Risk management of VP Bank Group

An effective capital, liquidity and risk management is ­crucial for the success and stability of a bank. Therefore, VP Bank systematically identifies, evaluates, manages and monitors the relevant risks as well as the steering of capital resources and liquidity to ensure its risks bearing capacity. The risk policy as approved 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). Therein, the specific goals and principles, organisational structures and ­processes, methods and instruments as well as target measures and limits are described and regulated. 

In Liechtenstein, the legal regulatory requirements regarding the 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 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. Since 1 January 2018, the Bank has to comply with the Liquidity Coverage Ratio (LCR) of at least 100 per cent. Due to its very robust equity basis, its balance-sheet structure and its comfort­able liquidity situation, the Bank has always over-fulfilled the regulatory limits in 2019. 

In addition to quantitative measures, also qualitative requirements regarding the 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 developed. 

The minimum capital ratio for VP Bank is 13 per cent of risk-weighted assets and consists of the regulatory minimum requirement of 8 per cent plus risk buffers for capital conservation and systemic risk of 2.5 per cent ­ each. Furthermore, Basel III provides for an anti-cyclical capital buffer which was set at 0 per cent for 2019 by the Financial Market Authority Liechtenstein.

VP Bank has always ofulfilled the minimum equity requirements during 2019. Due to a robust Tier-1 ratio of 20.2 per cent as of the end of 2019, appropriate freedom of action is ensured. This enables VP Bank to appropriately assume risks associated with banking operations. Due to the free available equity resources, there also remains potential for corporate acquisitions. 

The Leverage Ratio (indebtedness ratio) of VP Bank amounted to 7.1 per cent at the end of 2019. As of 31 December 2019, a regulatory minimum ratio does not yet exist 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 management 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 and Liquidity Ade- quacy ­Assessment Process), possible adverse effects on the equity and ­liquidity basis in stress situations are simu­lated and ­analysed. 

Whilst adhering to the legal liquidity norms and provisions, liquidity risks are monitored and managed using internal directives and limits for the interbank business and credit-granting activities. The granting of liquidity within VP Bank Group at all times has highest priority and is ensured with a large holding of cash and cash equivalents and high-quality liquid assets (HQLA). VP Bank was compliant with the minimum liquidity requirements during 2019 at all times.

VP Bank is legally obligated to comply with the Liquidity Coverage Ratio (LCR). During 2019, a minimum ratio of 100 per cent was required. With a value of 213 per cent, this target value was markedly exceeded due to the ­comfortable liquidity situation. 

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 2019, they were surveyed and assessed by the Financial Market Authority Liechtenstein by the means of an ILAAP questionnaire.

As part of its liquidity-management process, VP Bank has drawn up an emergency liquidity plan which ensures adequate liquidity in case 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 ongoingly monitored. Using stress tests, possible adverse scenarios are simulated and the impact on liquidity in stress situations analysed. 

Because of its importance the client lending business (CHF 6.8 billion as of 31 December 2019 or 50.1 per cent of total assets), the management and monitoring of credit risks plays 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 2019, the volume of client loans increased by CHF 0.6 billion to CHF 6.8 billion. In the interbank business, the volumes remain virtually unchanged compared to 2018 and at the end of the year, amount to CHF 0.7 billion. 

Due to the importance of the interest-bearing business activities, the management and monitoring of market risk is of particular importance. In this context, VP Bank Group is exposed to interest rate, foreign-currency and equity risk. The global interest-rate environment was characterised by very low interest rates. The negative interest-rate environment in principal currencies, the Swiss franc and Euro, ­continues to challenge balance-sheet management, as well as the investment of client deposits. 

VP Bank defines operational risk as the risk of losses being incurred as a consequence of the inappropriateness or failure of internal processes, individuals, systems or as a result of external events. Through risk assessments, possible risk scenarios are identified, described and assessed. Control over operational risk is undertaken in all organisational units of VP Bank by the respective exe­cutive managers. Thanks to a uniform implementation, it is possible to provide meaningful quarterly reporting to the relevant target groups (Board of Directors, Group ­Executive Management and senior executives) on the status of operational risks in VP Bank Group.

In addition to the aforementioned risks, the 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 based on the following principles:

Risk tolerance is the capacity of a bank, despite arising losses, to continue to exist on a going concern basis or at least to be able to fully satisfy the demands of investors and creditors. Risk appetite indicates the potential loss which the bank is prepared to bear arising from respective risk categories without thereby jeopardising the bank’s ability to continue to exist on a going concern basis. As a strategic success factor, risk tolerance is to be ensured by applying a suitable process to ensure an appropriate capital and liquidity base. 

Risk appetite is operationalised by a comprehensive system of limits and effectively implemented together with a clear set of guidelines governing the tasks, limits of authority and responsibilities of all functions, organisational units and bodies participating in the risk- and capital-management processes. 

Strategic and operational decisions are taken based on risk and return considerations and aligned with the interests of the stakeholders. Provided that legal and the regulatory provisions as well as the principles governing the business and ethical policies are observed, VP Bank taccepts risks consciously as long as the extent of these risks are known and the technical prerequisites to map them are at hand and that the bank is appropriately rewarded. It avoids transactions with risks not appropriately balanced 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.

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

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

The diagram above shows the core tasks, competencies and responsibilities of the positions, organisational units and committees for the individual risk groups which are involved in the risk-management process. The principle of the functional and organisational segregation of risk management and risk monitoring ensures avoiding ­conflicts of interest between those units which assume risks and those which monitor them. The management, monitoring and verification of risks is performed through the three lines of defence model as follows:

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

The Board of Directors bears the overall responsibility for the management of equity resources, liquidity and risk management within the Group. It is its responsibility to establish and maintain suitable processes and an ­organisational structure as well as a system of internal ­control (ICS) to ensure an effective and efficient management of equity resources, liquidity and risk, thereby ­ensuring adeherence to risk tolerance. 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. It is an autonomous organisational unit which is independent of business ­processes and is responsible for the periodic audit of ­structures and processes relevant for the risk policy. 

Group Executive Management (GEM) is responsible for implementing of and compliance with the risk policy approved by the Board of Directors. One of its core tasks is to ensure the functional capability of the risk-management process and the internal control system. Furthermore, it is responsible for the determination and assignment of duties, responsibilities and competencies of the Asset & Liability Committee, the allocation of target measures and limits, as set by the Board of Directors, 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) as the supreme body to monitor and steer the risks of VP Bank, the Group Executive Management assumes responsibility for 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 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 as part of the first line of defence. This includes in particular dealing with credit applications within the scope of delegated powers of authority as well as the risk assessment of individual credits.

Group Treasury & Execution bears the responsibility for the steering and management of financial risks within the limits and target measures 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 ­bodies and regularly prepares credit reports for the attention of Group Executive Management.

The Chief Risk Officer (CRO) is on top of the risk-management function. Within Group Executive Management, he is responsible for the 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 are 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 regarding capital adequacy, strategies and procedures for risk management as well as the risk exposure of VP Bank are set forth in the Risk Report and the commentary on the consolidated financial statements. In addition, VP Bank Group has drawn up a Disclosure Report for the financial year 2019. 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 regards strategy, business and reputational risks, no explicit regulatory capital-adequacy requirements are contained in the CRR. 

As of 31 December 2019, the business activities of VP Bank Group required equity totalling CHF 629.4 million (prior year: CHF 586.3 million). This represents 13 per cent of the eligible assets of CHF 4,841.9 million (prior year: CHF 4,510.32 million). The excess of equity (based upon a requirement of 13.0 per cent) as at 31 December 2019 amounts to CHF 349.5 million (prior year: CHF 354.5 million). The Tier-1 ratio of 20.2 per cent (prior year: 20.8 per cent) reflects the on-going extremely robust equity situation of VP Bank. In 2019, 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 2019.

¹ unaudited

Whilst complying with the relevant legal and regulatory provisions, the monitoring and steering of financial risks is based upon internal bank target measures and limits relating, inter alia, to volumes and sensitivities. In addition, scenario analyses and stress tests demonstrate the effect of events which were not or not sufficiently taken into ­consideration by the ordinary risk evaluation.

In this respect, the Board of Directors lays down strategic guard rails within which risk management is conducted. 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 from positions in debt securities, equities and other financial investments, foreign currencies, precious metals and related derivatives, as well as from interbank and client activities. 

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 regarding their maturity, split into 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 currency risk. A balance sheet overview by currency is to be found in appendix 34 (cf. balance sheet by currency). 

The Bank applies a comprehensive set of methods and indicators for the monitoring and management of market risks. In this respect, the value-at-risk approach was established 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. The value-at-risk indicator is computed on a Group-wide basis with the method 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 value-at-risk for all positions subject to market risk. The projected loss is valid for a holding period of ten trading days and will not be exceeded with a probability of 99 per cent. For fixed rate positions interest rate risk is calculated based on the respective fixed interest period, whereas an internal replication model is applied for floating positions.

The market value-at-risk of VP Bank Group at 31 December 2019 amounted to CHF 24.1 million (prior year scaled to a holding period of ten days CHF 30.9 million).

The table to the right shows a break down of the overall value-at-risk into different types of market risk. The com­putation of average, highest, lowest values by risk type and in aggregate 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.

1. From 2019, a holding period of 10 days will be used for market risks; the previous year's figures have been adjusted accordingly.

As maximum losses arising from extreme market situations cannot be determined by the value-at-risk approach, the ­market risk analysis is supplemented by stress tests. Such tests enable the Bank to estimate the effects of extreme ­fluctu­ations in market risk factors on the net present value. 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 shows the key rate duration of positions exposed to market risk. 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 are then increased by one per cent (+100 basis points) in each maturity band and per currency. 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 to the right the effects of a negative movement in the principal currencies on Group 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 31.12.2019 and 31.12.2018, respectively. 

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

For risk steering purposes, derivative financial instruments are entered into in the banking book and for hedging equity, interest-rate and currency risks as well as to manage the banking book. The derivatives eligible 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 by short-term client deposits and is therefore exposed to interest-rate risk. Rising interest rates have an adverse impact on the net present value of interest-bearing credits and refinancing costs. As part of its Asset & Liability Management, mostly interest-rate swaps accounted for at fair-value are deployed to hedge this risk. VP Bank applies fair-value hedge accounting under IFRS in order to counterbalance the effect of changes in the value of the hedged items in the balance sheet. For this, the hedged items (fixed-interest credits) are linked to the hedging instrument (payer swaps) by estblishing hedging relationships. In the event of fair-value changes caused by interest-rate changes, the value of the respective hedged item is adjusted and the gains/losses are accounted for as 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 based on 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 credit business – whilst complying with the legal liquidity norms and pro­visions regarding risk concentrations on the assets’ and liabilities’ side. 

As at the end of 2019, a lower limit of 100 per cent for the Liquidity Coverage Ratio (LCR) applies. With a value of 213 per cent for the LCR at the end of 2019, VP Bank ­presents a very comfortable liquidity situation.

In the area of short-term maturity bands, the Bank refinances itself, to a significant degree, with sight deposits 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 countermeasures on a timely basis and set limits where necessary, . 

Credit risks arise from all transactions with payment obli­gations of third parties in favour of the bank. Credit risks accrue 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. 

Risk concentrations may arise from large loans or through inadequate diversification of the credit portfolio. They may arise because borrowers are domiciled in the same countries or regions, are active in the same industry ­segment or possess similar collateral. Concentrations can lead to the creditworthiness of borrowers being impacted by the same economic, political or other factors. Risk concentrations are closely monitored and controlled by corresponding limits and operational ­controls. 

As of 31 December 2019, the total credit exposures amounted to CHF 10.1 billion without considering collateral (31 December 2018: CHF 9.6 billion). The table to the right shows the composition thereof by on- and off-balance sheet positions.

The following tables show the aggregate credit exposures split by counterparty, collateral, risk-weighting classes and domicile. For an analysis of financial instruments by rating, ➔table on page 134. 

The following table shows credit exposures according to collateral. Receivables from clients are generally granted 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 on an unsecured basis. 

In the mortgage-loan business, primarily residential properties, mixed or commercial objects in Switzerland and Liechtenstein serve as security. As regards the guidelines and procedures to value and manage mortgage collateral, the prescriptions of the Liechtenstein Capital-Adequacy Ordinance apply. Lombard credits are granted, by default, against pledges of 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 for collateral as well as the eligible collateral types 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 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 risk-weight 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, credits are granted on a regional and international basis to private and commercial clients whereby the focus is on the private client business with CHF 3.4 billion of mortgage loans (31 December 2018: CHF 3.2 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 account for 11 per cent of the total credit exposure (31 December 2018: 13 per cent). Exposures to banks relate exclusively to institutions with a high credit capacity (investment grade rating) and registered office in an OECD country. 

In addition to the Risk Policy, the Credit-Granting Rules constitute the binding framework regulating client-­risk management. They set out the general guidelines governing credit granting, the framework conditions for the conclusion of credit business and the decision makers powers including corresponding band widths for credit approvals (rules on powers of authority). 

In principle, the exposures in the private-client and commercial business must be covered by the collateral value (collateral less a deduction for risk). Counterparty risks in the loan business are governed by limits which restrict the level of exposure depending on creditworthiness, industry segment, collateral and risk domicile of the client. VP Bank employs an internal rating procedure to evaluate creditworthiness. Deviations from credit-­granting prin­ciples (exceptions to policy) are dealt with appropriately as part of the credit-risk management process. 

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 arise 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, not only counterparty risk but 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 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 unex- pected 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 is to be expected within one year. The 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 valuation by type of product.

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

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. 

Country risks are monitored and limited according to their country rating. The following table shows the split of credit exposures by rating classes. Non-rated country exposures are mostly exposures from local business activities (receivables secured by mortgage) of VP Bank (BVI) Limited.

On the following pages the additional tables to be disclosed in connection with IFRS 9 Impairment are set out.

1. By type of collateral.

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