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:
- hypothetical scenarios – which assume a hypothetical appreciation or depreciation of currency rates (by 20 percent and 50 percent),
- 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 measure | 31.12.2014 | 31.12.2013 |
|---|---|---|
| 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 position | 31.12.2014 | 31.12.2013 |
|---|---|---|
| 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 | |||||
|---|---|---|---|---|---|
| PLN | EUR | CHF | Other | Total | |
| 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 | |||||
|---|---|---|---|---|---|
| PLN | EUR | CHF | Other | Total | |
| 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.