Risk materiality assessment depends on the combination of likelihood and impact on capital (profit and loss account) and amunt of risk-weighted assets. Evaluation encompasses both risk before and after mitigation instruments / actions.
In internal capital calculation, the Group and the Bank have 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:
- 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,
- Measurement (quantification) of risk,
- Aggregation of internal capital to secure material risk of operations, while taking into account the effect of correlation between risk types,
- Assessment of capital adequacy by comparing the Bank’s economic risk (internal capital) to its capacity to cover the risk,
- Allocation of internal capital to business lines/areas of operation,
- Use of allocated internal capital to measure risk-based efficiency, set risk limits, reallocate capital while taking into account risk-weighted returns.
- Control and monitoring of the risk level, available financial resources, capital limits and objectives.
Capital adequacy assessment carried out at the end of 2020 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).
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.