46.5. Liquidity risk

The objective of liquidity risk management is to:

• ensure and maintain the Group’s solvency with respect to current and future payables taking into account the cost of acquiring liquidity and return on the Group’s equity,
• prevent the occurrance of crisis situations, and
• provide solutions necessary to survive a crisis situation when such circumstances occur.

The Group has centralized liquidity risk management system covering current liquidity management and first level control performed by the responsible functions, the second level control carried out by a dedicated unit responsible for risk management and the third level control performed by an independent audit.

Managing the Group’s liquidity is carried out in intraday, short-term and long-term horizon. Analysing of intraday liquidity concerns flows realized during the day, through a short-term liquidity analysis is understood liquidity measurement system which refers to the time horizon shorter than one year, long-term analysis covers period above one year. Due to the specific tools and techniques used for liquidity risk management, the Group manages current and medium-term liquidity together with short-term liquidity.

The liquidity control is performing as a continuous process of determining and analysing the levels of various indicators and measures related to intraday, short-term and long-term liquidity. Monitoring frequency is matched to the specific liquidity aspect – e.g. daily for short-term liquidity, monthly for long-term liquidity. Liquidity ratios and measures are subject to a formal limiting process. The limits’ utilisation is regularly monitored and presented to the Management of the Bank and subsidiaries. In case of exceeding, escalation process is running as to inform decision-makers and ultimately to restore the liquidity risk exposures to acceptable levels.

Scenario-based stress analyses, conducted on a monthly basis, constitute an integral part of the Group’s liquidity monitoring process. Within the scope of these analyses the Group’s liquidity is assessed under the conditions of crisis which is caused by financial markets or is caused by internal factors, specific to the Group.

Managing the liquidity, the Group pays special attention to the liquidity in foreign currencies through monitoring, limiting and controlling the liquidity individually for each currency, as well as monitoring demand for the current and future currency liquidity and in case of identification of such need the Group hedges using currency swaps. It is also monitored the potential influence on the liquidity of placing required collateral deposits for derivative transaction.

In order to define the principles of contingency liquidity management, Bank prepared ‘Contingency Liquidity Principles’ approved by the Management Board, which defines the contingency procedures in the event of crisis situations. This principles involve daily monitoring of the system and specific early-warning indicators for the Bank and the Group as well as three levels of liquidity risk states depending on the level of early-warning indicators, the Bank’s, the Group’s and market situation. It also defines the sources for covering the expected outflows from the Group. This document sets the procedures for monitoring the liquidity states, emergency action procedures, task forces dedicated for restoring the Group’s liquidity and the Management’s responsibilities for taking necessary decisions to restore the required liquidity level.

Below are presented basic quantitative information concerning the Group’s liquidity at the end of 2023 year in comparison to the end of 2022. They cover the structure of financial liabilities by contractual maturity, supervisory measures of long-term liquidity and Liquidity Coverage Ratio (‘LCR’) and the net stable funding ratio (NSFR), adjusted liquidity gap and financial flows from derivative transactions.

The adjusted liquidity gaps presented below include, inter alia, the adjustments concerning the stability of core deposits and their maturities, adjustments of flows from granted off-balance sheet commitments arising from financing, guarantees and from assets without contractual repayment schedules. On top of that, included are also the adjusted flows stemming from the security portfolio and flows resulting from earlier repayment of mortgage loans portfolio. These are the main elements differentiating the adjusted gaps from unadjusted ones. Moreover, the gaps are of static nature, i.e. they do not take into consideration the impact of changes of balance sheet and off-balance sheet items volume (i.e. new deposits).

The following are the liabilities and financial cash flows associated with off-balance sheet derivative transactions, settled, respectively in net and gross amounts.

Off-balance sheet derivative transactions settled by the Group in net amounts include:

• Interest Rate Swaps (IRS),
• Forward Rate Agreements (FRA),
• Foreign currency options,
• Interest rate options (Cap/Floor),
• Transactions based on equity securities and stock indexes,
• Transactions based on commodities and precious metals.

Off-balance sheet derivative transactions settled by the Group in gross amounts include:

• Cross-Currency Interest Rate Swaps (CIRS),
• Foreign currency forward contracts,
• Foreign currency swaps (FX-Swap),
• Forward contracts based on securities.