Model risk

Model risk is the risk of incurring losses as a result of making incorrect business decisions on the basis of the models functioning. As a part of the Group model risk is managed both at the level of the entity of the Group (the owner of the model), and at the level of the Bank as the parent company of the Group.

The objective of models management and model risk management is to mitigate the level of model risk in the Group through a well-defined and implemented process of models management Model risk management is performed through identification, assessment and monitoring of model risk, reporting and taking management actions. Solutions functioning in the Bank are used in the Group, with the possibility of their individual adaptation to the specific nature of the particular Entities.

The model risk evaluation is aimed at determining the scale of threats associated with the occurrence of the model risk. The assessment of the risk level is performed on the level of a single model and aggregate assessment of the model risk at the Group entities and Group level.

Risk monitoring of models includes in particular: update of the level of risk models, verification of the implementation status and evaluation of the implementation effectiveness of the risk reduction models.

The purpose of management actions is to form a model risk management process and the level of this risk in particular by setting acceptable levels of risk, making decisions about the use of tools that support risk management.

All significant models in the Bank and model of the Group entities are covered by regular process of independent validation carried out by the validation PKO Bank Polski SA.

In the second half of 2015 the Bank and PKO Bank Hipoteczny SA carried the work related to the adjustment to the requirements of Recommendation W concerning the risk management models of banks issued by the Polish Financial Supervision Authority in July 2015.