66. 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

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

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.

The adjusted liquidity gap comprises a set of particular balance sheet and off-balance sheet categories in respect of their adjusted maturities. The liquidity gaps presented below represent the sum of adjusted liquidity gaps of the Bank (adjustments relate to, among other things, the Bank’s core deposits from non-financial entities and their maturities, overdrafts and credit cards and their maturities, and liquid securities and their maturities), PKO Bank Hipoteczny, PKO Leasing SA, KREDOBANK SA and PKO Życie Towarzystwo Ubezpieczeń SA, and the contractual liquidity gaps of the other Group companies.

In all time horizons, the adjusted cumulative liquidity gap of the Group, determined as the sum of the adjusted liquidity gaps of the Bank, PKO Bank Hipoteczny SA, PKO Leasing SA, KREDOBANK SA and PKO Życie Towarzystwo Ubezpieczeń SA and the contractual liquidity gaps of the other Group companies, was positive both as at 31 December 2022 and 31 December 2021. This means that the Group has a surplus of the assets receivable over the liabilities payable.

The following supervisory liquidity measures (specified by the provisions approved at the EU level) are regularly set and monitored at the Group:

• Liquidity Coverage Ratio (LCR) – defining the relation of high-quality liquid assets to net outflows in the 30-day horizon in stress conditions (supervisory measure specified in the CRR Regulation);
• Net Stable Funding Ratio (NSFR) – a measure defining the relationship of items providing stable funding to items requiring stable funding;

In the period ended 31 December 2022 and 31 December 2021, liquidity measures remained above their respective supervisory limits.

As at 31 December 2022, the core deposit base constituted approx. 91.2% of all deposits placed with the Bank (excluding the interbank market), which represents a decrease of around 3.1 p.p. compared with the end of 2021.