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58. Currency risk management

Currency risk is the risk of incurring losses due to unfavourable exchange rate changes. The risk is generated by maintaining open currency positions in a given foreign currency.

The objective of currency risk management is to mitigate the risk of incurring losses arising from exchange rate fluctuations to an acceptable level by appropriate shaping the structure of statement of financial position and off-balance sheet positions.

58.1 Measurement of the currency risk

The Bank measures currency risk using the Value at Risk (VaR) model and stress-tests.

The value at risk (VaR) is defined as a potential loss arising from currency positions held and foreign exchange rate volatility under the assumed confidence level and taking into account the correlation between the risk factors. In 2015 PKO Bank Polski introduced a method of determining the historical VaR for foreign exchange.

Stress-tests and crash-tests are used to estimate potential losses arising from currency positions under extraordinary conditions on the currency market that cannot be described in a standard manner using statistical measures. Two types of scenarios are used by the Bank:

  1. hypothetical scenarios – which assume a hypothetical appreciation or depreciation of currency rates (by 20 percent and 50 percent),
  2. historical scenarios – based on the behaviour of currency rates observed in the past.

58.2 Forecasting and monitoring of currency risk

VaR of the Bank and stress-tests analysis of the Capital Group exposure to currency risk are stated cumulatively for all currencies in the table below:

Name of sensitivity measure 31.12.2015 31.12.2014
VaR for a 10-day time horizon with a confidence level of 99% threshold (in PLN thousand)*                25 384                  6 230
Change in CUR/PLN by 20% (in PLN thousand) (stress-test)**                  1 941                28 609
currency_risk_management_pkobp2015.xlsx

* Due to the nature of the activities carried out by the other Group entities generating significant currency risk as well as the specific nature of the market on which they operate, the Bank does not calculate consolidated VaR. These companies apply their own risk measures in the currency risk management. KREDOBANK SA uses the 10-day VaR, which amounted to approx PLN 4 836 thousand as at 31 December 2015 and approx. PLN 3 663 thousand as at 31 December 2014.

** The table presents the value of the most adverse stress-test of the scenarios: PLN appreciation by 20% and PLN depreciation by 20%.

The Group’s currency positions are presented in the table below:

Currency position  31.12.2015 31.12.2014
EUR                94 134             (216 994)
USD               (87 336)             (113 960)
CHF               (72 465)               (36 566)
GBP                 (1 798)                  5 009
Other (Global Net)              171 137              214 752
currency_risk_management_2_pkobp2015.xlsx

The volume of currency positions is a key factor determining the level of currency risk on which the Group is exposed (except for volatility of foreign exchange rates). The level of currency positions is determined by all foreign currency transactions, which are concluded by the Group, both in the statement of financial position and off-balance sheet transactions. The Bank’s exposure to currency risk is low (with reference to own funds, VaR for a 10-day time horizon for the Bank’s currency position as at 31 December 2015 amounted to ca. 0.09%).

58.3 Currency structure

The tables below present currency exposure by the specific types of assets, liabilities and off-balance sheet liabilities:

    Currency translated to PLN - 31.12.2015
PLN EUR CHF Other Total
 
Cash and balances with the central bank          12 562 515               727 336                 61 838               392 175          13 743 864
Amounts due from banks            1 949 983            1 677 024               113 138               813 232            4 553 377
Loans and advances to customers        149 855 311          13 527 617          32 243 774            3 074 215        198 700 917
Securities          41 330 148            1 674 781               993 615               591 090          44 589 634
Tangible assets          12 072 869                        79                        -                 127 083          12 200 031
Other assets and derivative financial instruments            7 287 317               216 376                 41 783                 84 208            7 629 684
Total assets (gross)        225 058 143          17 823 213          33 454 148            5 082 003        281 417 507
Depreciation / amortisation / impairment        (12 024 404)             (276 200)             (963 701)          (1 213 283)        (14 477 588)
Total assets (net)        213 033 739          17 547 013          32 490 447            3 868 720        266 939 919
 
Amounts due to the central bank                   4 219                        -                          -                          -                     4 219
Amounts due to banks            1 068 064            2 522 928          14 372 305               325 500          18 288 797
Amounts due to customers        175 739 475          10 993 307            2 453 140            6 572 539        195 758 461
Liabilities due to insurance operations            2 396 515                   3 848                        -                        130            2 400 493
Debt securities in issue            1 251 186            3 240 722            1 000 027            3 941 038            9 432 973
Subordinated liabilities            1 616 619                        -                 882 544                        -              2 499 163
Provisions               242 884                   5 396                   1 037                   2 777               252 094
Other liabilities and derivative financial instruments and provision for deffered income tax liability            7 424 363               459 055                 24 659               130 729            8 038 806
Equity          30 264 913                        -                          -                          -            30 264 913
Total liabilities and equity        220 008 238          17 225 256          18 733 712          10 972 713        266 939 919
Off-balance sheet liabilites granted          48 906 838            3 970 891               187 858            4 506 378          57 571 965
currency_risk_management_3_pkobp2015.xlsx

    Currency translated to PLN - 31.12.2014
PLN EUR CHF Other Total
 
Cash and balances with the central bank          10 724 759               492 047                 70 260               451 305          11 738 371
Amounts due from banks               294 737            1 255 349                 62 229               874 482            2 486 797
Loans and advances to customers        140 063 419          13 660 027          30 954 027            2 842 388        187 519 861
Securities          38 635 005               933 402                        -                 721 119          40 289 526
Tangible assets          11 712 203                        -                          -                          -            11 712 203
Other assets and derivative financial instruments            7 727 158               397 235                 64 329               551 218            8 739 940
Total assets (gross)        209 157 281          16 738 060          31 150 845            5 440 512        262 486 698
Depreciation / amortisation / impairment        (12 228 945)             (223 357)             (836 056)             (497 751)        (13 786 109)
Total assets (net)        196 928 336          16 514 703          30 314 789            4 942 761        248 700 589
 
Amounts due to the central bank                   4 427                        -                          -                          -                     4 427
Amounts due to banks            2 241 032            2 774 653          14 348 416                 30 381          19 394 482
Amounts due to customers        158 613 283            8 318 970            2 258 841            5 195 672        174 386 766
Liabilities due to insurance operations            2 675 833                   3 785                        -                        104            2 679 722
Debt securities in issue            1 268 242            5 818 661            2 671 536            3 542 171          13 300 610
Subordinated liabilities            1 619 833                        -                 794 152                        -              2 413 985
Provisions               308 453                   9 371                      818                   5 196               323 838
Other liabilities and derivative financial instruments and provision for deffered income tax liability            7 404 604               486 278               532 569               157 757            8 581 208
Equity          27 615 551                        -                          -                          -            27 615 551
Total liabilities and equity        201 751 258          17 411 718          20 606 332            8 931 281        248 700 589
Off-balance sheet liabilites granted          44 498 418            4 434 096               119 891            3 820 227          52 872 632
currency_risk_management_4_pkobp2015.xlsx

58.4 Reporting of the currency risk

The Bank prepares daily, weekly, monthly, and quarterly reports addressing currency risk. The quarterly reports are also applicable to the Group. Reports gather the information on currency risk exposure and updates on available limits regarding the risk.

58.5 Management decisions concerning currency risk

Main tools used in currency risk management in the Group include:

  • procedures for currency risk management
  • limits and thresholds for currency risk,
  • defining allowable types of transactions in foreign currencies and the exchange rates used in such transactions.

The Group has set limits and threshold values for currency risk for i.a.: currency positions, Value at Risk calculated for a 10-day time horizon and daily loss from transactions on currency market.

Methods of currency risk management in the Group’s subsidiaries are defined by internal regulations implemented by these entities, which are characterised by high level of currency risk measure outcomes. The regulations are defined after consultation with the Bank and take into account recommendations issued by the Bank to the entities.