The objective of capital adequacy management is to maintain own funds at a level which is adequate to the scale and profile of the risk relating to the Group’s activities at all times.
The process of managing the Group’s capital adequacy comprises:
- specifying and pursuing the Group’s capital targets;
- identifying and monitoring significant types of risk;
- measuring or estimating internal capital to cover individual risk types of risk and total internal capital;
- determining strategic tolerance limits and thresholds of capital adequacy measures;
- forecasting, monitoring and reporting the level and structure of equity and capital adequacy;
- managing the structure of the statement of financial position to optimize the quality of the Bank’s own funds;
- emergency measures with regard to capital;
- planning and allocating the requirements of own funds and internal capital to business areas and customer segments in the Bank as well as individual Group companies;
- assessing the profitability of individual business areas and customer segments.
Capital adequacy measures include:
- total capital ratio (TCR);
- the ratio of own funds to internal capital;
- Tier 1 core capital ratio (CET1);
- Tier 1 capital ratio (T1);
- leverage ratio.
The objective of monitoring the level of capital adequacy measures is to determine the degree of compliance with supervisory standards and to identify cases which require that emergency actions be implemented.
Major regulations applicable in the capital adequacy assessment process include:
- the CRR Regulation;
- the Polish Banking Law;
- the Act of 5 August 2015 on macroprudential supervision over the financial system and crisis management in the financial system (as amended), hereinafter referred to as “the Act on macroprudential supervision”.
- the Regulation of the Minister of Finance and Development of 6 March 2017 on the risk management and internal control systems, remuneration policy and the detailed procedure for estimating internal capital in banks.
In accordance with Article 92 of the CRR Regulation, the minimum levels of the capital ratios to be maintained by the Group are as follows:
- total capital ratio (TCR) – 8,0%;
- Tier 1 capital ratio (T1) – 6,0%;
- Tier 1 core capital ratio (CET1) – 4,5%.
In accordance with the CRR Regulation and the Act on macroprudential supervision, the Group is obliged to maintain a combined buffer representing the sum of the applicable buffers, namely:
- a conservation buffer which applies to all banks. Every year, the capital buffer will be increased to the target level of 2.5% (in 2019). As at 31 December 2018, the cinservation buffer amounted to 1.875%.
- the countercyclical buffer imposed to mitigate the systemic risk arising from the credit cycle. The Group calculates the countercyclical buffer at the level specified by the relevant authority of the country where the Group has exposures. Starting from 1 January 2017, the countercyclical buffer is equal to 0% for credit exposures in the Republic of Poland.
- a systemic risk buffer – intended to prevent and mitigate long-term non-cyclical risk or macroprudential risk which may cause strong negative consequences for the financial system and the economy of a given country. As at 31 December 2018, the systemic risk buffer was equal to 3%.
- the buffer relating to the fact that the Bank has been identified as a systemically important institution (‘O-SII’) – on 31 July 2018, on the basis of an assessment of the Bank’s systemic importance in accordance with the Act on macroprudential supervision, the Group received an individual decision of the Polish Financial Supervision Authority imposing a buffer on the Group of 1% of its total risk exposure calculated in accordance with the CRR Regulation.
In addition, the Group is obliged to maintain own funds to cover an additional capital requirement in order to hedge the risk resulting from mortgage-secured loans and advances to households denominated in foreign currencies (“a discretionary capital requirement”). On 29 November 2018, the Group received a letter from the Polish Financial Supervision Authority concerning an individual recommendation to meet an additional capital requirement (a discretionary capital requirement) for the consolidated capital ratios: the total capital ratio: 0.42 p.p.; Tier 1 capital ratio: 0.31 p.p.; and Tier 1 core capital ratio: 0.23 p.p.
In 2018 the Group received the Polish Financial Supervision Authority’s response as to the possibility of applying the 35% risk weight to PLN loans fully and completely secured by mortgage on housing properties. The Office of the PFSA indicated that the provisions of CRR are binding in this respect. The Group treats this position of the PFSA as a possibility to apply the preferential risk weight on a wider basis, including using an extended catalogue of source data on properties for the purpose of assessing the value of the collateral.
In 2018 and in 2017, the Group maintained a safe capital base in excess of the supervisory and regulatory limits.