The interest rate risk is a risk of incurring losses on the Group’s statement of financial position 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 potential losses arising from market interest rate changes to an acceptable level by appropriate shaping the structure of statement of financial position and off-balance sheet items.

57.1 Measurement of interest rate risk

In the process of interest rate risk management, Capital Group uses, in particular 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 the structure of the statement of financial position 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. In 2015 PKO Bank Polska SA introduced a method of determining the historical Var of interest rate risk.

The sensitivity of interest income is a measure determining changes in interest income resulting from abrupt changes in 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 maintained 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:

- 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., by ±100 b.p. and by ±200 b.p. and bend of yield curve scenarios (non-parallel fluctuations of ‘peak’ and ‘twist’ types),
- 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, 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.

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) | 31.12.2015 | |||||||

The Group - Periodic gap |
42 011 928 | 47 479 378 | (20 914 640) | (22 134 357) | (9 126 214) | (17 943 543) | 3 141 723 | 22 514 275 |

The Group - Cumulative gap |
42 011 928 | 89 491 306 | 68 576 666 | 46 442 309 | 37 316 095 | 19 372 552 | 22 514 275 | - |

PLN (in PLN thousand) | 31.12.2014 | |||||||

The Group - Periodic gap |
50 185 503 | 36 717 323 | (11 111 259) | (24 529 132) | (16 252 478) | (17 300 614) | 619 | 17 709 962 |

The Group - Cumulative gap |
50 185 503 | 86 902 826 | 75 791 567 | 51 262 435 | 35 009 957 | 17 709 343 | 17 709 962 | - |

USD (in USD thousand) | 31.12.2015 | |||||||

The Group - Periodic gap |
300 091 | (376 089) | (51 869) | 137 341 | 15 002 | (17 782) | (127 429) | (120 735) |

The Group - Cumulative gap |
300 091 | (75 998) | (127 867) | 9 474 | 24 476 | 6 694 | (120 735) | - |

USD (in USD thousand) | 31.12.2014 | |||||||

The Group - Periodic gap |
(90 058) | 49 219 | (223 141) | 97 697 | 199 222 | 17 406 | (111 872) | (61 527) |

The Group - Cumulative gap |
(90 058) | (40 839) | (263 980) | (166 283) | 32 939 | 50 345 | (61 527) | - |

Repricing Gap | 0-1 month |
1-3 months |
3-6 months |
6-12 months |
1-2 years | 2-5 years | >5 years | Total |

EUR (in EUR thousand) | 31.12.2015 | |||||||

The Group - Periodic gap |
(21 267) | 416 142 | 214 541 | (191 606) | (381 799) | (825 819) | 212 354 | (577 454) |

The Group - Cumulative gap |
(21 267) | 394 875 | 609 416 | 417 810 | 36 011 | (789 808) | (577 454) | - |

CHF (in CHF thousand) | 31.12.2014 | |||||||

The Group - Periodic gap |
(613 307) | 1 224 543 | 164 471 | (290 902) | 57 181 | (610 838) | 57 900 | (10 952) |

The Group - Cumulative gap |
(613 307) | 611 236 | 775 707 | 484 805 | 541 986 | (68 852) | (10 952) | - |

CHF (in CHF thousand) | 31.12.2015 | |||||||

The Group - Periodic gap |
(370 124) | 3 651 333 | 124 194 | (1 808 428) | (74 730) | (416 697) | (715 894) | 389 654 |

The Group - Cumulative gap |
(370 124) | 3 281 209 | 3 405 403 | 1 596 975 | 1 522 245 | 1 105 548 | 389 654 | - |

CHF (tys. CHF) | 31.12.2014 | |||||||

The Group - Periodic gap |
(2 265 607) | 2 942 060 | 264 700 | (504 100) | (11 100) | (4 300) | (7 000) | 414 653 |

The Group - Cumulative gap |
(2 265 607) | 676 453 | 941 153 | 437 053 | 425 953 | 421 653 | 414 653 | - |

At the end of 2015 and 2014 the Group had a positive cumulative gap in PLN in all time horizons.

57.2 Forecasting and monitoring of interest rate risk

As at 31 December 2015 and 31 December 2014, 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 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 entities, 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 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)* | 271 674 | 282 268 |

Parallel movement of interest rate curves by 200 b.p. (in PLN thousand) (stress-test)** | 2 013 781 | 2 380 354 |

* 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 approx. PLN 11 460 thousand as at 31 December 2015 and PLN 9 480 thousand as at 31 December 2014.

** The table presents the value of the most adverse stress-test of the scenarios: movement of interest rate curves in particular currencies by 200 b.p. up and by 200 b.p. down.

As at 31 December 2015 the interest rate VaR for a 10-day time horizon (10-day VaR) amounted to PLN 271 674 thousand, which accounted for approximately 1.00% of the Bank’s own funds. As at 31 December 2014 VaR for the Bank amounted to PLN 282 268 thousand, which accounted for approximately 1.13% of the Bank’s own funds. The amount of the funds is calculated in accordance with the provisions concerning calculation of th total capital ratio.

57.3 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.

57.4 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 types based on interest rates.

The Group established limits and thresholds for interest rate risk comprising i.a. 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 subsidiaries 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 the Group entities.