Main risks
Our group has always distinguished itself for its prudent and selective approach to risk management, its excellent asset quality and high degree of capitalisation, always above the minimum requirements and among the highest of Italian banks
In order to manage the implicit degree of uncertainty that characterises banking and financial activities, we have adopted a series of organisational rules, procedures and structures with the goal of:
- safeguarding the integrity of the bank’s assets, for the direct benefit of shareholders, customers and employees;
- supporting the formulation and implementation of company strategies;
- promoting the sustainable and long-lasting growth of the bank and the return for shareholders;
- structuring effective and reliable company processes and procedures.
For more information, see the Governance section.
Also during Covid emergency, we have demonstrated the strength of our risk management approach, with a swift response that has enabled us to protect the health and safety of our employees, at the same time guaranteeing business continuity for customers.
We identified the relevant risks to be subject to specific assessment and monitoring. The main ones are outlined below, with the oversight actions implemented to manage, mitigate and control them. We report that Mediobanca, owing to the sector in which it operates, does not consider the environmental risks significant.
Learn more about the theme of cybersecurity and the management of cyber risk.
Credit risk is defined as the risk of incurring losses on loans granted as a result of the borrower’s inability to repay them.
We utilize different credit risk management techniques in order to reflect the individual business characteristics of each product company.
While adopting the standardized methodology defined by the supervisory provisions in force for calculating regulatory capital, the Group also has internal rating models for the following customer segments:
- Banks, Insurances, Large Corporates and Holding Companies (customers mostly targeted by Mediobanca S.p.A.);
- Mid-corporate and Small Businesses (customers mostly targeted by the leasing companies);
- Private individuals (targeted by Compass for consumer credit and CheBanca! for mortgage lending).
Counterparty risk is defined as the risk of the counterparty in a transaction involving given financial instruments defaulting before the transaction itself is settled.
Counterparty risk is measured in terms of expected potential market value, thus doing away with the need to set arbitrary weightings for each type of fund employed.
Market risk is defined as the risk generated by operations on markets involving financial instruments which are held as part of the regulatory trading book and involving foreign currencies and/or commodities.
Exposure to market risk on the trading book, which is faced virtually entirely by Mediobanca S.p.A., is measured on a daily basis by calculating two main indicators:
- sensitivity (the so-called “Greeks”) to minor changes in the principal risk factors (such as interest rates, share prices, exchange rates, credit spreads, inflation and volatility);
- value-at-risk calculated using historical scenarios which are updated daily, assuming a disposal period of a single trading day and a confidence level of 99%.
Operating risk is the risk of incurring losses as a result of the inadequacy or malfunctioning of procedures, staff and IT systems, human error or external events.
Operational risks are managed, in Mediobanca and the main Group companies, by a specific Operational risk management team within the Risk Management unit.
Furthermore, with regard to potential losses due to disruption to operations or systems being unavailable, the Mediobanca group has set up a centralized IT governance unit and is committed to continually improving its business continuity and disaster recovery plans, to ensure that activities can continue and losses are limited in the event of major disruption.
The Bank’s leverage is the ratio between the entity’s capital divided by its overall exposure expressed as a percentage.
The risk of particularly high indebtedness levels relative to equity is monitored by the Group on a regular basis as part of the quarterly requirements stipulated by Circular 285 (COREP reporting).
The leverage ratio is one of the metrics which the Bank has identified in the Risk Appetite Framework (RAF), with specific alert and limit levels, for the purpose of quantifying its propensity to risk.
The Mediobanca Group monitors and governs interest rate risk by measuring the sensitivity of net interest rate income and economic value.
NII sensitivity analysis measures the impact of parallel and instantaneous shocks to the interest rate curve on current earnings. In this analysis, the asset stocks are kept constant, while the items falling due are renewed with others having the same financial characteristics, over a twelve-month time horizon.
Sensitivity analysis for economic value measures the impact on the current value of future flows in the worst case scenario of those contemplated in the EBA Guidelines.
This is defined as the risk that the Bank will not be able to meet its own payment commitments through being unable to raise the requisite funds (“funding liquidity risk”) or through limits on asset disposals (“market liquidity risk”).
Specifically, monitoring operating liquidity is intended to ensure that the mismatch between cash inflows and outflows, expected and not expected, remains sustainable in the short term. In this connection the metric adopted is the ratio between counterbalancing capacity (defined principally as the availability post-haircut of bonds and receivables eligible for refinancing with the ECB) and the cumulative net cash outflows, both of which calculated according to the ongoing concern and the specific and systemic stress scenarios.
Monitoring structural liquidity, on the other hand, is intended to ensure that the structure has an adequate financial balance for maturities of more than twelve months. The operating methods adopted involve analysing the maturity profiles for both assets and liabilities over the medium and long term checking that inflows cover 100% of outflows for maturities of more than one year, reduced to 90% of outflows for maturities of more than five years.
In addition to this monitoring, the Liquidity & ALM and Risk Management units carry out weekly stress tests assuming extraordinary factors such as:
- Drawdowns on committed lines granted to customers;
- Reductions in the debt security funding or unsecured funding channels;
- Renewal of only part of the retail funding expiring;
- Anticipation and full realization of lending volumes in the pipeline.
Strategic risk is defined as the risk deriving from changes in profits compared to the volatility in volumes or changes in customer behaviour (business risk), and the risk of reductions in profits or capital deriving from disruption to business as a result of adopting new strategic choices, wrong management decisions or inadequate execution of decisions taken (pure strategic risk).
We have instituted regular monitoring activity regarding the state of progress in implementing the objectives set in the strategic plan in force at the time, and the earnings/financial results set in the budget, in order to provide indications regarding the appropriate corrective measures to be taken.
- Concentration risk: the risk deriving from a concentration of exposures to individual counterparties or groups of related counterparties; to counterparties operating in the same economic sector or which operate in the same business or belong to the same geographical area.
- Compliance risk: the risk of incurring legal or administrative penalties, significant financial losses or damages to the Bank’s reputation as a result of breaches of external laws and regulations or self-imposed regulations.
- Reputational risk: the current and future risk of reductions in profits or capital deriving from a negative perception of the Bank’s image by customers, counterparties, shareholders, investors or regulatory authorities.