The financial and sovereign debt crisis and the accompanying drastic price losses on many securities markets have shown how important risk awareness and risk culture are. A functioning risk management system cannot eliminate both, but it is vital for the quantification and control of risks. Our risk control systems are continuously being improved.
This ensures that they are always in line with the everchanging business environment. The aim of our overall bank management system is to avoid negative deviations from our planned performance, equity capital and liquidity. The system for the monitoring and early identification of risks is intended to pinpoint risks at an early stage and ensure countermeasures are initiated if necessary. The integration of risk controls into our overall bank management system enables us to simultaneously identify and exploit opportunities.
Our risk strategy is the starting point for taking, measuring and controlling risks. As part of the overall strategy, it establishes which risks the bank is willing and able to take in order to achieve its strategic aims. The riskbearing capacity must be determined and the limits for the individual classes of risks must be deduced before any risks may be taken.
Major risks are identified, measured and analysed by the Risk Controlling department, while the Treasury is responsible for managing risks, as per the parameters defined by the bank’s investment committee. The Management Board regularly reports to the Supervisory Board about the current situation. Internal Audit routinely checks whether the risk management system complies with legal, regulatory and internal requirements.
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RISKS AND THEIR MANAGEMENT
In the risk management process, risks are measured weekly and compared with the defined limits. The Management Board is informed of these evaluations. Stress tests are also conducted every quarter that simulate the effects of external market conditions and economic developments.
We have identified the main risks to be market, default and liquidity risks, as well as operational risks.
We have identified the main risks to be market, default and liquidity risks, as well as operational risks.
DEFAULT RISKS
There are different types of default risks: credit rating risks, country risks and counterparty risks. Only the first of these is a prime consideration for our bank. We define credit rating risk as a borrower defaulting on interest rate and/or principal repayments due to a deterioration in their creditworthiness. The bank manages credit rating risk by checking creditworthiness, using qualified credit processing to structure the organisational, informational and personal aspects of our lending, implementing an organisational structure and integrated credit monitoring system irrespective of risk, and by pricing lending on a case-by-case basis. As regards our business as a whole, we manage credit rating risk by diversifying our loan portfolio, limiting risk via structural principles, increasing equity reserves and strengthening our profitability. Because we cater for the church sector, we are unable to ensure the same level of industry diversification in our credit portfolio as commercial banks with no particular target sector.
Although this specific structure does not currently present any heightened risks in on our experience, we have set structural limits for individual sectors within our loan portfolio. Sufficient value adjustments have been made for identifiable acute default risks in the credit portfolio. Based on past experience, we believe that the bank's long-term profitability is sufficient to shield us from latent risks, which are manageable in their entirety. We have also set aside untaxed general value adjustments and a prudential reserve in accordance with Section 340f of the German Commercial Code (HGB).
Despite the low level of risk associated with our loan portfolio, we strive to constantly optimise our credit risk management. We use a rating system for non-profit organisations (NPOs) to assess all church organisations that borrow over EUR 250,000. This is an effective, modern means of managing credit risks. We use the cooperative network's rating procedure for all other customer groups.
The bank counteracts default risks associated with fixedinterest securities by setting issuer limits and not including any securities in its portfolio that are issued by public authorities or financial institutions in OECD member countries with a Standard & Poor's rating below A. No corporate and emerging market bonds are accepted with a non-investment grade rating. We use a value -at riskapproach to manage the default risks arising from shares and other floating-rate securities.
Although this specific structure does not currently present any heightened risks in on our experience, we have set structural limits for individual sectors within our loan portfolio. Sufficient value adjustments have been made for identifiable acute default risks in the credit portfolio. Based on past experience, we believe that the bank's long-term profitability is sufficient to shield us from latent risks, which are manageable in their entirety. We have also set aside untaxed general value adjustments and a prudential reserve in accordance with Section 340f of the German Commercial Code (HGB).
Despite the low level of risk associated with our loan portfolio, we strive to constantly optimise our credit risk management. We use a rating system for non-profit organisations (NPOs) to assess all church organisations that borrow over EUR 250,000. This is an effective, modern means of managing credit risks. We use the cooperative network's rating procedure for all other customer groups.
The bank counteracts default risks associated with fixedinterest securities by setting issuer limits and not including any securities in its portfolio that are issued by public authorities or financial institutions in OECD member countries with a Standard & Poor's rating below A. No corporate and emerging market bonds are accepted with a non-investment grade rating. We use a value -at riskapproach to manage the default risks arising from shares and other floating-rate securities.
MARKET PRICE RISKS
Market risks consist of interest margin risks and market price risks. Interest margin risk is the danger of the bank's gross interest margin shrinking due to a reduction in the average interest charged and/or due to an increase in the average interest on deposits. We define market price risk as the risk of losses arising from falling market prices for our assets. We use computer-aided systems to quantify the associated risks. Based on analyses of riskbearing capacity, we define loss limits that are instrumental in shaping our management policy measures. We value our securities portfolios every week using the latest daily prices so as to quantify our market price risk. Each month, we analyse our interest rate change risks and the risk of losses from potential price movements. We do not keep a trading book as per Section 1a (1) of the German Banking Act (KWG).
Our interest rate forecasts are used to calculate how unforeseen interest rate trends would affect annual net profit. Going by the interest rate change risks measured as of 31 December 2012, our profits for 2013 and 2014 will not be substantially squeezed by changes in market interest rates.
We use interest rate hedging instruments to manage the risks. Macro-hedges are used for fixed-interest items on the asset side and micro-hedges for individual securities and loans. These are hedged for interest rate change risks by means of interest rate swaps. We always match currencies and maturities when using micro-hedges. We counteract currency risks by means of matching hedges for our currency exposure. Unsecured currency positions are only present in insignificant amounts.
Our interest rate forecasts are used to calculate how unforeseen interest rate trends would affect annual net profit. Going by the interest rate change risks measured as of 31 December 2012, our profits for 2013 and 2014 will not be substantially squeezed by changes in market interest rates.
We use interest rate hedging instruments to manage the risks. Macro-hedges are used for fixed-interest items on the asset side and micro-hedges for individual securities and loans. These are hedged for interest rate change risks by means of interest rate swaps. We always match currencies and maturities when using micro-hedges. We counteract currency risks by means of matching hedges for our currency exposure. Unsecured currency positions are only present in insignificant amounts.
LIQUIDITY RISKS
We define liquidity risks – including risks from cash flow fluctuations – as the possibility of being unable to meet current and future payment obligations on time or in the amount agreed. The bank quantifies this risk by monitoring liquidity every day and by analysing mismatched maturities. Our risk control system is based on active liquidity management consisting of a portfolio of securities that can be liquidised at any time, as well as access to sufficient short-term liquidity via parties with good credit ratings in the client and banking sectors. Defined countermeasures are taken if liquidity figures fall below precautionary values.
OPERATIONAL RISKS
Our definition of operational risks comprises hedging risk, the risk of crime, the risk of losses due to IT system failures, customer loyalty and withdrawal risks, staff risks in the form of a lack of qualifications, insufficient capacity, employee absences or unauthorised actions, and management risk associated with potential losses caused by managerial errors. As there are no methods for measuring these risks, they are not currently quantified.
At present, we manage security and crime risks by taking out appropriate insurance, drawing up emergency plans, protecting data, issuing compliance guidelines and ensuring our premises are secure. Plans are in place for emergency operations should our IT systems fail. We counteract customer loyalty and withdrawal risks by means of client support concepts, staff training, complaints management and a customer-friendly pricing policy. Staff risks are managed using employee training, HR planning and deployment, clearly defined responsibilities and by falling back on temping agencies as necessary. Strategic planning, the work of the Supervisory Board, our catalogue of responsibilities, the requirement for dual signatories and appropriate insurance all serve to prevent the risk of losses caused by managerial errors.
At present, we manage security and crime risks by taking out appropriate insurance, drawing up emergency plans, protecting data, issuing compliance guidelines and ensuring our premises are secure. Plans are in place for emergency operations should our IT systems fail. We counteract customer loyalty and withdrawal risks by means of client support concepts, staff training, complaints management and a customer-friendly pricing policy. Staff risks are managed using employee training, HR planning and deployment, clearly defined responsibilities and by falling back on temping agencies as necessary. Strategic planning, the work of the Supervisory Board, our catalogue of responsibilities, the requirement for dual signatories and appropriate insurance all serve to prevent the risk of losses caused by managerial errors.
SUMMARY OF THE BANK´S RISK POSITION
Overall, we believe that the risks described above do not pose a substantial threat to our bank's future development. We are confident that our risk management and monitoring system is well suited to defining, identifying, quantifying and controlling the risks to which our bank is exposed.
OUTLOOK
In light of economic developments, we expect business to keep developing positively in the years to come. We plan to grow our business volume by 4 per cent in both 2013 and 2014.
Our interest rate forecast predicts a moderate rise in interest rates over the next two years. Taking our projected course of business and simulated calculations into account, we expect an interest margin of 0.76 per cent in 2013 and 0.86 per cent in 2014. Twinned with a modest rise in administrative expenses, we anticipate an operating result before measurement gains or losses of 0.44 per cent in 2013 and 0.55 per cent in 2014.
We expect our operating profit to fund an appropriate increase in our equity capital in the next two years.
Our interest rate forecast predicts a moderate rise in interest rates over the next two years. Taking our projected course of business and simulated calculations into account, we expect an interest margin of 0.76 per cent in 2013 and 0.86 per cent in 2014. Twinned with a modest rise in administrative expenses, we anticipate an operating result before measurement gains or losses of 0.44 per cent in 2013 and 0.55 per cent in 2014.
We expect our operating profit to fund an appropriate increase in our equity capital in the next two years.