic factors that influence creditworthiness categories.

The Bank’s portfolio of bonds issued by euro area countries more heavily affected by the sovereign debt crisis, or in bonds issued by banks domiciled in these countries, remained at a moderate level. The Bank has not made any new investments in countries located on the periphery of the euro area since 2011. We do not believe that our investments are in danger of default. We are of the opinion that measures taken by individual countries, as well as protective mechanisms enacted at EU levels, are sufficient to ensure the repayment of the affected liabilities. In the case of bank bonds issued by banks domiciled in these countries, all of these bonds are covered bonds so that in this instance we also anticipate that they will be repaid as contractually agreed.

Among other risks, options involve the following risks: volatility risk (Vega; risk that the value of a derivative instrument will change due to increasing or decreasing volatility), time risk (Theta; is understood to the risk that measures how the passage of time impacts on the value of a derivative instrument), Rho risk (risk associated with a change in the value of the option due to a change in a risk-less rate of interest), and Gamma risk (risk of a change in the option’s Delta due to a change in the price of the underlying security; the option’s Delta thereby describes the change in the price of the option due to the change in the value of the underlying security). The volume of risks assumed is moderate as options are generally not employed in the capital market business for speculative purposes. Option positions are generally entered into on an implied basis due to debtors’ option rights (for example the right to give legal notice of termination per Art. 489 of the German Civil Code – BGB) and are then hedged if needed. These risks are attentively monitored in the daily risk report and are limited.

Currency risk defines the risk arising from changes in the market value of investments or liabilities dependent on currency exchange rates and which will react negatively due to changes in currency exchange rates. MünchenerHyp’s transactions outside Germany are hedged against currency risks to the greatest extent possible and only margins involved in payment of interest are not hedged.

Stock risks are currently not relevant for MünchenerHyp as our total investments in this asset class – in addition to our investments in the Cooperative Financial Network – amount to less than € 5 million. The Bank plans to invest in a mixed fund (a special fund) in 2017. The specific content of the fund is still open. This investment will, however, increase our stock exposure.

Market price risks are managed by determining the present value of all of MünchenerHyp’s transactions on a daily basis. The Bank uses the “Summit” IT programme for these calculations. The backbone of our interest rate risk management is the “bpV-vector”, which is calculated on a daily basis. This figure is determined by the change in the present value incurred per range of maturities when the mid-swap curve is shifted by one basis point. Furthermore, sensitivities to currency exchange rates are identified by changes in the present value that occur with a 10 percent shift up or down in exchange rates, as well as the effect of volatility on the present value when volatility increases by 1 basis point.

MünchenerHyp uses the value-at-risk (VaR) figure to identify and limit market risks. Linear as well as non-linear risks are taken into consideration using a historical simulation when calculating VaR. In addition, different stress scenarios are used here to measure the effect of extreme shifts in risk factors and the effects of other risk categories.

The current (daily) stress scenarios are:

  • Legal supervisory requirements: The current interest rate curve is completely parallel shifted up and down by 200 base points for every separate currency used. The worst result of the two shifts is used for calculation purposes.
  • Parallel shifts: The current interest rate curve is completely shifted up and down by 100 base points across all currencies. The worst result of the two shifts is used for calculation purposes.
  • Steepening/flattening: The current interest rate curve is rotated in both directions around the 5-year rate as the fixed point.
  • Basis Spread Worst Case: A worst case scenario is used to quantify basis spread risks. The scenario analyses the effects of different developments in the basis curves on the portfolio of loans with variable interest rates.
  • Historical simulations:
    • September 11, 2001 terror attack in New York: Changes seen in market prices between September 10, 2001 and September 24, 2001 – the immediate market reaction to the attack – are played out using the current levels.
    • The 2008 crisis in the financial markets: Changes in interest rates seen between September 12, 2008 (last banking day before the collapse of Lehman Brothers) and October 10, 2008 are played out using the current levels
    • Euro-crisis: changes in interest rates that took place during the Euro-crisis between 21 May 2012 and 4 June 2012 are played out in this scenario. Interest rates fell sharply during this period.

The maximum Value at Risk (VaR) of the banking book (interests, currencies and volatilities) at a confidence level of 99 percent at a ten-day holding period in 2016 amounted to a maximum of € 78 million. The average figure was about € 44 million.

Due to the fact that MünchenerHyp is a trading book institution (only for futures) we also manage potential risks in this area on an intraday basis. Furthermore, these trades are also integrated into our normal reporting procedures. Once again, no futures deals were conducted in 2016.

MünchenerHyp manages its credit spread risks by calculating the present value of its asset-related capital market transactions on a daily basis along with credit spread risks. The Bank uses the Summit programme to calculate the Credit Spread VaR, the Credit Spread sensitivities and various credit spread stress scenarios.

MünchenerHyp uses the VaR figure to identify and limit credit spread risks. The VaR figure is calculated based on historical simulation.


The current (daily) credit spread stress scenarios are:

  • Parallel shifts: All credit spreads are shifted up and down by 100 base points. The worst result of the two shifts is used for calculation purposes.
  • Historical simulation of the collapse of the investment bank Lehman Brothers: the scenario assumes an immediate change in spreads based on the changes that occurred one working day before the collapse of the investment bank until four weeks after this date.
  • Flight into government bonds: The scenario simulates a significantly visible aversion to risk that was previously seen in the markets. Spreads for riskier classes of paper widen while spreads for safer government bonds narrow.
  • Euro-crisis: The scenario replicates the development of spreads during the Euro-crisis that took place from October 1, 2010 and November 8, 2011. During this period the spreads of less creditworthy government bonds, in particular, rose sharply.

The credit spread VaR for the entire portfolio using a 99.9 percent level of confidence and holding period of one year stood at a maximum of € 109 million in 2016, while the average figure was about € 102 million.

The credit spread VaR for current assets (only third-party securities) using a 95 percent level of confidence and holding period of one year stood at a maximum of € 3 million in 2016, the average figure was about € 1 million.