MD&A - Risk management and control

12 Months Ended

Dec. 31, 2024

MDA Risk Management And Control [Line Items]

Disclosure Of Financial Risk Management Explanatory

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. 

›

Refer to the “Corporate governance” section of this report for more information about the responsibilities of the Risk Committee

and other BoD committees

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

authority over transactions, positions and exposures, and allocates risk authority delegated by the BoD to the business

divisions and Group functions.

The business division Presidents and Group function heads are responsible for the operation and management of their

business divisions and Group functions, including controlling the 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, risk reporting, and taking decisions on

transactions, positions, exposures, portfolio limits, and allowances in accordance with the risk control authorities

delegated to the Group CRO.

The Group Chief Compliance and Governance Officer is responsible for developing the Group’s risk management and

control framework (including taxonomies and risk appetite) for non-financial risks. This includes implementing

independent control frameworks for compliance and conduct, financial crime, and operational risks. The Group Chief

Compliance and Governance Officer is also responsible for managing governmental and regulatory affairs, investigations,

and interactions with governments, regulators and international standard setters.

The Group Chief Financial Officer (the Group CFO) 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. 

The Group Chief Operations and Technology Officer is responsible for driving digitalization, delivering technology services,

infrastructure and operations, including cybersecurity and information security, and providing Group-wide data

governance. 

The Group General Counsel manages the Group’s legal affairs, including effective and timely assessment of legal matters

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

The Head Group Human Resources & Group Corporate Services

defines and executes a human resources strategy aligned to UBS’s

objectives, supplies real estate infrastructure and controls supply and demand management activities

.

The Group Integration Officer develops UBS’s integration strategy with regard to Credit Suisse within agreed design

principles and in accordance with UBS’s strategy.

Some of these roles and responsibilities are replicated on the level of the business divisions, regions and / or significant

entities of the Group. Designated entity risk officers oversee and control financial and non-financial risks for significant

entities of UBS as part of the entity control framework, which complements the Group’s risk management and control

framework.

Credit risk:

the risk of loss resulting from the failure of a client or counterparty (including an issuer) to meet its

contractual obligations toward UBS. This includes loan underwriting risk and settlement risk.

Loan underwriting risk:

 the risk of loss arising during the holding period of financing transactions that are intended

for further distribution.

Settlement risk:

 the short-term form of credit risk arising when UBS delivers its side of an agreed-upon transaction

but does not receive an expected value in return from the counterparty.

Market risk:

 the risk of loss resulting from adverse movements in market variables. Market risks are actively

taken as part of trading activities but can also arise from non-trading activities. 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 that would occur if an issuer to which we are exposed through tradable securities or

derivatives referencing the issuer was subject to a credit-related event.

Investment risk:

 the risk associated with positions held as financial investments.

Liquidity risk:

 the risk that UBS is unable to meet business-as-usual or stress cash / collateral flows.

Funding risk:

 the risk that UBS is unable to borrow funds to support its current business and desired

strategy.

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. 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 refers to a

situation where 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

–

In Global Wealth Management, credit risk arises from collateralized lending, primarily against securities, residential and

commercial real estate, other real assets (such as ships and aircraft), private equity and hedge fund interest, and

investors’ uncalled capital commitments, as well as from collateralized clients’ derivatives trading. In addition, credit

risk also arises from unsecured lending, i.e. cash-flow-based corporate lending to entities owned and controlled by our

Global Wealth Management clients, and recourse-based lending.

–

A substantial portion of our credit risk arises from Personal & Corporate Banking’s lending exposure, including

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

loans, that depends on the performance of the Swiss economy and real estate market.

–

The Investment Bank’s credit risk 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 gives

rise to temporary concentrated exposure.

–

Credit risk in Non-core and Legacy relates to large, less-liquid structured financing transactions, including some with

residential and commercial real estate collateral, a corporate loan portfolio and a counterparty credit trading portfolio

with lending against securities collateral and derivatives.

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 Board of Directors and are delegated to the Group CEO, the Group Chief Risk Officer (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

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

exposure, country risk exposure 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, 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. 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 sectors. 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 agreements or similar master netting agreements, which

generally permit close-out and netting of transactions in case of default, subject to applicable law. For certain

counterparties, 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. 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. Non-cash collateral typically consists

of well-rated government debt or other collateral acceptable to Risk Control and permitted by applicable regulations.

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 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 and 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. Serviceability may be 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, equities and certain

hybrid securities), 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 adverse change in market value over a given close-out period and confidence

level. Less-liquid or more volatile collateral will typically have 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, structured portfolio hedges (SPHs), bespoke

protection and other instruments to actively manage credit risk. 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.

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. SPHs are structured to achieve true risk transfer by providing explicit protection against events that could cause

a loss in the referenced hedged positions, with the hedge payoff matched to the actual loss incurred on those positions

(i.e. no basis risk). Buying credit protection, if unfunded, 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.

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 credit impaired (PCI). An instrument is PCI 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 PCI), 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 of time.

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 arise primarily in the Investment Bank, Non-core and Legacy and, to a lesser extent, Global Wealth

Management. In the Investment Bank these risks are mainly connected with primary debt and equity underwriting, as

well as securities and derivatives trading for market-making and client facilitation. In Non-core and Legacy, market risks

arise mainly from structured trades, portfolios of loans and securitized products, and both complex and simple credit,

interest rate and equity derivative transactions. A limited contribution to market risk in Global Wealth Management

comes from municipal securities and taxable fixed-income securities.

–

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 businesses, the Swiss business of our Personal & Corporate

Banking business division, 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 and Group Treasury 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 covered in the risks controlled

by the Market and Treasury Risk Control functions.

–

Our primary portfolio measures of market risk are liquidity-adjusted stress loss and VaR. Both are subject to limits that

are approved by the Board of Directors (the BoD). Market risk measurement for certain legacy Credit Suisse components

can differ from the UBS Group excluding the aforementioned legacy Credit Suisse components, as set out below. These

positions continue to be managed on legacy Credit Suisse infrastructure until full migration of these positions to UBS

infrastructure or the liquidation of the positions.

–

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, business outlook and growth, and, for our single-name exposures, issuer credit quality.

–

Trading market risks are managed 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 for credit products is controlled by limits applied at the 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 CRO Treasury 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 regulatory (interest rate risk in the banking

book (IRRBB)) delta economic value of equity (EVE) target, set by the BoD. Limits are also set by the BoD to balance the

effect of foreign exchange movements on our common equity tier 1 (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 for

commercial purposes by business management and Risk Control and regular monitoring and reporting by Group Finance.

They are also included in Group-wide statistical and stress-testing metrics.

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

31 December 2024 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 2024 (31 December 2023: USD

2.2

bn).

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

%). For

SVaR, both for the UBS Group excluding certain legacy Credit Suisse components and the aforementioned legacy Credit

Suisse components, the most significant one-year period of financial stress from a historical dataset covering the period

from 1 January 2007 to the present is identified.

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

Items excluding certain legacy Credit Suisse components, by general market risk type

1,2

For the year ended 31.12.24

USD m

Equity

Interest

rates

Credit

spreads

Foreign

exchange

Commodities

Min.

0

11

6

1

2

Max.

12

24

16

9

14

Average

4

16

9

4

4

31.12.24

1

20

10

3

4

Total management VaR

5

23

12

11

Average (per business division and risk type)

Global Wealth Management

1

2

2

1

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

23

11

10

4

15

8

3

4

Non-core and Legacy

1

3

1

1

0

1

1

0

0

Group Items

4

12

5

6

1

4

3

1

0

Diversification effect

3,4

(6)

(8)

(1)

(5)

(4)

(1)

0

For the year ended 31.12.23

USD m

Equity

Interest

rates

Credit

spreads

Foreign

exchange

Commodities

Min.

3

9

3

1

1

Max.

19

21

19

10

10

Average

9

12

6

2

3

31.12.23

11

19

7

2

3

Total management VaR

7

25

15

19

Average (per business division and risk type)

Global Wealth Management

1

2

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

5

23

14

18

9

12

5

2

3

Non-core and Legacy

1

2

1

1

0

1

1

0

0

Group Items

3

6

4

5

1

4

3

1

0

Diversification effect

3,4

(6)

(7)

(1)

(5)

(4)

(1)

0

1 The legacy Credit Suisse components not included in the UBS Group management VaR predominantly reflect the portfolio in Non-core and Legacy. These positions continue to be managed on legacy Credit Suisse

infrastructure based on legacy Credit Suisse management VaR methodology until full migration of these positions to UBS infrastructure or the liquidation of the positions. This process is ongoing, and the management

VaR of the legacy Credit Suisse components is expected to continue decreasing over time. 2 Statistics at individual levels may not be summed to deduce the corresponding aggregate figures. The minima and maxima

for each level may 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. 3 The difference between the sum of

the standalone VaR for the business divisions and Group Items and the total VaR. 4 As the minima and maxima for different business divisions and Group Items 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 (a 10-day horizon 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. 

–

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.

–

The choice of a longer historical 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 one-year datasets avoids the smoothing effect of

longer datasets used for VaR. In addition, the ability to select a one-year period outside of recent market history allows

for a wider variety of potential loss events. Therefore, although the significant period of stress during the 2007–2009

financial crisis is no longer contained in the look-back window 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 comprehensive stress-testing framework.

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 additional regulatory capital.

In January 2024 we made two material VaR model changes to the VaR model of the UBS Group excluding certain

legacy Credit Suisse components: (i) the integration of time decay into regulatory VaR and stressed VaR for derivatives

with optionality; and (ii) an improvement in the profit or loss representation of derivatives with multiple underlyings. As

reported in the UBS Group first quarter 2024 report, the two changes resulted in a significant increase in market risk

RWA. 

In the second quarter of 2024, certain components of the legacy Credit Suisse VaR model were upgraded: (i) the full-

revaluation framework was extended to include interest rate and interest rate volatility risk factors; (ii) empirical

correlations in the aggregation of specific risk for the price risk of fund-linked products were added; and (iii) a two-factor

regression model for traded loans was introduced. These changes did not have a material impact on market risk RWA.

IRRBB arises from balance sheet positions such as Amounts due from 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 Derivative financial instruments, 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 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.

–

EVE sensitivity to yield curve moves is calculated as changes in the present value of future cash flows irrespective of

accounting treatment. These yield curve moves are also the key risk factors for statistical and stress-based measures,

e.g. VaR 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 product mix and no specific management actions.

The sensitivities are measured and reported monthly. 

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 (the Group 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 UBS Group banking book to a +1-basis-point parallel shift in yield curves was negative

USD

37.3

m as of 31 December 2024, compared with negative USD

30.1

m as of 31 December 2023. This excluded the

sensitivity of USD

5.5

m from AT1 capital instruments (as per specific FINMA requirements) in contrast to general BCBS

guidance. The exposure in the banking book of the UBS Group increased in 2024, driven by net interest income

stabilization initiatives.

The majority of our IRRBB is a reflection of the net asset duration that we ran to offset our modeled sensitivity of net

USD

29.4

m (31 December 2023: USD

24.3

m) assigned to our equity, goodwill and real estate, with the aim of generating

a stable NII contribution. Of this, USD

17.1

m and USD

10.6

m were attributable to the US dollar and the Swiss franc

portfolios, respectively, (31 December 2023: USD

17.6

m and USD

5.6

m, respectively).

Net interest income sensitivity

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

We assign a target duration to our investment of equity portfolio, 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 no change to balance sheet size and product mix, stable

foreign exchange rates, and no specific management action.

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

“Parallel up” scenario, assuming all positions were measured at fair value, was the most severe and would have resulted

in a change in EVE of negative USD

6.7

bn, or

7.6

%, of our tier 1 capital (31 December 2023: negative USD

5.7

bn, or

6.2

%), which is well below the

15

% threshold as per the BCBS supervisory outlier test for high levels of IRRBB.

The immediate effect on our tier 1 capital in the “Parallel up” scenario as of 31 December 2024 would have been a

decrease of approximately USD

0.9

bn, or

1.0

% (31 December 2023: USD

0.9

bn, or

0.9

%), 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.

As the overall interest rate risk sensitivity shows a greater impact from slower asset repricing compared with faster

liabilities repricing, the “Parallel down” scenario was the most beneficial and would have resulted in a change in EVE of

positive USD

7.2

bn (31 December 2023: positive USD

5.9

bn) and a small positive immediate effect on our tier 1 capital.

Interest rate risk – banking book

31.12.24

USD m

Effect on EVE

1

 – FINMA

Effect on EVE

1

 – BCBS

Scenarios

CHF

EUR

GBP

USD

Other

Total

Additional tier 1 (AT1) capital

instruments

Total

+1 bp

(10.5)

(1.4)

(0.3)

(24.6)

(0.5)

(37.3)

5.5

(31.7)

Parallel up

2

(1,509.7)

(263.7)

(65.5)

(4,758.9)

(95.6)

(6,693.4)

1,000.4

(5,693.0)

Parallel down

2

1,643.9

295.9

76.2

5,068.6

101.1

7,185.8

(1,173.0)

6,012.8

Steepener

3

(749.1)

(10.4)

(12.7)

(1,255.4)

(9.7)

(2,037.3)

168.0

(1,869.3)

Flattener

4

464.0

(33.3)

(0.2)

161.0

(10.5)

581.0

61.0

642.1

Short-term up

5

(149.4)

(112.2)

(22.8)

(1,820.7)

(46.1)

(2,151.1)

484.4

(1,666.7)

Short-term down

6

132.6

112.2

23.3

1,931.8

46.6

2,246.5

(504.4)

1,742.2

31.12.23

USD m

Effect on EVE

1

 – FINMA

Effect on EVE

1

 – BCBS

Scenarios

CHF

EUR

GBP

USD

Other

Total

Additional tier 1 (AT1) capital

instruments

Total

+1 bp

(3.7)

(0.6)

0.1

(26.0)

0.2

(30.1)

4.9

(25.2)

Parallel up

2

(548.9)

(119.3)

16.2

(5,027.2)

(0.9)

(5,680.2)

904.6

(4,775.5)

Parallel down

2

561.8

124.3

(29.2)

5,216.0

2.8

5,875.7

(1,044.5)

4,831.3

Steepener

3

(305.3)

(13.1)

(11.9)

(1,037.0)

(33.8)

(1,401.1)

93.4

(1,307.6)

Flattener

4

189.6

(5.0)

14.0

(124.2)

30.8

105.2

109.6

214.8

Short-term up

5

(27.3)

(39.4)

19.4

(2,171.3)

23.9

(2,194.7)

486.3

(1,708.4)

Short-term down

6

26.5

41.8

(21.8)

2,312.1

(26.8)

2,331.9

(507.8)

1,824.1

1 Economic value of equity. 2 Rates across all tenors move by ±150 bps for Swiss franc, ±200 bps for euro and US dollar, and ±250 bps for pound sterling. 3 Short-term rates decrease and long-term rates

increase. 4 Short-term rates increase and long-term rates decrease. 5 Short-term rates increase more than long-term rates. 6 Short-term rates decrease more than long-term rates.

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 the firm. 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 or regulation to buy, securities and units from investment vehicles 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

for commercial purposes 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 2024, we held equity investments and investment fund units totaling USD

6.8

bn (31 December 2023:

USD

7.2

bn), of which USD

4.5

bn (31 December 2023: USD

4.8

bn) was classified as Financial assets at fair value not held

for trading and USD

2.3

bn (31 December 2023: USD

2.4

bn) as Investments in associates

.

VaR is a statistical measure of market risk, quantifying 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 from which VaR is estimated is derived from our internally developed

VaR model, which simulates returns over the holding period for risk factors our trading positions are sensitive to, and

subsequently quantifies the profit / loss effect of these risk factor returns on our trading positions. Systematic commodity,

credit, equity, foreign exchange rate and interest rate risk factor returns are based on a pure historical simulation

approach. An unweighted five-year look-back window is used for the UBS Group excluding certain legacy Credit Suisse

components and an exponentially weighted two-year window for the aforementioned legacy Credit Suisse components.

Modeling idiosyncratic and specific risks for equity and credit risk factors using historical simulation is challenging, due

to the limited availability of continuous good-quality historical data. Wherever possible, historical simulation to model-

specific risk is used for the legacy Credit Suisse components; however, both traded market risk portfolios rely upon factor

models to distinguish systematic and idiosyncratic returns. For the UBS Group excluding certain legacy Credit Suisse

components, idiosyncratic returns are simulated through a Monte Carlo model, aggregating the sum of systematic and

residual returns in such a way that systematic and residual risk are consistently captured. For the legacy Credit Suisse

components, the available distribution of idiosyncratic returns is used to determine an extreme scenario for a given risk

factor’s specific risk; the resultant VaR and extreme scenario loss for a given risk factor are aggregated using a zero-

correlation assumption. 

For both the UBS Group excluding certain legacy Credit Suisse components and the aforementioned legacy Credit Suisse

components, VaR models are used for internal management purposes and for determining market risk risk-weighted

assets (RWA), although the two use cases consider different confidence levels and time horizons. For internal

management purposes, risk limits are established and exposures measured using VaR at a

95

% confidence level for the

UBS Group excluding certain legacy Credit Suisse components and

98

% for the aforementioned legacy Credit Suisse

components, 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 requirements under Basel III involves 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.