Annual report 2019

53.3. Market risk and ALM (asset and liabilities management)

Market risk management organization

The operations of BNP Paribas Bank Polska S.A. are recorded in the trading and in the banking book. Changes in market interest rates, foreign exchange rates, security prices and implied volatility of option instruments lead to changes in the net interest income and the result on measurement of the books’ present value. The risk of adverse changes in the value, driven by the aforesaid factors, is recognized by the Bank as market risk. Due to differences in the characteristic features of those books, the risk is monitored and managed with the use of tools and measures appropriate for the nature of the risk in each book.

In order to reflect the characteristics of financial market transactions appropriately, i.e. the intentions of the parties entering into the transactions, the major risks and the accounting treatment,  the Bank  allocates  all  on-  and  off-balance  sheet  items  to the banking or trading book. Detailed allocation criteria are established in the documents (“policies” and “methodologies”) adopted by resolutions of the Management Board of the Bank and defining the purpose of keeping each book, the profile and types of risks assumed by the Bank, the measurement and mitigation methods as well as the authorizations and place of each organizational unit of the Bank in the risk generation, measurement, mitigation and reporting process.

The process of concluding transactions and their recording, as well as risk level supervision and adoption of risk limits is performed by independent units. In line with the long-term strategy adopted by the Bank, as well as with its financial plan, the Supervisory Board determines the Bank’s risk tolerance, i.e. an acceptable risk level and profile, which is subsequently allocated, in the form of risk limits, to the books and portfolios by the Asset-Liability Committee (ALCO) and the Risk Management Committee. The Financial Markets Division takes responsibility for daily operational management of the risk inherent in trading book in line with the defined market risk limits. The structural interest rate and currency risk in the banking book and the market risk of the short- term liquidity position is managed by ALM Treasury. Management of the current operational currency risk position of the Bank is centralized in the trading book. The Financial and Counterparty Risk Department and ALM Finance and Operations are in charge of measuring and reporting risk and limit overrides. Additionally, the Financial and Counterparty Risk Department ensures that financial instruments are measured properly. The management result is calculated by the Financial Market Transactions Monitoring Unit, while transactions are recorded and settled by the Financial Market Transactions Processing Department.    The system of limit override acceptance is hierarchical. It depends on the period of such override and its scale, and is managed by the Department head or Members of  the Bank’s  Management  Board  exercising  supervision  of  the Risk  Function  and the function responsible for the risk override. Irrespective of the process, all limit overrides are reported immediately after they occur and discussed at monthly ALCO or Risk Management Committee meetings.

Interest rate risk in the banking book (ALM Treasury)

The banking book of Bank BGŻ BNP Paribas S.A. is composed of two parts: the first one is the ALM portfolio as part of which structural interest rate, currency and liquidity risks resulting from the structure of the statement of financial position determined by the core lending, deposit and investing operations of the Bank, are managed. On the other hand, the Treasury portfolio is subject to daily and short-term liquidity management. It is also used by the Bank for purposes of performing its investing activities as well as concluding hedging transactions on the financial market.

The ALM portfolio comprises accounts, deposits and loans, strategic items (long-term investments, own debt issues and long- term loans), financial market transactions hedging the portfolio (derivative instruments) and zero-interest items (to include equity, tangible assets, intangible assets, taxes and provisions and profit for the period), transferred under management of ALM Treasury through the Fund Transfer Pricing (FTP) system.

The Treasury portfolio includes liquid securities (liquidity buffer), interbank deposits and placements, nostro and loro accounts as well as financial market transactions hedging the market risk of the portfolio (derivative instruments).

The Bank’s policy in respect of the banking book – ALM and Treasury portfolios managed collectively – is to earn additional, stable revenue in excess of the product margin, without any threat to the stability of funds deposited by customers, equity and profit. The above mentioned objective is accomplished by the Bank by maintaining or matching its natural exposure generated by the core lending and deposit operations, in line with the adopted risk limits which guarantee limited sensitivity of the Bank’s profit to changes in market factors, in addition to bringing the exposure into line with financial market trends forecast in the medium and long term.

Competitive conditions of the local financial market and customer expectations are the main factors shaping the Bank’s product policy, in particular the application of variable interest rates for medium- and long-term credit products, and financing of these assets with short deposits and interest-free accounts.

The real interest rate gap, net interest income sensitivity and economic capital sensitivity are the key measures of the market risk in the banking book, which comprises the ALM portfolio and the Treasury portfolio. The major assumptions adopted for measurement of interest rate risk in banking book are as follows:

  1. individual assets, liabilities and off-balance sheet transactions are analysed at their nominal value which is used as the basis for calculation of interest;
  2. items and transactions based on floating reference rates, such as WIBOR, LIBOR, EURIBOR, NBP rediscount rate etc. are taken into account for purposes of determining the gap at the nearest repricing date for a given contract;
  3. items based on floating reference rates scaled with a multiplier are taken into account for purposes of determining the gap at the nearest repricing date for a given contract at nominal value scaled with a multiplier and the nominal amount scaled with a value (1 – multiplier) is considered at the maturity date or proportionally at the principal payment dates;
  4. fixed rate items and transactions are taken into account for purposes of determining the gap at the principal payment dates, at the amounts of the principal paid at a given date or at the full amount at the maturity date for items in case of which the principal is not repaid (e.g. term deposits). Items and transactions with unspecified maturity, repricing date or non-interest bearing are taken into account in line with the profile determined as a result of modelling, which is aimed to ensure the best possible reflection of the changes in interest and principal cash flows resulting from customer behaviors and in response to external factors, in particular the market interest
  5. for the portfolio of impaired loans – for net values (decreased by the created reserves) – the average contractual maturity for unimpaired exposures (IFRS stage 1 and 2) increased by two years is applied,
  6. economic capital is calculated based on positions at internal prices.


For interest rate risk models, the bank uses the provisions of the ‚W’ recommendation regarding verification of the model’s operation, qualitative criteria, minimum model acceptance criteria and ongoing control of the model’s accuracy.

Replication portfolio models for accounts with no specific maturity dates are behavioural models built on the basis of the historical variability of deposit account balances and the analysis of the closing ratios for the modelled position. As part of modeling, the portfolio is divided into structural parts and a variable part, which is assigned the symbol ON in interest rate analyses.

As regards loans with a fixed interest rate, prepayment ratios determined in accordance with the applicable models at the Bank are used. Prepayments are analysed separately for individual types of loans (cash, car), due to the different characteristics of these products. Factors included in the prepayment analysis: loan age, seasonality, financial incentive for the customer to prepay the loan.

Interest rate gap
as at 31.12.2019
Up to
1 month
5 years
Cash and balances at Central Bank 4,658,142 4,658,142
Amounts due from banks 513,142 2,491 34,589 550,222
Loans and advances to customers 32,313,528 28,865,051 8,416,106 5,089,256 769,747 75,53,688
Investment securities: 2,798,325 1,538,425 6,407,425 14,341,455 25,085,630
Other assets 1,359,799 53,072 218,033 1,044,726 487,057 3,162,687
Total assets: 41,642,936 28,920,614 10,207,153 12,541,407 15,598,259 108,910,369
Amounts due to banks (4,149,617) (1,421,562) (435,004) (223,178) (21,733) (6,251,094)
Amounts due to customers (41,466,126) (7,586,175) (14,388,460) (15,042,232) (7,899,429) (86,382,422)
Other amounts due (299,230) (150,020) (554,565) (1,024,683) (34,407) (2,062,905)
Other liabilities (3,039,100) (34,244) (7,236) (21,002) (1,539) (3,103,121)
Total liabilities: (48,954,073) (9,192,001) (15,385,265) (16,311,095) (7,957,108) (97,799,542)
Net off-balance sheet liabilities (1,710,137) (2,307,413) (1,229,503) 3,612,351 1,546,281 (88,422)
Interest rate gap (9,021,274) 17,421,200 (6,407,615) (157,337) 9,187,432 11,022,405


* Financial data have been rounded and presented in PLN ‘000, and therefore, in some cases, the totals may not correspond exactly to the total sum.
Interest rate gap
as at 31.12.2018
Up to
1 month
5 years
Cash and balances at Central Bank 2,797,755 99,368 2,897,123
Amounts due from banks 765,352 269,151 28,034 1,062,537
Loans and advances to customers 18,311,550 34,722,279 16,971,513 4,384,739 499,787 74,889,868
Investment securities: 2,292,360 2,292,360 7,575,361 5,956,000 8,665,000 26,781,081
Other assets 698,341 74,250 214,206 1,142,433 583,117 2,712,347
Total assets: 24,865,358 37,457,408 24,789,114 11,483,172 9,747,904 108,342,956
Amounts due to banks (3,521,273) (1,501,265) (828,699) (1,000) (5,852,237)
Amounts due to customers (24,729,401) (25,287,645) (14,725,492) (13,632,325) (6,618,884) (84,993,747)
Other amounts due (2,348,371) (284,651) (566,477) (1,061,970) (62,177) (4,323,646)
Other liabilities (2,361,922) (82,428) (2,444,350)
Total liabilities: (32,960,967) (27,155,989) (16,120,668) (14,695,295) (6,681,061) (97,613,980)
Net off-balance sheet liabilities (758,529) (3,265,721) (2,145,111) 4,661,450 1,499,236 (8,676)
Interest rate gap (8,854,138) 7,035,698 6,523,335 1,449,327 4,566,079 10,720,300
* Financial data have been rounded and presented in PLN ‘000, and therefore, in some cases, the totals may not correspond exactly to the total sum.

Estimated reductions or increases in the net interest income for the banking portfolio between 1 and 3 years, resulting from changes in market interest rates, are the measure of its sensitivity. For management and risk control purposes, the Bank calculates sensitivity to a number of different market parameter change scenarios: immediate shifts and shifts in time, parallel and non-parallel shifts, in normal and stress conditions, varying depending on the currency, market and instrument.

Annual net interest income sensitivity to an immediate shift of market rates by 50 bps (in PLN ’000) is presented in the below tables:

immediate shift in market rates by 50 bps: 31.12.2019 31.12.2018
– increase 81,905 67,362
– decrease (80,817) (60,870)

Sensitivity of interest result by currency:

immediate shift in market rates by 50 bps: PLN EUR USD CHF
– increase 41,776 35,749 5,004 (624)
– decrease (41,837) (34,597) (5,005) 622

The economic sensitivity of capital to a sudden parallel shift of market rates by +/- 200 basis points in thous. PLN and as percentage of own funds:

immediate shift in market rates by 50 bps: In thous. PLN %
– 200 bps increase (261,806) (3.10%)
– 200 bps decrease 51,879 0.61%

In terms of base risk, the Bank analyses positions based on different types of rates with the same interest rate repricing date. The largest potential change in the Bank’s net interest income may result from a change in the spread between Wibor 1M rates and the NBP reference rate.

If the market rate changes by 50 bps compared to the reference rate, the change in the result will be PLN 8,235 thousand.

Market risk in the trading book

The Bank’s trading activities are supplementary, as they support sales of financial products to corporate customers, non-bank financial customers (directly) and retail customers (through structured products, which are officially classified into the banking book). The Bank opens its own positions, thus generating income on short-term changes in price parameters (foreign currency rates or interest rates), while maintaining the exposure within the adopted risk limits. The Bank offers commodity instruments but does not maintain open position in commodity market.

As part of the interest rate risk exposure, which is the key exposure in the trading portfolio, the Bank could enter into IRS, OIS, CIRS, FRA and basis swap transactions and purchase and sale of foreign currency options on interest options. The interest rate risk was also determined by positions resulting from FX swap and FX Forward transactions. In 2019, as part of internal risk limits, the Bank maintained an open option position in order to optimize the result, i.e. generate additional benefits due to the lack of immediate closing of customer positions by reverse transactions on the interbank market. The priority of the Bank is to hedge the interest rate risk and currency risk.

Sensitivity of items to shifts in the yield curve and VaR are the key measures of the interest rate risk in the trading portfolio. Additionally, the Bank conducts sensitivity analyses, where the changes in interest rates are more considerable than those typically observed (stress tests).

In 2019, the interest rate risk for PLN items, measured by sensitivity to shifts in the yield curve in the trading portfolio, was lower (by PLN 35 thousand on average) than in 2018 (PLN 43 thousand).

2019 2018
31.12. (20) 7 64 (3)
average (35) 3 43 1
max 107 48 125 49
min (109) (60) (18) (49)
* Measure of sensitivity of instrument valuation to a shift in the yield curve by 1 b.p.

The Bank’s currency risk is measured using Value at Risk (VaR), which is a measure of the change in the market value of an asset or an asset portfolio with specific assumptions concerning the market parameters, at a specific time and with defined probability. For purposes of currency risk monitoring, it is assumed that VaR is determined with a 99% confidence level and that a position is maintained for one day. The VaR methodology is validated on a quarterly basis by means of an analysis which involves a comparison of the forecast figures and those determined on the basis of actual changes in foreign exchange rates, assuming that the currency position is maintained (back-testing). The comparative period covers the last 250 business days. The VaR model was back-tested in 2017 and the verification results indicate that there is no necessity to make any adjustments.

Foreign currency transactions used for management of the Bank’s currency position were characterized by a stable exposure and a low risk. The risk resulting from foreign currency transactions with customers was offset immediately. Therefore, also the intraday foreign currency exposure remained at a low level.

31.12.2019 31.12.2018
average 399 214
max 2,957 1,256
min 33 13

The Bank uses a historical method which assumes that the confidence level is 99% and that positions are maintained for 1 day.

31.12.2019 31.12.2018
Currency position items Assets Liabilities Assets Liabilities
USD 543,362 3,210,574 1,870,533 4,098,906
GBP 293,134 288,211 576,763 796,599
CHF 4,938,357 780,450 5,453,862 1,037,177
EUR 11,071,940 13,699,159 12,329,088 13,727,747
Other convertible currencies 232,927 338,235 848,369 976,147
PLN 92,874,422 91,637,513 85,733,043 86,175,082
Total 109,954,142 109,954,142 106,811,658 106,811,658

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