1 Risk management
For risk management purposes the Bank defines its overall risk strategy at HVB Group level. In particular, this means determining, on the basis of the available capital cushion, the extent and manner of permissible risk exposure for the various divisions. This means that whenever risk is taken, it must be determined whether it is possible to do so, based on risk cover calculations, and whether it is worth doing so in terms of risk/reward calculations.
Through the targeted and controlled assumption of risk, the various divisions implement – with profit responsibility – the risk strategies defined for them within HVB Group. In doing so, they utilise the regulatory and economic capital allocated to them within the framework of limit systems.
2 Risk monitoring
The risk management process is accompanied by comprehensive risk monitoring, which is functionally and organisationally independent and encompasses the following tasks:
Risk analysis
Risk analysis involves the identification and analysis of risks from business activities and the development of methods for measuring them. Parallel to these activities, the available capital cushion is defined and quantified.
Risk control
In addition to the quantification and validation of the risks incurred and the monitoring of the allocated limits, the subsequent risk control process involves risk reporting, which at the same time provides management with recommendations for action when making future risk-policy decisions.
The functional segregation of risk management and risk monitoring is also taken into account in organisational structures.
3 Divisions and committees
Risk management
The divisions are responsible for performing the risk management functions within the framework of the competencies defined by the Management Board of HVB Group. Important bodies operating at HVB Group level are the Strategic Credit Committee and the Asset Liability Committee.
Strategic Credit Committee (SCC)
Strategic issues are discussed and decided on by the Strategic Credit Committee (SCC) in its capacity as a management and decision-making body with responsibility for all areas. The role of the SCC has no effect on the final decision-making authority of the Management Board on matters that cannot be delegated or those related to the Minimum Requirements for Risk Management (MaRisk).
The issues addressed by the SCC are primarily the risk strategy of HVB Group and division-related risk strategies and measures, the specification of risk tolerance, risk classification processes, credit organisation principles, risk-related aspects with regard to process/ processing standards in the credit business, major changes or updates in the product range in the lending business and the amount of risk premiums (transfer prices) and country limits.
The SCC is chaired by the Chief Risk Officer, and has representatives from all the divisions and, from the back office side, Risk Control, Recovery Management and Credit & Risk Management.
Asset Liability Committee
The Asset Liability Committee makes decisions at its monthly meetings
on asset/liability management of HVB AG and sets guidelines for
HVB Group. The committee pursues the following key goals:
- establishment of uniform methods for asset/liability management for the entire HVB Group,
- optimum utilisation of the financial resources of liquidity and capital, and
- co-ordination of the requirements of the divisions for financial resources and business strategy.
Risk monitoring
The Chief Risk Officer is responsible for monitoring and co-ordinating important risk-policy activities within HVB Group. The activities of the Chief Risk Officer in the year under review were supported by the Audit Committee of the Supervisory Board, various units under the Chief Financial Officer and the Audit department.
Audit Committee of the Supervisory Board In 2006, the Management Board provided the Audit Committee of the Supervisory Board with information on the entire risk situation and risk management of the Bank at four meetings. The Supervisory Board received timely, detailed reports on all risks relevant to the Bank and on the performance of the loan portfolios and credit strategies. This reflects the vital importance for the continuing existence of the company of comprehensive early recognition of all risks and the feasibility of achieving business development targets.
Chief Risk Officer The following departments, which perform tasks for HVB Group as well as HVB AG, are under the responsibility of the Chief Risk Officer:
Risk Control
- Risk Control deals in HVB Group with market risk, credit risk,
operational risk and business risk as well as risks arising from the
Bank’s own real estate portfolio and shareholdings/financial investments.
Its tasks and competencies include ongoing, independent
risk measurement and monitoring, responsibility for risk measurement
methods and their ongoing development, as well as reporting
to the Chief Risk Officer, the Management Board of HVB Group
and the Audit Committee of the Supervisory Board.
In addition, Risk Control is responsible for economic capital measurement and aggregation as well as the implementation of uniform risk control standards, taking into account the corresponding statutory requirements and especially the regulatory requirements in HVB Group. As of the second quarter of 2007, the structure of Risk Control will be adjusted to match its redefined responsibilities within the UniCredit Group.
Credit & Risk Management
- The Credit & Risk Management department pools the credit processing units for special business transactions for the credit business of the former Germany segment and for North America, Latin America and Asia as defined in the Minimum Requirements for Risk Management (MaRisk). This essentially includes credit analysis and credit decisions along with their subsequent implementation and processing. These activities serve in particular to meet regulatory requirements, and encompass our business in the newly formed Retail,Wealth Management and Corporates & Commercial Real Estate Financing divisions. These units are supported by industry specialists who are involved in the decision-making process for credit exposures larger than €5 million for the lending business of the divisions named above and across the board for the lending business of the Markets & Investment Banking division.We see their input on credit exposure decisions as a value-added contribution in the interest of sector-oriented risk management.
Chief Credit Risk Officer
- The function of the Chief Credit Risk Officer was eliminated effective January 31, 2006, and the restructuring and workout areas, of which he was in charge, were placed under the responsibility of Recovery Management. Credit responsibility for the Americas and Asia was taken on by Credit & Risk Management, whereas credit policy was taken over by Risk Control. Credit responsibility for financial institutions was transferred to Credit Risk Banks, Institutions & Country Risk. The tasks of risk provision forecasting and portfolio analysis originally under the responsibility of the Chief Credit Risk Officer are now handled by Recovery Management. Risk Control is in charge of preparing centralised policies and operating guidelines for the entire credit business.
Real Estate Valuation and Consulting
- The Real Estate Valuation and Consulting department focuses on the valuation of individual properties and portfolios, regular updates and monitoring of property values, and the analysis and forecasting of real estate market trends. At the same time it provides support in risk assessment and management in relation to mortgage collateral and the pfandbrief business as well as the determination of economic capital pursuant to Basel II.
Chief Financial Officer
The following departments under the Chief Financial Officer provide
support in risk monitoring alongside the Tax Affairs and Investments
departments:
Accounting
- The Accounting department is able to identify unfavourable trends by analysing the income statements which it produces on a monthly basis. This provides an important contribution to compliance with the risk management process.
Regulatory Reporting
- The Regulatory Reporting department is responsible for reporting to the regulatory bodies with jurisdiction over the banking sector. Along with Principle I (backing of risk assets and market risk positions with own funds) and Principle II (governing the liquidity of credit institutions), this specifically includes the evidence of large exposures, loans in excess of €1.5 million and loans to directors.
Asset Liability Management
- The Asset Liability Management department controls the short-term and long-term liquidity within HVB Group to ensure that the Bank has adequate liquidity at all times and to optimise the funding costs. Key elements are co-ordinated operations on money markets and capital markets and the specification of liquidity profiles for the corresponding units. Asset Liability Management is also responsible for the balance sheet structure and measures to optimise regulatory capital as well as risk management of our investments. The measures implemented in connection with these functions serve to support our Bank’s rating and return targets.
Moreover, units under the responsibility of the Chief Financial Officer – along with the Risk Control department – are involved in our Basel II project activities.
Audit
- The Audit department operates as an independent organisational
unit. It reports directly to the Board Spokesman and acts on
behalf of the Management Board. Although it primarily performs
the internal audit function for HVB AG, it also performs tasks for
HVB Group as a whole. Its duties range from a control and advisory
function based on a standardised system of reporting through to
complete execution of internal auditing for the subsidiaries.
The Minimum Requirements for Risk Management (MaRisk) stipulate
that all operational and business processes must be audited at
least every three years – if useful or appropriate – and all processes
subject to especially high levels of risk must be audited at least
once a year.
In addition to the individual audit reports, an annual review is prepared to provide the Management Board with a comprehensive overview of all audit findings and conclusions as well as their current status. In addition, the head of the Audit department reports on current trends and results in auditing activities at the regular sessions of the Supervisory Board’s Audit Committee.
The departments and committees described here reflect the status of the organisational structure at December 31, 2006. Additional organisational adjustments may take place during the integration of HVB Group into the UniCredit Group.
Where necessary, a distinction is made in the Risk Report between the full HVB Group (including the companies which, in accordance with IFRS 5, are classified as discontinued operations and non-current assets or disposal groups held for sale) and the new HVB Group (excluding the companies which, in accordance with IFRS 5, are classified as discontinued operations and non-current assets or disposal groups held for sale).
