ING Bank Śląski | Annual Report 2014

ING BANK ŚLĄSKI

ING BANK ŚLĄSKIAnnual Report 2014

4. Value at Risk (“VaR”) Concept

The Value at Risk (VaR) is the main methodology used to calculate market risk in both Trading and Banking books. The VaR gives the potential loss that is expected not to be exceeded assuming certain confidence (probability) level. The Bank calculates VaR separately for individual interest rate portfolios, FX and FX options portfolios. The following assumptions for VaR calculation are taken: one-day position holding period, 99% confidence level and 260 day observation period is used. For trading book portfolios Bank uses the historical simulation methodology. To strengthen the risk control, Bank implemented additionally within FX risk area, the intra-day risk measurement and monitoring against approved limits. 

In the case of Bank Treasury Banking Books, Bank used till December 2014 the variance-covariance method. Since December 2014, after new methodology and appropriate VaR limit approval by Management Board, Bank formally started to measure the risk according to historical simulation method.  Market risk of commercial banking books is calculated in the framework of the banking portfolio using the methodology EaR and NPV at Risk described in further parts of the document. However, the calculation of the economic capital for commercial books is based on VaR by variance-covariance methodology. Economic capital for commercial books on 31.12.2014 amounted to PLN 2 635 thousand, which accounted for only 3.8% of the total economic capital of the Bank.

VaR measurement  in ING Bank Śląski is performed in accordance to market best practice. The VaR model accuracy for  Trading books is checked in a daily back-testing process. P&L figures, both “actual” and “hypothetical P&L” (change in end-of-day market value of the positions in a trading portfolio over 1 day, so excluding all intra-day activities that occurred during that day) are compared to the VaR figure. Any model outliers are investigated and explained.

Stress-testing

The Bank is aware that normal VaR does not present a full picture of market risk of a portfolio as it does not give an indication of potential losses in extreme changes of market circumstances. Therefore “Stressed VaR” calculation is performed. The Stressed VaR is a measure replicating calculations applied in the historical simulation calculations assuming that the current portfolio and continuous, historical 12-month market data, characterized by a significant deviation of the market parameters relevant for a given portfolio, are used.

Moreover, on a quarterly basis Bank-wide stress test is performed covering market risk, liquidity risk and credit risk under regulatory scenario and various other scenarios provided by Bank’s economists and approved by ALCO.

Trading Books Market Risk (VaR statistics)*

VaR numbers in 2014 (in PLN thousand)
Area Limit as at 31 Dec 2014 Average Min Max
Interest Rate 3,836.1 1,770.9 1,983.2 394.5 4,448.4
FX** 4,475.4 486.7 484.5 213.4 1,352.4
FX Options 2,131.2 423.8 456.3 168.6 829.0

 

VaR numbers in 2013 (in PLN thousand)
Area Limit as at 31 Dec 2013 Average Min Max
Interest Rate 3,732.5 800.0 865.0 135.1 2,962.6
FX** 3,939.8 319.4 648.1 319.4 1,019.1
FX Options 2,073.6 340.4 219.0 76.2 601.0

* All VaR limits and their usage in ING Bank Śląski are denominated in EUR. Limit levels and their usage in tables and graphs for the purpose of this document were converted into PLN using daily NBP fixing rate, in column “Limit” numbers are presented using end of year fixing.
** Including subsidiaries, based on monthly measurement.

Financial Markets kept their trading exposures at moderate levels comparing to approved limits. The average usage of limits in 2014 was respectively: 53% for interest rate trading, 17% for FX Spot and 22% for FX options. There were three cases of “hard” VaR limit breach reported for long-term interest rate trading book. The only one change of VaR limit took place in 2014. Management Board decided to increase VaR limit for FX trading book from EUR 800k to EUR 1 000k.

Bank Treasury Banking Books Market Risk (VaR statistics)*

VaR numbers in 2014 (in PLN thousand)
Area Limit as at 31 Dec 2014 Average Min Max
LMF&ALM 85,246.0 48,789.4 5,626.1 421.5 50,397.9

 

VaR numbers in 2013 (in PLN thousand)
Area Limit as at 31 Dec 2013 Average Min Max
LMF&ALM 8,294.4 1,159.5 1,800.8 641.9 3,912.1

* In case of LMF (Liquidity Management & Funding) and ALM, the numbers for 2013 and eleven months of 2014 represent Delta VaR as this measure was formally limited. In December 2014 Management Board approved the historical simulation based method and a new higher appropriate to this method VaR limit (it increased from EUR 2,0 mio. to EUR 20 mio.). The change (for 1 month) has been reflected adequately in the above statistics. The delta measurement based on variance-covariance method did not cover the spread between government bond and swap curve. However the historical simulation method takes into account the spread which is its unquestionable advantage. Taking into consideration the fact that Bank Treasury security portfolio is substantial also as a consequence the risk is much higher which is reflected in VaR numbers.

Treasury Department kept their exposures in banking book at moderate levels comparing to approved limits. An increase of limit and its usage which is visible on the chart resulted from the change of risk measurement method. It was already described above in more detailed way. The average usage of combined limit for Bank Treasury banking book amounted to 23 %.  In 2014 there was one “hard” VaR limit excess for the banking book. The excess resulted from the necessity of closing large risk position transfers from commercial books (from replicating portfolios) which was not possible to be closed within one day. The exposure was reduced below the limit the following day.

Commercial Banking Books Market Risk

As these books are materially hedged against changes in economic results, the main indication of the interest rate exposure of Commercial Banking books are Earnings at Risk “EaR” and NPV at Risk measurements (results of these measurements are presented later in the interest rate sensitivity analysis tables). The positions in Commercial Banking books are also subject to measurements of non-linear interest rate risk. Specifically, the Bank measures optionality risk (the potential losses on these positions given early-withdrawal of deposits and/or early re-payment of loans) and residual risk (the potential losses on these positions arising from non-standard rate-setting mechanisms which are not transferred to Bank Treasury responsible for interest rate risk management). The Bank is of the opinion that both of these risks are not material (potential losses typically represent a very small share of historical or projected results). FX position generated from banking books is transferred in whole to trading book and managed there.

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