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Notes to the consolidated financial statements

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46.2 Liquidity risk

 

Liquidity risk is the risk of the Group’s losing the capacity to pay its liabilities on a timely basis due to an unfavorable structure of its assets and liabilities. Liquidity risk may arise from a cash flow mismatch, sudden withdrawal of deposits, concentration of funding sources and the credit portfolio, inadequate level of liquid assets, limited liquidity of assets, the Bank’s customers’ default on their obligations or other unexpected developments in the financial market.

The Group’s liquidity risk is managed at the level of the Bank as the liquidity risk assumed by the subsidiaries is immaterial considering the nature of their business.

Maintaining an appropriate liquidity level requires determining an optimal balance between liquidity needs of the Bank, i.e. its demand for cash and the amount and cost of maintaining liquidity provisions which allow for generating cash surpluses. The objective of liquidity risk management is to balance proceeds and payments of funds under on- and off-balance sheet transactions in order to ensure cost-effective funding sources, generating of cash surpluses and their appropriate use. The Bank builds the structure of its assets and liabilities so as to ensure the achievement of defined financial ratios with the liquidity risk level acceptable for the Bank and in accordance with the risk appetite defined by the Supervisory Board and the liquidity risk tolerance specified by the Management Board.

The following principles have been adopted for the liquidity risk management process:

Liquidity risk management is based on written policies and procedures defining the methods of identification, measurement, monitoring, limiting and reporting of liquidity risk. The regulations determine also the scope of competencies assigned to each unit of the Bank in the liquidity risk management process.

The Bank’s Supervisory Board supervises compliance of the liquidity risk management policy with the financial strategy and plan and defines the liquidity risk appetite. The Management Board is responsible for organizing effective liquidity management and monitoring its efficiency. It also manages liquidity and determines tolerance for liquidity risk based on the assumed liquidity risk appetite and approves types and amounts of internal liquidity limits and thresholds for individual liquidity measures. The Asset-Liability Committee (ALCO) directly supervises the liquidity risk. It is also responsible for the Bank’s financing strategy, it approves the types and amounts of internal liquidity limit and thresholds, monitors supervisory liquidity measures on a daily basis, determines transfer rate adjustments in the internal fund system, directly supervises liquidity if an emergency plan is put into action. Risk and Capital Management Department is responsible for liquidity risk assessment and reporting. Liquidity risk management operations are managed in the Treasury Department for short-term liquidity and in the Controlling Department for medium-term and long-term liquidity.

In order to ensure high standards of liquidity risk management, compliant with best banking practices, at least once a year the Bank reviews and verifies the policies and procedures, including internal liquidity limits.

In order to determine the liquidity risk level, the Bank uses a number of measurement and assessment methods, such as:

Liquidity risk motoring includes a number of stress tests. On a daily basis the Bank carries out standard stress tests for two periods (7 days and 1 month) and for three different scenarios (“bank run”, “market crisis” and “mixed scenario”), analyzed in the “severe” and "less severe" variants.

The following table presents the results of standard daily stress tests performed as at 31 December 2016 and 31 December 2015 and compliant with the requirements for credit institutions imposed by the amended Recommendation P.

The “bank run” scenario is based on the loss of confidence in the Bank among market participants, which results in an outflow of customer funds including an increased amount of unsecured products not renewed by customers and an outflow of a portion of funds which contractual maturity falls outside the time horizon of the scenario. The amount of outflowing customer funds depends on the customer type, type of funds and type of product. The Bank assumes, for example, that funds deposited online and products with non-standard interest rates are more likely to be withdrawn.

The “market crisis” scenario assumes limited available financing on wholesale markets and a drop in financial assets combined with an increased demand for cash among customers using contingent commitments of the Bank. Additionally, the scenario assumes FX restrictions, stress conditions for many currencies and limited availability of financing in the banking sector, which translates into outflowing funds of customers, who are unable to obtain credit financing in the sector.

“Mixed scenario” combines both scenarios in question. It assumes in particular the occurrence of the “market crisis" (systemic crisis) and extraordinarily difficult situation of the Bank accompanied by an increased outflow of customer funds.

Standard stress tests are complemented by sensitivity analyses, assessing the impact of changes in the assumptions on each scenario. Standard tests are also supplemented by historical stress tests, which enable monitoring risks in various timeframes (from a few days to one year) and in various stress levels. Additionally, the Group carries out quarterly reverse stress tests, which consist in determining significant adverse outcomes and then determining the related reasons and effects. At least annually the Bank carries out comprehensive internal stress tests to assess how the stressors will affect the financial condition, liquidity and equity in order to plan possible action steps mitigating the negative impact of the crisis scenarios.

Stress tests carried out in the Bank are applied to determine the Bank's demand for liquid assets in current operations and in financial plans, where the minimum amount of liquid assets is determined in line with projections based on stress test outcomes. Stress test results provide additional information on the Bank’s sensitivity to analyzed stressors and are used in the process of determining liquidity limits.

The Bank has also developed a set of Early Warning Signals to identify increased risks or weaknesses in the liquidity position or a potential increase in the demand for liquidity. Early Warning Signals identify adverse trends, enable risk assessment and identification of possible risk mitigants. Consequently, not only stress tests results but also changes in risks trigger application of contingency funding plans to mitigate liquidity risk.

With a view to mitigating the liquidity risk, the Bank uses liquidity limits and thresholds for selected measures, including liquidity ratios or the mismatch between accumulated actual cash flows generated by assets and liabilities in individual time ranges.

Pursuant to Resolution No. 386/2008 of the Polish Financial Supervision Authority of 17 December 2008 on liquidity requirements for banks (as amended), the Bank monitors and complies with requirements concerning supervisory liquidity ratios. In 2016, the Bank fulfilled the requirements concerning the minimum supervisory liquidity ratios as specified in the aforesaid Resolution.

Since October 2015 the Bank has been obliged to maintain minimum liquidity coverage ratio ("LCR”) under Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No. 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for credit institutions and in conjunction with Regulation of the European Parliament and of the Council (EU) no. 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending the Regulation (EU) No. 648/2012. Minimum LCR applicable to the Bank has been 60% as from 2015, 70% - from 1 January 2016, 80% - from 1 January 2017 and 100% from 1 January 2018.

As at 31 December 2016, liquidity ratios remained within the valid risk limits.  The following table presents supervisory liquidity measures as at 31 December 2016 and 31 December 2015.

* The minimum supervisory requirement was 60% in the period from 1 October 2015 to 31 December 2015.

The Bank prepares the following cyclical reports on its exposure to liquidity risk:

The Bank has defined contingency plans to address sudden changes in the deposit base. An analysis of immediately available funding sources shows that in case of a sudden liquidity drop, the Bank is able to obtain sufficient funds without the need to implement its contingency plans. As at 31 December 2016, the Bank’s portfolio of liquid assets was sufficient to deal with an actual crisis.

Excess liquidity defined in accordance with the amended Recommendation P:

Realigned liquidity gaps

The following table presents realigned liquidity gaps for the Group as at 31 December 2016 and 31 December 2015.

 

Group’s financial assets and liabilities by maturity based on contractual non-discounted payments

 

 

 

 

Acquisition of funds

To ensure liquidity sufficient to ensure secure growth, the Bank acquires funds through:

Moreover, depending on the market situation and the demand for deposit products, the Bank may consider issuing short-term bonds.

The Bank also secures long-term financing to improve long-term liquidity through:

To ensure optimal alignment of the term structure of the sources of financing with the structure of assets held, the Bank takes into account liquidity measures specified by supervisory bodies and internal liquidity limits when taking decisions on fund acquisition.

The sources of financing are structured to match the lending needs. The following table presents the sources of financing as at 31 December 2016 and 31 December 2015.

* capital amount excluding interest accrued, commissions settled with the ESP method, other liabilities and provisions, which have been presented under “Other liabilities”