Annual Report 2010

Risk Management

Effective management and minimization of risk is a top priority for Bank Vozrozhdenie. Its risk management strategy focuses on achieving an optimal balance between profitability and the risk assumed.

When developing its risk management system, the Bank takes into account recommendations of the Central Bank of Russia and the Basel Committee on Banking Supervision.

The Bank’s risk management system takes account of risks both when making management decisions and during day-to-day banking activity. The system is designed to detect, identify and classify potential risks quickly, as well as analyze, measure and assess risk exposure and apply specific methods for managing banking risks. Procedures for assessing and managing risk are integrated into day-to-day business processes.

Bank Vozrozhdenies main risk management objectives are to mitigate the overall threats to its operations using the resources available, reduce the number of unforeseeable events/losses, evaluate the effectiveness of the business given the risks assumed, and streamline the risk management system.

To evaluate risks, the Bank uses the following key indicators:

  • Capital at risk — the maximum possible losses associated with the main types of risk
  • Economic capital  the capital necessary to cover overall risk, including potential and materialized
  • RAROC (Risk-Adjusted Return on Capital)  the return on economic capital, calculated as the ratio of net income to economic capital

Bank Vozrozhdenies business is exposed to a wide range of risks, the most significant ones in terms of potential losses being: credit, market, liquidity and operating risk.

Level of credit risk

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Credit risk

Bank Vozrozhdenie defines credit risk as the risk of losses due to non-fulfillment, delayed or incomplete fulfillment by a debtor of his financial obligations, as stipulated by a credit agreement. The Bank assumes credit risks in lending operations with all types of counterparties (corporate clients, financial organizations and individuals).

Efficient credit risk management is a priority in the course of the Banks business. Bank Vozrozhdenie has a system of authorizations and limits on products that carry credit risk.

The Bank has established a Credit and Investment Committee (CIC), which is responsible for managing credit risk efficiently and consists of various bodies and subcommittees:

  • The CIC main body is responsible for general issues relating to managing credit risk and defining and implementing credit policy as part of the Banks approved development strategy
  • The CIC minor body deals with issues relating to implementing credit policy when offering products that carry credit risk to clients and when making investments
  • The subcommittee on corporate clients is responsible for managing credit risk and implementing credit policy in the corporate segment
  • The subcommittee on retail lending is responsible for managing credit risk and implementing credit policy in the retail segment
  • The subcommittee on bank cards is responsible for managing credit risk and implementing credit policy when offering bank cards that carry credit risk

The subcommittees and managers responsible for individual lending are empowered to make decisions about accepting credit risk that restrict the maximum amount that a debtor can borrow.

As part of their authorization of decisions about lending, the subcommittees liaise with the corresponding subdivisions of the Head Office (Credit, Retail and Bank Cards departments).

Last year, to minimize credit risk and ensure that sufficient provisions for the loan portfolio are in place at all times, the Department for Credit Risk Control became one of the bodies that must approve loan applications from branches.

The authority to disburse loans and set other types of lending limits and conditions is approved by the Management Board and are subject to quarterly review. As of the first quarter of 2010, the Bank authorizes branches to issue loans independently if they meet certain criteria for the level of NPLs and returns on their financial and economic operations.

Alongside the system of authorization and decisions, Bank Vozrozhdenies methods for managing credit risk include a centralized system for setting and regulating interest rates and tariffs, as well as a system for limiting credit risk. In addition to the overall limits, the Banks credit policy sets planned qualitative and quantitative targets that determine the structure of the corporate loan portfolio by segment, sector and region and the structure of the loan portfolio in terms of currency and duration.

When lending to legal entities and individual entrepreneurs, preference is given to small and medium-sized enterprises. Priorities when providing clients with products carrying credit risk are also dependent on:

  • The importance, profitability and creditworthiness of a client for the Bank
  • The clients business sector
  • The Banks regional policy
  • The amount, type, form and purpose of the loan requeste

The business activity of a client who has received a loan is constantly monitored by a branch of Bank Vozrozhdenie and, where necessary, by internal divisions of Head Office: the Economic Security Service and Legal Department.

In the case of consumer lending, the Bank analyzes a borrowers financial standing, sources of income and credit history. Preference is given to the following types of clients:

  • Staff and managers of large corporate clients of the Bank
  • Cardholders and depositors of the Bank
  • People with proved high incomes, a high social status and a decent reputation
  • Clients who regularly use Bank services to make payments
  • Clients with a good credit history at the Bank

To obtain loans from Bank Vozrozhdenie, borrowers should offer collateral in adequate and sufficiently liquid form. When accepting real estate as collateral against a loan, the Bank uses a system of discounts for all types of property. Security provided for loans is subject to mandatory regular reviews for adequacy and liquidity.

Bank Vozrozhdenie pursues a balanced policy for provisions against losses on loans, equivalent debt and other operations, in accordance with branches internal documents.

Control over creating provisions on products bearing credit risk is carried out at the branch level and by the relevant internal divisions of Head Office: the Credit, Retail, and Bank Card departments. Overall supervision is provided by the Department for Credit Risk Control, and day-to-day control is the responsibility of the Internal Control and Audit Service.

Bank Vozrozhdenie has developed and implemented policies and procedures to avert and minimize losses arising from credit risk. The following procedures have been introduced:

  • Mandatory regular assessment of the financial standing of borrowers and the economic effectiveness of events and projects
  • Assessment of the adequacy and liquidity of collateral, objective evaluation of collateral and its insurance by appraisal and insurance companies accredited by the Bank
  • Ongoing monitoring of the borrowers fulfillment of his obligations to the Bank and the actual existence of the collateral
  • Assessment of credit quality and the level of risk associated with loans
  • Procedure for creating provisions against losses on loans and other operations
  • Procedure for transferring NPLs to the Department for Legal Enforcement of Payments and completing follow-up work with them
  • Procedure for determining and controlling the authority for issuing loans by branches and management bodies within the Bank according to loan size

In 2010, the Bank carried out work to implement a risk management strategy in accordance with the Action Plan approved by the Management Board:

  • Options for further developing the front-office system and automating the collection of initial information to implement a credit rating system were considered
  • A methodology for calculating capital at risk on the loan portfolio was devised
  • A new edition of the Regulation on Stress Testing was approved
  • The methodology for creating provisions for corporate loan portfolio impairment according to IFRS was updated


Market risk

The Bank distinguishes the following types of market risk: currency risk (operations on the FOREX market), interest-rate risk (bonds) and equity risk (quoted shares). Each of these is treated separately by the Bank. Limits are set for each issuer of financial instruments based on the volatility and liquidity of its securities. The volume and structure of the securities portfolio is considered not only as an income source, but also as a tool of current liquidity management. Limits on the interbank market are set according to the financial standing of a counterparty.

Decisions on managing market risk are made by the Assets and Liabilities Management Committee. It defines the volume and structure of the securities portfolio by assessing the quality of the securities based on capacity to generate income and maintenance of the necessary liquidity. The Banks market risk is subject to regular stress tests.

Bank Vozrozhdenie carries out transactions with stocks (local shares, ADRs and GDRs of Russian issuers), although this is not a primary business. The Bank manages its equity risk mainly by establishing and adhering to limits on investments in stocks. Given the limited investments and absence of transactions involving derivatives, the Bank considers the methods set out in Central Bank Regulation No. 313-P, “On the Procedure for Calculating Market Risk by Credit Organizations” (dated 14 November 2007) as sufficient for calculating risk on the trading portfolio.


Interest-rate risk

Interest-rate risk management of is aimed at minimizing the negative impact of fluctuations in interest rates on Bank margins. The main objective of interest-rate risk management is to ensure that the Bank achieves an interest margin (the difference between interest obtained from interest-earning assets and interest costs on interest-bearing liabilities) that is sufficient to cover operating costs and ensure profitable operations. The Bank does not consider interest-rate risk as a source of additional income and does not increase it in response to market expectations. Bank Vozrozhdenie reacts quickly to any changes in the overall level of interest rates and adjusts current base rates on funds received and allocated to meet its targets for interest income.

The Bank has an internal transfer pricing mechanism for resources. Prices for cash resources within the Bank (purchase and sale of cash between internal divisions) are regulated in accordance with the situation on the short-term capital market. This encourages internal divisions to structure their assets and liabilities in a way that ensures that interest-rate risk is liquid and profitable.

Issues relating to interest-rate risk management are regulated by the quarterly Regulation On the Main Principles for Managing the Resources of Bank Vozrozhdenie in Rubles and Foreign Currency, the Regulation On the Procedure for Calculating Interest-Rate Risk at Bank Vozrozhdenie, while the general parameters are defined in the Financial Plan for the year.

Mortgage loans and the possibility of their early repayment are the main sources of interest-rate risk. However, the volume of early repayments is not material. The Bank constantly monitors early repayments in its long-term loan portfolio.

The main ways of reducing interest-rate risk are balancing assets and liabilities according to dates of interest-rate adjustment and maturity, as well as regularly reviewing current rates. Base rates for funds received are defined by the Regulation On the Main Principles for Managing the Resources of Bank Vozrozhdenie, which is approved by the Management Board on a quarterly basis. Rates may be adjusted during a quarter depending on changes in the Central Bank refinancing rate and rates on financial markets.

The Banks interest-rate risk is subject to regular stress tests. Interest-rate risks on loan and deposit operations are assessed during gap analysis in compliance with the Regulation On Calculating Interest-Rate Risk at Bank Vozrozhdenie. Interest-rate risk is analyzed by the Treasury at least once a month.


Currency structure of assets
and liabilities, %

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Currency risk

The main method for assessing and controlling currency risk is calculating open currency positions. The Bank uses Central Bank methodology to estimate the risks from maintaining open positions in foreign currencies.

Bank Vozrozhdenie adheres to a conservative currency policy that strives to restrict currency risk by minimizing open positions. The quality of assets denominated in foreign currency is monitored carefully, particularly the quality of the loan portfolio.

The Banks policy for managing open positions in foreign currency includes establishing external and internal limits on currency positions as well as controlling compliance with these limits.

Internal management of currency risks includes a procedure for daily revaluation of positions and a system of control over volumes and stop-limits for positions that carry currency risk. The Bank sets limits on cash and term transactions by types of transactions and currencies. All currency operations are within the limits that the Bank sets for counterparties.

The Bank periodically carries out a revaluation of assets and liabilities and uses a stress test, which includes calculating potential losses from drastic changes in currency exchange rates. The frequency of such tests depends on the speed at which market conditions are changing and the level of currency risk. Bank Vozrozhdenie regularly analyzes the potential consequences of changes on the market.

To limit losses from anticipated changes in currency exchange rates, the Bank uses currency baskets (combinations of currencies in specific proportions). The basket consists of currencies with negatively correlated fluctuations, making the aggregate value of a basket more stable. The most obvious example is a basket consisting of US dollars and euros on the basis of the dual-currency basket of the Central Bank.

Open positions in foreign currency on the spot market are regulated in today, tomorrow, and spot transactions within the limits for correspondent banks and the National Clearing Center.

The effect of currency risk on capital at the end of a business day is evaluated using the methodology stipulated in Central Bank Regulation No. 313-P of 14 November 2007, On the Procedure of Calculating the Size of Market Risk for Credit Organizations and the internal Regulation On the Procedure for Bank Vozrozhdenie Calculating the Size of Market Risks.


Stock risk

This risk is not significant for the Bank, as transactions involving financial instruments are not a priority business. Bank Vozrozhdenie manages its stock risk mainly by establishing and monitoring limits on investments in financial instruments, as stipulated in the Procedure for the Treasury of Bank Vozrozhdenie Conducting Transactions Involving the Securities Portfolio in 2010. This gives a list of issuers in which securities the Treasury may invest.

Management of stock risk is regulated by the Regulation On Managing Stock Risk at Bank Vozrozhdenie (OAO).

Given the limited investments and absence of transactions with derivatives, the Bank considers the methods set out in Central Bank Resolution No. 313-P of 14 November 2007, On the Procedure for Credit Organizations Calculating the Size of Market Risk, as sufficient for calculating trading portfolio risk.

Management of currency, interest-rate and stock risk is carried out by the Management Board, the Committee for Asset and Liability Management, and the Internal Control and Audit Service, which has constant access to all information at all stages of the management process.


Liquidity risk

Liquidity risk is one of the most significant for Bank Vozrozhdenie, which has a centralized procedure for managing liquidity. A unified system operates at both internal divisions of the Head Office and branches. Most client operations (cash and settlement service, lending, deposits, etc) are carried out through the branch network. The Head Office carries out operations on financial markets, including international markets.

The liquidity-risk management system complies with both external requirements (standards set by the Central Bank) and with internal limits and operating procedures. These ensure that Bank Vozrozhdenie always has sufficient funds to meet the cash demands of its clients and counterparties in a full and timely fashion, as well as ensuring that the Banks business systems run smoothly.

General management and control over Bank liquidity is the responsibility of the Management Board, and is carried out on a permanent basis by the Committee for Asset and Liability Management, which is a working committee of, and subordinate to, the Management Board. Day-to-day liquidity management is carried out by the Treasury.

The procedure for interactions between subdivisions and the control mechanism are regulated by the Policy for Managing and Evaluating the Banks Liquidity and the Regulation on the Main Principles for Managing the Resources of Bank Vozrozhdenie in Rubles and Foreign Currency, as well as the Financial Plan for the year. The documents are approved by the Management Board.

Liquidity risk is managed by matching time limits for returning assets placed and liabilities attracted, as well as maintaining the necessary volume of high-liquidity funds (cash, balances on correspondent accounts at the Central Bank, interbank lending, REPOs).

Bank Vozrozhdenie adheres to the following basic principles in liquidity management:

  • Liquidity management is a constant, day-to-day process
  • When making decisions, the Bank always gives priority to liquidity rather than profitability in case of a conflict
  • Every transaction that has implications for liquidity must be taken into account when liquidity risk is calculated

Bank Vozrozhdenie takes strict account of the maturity and size of its investments in various financial instruments. Monitoring of actual and estimated short-term liquidity is carried out every day on the basis of a payment calendar and using projections of short-term cash needs. Calculation of liquidity needs is based on:

  • Ongoing compilation and revision of the current payment calendar (the calendar is compiled to reflect needs for one day, one week, one month and three months)
  • Periodic (monthly) analysis of gaps regarding the maturity of demands and liabilities

Maturity gaps are analyzed in accordance with Central Bank recommendations. Monitoring of compliance with Central Bank liquidity standards is carried out daily.

Risk of liquidity loss is analyzed by considering the Banks dependence on the interbank market, operations by large clients, and concentration of credit risks. Particular attention is paid to key liquidity risk factors: stability of liabilities, quality and diversification of assets, and fluctuations of exchange rates and interest rates on the money market. To ensure access to refinancing, the Bank is guided by the Central Banks Lombard List (a list of securities that can be used for REPO operations) when choosing instruments for its securities portfolio. To expand its liquidity regulation capacities, Bank Vozrozhdenie can makes use of Central Bank refinancing (lending) instruments as part of a general agreement with the Central Bank on the provision of unsecured loans to credit organizations and a general agreements on loans guaranteed by assets or pledges. In 2010, the Bank did not use the Central Bank refinancing system. Stress tests are applied to liquidity risk on a regular basis.


Operating risk

Bank Vozrozhdenie conducts monitoring and management of operating risk on a regular basis. Internal divisions of Head Office and the branches collect and submit information about operating losses, both actual and potential. The unified nature and completeness of this information enables the Bank to carry out a quantitative evaluation of operating-risk indicators compared with a group of risk factors, and sources of risk can be identified. In accordance with internal documents, the Banks risk managers report regularly on risk events, the aim being to organize processes that will enable similar events to be avoided in the future.

To minimize operating risk, the Bank has implemented a budgeting system that even at the planning stage identifies the most costly and inefficient operations and determines priority areas of client policy.

Bank Vozrozhdenie pays particular attention to establishing and observing procedures for monitoring its business, preparing accurate financial reports and providing all of the necessary information about its activities in a timely manner.

As regards information security, particular attention is given to protecting clients personal details and classified banking information. The Bank plays an active role in the work of the Association for Banking Information Security Standards (ABISS) and is also one of the first in the banking sector to have received a license from the Russian Federal Service for Technical and Export Control (FSTEK) to protect confidential information. The Banks specialists have devised special methodologies for auditing information security and certifying in-house IT infrastructure. The FSTEK license applies to all branches.

The information security audit, which is conducted on an ongoing basis, reduces operating risks and ensures a level of information security that is in line with the requirements of state regulatory bodies.

To hedge operating losses, Bank Vozrozhdenie uses a broad range of insurance instruments. It has taken out a Bankers Blanket Bond as well as Directors and Officers Liability Insurance, while its property (including IT, furniture and other items) is covered by the largest insurance companies in Russia.


Country risk

The Banks main activities involve providing services to residents in Russia. Country risk arises primarily when carrying out transactions involving foreign currency: settlement, credit, guarantee and trading transactions in securities.

Management of country risk is regulated by the Regulation On Organizing the Management of Country Risk at Bank Vozrozhdenie. The Treasury is responsible for monitoring country risk.

To evaluate country risk, the Bank uses ratings from S&P and Moodys and classifications from Central Bank documents.

The level of country risk that is acceptable for the Bank is ‘0 and 1, according to the classification of the export credit agencies that are signatories to the agreement with OECD member states, On the Main Principles of Providing and Using Export Credits With Official Support; and a rating of at least BBB according to S&Ps system or the equivalent Moodys rating; while countries in the first group of offshore territories in Central Bank Regulation No. 1317-U, dated 7 August 2003, are also acceptable.

All other risks are subject to individual examination and evaluation until a transaction is completed, while adequate provisioning must be made. As a rule, country risk is analyzed when reviewing applications for loans and bank guarantees and when implementing currency control.


Development of the risk management system

In 2011, Bank Vozrozhdenie plans to continue developing its risk management system. Key priorities will be streamlining the Risk Map, developing the system of key risk indicators and resources for controlling them efficiently, and streamlining the system of limits based on the key risk indicators. In addition, the Bank will focus its efforts on developing the organization of risk management at its branches and automate risk management processes further.

Capital adequacy, %

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Maturity structure of assets and liabilities, RUB million

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IR contacts

Tel.:  +7 (495) 620 9071
Fax: +7 (495) 620 1953

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