Citibank 2012 Annual Report Download - page 95

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Risk Aggregation and Stress Testing
While Citi’s major risk areas (i.e., credit, market and operational) are
described individually on the following pages, these risks are also reviewed
and managed in conjunction with one another and across the various
businesses via Citi’s risk aggregation and stress testing processes.
As noted above, independent risk management monitors and controls
major risk exposures and concentrations across the organization. This
requires the aggregation of risks, within and across businesses, as well
as subjecting those risks to various stress scenarios in order to assess the
potential economic impact they may have on Citigroup.
Stress tests are in place across Citi’s entire portfolio, (i.e., trading,
available-for-sale and accrual portfolios). These firm-wide stress reports
measure the potential impact to Citi and its component businesses of
changes in various types of key risk factors (e.g., interest rates, credit spreads,
etc.). The reports also measure the potential impact of a number of historical
and hypothetical forward-looking systemic stress scenarios, as developed
internally by independent risk management. These firm-wide stress tests
are produced on a monthly basis, and results are reviewed by senior
management and the Board of Directors.
Supplementing the stress testing described above, Citi independent risk
management, working with input from the businesses and finance, provides
periodic updates to senior management and the Board of Directors on
significant potential areas of concern across Citigroup that can arise from
risk concentrations, financial market participants, and other systemic issues.
These areas of focus are intended to be forward-looking assessments of the
potential economic impacts to Citi that may arise from these exposures.
The stress-testing and focus-position exercises described above 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.
In addition to Citi’s ongoing, internal stress testing described above, Citi
is also required to perform stress testing on a periodic basis for a number of
regulatory exercises, including the Federal Reserve Board’s Comprehensive
Capital Analysis and Review (CCAR) and the OCC’s Dodd-Frank Act Stress
Testing (DFAST). For 2013, these stress tests are required annually and mid-
year. These regulatory exercises typically prescribe certain defined scenarios
under which stress testing should be conducted, and they also provide defined
forms for the output of the results. For additional information, see “Risk
Factors—Business and Operational Risks” above.
Risk Capital
Citi calculates and allocates risk capital across the company in order to
consistently measure risk taking across business activities, and to assess risk-
reward relationships.
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 are reflected on Citi’s Consolidated
Income Statement and fair value adjustments to the Consolidated
Financial Statements, as well as any further declines in value not captured
on the Consolidated 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 99.9% and 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, are broadly
categorized as credit risk, market risk and operational risk.
•฀ Credit risk losses primarily result from a borrower’s or counterparty’s
inability to meet its financial or contractual obligations.
•฀ Market risk losses arise from fluctuations in the market value of trading
and non-trading positions, including the 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.
Citi’s risk capital framework is reviewed and enhanced on a regular basis
in light of market developments and evolving practices.