Principles of risk management

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 in 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) and reputation risk. Derivatives risk is a subject to a special control due to the specific characteristics of these 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 entities of the Group 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 entities of the Group, including the specific nature of the entity’s activity and the market on which it operates. 

The PKO Bank Polski SA Group’s top priority 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.

On 12 June 2013, the Bank signed an agreement to acquire Nordea Bank Polska, Nordea Finance Polska, Nordea Polska TUnŻ, and the corporate loan portfolio serviced directly by the Seller – the Scandinavian financial Nordea Group. The above mentioned acquisition will have no impact on the change in the risks identified in the business of PKO Bank Polski SA or Nordea Bank Polska SA.

In the first half of 2013 in respect of operational risk, the Bank endeavoured to adapt to the requirements of Recommendation M of the Polish Financial Supervision Authority amended in January 2013 relating to operational risk management in banks. The Bank complied with all the recommendations by 30 June 2013, and it intends to comply with the recommendation relating to disclosure of information on operational losses – in accordance with Recommendation M – in 3rd quarter 2013.

In the second half of 2013, the Bank implemented the process of incorporating counterparty credit risk in the valuation of financial instruments in accordance with the best practices in the market and internal conditions.

In 2013, works aimed at optimising the lending process and increasing its efficiency through the improvement of the management information system (MIS) and optimisation of the lending process dedicated to individuals, small and medium enterprises (SME) and corporate clients were carried out at KREDOBANK SA. Furthermore, internal regulations concerning the basic principles of the lending process organisation and regulations relating to the process of lending to individuals and legal persons were amended. 

In 2013, the PKO Leasing SA Group focused mainly on building a safe lease portfolio to guarantee positive consolidated financial results of the PKO Leasing SA Group, safety of the capital and reduction in the share of irregular receivables in the portfolio. Moreover, the internal regulations concerning market risk management were amended.