The MPS Banking Group operates in the domestic and international financial markets through many players. The most relevant market risk taking centers in terms of Trading Portfolio are the Parent Bank (Banca MPS) and MPS Capital Services. Biverbanca and Monte Paschi Ireland are not so important, even though the activity of Monte Paschi Ireland is now more oriented to coping with the Group’s funding and capital management requirements, rather than proprietary trading.
Each Bank operates on its own and manages trading positions on the basis of specific delegated authorities and operational limits, as established by the Board of Directors.
The other commercial banks of the Group (Banca Toscana, Banca Agricola Mantovana and MPS Banca Personale), in compliance with a specific Group regulation, are no longer entitled to take trading positions. Their activity is limited to trading securities on behalf of retail customers and securing a secondary market for their issued bonds.
The MPS Group Trading Portfolio consists of the aggregation of the portfolios managed by the risk taking centers. The aggregate is subject to monitoring and daily reporting by the Risk Management Unit of the Parent Bank on the basis of proprietary systems. Periodically, the management reporting flow on market risks is transmitted to the Risk Committee and to the Board of Directors of the Parent Bank as part of the Risk Management Report, through which the Top Management is informed about the overall MPS Group risk profile.
Each bank operates individually on its trading portfolio and simultaneously manages interest rates, equities, foreign exchange rates and credit positions in an integrated manner, within the operational delegated powers established by its own Board of Directors.
The new structure of the Parent Bank’s operational limits was enforced in 2008. Discretionary powers are expressed by level of delegation in terms of Value-at-Risk (VaR) and Monthly and Annual Stop Loss, in a different way with reference to HFT (Held-for-Trading) and AFS (Available-For-Sale) positions. The measurements of profitability components of AFS positions were adjusted for operating purposes so as to compare them with the components of HFT positions. In addition, the operational limits of issuer risk and bond concentration - which contemplate nominal ceilings diversified by kinds of counterparts and rating classes, in addition to and not in replacement of the VaR – have been re-designed.
The new structure of operational limits was inaugurated simultaneously with the production of the new Group Market Risk Management System, developed in house on an AlgorithmicsTM platform.
Market risks are mainly monitored for internal operating purposes in terms of Value-
at- Risk (VaR). As a result of the new system, the Group could finetune the Internal
Model of Market Risks, developed the Vega Risk model on optional positions and introduced the Credit Spread VaR for the first time. In particular, the idiosyncratic component of the specific risk implicit in the bonds and credit derivatives of the Trading Portfolio is currently covered with reference to the Credit Spread VaR.
The VaR for operating purposes is calculated independently by the Risk Management Unit of the Parent Bank. Calculations and market risk reporting are made on a daily basis. The VaR is calculated on the basis of a confidence interval of 99% with a holding period of one business day. The method used involves the historical simulation with daily full revaluation of all basic positions method, out of 500 historical records, with daily scrolling. The VaR calculated in this way takes account of all the effects of diversification between risk factors, portfolios and types of traded instruments. It is not necessary to assume any functional form in the distribution of the returns on assets, and also the correlations between different financial instruments are implicitly captured by the VaR model on the basis of the joint historical trend of risk factors.
The macro risk factors taken into account are: IR, EQ, FX, CS in relation to the following risk factors:
■ IR: interest rates on all relevant curves and respective volatility; ■ EQ: prices of equities, indices and baskets, and respective volatility; ■ FX: foreign exchange rates and respective volatility;
■ CS: credit spread.
The VaR is analysed in compliance with three main principles: (i) the organization hierarchy of the Portfolios, (ii) the hierarchy of the Financial Instruments, (iii) the hierarchy by Risk Factor and by mix of these. The following kinds of VaR can be identified with reference to the risk factors: Interest Rate VaR (IR VaR), Equity VaR (EQ VaR), Forex VaR (FX VaR) and Credit Spread VaR (CS VaR). The algebraic sum of these components determines the so-called Gross VaR (also Non Diversified VaR) and quantifies the relative benefit of diversification.
The new model produced metrics of Diversified VaR also at the MPS Group level, with the objective of taking account of all effects of diversification between the different banks in an integrated manner.
Moreover, scenario analyses are regularly conducted on interest rate risk, equity risk, forex risk and credit risk factors with diversified levels of “granularity”.
In particular, with reference to the Parent Bank’s Trading Portfolio, the aggregate monitored with integrated VaR methods is larger than the aggregate for regulatory purposes and incorporates some positions which are included in the Banking Book for reporting purposes, even though from the operating viewpoint
trading activities. These positions of a managerial nature - which are taken directly on the basis of instructions given by the Board of Directors or fall within the province of the Parent Bank’s Finance Area - are not qualified for addition to the Trading Portfolio for Regulatory Purposes (e.g. liquid securities, but classified as AFS from the accounting viewpoint). For the purpose of this section, such positions are monitored with methods typical of the risks of the Trading Portfolio.
The Parent Bank’s Business Areas entitled to take market risks are the Finance Area (FA) and the Treasury and Capital Management Area (TCMA).
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During Q1 2008, the trend of the MPS Group risks was remarkably affected by the trends of the financial markets, in addition to the structural change due to the introduction of the new Risk Management System, which influenced the average level and the variableness of the VaR metrics.
During the first quarter of 2008, the average VaR of the Group came to EUR 31.34 mln (about EUR 8 mln higher than the 2007 average, EUR 23.10 mln). This increase is mostly attributable to the management of the Credit Spread VaR component within the model. The VaR of the MPS Group ranged between a low of EUR 24.15 mln on 2 January 2008 and a high of EUR 36.58 mln on 8 February. The year-end VaR was EUR 35.85 mln.
0 5 10 15 20 25 30 35 40 45
31-Dec-06 31-Mar-07 30-Jun-07 30-Sep-07 31-Dec-07 31-Mar-08 MPS Group VaR
Average VaR 2007: € 23.10 mln Average VaR 2008: € 31.34 mln
MPS Group: Trading Book VaR
- VaR 99% 1 day diversified between banks in EUR million -
€ 35.85 mln 31.03.2008 € 24.97 mln 29.06.2007 € 20.38 mln 31.12.2006 € 22.78 mln 31.12.2007
gMPS Group – Trading Book VaR
VaR 99% 1 day
VaR (EUR mln) Date
Min 2008 24.15 02/01/2008
Max 2008 36.58 08/02/2008
The Parent Bank still represented the main source of market risks, with a 64% impact on the VaR at the end of Q1. MPS Capital Services accounted for roughly 30%, with the remaining 6% being absorbed by the other banks.
As regards the breakdown by risk factor as of 31.03.2008, equity risk factors (EQ VaR) accounted for about 45% of the Group’s VaR, followed by Credit Spread risk factors (CS VaR, 32%), forex risk factors (FX VaR, 13%) and interest rate risk factors (10%, IR VaR).
The trend of the VaR of the Parent Bank was similar to the Group’s trend. VaR Breakdown per Bank as of 31.03.2008
MPS Group MPS Capitall Services 30% Others 6% Banca MPS 64%
VaR Breakdown per Risk Factor s ofl 31.03.2008
MPS Group CS VaR 32% EQ VaR 45% FX VaR 13% IR VaR 10%
The average VaR of Banca MPS for the first quarter of 2008 came to EUR 24.14 mln, with a EUR 5 mln increase with respect to 2007 (EUR 19.29 mln). During the year, the Parent Bank’s VaR ranged between a low of EUR 19.46 mln on 14 March and a high of EUR 34.31 mln on 23 January. The year-end VaR was EUR 23.97 mln.
As regards the breakdown of VaR by risk factor, as of 31.03.2008 equity risk factors (EQ VaR) accounted for about 48% of the Parent Bank’s portfolio, followed by Credit Spread risk factors (27%), forex risk factors (FX VaR, 17%) and interest rate risk factors (8%, IR VaR).
0 5 10 15 20 25 30 35 40 45
31-Dec-06 31-Mar-07 30-Jun-07 30-Sep-07 31-Dec-07 31-Mar-08
MPS Bank: Trading Book VaR
- VaR 99% 1 day in EUR milion -
€ 19.35 mlnl 31.12.2007
€ 23.97 mln 31.03.2008
gMPS Bank – Trading Book VaR
VaR 99% 1 day
VaR (EUR mln) Date
Min 2008 19.46 14/03/2008
Max 2008 34.31 23/01/2008
Average 2008 24.14
VaR Breakdown per Risk Factor as of 31.03.2008
MPS Bank CS VaR 27% IR VaR 8% FX VaR 17% EQ VaR 48%