The identification and management of risk has always been a priority at Housing Finance Bank.  Risk management is embedded in the implementation of the Bank’s strategy.  The Board of Directors establishes a risk management framework, including responsibilities, authorities and key controls, through the Corporate Governance procedures.  Management Board and the Committee on Tariffs, Pricing and Liquidity use advanced analytical techniques to implement the framework.  The system’s provides feedback in the form of comprehensive reporting, which enables key controls.

The Board identifies the following as the major risk factors:

• Credit risk;
• Market risk;
• Liquidity risk;
• Operational risk;
• Tax, legal and compliance risks.

The Bank’s risk management complies with the regulations of the Central Bank of Russian Federation and the recommendations of the Basel Accord.

Credit risk management is viewed as the most important.  For corporate clientele it is tailor made.  Firstly, there are credit limits established by the Board of Directors: by industry / sector and by borrower / group.  Secondly, there are credit limits set by the Management Board: by product and by group of products.  Thirdly, all corporate loans applications are going through the department of financial and economic analysis, which is independent from the front office.  Finally, there is a collateral analysis department, which independently evaluates the collateral.  The Management Board makes the final decision after considering reports from all the units above plus legal and security service’s opinions. 

Credit risk management for individual borrowers is based on scoring systems, equivalent to those provided by the organisations, which Bank re-sells its loan portfolios to. In addition to that, bank uses collateral, loan insurance and collateral insurance.

For the Bank, market risk predominantly materialises as interest risk and foreign exchange risk.  Changes in interest rate levels, yield curves and spreads may affect the interest rate margin realised between interest income and borrowing costs. Changes in currency rates, particularly in dollar-rouble rate, may affect the value of assets and liabilities denominated in dollars and, therefore, earnings reported in roubles.

The Bank has implemented methods to mitigate and control these two risks such as:

• fixed rates deposits and loans;
• foreign currency denomination clauses;
• limits on dollar exposure;
• hedging.

Liquidity risk, which is the risk that the Bank is unable to honour its payment obligations when they are due and to replenish the funds when they are drawn, is managed by day-to-day liquidity monitoring, cash flow forecast and liquidity gap management.  Based on the recommendations of the Treasury and the Department of Financial and Economic Analysis, the  Committee on Tariffs, Pricing and Liquidity sets the maximum liquidity deficit on an annual basis. 

Operational risks and losses may result from fraud, human errors, inadequate transactions’ documentation, and failure to comply with internal rules or external regulatory requirements.  Operational risks are mostly mitigated by internal control system.

Tax risk, being associated with changes in, or errors in the interpretation of, taxation laws. This may result in increased charges or financial loss.  This risk is mitigated through high standards of accounting and legal personnel training.  Legal risk may come in different forms such as Bank’s failure to conduct business in accordance with applicable laws and non-enforceability of contractual obligations, which is mitigated by proper training of in-house lawyers and procuring legal advice.  Compliance risk arises from inability to comply fully with the laws and regulations and is exacerbated by an extensive red tape in Russia in general and in Russian banking system in particular.  Assigning day-to-day compliance duties to the Internal Control Service mitigates this risk.

General economy and political risks are also considered by the Bank but they are beyond its control.  Capital risk is not considered a priority yet due to high capital adequacy ratios.