Market risk

2.1 Interest rate and price risk – regulatory trading book

Market risk management model for the Trading Book

The Montepaschi Group’s Regulatory Trading Portfolio (RTP), or Trading Book, is made up of all the Regulatory Trading Books managed by the Parent Bank (BMPS) and MPS Capital Services (MPSCS). The market risks relating to the Trading Portfolio of MP Ireland were closed in the first half of 2013. The portfolios of the other subsidiaries are immune to market risk since they only contain their own bonds held to service retail customers. Trading in derivatives, which are brokered on behalf of the same customers, also calls for risk to be centralised at, and managed by, MPSCS.

The market risks in the trading book of both the Parent Company and the other Group entities (which are relevant as independent market risk taking centres), are monitored in terms of Value-at-Risk (VaR) for operational purposes. The Group’s Finance and Liquidity Committee is responsible for directing and coordinating the overall process of managing the Group’s proprietary finance thereby ensuring that the management strategies of the various business units are consistent.

The Group's Trading Book is subject to daily monitoring and reporting by the Risk Management Area of the Parent Company on the basis of proprietary systems. VaR for management purposes is calculated separately from the operating units, using the internal risk measurement model implemented by the Risk Management function in keeping with international best practices. However, the Group uses the standardised methodology in the area of market risks solely for reporting purposes.

Operating limits to trading activities, which are established by the the Parent Company's Board of Directors, are expressed by level of delegated authority in terms of VaR, which is diversified by risk factors and portfolios as well as by monthly and annual stop losses. Furthermore, in addition to being included in VaR computations and in the

respective limits for the credit spread risk component, the trading book’s credit risk is also subject to specific

operating limits for issuer and bond concentration risk which specify maximum notional amounts by type of

guarantor and rating class.

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 of risk factors (lookback period) with daily scrolling. The VaR calculated in this manner takes account of all diversification effects of risk factors, portfolios and types of instruments traded. It is not necessary to assume, a priori, any functional form in the distribution of asset returns, and the correlations of different financial instruments are implicitly captured by the VaR model on the basis of the combined time trend of risk factors.

The management reporting flow on market risks is periodically transmitted to the Risk Committee, the CEO, the Chairman and the Board of Directors of the Parent Company in a Risk Management Report, which keeps Top Management and governing bodies up to date on the overall risk profile of the Group.

The macrocategories of risk factors covered by the Internal Market Risk Model are IR, EQ, FX and CS as described below:

- IR: interest rates on all relevant curves, inflation curves and relative volatilities;

- EQ: share prices, indexes, baskets and relative volatilities;

- FX: exchange rates and relative volatilities;

- CS: credit spread levels.

VaR (or diversified or net VaR) is calculated and broken down daily for internal management purposes, even with respect to other dimensions of analysis:

- organisational/management analysis of portfolios,

- analysis by financial instrument,

- analysis by risk family.

It is then possible to assess VaR along each combination of these dimensions in order to facilitate highly detailed analyses of events characterising the portfolios.

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With particular reference to risk factors, the following are identified: Interest Rate VaR (IR VaR), Equity VaR (EQ VaR), Forex VaR (FX VaR) and Credit Spread VaR (CS VaR). The algebraic sum of these items gives the so-called Gross VaR (or non-diversified VaR), which, when compared with diversified VaR, makes it possible to quantify the benefit

of diversifying risk factors resulting from holding portfolios on asset class and risk factor allocations which are not

perfectly correlated. This information can also be analysed along all the dimensions referenced above.

The model enables the production of diversified VaR metrics for the entire Group in order to get an integrated overview of all the effects of diversification that can be generated among the various banks on account of the specific joint positioning of the various business units.

Moreover, scenario and stress-test analyses are regularly conducted on various risk factors with different degrees of granularity across the entire tree structure of the Group's portfolios and for all categories of instruments analysed. Stress tests are used to assess the bank's capacity to absorb large potential losses in extreme though plausible market situations, so as to identify the measures necessary to reduce the risk profile and preserve assets.

Stress tests are developed on the basis of discretionary and trend-based scenarios. Trend-based scenarios are defined on the basis of previously-registered real situations of market disruption. Such scenarios are identified based on a timeframe in which risk factors were subjected to stress. No particular assumptions are required with regard to the correlation among risk factors: use is made of the trend-based data for the stress period identified.

Stress tests based upon discretionary scenarios assume extreme changes occurring to certain market parameters (interest rates, exchange rates, stock indices, credit spreads and volatility) and measure the corresponding impact on the value of portfolios, regardless of their actual occurrence in the past. Simple discretionary scenarios are currently being developed (variation of a single risk factor) as are multiple ones (variation of several risk factors simultaneously). Simple discretionary scenarios are calibrated to independently deal with one category of risk factors at a time, assuming shocks do not spread to the other factors. Multiple discretionary scenarios, on the other hand, aim to assess the impact of global shocks that simultaneously affect all types of risk factors.

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During the third quarter of 2013, market risk in the Group's Regulatory Trading Book in terms of VaR showed an upward trend marked by a significant level of volatility compared to previous months and stood at EUR 5.71 mln as at 30 September 2013. In absolute terms, the VaR was influenced by the IR of subsidiary, MPSCS, due to its trading activity, primarily in Long Futures and Interest Rate Future Options.

0 5 10 15 20 MPS Group MPS Capital Services MPS Bank

Current Year Group Average: 8.59 EUR/mln

MPS Group: Trading Book - VaR 99% 1 day in EUR/mln -

7.60 mln 31.12.2012 5.71 mln 30.09.2013 12.86 mln 30.06.2013 8.01 mln 31.03.2013 5 10 15 20 Gruppo Montepaschi MPS Capital Services Banca MPS

Media Annua di Gruppo EUR 8,59 mln

Gruppo Montepaschi: Portafoglio di Negoziazione di Vigilanza - VaR 99% 1 day in EUR/mln -

7,60 mln 31.12.2012 5,71 mln 30.09.2013 12,86 mln 30.06.2013 8,01 mln 31.03.2013

With regard to legal entities, the Group’s market risks continue to be concentrated on MPSCS and, to a smaller extent, the Parent Company.

MPSCS accounted for 65.6% and the Parent Company for 34.4% of overall risk.

A breakdown of VaR by risk factors as at 30 September 2013 shows that 35.2% of the Group’s portfolio was allocated to Credit Spread risk factors (CS VaR), 33.3% was absorbed by interest rate risk factors (IR VaR), 18.8% was absorbed by equity risk factors (EQ VaR) and the remaining 12.7% by foreign exchange risk (FX VaR).

During the first nine months of 2013, the Group’s VaR ranged between a low of EUR 5.44 mln recorded on 2 August 2013 and a high of EUR 14.56 mln on 11 July 2013. On average, Group VaR was EUR 8.59 mln. The end-September 2013 figure was EUR 5.71 mln.

MPS Group: Trading Book

VaR by Bank as at 30/09/2013

MPS Capital Services; 65.6% MPS Bank; 34.4%

MPS Group: Trading Book

VaR by Risk Factor as at 30/09/2013

CS VaR; 35.2% IR VaR; 33.3% EQ VaR; 18.8% FX VaR; 12.7%

g MPS Group: Trading Book VaR 99% 1 day in EUR/mln

VaR Date End of Period 5,71 30/09/2013

Min 5,44 02/08/2013

Max 14,56 11/07/2013

EXPLANATORY NOTES- Part E – Risks and hedging policies

Qualitative Information