2019 Financial
and Social Report

Market risk and interest rate risk

The market risk encompasses current and prospective impact on earnings or capital, arising from changes in the value of the Group’s portfolio due to adverse movement in interest rates, foreign exchange rates or prices of bonds, equities or commodities.

The interest rate risk arising from Banking Book activities (IRRBB) encompasses current or prospective impact to both the earnings and the economic value of the Group’s portfolio arising from adverse movements in interest rates that affect interest rate sensitive instruments. The risk includes gap risk, basis risk and option risk.

The Group’s market risk measurement allows monitoring of all of the risk types, which are generic risk (including interest rate risk, foreign exchange risk, and equity risk), non-linear risk, specific risk and commodity risk. In 2019 the nonlinear risk and commodities risk did not exist in the Group. The equity risk assumed to be irrelevant since the Group’s engagement in equity instruments is immaterial.

Each market risk type is measured individually using an appropriate risk models and then integrated measurement of total market risk is built from those assessments without considering any type of diversification between the four risk types (the worst case scenario).

The main measure used by the Group to evaluate market risks (interest rate risk, foreign exchange risk, equity risk) is the parametric VaR (Value at Risk) model – an expected loss that may arise on the portfolio over a specified period of time (holding period) and with specified probability (confidence level) from an adverse market movement.

The Value at Risk in the Group (VaR) is calculated considering the holding period of 10 working days and a 99% confidence level (one tail). In line with regulatory requirements of CRDIV / CRR, since April 2014 the volatility associated with each market risk vertex considered in the VaR model (and respective correlation between them) has been estimated by the equally weighted changes of market parameters using the effective observation period of historical data of last year. Previously applied EWMA method (exponentially weighted moving average method) with effectively shorter observation period is now only justified by a significant upsurge in price volatility.

In order to monitor and limit the positions in instruments, for which it is not possible to properly assess market risk with the use of the VaR model (non-linear risk, commodity risk and specific risk), the appropriate assessment rules were defined. The non-linear risk is measured according to internally developed methodology which is in line with the VaR methodology – the same time horizon and significant level is used. Specific and commodities’ risks are measured through standard approach defined in supervisory regulations, with a corresponding change of the time horizon considered.

The market risk measurement is carried out daily (intra-day and end-of-day), both on an individual basis for each of the areas responsible for risk taking and risk management, and also in consolidated terms considering the effect of the diversification that exists between the particular portfolios.

To ensure that the VaR model adopted is appropriate for the evaluation of the risks involved in the open positions, a back-testing process has been instituted and is carried out daily.

All reported excesses are documented. This includes an explanation of their causes and their incorporation in one of the three classes of excess explanation: adequacy of the model, insufficient model accuracy or unanticipated market movements.

Parallel to the VaR calculation the portfolios are subject to a set of sensitivity analysis and stress scenarios, in order to:

  • Estimate the potential economic loss resulting from extreme variations in market risk factors,
  • Identify the market risk movements, possibly not captured by VaR, to which the portfolios are more sensitive,
  • Identify the actions that can be taken to reduce the impact of extreme variations in the risk factors.


The following types of market scenarios are being applied:

  • Parallel shifts of the yield curves;
  • More steep or flat shape of the yield curves;
  • Variations of the exchange rates;
  • Historical adverse scenarios.

The VaR is used as a measure in assessing the risks incurred by the positions in consolidated terms and separately for the Trading and Banking Book. In addition, each Book is divided into the risk management areas. The global limit is expressed as a fraction of the consolidated Own Funds and then limit is divided into the books, risk management areas and various types of risk, which enables the Group for full measurement, monitoring and control of market risk. The market risk exposure (VaR) together with the limit utilization is reported daily to all areas responsible for management and control of market risk in the Group.

The market risk limits are revised at least once a year and in order to take into account, inter alia, the change of the consolidated Own Funds, current and projected balance sheet structure as well as the market environment. The current limits in place have been valid since 1st January 2019 and will be replaced by revised limits on 1st January 2020.

In 2019 the VaR indicators for the Group remained on average at the level of PLN 27.3 million (12% of the limit) and PLN 33.2 million (15% of the limit) as of the end of December 2019. The VaR indicators presented in the table below reflect joint exposures to market risk in the Group, which are Trading Book and the Banking Book. The diversification effect applies to the generic risk and reflects correlation between its constituents. The low level of diversification effect is connected with the fact that the Group’s market risk is mainly the interest rate risk. The figures in the Table include also the exposures to market risk generated in subordinated companies, as the Bank manages market risk at central level.

The market risk in terms of VaR for the Group (‘000 PLN):

VaR measures for market risk (‘000 PLN) VaR (2019)
31.12.2018 Average Maximum Minimum 31.12.2019
Total risk 29 098 27 259 34 247 18 513 33 225
 Generic risk 27 337 25 324 31 925 16 646 31 039
 Interest Rate Risk 27 349 25 322 31 923 16 648 31 038
 FX Risk 78 76 607 7 12
 Diversification Effect 0,3% 0,0%
 Specific risk 1 761 1 935 2 767 1 591 2 186

The corresponding exposures as of 2018 respectively amounted to (‘000 PLN):

VaR measures for market risk (‘000 PLN) VaR (2018)
31.12.2017 Average Maximum Minimum 31.12.2018
Total risk 17 540 22 037 30 610 15 654 29 098
 Generic risk 15 666 20 126 28 757 13 786 27 337
 Interest Rate Risk 15 651 20 155 28 757 13 850 27 349
 FX Risk 97 144 3 353 8 78
 Diversification Effect 0,5% 0,3%
 Specific risk 1 874 1 911 2 871 1 761 1 761

The market risk exposure divided into Trading Book and Banking Book together with risk type division is presented in the table below (‘000 PLN):

Banking Book:

VaR measures for market risk (‘000 PLN) VaR (2019)
31.12.2018 Average Maximum Minimum 31.12.2019
Total risk 28 825 26 338 33 616 18 160 31 263
 Generic risk 27 067 24 434 31 749 16 463 29 080
Interest Rate Risk 27 067 24 434 31 749 16 463 29 080
FX Risk 0 0 0 0 0
Diversification Effect 0,0% 0,0%
Specific risk 1 758 1 903 2 375 1 588 2 184
VaR measures for market risk (‘000 PLN) VaR (2018)
31.12.2017 Average Maximum Minimum 31.12.2018
Total risk 16 271 20 240 29 406 15 358 28 825
 Generic risk 14 401 18 372 27 501 13 494 27 067
Interest Rate Risk 14 401 18 373 27 501 13 494 27 067
FX Risk 0 0 0 0 0
Diversification Effect 0,0% 0,0%
Specific risk 1 870 1 869 1 918 1 758 1 758

Trading Book:

VaR measures for market risk (‘000 PLN) VaR (2019)
31.12.2018 Average Maximum Minimum 31.12.2019
Total risk 478 1 785 5 464 446 2 455
 Generic risk 475 1 754 5 461 443 2 452
Interest Rate Risk 470 1 746 5 435 359 2 451
FX Risk 81 77 620 7 11
Diversification Effect 16,0% 0,4%
Specific risk 3 31 1 070 2 2
VaR measures for market risk (‘000 PLN) VaR (2018)
31.12.2017 Average Maximum Minimum 31.12.2018
Total risk 1 614 2 698 7 238 474 478
 Generic risk 1 610 2 656 6 999 471 475
Interest Rate Risk 1 598 2 555 6 984 469 470
FX Risk 97 143 3 351 8 81
Diversification Effect 5,3% 16,0%
Specific risk 4 42 1 007 2 3

In 2019, risk limits in terms of VaR were not breached – neither for the whole Group nor for the Banking Book and Trading Book, separately.

All eventual excesses of market risk limits are always reported, documented and ratified at the proper competence level.

Open positions mostly included interest-rate instruments and FX risk instruments. The FX risk covers all the foreign exchange exposures of the Group. According to the Risk Strategy approved in the Group, the FX open position is allowed, however should be kept at low levels. For this purpose, the Group has introduced a system of conservative limits for FX open positions (both Intraday and Overnight limits) and allows keeping FX open positions only in Trading Book.

In 2019, FX position generated in the Banking Book was fully transferred to the Trading Book where it was managed on a daily basis. During 2019 the FX open position remained on average at the level of PLN 7.6 million (9% of the limit) with maximum of PLN 39.0 million (45% of the limit). In 2019, the FX Total open position (Intraday as well as Overnight) remained below 2% of Own Funds and well below the maximum limits in place.

Evolution of the total FX open position (Overnight) in Trading Portfolio (PLN thousand):

Total position Period Average Period Minimum Period Maximum The Last Day of Period
2019 7 557 1 760 38 983 7 181
2018 7 323 1 493 39 817 5 318

In addition to above mentioned market risk limits, the stop loss limits are introduced for the financial markets portfolios. The aim is to limit the maximum losses of the trading activity of the Group. In case the limit is reached, a review of the management strategy and assumptions for the positions in question must be undertaken.

In the back-testing calculation for VaR model in Global Bank, five excesses were detected during the last twelve months (see table below, PLN thousand).

Reporting Date VaR
(generic risk)
Theoretical change in the value of the portfolio
(absolute values)
Number of excesses
in last 12 months *
2019-12-31 31 039 3 324 5
2018-12-31 27 337 3 996 5
* The excess is said to happen whenever the difference between the absolute change in portfolio value and VaR measure is positive.

In 2019, the excesses in the process of VaR model back testing were caused mainly by unanticipated market movements, which are Polish government bonds yields and short term rates. The number of excesses proves the model adequacy (green zone: 1 – 8 excesses acceptable).

VaR assessment is supplemented by monitoring the sensitivity to the above-mentioned stress tests scenarios of portfolios carrying market risk.

The results of stress tests for market risk were reported to the Capital, Assets and Liabilities Committee. In line with principles adopted by the Group the limits for stress test results based on the probability of the scenario materialization are triple as high as limits for daily management of market risk. In 2019 the limits for market risk exposure under stress scenarios were not exceeded.

Interest rate risk in Banking Book (IRRBB)

In case of the Banking Book, the main component of the market risk is interest rate risk.

Exposure to interest rate risk in the Banking Book are primarily generated by the unbalance between assets and liabilities (including equity) that have fixed rate (or zero rate) and also, to a lower extent, by the different repricing dates of assets and liabilities as well as its reference indexes, if contractually existing. Additionally, due to specificity of the polish legal system, the interest rate of consumer credits is limited (it cannot exceed two times Reference Rate of the National Bank of Poland increased by 7 percentage points). In situations of decreasing interest rates, the impact on Net Interest Income is negative and depends on the percentage of the loan portfolio that is affected by the new maximum rate.

Regarding the interest rate risk in Banking Book, the following principles are in place:

  • The market risk that results from the commercial banking activity is hedged or transferred on the monthly basis to areas that actively manage market risk and that are measured in terms of risk and profit and loss,
  • The Bank uses natural hedging between loans and deposits as well as fixed rate bonds and derivatives to manage interest rate risk with the main purpose of protecting the net interest income.

The variations in market interest rate have an influence on the Group’s net interest income, both under a short and medium-term perspective, affecting also its economic value in the long term. The measurement of both is complementary in understanding the complete scope of interest rate risk in Banking Book.

For this reason, apart from daily market risk measurement in terms of value at risk, the scope of the additional measurement of interest rate risk covers both earnings-based and economic value measures, which are quarterly:

  • the impact on the economic value of equity (EVE) resulting from different shocks with upward/downward yield curve movements, including scenarios defined by the supervisor (standard, supervisory test assuming sudden parallel +/-200 basis points shift of the yield curve as well as supervisory outlier test, SOT with set of six interest rate risk stress scenarios).

and monthly:

  • the interest rate sensitivity in terms of BPVx100, that is the change of the portfolio’s value for the parallel movement in the yield curve by 1 basis point multiplied by 100,
  • the impact on net interest income over a time horizon of next 12 months resulting from one-off interest rate shock of 100 basis points.

The interest rate risk measurement is carried for all the risk management areas in the Bank, with the particular attention on Banking Book.

In 2019, the further steps were taken in order to implement in the Group the revised Guidelines on the management of interest rate risk arising from non-trading book activities (EBA IRRBB Guidelines, EBA/GL/2018/02) that came due on 30th June 2019. The following actions were taken:

  • The IRRBB measurement tools were adjusted in order to monitor and report on regular basis the results of six stress tests scenarios under supervisory outlier test (SOT). According to the EBA IRRBB Guidelines, the principle was applied that aggregate value of EVE change for the same interest rate shock scenario is the sum of positive and negative value changes of each significant currency and positive changes are weighted by a factor of 50%,
  • The internal policy and others procedures connected with the interest rate risk management were revised and adjusted to the provisions of EBA IRRBB Guidelines. The documents were supplemented, inter alia, by the introduction of rules and procedures for updating the assumptions of the IRRBB models and stress test scenarios to ensure that they are regularly reviewed and, if necessary, amended,
  • In May 2019, the Capital, Assets and Liability Committee revised and approved the behavioural assumptions for measurement IRRBB (behaviour of customer with embedded customer optionality and accounts without specific repricing dates).

For the purpose of  interest rate risk management for non-maturing assets and liabilities or for the instruments with Client’s option embedded, the Group is defining specific assumptions, including:

  • Due date for balances and interest flows arising from non-maturing deposits are defined on the basis of historical data regarding customer behaviour, taking into account the stability of the volumes and with assumption of a maximum maturity of 3 years,
  • The tendency to faster repayment of receivables than contractually scheduled is taken under consideration by calculating a prepayment rate in respect to all relevant Bank’s loan portfolios on the basis of historical data. It should be noted, that mortgage loans that are the Group’s loan product with a dominant share, are indexed to floating interest rate. This causes that the tendency to early repayment is less important for the interest rate risk.
  • The equity, fixed and other assets that are assumed to have repricing period of 1 year. However to understand the impact of the chosen maturity profile the IRRBB measurement is carried out without inclusion of the equity capital to isolate the effects on both EVE and earnings perspectives.

The results of the above mentioned analysis as of the end of 2019 and 2018 did not exceed neither supervisory nor internally defined limits. The supervisory stress tests results of December 2019 show that even under the most severe outlier test scenario, the decline of EVE for Banking Book is far below supervisory limit of 15% of Tier 1. Similarly, decline of EVE under standard scenario of sudden parallel +/-200 basis points shift of the yield curve also stayed far below supervisory maximum of 20% of Own Funds.

The results of the sensitivity of the Banking Book to changes of interest rates in terms of BPVx100 as well as EVE are presented in Table below (PLN thousand).

Sensitivity of the Banking Book to changes of interest rates was as follows (‘000 PLN):

31.12.2019 31.12.2018
BPVx100 BPVx100
PLN (157 480) (37 109)
CHF 11 099 10 469
EUR 44 677 36 099
USD 14 256 12 065
Other 3 359 4 010
TOTAL (84 089) 25 533
Equity, fixed and other assets 73 352 73 117
TOTAL (10 738) 98 650
Sensitivity of EVE to changes of interest rates (*) 31.12.2019 31.12.2018
Standard, supervisory test (parallel yield curve +/-200 b.p. % Own Funds) -2,36% -0,14%
Supervisory outlier test (the most severe scenario, % CET1) -3,71% n.a.
(*)The principles listed in section 115 of the EBA IRRBB Guidelines were applied to calculate the change in EVE. The most severe decline of EVE is presented.

Additionally, for position in Polish Zloty in Banking Book in a scenario of immediate parallel yield curve decrease by 100 bps, the impact on net interest income in the next 12 months after 31st December 2019 is negative and equal to -3.4% of the annualized 4Q2019 net interest income (+1.2% for a 100 bps increase). The asymmetrical impact is connected mainly with the specificity of the polish legal system mentioned above (the formula for maximum rate valid in 2019 was applied). The NBP Reference rate is currently set at 1.5%, so that in case of decrease by 100 bps the maximum interest rate for loan portfolio could not exceed 8% annually in comparison to currently valid 10%.

Sensitivity of NII for PLN to changes of interest rates 31.12.2019 31.12.2018
Parallel yield curve increase by 100 b.p. +1,2% +3,4%
Parallel yield curve decrease by 100 b.p. -3,4% -4,6%

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