Interest rate risk

The interest rate risk is a risk of incurring losses on the Bank’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 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.

In the process of interest rate risk management, the Group uses, in particular, the Value at Risk (VaR) model, interest income sensitivity measure, price sensitivity measure, stress-tests and a reprising gap. In 2015 PKO Bank Polski SA introduced a method of determining the historical VaR of interest rate risk.

The Group established limits and thresholds for interest rate risk comprising the i.e. 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’s 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 to the entities by the Bank.

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 with regard to USD was significantly changed by exposure of the Group entities, in which the most significant exposure concerned the KREDOBANK SA Group.

VaR of PKO Bank Polski SA and stress-tests analysis of the Group's exposure to the interest rate risk (in PLN thousand)

* Due to the nature of the activities carried out by the other Group entities generating significant interest rate risk as well as 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. The KREDOBANK SA uses the 10-day interest rate VaR for the main currencies. As at 31 December 2015 the value of VaR in the KREDOBANK SA amounted to approx. PLN 11 460 thousand 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 Bank’s 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 (value of the funds calculated in accordance with regulations on calculation of the total capital ratio).