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 shaping the structure of balance and off-balance sheet items.

Measurement of the currency risk

The Bank measures the 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 position and foreign exchange rate volatility under the assumed confidence level and taking into account the correlation between the risk factors.

Stress-tests and crash-tests are used to estimate potential losses arising from currency position under extraordinary 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 assume a hypothetical appreciation or depreciation of currency rates (by 20% and 50%), 
  2. historical scenarios – bases on the behaviour of currency rates observed in the past.

Forecasting and monitoring of currency risk

VaR of the Bank and stress-testing of the Group’s financial assets exposed to currency risk are stated cumulatively for all currencies in the table below:

Name of sensitivity measure 31.12.2011 31.12.2010
VaR for a 10-day time horizon (in PLN thousand)* 1 470 3 171
Change in CUR/PLN +20% (in PLN thousand) (stress-test)** 17 210 8 109

*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 467 thousands as at 31 December 2011 and approx. PLN 182 thousand as at 31 December 2010, respectively.

** The table presents the value of the most adverse stress-test of the scenarios: PLN appreciation by 20% and PLN depreciation by 20%. The value of stress-test at the end of 2010 was brought to comparability.

The level of currency risk was low both at 31 December 2011 and 31 December 2010. The Group’s currency positions are presented in the table below:

  31.12.2011 31.12.2010
Currency position Currency position
EUR 83 153 (4 035)
GBP 50 48 073
CHF (37 266) (18 820)
USD (180 781) (78 916)
Other (Global Net) 11 630 11 257

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 at the end of 2011 amounted to ca. 0.01%).

Currency structure

The tables below present currency exposure by the specific types of assets, liabilities and contingent liabilities:

 
Currency translated to PLN – 31.12.2011
PLN EUR CHF Other Total
ASSETS, of which:
Cash and balances with the central bank 8 468 498 365 266 28 741 279 663 9 142 168
Amounts due from banks 366 793 1 070 348 219 257 772 641 2 429 039
Loans and advances to customers 111 613 129 8 295 725 24 625 849 2 758 034 147 292 737
Securities 27 626 050 309 552 - 256 527 28 192 129
Tangible assets 8 535 276 - - 352 399 8 887 675
Other assets and derivatives 4 882 258  260 814 41 031 186 993 5 371 096
Total assets (gross) 161 492 004 10 301 705 24 914 878 4 606 257 201 314 844
Depreciation / amortisation / impairment (9 044 071) (227 207) (538 972) (756 557) (10 566 807)
Total assets (net) 152 310 018 10 074 498 24 375 906 3 849 700  190 748 037
LIABILITIES AND EQUITY, of which:
Amounts due to the central bank 3 454 - - - 3 454
Amounts due to other banks 1 626 266 963 916 3 503 896 145 086 6 239 164
Amounts due to customers 132 464 871 6 852 350 1 306 358 5 850 318 146 473 897
Debt securities in issue 3 294 783 3 555 738 921 258 - 7 771 779
Subordinated liabilities 1 614 377 - - - 1 614 377
Provisions 601 371 13 843 434 3 516 619 164
Other liabilities and derivatives and deferred tax liabilities 4 782 744  324 797 4 523 92 154  5 204 218
Equity 22 821 984 - - - 22 821 984
TOTAL LIABILITIES AND EQUITY 167 209 850  11 710 644 5 736 469 6 091 074 190 748 037
CONTINGENT LIABILITIES GRANTED 32 000 400 3 321 411 128 614 1 439 963 36 890 388


  Currency translated to PLN – 31.12.2010
PLN EUR CHF Other Total
ASSETS, of which:
Cash and balances with the central bank 5 563 983 373 306 17 420 227 703 6 182 412
Amounts due from banks 248 565 1 113 541 637 132 336 719 2 335 957
Loans and advances to customers 103 869 753 6 285 663 22 910 754 2 458 619 135 524 789
Securities 22 207 655 133 968 - 161 666 22 503 289
Tangible assets 8 448 191 - - 223 295 8 671 486
Other assets and derivatives 3 672 430 120 470 491 122 908 3 916 299
Total assets (gross) 144 010 577 8 026 948 23 565 797 3 530 910 179 134 232
Depreciation / amortisation / impairment (8 313 676) (152 029) (358 477) (649 549) (9 473 731)
Total assets (net) 135 696 901 7 874 919 23 207 320 2 881 361 169 660 501
LIABILITIES AND EQUITY, of which:
Amounts due to the central bank 3 370 - - - 3 370
Amounts due to other banks 1 471 161 618 794 3 125 225 18 695 5 233 875
Amounts due to customers 122 932 057 5 577 720 1 067 586 3 403 852 132 981 215
Debt securities in issue 111 101 3 187 766 - - 3 298 867
Subordinated liabilities 1 611 779 - - - 1 611 779
Provisions 574 043 6 131 669 2 847 583 690
Other liabilities and derivatives and deferred tax liabilities 4 221 714 246 579 1 079 118 765 4 588 137
Equity 21 359 568 - - - 21 359 568
TOTAL LIABILITIES AND EQUITY 152 284 793 9 636 990 4 194 559 3 544 159 169 660 501
CONTINGENT LIABILITIES GRANTED 33 334 068 2 519 541 123 465 808 304 36 785 378

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. Reports are prepared mainly for RC, ALCO, the Bank’s Management Board and the Bank’s Supervisory Board.

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, i.a.: currency positions, Value at Risk calculated for a 10-day time horizon and daily loss from transactions on currency market.