Risk management of VP Bank Group

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 currently valid Basel III Capital Accord in the European Union. In Liechtenstein, the CRD was enacted in the Banking Act and related Ordinance. 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 with regards to liquidity, since 1 January 2018 the Bank is required to maintain a Liquidity Coverage Ratio (LCR) of at least 100 per cent. Thanks to its solid equity basis, balance-sheet structure and comfortable liquidity position, VP Bank has constantly outperformed the regulatory requirements over the course of 2018. 

In addition to quantitative measures, qualitative requirements for identification, measurement, steering and monitoring of financial and operational risks are imposed. These are continually reviewed by VP Bank for on-going effectiveness and further development. 

The regulatory minimum capital ratio of 13 per cent of risk-weighted assets consists of an 8 per cent minimum as well as additional capital conservation and systemic risk buffers of 2.5 per cent each. Furthermore, Basel III provides for an anti-cyclical capital buffer which, however, was set at 0 per cent for 2018 by the Financial Market Authority Liechtenstein.

VP Bank has observed the equity requirements during 2018 at all times. Thanks to an exceedingly robust tier-1 ratio of 20.9 per cent as at the end of 2018, VP Bank continues to enjoy ample scope for assuming risks associated with its conduct of banking operations. Even after accounting for all risks there remains potential for corporate acquisitions through free equity resources. 

The Leverage Ratio (indebtedness ratio) of VP Bank amounted to 7.3 per cent at the end of 2018. Although the Financial Market Authority Liechtenstein has not yet formally established a requirement for a minimum ratio by end of 2018, VP Bank continues to disclose the Leverage Ratio in its 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 is monitored on an on-going basis. Using an internal process to assess the adequacy of capital resources (Internal Capital Adequacy Assessment Process), possible adverse effects on the equity and liquidity position under stress situations are simulated and analysed. 

Besides observing legal liquidity requirements and provisions, liquidity risks of the interbank business and credit-granting activities are monitored and managed using internal directives and limits. Maintaining sufficient liquidity at all times has utmost priority at VP Bank Group. This is assured with large cash and cash equivalent holdings as well as high-quality liquid assets (HQLA). VP Bank has observed the minimum regulatory liquidity requirements during 2018 at all times.

VP Bank Group’s comfortable liquidity position is reflected with a Liquidity Coverage Ratio (LCR) of 143 per cent as at 31 December 2018, and in compliance with the minimum regulatory requirement of 100 per cent.

With ILAAP (Internal Liquidity Adequacy Assessment Process), the Financial Market Authority imposes specific requirements concerning internal strategies and procedures to determine, manage and monitor liquidity risks. In 2018, the ILAAP was surveyed and assessed for the first time by the Financial Market Authority Liechtenstein using a specific questionnaire.

As part of its liquidity management process, VP Bank has established an emergency liquidity plan to ensure that VP Bank holds adequate liquidity in the event of a liquidity crisis. Early warning indicators are regularly reviewed 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.

Due to the importance of the client lending business (CHF 6.2 billion as of 31 December 2018 or 50 per cent of total assets), management and monitoring of credit risks plays a central role at VP Bank. Credit risk management in the client lending business is governed – in addition to risk-policy regulations – by a set of rules for granting loans. In 2018, the volume of client loans increased by CHF 0.5 billion to CHF 6.2 billion whereas in the interbank business, the volumes fell by CHF 0.1 billion to CHF 0.8 billion. 

Given the importance of the interest-margin business, management and monitoring of market risk on the balance sheet takes on particular importance. Here, VP Bank Group is primarily exposed to interest-rate, foreign-currency and equity price risks. While short term interest rates in the US Dollar continued to increase during 2018, the interest rate environment in Switzerland and Europe was characterised by negative interest rates. This presents major challenges for balance sheet management as it remains difficult to invest client deposits at adequate yields. 

VP Bank defines operational risk as potential losses incurred as a consequence of the inappropriateness or failure of internal processes, individuals, systems or as a result of external events. With risk assessments possible risk scenarios are identified, described and assessed. Operational risk is controlled in all organisational units of VP Bank by their respective executive management. Thanks to such uniform implementation, it is possible to provide meaningful reporting of operational risks in VP Bank Group on a quarterly basis to relevant stakeholders (Board of Directors, Group Executive Management and senior executives).

In addition to the aforementioned risks, risk management of VP Bank Group covers strategy, business as well as ­reputational risk. Based on its business model and range of services, these risks are systematically analysed and reassessed on an on-going basis.

Risk management is predicated on the following ­principles:

Risk tolerance signifies the capacity of a bank to continue as a going concern or at least to fully satisfy the demands of investors and creditors, despite arising material losses. Risk appetite indicates the potential loss which the bank is prepared to bear without 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 an appropriate capital and liquidity base. 

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. These guidelines govern the tasks, authorities and responsibilities of all functions and organisational units participating in the risk and capital management processes. 

Strategic and operational decisions are taken with risks/returns considerations and aligned with the interests of stakeholders. Besides adhering to legal and regulatory provisions as well as observing principles governing business and ethical policies, VP Bank ensures that risks are appropriately understood, rewarded and the technical prerequisites to map them available. It avoids transactions with an unbalanced relationship of risks to returns, large risks and extreme risk concentrations which could jeopardise the ability of the Group to continue as a going concern.

Risk control and risk reporting to Group Executive ­Management and the Board of Directors are assured by a unit (Group Risk) which is independent of the functions involved in the management of risks. 

The underlying principle of risk monitoring is a comprehensive, objective, timely and transparent disclosure of risks to Group Executive Management and the Board of Directors. 

The diagram above shows the central tasks, competencies and responsibilities of those positions, organisational units and committees for the individual risk groups which are involved in the risk-management process. The imperative of the functional and organisational segregation of risk management and risk monitoring applies, thereby avoiding conflicts of interest between those units which assume risks and those which monitor them. The management, monitoring and verification of risks takes place over three lines of defence:

1. 1st line of defence: risk management
2. 2nd line of defence: risk monitoring
3. 3rd line of defence: internal/external audit.

The Board of Directors bears the overall responsibility for the management of equity resources, liquidity and risk management. It is its remit to establish and maintain ­suitable processes and an organisational structure as well as a system of internal control (ICS) for an effective and efficient management of equity resources, liquidity and risk, thereby ensuring the risk tolerance of the Bank. The Board of Directors lays down directives governing the risk policy and approves these. It monitors their implementation, sets the risk appetite on a Group level and establishes the target values and limits for the management of equity resources, liquidity and risk management. In assuming these tasks, the Board of Directors is assisted by the Risk Committee. 

Furthermore, the Board of Directors defines procedures regarding internal and external audit. It receives reports of the internal audit and the external auditors concerning extraordinary and significant events such as significant losses, serious disciplinary errors, litigation etc. In assuming this task, the Board of Directors is supported by the Audit Committee.

The Group Strategy & Digitalisation Committee (SDC) assists and advises the Board of Directors in the case of strategic issues and projects. It prepares strategy issues for the attention of the Board of Directors, explores in-depth strategic issues, ensures an on-going steering and management process in the area of strategy and reviews the strategy both periodically and on an ad-hoc basis. Furthermore, the Committee reviews the implementation of strategic measures.

Group Internal Audit is responsible for the function of internal audit within VP Bank Group. Organisationally, it forms an autonomous organisational unit which is independent of operations and is responsible for the periodic audit of structures and processes of relevance in connection with the risk policy as well as compliance therewith. 

Group Executive Management (GEM) is responsible for implementation and observance of the risk policy approved by the Board of Directors. Amongst its central tasks is to ensure the functional capability of the risk management process and the Internal Control System (ICS). Furthermore, it is responsible for the composition and assignment of duties, responsibilities and competencies of the Asset & Liability Committee, the allocation of objectives and limits to the individual Group subsidiaries as well as the group-wide management of strategy, business, financial, operational and reputational risk.

In its function as Group Risk Committee (GRC) which is the supreme body to monitor and steering the risks of VP Bank, Group Executive Management assumes respon­sibility implementing the risk strategy within the limits and targets set by the Board of Directors and Group Executive Management as well as dealing with overarching issues. 

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. It assesses the Group’s risk situation in the area of financial risks and initiates remedial steering measures, whenever necessary.

The Security Risk Committee (SRC) is the supreme security body of VP Bank which manages the operational implementation in the participating units by setting targets regarding the various security-related issues. It 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 related awareness of the need for security and culture.

The Group Credit Committee (GCC) is, inter alia, respon­sible for monitoring credit risks at the level of the individual credit. This includes in particular dealing with credit applications within the scope of delegated competencies as well as the risk assessment of individual credits.

Group Treasury & Execution 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. This is done whilst taking into account the Group’s risk tolerance as well as complying with legal and regulatory prescriptions.

Group Credit is responsible for the monitoring process of credit exposures at an individual credit level with regard to collateral and limits. In addition, Group Credit ensures that credits are approved by the defined competence centres and regularly prepares credit reports for the attention of Group Executive Management.

The Chief Risk Officer (CRO) heads the risk management function. Within Group Executive Management, he/she is responsible for independent risk monitoring of VP Bank Group and the individual Group subsidiaries. This covers all risk groups with the exception of default risk at the level of the individual exposure. The CRO ensures that the existing legal, supervisory-law and internal bank provisions regarding risk management are complied with and new risk management provisions implemented. 

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 CRO in assuming his respective duties. 

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 2018 financial 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 context, 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 Chapters 2-4 CRR
• Standard method for CVA-risks in accordance with Art. 384 CRR
• Comprehensive method for CRR risks to take account of financial collateral in accordance with Art. 223 CRR.

As with regards to strategy, business and reputational risk, no explicit regulatory capital adequacy requirements are stipulated in the CRR. 

As of 31 December 2018, the business activities of VP Bank Group required equity totalling CHF 586.3 million (prior year: CHF 493.9 million). This represents 13 per cent of the eligible assets of CHF 4,510.3 million (prior year: CHF 3,799.4 million). The excess of equity (based upon a requirement of 13.0 per cent) as at 31 December 2018 amounted to CHF 356.4 million (prior year: CHF 482.6 million). The tier-1 ratio of 20.9% (prior year: 25.7%) reflects the on-going extremely robust equity situation of VP Bank. In 2018, 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 2018.

Whilst complying with the relevant legal and supervisory-law provisions, the monitoring and 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 lays down 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. 

Market risks arise as a result of positions being entered into in debt securities, equity shares and other securities under financial investments, foreign currencies, precious metals and in related derivatives, arising both from activities for clients as well as for consolidated Group companies whose functional currency is denominated in a foreign currency. 

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 maturity-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 December 2018 amounted to CHF 154.7 million (prior year: CHF 122.4 million). 

The following table shows the value-at-risk (on a monthly basis) analysed by types of risk and the market value-at-risk computed over all risk categories. 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.

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 table on the right the effects of a negative movement in the principal currencies on consolidated net income and shareholders’ equity are set out. Responsible for the underlying fluctuation of the Swiss franc against the euro and the US dollar is the implicit volatility as of 31.12.2018 and 31.12.2017, respectively. 

The impact of a possible downturn in equity markets of 10, 20 and 30 per cent, respectively, on consolidated net income and equity is illustrated by the following table.

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 in the banking book. Eligible derivatives for this purpose are laid down in the Risk Policy.

VP Bank refinances its medium- to long-term client loans and its nostro positions in interest-bearing debt securities primarily with short-term client deposits and is thus subject to interest rate risk. Rising interest rates have an adverse impact on the net present value of fixed interest-bearing credits and increase refinancing costs. As part of its Asset & Liability Management, 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 the offsetting effect of changes in value of the hedged credit transactions on the balance sheet. For this purpose, a portion of the underlying transactions (fixed-interest credits) are linked to the hedging transactions (payer swaps) through hedging relationships. In the event of fair-value changes caused by interest-rate changes, the carrying value of the respective underlying transactions are adjusted and the gains/losses taken to income.

Because the unsettled fixed-interest positions are transformed into variable interest rate positions through transacting payer swaps, a close economic relationship between the underlying and hedging transactions exists 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 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 reassessed 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 in 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 arising differences 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 of significant extent 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 norms and provisions regarding risk concentrations on both asset and liability side.

As at the end of 2018, a lower limit of 100 per cent for the Liquidity Coverage Ratio (LCR) applies. With a value of 143 per cent for the LCR at the end of 2018, VP Bank presents a very comfortable liquidity situation.

For 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 could further rapidly procure liquidity on a secured basis through its access to the Eurex repo market. The risk of an extraordinary, nevertheless plausible event which will take place with a very small probability can be measured with stress tests. In this manner, VP Bank can take all applicable counter-measures on a timely basis and set limits where necessary. 

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 and 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. 

Risk concentrations can arise through inadequate diversification of the credit portfolio. Such concentrations can constitute exposures from borrowers which are domiciled in the same countries or regions, are active in the same industry segment or possess similar collateral. Concentrations can lead to the credit-worthiness of borrowers being impacted by the same economic, political or other factors. Risk concentrations are closely monitored by VP Bank as well as being controlled with corresponding limits and operational controls.

As of 31 December 2018, total credit exposures amounted to CHF 9.6 billion without considering collateral (31 December 2017: CHF 8.9 billion). The table on the right shows the exposures for on- and off-balance sheet ­positions.

The following tables show the split of the aggregate credit exposures of CHF 9.6 billion (31 December 2017: CHF 8.9 ­billion) by counterparty, collateral, risk-weighting classes and domicile.

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. 

Primarily residential properties and mixed or commercial objects in Switzerland and Liechtenstein serve as security in the mortgage-loan business. To value and manage mortgage collateral, the prescriptions of the Liechtenstein Capital-Adequacy Ordinance apply. Lombard credits are granted, by default, against pledges on liquid and diversified securities port­folios. In addition, life-assurance policies can be used as security. Pre-defined minimum requirements apply for the issuers of such policies. Each issuer is to be approved in advance.

The qualitative requirements on collateral as well as the eligible collateral values by type of collateral are set internally. Collateralisation policies have not varied significantly since the prior year. Risk concentrations within collateral can be avoided through a prudent credit policy. The standard collateralisation of credit exposures and conservative collateral limits lead to a significant reduction in the expected credit loss (ECL) particularly in the area of mortgage and lombard credits. 

In case of amounts due from banks, money-market paper and nostro positions in interest-bearing securities, the valuation is based on external credit ratings. The following tables show the individual on- and off-balance-sheet positions according to rating classes, risk-weighting classes and country of domicile.

1. As per ISO-3166 the Caribbean countries are shown under North America.

Within the scope of the client lending business, loans are granted on a regional and international basis to private and commercial clients. The focus remains on the private client business with a volume of CHF 3.2 billion of mortgage credits (31 December 2017: CHF 3.3 billion). From a regional perspective, VP Bank conducts the majority of its 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 account for 13 per cent of total credit exposures (31 December 2017: 14 per cent). Exposures to banks relate to institutions with a high credit capacity (investment grade rating) and registered office in an OECD country.

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 and 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, the exposures in the private client and commercial business 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 level 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 specific risk of the transaction.

VP Bank enters into both secured and unsecured positions in the interbank business. Unsecured positions result frommoney 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. Repo deposits are fully secured and the collateral received serves as a reliable source of liquidity in a crisis situation. Hence, counterparty risk and also liquidity risk is reduced with reverse-repo transactions. 

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 on both individual client level and portfolio level. At the portfolio level, VP Bank uses expected and unexpected credit loss estimates to monitor and measure credit risk. The expected credit loss calculates a loss per credit portfolio which may be anticipated within one year, based on historical loss

data and estimated default probabilities. Unexpected credit loss measures the deviation of the actual loss based on a confidence level of 99 per cent over a risk horizon of one year.

During the past financial year, VP Bank has further reduced the volume of credit derivatives in its own portfolio. The following table shows the contract volume of credit derivatives by type of product.

The following table shows impaired and non-performing receivables, as well as specific valuation allowances, by domicile.

Country risks arise whenever political or economic conditions specific to a country impinge on the value of an exposure abroad. Monitoring and management of country risk employs 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 case of secured exposures the location of collateral is used to determine the risk domicile.

The following table shows the split 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) Limited. 

The conversion to IFRS 9 Impairment results in the need to disclose information in table form which is set out on the following pages.

The following table shows the effect on valuation allowances of significant changes in the gross carrying values of financial instruments.

The following table provides disclosures on assets which were modified and at the same time have a stage 2 and 3 valuation allowance.

The portfolio-based valuation allowances as of 31.12.2017 were released, without impact on income, over the equity caption “profit reserves”. The new ECL valuation allowance was recorded, without impact on income, over the equity caption “profit reserves”.

The following table shows the impact of IFRS 9 valuation allowances on the balance sheet. Under IAS 39/37, VP Bank Group had already general valuation allowances (prior-year comparatives).