Risk management of VP Bank Group

1. Overview

An effective capital, liquidity and risk management is crucial for the success and stability of a bank. VP Bank has established a systematic process to identify, evaluate, manage and monitor the relevant risks as well as the steering of capital resources and liquidity to ensure its risk-bearing capacity. The binding risk management framework is defined by the Board of Directors of VP Bank Group and provided by the corresponding regulations.

The risk policy is an overarching framework that describes the limits and objectives set by the Board of Directors. Together with the risk strategies for each risk group (strategic risks/business risks, financial risks, operational risks and compliance risks), it regulates the specific goals and principles, organisational structures and processes, as well as methods and instruments of risk management in detail.

In Liechtenstein, the regulatory requirements governing risk management are set out primarily in the Banking Act and the Banking Ordinance. In addition, the European Union’s Capital Requirements Regulation (CRR) went into force in Liechtenstein on 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 Banking Act and Banking Ordinance. VP Bank was classified as a local systemically important institution by the Financial Market Authority ­Liechtenstein and must possess in aggregate equity of at least 12.5 per cent of its risk-weighted assets. In terms of liquidity, the Bank has been required to maintain a liquidity coverage ratio (LCR) of at least 100 per cent since 1 January 2018. Thanks to its solid equity basis, balance sheet structure and comfortable liquidity position, VP Bank constantly outperformed the minimum regulatory requirements in 2020. 

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

 

Capital and balance sheet management

The minimum capital ratio of VP Bank of 12.5 per cent of risk-weighted assets consists of the regulatory minimum requirement of 8 per cent, a capital conservation buffer of 2.5 per cent and a buffer for other systemically important institutions of 2 per cent. Basel III also provides for an anti-cyclical ­capital buffer that was set at 0 per cent for 2020 by the Financial Market Authority Liechtenstein. 

VP Bank complied with the minimum capital requirements for 2020 at all times. Thanks to an exceedingly robust tier 1 ratio of 20.8 per cent as of the end of 2020, this leaves sufficient room for manoeuvre. This enables VP Bank to continue taking risks associated with banking operations. 

As of the end of 2020, the leverage ratio of VP Bank was 7.1 per cent. As of 31 December 2020, there was no regulatory minimum value in place in Liechtenstein. VP Bank publishes 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 ongoing basis. With an internal process to assess the adequacy of capital resources (the Internal Capital or Internal Liquidity Adequacy Assessment Process), possible adverse effects on the equity and liquidity position under stress situations are simulated and analysed.

The market turbulence triggered by the COVID-19 pandemic did not have any significant impact key risk indicators and risk-bearing capacity.

 

Liquidity management

Whilst adhering to legal liquidity requirements and provisions, liquidity risks are monitored and managed using internal directives andlimits for the interbank business and credit-granting activities. Maintaining liquidity at all times within VP Bank Group has highest priority and is assured by large holdings of cash and cash-equivalent as well as high-quality liquid assets (HQLA). VP Bank observed the minimum regulatory liquidity requirements at all times during 2020.

VP Bank is legally obligated to comply with the liquidity coverage ratio (LCR). A minimum ratio of 100 per cent was required in 2020. With a value of 179 per cent, this target ratio was markedly exceeded thanks to a comfortable liquidity situation. 

With the Internal Liquidity Adequacy Assessment Process (ILAAP), the Financial Market Authority imposed specific requirements concerning internal strategies and procedures to determine, manage and monitor liquidity risks. In 2020, the Financial Market Authority Liechtenstein surveyed and assessed these requirements again using a ­specific ILAAP questionnaire.

As part of its liquidity management process, VP Bank has developed an emergency liquidity plan which ensures that VP Bank possesses sufficient liquidity in the event of liquidity crises. Early-warning indicators are regularly reviewed to monitor and identify, any deterioration in the liquidity situation at an early stage.

As part of liquidity management, compliance with regulatory requirements and the coverage of business needs is subject to ongoing monitoring. Using stress tests, possible adverse scenarios are simulated and the impact on liquidity in stress situations is analysed.

 

Credit risk

Due to the importance of the client lending business (CHF 6.3 billion as of 31 December 2020 or 46 per cent of total assets), management and monitoring of credit risks play a central role at VP Bank. Due to the strong devaluation of the global stock markets caused by the COVID-19 crisis, a valuation adjustment of an individual loan position had been required. Beyond that, no further loan losses were recorded. With the creation of the new Group Credit Risk unit within the responsibility of the Chief Risk Officer, a reorganisation of the first and second line of defence took place in credit risk management. Credit regulations govern credit risk management in the client loan business. 

In 2020, the volume of loans to clients decreased by CHF 0.5 billion. This is primarily the result of a significant reduction in lending in the Lombard lending business (deleverage) in the wake of the sharp fall in prices on the global stock markets. The volume of amounts due from banks has increased compared to the previous year, ­totalling CHF 1.8 billion at the end of 2020. In order to increase interest income in the current low-­interest envi­ronment, free liquid assets are increasingly being invested at banks with good credit ratings, predominantly Swiss ­cantonal banks.

In 2020, government support initiatives to mitigate the effects of lockdown measures on the economy, such as ­government-guaranteed bridging loans, played a subordinate role for VP Bank (credit volume approx. CHF 0.3 million). VP Bank supported borrowers by deferring repayments of principal and interest (approx. CHF 6.5 million) and by occasionally granting bridging loans (approx. CHF 8 million). Beyond the default of an individual loan, the COVID-19 crisis had no material impact on the credit risk situation of VP Bank so far.

 

Market risk

Regarding market risk, VP Bank Group is exposed to interest rate, currency and equity-risks. Given the importance of the interest-bearing business, ­management and monitoring of market risk is of particular importance. The global interest rate environment was characterised by very low interest rates throughout 2020. The negative interest rate environment in the two primary currencies of the Swiss franc and the euro, as well as the significantly fallen US dollar interest rate level, continues to challenge balance sheet management as well as the investment of client deposits. The major sell-off in the stock markets in March, triggered by the COVID-19 pandemic, led to interim devaluation of our equity investments, but such losses had largely been set off by the end of the year.

 

Operational risks

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. Possible risk scenarios are ­identified, described and assessed using risk assessments. In all organisational units of VP Bank, operational risk is monitored by the responsible managers. 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 quarterly status report on operational risks within VP Bank Group. 

The COVID-19 pandemic and the related measures have resulted in elevated operational risks: employees could be absent from work due to infection, data security must be ensured when employees are working from home, commu­nication channels for maintaining contact with clients are limited and the legal requirements differ from country to country. At the beginning of the pandemic, a task force was immediately convened, followed by ­activation of a crisis management team. In the course of the pandemic, a variety of measures were taken to ensure operations at all times.

 

Further risks

In addition to the aforementioned risks, risk management of VP Bank Group covers business/strategic risk, compliance risk and reputational risk. Based on its business model and range of services, these risks are systematically analysed and reassessed on an ongoing basis.

The topic of sustainability is becoming increasingly important in the financial sector. The ESG criteria are also caus­ing sustainability to find its way into nearly every area of activity of financial institutions to an ever greater extent. VP Bank will implement the EU Action Plan on Sustainable Finance in the years to come, making its contri­bution to promoting sustainable investments on this basis. Subsequently, this will require ESG criteria to be considered systematically in the risk management process.

ESG risks include climate risks, social risks and governance risks, and encompass any effects on earnings and the financial stability of VP Bank. Climate risks in particular do not represent a new risk category of their own but instead manifest themselves in existing risk categories (e.g. business, financial and operational risks). 

 

2. Principles underlying the risk ­policy

Risk management is predicated on the following principles:

 

Harmonisation of risk-bearing capacity and risk ­tolerance

Risk-bearing capacity generally refers to a bank’s ability to continue its business operations – or at least fully serve the claims of investors and creditors – in spite of losses from any risks that may materialise. Risk tolerance indicates the potential loss which the Bank is prepared to bear without jeopardising the Bank’s ability to continue its business (going concern). As a strategic success factor, risk-bearing capacity is to be maintained and enhanced by employing a suitable process to ensure an appropriate capital and liquidity base.

 

Clearly defined powers of authority and responsibilities

Risk tolerance is operationalised using a comprehensive limit system and implemented effectively with a clear definition of the duties, powers of authority and responsibilities of all bodies, organisational units and committees involved in the risk and capital management process.

 

Conscientious handling of risks

Strategic and operational decisions are taken based on risk-return calculations and aligned with the interests of the stakeholders. Subject to compliance with statutory and regulatory requirements as well as corporate policy and ethical principles, VP Bank consciously assumes risks provided that the extent of these are known, the system requirements for mapping them are in place and the Bank will be adequately compensated for them. Transactions with an imbalanced risk-return ratio are avoided, as are major risks and extreme risk concentrations, which could endanger the risk-bearing capacity and thus the future existence of the Group.

 

Segregation of functions

Units that report to the Chief Risk Officer and that are independent of the bodies that actively manage the risks are responsible for monitoring and reporting risks to Group Executive Management and the Board of Directors.

 

Transparency

Comprehensive, objective, timely and transparent disclosure of risks to Group Executive Management (GEM) and the Board of Directors (BoD) forms the basis for risk monitoring.

 

3. Organisation of capital, liquidity and risk management

Risk taxanomy

The prerequisite for risk management and the management of equity resources of VP Bank is the identification of all significant risks and their aggregation to an overall risk exposure. The identification of significant risks is based on the business model and related offerings of financial products and services of VP Bank.

The following chart (➔ see graphic) provides an overview of the risks to which VP Bank is possibly exposed in the context of its business activities. These are allocated to the risk groups of strategic/business risks, financial risks, operational risks, compliance risks and reputational risks.

Business risk and strategic risk encompass the risk of a potential decline in profitability as a result of an inadequate corporate orientation in relation to the market environment (political, economic, social, technological, ecological, legal) and can arise from unsuitable strategic positioning or absence of effective countermeasures in case of changes.

This includes the risk that the attractiveness of location-­related factors recedes or the significance and/or weighting of individual business areas undergo change by virtue of external factors. It also includes the risk that new product launches, market access or business processing are impeded or rendered impossible as a result of regulation or existing products, market access or business processing entail disproportionately high costs or are unprofitable. Finally, adverse developments may arise in connection with target markets as a result of political or geopolitical influences. 

Financial risk is deliberately taken in order to generate earnings or to pursue business policy interests.

In this respect, liquidity risk comprises short-term liquidity and refinancing risk as well as market liquidity risk. The liquidity and refinancing risk refers to the risk of being ­unable to refinance current and future payments on time, in full, in the right currency or on standard market terms. Market liquidity risk includes cases where it is not possible, because of insufficient market liquidity, to liquidate or hedge risk positions on a timely basis to the desired extent and at acceptable conditions.

Market risk refers to the risk of potential economic losses in the banking and trading book that emerge due to unfavourable changes in market prices (interest rates, foreign exchange rates, equity prices, commodities) or other price-influencing parameters such as volatility.

Credit risk includes default risk, counterparty risk, concentration risk and country risk. Default risk refers to the risk of a financial loss which may occur following the default of a debtor or loan collateral. Country risk is not posed by the counterparty itself, but by uncertain political, economic and social circumstances, and arises from restrictions in payment transactions in the risk domicile. Counterparty risk refers to the risk of a financial loss resulting from the default or a deterioration in the credit rating of a counterparty in trading activities or due to non-performance by the counterparty. Concentration risk includes potential losses incurred by the Bank due to an insufficiently diversified loan portfolio.

Operational risk is the risk 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 or, if that is not ­possible, be reduced to a level set by the Bank. Opera­tional risk can also arise in all organisational units, whereas financial risk can only arise in risk-taking units.

Compliance risk is understood to be breaches of statutory and regulatory provisions that can cause significant damage to VP Bank’s reputation or result in sanctions, fines or even in the Bank’s licence being withdrawn. The compliance risk of VP Bank consists in particular in the fact that VP Bank does not or does not sufficiently recognise financial crime risks of its clients and counterparties – such as money laundering, financing of terrorism, violations of sanctions and embargoes, or fraud and corruption activities – and has not established appropriate surveillance and monitoring processes/measures for identification, management and limitation of cross-border compliance risks as well as tax and investment compliance risks. 

Reputational risk describes the risk that the confidence of employees, clients, shareholders, regulatory authorities and the public is weakened or the public image and/or reputation of the Bank is impaired as a result of other types of risk or through various events. It can exhibit itself in the Bank suffering monetary losses and/or a decline in earnings.

 

 

Duties, powers and responsibilities

The following figure (➔ see graphic) shows the key duties, competencies and responsibilities of the bodies, organisational units and committees involved in the risk management process for the individual risk groups. The roles of risk steering and risk monitoring are separated. This is intended to avoid conflicts of interest between the risk-taking and the risk-monitoring entities. 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 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-bearing capacity of the Bank on a sustainable basis. The Board of Directors defines and approves the risk tolerance, the risk policy and the risk strategies. It monitors their implementation, sets the risk tolerance on a Group level and establishes the target values and limits for the management of equity resources, liquidity and risk. In assuming these tasks, the Board of Directors is assisted by the Risk Committee

In addition, the Board of Directors receives reports from the internal and external auditors on exceptional and material incidents, including significant losses, serious disciplinary errors, lawsuits and so on. In assuming this task, the Board of Directors is supported by the Audit Committee.

Group Internal Audit is responsible for the internal audit function within VP Bank Group. It is an autonomous organisational unit independent of operations and responsible for the periodic audit of structures and processes of in the context of the risk management process as defined by the risk policy.

Group Executive Management (GEM) is responsible for implementation and observance of the risk policy approved by the Board of Directors. One of 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 strategic, business, financial, compliance, operational and reputational risk. 

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

The Asset & Liability Committee (ALCO) is responsible for risk- and earnings-oriented balance sheet management based on the economic profit modeland the management of financial risks in line with the relevant statutory and regulatory rules. It assesses the Group’s risk situation in the area of financial risks and initiates remedial steering measures whenever necessary.

The Data and Process Risk Committee (DPRC) ensures the completeness and effectiveness of the business process map and the corresponding internal controls. It also manages external risks and provides leadership in the management of crises and disasters. In addition, the DPRC seeks to provide adequate safeguards against data security risks as well as IT/cyber risks. Furthermore, it ensures appropriate identification and mitigation of operational risks as well as process-related reputational risks.

The Group Credit Committee (GCC) is responsible for matters including managing credit risks and the handling of credit applications within the scope of delegated powers of authority in particular.

The Group Compliance Risk Committee (GCRC) proactively manages compliance risks, identifies primary risks, and ensures that risk-mitigating controls are implemented and adhered to. The GCRC also examines reputational risks related to specific clients.

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-bearing capacity, as well as in compliance with legal and regulatory requirements.

Group Credit Consulting (CRQ), as a first line of defence, is responsible for credit risk structuring and assessment of all credit applications on the Group level, as well as for the monitoring process of credit exposure on the individual loan level with regard to coverage and limits. CRQ is represented by units in all Group locations. For non-standard credit applications, Group Credit Risk carries out a review of the risk analysis, which was prepared by CRQ in the first instance. In addition, Group Credit Consulting approves loans on its own authority or submits them to the corresponding organisational unit, committee or body for assessment or approval.

The Chief Risk Officer (CRO) heads the risk management function. Within Group Executive Management, he is responsible for independent risk monitoring of VP Bank Group and the individual subsidiaries. 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.

Group Credit Risk (CCC) is the second line of defence, which is responsible for credit risk assessment of the largest individual credit risks of the Group. This concerns all credit exposures that go beyond Group Credit Consulting’s own area of authority and trigger an additional credit assessment by the second line of defence on the basis of defined risk criteria. In addition, Group Credit Risk is responsible for all material credit risk standards of VP Bank Group, including all guidelines and risk concepts as well as IT implementation. Group Credit Risk also supports and ­initiates all development projects related to the credit ­business of VP Bank Group, including regulatory projects. Furthermore, CCC regularly prepares portfolio credit risk reports in close cooperation with Group Risk for the attention of Group Executive Management and of the Board of Directors.

As a second line of defence, Group Risk (RCO) is respon­sible for independent monitoring of financial and operational risks. It is responsible for defining and assessing the risk methods and models, conducting the risk inventory and monitoring the economic risk-bearing capacity. With periodic risk reporting, the responsible bodies are informed about the risk situation as well as adherence to limits.

 

 

Process to ensure risk-bearing capacity

The primary objective of the ICAAP is to comply with the regulatory capital requirements and thus to ensure the continuation of the Bank. The risks of banking operations are to be borne by the available risk capital. The components of the risk management process established at VP Bank for all material risks are explained below:

Determination of the risk strategies: The risk strategies for each risk group (strategic risk/business risk, financial risk, and operational and compliance risks) are derived from the business strategy of VP Bank and provide the framework for efficient risk management of the respective risk types. The basic framework for the individual risk strategies is the risk policy.

Determining the risk coverage potential and setting the risk tolerance: The risk-bearing capacity concept of VP Bank Group distinguishes between a regulatory and a value-oriented perspective. The findings from each of the two perspectives are used in turn to validate and supplement the other perspective. With both perspectives, the identification of the risk-bearing capacity is based on consideration of appropriate deductions and risk buffers. On the basis of the risk-bearing capacity, the Board of Directors determines the limits and objec­tives for a rolling risk horizon of one year. At least semi-­annually, all significant risks and the available risk capital are juxtaposed (risk assessment of risk-bearing capacity calculation).

Risk identification (risk inventory): In the annual risk inventory to be undertaken as part of the review of the framework and risk strategies, it is ensured that all significant risks for the Group (both quantitative and qualitative) are identified. The analysis is carried out on a top-down and bottom-up basis using both quantitative and qualitative criteria. Significant risks are integrated fully into the risk management cycle, insignificant risks are reviewed and monitored at least annually within the scope of the risk inventory. As part of the risk inventory, potential risk concentrations in all significant risk types are evaluated.

Risk measurement: Relevant for the assessment of the risk-bearing capacity from a regulatory viewpoint is the eligible equity as well as the regulatory committed capital. From a value-oriented point of view, the risk-bearing capacity results from the net economic value of equity after deducting operating and risk costs, a buffer for other risks and the economic capital requirement. For the purpose of determining the economic capital requirement, all risk types of VP Bank which are classified as material within the scope of the annual risk inventory are taken into account and possible unexpected losses are considered (confidence level 99 per cent, risk horizon one year). The economic risk assessment also includes risk types which are not covered by the regulatory capital-adequacy requirements for the Bank. To determine the economically required capital, all significant risks are aggregated to form an overall risk assessment.

Assessment of risk-bearing capacity: Risk-bearing capa­city exists when the available risk capital is greater than the risks taken at any time. In this process, early-warning stages permit a timely change of direction in order not to endanger the continuation of the Bank as a going concern.

Risk steering encompasses all measures on all organisational levels to actively influence the Bank’s risks identified as being significant. In this respect, the objective is the optimisation of the risk return ratio within the limits and objectives set by the Board of Directors and Group Executive Management and to ensure the risk-bearing capacity of the Group whilst complying with legal and supervisory-law prescriptions. Risk steering takes place on both strategic and operating levels. Based upon the juxtaposition of risks and limits on the one hand, as well as of regulatory and economically required capital and available risk capital on the other, countermeasures are taken in case of negative deviations.

Independent risk monitoring (control and reporting to GEM and BoD): Risk steering is accompanied by com­prehensive risk monitoring, which is functionally and organisa­tionally independent of risk steering. Risk monitoring covers control and reporting. As part of the control of financial risks, steering impulses are derived from a routine target to actual comparison. The target is constituted by the limits and target measures set, as well as from legal and supervisory-law prescriptions. For review of the extent to which limits are exhausted (actual), early-warning stages are also deployed in order to take timely steering measures for any risks before losses occur.

As operational risks may arise as a result of internal control failures during current business activities, monitoring of operational risks in all organisational units of VP Bank is undertaken by the respective executive management.

From a risk-monitoring perspective, risk-based controls for compliance risks are carried out on an ongoing basis by Group Compliance, while the steering of compliance risks is the responsibility of the respective business units.

Reputational risks can result from financial, operational and compliance risks as well as from business and strategic risks. The business and strategic risks as well as any reputational risks are handled by Group Executive Management.

As part of reporting, results of monitoring are set forth in a regular, understandable and transparent manner. Reporting is made ex ante as an input for decisions and ex post for ­control purposes – in particular to analyse any deviation from bud­geted values – as well as ad hoc in case of suddenly and unexpectedly occurring risks.

The process of ensuring the risk-bearing capacity of VP Bank Group is presented in the figure above.

 

 

4. Own funds disclosure

The required qualitative and quantitative information on capital adequacy, on the strategies and procedures for risk management and 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 2020 business year. On this basis, the Bank fulfils the regulatory requirements of the Banking Ordinance and the Banking Act.

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 systemically important banks in Liechtenstein, VP Bank must 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: 

Standardised approach for credit risk under Part 3, Title II, Chapter 2 of the CRR

Basic-indicator approach for operational risk under Part 3, Title III, Chapter 2 of the CRR

Standardised procedure for market risk under Part 3, Title IV, Chapters 2 to 4 of the CRR

Standard method for credit valuation adjustment (CVA) risks in accordance with Art. 384 CRR

Comprehensive method for financial collateral in accordance with Art. 223 CRR

As in regard to strategic, business and reputational risk, no explicit regulatory capital requirements are stipulated in the CRR. The following table shows the equity situation of VP Bank Group as of 31 December 2020.

 

Capital-adequacy computation (Basel III)

in CHF 1,000

31.12.2020

31.12.2019

Core capital

 

 

Paid-in capital

66,154

66,154

Deduction for treasury shares

–61,071

–68,004

Retained earnings and other reserves

978,352

954,587

Group net income

41,622

73,543

Total shareholders’ equity

1,025,057

1,026,280

Deduction for dividends as per proposal of Board of Directors

–26,462

–36,385

Deduction for goodwill and intangible assets

–66,679

–62,189

Deduction for actuarial gains/losses from IAS19

57,859

61,151

Deduction for equity instruments as per art. 28 CRR

–9,989

–8,341

Other regulatory adjustments (deferred tax, securisation positions, prudential filter)

–7,032

–7,319

Total regulatory deduction

–52,303

–53,083

Eligible core capital (tier 1)

972,754

973,197

Eligible core capital (adjusted)

972,754

973,197

Credit risk (in accordance with Liechtenstein standard approach)

309,649

320,430

thereof price risk regarding equity securities in the banking book

8,011

8,265

Market risk (in accordance with Liechtenstein standard approach)

16,313

20,253

Operational risk (in accordance with basic indicator approach)

46,984

45,535

Credit Value Adjustment (CVA)

1,093

1,130

Total required equity

374,039

387,348

Capital buffer

210,397

242,093

Total required equity including capital buffer

584,436

629,441

 

 

 

CET1 equity ratio

20.8 %

20.1 %

Tier 1 ratio

20.8 %

20.1 %

Overall equity ratio

20.8 %

20.1 %

 

 

 

Total risk-weighted assets

4,675,482

4,841,859

 

 

 

Return on investment (net income / average balance sheet total)

0.3 %

0.5 %

 

5. Financial risks

Whilst complying with the relevant legal and regulatory provisions, the monitoring and steering of financial risks is based on 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 within the ordinary risk evaluation.

In this respect, the Board of Directors sets strategic barriers within which risk management is conducted. The identification, evaluation, steering and monitoring of all relevant risks is handled on 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

Market risks arise from taking positions in financial assets (debt instruments, shares and other securities), foreign currencies, precious metals and corresponding derivatives, as well as from client business, interbank business and from consolidated Group companies whose functional currency is a foreign currency.

Interest rate risk in VP Bank’s balance sheet constitutes a significant component of market risk. It arises mainly due to divergent maturities between asset- and liability-side positions. The table of maturity structure shows the assets and liabilities of VP Bank broken down into positions at sight, callable positions and positions with specific 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 employs 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 potential negative deviation, expressed in Swiss francs, from the value of all positions exposed to market risk as of the reporting date. The value-at-risk indicator is computed on a Group-wide basis with the method of historical simulation. In this process, the historical movements in market data over a period of at least five years are used in order to evaluate all positions subject to market risk. The projected loss is valid for a holding period of 10 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 variable rate positions.

The market value-at-risk of VP Bank Group as of 31 December 2020 amounted to CHF 22.9 million (prior year: CHF 24.1 million).

The following table shows a break down of the overall value-at-risk types of market risk. The computation of average, highest, lowest values by risk type and aggregate values is based on a separate year-on-year perspective of the end-of-month values; the aggregate value thus does not necessarily equate to the sum of the respective individual values by risk type.

 

Market-Value-at-Risk (end of month values)

in CHF million

Total

Interest-
rate risk

Equity
and
commodity
risk

Currency
risk

2020

 

 

 

 

Year-end

22.9

6.2

9.3

7.4

Average

23.7

7.1

7.7

8.8

Highest value

25.8

8.6

9.3

9.6

Lowest value

22.0

6.2

6.8

7.2

 

 

 

 

 

2019

 

 

 

 

Year-end

24.1

6.7

8.7

8.7

Average

28.0

10.4

8.5

9.1

Highest value

29.5

12.4

9.4

9.7

Lowest value

24.1

6.7

6.8

8.4

As 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 enable the Bank to estimate 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 items and derivatives in the area of market risks are computed with the aid of sensitivity indicators based on pre-defined 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 interest-rate risk. First of all, the present values of all asset and liability items as well as derivative financial instruments are calculated. Then, the interest rates of the relevant interest-rate curves are changed by 1 basis point and the result is scaled to 1 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.

 

Key rate duration profile per 100 basis points increase

in CHF 1,000

within
1 month

1 to 3
months

3 to 12
months

1 to 5
years

over
5 years

Total

31.12.2020

 

 

 

 

 

 

CHF

780

1,397

775

709

–10,762

–7,101

EUR

454

50

1,986

–3,861

–9,342

–10,713

USD

1,047

–2,285

1,154

–1,713

–8,698

–10,495

Other currencies

85

–225

995

2,985

0

3,840

Total

2,366

–1,063

4,910

–1,880

–28,802

–24,469

 

 

 

 

 

 

 

31.12.2019

 

 

 

 

 

 

CHF

1,207

753

2,077

–2,330

–8,213

–6,506

EUR

701

–422

1,734

–3,332

–16,231

–17,550

USD

534

–977

1,178

–7,923

–3,312

–10,500

Other currencies

57

41

550

2,426

0

3,074

Total

2,499

–605

5,539

–11,159

–27,756

–31,482

In the following table, the effects of a negative movement in the principal foreign 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 December 2020 and 31 December 2019, respectively. 

Movements in significant foreign currencies

Currency

Variance
in %

Effect on
net income
in CHF 1,000

Effect on
equity
in CHF 1,000

2020

 

 

 

EUR

–5

–1,918 

USD

–6

–6,402 

–3,480 

 

 

 

 

2019

 

 

 

EUR

–5

–2,939 

USD

–6

–6,440 

–3,844 

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 in the following table.

 

Movement in relevant equity share markets

Variance

Effect on
net income
in CHF 1,000

Effect on
equity
in CHF 1,000

2020

 

 

–10 %

–3,838 

–9,905 

–20 %

–7,677 

–19,809 

–30 %

–11,515 

–29,714 

 

 

 

2019

 

 

–10 %

–3,508 

–10,649 

–20 %

–7,015 

–21,297 

–30 %

–10,523 

–31,946 

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 exposed 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 and liability management, 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 record the offsetting effect of changes in the value of the hedged items on the balance sheet. For this purpose, a portion of the underlying transactions (fixed-interest credits) is linked to the hedging transactions (payer swaps) through hedging relationships. In the event of fair-value changes caused by interest rate changes, the carrying values of the 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 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 induced by interest rate changes offset each other. Ineffectiveness may result from variations in duration, due to different interest rates, interest payment dates or maturities of transactions.

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.

By entering into foreign exchange transactions, VP Bank has hedged its own financial investments against exchange rate fluctuations in the principal currencies. Currency risks from the client business generally may not arise; residual foreign currency positions are closed via the foreign exchange market. Group Treasury & Execution is responsible for the management of foreign currency risks from client business.

 

Liquidity risks

Liquidity risks may arise through contractual mismatches between the inflows 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 lending business and other balance sheet-related key figures – whilst complying with the legal liquidity norms and provisions regarding risk concentrations on both the asset and liability side.

As of the end of 2020, a lower limit of 100 per cent applies for the liquidity coverage ratio (LCR). With a value of 179 per cent for the LCR at the end of 2020, VP Bank presents a very comfortable liquidity situation. 

The maturity structure of assets and liabilities is set out in appendix 35. In the short-term maturity range, the Bank refinances itself primarily through client deposits at sight. 

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 using stress tests. In this manner, VP Bank can take all applicable remedial action on a timely basis and set limits where necessary.

 

Credit risks

Credit risks arise from all transactions for which payment obligations of third parties in favour of VP 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 and 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 creditworthiness of borrowers or the recoverability of collateral 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 2020, the total credit exposure excluding collateral was CHF 10.5 billion (as of 31 December 2019: CHF 10.1 billion). The following table shows the composition thereof by on- and off-balance-sheet items.

 

Credit exposures

in CHF 1,000

31.12.2020

31.12.2019

On-balance-sheet assets

 

 

Receivables arising from money market papers

116,166

122,956

Due from banks

1,784,320

735,026

Due from customers

6,281,087

6,796,832

Public-law enterprises

442

484

Trading portfolios

290

 

Derivative financial instruments

79,491

72,513

Financial instruments at fair value

45,190

73,805

Financial instruments measured at amortised cost

2,201,303

2,302,477

Total

10,508,289

10,104,093

 

 

 

Off-balance-sheet transactions

 

 

Contingent liabilities

115,339

143,951

Irrevocable facilities granted

81,668

97,495

Total

197,007

241,446

 

In 2020, the volume of loans to clients decreased by CHF 0.5 billion. This was mainly due to a significant reduction in lending in the lombard lending business in the wake of the COVID-19 crisis. The volume of amounts due from banks has significantly increased compared to the previous year, totalling CHF 1.8 billion at the end of 2020. Free liquid assets are increasingly invested with banks with good credit ratings, predominantly Swiss cantonal banks. 

Receivables from clients are generally granted on a secured basis. This primarily includes the mortgage business in Switzerland and Liechtenstein, the lombard loan business as well as a small number of special loans. 

In the mortgage business, cover is primarily provided by residential, mixed or commercial properties in Switzerland and Liechtenstein. In Liechtenstein, the regulations of the Capital Requirements Regulation apply to the guidelines and procedures for the valuation and management of mortgage collateral. Lombard loans are granted in exchange for the pledging of liquid and diversified securities portfolios. In addition, life insurance policies can be used as collateral. Predefined minimum requirements apply to the issuers of the corresponding policies. Each issuer must be preapproved.

The qualitative requirements for the cover and the permissible loan-to-value ratios per cover type are defined internally. Compared to the previous year, the collateralisation has not changed significantly. Risk concentrations within the collateral are to be avoided through a prudent credit policy. The standard collateralisation of credit exposures and the conservative pledging of collateral lead to a significant reduction in the expected credit loss (ECL), especially in the mortgage and lombard areas.

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 3.4 billion of mortgage loans (31 December 2019: CHF 3.3 billion). From a regional perspective, VP Bank conducts most of its business in the Principality of Liechtenstein and in the eastern part of Switzerland. 

The ten largest single exposures comprise 11 per cent of total credit exposures (31 December 2019: 11 per cent). 

In addition to the Risk Policy, the credit-granting rules constitute the binding framework for client credit risk management. They set out the general guidelines governing credit granting, the decision makers powers depending on corresponding band-widths for credit approval authority (rules on powers of authority).

In principle, exposures in the private client loans business and in the commercial loans business must be covered by the loanable value of the collateral (collateral after haircut). Counterparty risks in the loan business are governed by limits which restrict the level of exposure depending on the creditworthiness, industry segment, collateral and risk domicile of the client. VP Bank uses an internal rating method for assessing creditworthiness. 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 metals accounts), secured positions arising from reverse repo transactions, securities lending and borrowing, collateral management, and OTC derivative trans­actions. Repo deposits are fully secured and the collateral received serves as a reliable source of liquidity in a crisis. 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. Exposures to banks relate to institutions with a high credit capacity (investment grade rating) and registered office in an OECD country. A comprehensive system of limits restricts the level of exposure depending on the duration, rating, risk domicile and collateral of the counterparty. For banks, VP Bank relies on the rating provided by the two rating agencies Standard & Poor’s and Moody’s. OTC derivative transactions may only be concluded with counterparties with whom a netting agreement has been signed.

Credit risks are managed and monitored not only on an individual transaction level but also on a portfolio level. On the portfolio level, VP Bank uses expected and unexpected credit loss estimates to monitor and measure credit risk. The expected credit loss quantifies a loss per credit portfolio which may be anticipated within one year, based on historical loss data and estimated default probabilities. Unexpected credit loss quantifies the deviation of potential losses from the expected loss based on a confidence level of 99 per cent over a risk horizon of one year.

 

Credit derivatives (contract volume)

in CHF 1,000

Providers of
collateral as of
31.12.2020

Providers of
collateral as of
31.12.2019

Collateralised debt obligations

0

0

Total

0

0

No proprietary trading transactions in credit derivatives were carried out in the past financial year. 

 

Country risk

Country risks arise whenever political or economic conditions specific to a country may affect the value of an exposure abroad. The monitoring and management of country risk is carried out by 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, it is generally the case that 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.

Country exposures according to rating

in %

31.12.2020

31.12.2019

AAA

81.5

84.9

AA

14.7

12.0

A

1.6

0.6

BBB – B

0.7

0.9

CCC – C

0.1

0.1

Not Rated

1.5

1.5

Total

100.0

100.0

 

IFRS 9 Impairment

The following pages show the additional tables from IFRS 9 Impairment to be disclosed. 

 

Credit exposures by rating classes

in CHF 1,000

 

Carrying amount of the below financial position
 
 

 

Rating
(Standard &
Poor’s or
Equivalent)

Stage 1

Stage 2

Stage 3

Total
31.12.2020

Cash and cash equivalents

 

 

 

 

 

Investment Grade

 

 

 

 

 

Very Low credit risk

AAA

2,567,371

 

 

2,567,371

Low credit risk

AA+, AA, AA-, A+, A, A-

 

 

 

0

Moderate credit risk 

BBB+, BBB, BBB-

 

 

 

0

Non Investment Grade

BB+, BB, BB-,
B+, B, B-,
CCC+, CCC,
CCC-, CC, C

 

 

 

0

Default

D

 

 

 

0

Gross Carrying amount

 

2,567,371

0

0

2,567,371

Loss allowance

 

–142

 

 

–142

Carrying amount

 

2,567,229

0

0

2,567,229

 

 

 

 

 

 

 

 

 

 

 

 

Receivables arising from money market papers

 

 

 

 

Investment Grade

 

 

 

 

 

Very Low credit risk

AAA

53,463

 

 

53,463

Low credit risk

AA+, AA, AA-, A+, A, A-

62,735

 

 

62,735

Moderate credit risk 

BBB+, BBB, BBB-

 

 

 

0

Non Investment Grade

BB+, BB, BB-,
B+, B, B-,
CCC+, CCC,
CCC-, CC, C

 

 

 

0

Default

D

 

 

 

0

Gross Carrying amount

 

116,198

0

0

116,198

Loss allowance

 

–32

 

 

–32

Carrying amount

 

116,166

0

0

116,166

Due from banks

 

 

 

 

Investment Grade

 

 

 

 

 

Very Low credit risk

AAA

144,697

 

 

144,697

Low credit risk

AA+, AA, AA-, A+, A, A-

1,257,230

 

 

1,257,230

Moderate credit risk 

BBB+, BBB, BBB-

207,572

 

 

207,572

Non Investment Grade

BB+, BB, BB-,
B+, B, B-,
CCC+, CCC,
CCC-, CC, C

 

777

 

777

Default

D

 

 

 

0

Gross Carrying amount

 

1,609,499

777

0

1,610,276

Loss allowance

 

–135

 

 

–135

Carrying amount

 

1,609,364

777

0

1,610,141

 

 

 

 

 

 

 

 

 

 

 

 

Due from customers

 

 

 

 

Low credit risk

 

6,116,318

 

 

6,116,318

Moderate credit risk 

 

 

96,369

 

96,369

High Credit Risk

 

 

25,637

11,159

36,796

Doubtful

 

 

 

6,043

6,043

Default

 

 

 

56,102

56,102

Gross Carrying amount

 

6,116,318

122,006

73,304

6,311,628

Loss allowance

 

–1,581

–376

–28,142

–30,099

Carrying amount

 

6,114,737

121,630

45,162

6,281,529

 

 

 

 

 

 

 

Financial instruments measured at amortised cost

 

 

 

 

Investment Grade

 

 

 

 

 

Very Low credit risk

AAA

615,882

 

 

615,882

Low credit risk

AA+, AA, AA-, A+, A, A-

1,295,562

 

 

1,295,562

Moderate credit risk 

BBB+, BBB, BBB-

272,901

 

 

272,901

Non Investment Grade

BB+, BB, BB-,
B+, B, B-,
CCC+, CCC,
CCC-, CC, C

 

18,529

 

18,529

Default

D

 

 

 

0

Gross Carrying amount

 

2,184,345

18,529

0

2,202,874

Loss allowance

 

–1,270

–301

 

–1,571

Carrying amount

 

2,183,075

18,228

0

2,201,303

 

in CHF 1,000

Exposure to credit risk on loan commitments and financial guarantee contracts

 

Stage 1

Stage 2

Stage 3

Total
31.12.2020

Exposure to credit risk on loan commitments and financial guarantee contracts

 

 

 

 

Low credit risk

22

 

 

22

Moderate credit risk 

 

 

 

0

High Credit Risk

181,035

651

 

181,686

Doubtful

 

 

 

0

Default

 

 

 

0

Gross Carrying amount

181,057

651

0

181,708

Loss allowance

–201

 

 

–201

Carrying amount

180,856

651

0

181,507

 

in CHF 1,000

 

Carrying amount of the below financial position
 
 

 

Rating
(Standard &
Poor’s or
Equivalent)

Stage 1

Stage 2

Stage 3

Total
31.12.2019

Cash and cash equivalents

 

 

 

 

 

Investment Grade

 

 

 

 

 

Very Low credit risk

AAA

2,896,279

 

 

2,896,279

Low credit risk

AA+, AA, AA-, A+, A, A-

 

 

 

0

Moderate credit risk 

BBB+, BBB, BBB-

 

 

 

0

Non Investment Grade

BB+, BB, BB-,
B+, B, B-,
CCC+, CCC,
CCC-, CC, C

 

 

 

0

Default

D

 

 

 

0

Gross Carrying amount

 

2,896,279

0

0

2,896,279

Loss allowance

 

–113

 

 

–113

Carrying amount

 

2,896,166

0

0

2,896,166

 

 

 

 

 

 

 

 

 

 

 

 

Receivables arising from money market papers

 

 

 

 

Investment Grade

 

 

 

 

 

Very Low credit risk

AAA

84,626

 

 

84,626

Low credit risk

AA+, AA, AA-, A+, A, A-

38,365

 

 

38,365

Moderate credit risk 

BBB+, BBB, BBB-

 

 

 

0

Non Investment Grade

BB+, BB, BB-,
B+, B, B-,
CCC+, CCC,
CCC-, CC, C

 

 

 

0

Default

D

 

 

 

0

Gross Carrying amount

 

122,990

0

0

122,990

Loss allowance

 

–34

 

 

–34

Carrying amount

 

122,956

0

0

122,956

 

Due from banks

 

 

 

 

Investment Grade

 

 

 

 

 

Very Low credit risk

AAA

105,842

 

 

105,842

Low credit risk

AA+, AA, AA-, A+, A, A-

333,932

 

 

333,932

Moderate credit risk 

BBB+, BBB, BBB-

75,309

 

 

75,309

Non Investment Grade

BB+, BB, BB-,
B+, B, B-,
CCC+, CCC,
CCC-, CC, C

 

 

 

0

Default

D

 

 

 

0

Gross Carrying amount

 

515,083

0

0

515,083

Loss allowance

 

–86

 

 

–86

Carrying amount

 

514,997

0

0

514,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due from customers

 

 

 

 

Low credit risk

 

6,703,401

 

 

6,703,401

Moderate credit risk 

 

13,790

65,333

 

79,123

High Credit Risk

 

 

 

22,216

22,216

Doubtful

 

 

 

5,577

5,577

Default

 

 

 

23,070

23,070

Gross Carrying amount

 

6,717,191

65,333

50,863

6,833,386

Loss allowance

 

–1,879

–2,438

–31,754

–36,071

Carrying amount

 

6,715,312

62,895

19,109

6,797,316

 

 

 

 

 

 

 

Financial instruments measured at amortised cost

 

 

 

 

Investment Grade

 

 

 

 

 

Very Low credit risk

AAA

577,239

 

 

577,239

Low credit risk

AA+, AA, AA-, A+, A, A-

1,453,358

 

 

1,453,358

Moderate credit risk 

BBB+, BBB, BBB-

273,188

 

 

273,188

Non Investment Grade

BB+, BB, BB-,
B+, B, B-,
CCC+, CCC,
CCC-, CC, C

 

 

 

0

Default

D

 

 

 

0

Gross Carrying amount

 

2,303,785

0

0

2,303,785

Loss allowance

 

–1,308

 

 

–1,308

Carrying amount

 

2,302,477

0

0

2,302,477

 

in CHF 1,000

Exposure to credit risk on loan commitments and financial guarantee contracts

 

Stage 1

Stage 2

Stage 3

Total
31.12.2019

Exposure to credit risk on loan commitments and financial guarantee contracts

 

 

 

 

Low credit risk

11,453

 

 

11,453

Moderate credit risk 

 

 

 

0

High Credit Risk

220,254

160

 

220,414

Doubtful

 

 

 

0

Default

 

 

 

0

Gross Carrying amount

231,707

160

0

231,867

Loss allowance

–295

 

 

–295

Carrying amount

231,412

160

0

231,572

 

Information about amounts arising from expected credit losses

in CHF 1,000

Expected credit loss of the below financial position
 

 

Stage 1

Stage 2

Stage 3

Total
2020

Due from customers - mortgage loans1

 

 

 

 

01 January 2020

57

1,409

8,962

10,428

New financial assets originated or purchased

23

15

 

38

Transfers

 

 

 

0

to stage 1

601

–368

–233

0

to stage 2

 

 

 

0

to stage 3

 

 

 

0

Net remeasurement of loss allowance

–609

19

2,831

2,241

Financial assets derecognised during period (not written off)
i.e., repayments, modifications, sales, etc. 

–10

–96

–1,331

–1,437

Changes in models/risk parameters

 

–961

 

–961

Amounts written off on loans / utilisation in accordance with purpose

 

 

–3,648

–3,648

Foreign exchange and other adjustments 

 

 

–92

–92

31 December 2020

62

18

6,489

6,569

 

 

 

 

 

 

 

 

 

 

Due from customers - lombard loans1

 

 

 

 

01 January 2020

1,520

1,021

17,754

20,295

New financial assets originated or purchased

321

19

 

340

Transfers

 

 

 

0

to stage 1

 

 

 

0

to stage 2

–14

14

 

0

to stage 3

 

 

 

0

Net remeasurement of loss allowance

–218

 

21,635

21,417

Financial assets derecognised during period (not written off)
i.e., repayments, modifications, sales, etc. 

–365

–754

 

–1,119

Changes in models/risk parameters

 

 

 

0

Amounts written off on loans / utilisation in accordance with purpose

 

 

–22,254

–22,254

Foreign exchange and other adjustments 

17

1

–392

–374

31 December 2020

1,261

301

16,743

18,305

 

 

 

 

 

 

 

 

 

 

Due from customers - other loans1

 

 

 

 

01 January 2020

302

8

5,038

5,348

New financial assets originated or purchased

82

3

 

85

Transfers

 

 

 

0

to stage 1

5

–5

 

0

to stage 2

–3

3

 

0

to stage 3

–1

 

1

0

Net remeasurement of loss allowance

15

50

103

168

Financial assets derecognised during period (not written off)
i.e., repayments, modifications, sales, etc. 

–116

–1

 

–117

Changes in models/risk parameters

 

 

 

0

Amounts written off on loans / utilisation in accordance with purpose

 

 

–113

–113

Foreign exchange and other adjustments 

–26

–1

–119

–146

31 December 2020

258

57

4,910

5,225

  1. By type of collateral.

 

Due from customers - mortgage loans1

 

 

 

 

01 January 2019

61

6,529

9,254

15,844

New financial assets originated or purchased

15

188

 

203

Transfers

 

 

 

0

to stage 1

6,419

–4,135

–2,284

0

to stage 2

 

 

 

0

to stage 3

 

–431

431

0

Net remeasurement of loss allowance

–6,423

292

2,600

–3,531

Financial assets derecognised during period (not written off)
i.e., repayments, modifications, sales, etc. 

–13

–1,097

–394

–1,504

Changes in models/risk parameters

 

 

 

0

Amounts written off on loans / utilisation in accordance with purpose

 

 

–332

–332

Foreign exchange and other adjustments 

–2

63

–313

–252

31 December 2019

57

1,409

8,962

10,428

 

 

 

 

 

 

 

 

 

 

Due from customers - lombard loans1

 

 

 

 

01 January 2019

241

3,933

17,662

21,836

New financial assets originated or purchased

1,281

137

 

1,418

Transfers

 

 

 

0

to stage 1

 

 

 

0

to stage 2

 

 

 

0

to stage 3

 

–1

1

0

Net remeasurement of loss allowance

137

 

–94

43

Financial assets derecognised during period (not written off)
i.e., repayments, modifications, sales, etc. 

–140

–3,049

–473

–3,662

Changes in models/risk parameters

 

 

 

0

Amounts written off on loans / utilisation in accordance with purpose

 

 

 

0

Foreign exchange and other adjustments 

1

1

658

660

31 December 2019

1,520

1,021

17,754

20,295

 

 

 

 

 

 

 

 

 

 

Due from customers - other loans1

 

 

 

 

01 January 2019

243

5

6,108

6,356

New financial assets originated or purchased

130

7

 

137

Transfers

 

 

 

0

to stage 1

 

 

 

0

to stage 2

 

 

 

0

to stage 3

 

 

 

0

Net remeasurement of loss allowance

12

 

20

32

Financial assets derecognised during period (not written off)
i.e., repayments, modifications, sales, etc. 

–83

–4

–693

–780

Changes in models/risk parameters

 

 

 

0

Amounts written off on loans / utilisation in accordance with purpose

 

 

 

0

Foreign exchange and other adjustments 

 

 

–398

–398

31 December 2019

302

8

5,038

5,348

  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.

in CHF 1,000

Impact: increase/decrease

 

Stage 1

Stage 2

Stage 3

Total
2020

Volume change of central banks, money market instruments and banks by CHF 759 million

76

 

 

76

Volume change of bonds amc/oci by CHF 102 million (stage 1)

–38

 

 

–38

Reclassification of individual bonds in stage 2

 

301

 

301

Volume change of customer loans by CHF 642 million

–136

 

–3,612

–3,748

Impact of changes in volumes on loss allowances

–98

301

–3,612

–3,409

Loans with special collateral at VP Bank (Luxembourg) SA

 

–726

 

–726

Reassesment of mortgage claims at VP Bank (BVI) Ltd (Hurrican Irma)

5

–368

 

–363

Impact of changes in customer loans with additional risk provisions

5

–1,094

 

–1,089

Withdrawal of the special parameters for mortgage claims of VP Bank (BVI) Ltd (Hurrican Irma)

 

–961

 

–961

Other effects

–261

–7

 

–268

Total

–354

–1,761

–3,612

–5,727

in CHF 1,000

Impact: increase/decrease

 

Stage 1

Stage 2

Stage 3

Total
2019

Volume change of central banks, money market instruments and banks by CHF 371 million

1

 

 

1

Volume change of bonds amc/oci by CHF 79 million

–51

 

 

–51

Volume change of customer loans by CHF 572 million

1,340

 

 

1,340

Impact of changes in volumes on loss allowances

1,290

0

0

1,290

Mortgage claims at VP Bank (BVI) Ltd

2

–4,214

 

–4,212

Loans with special collateral at VP Bank (Luxembourg) SA

 

–2,907

 

–2,907

Reassessment of other customer loans with specific allowances

 

 

 

0

Impact of changes in customer loans with additional risk provisions

2

–7,121

0

–7,119

Other effects

265

–3

 

262

Total

1,557

–7,124

0

–5,567

 

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

Information about the nature and effect of modifications on the measurement of provision
for doubtful debts (Stage 2 and 3)
in CHF 1,000

Total
2020

Total
2019

Financial assets modified during the period

 

 

Amortised cost before modification

 

 

Net modificaton loss

 

 

Financial assets modified since initial recognition

 

 

Gross carrying amount at 31 December of financial assets for which loss allowance has changed from stage 2 or stage 3 to stage 1 during the period

6,045

24,634

 

6. Operational risks

Whilst financial risks are deliberately assumed in order to earn revenues, operational risk should be avoided by suitable controls and measures or, be reduced to a level set by the Bank, if possible.

There are a wide variety of causes for operational risks. People make mistakes, IT systems fail, external risks affect the Bank or business processes do not work. 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.

The management of operational risks is understood in VP Bank to be an integral cross-divisional function which is to be implemented across all business units and processes on a uniform and Group-wide basis.

The following methods are used:

The internal control system of VP Bank encompasses all process-integrated and process-independent measures, functions and controls which assure the orderly conduct of business operations.

In order to recognise potential losses on a timely basis and in order to ensure enough time for the implementation of countermeasures, early-warning indicators are used. 

Significant loss occurrences are systematically recorded and evaluated centrally. The findings from the collection of loss data are integrated directly into the risk management process. 

Group Risk is responsible for the Group-wide implementation, monitoring and further development of the risk management methods deployed and bears responsibility for the associated IT application. 

The risk factors leading to operational risks are assessed within the framework of periodic top-down and bottom-up risk assessments. Based on these assessments, Group Executive Management decides how to deal with the identified risks.

Each person in a management position is responsible for identification and evaluation of operational risks as well as for definition and performance of key controls and ­measures to contain risks. This responsibility may not be delegated. 

Knowledge and experience are 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 along the lines of ISO standard 22301:2012. The basis thereof is the BCM strategy which has been implemented by Group Executive Management and is reviewed for effectiveness and accuracy on an ongoing basis. Operationally critical processes are reviewed in detail, discussed and, where necessary, documented with a clear course of action. The organisation necessary for crisis management is in place and its members are routinely trained and instructed.

 

7. Business risk and strategic risk

Business risk may result from unexpected changes in market conditions and business environment with an adverse effect on profitability or equity. It indicates the risk of unexpected losses due to inadequate business strategies (strategic risk). Group Executive Management is responsible for managing business and strategic risk by taking into account the internal and external business environment. Top business risks are derived and appropriate measures are implemented (top-down process).

 

8. Compliance risk

Compliance risk is understood to be breaches of statutory and regulatory provisions that can cause significant damage to VP Bank’s reputation or result in sanctions, fines or even in the Bank’s licence being withdrawn. The compliance risk of VP Bank consists in particular of VP Bank not or not sufficiently recognising financial crime risks of its clients and counterparties – such as money laundering, financing of terrorism, violations of sanctions and embargoes, and fraud and corruption activities – and not establishing appropriate monitoring and control processes/measures for the identification, management and limitation of cross-­border compliance risks as well as tax and investment ­compliance risks. 

All relevant compliance risks which are of significance for the business and service activities of VP Bank Group are recorded and assessed within the scope of a Group-wide, annual compliance risk assessment. In this regard, all relevant, risk-based compliance controls as well as processes and systems within the overall organisation of VP Bank Group are assessed in order to determine whether they are up-to-date, appropriate and effective. In this context, the risk-based compliance controls must be proportionate to the respective compliance risk, the management effort and the intended control objectives. VP Bank Group also ensures through regular compliance trainings that all employees of VP Bank Group are familiar with and adhere to the relevant compliance regulations.

 

9. Reputational risk

Reputational risk represents the risk of negative economic effects that could arise as a result of damage to the public image or reputation of VP Bank. Business and strategic risks, financial risks, and operational and compliance risks can result in reputational risks and weaken the confidence in the Bank’s reputation of employees, clients, shareholders, regulators or the public in general. This may result in asset losses or a decline in earnings, for instance due to deteriorating or terminated client relationships, rating downgrades, higher refinancing costs or more difficult access to the interbank market.

Reputational risks are monitored by Group Executive Management.