Other risks

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 (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 in consolidated terms for Global Bank, Banking Book and Trading Book considering the effect of the diversification that exists between the 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 and Monetary Policy Council’s (MPC’s) series of decisions to increase interest rates in Poland resulted in increase of the Group’s market and interest rate risk.  

In 2021, the VaR for the Group that is jointly Trading Book and Banking Book, increased due to market volatility and in 4Q2021 breached the limits in place. The VaR limits were not breached in Trading Book. All excesses of market risk limits are always reported, documented, and ratified at the proper competence level. 

In 2021, open positions included just interest-rate instruments and FX risk instruments. The VaR indicators for the Group remained on average at the level of PLN161.7mn (63 per cent of the limit) and PLN391.3mn (150 per cent of the limit) as of the end of December 2021. However, in 2021, the VaR limits were very conservative – set for Global Bank at no more than 2.6 per cent and for Trading Book at 0.31 per cent of Own Funds). FX open position (Intraday as well as Overnight) remained below 2 per cent of The Own Funds and well below the maximum limits in place. 

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, 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).   

Exposure to interest rate risk in the Banking Book are primarily generated by the differences in repricing dates of assets and liabilities as well as its reference indexes, if contractually existing. It is specifically affected by the unbalance between assets and liabilities that have fixed rate, especially by the liabilities which cannot have interest rate lower than 0. Consequently, the level of sensitivity to interest rate changes is influenced by the level of interest rates taken as a reference. Additionally, due to specificity of the polish legal system, the interest rate of 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 share of the loan portfolio that is affected by the new maximum rate. On the other hand, assumptions regarding the timing and size of deposits repricing are also very important when assessing the interest rate sensitivity and risk. 

Considering the increase of interest rates that occurred in the 4th quarter 2021, the results of the IRRBB measurement as of the end of December 2021 indicate that the Group is now in a more balanced situation regarding the scenario of a decline or increase in interest rates. The supervisory outlier stress tests result as of December 2021 show that even under the most severe outlier test scenario, the decline of EVE for Banking Book is far below supervisory limit of 15 per cent 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 per cent of Own Funds. 

The results of sensitivity of NII for the next 12 months after 31st December 2021 and for position in Polish Zloty in Banking Book are carried out under the following assumptions: 

• static balance sheet structure as of that reference date (no change during the following 12 months), 
• reference level of net interest income assuming that all assets and liabilities with variable interest rate already reflect market interest rates levels as of 31st December 2021 (for example, the NBP Reference rate at the end of 2021 was set at 1.75 per cent), 
• application of a parallel move of 100 bps in the yield curve up and down is an additional shock to all market interest rates levels as of 31st December 2021 and is set at the repricing date of the assets and liabilities that happens during the 12 following months. 

In a scenario of parallel decrease of interest rates by 100bp, the results are negative and equal to PLN-162mn or -6.0 per cent of the Group’s NII reference level; In a scenario of parallel increase of interest rates by 100bp, the results are positive and equal to PLN160mn or +5.9 per cent of the Group’s NII reference level. The level of asymmetry that existed in past reporting dates is now lower as interest rates were meaningfully above 0 per cent on 31st December 2021 and the leverage impact of the maximum interest rate is now less strong than in previous years due to changes in the structure of portfolio and pricing of loans. 

More information on market risk and interest rate risk management can be found in chapter Market risk and interest rate risk of the Annual Consolidated Report of the Bank Millennium S.A. Capital Group for the 12-month period ending 31st December 2021. 

Liquidity risk reflects the possibility of incurring significant losses because 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 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 2021, the COVID-19 pandemic still had an impact on global financial markets, however 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. 

In 2021, the Group’s Loan-to-Deposit ratio decreased and was equalled to 86 per cent at the end of December 2021 (comparing to level of 91 per cent as of end of December 2020).  

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 2021, the share of Polish government securities (including NBP Bills) in total securities portfolio amounted to 98 per cent and allowed to reach the level of approx. PLN17.6bn (17 per cent of total assets), whereas at the end of December 2020 was at the level of approx. PLN18.4bn (19 per cent of total assets) (see table below).

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 using FX-denominated bilateral loans as well as subordinated debt, FX swaps and cross-currency interest rate swaps transactions. The importance of swaps has been decreasing because of the reduction of the FX mortgage loan portfolio and the hedge in foreign currency of the provisions for legal risk. The swaps portfolio is diversified in term of counterparties and maturity dates. For most 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 per cent for LCR valid in 2021 was met by the Group (as of the end of December 2021 the LCR reached the level of 150 per cent). 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 2021, the Group complied also with supervisory measures imposed by KNF Resolution 386/2008 as well as regularly calculated net stable funding requirement (NSFR). Since 28th June 2021 the NSFR as obligatory supervisory long term liquidity measure replaced M3 and M4 supervisory measures defined by the KNF. In each of the quarter, the NSFR was above the supervisory minimum of 100 per cent (supervisory minimum valid since 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 per cent 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, to understand the Group’s liquidity-risk profile and to ensure that the Group can 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 December 2021.  

More information on liquidity risk management can be found in chapter Liquidity risk the Annual Consolidated Report of the Bank Millennium S.A. Capital Group for the 12-month period ending 31st December 2021. 

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.  

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 Sub-unit in the Security Department is a centre of competence for the fraud prevention process.  

Lack of compliance of the Bank’s operations with binding laws, internal regulations, and market standards, which is linked with the risk of material or reputation losses or., It’s 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, 
• Counteracting corruption, 
• 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. To ensure compliance of the Bank’s operation with the generally applicable laws, the Compliance Department undertakes several activities such as: 

• informing about changes in law, 
• periodically reviewing all internal normative acts binding at the Bank in terms of compliance with applicable laws and standards, 
• analysing new products and services, 
• measuring compliance risk in processes operating at the Bank, 
• issuing opinions, 
• participating in key implementation projects, and 
• 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 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 by persons discharging managerial responsibilities, of the Bank’s shares, debt instruments of the Bank or derivatives or other financial instruments linked to them 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, considering 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.