Financial and
ESG report 2020

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.  

Within the current market environment, the Group continued to act very prudently. The strong market volatility in connection with the global COVID-19 pandemic resulted in increase of the Group’s market and interest rate risk.  

In 2020, open positions included just interest-rate instruments and FX risk instruments. In 2020, the VaR for the Group, that is jointly Trading Book and Banking Book, increased due to market volatility caused by the COVID-19 pandemic but still were below maximum limits in place. In 2020 the VaR indicators for the Group remained on average at the level of PLN72.5 million (29% of the limit) and PLN96.9 million (39% of the limit) as of the end of December 2020. FX open position (Intraday as well as Overnight) remained below 2% of Own Funds and well below the maximum limits in place. 

In 2020, 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).   

The supervisory stress tests results as at December 2020 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 results of COVID-19 pandemic and its negative impact on the economic environment, as well as the reductions of the reference rates by the Monetary Policy Council at its meetings on 17th March, 8th April 2020 and 28thMay 2020 had a negative impact on the activity and financial results of the Group. Before above mentioned three interest rate cuts, the NBP Reference rate was set at 1.5%, so that the maximum interest rate for loan portfolio could not exceed 10% annually. On March the maximum interest rate dropped immediately to 9%, in April to 8% and then in May to 7.2%.  

The above-mentioned decisions of the Monetary Policy Council to reduce interest rates to its historical minimum (decrease reference rate to 0.10% and the Lombard rate to 0.50%) as well as the decision regarding change in the parameters of the obligatory requirement, had altogether a significant negative impact on the Group’s net interest income. The cumulative decrease in net interest income for 2020 compared to the annualized level of 4Q19 amounted to a total of PLN223 million or 8%. Mainly due to the quick remedial actions taken by the Bank, the negative impact was eventually smaller than already disclosed estimates published on the Current Reports published on 14th April and 2nd June 2020 (PLN240 million to PLN285 million) but nonetheless, ceteris paribus, it resulted in lower NII than would otherwise have been achieved. 

In such a low interest rate environment in Poland, the results of sensitivity of NII for the next 12 months after 31st December 2020 and for position in Polish Zloty in Banking Book in a scenario of further decrease of interest rates by 100bps, is negative and equal to -16.7% of the annualized 4Q 2020 net interest income (+9.9% for a 100bps increase). The asymmetrical impact is connected mainly with the specificity of the polish legal system mentioned above with simultaneous limitation on further decrease on deposits side (minimum interest rate set at 0%).The NBP Reference rate is currently set at 0.10%, so that in case of decrease by 100bps the maximum interest rate for loan portfolio could not exceed 5.2% annually in comparison to currently valid 7.2%. In order to limit negative impact on NII sensitivity in case of further interest rate decrease, the interest rate swaps were concluded in 4Q 2020. 

The impact on net interest income in the next 12 months after 31st December 2020 (based on annualized 4Q 2020 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  31.12.2020  31.12.2019 
parallel yield curve increase by 100bp  +9.9%  +1.2% 
parallel yield curve decrease by 100bp  -16.7%  -3.4% 



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 2020. 

Liquidity risk reflects the possibility of incurring significant losses as a result of deteriorated financing conditions (financing risk) and/or of the sale of assets for less than their market value (market liquidity risk) to meet the funding needs arising from the Group’s obligations. 

The process of the Group’s planning and budgeting covers the preparation of a Liquidity Plan in order to make sure that the growth of business will be supported by an appropriate liquidity financing structure and supervisory requirements in terms of quantitative liquidity measures will be met. 

In 2020, the COVID-19 pandemic had an impact on global financial markets resulting in depreciation of Polish Zloty, limited confidence among market participants through lower possibilities of financing as well as a temporary, sharp decline in activity on the treasury securities market. Despite COVID-19’s implications observed in the market mentioned above, the Bank did not observe any threat to its liquidity position due to the spread of COVID-19. The Group continued to be characterized by solid liquidity position. 

The liquid assets portfolio, that is portfolio of government debt securities, supplemented by the cash and exposures to the National Bank of Poland, is treated as the Group’s liquidity reserve, which will overcome crisis situations. At the end of 2020, the share of Polish government securities (including NBP Bills) in total securities portfolio amounted to 98% and allowed to reach the level of approx. PLN18.4 billion (19% of total assets), whereas at the end of December 2019 was at the level of approx. PLN22.5 billion (23% of total assets), (see Table below).  

Main liquidity ratios 31.12.2020 31.12.2019
Loans/Deposits ratio (%)  91%  86% 
Liquid assets portfolio (PLN million)*  18 250  22 795 
Liquidity Coverage requirement, LCR (%)  161%  171% 
(*) Liquid Assets Portfolio: The sum of cash, exposure to Central Bank (the surplus above the required obligatory reserve), Polish Government debt securities, NBP-Bills and due from banks with maturity up to 1 month. The debt securities portfolio is reduced by NBP haircut for repo transactions and securities encumbered for non-liquidity purposes.


Consequently, the large, diversified and stable funding from retail, corporate and public sector Clients remains the main source of financing of the Group. The source of medium-term funding remains also medium-term loans, subordinated debt, own bonds issue and bank’s securities. 

The Group manages its FX liquidity through the use of FX-denominated bilateral loans as well as subordinated debt, FX swaps and cross-currency interest rate swaps transactions. The swaps portfolio is diversified in term of counterparties and maturity dates. For the majority of counterparties the Bank has signed a Credit Support Annex to the master agreements.  

The estimation of the Group’s liquidity risk is carried out both with the use of the ratios defined by the supervisory authorities and own indicators, for which exposure limits were also established. According to the Regulation of European Parliament and Council no 575/2013 on prudential requirements for credit institutions and investment firms (CRR); the Group is calculating the liquidity coverage requirement (LCR). The regulatory minimum of 100% for LCR valid in 2020 was compiled by the Group (as of the end of December 2020 the LCR reached the level of 161%). The measure is calculated daily and has been reported on the monthly basis to NBP since March 2014. Internally, the LCR is estimated daily and reported to the areas responsible for the management and control of the liquidity risk in the Group.  

In 2020, the Group also regularly calculated net stable funding requirement (NSFR). In each of the quarter, the NSFR was above planned supervisory minimum of 100% (supervisory minimum will be valid in June 2021).  

Additionally, the Group employs an internal structural liquidity analysis based on cumulative liquidity gaps calculated on an actuarial basis (i.e. assuming a certain probability of cash flow occurrence). In 2020 all the liquidity gaps were maintained positive however, in time buckets below 1 month, temporary below the minimum limits. The Group adopted very conservative limits of 12% of the balance sheet total for the short-term gaps. Hence, exceeding the limits for the liquidity gap should not be equated with any liquidity risk. 

Liquidity stress tests are performed at least quarterly, in order to understand the Group’s liquidity-risk profile and to ensure that the Group is in a position to fulfil its obligations in the event of a liquidity crisis and to update the Liquidity Contingency Plan and management decisions. 

The liquidity risk management process is regulated in the internal policy that is a subject of the Bank’s Management Board approval. 

The Group has also emergency procedures for situations of increased liquidity risk – the Liquidity Contingency Plan. The Liquidity Contingency Plan establishes the concepts, priorities, responsibilities and specific measures to be taken in the event of a liquidity crisis. The Liquidity Contingency Plan is tested and revised at least once a year. The revised Plan was approved by the Supervisory Board in October 2020.  

More information on liquidity risk management can be found in chapter 9.5 of the Annual Consolidated Report of the Bank Millennium S.A. Capital Group for the 12-month period ending 31st December 2020. 

Operational risk management is based on the processes structure implemented in the Group and overlapping the traditional organizational structure. Current management of the specific processes, including the management of the profile of process operational risk, is entrusted to Process Owners, who report to all other units participating in the risk management process and are supported by these units.  

In order to manage the fraud risk, the Group has in its structure a special organizational unit to develop, implement and monitor the Group’s policy for management of this risk in cooperation with other organizational units of the Group and in accordance with its internal regulations. Fraud Risk Management Team in the Security Department is a centre of competence for the fraud prevention process.  

On 3 March 2020 the Bank’s Management Board appointed the COVID-19 Pandemic Activities Coordination Team, which meets twice a month reporting the activity plan and status of particular tasks to the Bank’s Management Board. The Team comprises representatives of the Bank’s key areas. 

Lack of legal compliance of internal regulations and the ensuing risk of legal or regulatory sanctions, material losses or reputation risk, is one of the areas threatening the banking activity. By monitoring compliance with both internal and external regulations, Bank Millennium considers it to be particularly important: 

  • Preventing money laundering and financing of terrorism, 
  • Ensuring consistency of Bank Millennium’s internal normative acts with generally binding laws as well as recommendations issued by supervisory authorities, 
  • Counteracting and managing conflicts of interest, 
  • Observance of ethical principles, 
  • Monitoring personal transactions and protecting confidential information related to Bank Millennium, financial instruments issued by the Bank as well as information connected with purchase/sale of such instruments, 
  • Monitoring and ensuring compliance of the investment products covered by MiFID II. 

Bank Millennium undertakes appropriate actions for the purpose of ongoing and continuous tracking of changes occurring in generally binding legal regulations as well as recommendations and guidance given by supervisory authorities, both national as well as of the European Union. In order to ensure compliance of the Bank’s operation with the generally applicable laws, the Compliance Department undertakes a number of activities such as: 

  1. informing about changes in law, 
  2. periodically reviewing all internal normative acts binding at the Bank in terms of compliance with applicable laws and standards, 
  3. analysing new products and services, 
  4. measuring compliance risk in processes operating at the Bank, 
  5. issuing opinions, 
  6. participating in key implementation projects, and 
  7. staff training. 

The Bank’s operations may generate a conflict of interest between Bank’s interests and the interests of Customers. The Bank’s main principle is to take all reasonable steps to identify a conflict of interest between the Bank and its Customers, as well as between individual Customers, and also to establish rules ensuring that such conflicts have no adverse impact on Customers’ interests. 

The Bank Millennium Group undertakes also appropriate actions to ensure conduct concerning personal transactions, which is compliant with standards and laws. These actions and measures are meant to, according to the circumstances, to restrict or prevent performance of personal transactions by Relevant Persons in situations, which may cause a conflict of interest or be involved with access to confidential information or to data about Customers’ transactions. 

Shares of Bank Millennium are admitted to public trading on the Warsaw Stock Exchange. Such status requires special attention and observance of the obligation to maintain highest standards for transparency of financial markets. The policy of Bank Millennium is to maintain strict control as regards protection of the flow of confidential information (including in accordance with the requirements of Regulation No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on abuses on the market abuse, MAR). The Bank prohibits the use and disclosure of confidential information in any form. Purchasing and selling the Bank’s shares, derivative rights concerning the Bank’s shares or any other financial instruments thereto related is forbidden during closed periods. 

The Anti-Money Laundering and Counter Terrorism Financing programme (AML/CTF), applied by the Bank Millennium, is a comprehensive system of identification of threats related to money laundering crimes.  

Actions launched under this programme include in particular:  

  • application of financial security measures to Customers, depending on the degree of risk and based on „Know your Client” or (KYC) principle – the key concept of the program, 
  • transaction registration and reporting, 
  • identification of suspicious transactions, 
  • cooperation with the General Inspector of Financial Information. 

Bank Millennium adjusts its reports to the analysis of suspected transactions on the on-going basis, taking into account up-to-date patterns (sectors, cash-flow routes, Customer behaviour) for effective identification and reporting of transactions suspected of money laundering. Implemented internal procedures, organizational solutions and employee training programmes ensure efficient operation of the programme. 

Bank Millennium, with view to protecting Customers who invest their funds in investment products with varied degree of risk, strictly monitors compliance of these products, their offering and handling process with relevant internal regulations, laws and external guidelines – on the domestic and European Union level. A specific compliance monitoring programme also covers consumer loans and insurance products (including insurance – investment products) addressed to consumers. 

The Bank Millennium has mechanisms and internal regulations allowing for anonymous reporting of violations of law and internal regulations and ethical standards (the so-called whistleblowing) to the Chairman of the Management Board, and in the case of notification concerning a Member of the Management Board – to the Supervisory Board. The Bank Millennium will verify each application, ensuring that the reporting person will be protected by acts of repressive, discriminatory and unfair nature.

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