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Liquidity risk

Liquidity risk is the risk of the Group companies losing the capacity to pay its liabilities on a timely basis due to an unfavorable structure of its assets and liabilities and cash flow mismatch. 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 Group’s clients’ 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.

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 assumed financial ratios with the liquidity risk level accepted by the Bank.

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

• maintaining an acceptable liquidity level based on an appropriate portfolio of liquid assets,
• stable funds being the key source of funding for the Bank’s assets;
• undertaking initiatives aimed at maintaining the liquidity risk level within the accepted risk profile;
• maintaining supervisory liquidity measures above the defined limits.

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

• contractual and actual liquidity gap method,
• deposit base stability and concentration check,
• surplus of liquid assets over unstable liabilities,
• structural limits;
• stress testing.

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 maintains the liquidity measures above the statutory minimum. 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 1 October 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 individual balance sheet dates.

^1/ Value as at 31 December 2016. The minimum supervisory requirement was 60% in the period from 1 October 2015 to 31 December 2015.

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.

The following tables present realigned liquidity gaps for the Bank.