12. Main directions of change and types of risk related to mBank Group’s activities

12.1. Main directions of change in the risk management area

mBank Group manages risks on the basis of regulatory requirements and best market practice, by developing risk management strategies, policies and guidelines.

Risk management roles and responsibilities in mBank Group are organised around the three lines of defence model:

  1. The first line of defence consists of business segments (Business) Lines whose task is to take risk aspects into consideration when making business decisions.
  2. The second line of defence, Risk, provides the methodological framework and is responsible for making risk decisions at the request of Business and for measuring, limiting, monitoring and reporting of risks taken by the Group. Risk provides an independent oversight of the first line of defence.
  3. The third line of defence is Internal Audit, ensuring independent assessment of Business and Risk.

Risk responsibilities are based on the following pillars of organisational management:

  • Client-Centric Approach – understanding the needs of the Risk area clients.
  • One Risk – integrated approach to risk management.
  • Risk v. Return Rate – supporting business segments in the decision-making process and defining the Bank’s risk appetite on the basis of long-term relationship between risk and rate of return.

A new initiative of the Risk Area was added in 2013 and consequently developed throughout 2014 to the One Bank Strategy: “Approach to Risk Management”. It includes a range of projects grouped in five themes:

  • Strengthening the business-risk dialogue.
  • Review of risk appetite definitions.
  • Improvement of the credit process.
  • Improvement of Risk employee competences.
  • Simplification and integration of the risk IT structure.

Risk is the key partner to business segments and the Management Board in creating lasting value for the Bank and ensuring a long term balance between the expected rate of return for investors and the safety of the Bank. These strategic objectives require an integrated approach to risk, capital, financing and profitability management.

As a consequence of the foregoing, the Risk Management Strategy was updated and the Risk Appetite programme was implemented in 2014.

As part of the programme, risk appetite was defined with the participation of the Bank’s business units, managers and the Management Board, and it was documented by amending the Strategy, while comprehensive strategic risk limiting rules as well as actual limits were put in place.

Furthermore, the Bank updated the retail and corporate credit risk management strategy, as well as market risk, liquidity risk and operational risk management strategy in 2014.

Moreover, work was underway in 2014 to implement the comprehensive reputation risk management strategy approved by the Bank’s Management Board in December.

In 2014, the Bank implemented the Risk Management Effectiveness Self-Assessment process aimed to identify the key risks embedded in processes executed at the Bank and to assess their effective management. Self-Assessment results are used to take measures necessary to optimise and facilitate the Bank’s operational risk management system. The implementation of the Self-Assessment was divided into two stages. The first stage was implemented in H1 2014 and its results were approved by the Bank’s Management Board in September 2014. The second stage will be finalised by the end of June 2015.

In support of business projects, Risk took part in activities related to the implementation of the Orange Finance platform in order to ensure the implementation of the adequate credit policy and credit process. Risk continued its co-operation with mBank Hipoteczny in order to transfer mortgage-backed exposures to mBank Hipoteczny in the covered bond issue project (pooling). A new credit process is under implementation in Corporate Banking aiming to significantly enhance its effectiveness. The full path of credit process for large corporate clients was also reorganised ensuring 15 day SLA for complex cases. The decision-making matrix was also changed in a way significantly increasing the decision-making of the Bank’s authorities.

The IAAA (Information As An Asset) Project is implemented in the Bank. It aims at the reconstruction and integration of environments and methods of data management in the Bank. Risk area, as one of the leaders of this initiative, shapes actively the designed solutions and at the same time carries out work related to the adjustment of risk architecture in terms of optimal use of the project’s products.

Basel III regulatory standards

The new rules on prudential requirements for banks set out in the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD IV) on access to the activity of banks and the prudential supervision, implementing provisions of Basel III, are effective in the European Union as of January 1, 2014. The amendments introduced under Basel III include:

  • stricter capital requirements including a universal definition and components of the bank’s capital as well as implementation of capital ratio specified in relation to the funds of the highest quality,
  • introduction of own funds requirement associated with credit valuation adjustment,
  • implementation of financial leverage ratio,
  • introduction of additional capital buffers, including a capital conservation buffer, a countercyclical buffer, a global systemically important financial institutions buffer and systemic risk buffer,
  • liquidity requirements, measured by the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).

The regulatory amendments are mainly designed to protect the capital of banks against adverse effects of financial crises.

The new provisions of CRD IV must be implemented in a national legislation, while CRR takes effect as of January 1, 2014 without harmonisation with national laws.

Adaptation works in order to meet new regulatory standards in mBank Group are described in the IFRS Consolidated Financial Statements 2014 of mBank S.A. Group.