Alfa Banking Group systematically exploits the opportunities available to it to achieve its growth targets without losing sight of the related risks. The Group’s risk management division was founded in 1999 and established the first modern and unified risk management practice in Russia comprised of credit risk, market risk, retail risk and operational risk management, applied uniformly throughout the Group and across all product lines. The primary objectives of Alfa Banking Group’s risk management division are to prevent the Alfa Banking Group from taking on risks that could threaten its survival and to assist it in achieving an optimal level of risk-return in connection with its various transactions.
All risk authority is centralised in the Group’s Credit Committee (headed by the Chairman of the Executive Board) and Asset and Liability Committee (“ALCO”, headed by the CEO). The risk management departments report to the Head of Risk Management and are independent from the Group’s business units.
Credit Risk
The Alfa Banking Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower or groups of borrowers, as well as to industry sectors. Alfa Banking Group also complies with exposure limits for single borrowers and groups of related borrowers established by the CBR. Such credit risks are monitored on a revolving basis and subject to regular review by the Credit Committee and the credit risk management department. Limits on the level of credit risk by product, borrower and industry sectors are approved regularly by the Credit Committee within its authority and approved by the Executive Committee and the Board of Directors. Credit limits are established and monitored in accordance with Alfa-Bank’s lending policy.
Exposure to credit risk is managed by the credit risk management department through regular analysis of the ability of borrowers and potential borrowers to meet interest and principal repayment obligations, and by changing these lending limits where appropriate. Exposure to credit risk is also managed, in part, by obtaining collateral and corporate and personal guarantees. The Alfa Banking Group uses the same credit policies in making conditional obligations as it does for on-balance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures.
Market Risk
The Alfa Banking Group manages its market risk through risk-based (value at risk and extreme loss) limits for the Alfa Banking Group’s overall position and for individual trading desks, sub-limits for types of exposures to various types of securities (including both equity and fixed income securities) and markets, and position limits for issuers and individual instruments. Limits on securities are approved by ALCO based on analyses performed by the Market Risk Management (“MRM”) Department“. Additional issuer limits on fixed income securities are approved separately by the Credit Committee (or certain relevant subcommittees). Both the Alfa Banking Group’s proprietary and trading portfolios consist predominantly of liquid, traded securities, and its liquidity portfolio contains only debt instruments of Russian sovereign and highly-rated corporate borrowers.
Risk-based limits are monitored on a daily basis by the MRM Department with respect to individual trading desks, while the overall value at risk (or “VaR”) is monitored on a weekly basis.
Operational Risk
Alfa Banking Group is focused on the regular monitoring of its operational risk profiles and material exposures to operational losses. Alfa Banking Group’s system of regular reporting of information to senior management and the Board of Directors also supports the proactive management of operational risk.
Operational Risk Management (“ORM”) carries out risk-audit activities, assessments of operational risks and prepares recommendations for risk mitigation. ORM has implemented a number of tools recommended by the Basel Committee including: internal loss collection and reporting, key risk indicators, external loss data collection; and control and risk self-assessments. ORM is responsible for analysing new products and intra-bank regulations. The Group has a comprehensive insurance policy (Bankers Blanket Bond and Directors&Officers Liability), which is designed with ORM participation. Our achievements in operational risk management were recognised at the international level: Alfa-Bank has received the Operational Risk Achievement Award for two consecutive years.
Asset and Liability Risk Management
Asset and liability management, interest rate risk and exchange rate risk management are overseen by ALCO based on MRM Department analyses. Alfa Banking Group uses a dynamic liquidity model for asset and liability management, which analyses potential liquidity gaps over different periods under different scenarios, including general market crises, corporate loan portfolio delinquencies and material decrease of deposits. The model has been successful in improving the Group’s asset and liability management after certain liquidity tightness experienced by the Group in summer 2004. The Group’s interest rate risk (“IR”) is minimal because of the short terms and frequent repricing of assets and liabilities. Risks are managed primarily by matching the maturities of assets and liabilities. Foreign exchange rate (“FX”) risk is managed by matching the currencies of the Group’s assets and liabilities. Both FX and IR risks are managed by the Treasury within limits set by ALCO.
Retail Risk Management
Due to the rapid expansion of Alfa Banking Group's retail business, the new department of retail risk management was created at the end of 2005. Its infrastructure is supported by a globally renowned decision support system, whereas lending decisions are based on a globally accepted retail credit scoring practice. The department is staffed by experienced risk professionals with extensive experience in emerging markets both within and outside of Russia, and the Group is committed to making further investments in this direction to realise its strategic goal of building a profitable retail franchise.
