Market risk is defined as the risk of loss incurred as a result of changes in interest or currency exchange rates. The Bank uses derivatives to hedge against interest rate and currency exchange rate risks on its issuing, loan and securities operations. It may also have recourse to macro-hedging when necessary. Moreover, since the Bank has no trading activities, the Basel Committee recommendations for allocation of equity do not apply.
Interest rate risk: the Bank’s governing bodies have adopted a strategy that consists of systematically hedging positions in order to minimise risk. The interest rate risk in the CEB’s balance sheet is currently concentrated in both the long-term financial assets and loan portfolio at fixed rates, backed by the Bank’s prudential equity, plus the Social Dividend Account (SDA) amount and provisions for post-employment benefits.
Currency exchange rate risk: the CEB’s strategy is not to take any currency positions or finance assets and liabilities in a single currency. The residual risk arising from gains or losses in currencies other than the euro is measured daily and managed through a set of thresholds and limits. The net open position per currency is limited to the equivalent of € 1 million.