3.7. Market risk

In the process of organisation of the market risk management, the Bank follows rules and requirements set forth in Polish Financial Supervision Authority (KNF) regulations and recommendations, in particular in Recommendations A and I.

The fundamental principle applied in the organisation of the market risk management in the Bank is the separation of risk control and monitoring functions from structures undertaking and operationally managing Bank’s risk positions. Monitoring and controlling of the market risk is performed by the Financial Markets Risk Department in the Risk Area of the Bank under supervision of the Chief Risk Officer, while the market risk positions are operationally managed by Financial Markets Department, Brokerage Bureau and Treasury Department reporting to the Management Board member in charge of financial markets. The Brokerage Bureau is an organisational unit of the Bank separated from the Financial Markets Department focusing its activity on financial instruments subject to trading on the Warsaw Stock Exchange (WSE). In 2014 Debt Securities Issue Department (DCM) was separated from the structure of DFM and is responsible for debt issuance and managing of non-government debt securities in banking book. Moreover, the investment positions sensitive to market risk factors (e.g. prices of shares listed on the WSE) are managed in the Structured and Mezzanine Finance Department. DCM and DFS are operating in the Corporate & Investment Banking area.

In the course of Bank’s operations, the Bank is exposed to market risk, which is defined as a risk resulting from unfavourable change of the current valuation of the Bank’s open positions in interest rate, foreign currency and equity instruments due to changes of the appropriate market risk factors, in particular interest rates, foreign exchange rates, stock share prices and indices, implied volatilities of relevant options and credit spreads. The Bank identifies market risk primarily on the trading book positions valuated at fair value (either directly to market prices or via models) and as such may lead to losses reported in Bank’s financial results. Furthermore, the Bank assigns market risk to its banking positions independently of the accounting rules of calculating financial results on these positions. In particular, in order to reflect the interest rate risk of the retail and corporate banking products with unspecified interest revaluation dates or rates administered by the Bank, the Bank uses the so-called replicating portfolio models. In 2014 the VaR methodology was amended by taking into account additional risk factor (credit spreads for government and corporate bonds – in case of government bond the credit spread is calculated as difference between zero-coupon interest rate on bond and on swap curve) and change of the valuation of floating rate government bonds for the purpose of market risk measurement to address in valuation the effect of basis risk between rates on bond and on swap curves. As a consequence of these changes, since March 2014 part of risk (presented so far as interest rate risk) concerning variability of credit spread between curves is presented in CS VaR (credit spread risk) category. The expected increase of risk measure VaR was included in market risk limits, approved for 2014 for mBank Group and for particular units within market risk limitation system. In approved values of limits, there was reflected the expected increase of market risk measure due to increase of the investment horizon for the mBank capital model from 3 to 5 years (which was approved by Financial Markets Risk Committee in April 2014). Market risk measures applicable to interest rate banking book positions are based on net present value (NPV) models. Exposure to market risk is quantified by measurement of the value at risk (VaR) and by stress tests scenario analyses.

Market risk, in particular interest rate risk of the banking book is also quantified by calculation of the earnings at risk (EaR) measure for the banking portfolio.

In order to mitigate market risk exposure, by decision of Management Board (with respect to mBank portfolio) and mBank the Financial Markets Risk Committee (with respect to business lines portfolios) VaR limits and stress tests limits (management action triggers) are established.

Value at Risk

In 2014, Bank’s market risk exposure, as measured by the value at risk (VaR, for one day holding period, at 97.5% confidence level), was in relation to the established limits on moderate level. The average utilisation of VaR limit for Financial Markets Department, whose positions consist primarily of trading book portfolios, amounted to 33% (PLN 2.0 million), for the Brokerage Bureau (BM) 15% (PLN 0.3 million), while for the Treasury Department, whose positions are classified solely to the banking book, it was 59% (PLN 26.1 million) for the positions without capital modelling and 55% (PLN 23.9 million) for the positions with capital modelling. Value at risk for Debt Securities Issue Department (DCM) is limited since March 2014. The average utilization of this limit is 9% (PLN 0.3 million). The average utilisation of the VaR limit for the position of the Structured and Mezzanine Finance Department (DFS) in shares listed in the Warsaw Stock Exchange accounted for 72% (PLN 6.4 million). In 2014, the VaR figures for mBank’s portfolio were driven mainly by portfolios of instruments sensitive to interest rates and separated credit spread – the banking book T-bonds portfolios managed by Treasury Department and the trading book portfolios and interest rate exchange positions managed by Financial Markets Department. Second most significant portfolio having impact on the Bank’s risk profile were positions of DFS, where crucial risk factor remains the rate of PZU shares, due to holding significant investment position in shares of the company. The DFM portfolios of instruments sensitive to changes in exchange rates like FX spots, currency options, as well as the exposure of BM to equity price risk and risk of implied volatility of options traded on the Warsaw Stock, had a relatively low impact on the Bank’s risk profile.

mBank VaR

The tables below present VaR statistics for the Bank’s portfolio:

PLN 000's 2014 2013
31.12.2014 Mean Maximum Minimum 31.12.2013 Mean Maximum Minimum
VaR IR 16 457 14 693 19 081 8 122 15 155 16 034 22 806 6 774
VaR FX 937 348 1 162 95 212 348 1 196 73
VaR EQ 6 243 6 507 7 647 5 836 7 268 5 659 7 451 4 551
VaR CS 25 142 27 245 31 279 25 049        
VaR 33 393 29 448 36 453 15 968 16 910 17 622 23 556 10 840
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VaR IR – interest rate risk
VaR FX – currency risk
VaR EQ – equity risk
VaR CS – credit spread risk

Stress testing

Stress tests are additional measures of market risk, supplementing the measurement of the value at risk, which show the hypothetical changes in the current valuation of the Bank's portfolios, which would take place as a result of realisation of the so-called stress scenarios – i.e. market situations at which the risk factors would reach specified extreme values, assuming taking static portfolio.

Stress tests consist of two parts: standard stress tests designated for standard risk factors: currency exchange rates, interest rates, stock prices and their volatility, as well as a stress test, which involves changes in credit spreads. In this way, there was addressed among others, the need for covering in stress tests analysis the independent effect of basis risk (the spread between interest rates on government bonds and IRS), which the Bank is exposed to, due to maintaining a portfolio of Treasury bonds.

Average utilisation of stress test limits in mBank in 2014 amounted to 50% (PLN 783.9 million). The average utilisation of the limits in 2014 for the Treasury Department portfolio without capital modelling was 65% (PLN 618.9 million) and 59% (PLN 616.7 million) including capital modelling. For the Financial Markets Department portfolio the average utilisation was 30% (PLN 121.7 million), for BM portfolio 7% (PLN 0.8 million), for DCM portfolio 25% (PLN 15.5 million) and for DFS portfolio 65% (PLN 32.7 million). The most significant part of presented stress test values constitutes credit spread stress test for government bonds portfolio because stress test scenarios include scenario in which interest rates increase on average by 100 bps.

Market risk of mBank Group

The main sources of market risk of the mBank Group are the Bank’s positions. The table below shows VaR statistics (at 97.5% confidence level for a one-day holding period) for mBank Group (i.e. mBank, mBank Hipoteczny, mLeasing, Dom Maklerski mBanku) in 2014 for individual members of the Group in which market risk positions were identified and their decomposition to the VaRs corresponding to the main risk factor types – interest rate risk (VaR IR), foreign exchange risk (VaR FX), and equity prices risk (VaR EQ). The table below presents VaR for mBank as of the end of 2014:

PLN 000's mBank Group mBank mBH mLeasing DM mBanku
VaR IR 15 119 14 693 75 436 8
VaR FX 357 348 26 108 20
VaR EQ 6 540 6 507 0 0 137
VaR CS 27 245 27 245 0 0 0
VaR Mean 29 678 29 448 86 418 134
VaR Maximum 36 718 36 453 251 627 171
VaR Minimum 16 183 15 968 45 308 71
VaR 33 513 33 393 53 424 112
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For comparison, at the end of 2013 VaR for the mBank Group was PLN 17 152 thousand, including VaR for mBank at PLN 16 910 thousand, mBank Hipoteczny – PLN 64 thousand, mLeasing – PLN 615 thousands and Dom Maklerski mBanku – PLN 108 thousand.

PLN 000's mBank Group mBank mBH mLeasing DM mBanku
VaR IR 16 334 16 034 76 478 11
VaR FX 362 348 73 190 14
VaR EQ 5 680 5 659 0 0 66
VaR średni 17 776 17 622 108 532 64
VaR max 23 844 23 556 984 780 146
VaR min 10 668 10 840 59 214 45
VaR 17 152 16 910 64 615 108
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