Risk management

Effective capital, liquidity and risk management is an ­elementary prerequisite for the success and stability of a bank. VP Bank understands this to mean the systematic process to identify, evaluate, manage and monitor the ­relevant risks as well as the steering of capital resources and liquidity necessary to assume risks and guarantee risk-bearing capacity. The binding framework for action in this context is provided by the relevant regulations defined by the Board of Directors of VP Bank Group, comprising the Risk Appetite Statement, Risk Policy and Risk Strategies.

The Risk Appetite Statement defines the overall risk appetite in terms of the Bank’s risk taxonomy, and as such forms the basis for the operationalisation of the limits and objectives contained in the Risk Policy. As an overarching framework, and together with the risk strategies for each risk group (strategic/business risks, financial risks, operational risks and compliance risks), the Risk Policy regulates the specific goals as well principles, organisational structures and processes, and methods and instruments of risk ­management in detail.

In Liechtenstein, the regulatory requirements governing risk management are set out primarily in the Banking Act (BankA) and the Banking Ordinance (BankO). In addition, the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) are applied in Liechtenstein. In Liechtenstein, the CRD was enacted in the BankA and BankO. VP Bank is classified as a locally system-relevant banking institution by the Liechtenstein Financial Market Authority and must possess in aggregate equity amounting to at least 12.5 per cent of its risk-weighted assets. Thanks to its solid capital base, balance sheet structure and comfortable liquidity position, VP Bank constantly outperformed the minimum regulatory requirements over the course of 2021.

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

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 system-relevant banks of 2 per cent. Basel III also provides for an anti-cyclical ­capital buffer that was set at 0 per cent for 2021 by the Liechtenstein Financial Market Authority.

VP Bank complied with the minimum capital requirements for 2021 at all times. Thanks to an exceedingly robust tier 1 ratio of 22.4 per cent as of the end of 2021, it continues to guarantee sufficient room for manoeuvre. This enables VP Bank to continue to assume risks associated with the conduct of banking operations.

As of the end of 2021, the leverage ratio of VP Bank was 7.6 per cent. As of 31 December 2021, 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. Using an internal process to assess the adequacy of capital and liquidity 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.

In compliance with legal liquidity requirements and provisions of the BankO, CRR and CRD, VP Bank monitors and manages liquidity risks using internal directives and limits regarding interbank business and credit-granting activities. Maintaining liquidity within VP Bank Group has the highest priority at all times. This is assured with a large holding of cash and cash equivalents and high-quality liquid assets (HQLA). VP Bank observed the minimum regulatory liquidity requirements at all times during 2021.

In this context, compliance with the liquidity coverage ratio (LCR) of 100 per cent is required by law, which was clearly exceeded with a value of 160 per cent thanks to a comfortable liquidity situation. The net stable funding ratio (NSFR) of 100 per cent to be fulfilled from May 2022 on has also been significantly exceeded at 179 per cent as of the end of 2021. 

With the Internal Liquidity Adequacy Assessment Process (ILAAP), the Financial Market Authority imposes specific requirements concerning internal strategies and procedures to determine, manage and monitor liquidity risks, which were again surveyed and assessed by the Liechtenstein Financial Market Authority in 2021 using an ILAAP questionnaire.

As part of its liquidity management process, VP Bank has drawn up an emergency liquidity plan which ensures that it possesses adequate liquidity in the event of liquidity crises. Early-warning indicators are regularly reviewed to monitor and identify, on a timely basis, any deterioration in the liquidity situation.

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

The management and monitoring of credit risk plays a central role, particularly due to the importance of the client loans business (CHF 6.2 billion as of 31 December 2021 or 47 per cent of the total assets). In addition to the loans business, credit risks arising from the securities portfolio held for liquidity purposes in the banking book (predominantly high-quality liquid assets) as well as interbank deposits with banks with good credit ratings are also of relevance to VP Bank. 

Credit regulations govern credit risk management in the client loans business. The volume of client loans fell by only around CHF 44 million in 2021, with an increase in lombard loans being offset by lower exposures in the mortgage loan business as well as a reduction in unsecured loans.

Again in 2021, government support measures 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 of approx. CHF 0.3 million). VP Bank supported individual borrowers affected by the pandemic by deferring repayments of principal and interest (approx. CHF 6.7 million) and by occasionally granting bridging loans (approx. CHF 6.8 million). 

The volume of amounts due from banks fell slightly compared to the previous year, totalling CHF 1.7 billion at the end of 2021. In order to increase interest income in the consistently low-interest environment, free liquid assets are increasingly being invested with banks with good credit ratings, predominantly Swiss cantonal and regional banks.

The securities portfolio consists mainly of investment grade securities and had a nominal value of approximately CHF 2.3 billion as of 31 December 2021. Detailed directives (including volume and risk limits, duration ranges) for the management of securities are established in the risk management process.

Regarding market risk, VP Bank Group is exposed to interest rate, currency and equity-price 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 low interest rates throughout 2021. The negative interest rate environment in the two primary currencies of CHF and EUR, as well as the consistently low USD interest rate level, pose great challenges for balance sheet management, and it continues to be difficult to invest client funds.

VP Bank defines operational risk as potential losses or lost earnings 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. Operational risk is controlled in all organisational units of VP Bank by their respective management. Thanks to uniform Group-wide 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.

Operational risks increased with the COVID-19 pandemic: 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. Through a ­variety of measures, continued operations were ensured at all times during the pandemic and the risks were appropriately addressed and mitigated.

In addition to the aforementioned risks, risk management of VP Bank Group also 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 is making a significant contribution to promoting sustainable investments by implementing the EU Action Plan on Sustainable Finance, and this represents an important pillar in VP Bank’s overall strategy as part of the Sustainability Plan 2026. This also means that it is now necessary to ­consider ESG criteria systematically in the risk management process.

ESG risks include climate risks, social risks and governance risks, and encompass the resulting effects on the earnings situation and 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, compliance and operational risks). In accordance with the directives of the Taskforce on Climate-related Financial Disclosures (TCFD), VP Bank’s sustainability report provides details of the Bank’s approach to handling transitional and physical climate risks.

Risk management is predicated on the following principles:

According to the concept of risk-bearing capacity, a bank should be in a position to continue its business operations – or at least fully serve the demands 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 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 2021 business year. On this basis, the Bank fulfils the supervisory requirements pursuant to the Banking Ordinance (BankO) and the Banking Act (BankA), as well as the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD), that represent the implementation of the Basel III Capital Accord currently in force in the European Union (EU).

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 CRR risks to take account of financial collateral in accordance with Art. 223 CRR

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

Whilst complying with the relevant legal and regulatory provisions, the monitoring and steering of financial risks is based on internal bank objectives and limits relating to volumes, sensitivities and risk indicators. Scenario analyses and stress tests also demonstrate the effect of events which were not or not sufficiently taken into consideration within the scope of ordinary risk evaluation.

In this respect, the Board of Directors sets strategic barriers within which risk management is undertaken. Group Executive Management is responsible for the implementation and observance of the risk strategy for financial risks as approved by the Board of Directors. At the operational level, the identification, assessment and monitoring of all relevant risks is carried out by the CRO functions, which are independent of the risk management units. The risk-managing units are responsible for risk steering and first-instance compliance with the targets and limits relevant to them.

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 constitutes a significant component of market risk. It arises mainly due to divergent maturities between asset- and liability-side positions. The table of the 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. An overview, analysed by currency, is to be found in appendix 34 (➔ cf. balance sheet by currency).

The Bank employs a comprehensive set of methods and indicators for the monitoring and management of market risks. In this respect, the value-at-risk approach 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 CHF, 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 refers to a holding period of 250 trading days and will not be exceeded with a probability of 99 per cent. The calculation of interest rate risk takes into account the contractual interest fixing period of a position. For non maturing positions an internal replication model is applied.

The market value-at-risk (99% / 250 days) of VP Bank Group at 31 December 2021 amounted to CHF 129.6 million (previous year: CHF 114.3 million). The previous year’s figures were aligned to a holding period of 250 days (previously 10 days) accordingly.

The following table shows a break down of the overall market value-at-risk into its risk types.

As the maximum losses arising from extreme market situations cannot be determined with the value-at-risk approach, the market risk analysis is supplemented by stress tests. Such tests enable the Bank to estimate of the effects on the net present value of equity of extreme market fluctuations. 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 simulated 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 prices).

The table on the following page exemplifies the key rate duration. 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 increased 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 net 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 Group net income and shareholders’ equity are set out. Basis for the underlying fluctuation of the CHF against the EUR and the USD is the implicit volatility as of 31 December 2021 and 31 December 2020, respectively.

The impact of a possible downturn in equity markets of 10, 20 and 30 per cent, respectively, on Group 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, 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 fixed-interest lending operations and increase refinancing costs. 

As part of of its asset and liability management, interest rate swaps measured at fair value are deployed to hedge this risk. VP Bank applies fair-value hedge accounting under IFRS in order to record the offsetting effect of changes in value of the hedged 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 value of the underlying transactions are adjusted and the gains/losses taken to income.

Because the fixed-interest positions of the hedged items 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 effective whenever the movements in the value of the underlying and hedging transactions which are induced by interest rate changes offset each other. Ineffectiveness mainly results from variations in duration, such as 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 on the basis of 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 must not arise; currency positions that remain open 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.

With a liquidity coverage ratio (LCR) of 160 per cent at the end of 2021, 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 band, 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 metals 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 loan portfolio. Such concentrations can constitute exposures from borrowers who 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 checks.

As of 31 December 2021, the total credit exposure excluding collateral was CHF 10.4 billion (as of 31 December 2020: CHF 10.5 billion). The following table shows the composition of the on- and off-balance-sheet items.

The change in client loans is mainly the result of a decline in volume in the mortgage loan business and the reduction in unsecured loans. The volume of amounts due from banks has decreased slightly compared to the previous year, totalling CHF 1.7 billion at the end of 2021. Free liquid assets are increasingly invested with banks with good credit ratings, predominantly Swiss cantonal and regional banks.

Receivables from clients are granted by default on a secured basis. This area 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 mostly 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 pre-approved.

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 3.3 billion of mortgage credits (31 December 2020: CHF 3.4 billion). From a regional perspective, VP Bank conducts the lion’s share of its business in the Principality of Liechtenstein and in the eastern part of Switzerland.

The 10 largest single exposures represent 12 per cent of total credit exposures (31 December 2020: 11 per cent).

The credit risk strategy and the credit regulations form the binding framework for credit risk management in the client lending business. Set out therein are not only the general guidelines governing credit granting as well as the framework conditions for the conclusion of credit business but also the decision-makers and the corresponding bandwidths within the framework of which credits may be approved (rules on powers of authority).

In principle, exposures in the private client loans business and in the commercial loans business must be covered by the loan-to-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 creditworthiness, industry segment, collateral and risk domicile of the client. VP Bank uses an internal risk classification for assessing creditworthiness. Deviations from credit-granting principles (exceptions to policy) are dealt with as part of the credit risk management process under consideration of the respective risks.

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 situation. Hence, counterparty risk and also liquidity risk is reduced with reverse repo transactions.

Counterparty risks in the interbank business may only be entered into in approved countries and with approved counterparties. Exposures to banks relate to institutions with a high creditworthiness (investment grade rating) and registered office in an OECD country. A comprehensive system of limits contains the level of exposure depending on the duration, rating, risk domicile and collateral of the counterparty. In this regard, VP Bank relies essentially on the rating of banks by the two rating agencies Standard & Poor’s and Moody’s. OTC derivative transactions may be concluded exclusively 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. At the portfolio level, VP Bank uses expected and unexpected credit loss estimates to monitor and measure credit risk. The expected credit loss represents the average loss that can be expected within one year. The unexpected credit loss represents a scenario-based unexpected loss from a stressed loss framework that is the difference between the potential loss in a stressed scenario (stressed loss) and the loss to be expected in a normal market environment (expected loss) over one year. In the stressed loss framework, particular attention is paid to idiosyncratic credit risks. The unexpected loss is limited and monitored by a corresponding credit risk limit, both overall and for each loan portfolio.

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 impinge on the value of an exposure abroad. The monitoring and management of country risk is undertaken using volume limits which restrict the respective aggregate exposures per country rating (Standard & Poor’s and Moody’s). All on- and off-balance-sheet receivables are considered in this process; positions in the Principality of Liechtenstein and Switzerland do not fall under this country limit rule. 

The risk domicile of an exposure is the basis for recognising country risk. In the case of secured exposures, 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, if this is impossible, should be reduced to a level set by the Bank.

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 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 that enough time for the planning and realisation of countermeasures still remains, 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.

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 and, if necessary, determines proactive risk-reducing measures.

The Group Operational Risk & Methodology unit, which is part of Group Compliance & Operational Risk, is responsible for the Group-wide implementation, monitoring and further development of the methods used to manage operational risks and bears the technical responsibility for the associated IT application.

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 must 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 on the one hand results from unexpected changes in market and underlying conditions with an adverse effect on profitability or equity. On the other hand, strategic risk indicates the risk of unexpected losses or reduced earnings, resulting from management decisions regarding the strategic orientation of the Group. 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 worked out, the implementation of which is entrusted to the responsible body or organisational unit (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 compliance 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 level of risk involved, the management effort of the controls and the control objectives. VP Bank Group also ensures through regular compliance training that all employees of VP Bank Group are familiar with and can apply 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 of employees, clients, shareholders, regulators or the public in general in the Bank. 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.