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Risk Management

Aggravating geopolitical risks and crisis trends in the Russian economy in conjunction with the constantly growing size of Vnesheconombank’s loan portfolio materially increased the importance of risk management for maintaining the Group’s financial stability. Vnesheconombank Group’s risk management system is driven by consistent and continuous processes that involve all entities of the Group, including making strategic and day-to-day management decisions.

The risk management system operating in Vnesheconombank Group is a continuous framework of practices, organisational measures and IT efforts that seek to identify, assess and control risks and timely take measures to prevent and minimise risks and maximise performance within the existing risk appetite limits. The system is deeply integrated into Vnesheconombank Group’s operations and operates at all its levels from the Bank’s supreme governance body, the Supervisory Board, to the Bank’s specialised units and entities responsible for risk control and management.

We are improving our risk management system by building uniform standards and approaches to risk management applicable to those subsidiaries of the Group whose operations are associated with high risks. To this end, in 2013 Vnesheconombank Group developed and approved its Risk Management Policy and a roadmap to implement the policy. The roadmap provides for building an organisational and regulatory and methodological framework to ensure consistency and continuity of risk management approaches used in the Group.

Important milestones in this path included the creation of Vnesheconombank’s Risk Management Committee and appointment of Vnesheconombank Group’s Risk Director in 2014. At the same time, the Group’s subsidiaries continued their efforts on refining corporate regulatory documents that govern the risk management procedure and bringing them in compliance with the Risk Management Policy of Vnesheconombank Group.

Risk Management System of Vnesheconombank Group
Risks Occurred in 2014 and Response by Vnesheconombank Group

In 2014, the Russian economy was hit by plummeting oil prices, a highly volatile Russian rouble, capital outflow, rising interest rates in the financial market and sectoral sanctions imposed by some countries on the Russian Federation. In the second half of 2014, these sanctions also affected Vnesheconombank and its subsidiaries. The sanctions mainly constrain Vnesheconombank Group’s access to equity and debt financing in the US, Canada and EU member states with above 30-day maturities.

Due to the sanctions and other adverse macroeconomic factors, Vnesheconombank Group put in place additional measures to improve its risk management system, including the ones to identify, assess, manage, monitor and control risks, and to prepare reports that would describe the impact by unfavourable external factors on the financial position and performance of the Group to be used by the Bank’s and its subsidiaries’ governing bodies in making their management decisions.

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Steps Taken by Vnesheconombank Group in 2014 in Response to Aggravated Geopolitical and Macroeconomic Risks

Developing and improving
the regulatory framework

  • The calculation methodology for Vhesheconombank’s economic capital was developed
  • Compliance of the risk management regulatory framework of Vnesheconombank and the Group’s entities with the Group’s Risk Management Policy was analysed
  • Risk management policies of SME Bank, VEB Capital, BelVEB and Prominvestbank were approved
  • Subsidiaries’ regulatory framework for group-wide liquidity management, including financial stability plans were reviewed
  • Proposals to update and improve the regulatory framework on crisis liquidity management were prepared
  • The development of uniform risk management standarts was launched
  • The Regulations on the Working Group on Coordination of Liquidity and Risk Management of Subsidiary Banks and Financial Companies of Vnesheconombank were updated

Developing risk management
reporting

  • Structural risks reports for Vnesheconombank’s management and liquidity calculations were regularly prepared
  • Monthly internal reporting on the status of credit risks for Vnesheconombank’s management was introduced
  • Quarterly reports on risks of the Group’s subsidiary banks for Vnesheconombank’s management were prepared (including a breakdown of risk levels and changes by type and business line; expert assessment of asset quality and capital requirements; estimate of stock market and currency risks using the Value-at-Risk (VaR) methodology; results of the interest rate sensitivity analysis; and liquidity status with an estimate of the size of potential funding sources)
  • Approaches to the assessment of risks of the Group’s entities were unified; an automated reporting system was put in place

Risk-oriented analysis
of operations

  • Control over risks related to material transactions by subsidiaries (assessment of material transaction risks in order to prepare directives on decision-making for Vnesheconombank’s representatives that sit on governing bodies of subsidiaries) was enhanced
  • Borrowers’ ability to timely meet their obligations to the Group’s lending institutions in the new economic environment was reviewed
  • The portfolio of loans denominated in foreign currencies was additionally analysed
  • Proposals to further analyse sources for repayment of foreign currency loans and confirm borrowers’ creditworthiness was prepared
  • Perfomance of the distressed and overdue debt portfolio was analysed
  • The efficiency of managing Vnesheconombank’s open currency position was reviewed

Vnesheconombank’s Development Strategy for 2015–2020 provides for further improvements to the Group’s risk management system as a paramount pre-requisite for Vnesheconombank Group’s financial stability. The Strategy provides for a range of measures that will include:

  • developing and implementing a methodology for consolidated quantitative assessment of risks assumed to estimate the economic capital required to cover potential losses;
  • raising awareness of governing bodies about risks assumed by the Group;
  • developing a system of key indicators for material risks;
  • developing and putting in place a process to establish, and follow up compliance with, the risk appetite;
  • develop risks management information systems.

Priority initiatives that are planned to be implemented in 2015 include the development of unified risk management standards for Vnesheconombank Group and a group-wide system of key risk indicators, as well as implementation of procedures for their monitoring. An important task for the Bank will also consist in improving risk monitoring procedures and addressing distressed and overdue debt in a more efficient way. These steps will help to timely identify a decline in asset quality and an impact by negative factors on Vnesheconombank Group's portfolio so as to take timely preventive measures.