Principles of risk management

The Bank’s Management Board is responsible for the risk management, including supervising and monitoring of activities taken by the Bank.

Risk management is one the most important internal processes both in PKO Bank Polski SA and in other entities of the PKO Bank Polski SA Group. Risk management aims at ensuring profitability of business activity, while ensuring control of the level of risk and maintaining it within risk tolerance and limit system adopted by the Bank, in the changing legal and macroeconomic environment. The level of the risks is an important component of the planning process.

In the PKO Bank Polski SA Group, the following types of banking risk have been identified, which are subject to management: credit risk, interest rate risk, currency risk, liquidity risk, commodity price risk, price risk of equity securities, derivative instruments risk, operational risk, compliance risk, risk of macroeconomic changes, model risk, business risk (including strategic risk), reputation risk, capital and insurance risk. Derivatives risk is a subject to a special control due to the specific characteristics of used financial instruments.
Risk management in the Group is based especially on the following principles:

  • the Group manages all of the identified types of banking risk,
  • the risk management process is appropriate to the scale of the operations and to the materiality, scale and complexity of a given risk and tailored to new risk factors and sources on a current basis,
  • the risk management methods (in particular the models and their assumptions) and the risk measurement systems are tailored to the scale and complexity of the risk and verified and validated on a periodical basis,
  • the area of risk and debt recovery remains organisationally independent from business activities,
  • risk management is integrated with the planning and controlling systems,
  • the risk level is monitored on a current basis,
  • the risk management process supports the implementation of the Group’s strategy in keeping with the risk management strategy, in particular with regard to the level of tolerance of the risk.

The risk management process is supervised by the Supervisory Board of the Bank, which is informed on a regular basis about the risk profile of the Bank as well as of the PKO Bank Polski SA Group and the most important activities taken in the area of risk management.

The Bank’s Management Board is responsible for the risk management, including supervising and monitoring of activities taken by the Bank in the area of risk management. The Bank’s Management Board takes the most important decisions affecting the risk level of the Bank and enacts internal regulations regarding the risk management.
The risk management process is carried out in three, mutually independent lines of defence:

  • the first line of defence, which is functional internal control that ensures using risk controls mechanisms and compliance of the activities with the generally applicable laws,
  • the second line of defence, which is the risk management system, including methods, tools, process and organisation of risk management,
  • the third line of defence, which is an internal audit.

The independence of the lines of defence consists of preserving organisational independence in the following areas:

  • the function of the second line of defence as regards creating system solutions is independent of the function of the first line of defence,
  • the function of the third line of defence is independent of the functions of the first and second lines of defence,
  • the function of managing the compliance risk reports directly to the President of the Management Board.

The Bank supervises activities of the individual subsidiaries of the PKO Bank Polski SA Group. As part of this supervision, the Bank sets out and approves development strategies of the entities, including the level of the risk. The Bank also supervises the entities’ risk management systems and provides support in the development of these systems. Additionally, it reflects business risk of the particular entities in the risk reporting and risk monitoring system of the entire Group.

The internal management regulations of certain types of risk in the Group entities are defined by internal regulations implemented by those entities, after consulting the Bank’s opinion and having taken into account the recommendations issued by the Bank. The internal regulations of the entities concerning risk management are introduced based on consistency principle and comparable assessment of particular types of risk within the Bank and Group entities, including the scope and nature of the link entities included in the Group, the specificity and scale of the entity’s activity and the market on which it operates.

The top priority of the PKO Bank Polski SA Group is to maintain its strong capital position and to increase its stable sources of financing underlying the stable development of business activity, while maintaining the priorities of efficiency and effective cost control and appropriate risk assessment.

For this purpose, in 2014 the Bank has taken the following activities:

  • in January 2014, acquired financing due to issuance of bonds under the EMTN programme in the amount of EUR 500 million,
  • in February 2014, acquired financing due to Cross Currency Repo transactions in the amount of CHF 50 million,
  • in April 2014, acquired long-term financing from Nordea Bank AB (publ) in the amount of approx. PLN 14 billion as a result of acquisition of the Nordea Group entities,
  • in May and November 2014, rolled forward short-term bonds with a current maturity of three months in the amount of PLN 700 million and issued additional PLN 50 million of these securities,
  • transferred a part of the Bank’s profit for 2013 to own funds.

In 2014, the Bank acquired Nordea Bank Polska SA, Nordea Finance Polska SA, Nordea Polska Towarzystwo Ubezpieczeń na Życie SA, and the corporate loan portfolio serviced directly by the seller – the Scandinavian financial group Nordea. The above mentioned transactions had no impact on the change in the risks identified in the business of PKO Bank Polski SA or Nordea Bank Polska SA.

In October 2014, PKO Bank Polski SA obtained the Polish Financial Supervision Authority’s consent to introduce a significant expansion of the Advanced Measurement Approach (AMA) used for calculating the own funds requirement in respect of operating risk, by including in this approach an additional part of the operations which resulted from the merger with Nordea Bank Polska SA.

In the 4th quarter of 2014, the legal merger took place, which ended the stage of formal integration of the aforementioned companies acquired by the Bank. The operating merger is scheduled for the first half of 2015.