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2018 Financial and Social Report

Market risk and others risk types

Table EU MRA – Qualitative disclosure requirements related to market risk

Qualitative information related to market risk are disclosed in Financial Report (chapter 8) and in Management Report, according to requirements of the Table EU MRA – Qualitative disclosure requirements related to market risk (EBA/GL/2016/11) [445 CRR].

 

The Group uses standardized approaches to calculate its capital requirements for various types of market risk. The Group had requirements for own funds for specific risk of debt instruments and the general interest rate risk. The exposure to market risk was not material. Capital requirements for this risk represented about 1% of the total amount of capital requirements as at 31 December, 2018.

Risk weighted exposure and own funds requirements to market risk are showed in the below table.

RWA Capital
requirements
1 Interest rate risk (general and specific) 253 788 20 303
2 Equity risk (general and specific)
3 Foreign exchange risk
4 Commodity risk
Options
5 Simplified approach
6 Delta-plus method
7 Scenario approach
8 Securitization (specific risk)
9 Total 253 788 20 303

Own funds requirements to settlement risk, delivery risk, large exposures limits excess were not reported as at 31.12.2017.

 

Table EU MRB –Qualitative disclosure requirements for institutions using the IMA

Table EU MR2-A – Market risk under the IMA

Table EU MR2-B – RWA flow statements of market risk exposures under the IMA

Table EU MR3 – IMA values for trading portfolios

Table EU MR4 – Comparison of VaR estimates with gain/loss

Information listed in the above tables is not presented, as the Bank does not use internal models to calculate capital requirements to credit risk.

Exposures in equities not included in the trading book

As at 31 December 2018 the Group had exposures in equities not included in the trading book with total balance-sheet value of PLN 50,908 thousand. The adopted methods of valuation. balance-sheet classification and effect of measurement at fair value are presented in the table below. (Art. 447)

Table 38 Exposures in equities not included in the trading book (in PLN thous.)
Balance-sheet classification Measurement method Balance-sheet
value
Effect of pricing
carried in
revaluation
capital
Equity instruments mandatorily
at fair value through profit or
loss (FVTPL)
Valuation models in case of stock
and shares not quoted on the
active market
21 609 0
Equity instruments at fair value
through other comprehensive
income (FVTOCI)
Fair value measured on the basis
of active market quotations or
valuation models in case of stock
and shares not quoted on the
active market
29 299 28 246

 

Below are presented the most important from the point of view of the balance sheet equity exposures of the Group as at 31 December 2018, including the assignment of strategic goals of connected with these equities:

  1. Polski Standard Płatności sp. z o.o.; balance-sheet value PLN 21,609 thous. – the purpose of the equity exposure is to introduce into the Bank’s offering new products and services for the Bank’s customers (FVTPL)
  2. Biuro Informacji Kredytowej S.A.; balance-sheet value PLN 15,848 thous. – the equity exposure is connected with the banking activity (FVTOCI);
  3. Krajowa Izba Rozliczeniowa S.A.; balance-sheet value PLN 12,863 thous.- the equity exposure is connected with the banking activity (FVTOCI);
  4. Giełda Papierów Wartościowych SA; balance-sheet value PLN 257 thous. – the equity exposure is connected with activity on the capital market (FVTOCI).

In the analysed period (2018) the Group:

  • changed accounting principles relating to recognition, valuation and presentation in financial statements equity instruments, due to implementation of IFRS9 commencing from 1st January 2018. Equity instruments (with the exception of related entities not covered by the provisions of IFRS9) are classified as valued at fair value through profit & loss (FVTPL), provided that the Group do not intend to hold them as a strategic investment, or at fair value through other comprehensive income (FVTOCI) for instruments which are not held for trading purposes. The decision to use the option to value capital instruments at fair value through other comprehensive income shall be taken by the Group on the day of the initial recognition of the instrument and constitute an irrevocable designation (even at the moment of selling, the profit/loss on the transaction shall not be recognised in the Profit and Loss Account). At the moment of implementation of IFRS9, the Group designated some equity investments from the strategic investment portfolio for which it is not planned to realize profits from sales in the mediumterm horizon to the category of fair value measurement with the effect of valuation through other comprehensive income;
  • did not realise profit on sale of shares from the FVTOCI and mandatorily at FVTPL book,
  • in calculating own funds as at 31.12.2018 the positive effect of pricing of shares (net amount with account of deferred tax) from the FVTOCI book, presented in the balance-sheet in revaluation capital was recognised in the amount of PLN 22,879 thous.

Exposure to interest rate risk on positions not included in the trading book

Information on exposures to interest rate risk on positions not included in the trading book are presented in the Yearly Financial Report, in the market risk management section of the financial risk management chapter (Art.448).

Exposure to liquidity risk

In accordance with the Regulation of the European Parliament and of the Council (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms (CRR), the Group sets a liquidity coverage requirement (LCR). The net outflow coverage ratio is determined individually by each entity of the Group subject to the requirement to determine this ratio and consolidated for the Group. The minimum, supervisory level of the 100% LCR ratio, which was in force in 2018, was met by the Group on each reporting date (at the end of December 2018, the LCR ratio was 212%). The amount and main components of the net outflow coverage ratio for the Group in 2018 are presented in Appendix 3, in accordance with the guidelines on disclosure of the net coverage ratio in addition to disclosing information on liquidity risk management pursuant to art. 435 of Regulation (EU) No 575/2013 (EBA/GL/2017/01). The data presented were designated as simple averages from observations at the end of each month in the twelve-month period preceding December 31, 2018.

The Group recognizes derivative transactions as material (the total nominal value of such transactions exceeded 10% of the net liquidity outflow of the LCR). The liquidity risk in the unfavorable market scenario results from the change in the market value of derivative instruments, which creates liquidity needs due to coverage of margins. Both in stress scenarios and in the LCR approach, this additional liquidity requirement is included as the largest absolute flow of net hedges realized over a 30-day period over 24 months.

Detailed information on the strategy, organizational model and liquidity risk management process in the Bank Millennium SA Group. presented in the Annual Financial Report, in the part concerning liquidity risk management, in the chapter on financial risk management (Art. 435).