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 market movement (prices).
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 framework of market risk and interest rate risk management and its control are defined on a centralized basis with the use of the same concepts and metrics which are used in all the entities of the BCP Group.
The main measure used by the Group to evaluate market risks 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) with a required probability (confidence level) due to an adverse market movement. The market risk measurement is carried out daily, both on an individual basis for each of the areas responsible for risk taking and risk management, and also in consolidated terms for Global Bank, Banking Book and Trading Book considering the effect of the diversification that exists between the particular portfolios.
VaR ratios reflect total exposure to market risk in the Group. In 2019, open positions included just interest-rate instruments and FX risk instruments. In 2019 the total risk exposure for the Group, that is jointly Trading Book and Banking Book, were relatively low and remained on average at the level of approx. PLN 27.3 million (12 % of the internal limit) and VaR indicators for Trading Book stayed on average at approx. PLN 1.8 million (6 % of the internal limit). FX open position (Intraday as well as Overnight) remained below 2% of Own Funds and well below the maximum limits in place.
In 2019, the total market risk exposure in terms of VaR as well as FX open position was kept within limits in place (no excesses were detected).
All eventual excesses of market risk limits are reported, documented and ratified at the proper competence level.
Apart from daily measurement at the level of each book and market risk area, the VaR model is mainly applicable and analysed at the Trading Book level, where the policy intention is to trade positions on the regular basis (mostly daily). On contrary, following the supervisory guidelines, the interest rate risk in Banking Book is additionally covered by both earnings-based and economic value measures, in particular by measuring:
- the impact on the net interest income over a time horizon of next 12 months resulting from one-off interest rate shock of upward/downward yield curve shift by 100 basis points,
- the impact on the economic value of equity (EVE) resulting from different upward/downward basis points shocks, including scenarios defined by the supervisor (standard, supervisory test assuming sudden parallel +/-200 basis points shift of the yield curve as well supervisory outlier test, SOT with set of six interest rate risk stress scenarios).
In 2019, the further steps were taken in order to implement the revised Guidelines on the management of interest rate risk arising from non-trading book activities (EBA Guidelines, EBA/GL/2018/02) that came due on 30th June 2019. 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) as well as adjust the IRRBB measurement tools 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 supervisory stress tests results as at 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 impact of interest rate change on Net Interest Income is asymmetrical and it is negative in case of decreasing interest rates. This is due to the Polish legal system and the fact that the interest rate of consumer loans and credit cards is limited (it cannot exceed twice Reference Rate of the National Bank of Poland increased by 7 percentage points). The strength of impact on net interest income in face of decrease of the interest rate depends, among other factors, on the percentage of the loan portfolio that is affected by the new maximum rate.
The impact on net interest income in the next 12 months after 31st December 2019 (based on annualized 4Q 2019 net interest income), in a scenario of immediate parallel yield curve decrease for position in Banking Book in Polish Zloty, is the following:
|Sensitivity of NII for PLN interest rate change||31.12.2019||31.12.2018|
|parallel yield curve increase by 100 bp||1.2%||3.4%|
|parallel yield curve decrease by 100 bp||-3.4%||-4.6%|
More information on market risk and interest rate risk management can be found in chapter 9.4 of the Annual Consolidated Report of the Bank Millennium S.A. Capital Group for the 12-month period ending 31st December 2019.