55. Currency risk management

Currency risk is the risk of incurring losses due to unfavourable exchange rate changes. The risk is generated by maintaining open currency positions in a given foreign currency.

The objective of currency risk management is to mitigate the risk of incurring losses arising from exchange rate fluctuations to an acceptable level by appropriate shaping the structure of statement of financial position and off-balance sheet positions.

55.1. Measurement of the currency risk

The Bank measures currency risk using the Value at Risk (VaR) model and stress-tests.

The Value at Risk (VaR) is defined as a potential loss arising from currency position and foreign exchange rate volatility under the assumed confidence level and taking into account the correlation between the risk factors.

Stress-tests and crash-tests are used to estimate potential losses arising from currency position under extraordinary market conditions that cannot be described in a standard manner using statistical measures. Two types of scenarios are used by the Bank:

  1. hypothetical scenarios – which assume a hypothetical appreciation or depreciation of currency rates (by 20 percent and 50 percent),
  2. historical scenarios – based on the behaviour of foreign exchange rates observed in the past.

55.2. Forecasting and monitoring of currency risk

VaR of the Bank and stress-testing of the Group’s exposure to currency risk are stated cumulatively for all currencies in the table below:

Name of sensitivity measure31.12.201431.12.2013
VaR for a 10-day time horizon with a confidence level of 99% threshold (in PLN thousand)* 6,230 2,443
Change in CUR/PLN by 20% (in PLN thousand) (stress-test)** 28,609 21,428

 

* Due to the nature of the activities carried out by the other Group entities generating significant currency risk as well as the specific nature of the market on which they operate, the Bank does not calculate consolidated VaR. These companies apply their own risk measures in the currency risk management. KREDOBANK SA uses the 10-day VaR, which amounted to approx.
PLN 3 663 thousand as at 31 December 2014 and approx. PLN 906 thousand as at 31 December 2013.
** The table presents the value of the most adverse stress-test of the scenarios: PLN appreciation by 20% and PLN depreciation by 20%.

The Group’s currency positions are presented in the table below:

Currency position31.12.201431.12.2013
EUR (216,994) 13,010
USD (113,960) 79,507
CHF (36,566) 6,526
GBP 5,009 3,673
Other (Global Net) 214,752 6,020

 

The volume of currency positions is a key factor determining the level of currency risk on which the Group is exposed (except for volatility of foreign exchange rates). The level of currency positions is determined by all foreign currency transactions, which are concluded by the Group, both in the statement of financial position and off-balance sheet transactions. The Bank’s exposure to currency risk is low (with reference to own funds, VaR for a 10-day time horizon for the Bank’s currency position as at 31 December 2014 amounted to ca. 0.03%).

55.3. Currency structure

The tables below present currency exposure by the specific types of assets, liabilities and off-balance sheet liabilities:

Currency translated into PLN - 31.12.2014
PLNEURCHFOtherTotal
Cash and balances with the central bank 10,724,759 492,047 70,260 451,305 11,738,371
Amounts due from banks 294,737 1,255,349 62,229 874,482 2,486,797
Loans and advances to customers 140,063,419 13,660,027 30,954,027 2,842,388 187,519,861
Securities 38,635,005 933,402 - 721,119 40,289,526
Non-current assets 11,712,203 - - - 11,712,203
Other assets and derivatives 7,727,158 397,235 64,329 551,218 8,739,940
Total assets (gross) 209,157,281 16,738,060 31,150,845 5,440,512 262,486,698
Depreciation/amortisation/impairment (12,228,945) (223,357) (836,056) (497,751) (13,786,109)
Total assets (net) 196,928,336 16,514,703 30,314,789 4,942,761 248,700,589
Amounts due to the central bank 4,427 - - - 4,427
Amounts due to banks 2,241,032 2,774,653 14,348,416 30,381 19,394,482
Amounts due to customers 158,613,283 8,318,970 2,258,841 5,195,672 174,386,766
Liabilities due to insurance operations 2,675,833 3,785 - 104 2,679,722
Debt securities in issue 1,268,242 5,818,661 2,671,536 3,542,171 13,300,610
Subordinated liabilities 1,619,833 - 794,152 - 2,413,985
Provisions 308,453 9,371 818 5,196 323,838
Other liabilities and derivatives and deferred income tax liability 7,404,604 486,278 532,569 157,757 8,581,208
Equity 27,615,551 - - - 27,615,551
Total liabilities and equity 201,751,258 17,411,718 20,606,332 8,931,281 248,700,589
Off-balance sheet liabilities granted 44,498,418 4,434,096 119,891 3,820,227 52,872,632

Currency translated into PLN - 31.12.2013
PLNEURCHFOtherTotal
Cash and balances with the central bank 6,359,564 581,510 39,657 265,389 7,246,120
Amounts due from banks 805,314 574,672 13,862 528,176 1,922,024
Loans and advances to customers 125,394,275 8,444,323 19,931,944 2,503,500 156,274,042
Securities 29,365,544 145,846 - 317,785 29,829,175
Non-current assets 9,973,096 - - - 9,973,096
Other assets and derivatives 5,333,488 255,297 27,576 482,956 6,099,317
Total assets (gross) 177,231,281 10,001,648 20,013,039 4,097,806 211,343,774
Depreciation/amortisation/impairment (10,570,899) (173,928) (614,275) (753,562) (12,112,664)
Total assets (net) 166,660,382 9,827,720 19,398,764 3,344,244 199,231,110
Amounts due to the central bank 4,065 - - - 4,065
Amounts due to banks 1,256,472 811,344 1,389,847 289,674 3,747,337
Amounts due to customers 139,590,140 6,495,989 1,430,741 4,387,311 151,904,181
Debt securities in issue 1,422,185 3,538,895 2,545,438 3,039,928 10,546,446
Subordinated liabilities 1,620,857 - - - 1,620,857
Provisions 306,107 9,107 467 5,189 320,870
Other liabilities and derivatives and deferred income tax liability 5,558,145 259,237 1,471 114,176 5,933,029
Equity 25,154,325 - - - 25,154,325
Total liabilities and equity 174,912,296 11,114,572 5,367,964 7,836,278 199,231,110
Off-balance sheet liabilities granted 39,453,333 3,101,545 88,784 1,954,118 44,597,780

55.4. Reporting of the currency risk

The Bank prepares daily, weekly, monthly, and quarterly reports addressing currency risk. The quarterly reports are also applicable to the Group. Reports gather the information on currency risk exposure and updates on available limits regarding the risk.

55.5. Management decisions concerning currency risk

Main tools used in currency risk management in the Group include:

  • procedures for currency risk management,
  • limits and thresholds for currency risk,
  • defining allowable types of transactions in foreign currencies and the exchange rates used in such transactions.

The Group has set limits and threshold values for currency risk for i.a.: currency positions, Value at Risk calculated for a 10-day time horizon and daily loss from transactions on currency market.

Methods of currency risk management in the Group’s subsidiaries are defined by internal regulations implemented by these entities, which are characterised by high level of currency risk measure outcomes. The regulations are defined after consultation with the Bank and take into account recommendations issued by the Bank to the entities.