The MPS Group Trading Portfolio – Trading Book – is made up of all Supervision Trading Portfolios managed by the Parent Bank (BMPS), by MPS Capital Services (MPSCS) and for the
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remaining part by Biverbanca and by Montepaschi Ireland, the Irish subsidiary. The recent joining the Group of Banca Antonveneta had no significant impact on this sector since the adopted management approach centralized all market risks with BMPS and MPSCS. The portfolios of the other subsidiaries with a commercial mission are substantially closed to market risk excluding any remaining bonds issued by the same, temporarily held in support of the operations with retail customers. Also for the operating activity in derivatives, traded in favor of the same customers, risks are centralized and monitored by MPSCS.
Market risks are monitored for management purposes in terms of Value-at-Risk (VaR), both in relation to the Parent Bank and the other Group companies which are relevant as independent risk- taking centers. Each bank operates with its own trading portfolio while meanwhile managing accounts on interest rate, on shares, on exchange rates and on loans, in an integrated way, within the operational limits fixed by the Board of Directors. In particular, with reference to the Trading Portfolio of the Parent Bank the aggregate monitored with VaR-integrated methods is wider than the aggregate for supervisory purposes since it also includes some accounts of the Banking Portfolios which, from the management point of view, are subject to the operating responsibility of Business Areas involved in trading. They are managerial accounts directly undertaken on the basis of provisions of the Board of Directors or accounts which may be linked, from a management point of view, to the Finance Area of the Parent Bank and not qualified to be included in the Supervision Trading Portfolio (such as AFS shares and bonds).
The MPS Group Trading Portfolio is subject to daily monitoring and reporting by the Risk Management Unit of the Parent Bank on the basis of proprietary systems. The VaR for management purposes is calculated independently of the operating units, using the internal model of market risk measurement implemented by the Risk Management Unit, in line with the international best practices.
Operational limits to trading activities, which are set by the Board of Directors, are expressed by level of delegated authority in terms of VaR, which is diversified by risk factors and portfolios and monthly and yearly Stop Loss. In particular, the credit risk of the trading book is included in VaR measurements and in the respective limits for the credit spread risk part and is also subject to specific operating issuing and bond concentration risk limits providing for notional ceilings by kinds of counterparts and rating categories.
VaR is calculated with a 99% confidence interval and a holding period of 1 business day. The Group adopts the method of historical simulation with daily full revaluation of all basic positions, out of 500 historical entries (about 2 business years) with daily scrolling. The VaR calculated in this manner takes account of all diversification effects of risk factors, portfolios and kind of instruments traded. It is not necessary to assume, a priori, any functional form in the distribution of the assets returns, and the correlations of different financial instruments are implicitly captured by the VaR model on the basis of the time trend of risk factors. The management reporting flow on market risks is periodically transmitted to the Risk Committee and to the Board of Directors of the Parent Bank with the Risk Management Report, which informs the Top Management about the overall risk profile of the MPS Group.
The macro-categories of risk factors within the Market Risk Internal Model are IR, EQ, FX, CS as follows:
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EQ: share prices, indexes and baskets and relative volatility; FX: exchange rates and relative volatility;
CS: credit spread levels.
The VaR (or diversified VaR, or Net VaR, i.e.net of all diversification effects) is anyway daily calculated as single and integrated measurement through at least three main analysis scales:
organizational/portfolio management by Financial Instruments
by Risk Family
VaR may also be calculated by any combination of these scales to facilitate very detailed analysis of events involving portfolios.
In particular, risk factors may be identified as follows: Interest Rate VaR (IR VaR), Equity VaR (EQ VaR), Forex VaR (FX VaR) and the Credit Spread VaR (CS VaR). The algebraic sum of these components determines the so-called Gross VaR (o undiversified VaR) which if compared with diversified VaR allows to quantify the diversification benefit among risk factors resulting from holding portfolios allocated to asset class and risk factors which do not perfectly match. Also this information can be analyzed using the above-mentioned scales.
The new model adopted starting from the beginning of 2008 therefore produced diversified VaR metrics substantially for the whole MONTEPASCHI Group so that all diversification effects can be evaluated which may result among several banks because of the specific positioning of the different business units.
Finally backdrop analysis on various risk factors are regularly carried out with diversified levels of granularity.
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In the first six months of 2008, trends of the MPS Group risks followed own financial market trends and their increased volatility and were also affected by the change in model due to the introduction of the new Risk Management System, which affected both the average level and the variability of VaR metrics as already underlined also in the March quarterly report.
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After 31 March 2008, VaR kept on increasing to reach the year’s maximum amount on April 10 (EUR 40.35mln) and then gradually decreased after the containment of exposures in the second part of the half-year period, above all in share section. As of the end of June, Group risks amounted to EUR 25,78 mln back in line with those as of December and June 2007.
The Group VaR is strongly affected by risk dynamics concerning Banca MPS accounts even if the MPS Capital Service incidence kept growing in the course of 2008. As of 30 June 2008 the Parent Bank incidence is still 57% of the overall risk, MPS Capital Service 40%, whereas the remaining 3% is absorbed by other banks.
0 5 10 15 20 25 30 35 40 31-De c-06 31-J an-07 28-Feb- 07 31-Mar -07 30-A pr-0 7 31-May -07 30-Jun -07 31-J ul-07 31-A ug-0 7 30-S ep-0 7 31-Oc t-07 30-No v-07 31-D ec-07 31-J an-0 8 29-Feb- 08 31-Mar -08 30-Ap r-08 31-May -08 30-Jun -08 MPS Group MPS Bank Average Year 2008: € 30.92 mln Average Year 2007: € 23.10 mln
MPS Group: Trading Book VaR
- VaR 99% 1 day in EUR/mln -
35.85 mln 31.03.2008 MAX VaR: 40.35 mln 10.04.2008 24.97 mln 29.06.2007 25.78 mln 30.06.2008 22.78 mln 31.12.2007
VaR Breakdown per Bank as of 30.06.2008
MPS Group: Trading Book VaR
MPS Capital Services 40% Others 3% Banca MPS 57%
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During the first half of 2008, market risks measured as VaR fluctuated within the following value range: a low of EUR 22,90mln and a high of EUR 40,35mln registered on 10 April 2008. The average of the first six months of 2008 amounted to EUR 30,92mln. At the end of June it was EUR 25,78 mln.
In terms of risk factors, as of 30 June 2008, main risk sources in the Trading Portfolio are the VaR CS and the VaR EQ representing together more than 70% of the overall risk. The persisting international financial crisis, which started past summer and continued in the first half year of 2008, was one of the main cause of the growing incidence of these two risk factors.
Hereunder impacts in terms of fair-value adjustments of the MPS Group Trading Portfolio follow net of the AFS securities components by the different kind of adjustments of the underlying risk factors.
g MPS Group: Trading Book
VaR 99% 1 day in €/mln VaR Date End of period 25.78 30/06/2008 Min 22.90 05/06/2008 Max 40.35 10/04/2008 Average 30.92
VaR Breakdown per Risk Factor as of 30.06.2008
MPS Group: Trading Book VaR
CS VaR 39% IR VaR 18% FX VaR 9% EQ VaR 34%
g MPS Group: Trading Book
EUR/mln
Risk Family Scenario Fair Value Impact
Interest Rate +100bp all Interest Rate Curves -26.54
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With reference to the Parent Bank the diversified VaR by risk factors and portfolios grew rapidly until the end of March 2008 and then dropped again to values much lower than the average in May and in June.
In terms of VaR composition by risk factors as at 30 June 2008, 36% of Banca MPS Portfolio is allocated to Credit Spread risk factors (CS VaR), 35% to equity risk factor (EQ VaR), 18% is absorbed by interest rate risk and for the remaining 11% by forex risk (FX VaR)
g MPS Group: Trading Book
Risk Family Scenario Fair Value Impact
Equity +1% all Equity Prices (stocks, indices, basket) 0.91
Equity +1% all Equity Volatilities -3.82
g MPS Group: Trading Book
EUR/mln
Risk Family Scenario Fair Value Impact
Forex +1% all FX Rates -0.11
Forex +1% all FX Volatilities -3.73
VaR Breakdown per Risk Factor as of 30.06.2008
MPS Bank: Trading Book
CS VaR 36% IR VaR 18% FX VaR 11% EQ VaR 35%
g MPS Bank: Trading Book
VaR 99% 1 day in €/mln VaR Date End of period 16.00 30/06/2008 Min 14.88 24/06/2008 Max 34.31 23/01/2008 Average 22.50
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The average VaR of the first half of 2008 of Banca MPS came to EUR 22,50 mln with a maximum amount of EUR 34,31 mln and a minimum amount of EUR 14,88. End-of-period (as of 30 June 2008) total amounted to EUR 16,00 mln .
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