6th Floor, Princes Court, 7 Princes Street, London EC2R 8AQ
Tel: 020 7710 8300 Fax: 020 7726 2808
KOOKMIN BANK International Limited
Kookmin Bank International Ltd “KBI”
Basel II Pillar 3 Disclosures - 2010
Contents / PAGE NO.1. Introduction to Pillar 3 / 2
2. Frequency & Basis of Disclosures / 2
3. KBI and KB Financial Group / 2
4. Risk Governance / 3
5. Risk Management Policies / 3
6. Capital Adequacy Overview & Resources
7. Table of ICAAP figures, Pillars 1, 2 and 3. / 4
6
1. Introduction to Pillar 3
Basel II Framework “the framework”, as adopted by the European Union, was implemented in the UK by the FSA.
The framework is based on three “pillars” which are as follows:-
- Pillar 1: This is the calculation of the risk weighted asset amounts (“RWA”) and capital requirements. Under Basel II, KBI has chosen for Credit Risk, the standardised approach (”TSA”), TSA for Credit Risk involves the calculation of Risk Weighted Assets (“RWA”) similar to that used in Basel 1, but ratings from accredited rating agencies also modify the weightings. RWAs are calculated by multiplying the credit exposure by a factor depending upon the type of counterparty, length of risk and rating (if available) from an accredited rating agency.
For Operational risk, KBI is using the Basic Indicator Approach “BIA”. The BIA is equal to 15% of the bank’s net interest income and the net non interest income averaged over a three year period as per FSA (BIPRU section 6.3)
- Pillar 2 requires firms to assess the need to hold additional capital to cover risks not covered under Pillar 1 .It consists of two processes:
(i)An internal Capital Adequacy Assessment Process (ICAAP) and
(ii)An internal review and evaluation process
KBI’s ICAAP considers all components of its risk management, exposures and capital requirements. The internal review and evaluation process is the bank’s review of its capital management and assessment of its internal controls and corporate governance
- Pillar 3 : The disclosure of risk management and capital adequacy information
Pillar 3 prescribes how, when and at what level information should be disclosed about the bank’s risk management and capital adequacy practices.The disclosures are designed to enable stakeholders and market participants to assess an institution’s risk appetite, business, exposures and capital.
2. Frequency and Basis of Disclosures
Due to the scale of KBI’s operations and activities, the Board has decided that disclosures shall be published annually. KBI has prepared the disclosures on an unconsolidated basis and should be read in conjunction with the Financial statements. Disclosures will be published on the Bank’s website at www. Kookmin.co.uk .
3. KB Financial Group
Kookmin Bank International Ltd “KBI” is a UK incorporated subsidiary of Kookmin Bank which is the largest bank in South Korea. The Kookmin Bank Group established a financial holding company, KB Financial Group, in September 2008, with Kookmin Bank as a subsidiary.
Therefore KBI has to comply with UK company law and FSA regulations as a separately incorporated UK bank. Kookmin Bank is KBI’s parent company, owning 100% of its shares.
4. Risk Governance
4.1 The Board of Directors
The responsibility and authority for controlling all risks rests with the Executive Directors, who are appointed from the management of KBI’s parent bank.The Board of Directors comprises two Executive Directors, a Non Executive Director who works for KBI’s parent bank and a UK based Non Executive Director. Reviews of the risks taken and compliance with limits set are regularly presentedto the Board of Directors.
4.2 The Credit Committee
The Credit Committee supports the Board’s Corporate Governance responsibilities in relation to credit risk management.
4.3 Audit Committee Internal Auditor & Compliance
The Audit committee consists of the Managing Director, the Deputy Managing Director, and the two Non Executive Directors, one of whom is UK based and the other is a manager of its parent, Kookmin Bank, Seoul. The audit committee is chaired by the UK Non Executive Director, a very experienced UK banker.
KBI employs another very experienced banker on a part time basis as its Internal Auditor.
He performs internal audits as directed by the Audit committee. The Internal Auditor has no other bank responsibilities.
The compliance function exists to maintain and monitor the quality of the bank’s business activities and to ensure that the business remains in full compliance with the UK regulatory regime . The Compliance and Money Laundering Reporting Officer has considerable experience in these fields in the context of KBI.
5. Risk Management Policies
5.1 Credit Risk
The credit committee consists of all the senior credit officers of the bank and includes the two Executive Directors. All risks are considered and signed off prior to contractual committal.
New credit exposures are carefully considered by senior management prior to transaction. Potential non-bank exposures are subject to detailed credit analysis and subsequently reviewed regularly by the KBI’s credit committee and by the Board of Directors. There are also limits set by our parent bank for the size and type of risks taken by KBI independently. All credit risks above these levels require the approval of KBI’s parent company.
Most non bank credit risks are currently Korean companies as this is where the bank considers it has a comparative credit advantage. In order that KBI is able to lend to and borrow from, and transact trade finance business with, its parent, Kookmin Bank, there is a legally enforceable netting agreement of assets and liabilities between the two banks.
5.2 Liquidity Risk
The Board of Directors sets the limits and guidelines for the bank’s liquidity policy. The principal objective of the policy is to ensure that at all times there are sufficient liquid assets to satisfy the bank’s payment obligations and potential obligations to the depositors, together with other business liabilities, as they fall due, without incurring unacceptable shortfalls. Liquidity risk is monitored daily to ensure it remains within the FSA guidelines and the bank’s own limits
5.3 Operational and Fraud Risk
The policy of the bank is to ensure that at all times adequate and effective internal control systems are in place to monitor and manage risk. The bank maintains dual control with segregation of duties. It also controls system access and use on a dual control basis for the processing and recording of its transactions. By these controls, the bank minimises the risks of operational losses and fraud. In addition, staff are instructed to be vigilant about potential frauds being attempted by outside parties.
5.4 Market Risk
KBI’s market risks consist of interest rate and foreign exchange risks. Both these risks are controlled independently and are governed by policies approved by the Board of Directors.The bank considers that it has relatively low levels of market risk.
Loans are normally entered into on a margin over Libor basis, and also funded on a LIBOR basis. However, a potential medium term interest rate risk is created when we purchase medium term fixed rate bonds. The fixed rate interest income flow is exchanged for LIBOR based income by the use of Interest Rate swaps. The resulting LIBOR-based income is then more easily managed, as the interest rate period is then able to be match-funded with a LIBOR-based deposit.
Foreign exchange transactions are mainly undertaken to sell the bank’s profits for its base currency.
We have engaged in swap funding in the past, but this method of funding is not presently used.
6. Capital Adequacy Overview & Resources
KBI produced its ICAAP which was accepted by the FSA in 2010. The FSA has set its Individual Capital Guidance, “ICG” figure.KBI has remained within this figure throughout the recent economic downturn.
a) Capital
Capital as at 31st December 2010 USD
Tier 1 Capital net of deductions 52,573k
Tier 2 Capital (general provisions on loans) 188k
Total Capital 52,761k
b) Capital Requirements for Credit Risk31st December 2010
Type of Exposure / Total exposure USD / 8% risk weighted value USDBanks (incl. Bank Securities) / 255,937 / 8,127
Corporates (incl. Corporate Securities) / 57,281 / 3,879
Other / 2,027 / 162
Total / 315,245 / 12,168
The exposures include off balance sheet exposure such as undrawn credit commitments. The average exposures in the year were not materially different from the above.
In our assessments and stress-testing under ICAAP, no scenario resulted in the need to increase our capital. In fact even the most severe scenario left at least 20% of capital remaining.
c) Credit Exposures(after netting intragroup exposures) by Maturity USD as at 31st December 2010
Period / Banks(after netting) / Corporate Loans / Securities / Total
Repayable within 3 months / 10,810 / 0 / 615 / 11,425
4-6 months / 0 / 6,757 / 4,074 / 10,831
7 months up to 1 year / 0 / 1,505 / 12,596 / 14,101
More than 1 year up to 5 years / 0 / 13,914 / 42,242 / 56,156
Over 5 years / 0 / 0 / 10,230 / 10,230
Total / 10,810 / 22,176 / 67,757 / 102,743
Loan Commitments / 0 / 0 / 0 / 0
KBI had no credit risks which were non performing or past due as at 31st December 2010.
d)Counterparty Credit Risk
KBI has US$ 38m equivalent of Interest Rate Swap contracts as at 31st December 2010.
These are used to remove the Interest rate risk on fixed rate Securities, as explained in item 5.4 above.
e) Market Risks
KBI’s activities expose it to the financial risks of changes in interest rates and to some extent changes in foreign currency exchange rates. KBI maintains small limits on FX exposures and usually keeps the exposures as low as practicable.
Interest rate risk is managed by KBI by maintaining an appropriate mix of assets with long and short term rates and maturities, and the use of interest rate swaps to convert fixed income to floating, hence all assets are then able to be broadly match-funded on Libor terms
Interest rate mismatch reports are regularly produced, reviewed and monitored against limits. Reports also include “stress testing” of movements in rates of 1% and 2%.
f) CapitalRequirement for Operational Risk
KBI’s capital requirement for operational risk as at 31st December 2010,using the Basic Indicator method,was USD1,108k.
g) Overall Capital Adequacy Ratio
The Capital adequacy ratio as at 31st December 2010 was 25 %.
h) Pillar 2, ICAAP
Credit assessment and stress-testing has already been mentioned under item 6 b). The credit element is by far the largest. As a guide to the other factors, a schedule of resulting figures is enclosed. These figures should only be viewed, of course, in the context of the parameters of ICAAP considerations.
7 Table of ICAAP figures of Pillar 1 and Pillar 2 Capital Figures – December 31, 2010.
USD (000)s
Pillar 1Capital
Adequacy / Pillar 2
ICAAP assessment / Pillar 3 Totals
Credit Risk / 12,168 / 10,940 / 23,108
Market & Counterparty Risk / 104 / 115 / 219
Operational Risk / 1,108 / 75 / 1,183
Fixed Overhead Requirement (FOR) / N/A / N/A / N/A
Subtotal / 13,380 / 11,130 / 24,510
Pillar 2 – Concentration Risk / 616 / 616
Pillar 2 Risk- Liquidity and Reputational risk / 825 / 825
Pillar 2 Risk- Fraud and ML risk / 250 / 250
Pillar 2 Risk-Business Disruption risk / 225 / 225
Pillar 2 Interest rate risk on Banking book / 750 / 750
Pillar 2 Total / 13,380 / 13,796 / 27,176
Adjustments(diversification if claimed etc) / N/A / N/A / N/A
Additional capital to cover stress testing / 0 / 0
Total / 13,380 / 13,796 / 27,176
Current total capital / 52,761 / 52,761
Surplus / 39,381 / 25,585
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