DHL 2005 Annual Report Download - page 134

Other disclosures
51 Financial instruments
Financial instruments are contractual obligations to receive or deliver
cash and cash equivalents. In accordance with IAS 32 and IAS 39,
these include both primary and derivative nancial instruments.
Primary nancial instruments include in particular bank balances,
all receivables, liabilities, securities, loans and accrued interest. Ex-
amples of derivatives include options, swaps and futures.
e Deutsche Postbank group accounts for most of the nancial in-
struments in Deutsche Post World Net. e risks and derivatives of
the Deutsche Postbank group’s nancial instruments are therefore
presented separately below.
51.1 Risks and nancial instruments of the
Deutsche Postbank group
51.1.1 Risk management system
e Deutsche Postbank group has created the basis for risk- and
earnings-based overall bank management by organizing its risk man-
agement activities.
e Management Board of Deutsche Postbank AG is responsible for
risk strategy, the appropriate organization of risk management, moni-
toring the risk content of all transactions, and risk control.
In conjunction with the Risk Committees, the Management Board of
Deutsche Postbank AG has dened the underlying strategies for ac-
tivities on the nancial markets and the other business sectors of the
Deutsche Postbank group. e Management Board takes decisions
on risk capital, the limiting procedures and limit levels for all risks
associated with the banking and non-bank business; it denes the
products and markets in which the Deutsche Postbank group will be
active.
Operational responsibility for risk management is spread across
several units in the group, primarily the Financial Markets division,
Domestic/Foreign Credit Management departments and the credit
functions of the private customer business and, at decentralized level,
the Deutsche Postbank International S.A. and PB Capital Corp. sub-
sidiaries, as well as the branches in Luxembourg and London.
e risk control units measure and assess group-wide risk, ensure
that limits are monitored and complied with, and develop risk man-
agement strategies together with the operating units.
Denition of risk types
e Deutsche Postbank group distinguishes between the following
risk types:
• Market price risk
• Counterparty risk
• Liquidity risk
• Operational risk
• Model risk
• Risk from shareholdings/risks from equity investments
• Strategic risk
Market price risk denotes the potential risk that may lead to losses
in nancial transactions from changes in interest rates, volatilities,
exchange rates and equity prices. Changes in value are derived from
daily marking to market, independently of their measurement for -
nancial accounting purposes.
e Deutsche Postbank group denes counterparty risk as the po-
tential loss that may be caused by changes in the creditworthiness of,
or default by, a counterparty (for example, as a result of insolvency).
Counterparty risk consists of the following risk types:
• credit risk, that is, the potential loss that may arise due to the in-
ability of a debtor to discharge its payment obligations or due to a
deterioration in its credit rating,
• country risk, or transfer risk, which may arise in the case of cross-
border payments due to the unwillingness (political risk) or inabil-
ity (economic risk) of a country to discharge its payment obliga-
tions, and
• counterparty risk which may arise due to default by a counterparty
in the settlement of payment obligations (replacement risk) or to
untimely performance of payment obligations (settlement risk).
Liquidity risk is the risk that the Deutsche Postbank group will be
unable to meet its current and future payment obligations in full or
at the due date. Funding risk (a special form of liquidity risk) aris-
es when the necessary liquidity cannot be obtained at the expected
terms when required.
e Basel Committee on Banking Supervision denes operational
risk as “the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events”. e Deutsche
Postbank group has used this denition as the basis for introducing a
corresponding group-wide control process.
Model risk is a collective term for the risk that arises when the only
information available to decision-makers for management purposes
derives from assumptions-based modeling.
e Bank denes risks from shareholdings/risks from equity invest-
ments rstly as potential losses that may arise from the provision of
equity capital to third parties, and secondly as the earnings risk re-
sulting from the prot and loss transfer agreements entered into with
a large number of subsidiaries.
Annual Report 2005
130