Market risk

In its operations, the bank is exposed to market risk, which is defined as a risk resulting from unfavourable change of the current valuation of financial instruments in the bank’s portfolios due to changes of the market risk factors, in particular:

• interest rates (IR);
• foreign exchange rates (FX);
• stock share prices and indices;
• implied volatilities of relevant options;
• credit spreads (CS) to the extent reflecting market fluctuations of debt instruments prices.

In terms of the banking book, the bank distinguishes the interest rate risk, which defines as the risk of an adverse change in both the current valuation of the banking book position and the net interest income as a result of changes in interest rates.

For the purpose of internal management, the bank quantifies exposure to market risk, both for banking and trading book, by measuring:

• the Value at Risk (VaR);
• expected loss under condition that this loss exceeds Value at Risk (ES – Expected Shortfall);
• the Value at Risk in stressed conditions (Stressed VaR);
• economic capital to cover market risk;
• stress tests scenario values;
• portfolio sensitivities to changes of market prices or market parameters.

For the banking book, the bank also uses the following measures:

• sensitivity of the economic value of capital (delta EVE);
• sensitivity of net interest income (delta NII);
• repricing gap.

The implementation of market risk management strategy involves managing the bank’s positions in a way enabling to maintain market risk profile within the risk appetite defined by the bank.

The bank is focused on meeting customers’ business needs, while reducing trade in derivatives, as well as applying the principle of lack of commodity open positions.

The bank stabilises interest income using long-term fixed-rate assets and derivatives and assuming – for equity capital and current accounts – the maximum modelled maturity of 10 years.

The main principle stipulates separation between the market risk monitoring and control functions and the functions related to opening and maintaining open market risk positions. In addition, the bank applies the rule of organisational separation between managing banking book and trading book positions.

The mBank’s positions constitute the main source of market risk for the mBank Group.

Value at risk

In 2020, the market risk exposure, as measured by the Value at Risk (VaR for a 1-day holding period, at 97.5% confidence level), remained at a moderate level in relation to the established VaR limits.

The table below presents VaR and Stressed VaR for the Group’s and mBank’s portfolios (including modelling of equity capital and current accounts):

The Value at Risk (VaR) was largely influenced by the portfolios of instruments sensitive to the interest rates and the separate credit spread – mainly the portfolios of the Treasury bonds (in the banking and trading books) and positions resulting from interest rate swap transactions.

Sensitivities measures

The table presents the values of IR BPV and CS BPV (+1 b.p.) for the Group’s and mBank’s portfolios, broken down into the banking and trading books (including modelling of equity capital and current accounts):

The credit spread sensitivity (CS BPV) for the mBank’s banking book, results in c.a. 50% from the positions in debt securities valued at amortised cost. Changes in market price have no impact on the revaluation reserve or the income statement for these positions.

Interest rate risk of the banking book

The sensitivity of net interest income is calculated and monitored over a five-year horizon in the bank’s base scenario assuming a normal situation and in more than 20 defined stress-test scenarios. The table below presents the sensitivity of the net interest income within 12 months horizon, assuming an unfavourable 100 bps change of market interest rates (parallel shift of the curves by 100 bps with floor on product level) and based on a stable portfolio over the period.