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2018 Financial and Social Report

The Group and the Bank calculate and maintain on an ongoing basis internal capital amount, that is considered to cover adequately the nature and level of the risk to which they are or might be exposed, according to art. 73 od Directive 2013/36/UE.

Group and Bank carry out the internal capital adequacy assessment process (ICAAP) in reliance on the models of internal (economic) capital.

Group and Bank define economic capital as the amount of capital which is needed to cover all the unexpected economic losses that may occur during a specified future period and that are estimated with specific probability, without jeopardizing interests of the Group’s depositors/creditors. Internal capital calculations incorporate all the material risk types to which the Group is exposed and are based on a set of parameters developed on the basis of the individual features and characteristics of the Polish market. The models quantify the value of expected and unexpected losses on account of the risk types considered to be material, at the assumed confidence level and in a 1-year time horizon.

Internal capital is calculated and maintained as to every risk type evaluated as a material one and as to risk types, to which own funds requirements are maintained, according to CRR.

Those are the following risk types, presented together with methods of internal capital estimation. The last risk materiality assessment was completed in December 2018.

Risk type Internal capital estimation method
Credit risk and counterparty credit risk VaR for credit risk – modified Credit Risk + model
Market risk – trading portfolio Modified VaR model
Market risk – interest rate in banking portfolio Modified VaR model
Risk of equities in banking portfolio Own funds requirements to equities
Credit valuation adjustment risk Own funds requirements to credit valuation adjustment risk
Additional internal capital stemming from decision of the competent authority on maintaining own funds to cover risk of retail exposures denominated in FX secured on residential real estates Modified methodology of calculation of additional own funds requirements to cover risk of retail exposures denominated in FX secured on residential real estates
Hard-to-measure risks Methodology of defining of internal capital to hard-to-measure risk types
Operational risk Modified standard method

Risk types materiality assessment in 2018 covered in total 36 defined by the Bank/Group risk types, including many types of nonfinancial and hard-to-measure risks. Regarding the latter, there were following risk types defined and evaluated, including: outsourcing risk, reputational risk, business risk, litigation risk, excessive leverage risk, separated risk of exposures secured on residential real estate in FX – RRE FX and other. As a result of the assessment, additional internal capital to cover RRE FX risk and hard-to-measure risk types was decided to be maintained (look at the above table).

In internal capital calculation, the Group has taken a conservative approach to the correlation between individual risk types (the fact that different risk types do not convert to losses simultaneously) and calculates the effect of diversification on the entire loss distribution.

In line with the recommendations issued by the banking supervision authority, individual risk types and the diversification effect are subjected to stress tests. The total diversified internal capital is subject to economic assessment of capital adequacy, by a comparison with “risk bearing capacity” (available financial resources). The Group conservatively assumes that the available financial resources are equivalent to regulatory own funds which form the basis for calculating the total capital ratio.

The internal capital adequacy assessment process following the Group’s approach is closely linked to the risk, capital and business management processes in place in the Group. It consists of the following stages:

  1. Classification and assessment of materiality of risk types, to determine the method for incorporating them in the risk management process and in the ICAAP process,
  2. Measurement (quantification) of risk,
  3. Aggregation of internal capital to secure material risk of operations, while taking into account the effect of correlation between risk types,
  4. Assessment of capital adequacy by comparing the Bank’s economic risk (internal capital) to its capacity to cover the risk,
  5. Allocation of internal capital to business lines/areas of operation,
  6. Use of allocated internal capital to measure risk-based efficiency, set risk limits, reallocate capital while taking into account risk-weighted returns.
  7. Control and monitoring of the risk level, available financial resources, capital limits and objectives.

Capital adequacy assessment carried out at the end of 2018 indicates a high level of this adequacy, which is shown in a significant surplus of capital resources (equivalent to regulatory own funds) as compared to economic risk (internal capital value) and risk calculated on the basis of supervisory regulations (the value of minimum capital requirements to cover risk). Internal capital at the end of 2018 is about one third higher than the capital requirements in the 1st Pillar.

Both the Bank and the Group meet the statutory requirements regarding the level of own funds and the internal capital set forth in Article 128 of the Banking Law Act and in the CRR.