MD&A - Risk management and control

12 Months Ended

Dec. 31, 2022

Entity [Table]

Disclosure Of Financial Risk Management Explanatory

Credit risk:

 the risk of loss resulting from the failure of a client or counterparty to meet its

contractual obligations toward UBS. This includes settlement risk, loan underwriting risk and step-in risk.

Settlement risk:

 the risk of loss resulting from transactions that involve exchange of value (e.g.,

security versus cash) where we must deliver without first being able to determine with certainty that

we will receive the consideration.

Loan underwriting risk:

 the risk of loss arising during the holding period of financing transactions

that are intended for further distribution.

Step-in risk:

 the risk that UBS may decide to provide financial support to an unconsolidated entity

that is facing stress in the absence of, or in excess of, any contractual obligations to provide such

support.

Market risk

 (traded and non-traded): the risk of loss resulting from adverse movements in

market variables. Market variables include observable variables, such as interest rates, foreign exchange

rates, equity prices, credit spreads and commodity (including precious metal) prices, as well as variables

that may be unobservable or only indirectly observable, such as volatilities and correlations. Market risk

includes issuer risk and investment risk.

Issuer risk:

 the risk of loss from changes in fair value resulting from credit-related events affecting

an issuer to which we are exposed through tradable securities or derivatives referencing the issuer.

Investment risk:

 issuer risk associated with positions held as financial investments.

Liquidity risk:

 the risk that the firm will not be able to efficiently meet both expected and

unexpected current and forecast cash flows and collateral needs without affecting either daily

operations or the financial condition of the firm.

Funding risk:

 the risk that the firm will be unable, on an ongoing basis, to borrow funds in

the market on an unsecured (or even secured) basis at an acceptable price to fund actual or

proposed commitments , i.e., the risk that UBS’s funding capacity is not sufficient to support the

firm’s current business and desired strategy.

The

Board of Directors

 (the BoD) approves the risk management and control framework of the Group, including

the Group and business division overall risk appetite. The BoD is supported by its Risk Committee, which monitors and

oversees the Group’s risk profile and the implementation of the risk framework approved by the BoD, and approves the

Group’s risk appetite methodology. The Corporate Culture and Responsibility Committee (the CCRC) helps the BoD meet

its duty to safeguard and advance UBS’s reputation for responsible and sustainable conduct, reviewing stakeholder

concerns and expectations pertaining to UBS’s societal contribution and corporate culture. The Audit Committee assists

the BoD with its oversight duty relating to financial reporting and internal controls over financial reporting, and the

effectiveness of whistleblowing procedures and the external and internal audit functions.

The

Group

Executive Board

 (the GEB) has overall responsibility for establishing and implementing a risk management and

control framework in the Group, managing the risk profile of the Group as a whole.

The

Group Chief Executive Officer

 has responsibility and accountability for the management and performance of the Group,

has risk authority over transactions, positions and exposures, and allocates business divisions and Group Functions risk limits

approved by the BoD.

The

business division Presidents and Group functional heads

are responsible for the operation and management of their

business divisions / Group Functions, including controlling the dedicated financial resources and risk appetite of the

business divisions.

The

regional Presidents

 ensure cross-divisional collaboration in their regions and are mandated to inform the GEB about

any regional activities and issues that may give rise to actual or potentially material regulatory or reputational concerns.

The

Group Chief Risk Officer

 (the Group CRO) is responsible for developing the Group’s risk management and control

framework (including risk principles and risk appetite) for credit, market, country, treasury, model and sustainability and

climate risks. This includes risk measurement and aggregation, portfolio controls and risk reporting. The Group CRO sets

risk limits and approves credit and market risk transactions and exposures. Risk Control is also the central function for

model risk management and control for all models used in UBS. A framework of policies and authorities support the risk

control process.

The

Group Chief Compliance and Governance Officer

 is responsible for developing the Group’s non-financial risk

framework, which sets the general requirements for identification, management, assessment and mitigation of non-

financial risk, and for ensuring that all non -financial risks are identified, owned and managed according to the non-

financial risk appetite objectives, supported by an effective control framework.

The

Group Chief Financial Officer

 is responsible for transparency in assessing the financial performance of the Group and

the business divisions, and for managing the Group’s financial accounting, controlling, forecasting, planning and

reporting. Additional responsibilities include managing UBS’s tax affairs, as well as treasury and capital management,

including liquidity and funding risk and UBS’s regulatory ratios, Finance Artificial Intelligence & Data Analytics strategy

and Group M&A. 

The

Group General Counsel

 manages the Group’s legal affairs (including litigation involving UBS), ensuring effective and timely

assessment of legal matters impacting the Group or its businesses, and managing and reporting all litigation matters.

The

Head Human Resources

 is responsible for independent oversight and challenge of employment-related risks.

Group Internal Audit

 (GIA) independently assesses the effectiveness of processes to define strategy and risk appetite and

overall adherence to the approved strategy. It also assesses

the effectiveness of governance processes and risk

management, including compliance with legal and regulatory requirements and internal governance documents. The

Head GIA reports to the Chairman of the BoD. GIA also has a functional reporting line to the BoD Audit Committee.

Some of these roles and responsibilities are replicated for significant legal entities of the Group. Designated

legal entity

risk officers

 oversee and control financial and non -financial risks for significant legal entities of UBS as part of the legal

entity control framework, which complements the Group’s risk management and control framework.

We apply a variety of methodologies and measurements to quantify the risks of our portfolios and potential risk

concentrations. Risks that are not fully reflected within standard measures are subject to additional controls, which may

include preapproval of specific transactions and the application of specific restrictions. Models to quantify risk are

generally developed by dedicated units within control functions and are subject to independent validation.

Risk concentrations may exist where one or several positions within or across different risk categories could result

in significant losses relative to UBS’s financial strength. Identifying such risk concentrations and assessing their potential

impact is a critical component of our risk management and control process.

For financial risks, we consider a number of elements, such as shared characteristics of positions, the size of the portfolio

and the sensitivity of positions to changes in the underlying risk factors. Also important in our assessment is the liquidity

of the markets where the positions are traded, as well as the availability and effectiveness of hedges or other potential

risk-mitigating factors. This includes an assessment of, for example, the provider of the hedge and market liquidity where

the hedge might be traded. Particular attention is given to identification of wrong -way risk and risk on risk. Wrong -way

risk is defined as a positive correlation between the size of the exposure and the likelihood of a loss. Risk on risk is when

a position and its risk mitigation can be impacted by the same event.

For non-financial risks, risk concentrations may result from, for example, a single operational risk issue that is large on its

own (i.e., it has the potential to produce a single high -impact loss or a number of losses that together are high impact)

or related risk issues that may link together to create a high impact.

Risk concentrations are subject to increased oversight by Group Risk Control and Group Compliance, Regulatory &

Governance, and assessed to determine whether they should be reduced or mitigated, depending on the available means

to do so. It is possible that material losses could occur on financial or non -financial risks, particularly if the correlations

that emerge in a stressed environment differ markedly from those envisaged by risk models.

Main sources of credit risk 

–

Global Wealth Management credit risk arises from lending against securities collateral, including derivative trading

activity, and lending against residential and commercial real estate collateral, as well as corporate and other lending. 

–

A substantial portion of lending exposure arises from Personal & Corporate Banking, which offers mortgage loans,

secured mainly by owner-occupied properties and income-producing real estate, as well as corporate loans, and

therefore depends on the performance of the Swiss economy and real estate market.

–

The Investment Bank’s credit exposure arises mainly from lending, derivatives trading and securities financing.

Derivatives trading and securities financing are mainly investment grade. Loan underwriting activity can be lower rated

and give rise to temporary concentrated exposure .

–

Credit risk within Non-core and Legacy portfolio relates to derivative transactions and securitized positions.

Overview of measurement, monitoring and management techniques

–

Credit risk from transactions with individual counterparties is based on our estimates of probability of default (PD),

exposure at default (EAD) and loss given default (LGD). Limits are established for individual counterparties and groups

of related counterparties covering banking and traded products, and for settlement amounts. Risk authorities are

approved by the Bo ard of Directors and are delegated to the Group CEO, the Group CRO and divisional CROs, based

on risk exposure amounts, internal credit rating and potential for losses.

–

Limits apply not only to the current outstanding amount but also to contingent commitments and the potential future

exposure of traded products.

–

The Investment Bank monitoring, measurement and limit framework distinguishes between exposures intended to be

held to maturity (take-and-hold exposures) and those intended for distribution or risk transfer (temporary exposures).

–

We use models to derive portfolio credit risk measures of expected loss, statistical loss and stress loss at Group -wide

and business division levels, and to establish portfolio limits.

–

Credit risk concentrations can arise if clients are engaged in similar activities, located in the same geographical region

or have comparable economic characteristics, e.g., if their ability to meet contractual obligations would be similarly

affected by changes in economic, political or other conditions. To avoid credit risk concentrations, we establish limits /

operational controls that constrain risk concentrations at portfolio, sub-portfolio or counterparty levels for sector

exposure, country risk and specific product exposures.

Counterparty credit risk (CCR) arising from traded products, which include OTC derivatives, ETD exposures and

SFTs, originating in the Investment Bank, Non -core and Legacy Portfolio, and Group Treasury, is generally managed on a

close-out basis. This takes into account possible effects of market movements on the exposure and any associated

collateral over the time it would take to close out our positions. In the Investment Bank, limits are applied to the potential

future exposure per counterparty, with the size of the limit dependent on the counterparty’s creditworthiness (as

determined by Risk Control). Limit frameworks are also used to control overall exposure to specific classes or categories

of collateral on a portfolio level. Such portfolio limits are monitored and reported to senior management.

Trading in OTC derivatives is conducted through central counterparties where practicable. Where central counterparties

are not used, we have clearly defined policies and processes for trading on a bilateral basis. Trading is typically conducted

under bilateral International Swaps and Derivatives Association or similar master netting agreements, which generally

allow for close-out and netting of transactions in case of default, subject to applicable law. For most major market

participant counterparties, we use two-way collateral agreements under which either party can be required to provide

collateral in the form of cash or marketable securities when the exposure exceeds specified levels. This collateral typically

consists of well-rated government debt or other collateral permitted by applicable regulations. For certain counterparties,

an initial margin is taken to cover some or all of the calculated close-out exposure. This is in addition to the variation

margin taken to settle changes in market value of transactions. Regulations on margining uncleared OTC derivatives

continue to evolve. These generally expand the scope of bilateral derivatives activity subject to margining. They will also

result in greater amounts of initial margin received from, and posted to, certain bilateral trading counterparties than had

been required in the past. These changes should result in lower close-out risk over time.

We actively manage credit risk in our portfolios by taking collateral against exposures and by utilizing credit

hedging.

We use a scoring model as part of a standardized front-to-back process for credit decisions on originating or

modifying Swiss mortgage loans. The model’s two key factors are the LTV ratio and an affordability calculation.

The value we assign to each property is based on the lowest value determined from model-derived valuations, the

purchase price, an asset value for income-producing real estate (IPRE), and, in some cases, an additional external

valuation.

We similarly apply underwriting guidelines for our Global Wealth Management Region Americas mortgage loan

portfolio, taking into account loan affordability and collateral sufficiency. LTV standards are defined for the various

mortgage types, such as residential mortgages or investment properties, based on associated risk factors, such as property

type, loan size, and purpose. The maximum LTV allowed within the standard approval process ranges from

45

% to

80

%.

In addition to LTV, other credit risk metrics, such as debt-to-income ratios, credit scores and required client reserves, are

also part of our underwriting guidelines.

A risk limit framework is applied to the Global Wealth Management Region Americas mortgage loan portfolio. Limits are

set to govern exposures within LTV categories, geographic concentrations, portfolio growth and high-risk mortgage

segments, such as interest-only loans. These limits are monitored by a specialized credit risk monitoring team and reported

to senior management. Supplementing this limit framework is a real estate lending policy and procedures framework,

set up to govern real estate lending activities. Quality assurance and quality control programs monitor compliance with

mortgage underwriting and documentation requirements.

For our mortgage loan portfolio in the Global Wealth Management regions of EMEA and Asia Pacific, we apply global

underwriting guidelines with regional variations to allow for regulatory and market differentials. As in other regions, the

underwriting guidelines take into account affordability and collateral sufficiency. Affordability is assessed at a stressed

interest rate using, for residential real estate, the borrowers’ sustainable income and declared liabilities, and for

commercial real estate the quality and sustainability of rental income. For interest-only loans, a declared and evidenced

repayment strategy must be in place. The applicable LTV for each mortgage is based on the quality and liquidity of the

property and assessed against valuations from bank-appointed third-party valuers. Maximum LTV varies from

30

% to

70

%, depending on the type and location of the property, as well as other factors. Collateral sufficiency is often further

supported by personal guarantees from related third parties. The overall portfolio is centrally assessed against a number

of stress scenarios to ensure that exposures remain within predefined stress limits.

Lombard loans are secured by pledges of marketable securities, guarantees and other forms of collateral. Eligible

financial securities are primarily liquid and actively traded transferable securities (such as bonds and equities), and other

transferable securities, such as approved structured products for which regular prices are available and the issuer of the

security provides a market. To a lesser degree, less liquid collateral is also used.

We derive lending values by applying discounts (haircuts) to the pledged collateral’s market value. Haircuts for marketable

securities are calculated to cover a possible change in value over a given close-out period and confidence level. Less liquid

or more volatile collateral will typically ha ve larger haircuts.

We assess concentration and correlation risks across collateral posted at a counterparty level, and at a divisional level

across counterparties. We also perform targeted Group-wide reviews of concentration. Concentration of collateral in

single securities, issuers or issuer groups, industry sectors, countries, regions or currencies may result in higher risk and

reduced liquidity. In such cases, the lending value of the collateral, margin call and close-out levels are adjusted

accordingly.

We use single-name credit default swaps (CDSs), credit-index CDSs, bespoke protection and other instruments to

actively manage credit risk in the Investment Bank and Non-core and Legacy Portfolio. The aim is to reduce concentrations

of risk from specific counterparties, sectors or portfolios and, for CCR, the profit or loss effect arising from changes in

credit valuation adjustments (CVAs).

We have strict guidelines with regard to taking credit hedges into account for credit risk mitigation purposes. For example,

when monitoring exposures against counterparty limits, we do not usually apply certain credit risk mitigants, such as

proxy hedges (credit protection on a correlated but different name) or credit-index CDSs, to reduce counterparty

exposures. Buying credit protection also creates credit exposure with regard to the protection provider. We monitor and

limit exposures to credit protection providers, and also monitor the effectiveness of credit hedges as part of our overall

credit exposures to the relevant counterparties. Trading with such counterparties is typically collateralized. For credit

protection purchased to hedge the lending portfolio, this includes monitoring mismatches between the maturity of credit

protection purchased and the maturity of the associated loan. Such mismatches result in basis risk and may reduce the

effectiveness of the credit protection. Mismatches are routinely reported to credit officers and mitigating actions are taken

when necessary.

We have developed tools and models to estimate future credit losses that may be implicit in our current portfolio.

Exposures to individual counterparties are measured using three generally accepted parameters: PD, EAD and LGD. For a

given credit facility, the product of these three parameters results in the expected loss (the EL). These parameters are the

basis for the majority of our internal measures of credit risk, and key inputs for regulatory capital calculation under the

advanced internal ratings-based (A-IRB) approach of the Basel III framework. We also use models to derive the portfolio

credit risk measures of EL, statistical loss and stress loss.

Internal UBS rating scale and mapping of external ratings

Internal UBS rating

1-year PD range in %

Description

Moody’s Investors

Service mapping

S&P mapping

Fitch mapping

0 and 1

0.00–0.02

Investment grade

Aaa

AAA

AAA

2

0.02–0.05

Aa1 to Aa3

AA+ to AA–

AA+ to AA–

3

0.05–0.12

A1 to A3

A+ to A–

A+ to A–

4

0.12–0.25

Baa1 to Baa2

BBB+ to BBB

BBB+ to BBB

5

0.25–0.50

Baa3

BBB–

BBB–

6

0.50–0.80

Sub-investment grade

Ba1

BB+

BB+

7

0.80–1.30

Ba2

BB

BB

8

1.30–2.10

Ba3

BB–

BB–

9

2.10–3.50

B1

B+

B+

10

3.50–6.00

B2

B

B

11

6.00–10.00

B3

B–

B–

12

10.00–17.00

Caa1 to Caa2

CCC+ to CCC

CCC+ to CCC

13

>17

Caa3 to C

CCC- to C

CCC- to C

Counterparty is in default 

Default

Defaulted

D

D

In line with the regulatory definition, we report a claim as non-performing when: (i) it is more than 90 days past

due; (ii) it is subject to restructuring proceedings, where preferential conditions concerning interest rates, subordination,

tenor, etc. have been granted in order to avoid default of the counterparty (forbearance); (iii) the counterparty is subject

to bankruptcy / enforced liquidation proceedings in any form, even if there is sufficient collateral to cover the due

payment; or (iv) there is other evidence that payment obligations will not be fully met without recourse to collateral.

Default and credit-impaired 

UBS uses a single definition of default for classifying assets and determining the PD of its obligors for risk modeling

purposes. The definition of default is based on quantitative and qualitative criteria. A counterparty is classified as

defaulted when material payments of interest, principal or fees are overdue for more than 90 days, or more than 180

days for certain exposures in relation to loans to private and commercial clients in Personal & Corporate Banking and to

private clients of Global Wealth Management Region Switzerland. UBS does not consider the general 90-day presumption

for default recognition appropriate for those portfolios, given the cure rates, which show that strict application of the

90-day criterion would not accurately reflect the inherent credit risk. Counterparties are also classified as defaulted when:

bankruptcy, insolvency proceedings or enforced liquidation have commenced; obligations have been restructured on

preferential terms (forbearance); or there is other evidence that payment obligations will not be fully met without recourse

to collateral. The latter may be the case even if, to date, all contractual payments have been made when due. If one claim

against a counterparty is defaulted on, generally all claims against the counterparty are treated as defaulted.

An instrument is classified as credit-impaired if the counterparty is classified as defaulted and / or the instrument is

identified as purchased or originated credit-impaired (POCI). An instrument is POCI if it has been purchased at a deep

discount to its carrying amount following a risk event of the issuer or originated with a defaulted counterparty. Once a

financial asset is classified as defaulted / credit-impaired (except POCI), it is reported as a stage 3 instrument and remains

as such unless all past due amounts have been rectified, additional payments have been made on time, the position is

not classified as credit-restructured, and there is general evidence of credit recovery. A three-month probation period is

applied before a transfer back to stages 1 or 2 can be triggered. However, most instruments remain in stage 3 for a

longer period. As of 31 December 2022, we had no instruments classified as POCI on our books.

If payment default is imminent or default has already occurred, we may grant concessions to borrowers in financial

difficulties that we would otherwise not consider in the normal course of business, such as offering preferential interest

rates, extending maturity, modifying the schedule of repayments, debt / equity swap, subordination, etc. When a

forbearance measure takes place, each case is considered individually and the exposure is generally classified as defaulted.

Forbearance classification remains until the loan is repaid or written off, non-preferential conditions are granted that

supersede the preferential conditions, or the counterparty has recovered and the preferential conditions no longer exceed

our risk tolerance.

Contractual adjustments when there is no evidence of imminent payment default, or where changes to terms and

conditions are within our usual risk tolerance, are not considered to be forborne.

Main sources of market risk 

Market risks arise from both trading and non-trading business activities.

–

Trading market risks are mainly connected with primary debt and equity underwriting and securities and derivatives

trading for market-making and client facilitation in our Investment Bank, as well as the remaining positions in Non-

core and Legacy Portfolio in Group Functions and our municipal securities trading business in Global Wealth

Management.

–

Non-trading market risks arise predominantly in the form of interest rate and foreign exchange risks connected with

personal banking and lending in our wealth management business, our Swiss personal and corporate banking

business, the Investment Bank’s lending business, and treasury activities.

–

Group Treasury assumes market risks in the process of managing interest rate risk, structural foreign exchange risk and

the Group’s liquidity and funding profile, including high -quality liquid assets (HQLA).

–

Equity and debt investments can also give rise to market risks, as can some aspects of employee benefits, such as

defined benefit pension schemes.

Overview of measurement, monitoring and management techniques 

–

Market risk limits are set for the Group, the business divisions, Group Treasury and Non-core and Legacy Portfolio at

granular levels in the various business lines, reflecting the nature and magnitude of the market risks.

–

Management value-at-risk (VaR) measures exposures under the market risk framework, including trading market risks

and some non-trading market risks. Non-trading market risks not included in VaR are also covered in the risks controlled

by Market & Treasury Risk Control, as set out below.

–

Our primary portfolio measures of market risk are liquidity-adjusted stress (LAS) loss and VaR. Both are common to all

business divisions and subject to limits that are approved by the Board of Directors (the BoD).

–

These measures are complemented by concentration and granular limits for general and specific market risk factors.

Our trading businesses are subject to multiple market risk limits, which take into account the extent of market liquidity

and volatility, available operational capacity, valuation uncertainty, and, for our single-name exposures, issuer credit

quality.

–

Trading market risks are managed on an integrated basis at portfolio level. As risk factor sensitivities change due to

new transactions, transaction expiries or changes in market levels, risk factors are dynamically rehedged to remain

within limits. We do not generally seek to distinguish in the trading portfolio between specific positions and associated

hedges.

–

Issuer risk is controlled by limits applied at business division level based on jump-to-zero measures, which estimate

maximum default exposure (the default event loss assuming zero recovery).

–

Non-trading foreign exchange risks are managed under market risk limits, with the exception of Group Treasury

management of consolidated capital activity. 

Our Market & Treasury Risk Control function applies a holistic risk framework, setting the appetite for treasury-related

risk-taking activities across the Group. Key elements of the framework include an overarching economic value sensitivity

limit, set by the BoD, and the sensitivity of net interest income to changes in interest rates targets, set by the Group CEO.

Limits are also set by the BoD to balance the effect of foreign exchange movements on our CET1 capital and CET1 capital

ratio. Non-trading interest rate and foreign exchange risks are included in Group-wide statistical and stress testing metrics,

which flow into our risk appetite framework.

Equity and debt investments are subject to a range of risk controls, including preapproval of new investments by business

management and Risk Control and regular monitoring and reporting. They are also included in Group -wide statistical

and stress testing metrics.

VaR is a statistical measure of market risk, representing the potential market risk losses over a set time horizon

(holding period) at an established level of confidence. VaR assumes no change in the Group’s trading positions over the

set time horizon.

We calculate VaR daily. The profit or loss distribution VaR is derived from our internally developed VaR model, which

simulates returns over the holding period for those risk factors our trading positions are sensitive to, and subsequently

quantifies the profit / loss effect of these risk factor returns on trading positions. Risk factor returns associated with

general interest rate, foreign exchange and commodities risk factor classes are based on a pure historical simulation

approach, using a five-year look-back window. Risk factor returns for selected issuer-based risk factors (e.g., equity prices

and credit spreads) are split into systematic and residual issuer-specific components using a factor model approach.

Systematic returns are based on historical simulation, and residual returns on a Monte Carlo simulation. VaR model profit

or loss distribution is derived from the sum of systematic and residual returns in such a way that we consistently capture

systematic and residual risk. Correlations among risk factors are implicitly captured via a historical simulation approach.

When modeling risk factor returns, we consider the stationarity properties of the historical time series of risk factor

changes. Depending on the stationarity properties of the risk factors within a given factor class, we model the factor

returns using absolute returns or logarithmic returns. Risk factor return distributions are updated fortnightly.

Our VaR model does not have full revaluation capability, but we source full revaluation grids and sensitivities from front-

office systems, enabling us to capture material non-linear profit-or-loss effects.

We use a single VaR model for both internal management purposes and determining market risk risk -weighted assets

(RWA), although we consider different confidence levels and time horizons. For internal management purposes, we

establish risk limits and measure exposures using VaR at a

95

% confidence level with a 1-day holding period, aligned to

the way we consider the risks associated with our trading activities. The regulatory measure of market risk used to

underpin the market risk capital requirement under Basel III requires a measure equivalent to a

99

% confidence level

using a 10-day holding period. To calculate a 10-day holding period VaR, we use 10-day risk factor returns, with all

observations equally weighted.

Additionally, the portfolio populations for management and regulatory VaR are slightly different. The one for regulatory

VaR meets regulatory requirements for inclusion in regulatory VaR. Management VaR includes a broader range of

positions. For example, regulatory VaR excludes credit spread risks from the securitization portfolio, which are treated

instead under the securitization approach for regulatory purposes.

We also use stressed VaR (SVaR) for the calculation of market risk RWA. SVaR uses broadly the same methodology as

regulatory VaR and is calculated using the same population, holding period (10-day) and confidence level (

99

%). Unlike

regulatory VaR, the historical data set for SVaR is not limited to five years, instead covering the period from 1 January

2007 to the present. In deriving SVaR, we seek the largest 10-day holding period VaR for the current Group portfolio

across all one-year look-back windows from 1 January 2007 to the present. SVaR is computed weekly.

Management value -at-risk (1-day, 95% confidence, 5 years of historical data) of our business divisions and Group

Functions by general market risk type

1

For the year ended 31.12.22

USD m

Equity

Interest

rates

Credit

spreads

Foreign

exchange

Commodities

Min.

2

8

4

2

2

Max.

17

18

9

11

7

Average

6

10

5

3

3

31.12.22

6

10

4

3

3

Total management VaR, Group

6

18

11

9

Average (per business division and risk type)

Global Wealth Management

1

2

1

1

0

1

1

0

0

Personal & Corporate Banking

0

0

0

0

0

0

0

0

0

Asset Management

0

0

0

0

0

0

0

0

0

Investment Bank

6

17

10

8

6

9

5

3

3

Group Functions

3

5

4

5

1

4

3

1

0

Diversification effect

2,3

(5)

(5)

(1)

(3)

(4)

(1)

0

For the year ended 31.12.21

USD m

Equity

Interest

rates

Credit

spreads

Foreign

exchange

Commodities

Min.

1

7

5

1

2

Max.

35

13

11

9

5

Average

7

9

7

3

3

31.12.21

8

11

7

6

3

Total management VaR, Group

4

36

11

12

Average (per business division and risk type)

Global Wealth Management

1

3

1

2

0

1

2

0

0

Personal & Corporate Banking

0

0

0

0

0

0

0

0

0

Asset Management

0

0

0

0

0

0

0

0

0

Investment Bank

3

36

11

11

7

9

7

3

3

Group Functions

4

8

5

4

0

4

4

1

0

Diversification effect

2,3

(6)

(5)

0

(5)

(5)

(1)

0

1 Statistics at individual levels may not be summed to deduce the corresponding aggregate figures. The minima and maxima for each level may well occur on different days, and likewise, the VaR for each business

line or risk type, being driven by the extreme loss tail of the corresponding distribution of simulated profits and losses for that business line or risk type, may well be driven by different days in the historical time series,

rendering invalid the simple summation of figures to arrive at the aggregate total. 2 Difference between the sum of the standalone VaR for the business divisions and Group Functions and the VaR for the Group as

a whole. 3 As the minima and maxima for different business divisions and Group Functions occur on different days, it is not meaningful to calculate a portfolio diversification effect.

Actual realized market risk losses may differ from those implied by VaR for a variety of reasons.

–

VaR is calibrated to a specified level of confidence and may not indicate potential losses beyond this confidence level.

–

The 1-day time horizon used for VaR for internal management purposes (10-day for regulatory VaR) may not fully

capture market risk of positions that cannot be closed out or hedged within the specified period.

–

In some cases, VaR calculations approximate the effect of changes in risk factors on the values of positions and

portfolios. This may happen due to the number of risk factors included in the VaR model needing to be limited. 

–

Effects of extreme market movements are subject to estimation errors, which may result from non-linear risk

sensitivities, and the potential for actual volatility and correlation levels to differ from assumptions implicit in VaR

calculations.

–

Using a five-year window means sudden increases in market volatility will tend not to increase VaR as quickly as the

use of shorter historical observation periods, but such increases will affect VaR for a longer period of time. Similarly,

after periods of increased volatility, as markets stabilize, VaR predictions will remain more conservative for a period of

time influenced by the length of the historical observation period. 

SVaR is subject to the limitations noted for VaR above, but the use of on e-year data sets avoids the smoothing effect of

the five-year data set used for VaR and the absence of the five-year window gives a longer history of potential loss events.

Therefore, although the significant period of stress during the 2007 –2009 financial crisis is no longer contained in the

historical five-year period used for management and regulatory VaR, SVaR continues to use that data. This approach aims

to reduce the procyclicality of the regulatory capital requirements for market risks.

We recognize that no single measure can encompass all risks associated with a position or portfolio. We use a set of

metrics with both overlapping and complementary characteristics to create a holistic framework that aims to ensure

material completeness of risk identification and measurement. As a statistical aggregate risk measure, VaR supplements

our liquidity-adjusted stress and comprehensive stress testing frameworks.

We also have a framework to identify and quantify potential risks not fully captured by our VaR model and refer to such

risks as risks not in VaR. The framework underpins these potential risks with regulatory capital, calculated as a multiple

of regulatory VaR and stressed VaR.

In the fourth quarter of 2022, we made an upgrade to our credit spread factor model, in which we significantly

increased the coverage of single -name-issuer bond spread curves.

  

The resulting RWA decrease was offset by an RWA

increase arising from the introduction of a FINMA-agreed temporary measure.

Interest rate risk in the banking book (IRRBB) arises from balance sheet positions such as Loans and advances to

banks, Loans and advances to customers, Financial assets at fair value not held for trading, Financial assets measured at

amortized cost, Customer deposits, Debt issued measured at amortized cost, and derivatives, including those subject to

hedge accounting. Fair value changes to these positions may affect other comprehensive income (OCI) or the income

statement, depending on their accounting treatment.

Our largest banking book interest rate exposures arise from customer deposits and lending products in Global Wealth

Management and Personal & Corporate Banking, as well as from debt issuance, liquidity buffers and interest rate hedges

in Group Treasury. The inherent interest rate risks stemming from Global Wealth Management and Personal & Corporate

Banking are generally transferred to Group Treasury, to manage them centrally together with our modeled interest rate

duration assigned to equity, goodwill and real estate. This makes the netting of interest rate risks across different sources

possible, while leaving the originating businesses with commercial margin and volume management. The residual interest

rate risk is mainly hedged with interest rate swaps, to the vast majority of which we apply hedge accounting. Short-term

exposures and most of our HQLA classified as Financial assets at fair value not held for trading are hedged with derivatives

accounted for on a mark-to-market basis. Long-term fixed-rate debt issued and HQLA hedged with external interest rate

swaps are designated in fair value hedge accounting relationships.

Risk management and governance

IRRBB is measured using several metrics, the most relevant of which are the following.

–

Economic value of equity (EVE) sensitivity to yield curve moves is calculated as changes in the present value of future

cash flows irrespective of accounting treatment. They are also the key risk factors for statistical and stress-based

measures, e.g., value-at-risk and stress scenarios, as well as the regulatory interest rate scenarios. These are measured

and reported daily. The regulatory IRRBB EVE exposure is the most adverse regulatory interest rate scenario that is

netted across currencies. It excludes the sensitivity from additional tier 1 (AT1) capital instruments (as per specific

FINMA requirements) and the modeled interest rate duration assigned to equity, goodwill and real estate. UBS also

applies granular internal interest rate shock scenarios to its banking book positions to monitor its specific risk profile. 

–

Net interest income (NII) sensitivities to yield curve moves are calculated as changes of baseline NII over a set time

horizon, which we internally compute by assuming interest rates in all currencies develop according to their market-

implied forward rates and assuming constant business volumes and no specific management actions. The sensitivities

are measured and reported monthly. Our Pillar 3 disclosure (as per specific FINMA requirements) excludes the

contribution from cash held at central banks.

We actively manage IRRBB , with the aim of reducing the volatility of NII subject to limits and triggers for EVE and NII

exposure at consolidated and significant legal entity levels.

The Group Asset and Liability Committee (ALCO) and, where relevant, ALCOs at a legal entity level perform independent

oversight over the management of IRRBB, which is also subject to Group Internal Audit and model governance.

›

Refer to “Group Internal Audit” in the “Corporate governance” section of this report and to “Risk measurement” in this section for

more information

Key modeling assumptions

The cash flows from customer deposits and lending products used in calculation of EVE sensitivity exclude commercial

margins and other spread components, are aggregated by daily time buckets and are discounted using risk-free rates.

Our external issuances are discounted using UBS’s senior debt curve, and capital instruments are modeled to the first call

date. NII sensitivity, which includes commercial margins, is calculated over a one-year time horizon, assuming constant

balance sheet structure and volumes, and considers embedded interest rate options.

The average repricing maturity of non-maturing deposits and loans is determined via target replication portfolios designed

to protect product margins. Optimal replicating portfolios are determined at granular currency- and product-specific levels

by simulating and applying a real-world market rate model to historically calibrated client rate and volume models.

We use an econometric prepayment model to forecast prepayment rates on US mortgage loans in UBS Bank USA and

agency mortgage-backed securities (MBSs) held in various liquidity portfolios of UBS Americas Holding LLC consolidated.

These prepayment rates are used to forecast both mortgage loan and MBS balances under various macroeconomic

scenarios. The prepayment model is used for a variety of purposes, including risk management and regulatory stress

testing. Swiss mortgages and fixed-term deposits generally do not carry similar optionality, due to prepayment and early

redemption penalties.

The EVE sensitivity in the banking book to a +1-basis-point parallel shift in yield curves was negative USD

25.0

m

as of 31 December 2022, compared with negative USD

29.9

m as of 31 December 2021, the change predominantly

driven by rising market rates. This exclude s the sensitivity of USD 3. 4m from additional tier 1 (AT1) capital instruments

(as per specific FINMA requirements) in contrast to general Basel Committee on Banking Supervision (BCBS) guidance.

The majority of our interest rate risk in the banking book is a reflection of the net asset duration that we run to offset

our modeled sensitivity of net USD

19.6

m (31 December 2021: USD

22.1

m) assigned to our equity, goodwill and real

estate, with the aim of generating a stable NII contribution. Of this, USD

14.0

m and USD

4.8

m are attributable to the US

dollar and the Swiss franc portfolios, respectively (31 December 2021: USD

15.6

m and USD

5.5

m, respectively).

In addition to the sensitivity mentioned above, we calculate the six interest rate shock scenarios prescribed by FINMA.

The “Parallel up” scenario, assuming all positions were fair valued, was the most severe and would have resulted in a

change in EVE of negative USD

4.6

bn, or

7.9

%, of our tier 1 capital (31 December 2021: negative USD

6.0

bn, or

10.0

%),

which is well below the

15

% threshold as per the BCBS supervisory outlier test for high levels of interest rate risk in the

banking book. 

The immediate effect on our tier 1 capital in the “Parallel up” scenario as of 31 December 2022 would have been only a

decrease of USD

0.4

bn, or

0.6

% (31 December 2021: USD

1.1

bn, or

1.8

%), reflecting the fact that the vast majority of

our banking book is accrual accounted or subject to hedge accounting. The “Parallel up” scenario would subsequently

have a positive effect on NII, assuming a constant balance sheet.

UBS also applies granular internal interest rate shock scenarios to its banking book positions to monitor the banking

book’s specific risk profile. 

Net interest income sensitivity

The main NII sensitivity in the banking book resides in Global Wealth Management and Personal & Corporate Banking.

Our investment of equity portfolio has a long duration and Group Treasury actively manages the residual IRRBB. This

sensitivity is assessed using a number of scenarios assuming parallel and non -parallel shifts in yield curves, with various

degrees of severity, and we have set and monitor thresholds for the NII sensitivity to immediate parallel shocks of –200

and +200 basis points under the assumption of constant balance sheet volume and structure.

We make direct investments in a variety of entities and buy equity holdings in both listed and unlisted companies,

with the aim of supporting our business activities and delivering strategic value to UBS. This includes investments in

exchange and clearing house memberships, as well as minority investments in early-stage fintechs and technology

companies via UBS Next. We may also make investments in funds that we manage in order to fund or seed them at

inception or to demonstrate that our interests align with those of investors. We also buy, and are sometimes required by

agreement to buy, securities and units from funds that we have sold to clients.

The fair value of equity investments tends to be influenced by factors specific to the individual investments. Equity

investments are generally intended to be held for the medium or long term and may be subject to lock -up agreements.

For these reasons, we generally do not control these exposures by using market risk measures applied to trading activities.

However, such equity investments are subject to a different range of controls, including preapproval of new investments

by business management and Risk Control, portfolio and concentration limits, and regular monitoring and reporting to

senior management. They are also included in our Group-wide statistical and stress testing metrics, which flow into our

risk appetite framework.

As of 31 December 2022, we held equity investments and investment fund units totaling USD

3.0

bn, of which USD

1.9

bn

was classified as Financial assets at fair value not held for trading and USD

1.1

bn as Investments in associates

.

Debt investments classified as Financial assets measured at fair value through other comprehensive income as of

31 December 2022 were measured at fair value with changes in fair value recorded through Equity, and can broadly be

categorized as money market instruments and debt securities primarily held for statutory, regulatory or liquidity reasons.

The risk control framework applied to debt instruments classified as Financial assets measured at fair value through other

comprehensive income depends on the nature of the instruments and the purpose for which we hold them. Our

exposures may be included in market risk limits or be subject to specific monitoring and interest rate sensitivity analysis.

They are also included in our Group-wide statistical and stress testing metrics, which flow into our risk appetite

framework. 

Debt instruments classified as Financial assets measured at fair value through other comprehensive income had a fair

value of USD

2.2

bn as of 31 December 2022, compared with USD

8.8

bn as of 31 December 2021. Effective from 1 April

2022, UBS has reclassified a portfolio of financial assets from Financial assets measured at fair value through other

comprehensive income with a fair value of USD

6.9

bn to Other financial assets measured at amortized cost, in line with

the principles in IFRS 9,

Financial Instruments

, which require a reclassification when an entity changes its business model

for managing financial assets.