New cookie policy

As part of our site, we use cookies to provide you with the highest level of service, including tailor-made solutions. Using the site without changing cookies settings means that they will be posted on your end device. You can change cookies settings at any time. More details in our "Cookie Policy".

 

Notes to the consolidated financial statements

Download note

46.3 Market risk

 

Market risk involves the risk of impairment of assets, increase in liabilities or change in the Group’s financial performance and capital as a result of sensitivity to fluctuation of market parameters (prices).  Market risk applies to both on- and off-balance sheet items. In the Group, market risk is divided into interest rate risk, currency risk and credit valuation adjustment (CVA) risk.

The primary objective of market risk management in the Bank and in the Group is to optimize the exposure management process and protect the financial performance at the same time.

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

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

In order to ensure high standards of operational risk management, compliant with best banking practices, once a year the Bank reviews the applicable policies and procedures.

The Bank has separate organizational units in charge of market risk control, monitoring and management.

Market risk reports present separately the interest rate risk related to the banking book, the trading book and the currency risk. Daily reports are used for operational market risk management purposes, while periodic reports are prepared for management purposes.

In the Bank’s opinion, as at 31 December 2016 and 31 December 2015 CVA risk was insignificant and regarded a few derivative transactions concluded with banks included in investment ratings.  The CVA-related capital requirement was PLN 12 thousand as at 31 December 2016 and PLN 49 thousand as at 31 December 2015.

As for market risk, in 2015 the Bank started to apply cash flow hedge accounting to WIBOR 3M-based housing loan portfolio using IRS contracts. In 2016 the Bank started to apply cash flow hedge accounting to WIBOR 6M-based housing loan portfolio using IRS contracts. As at 31 December 2016 and 31 December 2015 the par value of 3M WIBOR-based IRS transactions concluded for the purpose of hedge accounting was PLN 140 million, while as at 31 December 2016 the par value of 6M WIBOR-based IRS transactions concluded for the purpose of hedge accounting was PLN 75 million.

 

Interest rate risk

Interest rate risk results from the exposure of the Bank and the Group’s financial performance and equity to adverse changes in interest rates.

The interest rate risk arises from:

The Bank adapts its interest rate risk management to the type and scale of its business. Interest rate risk in the Bank may be related to the banking book and to the trading book.

The objective of interest rate risk management is to build a structure of assets and liabilities ensuring protection of the present value and the net interest income of the Bank for the banking book and to obtain financial benefits through transactions on interest rate instruments concluded on own account in the trading book, with the accepted interest rate risk level.

Interest rate risk management in the Bank is based on written policies and procedures, which define the methods of:

Interest rate risk related to the banking book is measured and monitored with the use of such risk measures as:

Interest rate risk related to the trading book is measured and monitored with the use of such risk measures as:

Additionally, the Bank performs stress tests involving sensitivity analysis and examining the effects of interest rate changes on the present value of risk-exposed items based on specified changes in the yield curve, and the effects of changes in interest rates on the net interest income of the Group. Under stress tests, the Bank measures its exposure using a variety of interest rate risk scenarios, among others assuming:

The Bank prepares the following cyclical reports on interest rate risk exposure related to the banking and trading book:

For the purpose of calculating the Banking Book risk measures, the current value of loans and deposits is determined based on reference rates arising from revaluation dates and liquidity adjustment excluding the commercial margin realized on each product. Additionally, stress tests for downward curve shift purposes are based on the assumption that interest on items sensitive to interest rate risk shall not drop below 0%.

The following tables present the interest rate risk level for the banking book (BPV and stress tests) as at 31 December 2016 and 31 December 2015.

 

BPV for the banking book 

Results of stress tests for +/- 200 b.p. for the banking book

 

The table below presents the change in the annual net interest income in the 12-month period from the end of the reporting period assuming a change in interest rates of +/- 100 b.p. and an unchanged balance as at the end of the reporting period. The analysis is based on the following assumptions:

Change in annual net interest income with the rate change by +/-100 b.p.

In 2016 and 2015, Bank’s trading activities regarding interest rates were limited to transactions on Polish treasury securities denominated in PLN. The Bank did not conclude speculative derivative transactions on its own behalf or derivative transactions with its customers. In 2016 the Bank held no open speculative interest rate positions at day closing.

The following table presents the interest rate risk level for the trading book (BPV) as at 31 December 2016 and 31 December 2015.

BPV for the trading book

Presented below are the Group’s assets, liabilities and off-balance sheet items classified based on the interest rate risk criterion – revaluation date for floating rate items or maturity for fixed rate items – as at 31 December 2016 and 31 December 2015.

In the above table, the Group has changed the presentation of overdue loans and advances, as well as impairment losses in the amount of PLN 108,431 thousand, presented under “Up to 1 month” item of “Loans and advances granted to customers” in the financial statements for the year ended 31 December 2015.  In these consolidated financial statements overdue loans and advances along with impairment losses are presented under “Non-interest bearing assets/liabilities”. 

Currency risk

Currency risk arises from the current and future performance of the Bank and the Capital Group as well as their equity being exposed to adverse changes in foreign exchange rates.

The objective of currency risk management is to protect the exchange gain and obtain financial benefits through transactions concluded in FX instruments on own account with the accepted risk level.

Currency risk management process involves its measurement through:

Value at Risk (VaR) is defined as the maximum loss which may be incurred by the Bank within a specified time horizon and with a specified probability. The Bank calculates VaR using the historical simulation method assuming a 99.2% confidentiality range and a 10-day position maintenance period.

Stress tests are complementary to VaR for the currency risk and they are performed to estimate the loss which may be incurred by the Bank in case of extremely adverse (stress) changes in foreign exchange rates.

The currency risk management process includes daily monitoring of:

VaR statistics for currency risk in 2016 and as at 31 December 2016 and 31 December 2015

 

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

The table below presents the values of currency positions for USD, EUR, GBP and CHF in 2016 and as at 31 December 2016 and 31 December 2015. The maximum, minimum and average amounts have been presented for absolute position values (in thousands).

In 2016 and 2015, the Bank’s currency risk was low due to an insignificant share of foreign currency assets and liabilities in the balance sheet total (below 2%). In the period from 31 December 2015 to February 2016, the value of total currency position exceeded 2% of equity.  In the period from February 2016 to 31 December 2016, the value of total currency position did not exceed 2% of equity. 

 

The following table presents assets, liabilities and off-balance sheet items of the Group as at 31 December 2016 and 31 December 2015 by currency.

Financial derivatives

Although its offering includes derivatives, the Group has not actively participated in the market of derivative instruments. The Group’s transactions include those on derivatives concluded for currency and interest rate risk management purposes regarding IRS, OIS and FRA transactions denominated in PLN and FX swaps. In 2016 and 2015 the Group did not conclude speculative derivatives on own account or derivative transactions with customers.

Derivatives are measured on a daily basis using the discounted cash flow model. The measurement is based on commonly available rates and market quotations. As the scale of derivative transactions which until June 2015 were entered into with banks with investment rating only and which have been settled mostly through KDPW CCP clearing house since July 2015 (IRS, OIS and FRA transactions denominated in PLN) , is inconsiderable, the Group’s measurement of derivatives does not take into account the counterparty credit risk or own credit risk, which the Group believes exert a marginal effect on measurement of its derivative transactions.

The Group prepares the following cyclical reports on interest rate risk exposure related to the banking and trading book:

Additionally, the Group performs stress tests involving sensitivity analysis and examining the effects of interest rate changes on the present value of risk-exposed items based on specified changes in the yield curve.