Definition of liquidity risk
Liquidity risk is the risk of being unable to meet payment obligations resulting from balance sheet and off-balance sheet items held by the Bank on terms and conditions convenient for the Bank and at reasonable prices. The category of liquidity risk includes the funding liquidity risk which is the risk of losing the existing funding sources and the risk of being unable to replenish the required funding, or loss of access to new funding sources.
Purpose of liquidity risk management
The purpose of liquidity risk management is to ensure necessary amount of funding to meet current and future (including potential) liabilities, taking into account the specific features of the activity and the needs that may emerge as a result of changing market or macroeconomic conditions.
Liquidity risk management process
The Bank operates an internal liquidity adequacy assessment process (ILAAP) consisting in effective management of liquidity risk to ensure that the Bank holds stable funding and adequate liquidity buffers to meet obligations on time, including in stress conditions, and to ensure the compliance with regulatory requirements for liquidity. Through ILAAP items, the Bank defines liquidity risk tolerance, or the liquidity risk level it intends to maintain, that is coherent with the risk appetite and the overall strategy of the Bank.
Organisation of the liquidity risk management process
The Bank has appointed a Capital, Assets and Liabilities Management Committee (CALCO) specifically to manage assets and liabilities. The liquidity risk strategy, including the acceptable risk level, the anticipated balance sheet structure, and the funding plan are approved by the Bank’s Management Board and then accepted by the Bank’s Supervisory Board. The Treasury Department is responsible for entering into treasury interbank deals, and the transactions are settled and accounted for by the Operations Division, and the monitoring and measurement of liquidity risk is conducted at the Financial Risk Management Department. The separation of responsibilities for the management of liquidity risk is transparent and ensures the separation of responsibilities up to the Member of the Management Board level, which ensures their full operational independence.
Measurement and assessment of liquidity risk
Liquidity risk is measured at the Bank taking into account all significant positions – both on and off balance sheet (including, in particular, derivatives). The liquidity management metrics at the Bank include ratios and the related limits of the following liquidity types:
intraday
liquidity
current
liquidity
short-term
liquidity
mid-term
liquidity
long-term
liquidity
Liquidity risk measurement and reporting
Alior Bank regularly monitors and reports liquidity risk metrics levels and how much the internal limits and thresholds have been utilised.
As part of liquidity risk management, the Bank analyses the maturity profiles in a longer term, depending to a large extent on the adopted assumptions for future cash flows related to asset and liability positions. These assumptions are subject to acceptance of the CALCO Committee and of the Bank’s Management Board.
Listing of maturities of contracted flows of assets and liabilities on the consolidated basis as at 31 December 2019 (PLN million):
| 31/12/2019 | 1D | 1M | 3M | 6M | 1Y | 2Y | 5Y | 5Y+ | RAZEM | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 31/12/2019 | ASSETS | 1D | 1 730 | 1M | 3 270 | 3M | 2 505 | 6M | 3 846 | 1Y | 6 343 | 2Y | 11 947 | 5Y | 22 759 | 5Y+ | 42 698 | RAZEM | 95 098 |
| 31/12/2019 | Cash and Nostro | 1D | 1 357 | 1M | 0 | 3M | 0 | 6M | 0 | 1Y | 0 | 2Y | 0 | 5Y | 0 | 5Y+ | 0 | RAZEM | 1 357 |
| 31/12/2019 | Receivables from banks | 1D | 0 | 1M | 73 | 3M | 0 | 6M | 0 | 1Y | 0 | 2Y | 135 | 5Y | 0 | 5Y+ | 0 | RAZEM | 208 |
| 31/12/2019 | Securities | 1D | 373 | 1M | 1 424 | 3M | 2502 | 6M | 3336 | 1Y | 5871 | 2Y | 9 298 | 5Y | 16 898 | 5Y+ | 33 381 | RAZEM | 73 083 |
| 31/12/2019 | Receivables from customers | 1D | 0 | 1M | 1 773 | 3M | 3 | 6M | 510 | 1Y | 472 | 2Y | 2 514 | 5Y | 5 861 | 5Y+ | 5 816 | RAZEM | 16 949 |
| 31/12/2019 | Other assets | 1D | 0 | 1M | 0 | 3M | 0 | 6M | 0 | 1Y | 0 | 2Y | 0 | 5Y | 0 | 5Y+ | 3 501 | RAZEM | 3 501 |
| 31/12/2019 | Liabilities and equity | 1D | -46 201 | 1M | -5 111 | 3M | -4 742 | 6M | -3 939 | 1Y | -5 436 | 2Y | -2 720 | 5Y | -1 457 | 5Y+ | -7 717 | RAZEM | -77 323 |
| 31/12/2019 | Owed to banks | 1D | -278 | 1M | -117 | 3M | -31 | 6M | -41 | 1Y | -65 | 2Y | -116 | 5Y | -172 | 5Y+ | -79 | RAZEM | -899 |
| 31/12/2019 | Owed to customers | 1D | -44 122 | 1M | -4 921 | 3M | -4 556 | 6M | -3 939 | 1Y | -4 011 | 2Y | -1 106 | 5Y | -342 | 5Y+ | -26 | RAZEM | -62 653 |
| 31/12/2019 | Own issues | 1D | 0 | 1M | -67 | 3M | -126 | 6M | -285 | 1Y | -1 272 | 2Y | -1 394 | 5Y | -826 | 5Y+ | -793 | RAZEM | -4 763 |
| 31/12/2019 | Shareholders’ equity | 1D | 0 | 1M | -6 | 3M | -12 | 6M | -18 | 1Y | -36 | 2Y | 0 | 5Y | 0 | 5Y+ | -6 687 | RAZEM | -6 759 |
| 31/12/2019 | Other liabilities | 1D | -1 801 | 1M | 0 | 3M | -17 | 6M | -26 | 1Y | -52 | 2Y | -104 | 5Y | -117 | 5Y+ | -132 | RAZEM | -2 249 |
| 31/12/2019 | Balance sheet gap | 1D | -44 471 | 1M | -1 841 | 3M | -2 237 | 6M | -93 | 1Y | 907 | 2Y | 9 227 | 5Y | 21 302 | 5Y+ | 34 981 | RAZEM | 1777 |
| 31/12/2019 | Accumulated balance sheet gap | 1D | -44 471 | 1M | -46 312 | 3M | -48 549 | 6M | -48 642 | 1Y | -47 735 | 2Y | -38 508 | 5Y | -17 206 | 5Y+ | 17775 | RAZEM | |
| 31/12/2019 | Derivatives – inflows | 1D | 0 | 1M | 7 978 | 3M | 2 077 | 6M | 748 | 1Y | 344 | 2Y | 761 | 5Y | 285 | 5Y+ | 43 | RAZEM | 12 236 |
| 31/12/2019 | Derivatives – outflows | 1D | 0 | 1M | -7 956 | 3M | -2 084 | 6M | -744 | 1Y | -344 | 2Y | -774 | 5Y | -289 | 5Y+ | -42 | RAZEM | -12 233 |
| 31/12/2019 | Derivatives – net | 1D | 0 | 1M | 22 | 3M | -7 | 6M | 4 | 1Y | 0 | 2Y | -13 | 5Y | -4 | 5Y+ | 1 | RAZEM | 3 |
| 31/12/2019 | Guarantee and financial lines | 1D | -8 627 | 1M | 0 | 3M | 0 | 6M | 0 | 1Y | 0 | 2Y | 0 | 5Y | 0 | 5Y+ | 0 | RAZEM | -8 627 |
| 31/12/2019 | Off balance sheet gap | 1D | -8 627 | 1M | 22 | 3M | -7 | 6M | 4 | 1Y | 0 | 2Y | -13 | 5Y | -4 | 5Y+ | 1 | RAZEM | -8 624 |
| 31/12/2019 | Gap, total | 1D | -53 098 | 1M | -1 819 | 3M | -2 244 | 6M | -89 | 1Y | 907 | 2Y | 9 214 | 5Y | 21 298 | 5Y+ | 34 982 | RAZEM | 9 151 |
| 31/12/2019 | Accumulated gap, total | 1D | -53 098 | 1M | -54 917 | 3M | -57 161 | 6M | -57 250 | 1Y | -56 343 | 2Y | -47 129 | 5Y | -25 831 | 5Y+ | 9 151 | RAZEM |
The Bank maintains a high liquidity buffer by investing in government and commercial debt securities of the highest ranking that can be quickly liquidated, by keeping funds on the current account at NBP and in other banks (nostro accounts), by keeping cash at the Bank’s cash desks, and by investing the funds in interbank deposits, within the established limits. The adequacy of the liquidity buffer is controlled by comparing it with the established minimum liquidity buffer necessary to survive a stress scenario for up to and including 7 days and for 30 days.
As at 31 December 2019, the total liquidity buffer was PLN 14,295 million as compared to a minimum level of PLN 11,398 million under the shock scenario. To calculate the liquidity buffer, the Bank uses appropriate reductions of particular components of that buffer to take into account market liquidity risk (product).
The main source of funding of the Banks activities, including the liquid assets portfolio, are funds acquired from the deposit base whose level as at the end of 2019 was about 86% of total liabilities.
In addition, the Bank conducts liquidity stress tests taking into account an internal, external, and mixed crisis, including it prepares a plan of acquisition of funds in emergency situations, as well as it defines and verifies the rules for the sale of liquid assets, taking into account the cost of maintaining liquidity.
Under resolution 386/2008 of the Polish Financial Supervision Authority of 17 December 2008, the Bank establishes and reports on a daily basis:
- rate of coverage of illiquid assets with own funds,
- rate of coverage of illiquid or restricted-liquidity assets with own funds and stable third-party funds.
These ratios as at 31 December 2019 were, respectively: 3.68 and 1.18.
As required by the above-mentioned Resolution, the Bank conducts a deepened analysis of long-term liquidity, stability and structure of funding sources, taking into account the level of core deposits and concentration of term and current deposits. In addition, the Bank monitors the volatility of on-balance-sheet and off-balance-sheet items, in particular the projected inflows due to credit lines and guarantees provided to customers.
In addition, under Regulation No 575/2013 of the European Parliament and of the Council (EU) of 26 June 2013 on prudential requirements for credit institutions and investment firms (Capital Requirements Regulation – CRR), the Bank monitors and maintains on an adequate level the Liquidity Coverage Ratio – LCR. As at 31 December 2019, LCR for the Group was 148% as compared to the required 100%.
Management of liquidity risk at the Bank’s foreign Branch
In 2019, Alior Bank S.A. held one foreign branch, in Romania, which conducted deposit and credit activity. The Branch is to conduct credit activity with the funding received from Alior Bank S.A. and from the funding acquired in the local market. The Branch’s liquidity level is monitored on an ongoing basis by dedicated organisational units of the Branch and of the Bank’s Headquarters.