Interest rate
risk management

The interest rate risk is a risk of incurring losses on the Bank's balance and off-balance sheet items sensitive to interest rate fluctuations, as a result of changes in the interest rates on the market.

The objective of interest rate risk management is to mitigate the risk of incurring losses arising from market interest rate changes to an acceptable level by shaping the structure of balance and off-balance sheet items.

Measurement of interest rate risk

In the process of interest rate risk management, the Group uses, in particularly, the Value at Risk (VaR) model, interest income sensitivity measure, stress tests and a repricing gap.

The value at risk (VaR) is defined as a potential loss arising from the maintained structure of balance and off-balance sheet items and the volatility of interest rates, with the assumed probability level and taking into account the correlation between the risk factors.

The sensitivity of interest income is a measure showing changes in interest income resulting from abrupt changes in the interest rates. This measure takes into account the diversity of revaluation dates of the individual interest-bearing items in each of the selected time horizons.

Stress-tests are used to estimate potential losses arising from a held structure of the statement of financial position and off-balance sheet items under market conditions that cannot be described in a standard manner using statistical measures. Two types of scenarios are used by the Bank:

  1. hypothetical scenarios – which are based on arbitrary interest rate fluctuations: a parallel move in interest rate curves for the particular currencies by ±50 b.p., ±100 b.p. and by ±200 b.p.,
  2. historical scenarios – in which interest rate fluctuations are adopted based on the behaviour of interest rates in the past, including: the highest historical change, a bend of a yield curve along with portfolio positions, a bend of yield curve of peak and twist types, the largest historical non-parallel fluctuation of the interest rate curves for securities and derivative instruments that hedge them.

The repricing gap shows the difference between the present value of assets and liabilities exposed to interest rate risk, subject to revaluation in a given time range, and these balances are recognised on the transaction date.

Measures of interest rate gap are determined for other Group entities using similar methods to those used for determining the interest rate gap for the Bank itself, taking into account the specific nature of the entities.

Repricing Gap 0-1
month
1-3
months
3-6
months
6-12
months
1-2 years 2-5 years 5 years Total
PLN (in PLN thousand) 31.12.2011
The Group - periodic gap 50 300 391 13 856 572 (20 533 401) (22 321 974) (4 487 228) 900 527 79 727 17 794 614
The Group - cumulative gap 50 300 391 64 156 963 43 623 562 21 301 588 16 814 360 17 714 887 17 794 614 -
PLN (in PLN thousand) 31.12.2010
The Group - periodic gap 40 074 163 16 872 118 (23 857 194) (13 908 620) (2 867 293) 538 212 329 000 17 180 386
The Group - cumulative gap 40 074 163 56 946 281 33 089 087 19 180 467 16 313 174 16 851 386 17 180 386 -
USD (in USD thousand) 31.12.2011
The Group - periodic gap 542 875 (35 377) (311 295) (360 850) (39 223) 24 152 84 102 (95 616)
The Group - cumulative gap 542 875 507 498 196 203 (164 647) (203 870) (179 718) (95 616) -
USD (in USD thousand) 31.12.2010
The Group - periodic gap 304 316 (161 359) (166 953) (139 043) 11 781 54 871 94 404 (1 983)
The Group - cumulative gap 304 316 142 957 (23 996) (163 039) (151 258) (96 387) (1 983) -
EUR (in EUR thousand) 31.12.2011
The Group - periodic gap 299 125 (187 104) (25 506) (16 821) (40 984) (337 996) 7 879 (301 407)
The Group - cumulative gap 299 125 112 021 86 515 69 694 28 710 (309 286) (301 407) -
EUR (in EUR thousand) 31.12.2010
The Group - periodic gap 661 080 (308 414) 78 172 (223 242) 19 577 (592 387) 40 700 (324 514)
The Group - cumulative gap 661 080 352 666 430 838 207 596 227 173 (365 214) (324 514) -
CHF (in CHF thousand) 31.12.2011
The Group - periodic gap (683 848) 546 151 (15 430) (38 121) 1 427 (29 085) 7 345 (211 561)
The Group - cumulative gap (683 848) (137 697) (153 127) (191 248) (189 821) (218 906) (211 561) -
CHF (in CHF thousand) 31.12.2010
The Group - periodic gap 302 630 (552 592) (3 600) (4 460) (40) 1 520 6 770  (249 772)
The Group - cumulative gap (302 630) (249 962) (253 562) (258 022) (258 062) (256 542) (249 772) -

At the end of 2011 and 2010 the Group had a positive cumulative gap in PLN in all time horizons.

Forecasting and monitoring of interest rate risk

As at 31 December 2011 and 31 December 2010, the exposure of the PKO Bank Polski SA Group to the interest rate risk comprised mainly of the exposure of the Bank. Interest rate risk generated by the other Group entities with regard to PLN, EUR and CHF did not have a significant effect on the interest rate risk of the entire Group and therefore did not significantly affect its risk profile. Interest rate risk with regard to USD was significantly altered by exposure of the Group, in which the biggest part has the exposure of KREDOBANK SA.

VaR of the Bank and stress tests analysis of the Group’s exposure to the interest rate risk are presented in the following table:

Name of the sensitivity measure 31.12.2011 31.12.2010
VaR for a 10-day time horizon (in PLN thousand)* 62 661 39 004
Parallel movement of interest rate curves by 200 b.p. (in PLN thousand) (stress test) 530 726 522 641

*Due to the nature of the activities carried out by the other Group entities generating significant interest rate risk as well as a the specific nature of the market on which they operate, the Group does not calculate consolidated VaR. These companies apply their own risk measures in the interest rate risk management. KREDOBANK SA uses the 10-day interest rate VaR for the main currencies, which amounted to PLN 29 673 thousands as at 31 December 2011 and PLN 30 150 thousand as at 31 December 2010, respectively.

As at 31 December 2011 the interest rate VaR for a 10-day time horizon (10-day VaR) amounted to PLN 62 661 thousand, which accounted for approximately 0.36% of the value of the Bank’s own funds. As at 31 December 2010, VaR for the Bank amounted to PLN 39 004 thousand, which accounted for approximately 0.24% of the Bank’s own funds*.

Reporting of the interest rate risk

The Bank prepares daily, weekly, monthly and quarterly reports addressing interest rate risk. The quarterly reports are also applicable to the Group. Reports present the information on interest rate risk exposure and usages of available limits regarding the risk. Reports are prepared mainly for RC, ALCO, the Bank’s Management Board and the Bank’s Supervisory Board.

Management decisions as regards interest rate risk

The main tools used in interest rate risk management in the Group include:

  • procedures for interest rate risk management,
  • limits and thresholds for interest rate risk,
  • defining allowable transactions based on interest rates.

The Group established limits and thresholds for interest rate risk comprising the following: price sensitivity, interest income sensitivity, limits and threshold for losses and limits on instruments sensitive to interest rate fluctuations.

Methods of interest rate risk management in the Group entities are defined by internal regulations implemented by those entities which are characterised by significant values of interest rate risk measure outcomes. These regulations are developed after consultation with the Bank and include recommendations issued by the Bank for Group entities.

*Own funds calculated in accordance with regulations concerning calculation of the capital adequacy ratio.