Market Risk Assessment & Limit Systems

Market risk assessment encompasses several key components:

🔍 Risk Identification and Classification

📊 Quantification Methods

⚙ ️ Modeling Approaches

🔄 Validation and Backtesting

The regulatory requirements for market risk assessment are extensive and based on various frameworks:

📜 Capital Requirements Regulation (CRR)

🏦 Minimum Requirements for Risk Management (MaRisk)

🌐 International Standards

📊 Reporting Obligations

Value at Risk (VaR) is a central metric in market risk assessment:

🎯 Definition and Concept

📊 Calculation Methods

⚙ ️ Practical Aspects

Stress tests are an essential instrument in market risk management and complement Value-at-Risk models: Purpose and Significance Overcoming VaR limitations: Capturing extreme events beyond historical experience Identifying vulnerabilities: Uncovering weaknesses in the risk profile Quantifying extreme risks: Measuring potential losses in crisis scenarios Regulatory requirement: Mandatory component of risk management according to MaRisk and CRR Types of Stress Tests Sensitivity Analyses

200 basis point interest rate shock)

2008 financial crisis, COVID‑19 shock 2020)

Limit systems are a central instrument for managing market risks: Basic Principles and Structure Definition: Setting upper bounds for risk exposures at various levels Hierarchical structure: Cascading limits from the overall bank to individual trading desks Risk appetite: Deriving limits from the overarching risk appetite of the company Consistency: Coordination of different limit types to avoid contradictions Types of Limits Position limits: Limiting the nominal volume or market value of positions Sensitivity limits: Limiting sensitivity to risk factors (Delta, Gamma, Vega) VaR limits: Limiting Value at Risk at various levels Loss limits: Limiting realized or unrealized losses (stop-loss limits) Stress limits: Limiting potential losses under stress scenarios Implementation and Governance Limit setting: Process for determining appropriate limit values Limit allocation: Distribution of total risk to various business areas Limit monitoring: Continuous monitoring of utilization and compliance Escalation processes: Defined procedures for limit breaches Regular review: Adjustment of limits to changed market conditions and business strategies.

Risk-bearing capacity analysis (RBCA) is a central element of overall risk management with close connection to market risk management: Basic Concept and Significance Definition: Ability of a company to absorb potential losses from risks through available risk coverage potential Regulatory basis: MaRisk AT 4.1 requires an appropriate risk-bearing capacity concept Strategic relevance: Linking risk appetite, capital planning, and business strategy Limitation: Derivation of overall bank limits from risk-bearing capacity Components and Methodology Risk Coverage Potential (RCP): Available resources for absorbing losses

Backtesting is a critical process for validating risk models, especially for Value-at-Risk (VaR): Basic Principles and Regulatory Requirements Definition: Comparison of risk forecasts with actual results Regulatory framework: CRR Art.

366 defines requirements for internal models Outlier criteria: Maximum

4 exceedances per year for green zone (CRR) Consequences: Multiplication factors for capital requirements based on backtesting results Backtesting Methods Binomial Test (Kupiec Test)