Qualitative information
Interest rate risk arises from changes in interest rates which have the following effects: • on net interest income and consequently on the profits of the bank (cash flow risk); • on the net present value of assets and liabilities, which has an impact on the present
value of future cash flows (fair value risk).
The control and management of interest rate risk is performed in a centralised manner by the Parent within the framework defined annually of a Financial Risks Policy which identifies measurement methods and models and limits or early warning thresholds concerning the sensitivity of the economic value of the Group.
As already reported in the Table 1 section, exposure to interest rate risk is measured by using gap analysis and sensitivity analysis models on all those financial instruments, assets and liabilities, not included in the trading book, in accordance with supervisory regulations. Sensitivity analysis of economic value (fair value risk) includes an estimate of the impacts resulting from the early repayment of mortgages and long term loans, regardless of whether early repayment options are contained in the contracts.
Sensitivity analysis of net interest income (cash flow risk) focuses on changes in profits over a time horizon of twelve months calculated in scenarios of parallel shocks on the reference interest rate curve. The estimate of the change in net interest income includes an estimate of the impact of reinvesting/refinancing maturing interest flows and the effect connected with the elasticity and viscosity of on demand items. The elasticities and delays in adjusting contracted interest rates are differentiated by commercial segment and customer class. Measurement, monitoring and reporting of interest rate risk exposure is performed at consolidated and individual level by the Risk Management Area of the Parent, which performs the following on a monthly basis:
• a sensitivity analysis designed to measure changes in the value of assets on the basis of parallel shocks on interest rate levels for all the time buckets of the curve;
• a simulation of the impact on net interest income for the current year by means of a static gap analysis (i.e. assuming that the positions remain constant during the period), considering different hypotheses for the elasticity of demand deposits.
Exposure of the Group to interest rate risk and measures designed to modify it are examined periodically by the UBI Finance Committee.
Quantitative information
The exposure of the Group to interest rate risk, measured in terms of core sensitivity measured on a scenario of a increase in interest rates of +100 bp, on items as at 31st December 2010 amounted to approximately -346,38 million euro (-227,93 million euro as at
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31st December 2009 and -290,51 million euro as at 30th June 2010), equal to 3,32% of the consolidated supervisory capital as at 31st December 2010, compared to a limit of -400 million euro set on that aggregate by the Group Financial Risks Policy for 2010 and an early warning threshold on that same indicator of -350 million euro.
The total level of exposure includes an estimate of the impact of the early repayment of loans (approximately +204 million euro in terms of sensitivity) and also the effect of structural ALM action taken using derivatives – even if subject to a capital requirement for market risk – with the objective of acting on the individual sensitivity of Group companies (approximately -94,29 million euro).
In detail, the core sensitivity originated by the Network Banks amounted to approximately -92 million euro, while approximately -38 million euro is attributable to the activities of the Product Companies. The Parent contributes a total of approximately -216 million euro, including -117 million euro from structural and sensitivity action relating to Group member companies. In fact UBI Banca operates as the sole counterparty for Group member companies in hedging derivatives contracts and, if necessary, it then closes the positions on the market on the basis of positioning with respect to the limits set by the Financial Risks Policy and expected scenarios for future interest rate trends.
Sensitivity analysis of net interest income focuses on changes in profits resulting from a parallel shock on the yield curve measured over a time period of 12 months. The overall determination of exposure contributes to the analysis of the viscosity of on-demand items. The exposure of the UBI Group to interest rate risk, estimated in terms of an impact on net interest income of an increase in reference interest rates of 100 bp, amounted to +68 million euro as at 31st December 2010.
PARALLEL SHIFT IN THE YIELD CURVE (amounts in millions of euro)
Scenario Currency Impact on economic value Impact on net interest income
+100 bp EUR -349,01 68,58 Other non significant currencies 2,63 -0,58 TOTAL + 100 bp -346,38 68,00 -100 bp EUR 426,97 -191,41 Other non significant currencies 1,61 -1,17 TOTAL – 100 bp 428,58 -192,58
NOTE. Non significant currencies are those which account for more than five percent of the assets or liabilities in the banking portfolio.
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RISK INDICATORS
Annual average
+200 bp
Impact on economic value/Tier I 8,79%
Impact on economic value/Supervisory capital 5,88%
-200 bp
Impact on economic value/Tier I -10,35%
Impact on economic value/Supervisory capital -6,92%
End of period
values
+200 bp
Impact on economic value/Tier I 8,93%
Impact on economic value/Supervisory capital 5,97%
-200 bp
Impact on economic value/Tier I -11,8%
Impact on economic value/Supervisory capital -7,9%
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