Market risk is the risk of loss due to adverse movements in financial markets, such as interest rate or foreign exchange markets.
Interest Rate Risk
Interestrate risk is the current or prospective risk to the Bank’s capital and earningsfrom adverse movements in interest rates.
Inthe normal course of business, the CEB is exposed to various sources ofinterest rate risk, such as gap risk - which arises from mismatches in thedates on which financial instrument rates are reset -, basis risk and optionrisk.
TheBank takes a prudent approach to managing interest rate risk to preserve itsfinancial stability and protect its income and capital. It manages interestrate risk throughout the balance sheet by using micro-hedging or macro-hedgingderivatives, converting assets and liabilities into euro-denominated floatingrate instruments. The CEB manages the structural interest rate risk on equity,which is not interest-rate sensitive, by adopting a convention for the interestrate repricing profile and duration of equity. This convention is regularlyreviewed in light of CEB’s risk appetite and financial market trends.
TheBank measures interest rate risk in accordance with Basel/EU regulations andEuropean Banking Authority (EBA) standards. It defines its risk appetite basedon the metric measuring the interest rate sensitivity of the economic value of equity.The CEB also monitors the interest rate sensitivity of the interest margin.
Foreign Exchange Risk
Foreignexchange risk is defined as the potential loss of on- and off- balance-sheetpositions resulting from adverse movements in exchange rates.
TheCEB does not take any foreign exchange position and systematically hedgesassets and liabilities in euros, using derivative instruments. The residualrisk arising from carrying interests in currencies other than the euro ismonitored and hedged monthly. The net open position is limited to theequivalent of €1million per currency at the end of each month.
