Currency risk

Currency risk is defined as the risk of a loss occurring due to changes in foreign exchange rates. The Bank additionally distinguishes the effect of exchange rates on the Bank’s results over a long term, due to currency conversion of future currency income and costs at potentially unfavourable rates. The primary purpose of currency risk management is to identify the areas of activity of the Bank that can be exposed to that risk and take measures to limit as far as possible any losses occurring out of it. The Bank’s Management Board defines the currency risk profile which must be characterised by compliance with the applicable financial plan of the Bank.

Alior Bank regularly monitors and reports: 

Level of currency risk metrics

Level of utilisation of internal limits and thresholds for currency risk

Results of stress tests

Currency risk limits are determined in such a way as to keep the risk at a limited level. 

Alior Bank’s main currency risk management tools include: 

  • internal procedures for currency risk management; 
  • internal models and metrics of currency risk; 
  • limits and warning thresholds for currency risk; 
  • restrictions on admissible currency transactions; 
  • stress tests. 

Currency risk is measured and assessed by limiting currency positions taken by the Bank.  

To measure credit risk, the Bank uses VaR metric and stress tests.  

VaR determines the potential amount of losses on the maintained currency positions due to changes of exchange rates, while keeping the adopted confidence level and position duration. To determine the VaR level, the Bank uses the variance-covariance method at confidence level of 99%. The amount is calculated for each day for particular areas responsible for risk taking and management, individually and in aggregate. 

As at 31 December 2019, the maximum loss on the currency portfolio held by the Bank (managed in the trading book), determined based on VaR in time horizon of 10 days, could be PLN 436 thousand (PLN 154 thousand as at 31 December 2018) with the adopted confidence level of 99%. (PLN thousand). 

  31/12/2019 31/12/2018
  Horizon [days] 31/12/2019 10 31/12/2018 10
  VaR [PLN] 31/12/2019 436 31/12/2018 154

To measure of Alior Bank’s Capital Group exposure to the risk of exchange rate changes, the Bank conducts stress tests. Below are presented the results of stress tests of changes of exchange rates relative to PLN by +/- 20% (PLN thousand). 

  31/12/2019 31/12/2018
  rates + 20% 31/12/2019 23 190 31/12/2018 -4 203
  rates -20% 31/12/2019 -5 761 31/12/2018 10 716