OPTIVA PANK

ANNOUNCEMENT

24.03.99

 

 

NOTE 2    FINANCIAL RISK POLICY

 

The management of financial risks in Optiva Bank is performed by the Assets and Liabilities

Management Committee (ALCO), Credit Committees and the Investment Committee.

Market Risk

Market risks arise from changes in interest rates, exchange rates and prices of financial

assets. The Optiva Bank’s Financial Policy Statement clarifies that different market risks,

including interest rate, foreign exchange and counterparty risk are strictly followed and

controlled in its everyday activities. In Optiva Bank the market risk limits are determined by

ALCO in the frame of limits set by the Financial Policy Statement approved by Supervisory

Board. These risks are monitored and managed by ALM Department (Asset and Liabilities

Management Department) in cooperation with Financial Markets Department and regularly

reported to ALCO and Supervisory Board.

Foreign Exchange Risk

With the aim to keep the risk profile low, Optiva Bank holds minimum (reasonable) level of

foreign exchange positions necessary to offer services to clients. Bank does not actively take

foreign exchange positions. In addition to the regulation of open foreign currency positions

established by the Bank of Estonia, the Bank’s Financial Policy establishes maximum open

foreign currency position limits, which are more conservative and at least quarterly overviewed.

All foreign currency positions are continuously followed and marked to market. Open foreign

currency positions are hedged primarily by swap and forward deals.

Interest Rate Risk

Exposures to fluctuations on interest rates are mainly caused by the imbalances in the interest

rate structure of assets and liabilities and their off-balance sheet equivalents.

Optiva Bank uses gap methodology for measuring and monitoring the interest rate risk. The

interest rate exposure is defined as the potential loss according to yield curve parallel shift by 100

basis points. Interest rate risk limit is approved by the Supervisory Board. The overall limit is set

by a certain per cent of the budgeted interest income of the year. Interest rate risk is minimised

by increasing the structural conformity of assets and liabilities. Open interest rate positions are

covered according to the ALCO vision of future trends in the market. To manage interest rate

exposures the Bank is using different derivative instruments like exchange traded futures and

options or interest rate swaps.

Equity Trading

The Bank’s equity investments are divided into two portfolios: Equity Trading and Equity

Investment Portfolio.

The size of the Equity Trading Portfolio is held on the reasonable level to provide equity trading

services to the customers of the Bank. The size of the Equity Trading Portfolio is set by ALCO.

The structure of the Portfolio is set by The Investment Committee, monitored by ALM department

and periodically reported to ALCO. The Trading Portfolio is marked to market.

The size of the Equity Investment Portfolio is approved by the Supervisory Board. The Investment

Committee approves every investment decision, monitors the Portfolio and reports periodically to

ALCO and Supervisory Board.

Liquidity risk

The liquidity risk emerges in certain market situations when it is impossible to finance assets or

fulfil contractual obligations at appropriate prices. Optiva Bank's liquidity management is

designed to ensure the availability of adequate funds to enable the Bank to fulfil its obligations to

customers and counterparts. The daily liquidity risk is managed and monitored by Optiva Bank’s

Financial Markets Department and ALM Department. The Bank’s liquidity position is reported to

ALCO. Based on the reports ALCO is making the decisions concerning the liquidity targets

of the Bank.

Credit Risk

Credit risk reflects the risk where a counterparty fails to perform on an obligation to the Bank. The

activities of the Bank generate credit risk through various instruments regardless whether these

are in the balance sheet or not. All such exposures are monitored and controlled through a

framework of limits defined by the relevant Credit Committee and through the portfolio

diversification defined by Investment Committee or relevant Credit Committee. Due to different

risk levels, different limits are applied for debt instruments and equity investments during everyday

control.

Before granting a loan, the bank carries out a thorough analysis of the loan applicant’s economic

activity and financial performance, as a result of which the applicant is allocated in a certain risk

category. The Bank regularly monitors the financial performance of the loan clients. According to

the further information the risk category is changed or left unchanged.

The system of the credit risk assessment enables the Bank to monitor, control and analyse

qualities and risks in the loan portfolio and to find the right proportion of loan cost and credit risk,

i.e. to determine the right loan price. Preconditions of a quality loan portfolio are fixed and well-

considered requirements that the Bank imposes on the borrowers, and the diversity of loan

portfolio both by client groups and economic sectors.

The assessment and everyday monitoring of the clients’ credit risk is performed by the Corporate,

Business Banking and Personal Banking Division. The overall control and quality monitoring of

Bank’s loan portfolio is performed by ALM Department. The credit risk of other banks is

assessed and monitored by ALM Department on daily basis, based on limits approved by the

Supervisory Board.

Operations Risk

Operations risk is formed by the factors, which may bring along suspension of the Bank's

operations. Strict procedure rules have been established to employees and dual information

systems are used to guarantee the performance of electronic operations. For hedging the

operations risk, the Bank has concluded an insurance policy with Industrial Insurance Ltd.

Legal Risk

Legal risk is a risk arising from inadequacy and ineffectiveness of concluded agreements. For

management of the risk, the validity of concluded agreements is checked regularly. Assessment

of legal risk is performed by the Legal Department. Every major division in Optiva Bank

employs at least one lawyer in its everyday activities.