Pág �09559 de muestreo apropiada para el registro de cada
4.2.1 CRITERIOS GENERALES.
Summary of key developments in 2010
The most important developments that took place in 2010 with
regard to risk management and control include:
– On a net basis (new credit loss expenses minus recoveries), credit losses at the Group level were CHF 66 million, signifi- cantly down from CHF 1,832 million in 2009. Our Swiss and international loan portfolios were materially unchanged.
– Our impaired loan portfolio decreased by CHF 2.7 billion, pri-
marily due to sales of certain restructured legacy leveraged
finance positions, without the incurrence of any meaningful incremental costs to the firm.
– During the second half of the year, our market risk profile in-
creased moderately from previously low levels (on both an ab- solute basis and a relative basis to our peers) in line with our
previously communicated growth plans in the Investment
Bank. This is reflected in the development of our value-at-risk (VaR) and market risk related risk-weighted assets (RWA).
– After repurchasing USD 7.6 billion at par value of outstanding
client holdings of student loan auction rate securities (ARS) in 2010, our remaining purchase commitment at the end of the year was immaterial with a par value of USD 63 million. De- spite the material buy-backs, our inventory of student loan ARS decreased by net USD 0.6 billion to USD 9.8 billion, as a result of significant redemptions and sales in the secondary market.
– We commuted several trades with monoline insurers, which
along with an increase in the fair values or the remaining in- sured assets resulted in a reduction of our net exposure to monoline insurers after credit valuation adjustments (CVA) to USD 1.6 billion. Based on fair values, only 2% of our remaining
portfolio of assets hedged with monoline insurers related to US
residential mortgage-backed securities collateralized debt obli- gations (RMBS CDO). Approximately 73% of the remaining as- sets were collateralized loan obligations (CLO), the vast major- ity of which were rated AA and above.
– Our sovereign exposures are subject to limits and are actively
managed under an established country risk control framework. As a result, sovereign exposures are commensurate with the rating of each country and the size of each economy. Sover- eign exposures of industrialized European countries rated AA
and below were materially reduced on a gross and net basis
during the year. In addition, we do not have material sovereign risk exposures in the Middle East and North African region.
– We have made further significant enhancements to our firm-
wide risk measures and tools. Our stress testing framework has continued to evolve, including the development of new sce- narios to capture our risk exposure to extreme market events and macroeconomic developments.
– Since the start of 2009, the Swiss Financial Market Supervisory
Authority (FINMA) has conducted regular stress tests on the two large Swiss banks. In July 2010, FINMA carried out a stress test which assumed a severe global recession and very sharp, specific shocks for certain European countries. FINMA’s analysis showed that UBS “would have a tier 1 ratio of at least 8% under the stress events tested.”
– In anticipation of the enhanced Basel II framework, we further
enhanced our risk appetite framework by making it more com- prehensive and relevant to the current financial environment. New measures supplementing the current market risk capital have been introduced, enabling compliance with the enhanced Basel II requirements.
– Over the last two years, we took comprehensive steps to help
ensure that our compensation plans and processes were re- designed and implemented in such a way to ensure appro- priate risk-taking. Risk awareness, assessment and manage- ment were integrated into our compensation framework. They now form a basis for designing our compensation plans, determining the overall bonus pool, allocating individual bonuses, and identifying and monitoring performance and
compensation of key risk takers and controllers across the
organization.
Disciplined risk management and control are essential to our success. In 2010 we continued to make significant invest-
ments in our infrastructure, processes, methodologies and people to ensure that our risk frameworks are sufficiently robust to support our risk appetite and business aspirations. Our risk appetite is established within our risk capacity as determined by a complementary set of firm-wide risk metrics, and is approved under Board of Directors authority. It is administered and enforced by a detailed limit framework of portfolio and position limits at both Group and business division levels. Each element of our risk control framework plays a key role in the decision-making processes within the firm. All material risks are reported to the respective authority holders at least monthly. In 2010, increased risk-taking was authorized for incremental trading activity, particularly to support client flow activity, and also for loan underwriting. Outside of these two areas, the core risk profile of the firm remained largely unchanged. Reduction of our residual risk positions remained a priority in 2010. We further reduced our exposures to monoline insurers, student loan auction rate securities and certain restructured legacy leveraged finance positions, thereby decreasing our impaired loan portfolio.
Risk and tr
easury management
culations. Work in this area is ongoing.
– In order to standardize methodology, processes and tools for
credit monitoring across our wealth management locations,
we began global deployment of a new monitoring solution for
this business. Additionally, in our Global Asset Management business, we commenced deployment of a third-party risk measurement application, which will facilitate improved re-
porting and provide our portfolio managers with enhanced risk
management models.
➔Refer to the “Credit risk“, “Market risk“, “Operational risk“,
“Risk concentrations” and “Liquidity and funding management“
sections of this report for more information
➔Refer to the “Compensation” section of this report for more
information on our compensation practices
Risk management and control principles
We have five key principles that support the firm in achieving an
appropriate balance between risk and return:
– Protection of financial strength by controlling our overall risk
exposures and assessing potential risk concentrations at posi- tion and portfolio levels, as well as across all risk types and business divisions.
– Reputation protection, which depends on a sound risk culture
characterized by a holistic and integrated view of risk, perfor- mance and reward, including effectively managing and con- trolling risks. Our risk culture demands that all employees make protecting the firm’s reputation a priority.
– Management is accountable for all risks in their business, and
is responsible for the continuous and active management of
their respective risk exposures to ensure that risk and return are balanced.
– Independent control functions oversee the risk-taking activities
of the business, the effectiveness of risk management in the business and the mitigation of operational risks.
– Disclosure of risk to provide comprehensive and transparent re- porting to senior management, the Board of Directors (BoD), shareholders, regulators, rating agencies and other stakeholders. Our risk management and control principles are implemented through a risk management and control framework. This frame-
work comprises qualitative elements such as policies and authori- ties, and quantitative components including risk measurement methodologies and risk limits.
In addition, the framework is dynamic and continuously adapt- ed as our businesses and the market environment evolve. It in- cludes clearly defined processes to deal with new business initia- tives as well as large and complex transactions.
Audited
a BoD Risk Committee (RC), which monitors and oversees the firm’s risk profile and the implementation of the risk frame- work as established by the BoD. The BoD RC also assesses and approves the firm’s key risk measurement methodolo- gies.
– The Group Executive Board (GEB) implements the risk frame-
work, controls the firm’s risk profile and approves all major risk policies.
– The Group Chief Executive Officer (Group CEO) is responsible
for the results of the firm, has risk authority over transactions, positions and exposures, and also allocates portfolio limits ap- proved by the BoD within the business divisions.
– The divisional CEOs are accountable for the results of their business divisions including actively managing their risk expo- sures, and ensuring that risks and returns are balanced.
– The Group Chief Risk Officer (Group CRO) reports directly to
the Group CEO and has functional and management authority over risk control throughout the firm. Risk Control provides
independent oversight of risk and is responsible for imple- menting the risk control processes for credit, country, market, investment and operational risks. This includes establishing methodologies to measure and assess risk, setting risk limits
and developing and operating an appropriate risk control in- frastructure. The risk control process is supported by a frame- work of policies and authorities, which are delegated to Risk Control Officers, corresponding to their experience and scope of responsibilities.
– The Group Chief Financial Officer (Group CFO) is responsible for ensuring that disclosure of our financial performance is clear
and transparent and meets regulatory requirements and corpo- rate governance standards. The Group CFO is also responsible
for implementing the risk management and control frame- works for capital management, liquidity, funding and tax.
– The Group General Counsel (Group GC) is responsible for im-
plementing the firm’s risk management and control principles for legal and compliance matters.
Risk categories
The risks faced by our businesses can be broken down into three different categories: primary risks, consequential risks and busi- ness risks. Primary and consequential risks result from our busi- ness activities and are subject to independent risk control. Primary risks consist of credit risk, country risk, market risk (including is- suer risk) and investment risk. Consequential risks consist of op- erational risk, which includes legal, compliance and tax risks, and liquidity and funding risks. Definitions of primary and consequen-
– Credit risk: the risk of loss resulting from the failure of a client or counterparty to meet its contractual obligations.
– Country risk: the risk of loss resulting from country-specific events. It includes transfer risk, whereby a country’s authorities prevent or restrict the payment of an obligation, as well as systemic risk events arising from country-specific political or macroeconomic developments.
– Market risk and investment risks: the risk of loss resulting from
changes in market variables, whether to our trading positions or financial investments.
– Operational risk: the risk of loss resulting from inadequate or
failed internal processes, people and systems, or from external causes, whether deliberate, accidental or natural. This includes risks related to legal, compliance and tax matters.
– Liquidity and funding risks: the risk that we might be unable to
either meet our payment obligations when due or to borrow funds in the market at an acceptable price to fund actual or
proposed commitments.
Finally, business risks arise from the commercial, strategic and economic risks inherent in our business activities. It is manage- ment’s responsibility to manage these risks.
➔Refer to the “Credit risk”, “Market risk”, “Operational risk”
and “Liquidity and funding management” sections of this
report for a description of the control frameworks for these risk categories
Risk measurement
A variety of methodologies and measurements are applied to
quantify the risks of our portfolios and risk concentrations. Risks that are not properly reflected by standard measures are subject to additional controls, which may include pre-approval of trans- actions and specific restrictions. Models to quantify risk are gen- erally developed by dedicated units within the firm-wide and business division-facing control functions. We require that valua- tions and risk models which could impact the firm’s books and records be independently verified and subjected to ongoing monitoring and control by the Group CRO and Group CFO orga- nizations.
Statistical loss and stress loss
We assess potential future losses using two complementary types
of risk measures: statistical loss and stress loss. Statistical loss
Statistical loss measures include VaR, expected loss (EL) and earn- ings-at-risk (EaR). VaR estimates the losses which could poten- tially be realized over a set time period at an established level of confidence. EL is used to measure the average annual costs that are expected to arise from our credit portfolios and from opera- tional risks. EaR is comprised of core statistical measures overlaid with management judgment, and measures the potential shortfall
Audited
Audited
in our earnings, which could potentially be realized over a set time period at an established level of confidence.
➔Refer to the “Credit risk”, “Market risk” and “Operational risk”
sections of this report for a description of our key statistical loss measures
Stress loss
To complement our statistical loss measures and better under- stand our risk capacity and appetite, we also perform stress testing. Stress loss is the loss that could result from extreme events under specified scenarios. We use stress testing to quan- tify our exposures to plausible yet extreme and unusual market movements, and to enable us to identify, understand and manage our potential vulnerabilities and risk concentrations. Our stress testing framework incorporates a comprehensive range of portfolio-specific stress tests as well as combined firm- wide stress tests.
Portfolio-specific stress tests are measures that focus on risks of specific portfolios within the business divisions. Our portfolio stress loss measures are characterized by past events but also include forward-looking elements. The stress scenarios
for trading risks capture the liquidity characteristics of different
markets and positions. Our stress frameworks include a sce- nario which reflects the extreme market conditions that were experienced at the height of the financial crisis in the fourth quarter of 2008.
Combined stress testing (CST) captures firm-wide exposure to a number of global systemic events, including a severe global recession. These stress tests are based on forward-looking mac-
roeconomic and market event scenarios calibrated to different
levels of severity. The evolution of economic variables and mar- ket indicators under these scenarios is defined and applied to our entire risk portfolio. The impact of primary, consequential
and business risks is assessed with the aim of calculating the loss and capital implications should these stress scenarios be
realized.
Stress test results are included in risk reporting and are impor- tant inputs for the risk control, risk appetite and business plan- ning processes of the firm. Our firm-wide stress testing, which captures all major risks across our business divisions, is one of the key inputs for discussions between senior management, the BoD and regulators with regard to our risk profile. We continue to provide detailed stress analyses to FINMA in accordance with their requirements.
The stress scenarios are reviewed, updated and expanded reg- ularly in the context of the macroeconomic and geopolitical envi-
ronment by a committee comprised of representatives from the
business divisions, Risk Control and Economic Research. Our stress
testing therefore attempts to provide a control framework that is
forward-looking and responsive to changing market conditions. However, the market moves experienced in real stress events may differ from moves envisaged in our scenario specifications.
Most major financial firms employ stress tests, but their ap- proaches vary significantly, and there are no industry standards
Risk and tr
easury management
Group risk appetite framework
Our risk appetite framework establishes risk appetite objectives in respect of earnings and capital levels that we seek to maintain, even after experiencing severe losses over a defined time horizon. In order to monitor our risk profile against our risk appetite, we use our two complementary firm-wide risk measurement frameworks: EaR (together with its extension, capital-at–risk (CaR)) and CST.
Both frameworks capture risks across all of our business divisions
and from all major risk categories, including primary risks, conse- quential risks and business risks. These measures are significant components of our risk control, capital management and business planning processes, which are described in more detail below.
– EaR is measured as the potential shortfall in earnings at a 95%
confidence level and is evaluated over both three-month and one-year periods.
– CaR extends EaR to consider the impact on BIS tier 1 capital of
a more severe earnings shortfall and is measured at confidence levels from 95% to 99.9%.
– CST supplements EaR and CaR. As described in the “Stress loss”
section above, our firm-wide stress tests evaluate the impact across our risk portfolios, and thereby on our earnings and cap- ital, based on specified macroeconomic stress scenarios.
market and economic events. Comparison of the firm’s risk ex-
posure with our risk capacity under prevailing operating condi-
tions as well as prospective business plans serves as an input to
the risk limit framework. This comparison is also a key tool to support management decisions on potential adjustments to the risk profile of our firm.
➔Refer to the “Credit risk”, “Market risk” and “Risk concentration”
sections of this report for more information on our risk exposures
Risk disclosures
The measures of risk exposure that we use may differ depending on the purposes for which exposures are calculated: financial ac- counting under International Financial Reporting Standards (IFRS),
determination of our required regulatory capital or our internal
management. The exposures detailed in the “Credit risk” and “Market risk” sections are typically based on our internal man- agement view of risk exposure.
➔Refer to the “Basel II Pillar 3” section of this report for further
information on the exposures we use in the determination of