Citibank 2009 Annual Report Download - page 72

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RISK AGGREGATION AND STRESS TESTING
While Citi’s major risk areas are described individually on the following
pages, these risks also need to be reviewed and managed in conjunction with
one another and across the various businesses.
The Chief Risk Officer, as noted above, monitors and controls major
risk exposures and concentrations across the organization. This means
aggregating risks, within and across businesses, as well as subjecting those
risks to alternative stress scenarios in order to assess the potential economic
impact they may have on Citigroup.
Comprehensive stress tests are in place across Citi for mark-to-market,
available-for-sale, and accrual portfolios. These firm-wide stress reports
measure the potential impact to Citi and its component businesses of very
large changes in various types of key risk factors (e.g., interest rates, credit
spreads), as well as the potential impact of a number of historical and
hypothetical forward-looking systemic stress scenarios.
Supplementing the stress testing described above, Risk Management,
working with input from the businesses and finance, provides enhanced
periodic updates to senior management on significant potential exposures
across Citigroup arising from risk concentrations (e.g., residential real
estate), financial market participants (e.g., monoline insurers), and other
systemic issues (e.g., commercial paper markets). These risk assessments
are forward-looking exercises, intended to inform senior management about
the potential economic impacts to Citi that may occur, directly or indirectly,
as a result of hypothetical scenarios, based on judgmental analysis from
independent risk managers. Risk Management also reports to the Risk
Management and Finance Committee of the Board of Directors, as well as the
full Board of Directors on these matters.
The stress testing and risk assessment exercises are a supplement to the
standard limit-setting and risk-capital exercises described below, as these
processes incorporate events in the marketplace and within Citi that impact the
firm’s outlook on the form, magnitude, correlation and timing of identified
risks that may arise. In addition to enhancing awareness and understanding of
potential exposures, the results of these processes then serve as the starting point
for developing risk management and mitigation strategies.
RISK CAPITAL
Risk capital is defined as the amount of capital required to absorb potential
unexpected economic losses resulting from extremely severe events over a
one-year time period:
“Economic losses” include losses that appear on the income statement •฀
and fair value adjustments to the financial statements, as well as any
further declines in value not captured on the income statement.
“Unexpected losses” are the difference between potential extremely severe •฀
losses and Citigroup’s expected (average) loss over a one-year time period.
“Extremely severe” is defined as potential loss at a 99.97% confidence •฀
level, based on the distribution of observed events and scenario analysis.
The drivers of “economic losses” are risks, which for Citi can be broadly
categorized as credit risk (including cross-border risk), market risk
(including liquidity) and operational risk (including legal and regulatory):
Credit risk losses primarily result from a borrower’s or counterparty’s •฀
inability to meet its obligations.
Market risk losses arise from fluctuations in the market value of trading •฀
and non-trading positions, including the treatment changes in value
resulting from fluctuations in rates.
Operational risk losses result from inadequate or failed internal processes, •฀
systems or human factors or from external events.
These risks are measured and aggregated within businesses and across
Citigroup to facilitate the understanding of our exposure to extreme downside
events as described under “Risk Aggregation and Stress Testing.”
The risk capital framework is reviewed and enhanced on a regular basis in
light of market developments and evolving practices.
The following is a more detailed discussion of the principal risks Citi
assumes in conducting its activities: credit, market and operational risk.