Market risk encompasses current and prospective impact on earnings or capital, arising from changes in the value of the Group’s portfolio due to adverse market movement. The framework of market risk management and its control are defined on a centralized basis with the use of the same concepts and metrics which are used in all the entities of the BCP Group.
The main measure used by the Group to evaluate market risks is the parametric VaR (Value at Risk) model – an expected loss that may arise on the portfolio over a specified period of time (holding period) with a required probability (confidence level) due to an adverse market movement. The market risk measurement is carried out daily, both on an individual basis for each of the areas responsible for risk taking and risk management, and also in consolidated terms considering the effect of the diversification that exists between the particular portfolios.
In parallel to VaR calculations, in order to estimate the potential economic loss resulting from the extreme changes in the market risk factors, a number of stress tests are conducted for the portfolios that are subject to high market risk. In 2016 the results of stress test were regularly reported to the Capital, Assets and Liabilities Committee (CALCO). There were no excesses of the established limits detected. Additionally, in the process of interest rate risk management, the Group also uses interest income sensitivity measure and analyzes repricing gaps.
The impacts of interest change on Net Interest Income is asymmetrical and it is negative in case of decreasing interest rates. This is due to the Polish legal system and the fact that the interest rate of consumer loans and credit cards is limited (from January 2016 it cannot exceed twice Reference Rate of the National Bank of Poland increased by 7 percentage points). The strength of impact on net interest income in face of decrease of the interest rate depends, among other factors, on the percentage of the loan portfolio that is affected by the new maximum rate. For position in Polish Zloty, in a scenario of immediate parallel yield curve decrease by 100 bps, the impact on net interest income in the next 12 months after 31st December 2016 is negative and equals to -5.9 % of the annualized 4Q 2016 net interest income (or +4.4% for a 100 bps yield curve increase).
VaR ratios reflect total exposure to market risk in the Group. In 2016, open positions included just interest-rate instruments and FX risk instruments. The total market risk exposure in the Group was relatively low during 2016 and was on average equal to PLN 44.0 million compared to the end-of-year internal limit of PLN 318.1 million. In 2016, the total market risk exposure in the Group was kept within limits in place (no excesses were detected).
All eventual excesses of market risk limits are reported, documented and ratified at the proper competence level.
Liquidity risk reflects the possibility of incurring significant losses as a result of deteriorated financing conditions (financing risk) and/or of the sale of assets for less than their market value (market liquidity risk) to meet the funding needs arising from the Group’s obligations.
The process of the Group’s planning and budgeting covers the preparation of a Liquidity Plan in order to make sure that the growth of business will be supported by an appropriate liquidity financing structure and supervisory requirements in terms of quantitative liquidity measures will be met.
In 2016, the Group’s Loan-to-Deposit ratio was kept well below 100%. This ratio, including own bond issues sold to individuals and sell-buy back transactions with customers, improved at the end of December 2016 and equalled 84% (comparing to level of 87% as of end of December 2015). The liquidity surplus was still invested in the portfolio of liquid assets (Cash, balance with NBP, NBP Bills and Polish Government bonds). The share of Polish government securities (including NBP Bills) in total securities portfolio amounted to 99%. During 2016 this portfolio grew by 23% from PLN 14.0 billion at the end of December 2015 (21% of total assets) to approx. PLN 17.3 billion at the end of December 2016 (25% of total assets). The portfolio of debt securities (especially available for sale, without trading activity), supplemented by the cash and exposures to the National Bank of Poland, is treated as the Group’s liquidity reserve, which will overcome crisis situations (see Table below).
(*) including bonds for individual Clients and sell-buy-backs with Clients
(**) Cash, Exposures to NBP, NBP Bills and Polish Treasury Bonds qualified as assets available for sell (not trading activity)
Consequently, the large, diversified and stable funding from retail, corporate and public sector Clients remains the main source of financing of the Group. The source of medium-term funding remains also medium-term loans, subordinated debt, own bonds issue and bank’s securities.
The Group manages its FX liquidity through the use of FX-denominated bilateral loans as well as subordinated debt, FX swaps and cross-currency interest rate swaps transactions. The swaps portfolio is diversified in term of counterparties and maturity dates. For the majority of counterparties the Bank has signed a Credit Support Annex to the master agreements.
The estimation of the Group’s liquidity risk is carried out both with the use of the ratios defined by the supervisory authorities and own indicators, for which exposure limits were also established. In 2016 both internal as well as supervisory liquidity measures were kept well above the minimum limits in place, including the liquidity coverage requirement (LCR) calculated according to the Regulation of European Parlament and Council no 575/2013 on prudential requirements for credit insitutions and investment firms (CRR). The regulator minimum of 70% for LCR valid in 2016 was complied by the Group (as of the end of December 2016 the LCR reached the level of 124%). The measure has been reported on the monthly basis to NBP since March 2014.
Additionally, the Group employs an internal structural liquidity analysis based on cumulative liquidity gaps calculated on an actuarial basis (i.e. assuming a certain probability of cash flow occurrence). In 2016 all the liquidity gaps were maintained at the levels significantly above the minimum limits.
Liquidity stress tests are performed at least quarterly, in order to understand the Group’s liquidity-risk profile and to ensure that the Group is in a position to fulfil its obligations in the event of a liquidity crisis and to update the Liquidity Contingency Plan and management decisions.
The liquidity risk management process is regulated in the internal policy that is a subject of the Bank’s Management Board approval
The Group has also emergency procedures for situations of increased liquidity risk – the Liquidity Contingency Plan. The Liquidity Contingency Plan establishes the concepts, priorities, responsibilities and specific measures to be taken in the event of a liquidity crisis. The Liquidity Contingency Plan is tested and revised at least once a year.
Operational risk management is based on the processes structure implemented in the Group and overlapping the traditional organisational structure. Current management of the specific processes, including the management of the profile of process operational risk, is entrusted to Process Owners, who report to all other units participating in the risk management process and are supported by these units.
In order to manage the fraud risk, the Group has in its structure a special organizational unit to develop, implement and monitor the Group’s policy for management of this risk in cooperation with other organisational units of the Group and in accordance with its internal regulations. The Fraud Risk Management Bureau is a centre of competence for the fraud prevention process.