Risk management of VP Bank Group

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.

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.

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.

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.

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.

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.

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). 

Risk management is predicated on the following principles:

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.

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.

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.

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.

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.

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.

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 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.

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.

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. 

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.

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 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 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.

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.

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

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.

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

1. By type of collateral.

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.

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

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.

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).

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.

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.