Use of internal estimates
The Group acts in accordance with the IRB principles for the application of „use test” criteria. This means that the risk parameters used to calculate capital requirements for credit risk are also the parameters that are used for other internal purposes, in particular in the risk management process.
Internal rating or internal loss estimation models play a major role in the risk management process and in the decision process at different risk management levels, i.e. for the purposes of defining the Bank’s credit risk strategy, for approving and monitoring credit risk and for allocating economic capital.
The Group has many years of experience in using internal rating models, since individual rating systems have been used to evaluate client risk since the 1990s. Ever since that time, the methodologies have been developed, improved and, to an increasing extent, incorporated in business processes, thus boosting risk management „culture” and awareness in the management process.
Management information system +
Internal estimates are used broadly in the management information system in the areas of risk and operating activity. The individual management levels (Supervisory Board, Management Board, specialized committees) receive detailed information about exposure to individual risks types and about the risk profile, including estimated risk parameters. This allows for effective risk management.
Risk Appetite +
Internal estimates have been used to determine the „risk appetite” of the Bank and the Bank Millennium Group. The risk appetite incorporates measures, buffers and quantitative limits which, along with qualitative guidelines on managing individual risk types, determine the Bank’s propensity for risk. Risk parameters are also an important element of the risk strategy being pursued, which includes objectives and guidelines for managing different risk types.
Concentration limits +
In the area of credit concentration risk and risk of significant exposures, internal estimates have been used to develop exposure limits for individual segments of the credit portfolio. For this purpose, a risk level calculated using risk parameters is compared to the available financial resources, which may be used to secure the risk. including a buffer for a potential increase in risk.
Decision-making powers +
Credit decision-making powers are an important area where internal estimates are applied. The limits for decision-making powers rely on the client’s MS risk grade and the total exposure to its economic group.
Evaluation of borrowing capacity and creditworthiness +
Internal estimates affect significantly the evaluation of the client’s borrowing capacity and creditworthiness. The rating affects the borrowing capacity through the following activities: (a) verification of „cut-off point” criteria which determine the maximum acceptable rating for each segment/product; (b) calculation of the client’s credit limit.
Loan prices and pricing policy +
Risk parameters are also used for pricing credit transactions, by reflecting the cost of risk and the cost of capital in the price.
Economic capital +
Credit and market risk parameters are used as one of the elements that allow the Bank to calculate economic capital corresponding to the risk. Economic capital in turn is used to evaluate the safety of operations, to allocate and reallocate capital to business lines, to evaluate risk-based efficiency and to determine concentration limits.