5. Earnings at Risk (EAR) Concept
EaR measurements are used for the all banking book positions which are accrual-accounted and for the positions which are market valuated as a complement to the sensitivity to interest rate risk. Two approaches are used, as detailed below; both approaches cover a 1-year time horizon and provide the possible changes in accrual results given shock changes of +/-1% and ramped changes of +/- 2%. The two approaches taken are as follows:
- A “basic” approach is used for positions comprised of term transactions and/or small volumes of demand positions. This approach assumes that any future funding gaps or surpluses will be financed or invested with a tenor of one month.
- An “advanced” approach is used for material volumes of demand positions. At present it is the Bank’s PLN demand deposit base and its internal investment into Bank Treasure banking books. The measurements simulate the changes in the Bank’s results coming from the combination of:
- Current (internal) investment of these funds and replenishment of these investments as previous investments mature and/or new volumes are attracted. Future (re-) investments are predicted based on continued use of current investment rules.
- An assessment of the relation between changes in market rates and the rates that the Bank must pay its clients in order to maintain volumes.