64. Liquidity risk management

Liquidity risk is the risk of the inability to settle liabilities as they become due because of an absence of liquid assets. The lack of liquidity may be due to the inappropriate structure of assets and liabilities, including off-balance sheet, a mismatch of cash flows, customers failing to settle their liabilities, a sudden withdrawal of funds by the customers or other market events.

The Group also manages financing risk which takes into account the risk of losing the existing sources of financing and inability to renew the required means of financing or the loss of access to new sources of financing.

To ensure the necessary level of funds needed to settle current and future liabilities (also potential ones) as they become due, taking into account the nature of the activities conducted and the needs which may arise due to changes in the market environment, by appropriately establishing the structure of balance sheet and off-balance sheet assets and liabilities.

The Group uses the following measures of the liquidity risk:

• contractual and adjusted liquidity gap;
• liquidity surplus;
• liquidity coverage ratio (LCR);
• net stable funding ratio (NSFR);
• liquidity reserve;
• the ratio of stable funds to illiquid assets;
• measures of stability of the deposit and loan portfolios;
• liquidity stress tests.

Control over liquidity risk consists in determining liquidity risk limits and thresholds tailored to the scale and complexity of the Group’s operations, in particular the strategic limit of tolerance to liquidity risk.

The following measures are monitored by the Group on a regular basis:

• utilization of the strategic limit of tolerance to liquidity risk;
• utilization of regulatory liquidity standards;
• utilization of internal limits and thresholds of liquidity risk;
• concentration of the sources of financing;
• early warning indicators – monitored for the early detection of unfavourable
• occurrences which may have a negative impact on the Group’s or the
• financial sector’s liquidity position (when exceeded, early warning indicators trigger liquidity contingency plans).

The Group also makes regular forecasts of liquidity risk which take into account the current developments in the Group’s operations. Liquidity forecasts include primarily the levels of selected liquidity risk measures envisaged in the forecasts of the Group’s assets and liabilities and in selected stress test scenarios.

Liquidity reports are developed on a daily, weekly, monthly and quarterly basis and once a year, an in-depth long-term liquidity analysis is performed. The reports gather the information on liquidity risk exposure and updates on the use of limits for that risk. The reports are addressed mainly to: ALCO, RC, the Management Board, the Risk Committee and the Supervisory Board.

The main tools for liquidity risk management used by the Group are:

• procedures for liquidity risk management, in particular contingency plans;
• limits and thresholds to mitigate short-term, medium-term and long-term liquidity risk;
• supervisory liquidity standards;
• deposit, investment and securities purchase and sale transactions as well as derivatives, including transactions for the sale or purchase of securities;
• transactions ensuring long-term financing of the lending activities.

The Group’s policy concerning liquidity is based on keeping an appropriate level of liquidity surplus and supervisory and internal measures of liquidity risk and financing through appropriate shaping of the portfolio of liquid securities, and stable sources of financing (a stable deposit base, in particular). In liquidity risk management, money market instruments, including NBP open market operations, are also used.