Counterparty credit risk

In respect to the approaches used to assign internal capital to counterparty credit risk exposures, a modified Credit Risk+^[1] approach is used, taking into account counterparty risk parameters: PD, LGD & EAD.

[1] Statistical credit risk model, developed by Credit Suisse First Boston bank

Credit limits applicable to counterparty credit risk exposures are set within the exposure limits for banks and non-bank customers, which are parties to transactions.

For banks, exposure limits are set in accordance with the Instructions for setting and controlling exposure limits to foreign and Polish banks. With respect to foreign exchange transactions, currency swaps, currency options, deposit transactions, FRAs, interest rate swaps and principal-interest rate swaps (“currency and deposit transaction limit”) – partial limits are set, which mark the Bank’s maximum exposure to outstanding currency purchase/sale transactions (spot and forward), active (outstanding) term deposits in a foreign or Polish bank (without due interest) and other outstanding transactions mentioned above. Irrespective of the partial limits, settlement limits have been set, which are linked to the concentration of the counterparty’s obligations towards the Bank for the settlement date agreed on when they were concluded (“value date”).

The Group also concludes derivatives contracts upon orders from its customers. With respect to treasury transaction limits (including derivatives) concluded with non-bank customers, granting such limits to a customer is a pre-requisite^[1] for the Bank to perform a derivative transaction for the customer. The Bank requires a customer applying for a treasury limit to have credit capacity for its current exposure and additionally for the amount equal to a specific portion of the requested treasury limit, to have a risk rating and natural exposure, that is cash flows under sales and purchases in a convertible currency other than PLN.

[1] It is possible to conclude transaction under cash deposit, in case of lack of treasury transaction limit

As part of the policies for securing collateral, Credit Support Annexes to ISDA (International Swaps and Derivatives Association) agreements (CSAs) are broadly used.

The Bank concludes derivative transactions with other players on the inter-bank market, with which it has signed ISDA agreements (International Swaps and Derivatives Agreements). According to the current market practices, CSAs are signed along with ISDA agreements to regulate the matters related to the collateralization of exposures under concluded derivative transactions. CSAs are bilateral agreements and establish mutual rights for a party whose valuation of derivatives is negative on a given day to request a security deposit.

The position under concluded derivative transactions with customers other than banks is immediately referred for management by inter-bank market dealers and is hedged by an inter-bank market transaction.

The rules for establishing credit impairment for credit risk are presented in the section entitled “Financial risk management – Credit risk” of the Yearly Financial Report.

The Group does not identify its wrong-way risk exposures as material.

The Bank is a party to a loan agreement with the European Investment Bank („Finance Contract”). The loan amount is EUR 100 million.

At the end of 2016, the loan is secured by State Treasury bonds WZ0118 with a nominal value of PLN 623 million.

According to the provisions of the Finance Contract, in the event of a downgrade in the Bank’s credit rating (Fitch, Standard & Poor’s), it will be necessary to establish additional pledges in the form and amounts to the satisfaction of EIB.

To determine the amount of its credit exposure under derivative instruments, the Group applies the Mark-to-market method laid down in Article 274 of CRR.

Amounts of counterparty credit risk by approach is presented in the below table.

Counterparty credit risk by approach (PLN thous.)

Scrollbar is
below the table

download xls

	Notional	Replacement cost/current market value	Potential future credit exposure	EEPE (Effective Expected Exposure Profile)	Multiplier	EAD post CRM (EAD post Credit Risk Mitigation)	RWAs
Mark to market		372 261			0	478 523	222 282

Risk of credit valuation adjustment (PLN thous.)

Scrollbar is
below the table

download xls

	Exposure value	RWAs
Total portfolios subject to the advanced method	0	0
(i) VaR component (including the 3x multiplier)		0
(ii) SVaR component (including the 3x multiplier)		0
All portfolios subject to the standardized method	556 060	178 130
based on the original exposure method	0	0
Total subject to the CVA capital charge	556 060	178 130