Interest rate risk results from the exposure of the Group’s financial performance and equity to adverse changes in interest rates.
The interest rate risk arises from:
mismatch of revaluation dates: the risk is expressed as a threat to the Bank's revenue, mostly interest income, in case of unfavorable changes of market interest rates or significant changes of the balance sheet revaluation structure resulting in changes in the interest gain/loss,
basis risk arising from imperfect correlation between interest rates on products that generate interest income and expense and have the same revaluation dates,
yield curve risk where the ratio between the interest rates concerning different periods but the same index or market changes,
client option risk arising when clients change the amount and timeline of cash flows on assets, liabilities and off-balance sheet items according to their rights arising from loan or deposit agreements, without incurring any additional costs.
The Group’s interest rate 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.
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:
risk measure calculation (risk measurement),
risk exposure limiting – determining the acceptable risk level,
monitoring items and changes in each book, portfolio and the limit use levels,
risk exposure reporting,
hedging exposures against interest rate risk.
In order to ensure high standards of interest rate risk management, compliant with best banking practices, in 2015 the Bank reviewed the applicable policies and procedures.
Interest rate risk related to the banking book is measured and monitored with the use of such risk measures as:
BPV (Basis Point Value) denoting interest rate risk expressed as a cash value, related to maintaining of a given position when interest rates change by one basis point,
NII (Net Interest Income) – a change in the net interest income representing the difference between interest income and expense with an interest rate change at a specified level,
BPV gap value in each revaluation range,
Duration: a measure of interest rate risk interpreted as the average duration of an instrument or portfolio,
early repayment of loans and withdrawal of deposits ratios for each type of products and entities.
Interest rate risk related to the Trading Book is measured and monitored with the use of such risk measures as:
BPV and BPV gap value in each revaluation range,
Value at Risk (VaR).
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 individual balance sheet dates.
BPV in the banking book (PLN ‘000)
Results of stress tests for +/- 200 b.p. (PLN ‘000)
Change in the present value of the banking book
200 b.p. down
200 b.p. up
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:
for interest rate decrease: interest rates on loans shall not exceed the interest rate cap determined in applicable laws and interest rates on deposits (both term and current accounts) shall not drop below 0%;
for interest rate increase: interest on interest-free current accounts shall not increase.
Change in the annual net interest income (in PLN ‘000)
200 b.p. down
200 b.p. up
Lower fluctuations in the net interest income in the period of 12 months following 31 December 2015 in case of a decrease in interest rates as at 31 December 2015 result from amended principles applicable as of 1 January 2016 determining maximum interest rate and linking it to the NBP reference rate increased by the margin and multiplied by 2. By 31 December 2015 the interest rate cap on credit exposures was not to exceed the four-time Lombard rate of the NBP.
In 2014 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 clients.
The following table presents BPV for the trading book as at individual balance sheet dates.