All risk authority is centralised in the Group’s Credit Committee and Asset and Liability Committee («ALCO»). The risk management departments report to the Chief Risk Officer and are independent from the Group’s business units.

The Alfa Banking Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower or groups of borrowers, as well as to industry sectors. Alfa Banking Group also complies with exposure limits for single borrowers and groups of related borrowers established by the CBR. Such credit risks are monitored on a revolving basis and are subject to regular review by the Credit Committee and the credit risk management department. Limits on the level of credit risk by product, borrower and industry sectors are approved regularly by the Credit Committee within its authority and approved by the Executive Committee and the Board of Directors through approval of Loan policy. Credit limits are established and monitored in accordance with current Alfa-Bank’s Loan policy.

The Group uses a wide range of techniques to reduce credit risk on its lending operations managing both individual transaction loss drivers, such as probability of default, loss given default and exposure at default, and systemic risk drivers on a portfolio basis Exposure to credit risk is also managed, in part, by obtaining collateral and corporate and personal guarantees.

Exposure to credit risk is managed by the credit risk management department through regular analysis of the ability of borrowers and potential borrowers to meet interest and principal repayment obligations, and by changing these lending limits where appropriate.

The Alfa Banking Group uses the same credit policies in making conditional obligations as it does for on-balance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures.

The Alfa Banking Group manages its market risk through market value-based and risk-based (value at risk and extreme loss) limits for the Alfa Banking Group’s overall position and for individual trading desks. Limits for trading positions are approved by ALCO based on analyses performed by the Market Risk Management («MRM») Department. Additional issuer limits on fixed income securities are approved separately by the Credit Committee (or certain relevant subcommittees). Position market value-based and risk-based limits are monitored on a daily basis with respect to individual trading desks, while the overall value at risk (or «VaR») is monitored on a weekly basis.

Alfa Banking Group is focused on the regular monitoring of its operational risk profiles and material exposures to operational losses. Alfa Banking Group’s system of regular reporting of information to senior management and the Board of Directors also supports the proactive management of operational risk.

Operational Risk Management («ORM») carries out risk-audit activities, assessments of operational risks and prepares recommendations for risk mitigation. ORM has implemented a number of tools recommended by the Basel Committee including: internal loss collection and reporting, key risk indicators, external loss data collection; and control and risk self-assessments. ORM is responsible for analyzing new products and intra-bank regulations. The Group has a comprehensive insurance policy (Bankers Blanket Bond and Directors&Officers Liability), which is designed with ORM participation. Our achievements in operational risk management were recognized at the international level: Alfa-Bank has received the Operational Risk Achievement Award for two consecutive years.

Asset and liability management, interest rate risk and exchange rate risk management are overseen by ALCO based on Treasury and MRM Department analyses. Alfa Banking Group uses and constantly upgrades a dynamic liquidity model for asset and liability management, which forecasts potential liquidity gaps over different time spans under different scenarios, including interbank market crises, increase of corporate loan portfolio delinquencies and material decrease of term deposits and current accounts. This model is applied on daily basis. ALCO has fixed maximum liquidity gap for «crisis» forecasts. Using results of asset and liabilities management models Bank successfully overcame problems with liquidity in summer 2004.

Interest rate (IR) risk is managed by Treasury within limits set by ALCO. Treasury follows up the limits on weekly basis. Limits are set in terms of sensitivity of assets, liabilities, off-balance instruments present value to the increase of interest rates up to 100 basic points. Interest rate (IR) risk is managed primarily by forward contracts on buying/selling foreign currency and derivatives such as interest swap.

Foreign exchange rate («FX») risk is managed by matching the currencies of the Group’s assets and liabilities. Both FX and IR risks are managed by the Treasury within limits set by ALCO.

Due to the rapid expansion of Alfa Banking Group’s retail business, the new department of retail risk management was created at the end of 2005. Its infrastructure is supported by a globally renowned decision support system, whereas lending decisions are based on a globally accepted retail credit scoring practice. The department is staffed by experienced risk professionals with extensive experience in emerging markets both within and outside of Russia, and the Group is committed to making further investments in this direction to continue its strategic focus in maintaining profitable growth and consolidate its position as one of the leading places in the retail lending space.