NBG » Topics » 4.3 Market Risk

This excerpt taken from the NBG 20-F filed Jul 15, 2009.

Market Risk

        Market risk arises from the uncertainty and volatility of prices and rates as they change in the relevant markets over time, including interest rates, equity prices and foreign exchange rates. While our trading activities enhance profitability by allowing us to offer an expanded suite of financial services, these activities involve bearing market risk. We seek to identify, estimate, monitor and manage market risk effectively by means of a framework of principles, measurements and valid limits that are applied to each of the Group's transactions. The most significant types of market risk for the Group are interest rate risk, equity risk and foreign exchange risk.

This excerpt taken from the NBG 6-K filed Mar 31, 2009.
4.3 Market Risk

 

Market risk arises from the uncertainty concerning changes in market prices and rates (including interest rates, equity and bond prices and foreign exchange rates) and their levels of volatility.  In recent years, the Group has expanded its trading activities to a wide variety of financial products in order to enhance profitability and service its clientele.  This involves the undertaking of market risk, which the Group seeks to identify, estimate, monitor and manage effectively through a framework of principles, measurement processes and an a valid set of limits that apply to all of the Group’s transactions .  The most significant types of market risk for the Group are interest rate risk, equity risk and foreign exchange risk.

 

This excerpt taken from the NBG 20-F filed May 27, 2008.

Market Risk

        In recent years, we have expanded our trading activities by engaging into a wide variety of financial products in order to enhance profitability and service our clientele. This involves the undertaking of Market Risk, which we seek to identify, measure and manage effectively through a framework of principles, measurement processes and an adequate limit structure.

        Based on our positions, the most significant types of Market Risk that we distinguish are the following: Interest Rate Risk, Equity Risk and Foreign Exchange Risk.

    Interest Rate Risk

        Interest Rate Risk is the risk related to the potential loss that might incur on the Bank's portfolio due to adverse movements in the interest rates. In our case, the interest rate risk stems from the trading and AFS Bond portfolios and the interest rate exchange-traded and OTC derivatives.

        More specifically, as we are the principal market maker in Greek Government bonds (we have been ranked first among the 22 prime dealers of the Electronic Secondary Securities Market ("HDAT") for the past seven years), we retain a substantial portfolio of sovereign debt and we carry a moderate portfolio of Greek and international investment grade corporate issuers. As of December 31, 2007, 87% of our total bond portfolio comprised Greek Government bonds, of which 70% were fixed.

        In order to provide an economic hedge for the fixed interest rate exposure arising from our position in fixed rate Greek Government bonds, we enter into future contracts relating to short-, medium- and long-term German government bonds. To a lesser extent, we maintain positions on bond and interest rate futures for speculative purposes.

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        We are also active in the swap market, engaging in straightforward as well as more sophisticated deals for hedging and proprietary purposes. As a means of hedging, we convert the fixed rate risk into floating rate risk in order to reduce earnings volatility.

    Equity Risk

        Equity Risk is the risk related to the potential loss that might occur due to adverse movements in the prices of stocks and equity indices. The Bank holds a portfolio of stocks, the majority of which are traded on the ATHEX, and retains positions on stock and equity index derivatives traded in Greek and international exchanges. Our cash portfolio comprises trading (i.e. short-term) and Available for

        Sale ("AFS") (i.e. long-term) positions. Our portfolio of equity derivatives primarily serves as a mechanism to hedge the equity risk arising from our cash position and from the equity-linked products given to our clientele. In the same context and to a lesser extent, we enter into OTC equity transactions for pure trading and hedging purposes.

    Foreign Exchange Risk

        Foreign Exchange Risk is the risk related to the potential loss the Bank may suffer due to adverse movements in foreign exchange prices. The foreign exchange risk derives from the Bank's Open Currency Position ("OCP"), which mostly stems from the transactions of our Treasury Division in foreign currency (i.e. foreign exchange ("FX") spot and forward transactions). The OCP is distinguished between Trading OCP and Structural OCP. The Structural OCP contains all the Bank's investment assets and liabilities in foreign currency (i.e. loans, deposits, etc) along with the FX transactions performed by our Treasury Division.

        The Bank trades in all major currencies holding mainly short-term positions for trading purposes and for servicing our institutional, corporate, domestic and international clientele. According to the Bank's strategy, the end of day open currency position should comply with the relevant limits set by the Treasury Division (i.e. the overnight, intra-day and stop loss limits).

This excerpt taken from the NBG 6-K filed Mar 19, 2008.

4.2 Market Risk

 

Market risk is the current or prospective risk to earnings and capital arising from adverse movements in bond, equity, commodity, currency and derivative prices in the trading book. This risk arises in market making, dealing, and position taking activities.

 

The Group maintains adequate market risk measurement, monitoring, and control functions, including:

 

·             Market risk measurement systems that capture all material sources of market risk. These measurement systems include Value at Risk (VaR) models where appropriate.

 

·             Operating limits and other practices that maintain exposures within levels consistent with internal policies.

 

·             Measurement of vulnerability to loss under stressful market conditions.

 

·             Assessment of hedging strategy.

 

·             Adequate and effective processes and information systems for measuring, monitoring, controlling, and reporting market risk exposures.

 

·             A documented policy regarding the management of market risk.

 

This excerpt taken from the NBG 6-K filed Mar 22, 2007.

4.2 Market Risk

The Bank takes on exposure to market risk. Market risk is the risk of loss attributed to adverse changes in the market value and the liquidity level of the Bank’s portfolio due to unfavourable movements in interest rates, foreign exchange rates and equity prices / indices.

Since 2003, the Bank applies the “Value at Risk - (VaR)” model, in order to estimate the worst expected loss for 1-day holding period and a confidence interval of 99%. The Bank currently implements the VaR model taking into account the positions of both trading and available for sale (AFS) portfolios, through the most advanced software developed by the company Algorithmics. It should be noted that the Bank of Greece, as well as internal and external advisors, have certified the aforementioned methodology.

The Bank has established a framework of VaR limits in order to control and manage more efficiently the risks to which it is exposed. These limits have been determined upon the worldwide best practices; they refer not only to specific types of market risk - such as interest rate risk, foreign exchange risk and equity risk - but also to the overall market risk of the Bank’ s trading and available for sale portfolios. In 2006, the Total VaR estimate (with 1-day holding period and 99% confidence interval) of the Bank’s portfolio varied from €1.5 million to €10.6 million, with an average estimate of €5 million.

The Bank conducts a back-testing program on the positions of the trading portfolio on a daily basis, in order to evaluate and assess the accuracy of the VaR model. Back-testing compares the one-day VaR calculated by the internal model, with the change in the value of the portfolio due to the actual movements of the relevant risk factors. During 2006, there were only 3 cases out of 251 days where the actual change in the value of the portfolio exceeded the VaR estimates. Supplementary to the VaR model, the Bank conducts stress testing on a weekly basis, on both the trading and the available for sale portfolios, based on specific scenarios. The aim of stress testing is to evaluate the gains or losses that may occur under extreme market conditions.

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This excerpt taken from the NBG 20-F filed Jul 14, 2006.
Market Risk.   Market risk includes, but is not limited to, interest rate, foreign exchange rate, bond price and equity price risks. Changes in interest rate levels, yield curves and spreads may affect our net interest margin. Changes in currency exchange rates affect the value of assets and liabilities denominated in foreign currencies and the value of our assets in foreign currencies and may affect income from foreign exchange dealing. If our acquisition of Finansbank is successful, for instance, we will be exposed to exchange rate risk from the New Turkish Lira. The performance of financial markets may cause changes in the value of our investment and trading portfolios. We have implemented risk management methods to mitigate and control these and other market risks to which we are also exposed. However, it is difficult to predict with accuracy changes in economic or market conditions and to anticipate the effects that such changes could have on our financial performance and business operations.

·      

This excerpt taken from the NBG 6-K filed Mar 1, 2006.

4.2 Market Risk

 

The Bank takes on exposure to market risk. Market risk is the risk of loss attributed to adverse changes in the liquidity and market value of the Bank’s portfolio due to general and specific market movements, the most significant of which are: interest rates, foreign exchange rates and equity prices.

 

Market risk is primarily incurred through the Bank’s trading portfolio.

 

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Since 2003, the Bank applies the “Value at Risk-(VaR)” model to estimate the market risk of positions held and the maximum losses expected, based upon a number of assumptions for various changes in market conditions. The Bank currently implements the VaR model, assuming a one-day holding period and utilizing a confidence level of 99% taking into account the sum of all our trading and available for sale (AFS) positions in all currencies. In addition, the Bank aiming to accelerate the process of the determination and the maximum utilization of its results adopted within 2005 and applied the most advanced methodology of ‘Algorithmics’ company for measuring market risk variables. It is noted that Bank of Greece has also certified the aforementioned methodology.

 

The Bank has established a framework of VaR limits in order to control and manage more efficiently the risks to which it is exposed. These limits have been determined upon the worldwide best practices; they refer not only to individual market risk variables such as interest rate risk, foreign exchange risk and equity risk but also to the overall market risk and concern both, the trading and investment portfolio of the Bank. For 2005, the VaR estimate for the Bank’s trading portfolio, moved between € 2.0 million and € 7.8 million with an average estimate of € 4.7 million.

 

The Bank in order to ensure the quality and reliability of the VaR estimates conducts a back-testing program for both the trading and the investment portfolio. “Back-testing” compares the one-day VaR calculated on positions at the close of each business day (theoretical gains / losses), with the actual gains / losses arising on those positions on the next business day. It is noted that in a total of 251 working days of 2005, there were only 3 cases representing 1,20% where the actual change in the value of the portfolio exceeded the VaR estimates.

 

Supplementary to the VaR model, the Bank on a monthly basis applies standard stress scenarios aiming to approximate the gains or losses of both, the trading and investment portfolio, in cases of severe movements of market risk variables, such as interest and foreign exchange rates and crises in equity, corporate and emerging markets.

 

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