Source: https://report.vpbank.com/en/2017/financial-report/financial-report-group/risk-management.html
Timestamp: 2019-07-22 22:25:28
Document Index: 102561214

Matched Legal Cases: ['Art. 7', 'Art. 21', 'art 3', 'art 3', 'art 3', 'Art. 384', 'Art. 223']

Effective capital, liquidity and risk management is an elementary prerequisite for the success and stability of a bank. VP Bank understands this term to mean the systematic process to identify, evaluate, manage and monitor the relevant risks as well as the steering of capital resources and liquidity necessary to assume risks and guarantee risk tolerance. The risk policy laid down by the Board of Directors of VP Bank Group constitutes the mandatory operating framework in this respect.
The risk policy contains an overarching framework as well as a risk strategy for each risk group (financial risks, operational risks, business risks). Described and clearly regulated therein are the specific goals and principles, organisational structures and processes, methods and instruments as well as target measures and limits.
In Liechtenstein, the legal regulatory requirements governing risk management are set out primarily in the Banking Act (BankA) and the Banking Ordinance (BankO). In addition, the Capital Requirements Regulation (CRR) of the European Union was put into effect as of 1 February 2015. Together with the Capital Requirements Directive (CRD), the CRR constitutes the implementation of the Basel III Capital Accord in the European Union. In Liechtenstein, the CRD was enacted in the BankA and BankO. VP Bank was classified by the Financial Market Authority Liechtenstein as a locally system-relevant bank and must possess in aggregate equity amounting to at least 13 per cent of its risk-weighted assets. As regards liquidity, the Bank is required to comply with the Liquidity Coverage Ratio (LCR) of 80 per cent and 100 per cent as of 31 December 2017 and 1 January 2018, respectively. Thanks to its eminently robust equity basis, its balance-sheet structure and its comfortable liquidity situation, VP Bank has always markedly over-fulfilled the 2017 regulatory limits.
In addition to quantitative measures, qualitative requirements as to the identification, measurement, steering and monitoring of financial and operational risks are imposed. These are continually reviewed for on-going effectiveness and further development.
The minimum capital ratio of VP Bank of 13 per cent of risk-weighted assets consists of the regulatory minimum requirement of 8 per cent as well as a capital conservation and systemic risk buffer each of 2.5 per cent. Furthermore, Basel III provides for an anti-cyclical capital buffer which, however, was set at 0 per cent for 2017 by the Financial Market Authority Liechtenstein.
Thanks to an exceedingly robust tier 1 ratio of 25.7 per cent as of the end of 2017, it continues to guarantee sufficient freedom of action. This enables VP Bank to continue to assume risks associated with the conduct of banking operations. At the same time, there remains potential for corporate acquisitions through free equity resources, even after covering all risks.
The Leverage Ratio of VP Bank amounted to 7.5 per cent at the end of 2017. As of 1 January 2017, a regulatory minimum ratio does not exist as yet in Liechtenstein. VP Bank must publish further information as to the Leverage Ratio in the Disclosure Report.
As part of the management of equity resources and the balance-sheet structure, compliance with regulatory requirements and the coverage of its business needs are monitored on an on-going basis. Using an internal process to assess the adequacy of capital resources (Internal Capital Adequacy Assessment Process), the possible adverse effect on the equity basis in stress situations is simulated and analysed.
Whilst observing the legal liquidity standards and provisions, liquidity risks are monitored and managed using internal directives and limits for the interbank business and credit-granting activities. The maintenance of liquidity at all times within VP Bank Group continues to have the highest priority. This is assured with a large holding of cash and cash equivalents and high-quality liquid assets (HQLA).
VP Bank is legally obligated to comply with the Liquidity Coverage Ratio (LCR). As of the end of 2017, a minimum ratio of 80 per cent was demanded; as from 1 January 2018, the minimum ratio is increased to 100 per cent. With a value of 161 per cent, this target value can be markedly exceeded thanks to a comfortable liquidity situation. The increase over the prior year is to be ascribed primarily to a refinement in the computation.
In future, in the area of liquidity, a so-called Net Stable Funding Ratio (NSFR) will need to be complied with, in addition to the Liquidity Coverage Ratio. It dictates the structural liquidity of credit institutions and is designed to ensure matched refinancing on a long-term basis. A time horizon of one year is considered for this ratio. Although the Net Stable Funding Ratio is only mandatory in the future, VP Bank already now monitors compliance with this ratio.
Pursuant to Art. 7a BankA, banks are to develop effective strategies and procedures to determine, manage, monitor and report, inter alia, liquidity risks. At the end of 2017, the Financial Market Authority Liechtenstein published a new notice (No. 2017/6) which gives further guidance on the requirements regarding the process to assess the adequacy of internal liquidity (Internal Liquidity Adequacy Assessment Process, ILAAP). The strategies and procedures to determine, manage and monitor liquidity risks are to be reviewed and assessed annually by the Financial Market Authority Liechtenstein using an ILAAP questionnaire. This questionnaire is already to be submitted for the first time to the Financial Market Authority Liechtenstein in 2018.
As part of its liquidity-management process, VP Bank has drawn up an emergency liquidity plan which ensures that VP Bank possesses adequate liquidity in the event of liquidity crises. Early-warning indicators are regularly monitored to monitor and identify, on a timely basis, any deterioration in the liquidity situation.
As part of liquidity management, compliance with regulatory requirements and the coverage of business needs is subjected to on-going monitoring. Using stress tests, possible adverse scenarios are simulated and the impact on liquidity in stress situations analysed.
Because of the importance of the client lending business (CHF 5.6 billion as of 31 December 2017 or 44 per cent of total assets), the management and monitoring of credit risks continues to play a central role. Credit-risk management in the client lending business is governed – in addition to risk-policy regulations – by the rules on the granting of credits. In 2017, the volume of client loans increased by CHF 0.4 billion to CHF 5.6 billion. In the interbank business, the volumes in 2017 increased by CHF 0.2 billion to CHF 0.9 billion at the end of the year.
The interest-rate environment in the Swiss franc and in the Euro in 2017 was characterised by negative interest rates for short-term maturities. The negative interest-rate environment in both principal currencies presents balance-sheet management with major challenges. The investment of client deposits still presents difficulties. VP Bank has continued to pursue the measures it took as a reaction to the abandonment by the SNB of the minimum exchange-rate policy to the Euro and the shift into negative territory of the target range. In 2018, the monitoring and management of market risks remains of central importance.
Knowledge and experience is exchanged within the Group to ensure a coordinated approach. Meaningful reporting on a quarterly basis to the relevant target groups (Board of Directors, Group Executive Management and senior executives) on the status of operational risks in VP Bank Group is possible thanks as a result of a uniform implementation.
Alignment of risk tolerance and risk appetite
Risk appetite is reflected in the risk capital and indicates the maximum loss which the bank is prepared to bear arising from crystallising risks without thereby jeopardising the bank’s ability to continue as a going concern. As a strategic success factor, risk tolerance is to be maintained and enhanced by employing a suitable process to ensure and increase an appropriate capital base.
Clear defined powers of authority and responsibilities
Risk appetite is rendered operational with the aid of a comprehensive system of limits and implemented in an effective manner together with a clear set of guidelines governing the tasks, limits of authority and responsibility of all functions, organisational units and bodies participating in risk- and capital-management processes. The risk coverage potential results from net present value of equity, less operating and risk costs as well as regulatory capital-adequacy requirements.
Conscientious handling of risks
Strategic and operational decisions are taken based on risk/return calculations and aligned with the interests of the stakeholders. Whilst complying with legal and ­regulatory provisions as well as the principles underlying business and ethical policies, VP Bank takes on risks consciously so long as the extent of these are known and the technical prerequisites to map them are at hand and that the bank is adequately rewarded. It avoids transactions with an unbalanced relationship of risks to returns as well as large risks and extreme risk concentrations which could jeopardise risk tolerance and thus the ability of the Group to continue as a going concern.
Whilst financial risks are consciously assumed in order to generate revenues, operational risks are to be avoided through appropriate controls and measures or, if that is not possible, to be reduced to a level laid down by the bank.
Market risks express the danger that possible economic losses in value in the banking and trading books will arise from adverse changes in market prices (interest rates, currency rates, equity prices and commodities) or other price-influencing parameters such as volatility.
Liquidity risks comprise short-term liquidity and refinancing risks as well as market liquidity risk. Liquidity and refinancing risks express the danger that current and future payment obligations cannot be refinanced on the due date or to the full extent, not in the correct currency or not on customary market terms and conditions. Market liquidity risk includes cases where it is not possible, because of insufficient market liquidity, to liquidate or hedge positions subject to risk on a timely basis to the desired extent and on acceptable conditions.
Credit risks encompass counterparty and country risk, concentrations of risk as well as residual risks deriving from the use of credit collateral (realisation or liquidation risk). Counterparty risks describe the danger of a financial loss which may arise if a counterparty of the bank cannot or does not wish to meet its contractual commitments in full or on the due date (default risk) or the credit-worthiness of the debtor has deteriorated (solvency risk). Country risks as a further extension of credit risk arise whenever political or economic conditions specific to a country diminish the value of an exposure abroad. Concentration risks encompass potential losses accruing to the bank not through the debtor itself but as a result of an insufficient diversification of the credit portfolio. Realisation or liquidation risks encompass potential losses accruing to the bank not from the debtor itself as a result of an insufficient possibilities of realising the collateral.
Operational risks represent the danger of incurring losses arising from the inappropriateness or failure of internal procedures, individuals or systems or as a result of external events. These are to be avoided by appropriate controls and measures before they crystallise or, if that is not possible, to be reduced to a level set by the bank. Operational risks may also arise in all organisational units whereas financial risks can only arise in risk-taking units.
Business risks, on the one hand, result from unexpected changes in market and underlying conditions having an adverse impact on profitability or equity; on the other, they describe furthermore the danger of unexpected losses resulting from management decisions concerning the business policy orientation of the Group (strategic risks). The Group Executive Management (GEM) of VP Bank is responsible for managing business risks. These business risks are analysed by the Group Executive Management, taking into account the banking environment and the internal company situation, and appropriate measures are developed.
If the above-mentioned risks are not recognised, appropriately controlled, managed and monitored, this may lead – apart from financial losses – to reputation being damaged. VP Bank therefore considers reputational risk not to be a risk category in its own right but rather as the danger of incurring losses resulting from the individual risk types of other risk categories. Management of reputational risks is incumbent on Group Executive Management.
Pursuant to Art. 21d par. 4 of the Banking Ordinance (BankO), a member of Group Executive Management shall head up the risk-management function (Chief Risk Officer) who is specifically responsible for this function. Insofar as the nature, scope and complexity of business activities justify it and no conflict of interest exists, another senior executive within the bank may assume this function. In VP Bank, the role of Chief Risk Officer is embedded in the organisational unit “General Counsel & Chief Risk Officer” at the level of the Group Executive Management.
In addition to the Chief Risk Officer (CRO), a series of committees and operational units are involved in risk and capital-management processes. The following table gives an overview in diagram form of the organisational structure relating to risk management in VP Bank.
The Board of Directors bears the overall responsibility for capital, liquidity and risk management within the Group. It is its remit to establish and maintain an appropriate structure of business processes and organisation as well as an internal control system (ICS) for an effective and efficient management of capital, liquidity and risk thereby ensuring the risk tolerance of the bank on a sustainable basis. The Board of Directors approves the Risk Policy and monitors its implementation, lays down the risk appetite on a Group level and stipulates the target measures and limits for capital, liquidity and risk management. In assuming its duties, the Board of Directors is supported by the Audit Committee, the Risk Committee and Group Internal Audit.
The Group Executive Management (GEM) is responsible for the implementation and observance of the Risk Policy approved by the Board of Directors. Amongst its core tasks are the responsibility to ensure the effective functioning of risk management processes and the internal control system, the allocation of the target measures and limits set by the Board of Directors for the individual Group companies, the Group-wide management of credit, market, liquidity, operational, business and reputational risks as well as capital-management activities.
The Group Risk Committee (GRC) is the supreme authority for monitoring and steering the risks to which VP Bank is exposed. The principal tasks of the Group Risk Committee are the implementation of the risk strategy for financial and operational risks within the overall framework of the target measures and limits laid down by the Board of Directors and Group Executive Management.
Whilst complying with the relevant legal and regulatory provisions, the Asset & Liability Committee (ALCO) is responsible for the risk and return-oriented management of the balance sheet on the basis of the Economic Profit Model as well as for the steering of financial risks. The ALCO assesses the Group’s risk situation in the area of financial risks and initiates remedial control measures, whenever necessary.
As an independent function for the centralised identification, evaluation (measurement and assessment) and monitoring (control and reporting) of the risk situation and risk tolerance of the Group, Group Risk supports the Board of Directors, Group Executive Management, Group Risk Committee and the Chief Risk Officer in assuming their respective duties. A further task of Group Risk consists of ensuring that existing legal, regulatory and internal bank risk-­management provisions are complied with and new risk-management prescriptions implemented. In addition thereto is the regular review and assessment of the effectiveness and appropriateness of the methods, performance indicators and systems deployed in risk management.
Group Treasury bears the responsibility for the day-to-day steering of financial risks within the target measures and limits laid down by the Board of Directors and Group Executive Management, whilst complying with legal and regu­latory prescriptions. Part of its core tasks is the balance-­sheet structure management whilst taking account of profitability, market and credit risks as well as the liquidity and equity situation of VP Bank as well as additionally, the management of equity resources, liquidity and collateral and of limits for banks and countries.
All risk-taking functions and organisational units are regar­ded as the operating units.
The Security Risk Committee (SRC), whose activities are oriented to coordination and strategy, is the supreme security committee of VP Bank which manages the operational implementation in the units involved by setting targets regarding the various security-related issues. The Security Risk Committee deals with all strategic security issues of VP Bank Group. This covers physical security, information security (incl. cyber security), business continuity management as well as the awareness of the need for security and culture.
The risk-adjusted capital base of VP Bank is assured by corresponding procedures and systems. The Internal ­Capital Adequacy Assessment Process (ICAAP) of VP Bank is briefly outlined below and presented in the following diagram:
The risk strategy and risk appetite which is derived from the global and individual limits is laid down during the annual planning process based on a risk tolerance analysis and taking into account stress scenarios, strategic initiatives and changes in regulatory directives laid down by the Board of Directors. The risk capital includes the regulatory capital required to support business activities and the economic capital for extreme unexpected losses arising from market, credit and operational risks. For the latter, the Board of Directors makes available only a part of the maximum available risk cover potential in the form of an overall bank limit. Accordingly, not all of the freely available equity (after deducting the regulatory required capital as well as funds planned for future capital expenditure) is made available; a portion thereof is retained rather as a risk buffer for unquantifiable or not fully identified risks. To ensure that VP Bank has always enough equity available to cover all significant risks, a rolling three-year capital plan is prepared which takes into account differing distinct stress levels.
The annual identification of risks (risk inventory) ensures that all risks of relevance to the Group are identified. In addition, an identification of risks is undertaken on a mandatory basis as part of the process of introducing new financial instruments, the assumption of activities in new fields of business or geographic markets as well as in the event of changes to legal or regulatory provisions.
The risk-tolerance concept of VP Bank Group distinguishes between a regulatory and value-oriented perspective. From a regulatory perspective, the free risk-coverage potential results from the eligible equity less the regulatory required capital and an internal core-capital buffer. From a value-oriented point of view, the free risk-coverage potential results from the net present value of the equity less operating and risk costs as well as a risk buffer for other risks.
In computing the economically required equity, the risks are aggregated to form an overall assessment whereby the value-at-risk method is employed for the financial risks. Operational risks are computed using the basis indicator approach. Over and above this, VP Bank resorts to a broad panoply of methods and indicators which are described in greater detail in the sections on the individual risk groups.
Risk management is performed on a strategic level by setting goals, limits, principles of conduct as well as process guidelines. On an operating level, the diversification of risks is ensured by managing financial risks within the target measures and limits set as well by observing regulatory requirements.
Risk monitoring (control and reporting) encompasses the control of and reporting on the risk situation. The exceeding of limits highlighted by routine target-to-actual variance analyses, within the scope of controls, serves as an impetus for steering measures. The target values are derived from the internal target measures and limits set as well as legal and regulatory norms. In this respect, advance warning stages enable an early course of action in order to avoid exceeding limits. As part of reporting, the results of the review are set forth in a reliable, regular and transparent manner. Reporting is made ex ante to the preparation of decisions, ex post to control purposes as well as ad hoc in the case of suddenly and unexpectedly occurring risks.
In addition to an ICAAP report, VP Bank, as a locally system-relevant institution, is required to draw up an annual Recovery Plan at a Group level which is to be submitted to the Financial Market Authority Liechtenstein. The Recovery Plan is designed to serve as a preparation for managing crisis situations and to contribute to the marked improvement of the ability of system-relevant institutions to withstand and react to possible crisis scenarios. Central elements of the Recovery Plan, in this connection, are both the conscious approach to handling possible crisis scenarios as well as the preparation of strategic and organisational measures to be taken in the event of a crisis.
4. Disclosure of required equity
The required qualitative and quantitative information on capital adequacy, the strategies and procedures for risk management as well as on the risk situation of VP Bank are set forth in the Risk Report and the commentary on the consolidated financial statements. Over and above this, VP Bank Group has drawn up a Disclosure Report for the 2017 business year. In this manner, the bank fulfils the regulatory requirements of the Banking Ordinance (BankO) and the Banking Act (BankA).
The capital-adequacy and liquidity requirements for credit institutions in Liechtenstein are based on the Basel III rules as implemented in the European Union. As one of the three system-relevant banks in Liechtenstein, VP Bank is to fulfil the requirement of additional capital buffers.
VP Bank computes its required equity in accordance with the provisions of the CRR. In this connection, the following approaches are applied:
Standard approach for credit risks in accordance with Part 3 Section II Chapter 2 CRR
Basis indicator approach for operational risks in accordance with Part 3 Section III Chapter 2 CRR
Standard method for market risks in accordance with Part 3 Section IV Chapter 2-4 CRR
Standard method for Credit Value Adjustment risks in accordance with Art. 384 CRR
Comprehensive method to take account of financial collateral in accordance with Art. 223 CRR.
As of 31 December 2017, the business activities of VP Bank Group required equity totalling CHF 493.0 million (prior year: CHF 450.3 million). This represents 13 per cent of the risk-weighted assets of CHF 3,799.4 million (prior year: CHF 3,464.0 million). The excess of equity (based upon a requirement of 13.0 per cent) as at 31 December 2017 amounted to CHF 482.6 million (prior year: CHF 488.2 million). The tier 1 ratio of 25.7 per cent (prior year: 27.1 per cent) reflects the on-going extremely robust equity situation of VP Bank. In 2017, VP Bank Group used no hybrid capital under eligible equity and, in accordance with International Financial Reporting Standards (IFRS), netted no assets against liabilities (balance-sheet reduction).
The following table shows the capital-adequacy situation of the Group as of 31 December 2017.
–36,385
–31,660
3,799,412
Whilst complying with the relevant legal and regulatory provisions, the monitoring and daily steering of financial risks is based upon internal bank target measures and limits relating to volumes and sensitivities. Scenario analyses and stress tests demonstrate in addition the effect of events which were not or not sufficiently taken into consideration within the scope of ordinary risk evaluation.
In this respect, the Board of Directors sets strategic guard rails within which risk management is undertaken. The identification, measurement, steering and monitoring of all relevant risks is handled at the operating level. Group Executive Management is responsible for the implementation and observance of the risk strategy for financial risks as approved by the Board of Directors.
Interest-rate risk in VP Bank’s balance sheet constitutes a significant component of market risk. It arises primarily because of differing maturities of asset and liability positions. The maturing-structure table shows the assets and liabilities of VP Bank, analysed by sight positions, cancellable positions and those with differing maturities (cf. appendix 35). Asset and liability positions of VP Bank denominated in foreign currencies are of importance to determine the foreign-currency risk. An overview, analysed by currency, is to be found in appendix 34 (cf. balance sheet by currency).
The Bank employs a comprehensive set of methods and indicators for the monitoring and management of market risks. In this respect, the value-at-risk approach has established itself as the standard method to measure general market risk. The value-at-risk for market risks quantifies the negative deviation, expressed in Swiss francs, from the value of all positions exposed to market risk as of the date of the evaluation. The value-at-risk indicator is computed on a Group-wide basis with the aid of historic simulation. In this process, the historical movements in market data over a period of at least five years are used in order to measure all positions subject to market risk. The projected loss is valid for a holding period of one year and will not be exceeded with a probability of 99 per cent. To compute the value-at-risk for interest-rate risk, fixed interest-bearing positions are mapped with the interest lock-up period and variable interest positions using an internal replication model.
The market risk value-at-risk of VP Bank Group at 31 De­- cember 2017 amounted to CHF 122.4 million (prior year: CHF 119.0 million).
The table below shows the market-value-at-risk (on a monthly basis) in total and analysed by types of risk. The computation of average, highest, lowest values by risk type and aggregate values is based on a separate year-on-year perspective; the aggregate value thus does not necessarily equate to the sum of the respective individual values by risk type.
Market-Value-at-Risk
(value at end of month)
As the maximum losses arising from extreme market ­situations cannot be determined with the value-at-risk approach, the market risk analysis is supplemented by stress tests. Such tests render possible an estimate of the effects on the net present value of equity of extreme market fluctuations in the risk factors. In this manner, the fluc­tuations in net present value of all balance-sheet positions and derivatives in the area of market risks are computed with the aid of sensitivity indicators based on synthetically produced market movements (parallel shift, rotation or inclination changes in interest-rate curves, exchange-rate fluctuations by a multiple of their implicit volatility, slump in equity share prices).
The following table exemplifies the results of the key rate duration process. First, the present values of all asset and liability positions as well as derivative financial instruments are determined. The interest rates of the relevant interest-rate curves in each maturity band and per currency are then increased by one per cent (+100 basis points). The respective movements represent the gain or loss of the present value resulting from the shift in the interest-­rate curve. Negative values point to an excess of assets, positive values to an excess of liabilities in the maturity band.
In the following table are set out the effects of a negative movement in the principal currencies on consolidated net income and shareholders’ equity. Responsible for the underlying fluctuation of the Swiss franc against the Euro and the US dollar is the implicit volatility as of 31.12.2017 and 31.12.2016, respectively.
–3,516
–7,252
–8,346
–5,855
–11,710
–17,566
–2,576
–20,815
–16,657
–33,342
–10,871
–15,043
–24,824
–10,551
–10,642
–40,274
–33,897
–66,040
For risk steering purposes, derivative financial instruments are entered into exclusively in the banking book and serve to hedge equity price, interest-rate and currency risks as well as to manage the banking book. The derivatives approved for this purpose are laid down in the Risk Policy.
VP Bank refinances its medium and long-term client loans and its nostro positions in interest-bearing debt securities primarily with short-term client deposits and thus is sub­- ject to an interest-rate risk. Rising interest rates have an adverse impact on the net present value of interest-bearing credits and increase refinancing costs. As part of its asset & liability management, mostly interest-rate swaps measured at fair value are deployed to hedge this risk. VP Bank applies fair-value hedge accounting under IFRS in order to record in the balance sheet the contra effect of changes in value of the hedged credit transactions. For this, a portion of the underlying transactions (fixed-interest credits) are linked to the hedging transactions (payer swaps) in hedging relationships. In the event of fair-value changes caused by interest-rate changes, the carrying value of the underlying transactions concerned are adjusted and the gains/losses taken to income.
Because the unsettled fixed-interest positions are transformed into variable interest-rate positions through the conclusion of payer swaps, a close economic relationship exists between the underlying and hedging transactions in relation to the hedged risk. Therefore, the hedging relationship between the designated amount of the underlying transactions and the designated amount of the hedging instruments (hedge ratio) is set on a one-to-one basis. A hedging relationship is efficient and/or effective whenever the movements in the value of the underlying and hedging transactions which are induced by interest-rate changes offset each other. Ineffectiveness is a result primarily of deviations in duration e.g. as a result of differing interest rates, timing of interest payments or differing maturities.
The initial efficiency of a hedging relationship is proven with a prospective effectiveness test. For this purpose, future changes in the fair value of the underlying and hedging transactions are simulated based upon scenarios and subjected to a regression analysis. Effectiveness is assessed on the basis of the results of the analysis. Repeated reviews take place during the duration of the hedging relationship.
VP Bank has hedged its own financial investments against currency fluctuations in the main currencies through the conclusion of foreign-currency forward contracts. In prin­ciple, no currency risks should arise from client activities; residual unsettled foreign-currency positions are closed out over the foreign-currency spot market. Group Trading & Execution is responsible for the management of foreign-currency risks arising from client activities.
Liquidity risks may arise through contractual mismatches between the in- and outflows of liquidity in the individual maturity bands. Any differences arising demonstrate how much liquidity the bank must eventually procure in each maturity band should there be an outflow of all volumes at the earliest possible time. Furthermore, refinancing concentrations may lead to a liquidity risk if they are so significant that a massive withdrawal of the related funds could trigger liquidity problems.
Liquidity risks are monitored and managed using internal targets and limits for interbank and client-related business – whilst complying with the legal liquidity standards and provisions regarding risk concentrations on the assets’ and liabilities’ side.
As part of the introduction of the Basel III rules in Liechtenstein, the Liquidity Coverage Ratio (LCR) has been calculated since the end of June 2015 and reported to the Financial Market Authority Liechtenstein. As at the end of 2017, a lower limit of 80 per cent for the LCR applies which will be raised to 100 per cent at the beginning of 2018. At the end of 2016, VP Bank presents a comfortable liquidity situation with a value for the LCR of 161 per cent.
In future, in addition to the Liquidity Coverage Ratio, the so-called Net Stable Funding Ratio (NSFR) will need to be observed in the area of liquidity. The final guidelines regarding the Net Stable Funding Ratio (NSFR) are not yet available as at the end of 2017 so that no final value can yet be computed. VP Bank now already monitors the NSFR regularly on the basis of the already existing rules.
In the area of short-term maturity bands, the Bank refinances itself, to a significant degree, with sight balances from clients. The maturity structure of assets and liabilities is set out in appendix 35.
VP Bank can rapidly procure liquidity on a secured basis in case of need through its access to the Eurex repo market. The risk of an extraordinary, nevertheless plausible event which will take place with a very small degree of proba­bility can be measured with the aid of stress tests. In this manner, VP Bank can take all applicable remedial action on a timely basis and, where necessary, set limits.
Credit risks arise from all transactions for which payment obligations of third parties in favour of the bank exist or can arise. Credit risks accrue to VP Bank from client lending activities, the money-market business including bank guarantees, correspondent and metal accounts, the reverse repo business, the Bank’s own portfolio of securities, securities lending and borrowing, collateral management as well as OTC derivative trades.
As of 31 December 2017, total credit exposures amounted to CHF 8.9 billion (31 December 2016: CHF 8.0 billion). The following table shows the composition thereof by on- and off-balance sheet positions.
5,647,091
8,895,432
On-balance-sheet assets as of 31.12.2017
3,374,367
3,381,030
Off-balance-sheet transactions as of 31.12.2017
The following table shows credit exposures according to collateral. Receivables from clients are granted by default on a secured basis. This area primarily includes the mortgage business in Switzerland and Liechtenstein, the lombard credit business as well as a small number of special credits. Receivables from banks as well as financial instruments are granted, as a rule, on an unsecured basis.
5,261,477
5,275,885
In the case of amounts due from banks, money-market paper as well as nostro positions in interest-bearing securities, the valuation is based upon external ratings. The following tables show the individual on- and off-balance-sheet positions according to rating classes, risk-weighting classes and country of domicile.
(AAA to BBB–)
(BB+ to BB–)
–65,561
2,151,338
3,186,073
5,774,911
–66,627
2,014,649
2,305,498
3,342,978
2,014,905
1,315,610
8,989,464
3,582,294
4,529,696
As per ISO-3166 the Caribbean countries are shown under North America. In the previous year the amounts were shown in other countries.
Within the scope of the client lending business, credits are granted on a regional and international basis to private and commercial clients whereby the focus is in the private client business with CHF 3.3 billion of mortgage credits (31 December 2016: CHF 3.3 billion). From a regional perspective, VP Bank conducts the lion’s share of this business in the Principality of Liechtenstein and in the Eastern part of Switzerland. Given the broad diversification of exposures, there are no risk concentrations by industry or segment.
The ten largest single exposures encompass 14 per cent of total credit exposures (31 December 2016: 13 per cent). Exposures to banks relate to institutions with a high credit capacity (investment grade rating) and registered office in an OECD country (excluding GIIPS countries).
In addition to the Risk Policy rules, the Credit-Granting Rules constitute the binding framework regulating client lending activities. Set out therein are not only the general guidelines governing credit granting as well as the framework conditions for the conclusion of credit business but also the decision makers and the corresponding bandwidths within the framework of which credits may be approved (rules on powers of authority). In principle, in the area of private and commercial clients lendings exposures must be covered by the collateral value of the security (collateral less a deduction for risk). Counterparty risks in the loan business are governed by limits which restrict the amount of exposure depending on credit-worthiness, industry segment, collateral and risk domicile of the client. VP Bank employs an internal rating procedure to evaluate credit-worthiness. Deviations from credit-granting principles (exceptions to policy) are dealt with as part of the credit-risk management process depending on the risk content.
VP Bank enters into both secured and unsecured positions in the interbank business. Unsecured positions result from money-market activities (including bank guarantees, correspondent and metal accounts), secured positions arising from the reverse repo business, securities & lending activities, collateral management as well as OTC derivative transactions. As repo deposits are fully secured and the collateral received serves as a reliable source of liquidity in a crisis situation, not only the counterparty risk but also liquidity risk is reduced.
Counterparty risks in the interbank business may only be entered into in approved countries and with approved counterparties. A comprehensive system of limits contains the level of exposure depending on the duration, rating, risk domicile and collateral of the counterparty. In this regard, VP Bank uses for banks the ratings of the two rating agencies, Standard & Poor’s and Moody’s. OTC derivative transactions may only be concluded with counterparties with whom a netting contract has been agreed.
Credit risks are managed and monitored not only on an individual client level but also on a portfolio level. At the portfolio level, VP Bank uses the expected and unexpected credit loss to monitor and measure credit risk. The expected credit loss calculates – based on historical loss data and estimated default probabilities – the loss per credit portfolio which may be anticipated within one year. In addition, the results of the analysis flow into the calculation of the general lump-sum valuation allowances in the annual financial statements. The unexpected credit loss measures the deviation of the actual loss, expressed as the value-at-risk, from the expected loss assuming a defined probability.
Total reporting period 2017
Total reporting period 2016
Country risks arise whenever political or economic conditions specific to a country impinge on the value of an exposure abroad. The monitoring and management of country risk is undertaken using volume limits which restrict the respective aggregate exposures per country rating (Standard & Poor’s and Moody’s). All on- and off-balance sheet receivables are considered in this process; positions in the Principality of Liechtenstein and Switzerland do not fall under this country limit rule. The risk domicile of an exposure is the basis for recognising country risk. In the case of secured exposures, in principle the country in which the collateral is located is considered.
The following table shows the distribution of credit exposures by country rating. Non-rated country exposures are mostly exposures from local business activities (receivables secured by mortgage) of VP Bank (BVI) Ltd.
CCC – C
The causes for operational risks are multiple. Individuals make mistakes, IT systems fail or business processes are inoperative. It is therefore necessary to determine the factors which trigger important risk events and their impact in order to contain them with suitable preventive measures.
Each person in a management position is responsible for the identification and evaluation of operational risks as well as for the definition and performance of key controls and measures to contain risks. This responsibility may not be delegated. Each person in a management position shall make a critical annual assessment of whether the key controls have on-going validity and whether key controls are missing. Each management member in levels 1 and 2 undertakes an annual self-assessment of that part of the internal control system for which he/she is responsible. The results of this self-analysis are communicated annually to the central unit Group Risk.
Within the scope of its decision-making authority, the latter makes available, on a Group-wide basis, the instruments for a systematic management of operational risks and ensures their on-going development. These include the conduct of risk assessments (scenario analyses) as part of risk identification and evaluation, the performance of key controls, the maintenance of a data bank of incidents as well as the deployment of early warning indicators. These take place, at a minimum, on an annual basis, depending on the situation.
Knowledge and experience is exchanged within the Group to ensure a coordinated approach. Thanks to a uniform implementation, it is possible to provide the relevant target groups (Board of Directors, Group Executive Management and senior management executives) with a meaningful quarterly status report on operational risks within VP Bank Group.
Business Continuity Management (BCM), as a further important sub-area, is systematically pursued by VP Bank with expert and specialised knowledge along the lines of the ISO standard 22301:2012. The basis thereof is the BCM strategy which has been implemented by Group Executive Management and reviewed on an on-going basis for effectiveness and accuracy. Operationally critical processes are reviewed in detail, discussed and, where necessary, documented with a clear course of action whenever risks crystallise. The organisation necessary for crisis management is in place and its members routinely trained and instructed.
Business risks result, on the one hand, from unexpected changes in market and environmental conditions with an adverse effect on profitability or equity or, on the other hand, they indicate moreover the danger of unexpected losses resulting from management decisions concerning the business policy orientation of the Group (strategic risks). The Group Executive Management is responsible for managing business risks. Taking into account the banking environment and the internal company situation, these risks are analysed by the Group Executive Management, top-risk scenarios are derived and appropriate measures are worked out, the implementation of which is entrusted to the responsible body or organisational unit (top-down process).