70. Liquidity risk management

Liquidity risk is the risk of inability to settle liabilities as they become due because of the absence of liquid assets. The lack of liquidity may be due to the inappropriate structure of assets and liabilities, including off-balance sheet, a mismatch of cash flows, customers failing to settle their liabilities, a sudden withdrawal of funds by the customers or other market events.

The Group also manages the financing risk which takes into account the risk of losing the existing sources of financing and the inability to renew the required means of financing or the loss of access to new sources of financing.

To ensure the necessary level of funds needed to settle current and future liabilities (also potential ones) as they become due, taking into account the nature of the activities conducted and the needs which may arise due to changes in the market environment, by appropriately establishing the structure of balance sheet and off-balance sheet assets and liabilities.

The Group uses the following measures of the liquidity risk:

• contractual and adjusted liquidity gap;
• liquidity surplus;
• liquidity reserve;
• the ratio of stable funds to illiquid assets;
• liquidity coverage ratio (LCR);
• domestic supervisory liquidity measures (M3-M4);
• measures of stability of the deposit and loan portfolios;
• liquidity stress tests.

Control over the liquidity risk consists in determining liquidity risk limits and thresholds tailored to the scale and complexity of the Group’s operations, in particular the strategic limit of tolerance to liquidity risk.

The following measures are monitored by the Group on a regular basis:

• utilization of the strategic limit of tolerance to liquidity risk;
• utilization of regulatory liquidity standards;
• utilization of internal limits and thresholds of liquidity risk;
• concentration of the sources of financing;
• early warning indicators – monitored for the early detection of unfavourable occurrences which may have a negative impact on the Group’s or the financial sector’s liquidity position (when exceeded, early warning indicators trigger liquidity contingency plans).

The Group also makes regular liquidity forecasts which take into account the current developments in the Group’s operations. Liquidity forecasts include primarily the levels of selected liquidity risk measures envisaged in the forecasts of the Group’s assets and liabilities and in selected stress test scenarios.

Liquidity reports are developed on a daily, weekly, monthly and quarterly basis and once a year, an in-depth long-term liquidity analysis is performed. The reports contain information on liquidity risk exposure and on the risk limits utilization. The reports are addressed mainly to: ALCO, RC, the Management Board, the Risk Committee and the Supervisory Board.

The main tools for liquidity risk management used by the Group are:

• procedures for liquidity risk management, in particular contingency plans;
• limits and thresholds to mitigate short-term, medium-term and long-term liquidity risk;
• national and European supervisory liquidity standards;
• deposit, investment and securities transactions and well as derivatives, including structural currency transactions and transactions for the sale or purchase of securities;
• transactions ensuring long-term financing of the lending activities.

The Group’s policy concerning liquidity is based on keeping an appropriate level of liquidity surplus and supervisory and internal measures of liquidity risk and financing through an increase in the portfolio of liquid securities, and stable sources of financing (a stable deposit base, in particular). In liquidity risk management, money market instruments, including NBP open market operations, are also used.