Interest rate risk is defined as a risk of adverse effect of market interest rates on the current result or net current value of the Bank’s equity. Due to its policy of limiting risks in the trading book, the Bank has attached special importance to specific aspects of interest rate risk related to the banking book, such as:
- risk of repricing gap;
- basis risk;
- yield curve risk;
- customer option risk.
In addition, for interest rate risk, the Bank pays special attention to the modelling of products with undefined maturity and the amount of interest determined by the Bank (e.g. for current deposits), and the effect of non-interest items on risk (e.g., equity, fixed assets).
The purpose of interest rate risk management is to limit potential losses due to changes in market interest rates to an acceptable level by adequate composition of balance sheet and off-balance sheet items.
Interest rate risk is measured and mitigated by monitoring the volatility of net interest income (NII) and changes in economic value of equity (EVE) of the Bank. In addition to NII and EVE metrics, the Bank uses BPV, VaR, repricing gap and stress tests to measure interest rate risk.
The Bank conducts scenario analysis which covers, among other things, the effect of specific interest rate changes on the future net interest income and economic value of equity. Under these scenarios, it maintains internal limits whose use is measured daily. Changes of the economic value of equity metric with the scenarios defined by EBA, and also with parallel shift of interest rate curves by +/- 200 basis points at the end of 2019 and at the end of 2018 for Alior Bank’s Capital Group are presented below (thousands of zloty).
Scenario | Change of economic value of equity 31/12/2019 | Change of economic value of equity 31/12/2018 | |||
---|---|---|---|---|---|
Scenario | Parallel up shift of interest rates (EBA) | Change of economic value of equity 31/12/2019 | 117,133 | Change of economic value of equity 31/12/2018 | 199,744 |
Scenario | Parallel down shift of interest rates (EBA) | Change of economic value of equity 31/12/2019 | -157,107 | Change of economic value of equity 31/12/2018 | -210,417 |
Scenario | Steeper interest rates curve (EBA) | Change of economic value of equity 31/12/2019 | -49,385 | Change of economic value of equity 31/12/2018 | 9,183 |
Scenario | Flatter interest rates curve (EBA) | Change of economic value of equity 31/12/2019 | 50,185 | Change of economic value of equity 31/12/2018 | 39,414 |
Scenario | Increase in short-term interest rates (EBA) | Change of economic value of equity 31/12/2019 | 84,891 | Change of economic value of equity 31/12/2018 | 101,249 |
Scenario | Decrease in short-term interest rates (EBA) | Change of economic value of equity 31/12/2019 | -130,323 | Change of economic value of equity 31/12/2018 | -147,951 |
Scenario | Parallel up shift of curves by 200 bp | Change of economic value of equity 31/12/2019 | 108,317 | Change of economic value of equity 31/12/2018 | 179,244 |
Scenario | Parallel down shift of curves by 200 bp | Change of economic value of equity 31/12/2019 | -136,170 | Change of economic value of equity 31/12/2018 | -208,436 |
Scenario | Worst scenario | Change of economic value of equity 31/12/2019 | -157,107 | Change of economic value of equity 31/12/2018 | -210,417 |
Scenario | Worst scenario as % Tier 1 | Change of economic value of equity 31/12/2019 | 2,4% | Change of economic value of equity 31/12/2018 | 3,2% |
are presented below (thousands of zloty).
Change of net interest income within 1 year with change of interest rates by 100 bp (negative scenario) as at the end of 2019 and as at the end of 2018 for Alior Bank’s Capital Group is presented below:
31/12/2019 | 31/12/2018 | ||||
---|---|---|---|---|---|
NII | 31/12/2019 | 6,86% | 31/12/2018 | 5,98% |