Counterparty credit risk

The below table presents risk-weighted assets and own funds requirements amounts regarding counterparty credit risk.

In respect to the approaches used to assign internal capital to counterparty credit risk exposures, a modified Credit Risk+* approach is used, taking into account counterparty risk parameters: PD, LGD & EAD.

*Statistical credit risk model, developed by Credit Suisse First Boston Bank

Credit limits applicable to counterparty credit risk exposures are set within the exposure limits for banks and non-bank customers, which are parties to transactions.

For banks, overall exposure limits are set in accordance with internal Instruction for setting and controlling exposure limits to foreign and domestic banks. With respect to foreign exchange transactions, fx swaps, currency options, deposit transactions, FRAs, interest rate swaps and currency-interest rate swaps (“fx and money market transactions”) – sub-limits are set, which mark the Bank’s maximum exposure to outstanding currency purchase/sale transactions (spot and forward), active (outstanding) term deposits in a foreign or Polish bank (without due interest) and other outstanding transactions mentioned above. Irrespective of the sub-limits, settlement limits have been set, which are linked to the concentration of the counterparty’s obligations towards the Bank for the settlement date agreed on when they were concluded (“value date”).

The Group also concludes derivatives contracts upon orders from its customers. With respect to treasury transaction limits (including derivatives) concluded with non-bank customers, granting such limits to a customer is a pre-requisite* for the Bank to perform a derivative transaction for the customer. The Bank requires a customer applying for a treasury limit to have credit capacity for requested treasury limit and additionally for the amount equal to a specific portion of the requested treasury limit, to have a risk rating and natural exposure, that is cash flows under sales and purchases in a convertible currency other than PLN.

*It is possible to conclude transaction under cash deposit, in case of lack of treasury transaction limit

As part of the policies for securing collateral, Credit Support Annexes to ISDA (International Swaps and Derivatives Association) agreements (CSAs) are broadly used – or their Polish equivalents (binding in relations with domestic banks).

The Bank concludes derivative transactions with those counterparties on the inter-bank market, with whom it has signed ISDA (International Swaps and Derivatives Association) master agreements. According to current market practice and regulations, CSAs are signed along with ISDA agreements to cover matters related to the collateralization of exposures under concluded transactions. CSAs are signed bilaterally and establish mutual rights to receive a security deposit from a counterparty for whom the valuation of active derivative transactions is negative on a given day. All active CSAs in place between the Bank and its counterparties fulfil currently binding on the Bank requirements (including the ones related to Variation Margin) established by EMIR regulations.

The position concluded under derivative transactions with customers other than banks is immediately referred for management by inter-bank market dealers and is hedged by an inter-bank market transaction.

The rules for establishing credit impairment for credit risk are presented in the section entitled “Financial risk management – Credit risk” of the Yearly Financial Report.

The Group does not identify its wrong-way risk exposures as material.

The Bank is the Guarantor of the loan agreement signed between Millennium Leasing and European Investment Bank („Finance Contract”) on December 15, 2017. The loan amounts to EUR 100 m and was drawn in four tranches in 2018.

The loan is secured in two ways. By Millennium Leasing in the form of assignment of rights from lease agreements (the value of assigned rights makes not less than 120 % of the granted loan) and by Bank Millennium in the form of the First Demand Guarantee up to amount of the already drawn loan plus accompanied interests, taxes, fiscal charges, duties etc.

According to the provisions of the Finance Contract in case the credit rating:

• by Fitch is B+ or below;
• by Moody is B1 or below;

it will be necessary to establish additional security for the Guarantee in the form of guarantee on terms acceptable for EIB (cash collateral, financial collateral, or other security).

The provisions of First Demand Guarantee warranty to EIB that in the time of execution of FDG by EIB,  Bank Millennium long term rating granted by Fitch is BBB-, by Moody’s is Baa2. Bank Millennium is obliged to inform EIB about  any change in its rating.

To determine the amount of its credit exposure under derivative instruments, the Group applies the Mark-to-market method laid down in Article 274 of CRR.

Amounts of counterparty credit risk by approach is presented in the below table.

Amounts of risk of credit valuation adjustment are showed in the below table.

Exposures to derivatives with Central Counterparties are presented in the below table.