3.12. Other risks

 Business risk

Business risk is understood as the risk of potential loss resulting from the deviations (calculated separately for revenues and costs) of actual net operating profit from the planned one. In particular it includes strategic risk connected with the possibility of occurrence of negative financial consequences as a result of wrong or disadvantageous decisions or their wrong implementations. It is assumed, that the results of the strategic decisions are reflected in deviations of operating profit in one-year horizon.

One of the tools used by the Bank in order to manage and effectively reduce business risk is an ongoing monitoring of financial results of all business units and preparation of forecasts of the Group’s future financial results. In case of high fluctuations, the Controlling and Management Information Department is responsible for the analysis of their causes. The results of the analysis are included in the form of notes to the financial results of the Bank and the Group provided to the Management Board.

Business risk is included in the calculation of economic capital of mBank and mBank Group.

Model risk

Model risk is understood as the risk of negative consequences connected with the decisions made on the basis of the output data of models which have been improperly constructed or are improperly administered. Model risk may result in financial losses or in the loss of potential profits, improper business or strategic decisions or negatively influence the bank’s reputation.

The following specific subcategories can be distinguished in particular in model risk:

  • Data risk understood as the risk arising from necessity to use data of unsatisfactory quality, completeness and reliability in the models construction and validation.
  • Assumptions/methodology risk understood as the risk arising from incorrect assumptions or over-simplification made in the model construction or resulting from the usage of inappropriate mathematical, statistical techniques, improper expert solutions or incorrect usage of them while developing the model.
  • Models administration risk understood as the risk of incorrect usage of models or their improper operation because of inadequate documentation, monitoring, validation and updates of these models, including assessing the adequacy of the model for current conditions.

Model risk is managed on a systemic basis by a proper internal regulations concerning monitoring and validation of models.

The Model Management Policy determines the participants and the framework for model management process, including issues related to the development of models in the Group, their approval, implementation, verification/validation, monitoring, implementation of changes and the associated reporting process.

The Policy and the resulting organizational solutions are designed to provide high-quality models throughout the whole period of their operation. Due to the implementation of the Policy, the Management Board of the Bank is confident about the adequacy and reliability of model results, which are used in business processes. Simultaneously, the Policy implementation meets the requirements of the Polish Financial Supervision Authority regarding the use of models for internal purposes of the Bank, as well as for the calculation of the capital requirement in accordance with the internal ratings based approach in case of credit risk.

Reputational risk

In today’s competitive environment, the reputation of a company is increasingly gaining in importance. Banks, as public trust companies, not only are expected to be profitable and offer shareholders an adequate return, but also to be ethical, environmentally friendly, and socially responsible.

The aim of management of reputational risk, defined as a risk resulting from a negative perception of the image of the Bank or other member in the Group among its stakeholders, is to identify, assess and address reputational risk in specific processes in order to safeguard and enhance the good name of mBank and mBank Group.

The following tools and methods are used in mBank to monitor and manage reputational risk:

  • mBank’s values (client-centric organization, simplicity, professionalism, engagement and  forward looking), which are the mBank’s code used while building either business relations or internal inside of the Group;
  • Engagement culture survey – perception of mBank by its employees;
  • Corporate Social Responsibility, which makes the Bank noticeable to the public through participation in projects of the mBank Foundation and volunteer works;
  • Monitoring of press publications, comments in the Internet, social media or internet forums;
  • Customer satisfaction analysis in retail and corporate banking;
  • New product process - reputational risk is one of the topics analyzed within new products’ implementation process;
  • Analysis of customers’ complaints. 

In 2014, the Bank developed Reputational Risk Management Strategy of mBank Group, which describes rules and components of reputational risk management, and emphasizes, in particular, such issues as: reputational risk profile and organization and methods of reputational risk management.

Capital risk

In order to prevent materialization of capital risk, understood as risk resulting from the lack of sufficient capital assurance to absorb unexpected losses, the Bank applies a capital management process.

The capital management in mBank Group is organised as a process including planning, steering and controlling within the frames of economic capital, regulatory capital and internal capital. Within the framework of capital management process, regular monitoring of capital adequacy and effectiveness is conducted, aimed at assurance that adequate and optimum level of capital is maintained in mBank Group. This is supported by analysis and stress testing procedures, designed to provide in depth view on current capital position, as well as possible development in the future.

The capital management process in mBank Group is documented. The Capital Management Policy constitutes the core documentation in this respect. It is directly linked to the General Business Strategy and Risk Management Strategy as well as the Multi-year Financial Plan of mBank Group and with the ICAAP documentation.

The underlying assumption of the Capital Management Policy is to ensure effective planning and deployment of the capital base within the mBank and mBank Group. The goal of the Policy is to set up the effective decision-making process for capital management. This is provided mainly by applying risk appetite guidelines and developing guidelines to assure sufficient capital to cover risks identified in business activity, as well as defining the organisational framework for the efficient functioning of capital management system.

The Capital Management Policy is based on two fundamental pillars:

  • maintenance of optimal level and structure of own funds, assuring capital adequacy above the statutory minimum requirement (including risk appetite defined by the Management Board) as well as ensuring coverage against all material risks identified in mBank Group’s activity,
  • effective use of the capital base, guaranteeing achievement of expected returns, including return on regulatory capital and risk adjusted capital.

In addition, the document focuses on capital management in an environment of capital shortage.