68. Interest rate risk management
Report Online
2020
Interest rate risk management
Interest rate risk is a risk of losses being incurred on the Group’s balance sheet and off-balance sheet items sensitive to interest rate fluctuations, as a result of changes in market interest rates.
To reduce the potential losses resulting from market interest rate fluctuations to an acceptable level by properly shaping the structure of balance sheet and off-balance sheet items.
The Group uses the following measures of interest rate risk: interest income sensitivity, economic value sensitivity, value at risk (VaR), stress tests and repricing gaps.
Control over interest rate risk consists of determining interest rate risk limits and thresholds tailored to the scale and complexity of the Group’s operations, in particular the strategic limit of tolerance to interest rate risk.
The following measures are monitored by the Group on a regular basis:
- the levels of interest rate risk measures;
- utilization of the strategic limit of tolerance to interest rate risk;
- utilization of internal limits and thresholds of interest rate risk.
Reports on interest rate risk are prepared on a daily, weekly, monthly and quarterly basis.
The main tools for interest rate risk management used by the Group are: interest rate risk management procedures, interest rate risk limits and thresholds.
The Group established limits and thresholds for interest rate risk comprising, among other things, the following: interest income sensitivity, sensitivity of the economic value and losses.
Financial information
The PKO Bank Polski S.A. Group’s exposure to interest rate risk remained within the adopted limits as at 31 December 2020 and 31 December 2019. The Group was mainly exposed to PLN interest rate risk. The interest rate risk generated by the Group companies did not materially affect the interest rate risk of the entire Group and therefore did not change its risk profile significantly.
The Group categorizes its portfolios from the perspective of interest rate risk management:
- the banking book – comprises balance sheet and off-balance sheet items not included in the trading book, in particular items resulting from the Group’s core activities, transactions concluded for investment and liquidity purposes and their hedging transactions;
- the trading book – comprises transactions concluded on financial instruments as part of activities conducted on own account and on behalf of the customers.
Banking book
In order to monitor interest rate risk, the Bank applies interest rate risk measures that reflect the identified four main types of interest rate risk:
- the risk of revaluation date mismatch;
- the yield curve risk;
- the basis risk; and
- the customer option risk.
The sensitivity of interest income to sudden shifts in the yield curve is determined by the potential financial effect of such a shift reflected in a changed amount of interest income in a given time horizon. The change results from the mismatch between the revaluation dates of assets, liabilities and off-balance sheet liabilities granted and received (in particular derivative instruments) sensitive to interest rate fluctuations.
The sensitivity of interest income in the banking book of the Group to the abrupt shift in the yield curve of 100 bp down in a one-year horizon in all currencies is shown in the table below:
| NAME OF THE MEASURE | 31.12.2020 | 31.12.2019 |
|---|---|---|
| Sensitivity of interest income (PLN million) | (527) | (907) |
Sensitivity of economic value reflects the fair value changes of items in the portfolio arising from the parallel shift of the yield curves by 100 bp up or down (the most unfavourable of the scenarios mentioned).
The table below presents the economic value sensitivity measure (BPV) of the banking book of the Group in all currencies as at 31 December 2020 and 31 December 2019:
| NAME OF THE MEASURE | 31.12.2020 | 31.12.2019 |
|---|---|---|
| Sensitivity of economic value (PLN million) | (443) | (266) |
Trading book
In order to monitor the interest rate risk in the trading book, the Bank applies the value-at-risk (VaR) measure.
The IR VaR measure is a potential amount of loss that may be incurred in normal market conditions in a specific time (i.e. horizon) and with an assumed level of probability related to changes in the interest rate curves.
The IR VaR in the Bank’s trading book is shown in the table below:
| NAME OF THE MEASURE | 31.12.2020 | 31.12.2019 |
|---|---|---|
| IR VaR for a 10-day time horizon at the confidence level of 99% (PLN million): | ||
| Average value | 11 | 5 |
| Maximum value | 20 | 10 |
| Value at the end of the period | 13 | 6 |