Risk and Capital Adequacy Report2013
GER-nr, 80050410
Table of Contents
1.Objectives and Risk Policies Risk Management in General 3 Credit Risk 4
Market Risk7
Liquidity Risk7
Operational Risk7
Risk on Capital Base8
2.Capital Base9
3.Solvency Requirement and CapitalBase Adequacy10
- including a description of internal processes and the solvency requirement model
4.Counterpart Risk14
5.Market Risk15
6. Exposure in shares, etc. not included in the bank’s trading portfolio16
7. Exposure to interest risk in positions not included in the bank’s trading portfolio17
8.Credit Risk18
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Objectives and risk policies
Risk Management in General
The BANK of Greenland operates on the basis of a balanced risk profile.
The bank’s Board of Directors keep a watchful eye on the bank’s risks and takes steps to follow up on developments.
The Board of Directors has established an overriding framework as well as a set of principles for the various areas of risk.
The bankmaintains an on-going process for developing toolsfor identifying and managing risks.
The Board of Management is responsible for the risk management function. The day-to-day management of risk is the job of the Credit / Foreign Affairs Department. Independent monitoring of this department is the job of the Accounts Department.
The BANK of Greenland uses the standard method for credit and market risks as well as the base indicator method for operational risks.
The most important risks in the operation of The BANK of Greenland and those which impact the bank’s growth, earnings and financial position are the following:
Credit Risk: Risk that the bank incurs a complete or partial financial loss as a result of its customers’ inability to live up to their commitments.
Market Risk: Risk that the value of the bank’s assets and liabilities are impacted by conditions in the marketplace, e.g. the state of the market, developments on stock exchanges and changes in foreign currency prices and interest rates.
Liquidity Risk: Risk that the bank incurs a loss resulting from the bank’s inability to live up to its commitments to depositors.
Operational Risk: Risk that the bank incurs a complete or partial financial loss as the result of inadequate or inappropriate internal procedures, human error, IT systems, etc.
Risk on Capital Base: Risk that the bank cannot comply with the banking acts’ minimum requirements for solvency, and that it cannot maintain individual solvency requirements.
Credit Risk
Within the area of credit, the objective of The BANK of Greenland is to limit loss on loans, advances, credits and guarantees. However, the bank is well aware that providing credit is the bank’s most important source of earnings; therefore an evaluation of the relation between earnings and risk is on-going.
The BANK of Greenland manages its credit risk by means of established policies and business procedures. The Board of Directors at the bank has established these policies and procedures with a view to making loans available to those customers who, with their solid positions and earnings, ensure high quality of their exposure when compared with the interest margin paid.
Credits, loans, advances and guarantees are provided at different levels within the bank depending on the size and risk of the exposure. The bank keeps a constant eye on all loans and guarantees above a certain level in order to ensure that any signs of failing ability to repay the debt to the bank can be identified as soon as possible so that the bank can then, in collaboration with its customer, avoid loss.
Risk Concentrations
The bank’s risk concentration for loans and guarantees is part of its credit risk management. The bank wishesto find an appropriate spread of loans and guarantees to commercial as well as retail customers.Furthermore, the bank seeks a balanced spread of its loans and guarantees among thevarious lines of business among its corporate customers. The bank finds this spread appropriate in light of the potential range of business opportunities in the bank’smarket area.
Exposures with one customer or a group of associated customers may not, after deduction of special secured claims, exceed 25% of the bank’s capital basis in accordance with the Danish Financial Enterprise Act §145. The Danish Financial Supervisory Authority (FSA) receives quarterly reports of these figures.
The BANK of Greenland has a policy stating that the sum of major exposures may not exceed 100% of its capital base.
Credit exposures amounting to 10% or more of the bank’s capital base
End 2013End 2012End 2011
Major exposures - number57 8
Greater than 20% of the capital base00 0
15-20% of the capital base02 3
10-15% of the capital base55 5
Inpercentage of the capital base58.793.5 110.2
The BANK of Greenland wishes to maintain a good spread in the lines of business serviced.
Loans and guarantee debtors distributed by sector and lines ofBusiness (calculated before impairments and/or provisions).
Lines of Business / DKr1,000Public Authorities / 351,510
Agriculture, hunting, fishing and forestry / 130,108
Industry and mining / 29,474
Energy supply / 12,204
Construction companies
- Construction of buildings / 184,049
- Other construction activities / 142,219
Total construction companies / 326,268
Trade / 298,421
Transport, hoteller og restauranter
- Transportation, postal and courier services / 151,374
- Hotels and restaurants / 124,692
Total Transportation, hotelsand restaurants / 276,066
Information and communication / 21,686
Financingand insurance / 77,221
Total real estate / 549,029
Other types of commerce / 64,159
Total commercial activities / 1,784,636
Retail customers / 1,686,021
Total / 3,822,167
It should be borne in mind that the distribution of loans, advances and guarantees according to lines of business should be evaluated in terms of the special geographical conditions in The BANK of Greenland’s primary market area.
Adjustment of Loan Exposures
The BANK of Greenland keeps individual tabs on all its loans and advances above a pre-determined limit. Other loans and guarantees are monitored on a group basis; however, when objective criteria indicate an increase in risk, these loans and guarantees are also evaluated individually.
Impairments on loans are done individually as well as in groups. Individual impairments are made when an objective indication that value deterioration has occurred resulting in a reduction of expected future repayments. Individual impairments are established and evaluated centrally by the bank’s Credit Department. At the end of 2013, exposures showing an objective indication of value deterioration amount to DKr 220.1m of which DKr 66.1m has been written off.
Group deterioration on credit risk groups, where there has been no individual deterioration, is made on the basis of the model designed by the Danish Association of Local Credit Institutions into which The BANK of Greenland’s historic losses have been incorporated.
These deteriorations amount to a total of DKr 10.6m.
Limits are placed on the amounts available for lending when individual deteriorations have taken place on a particular exposure.
Loans are written off when the collateral put up has been realized, and there no longer is any reasonable possibility of repayment. Partial write-offs are made when exposures are settled over a lengthy period of time. Interest accrual ceases when there no longer is any expectation that the loan will be repaid.
Collateral
The majority of The BANK of Greenland’s loans and advances has been secured by means of liens in real estate (private housing, office buildings, and other commercial property), in movable property (vehicles, operating equipment and the like), in fishing rights, in securities (shares, bonds and unit trusts), in cash deposited in banks, guarantees from other credit institutions or public authorities and by means of exposures in companies and sureties from the companies’ owners.
Collateral is evaluated prudently on the principle of forced sale. During evaluation, special, geographical difficulties will be taken into consideration in the event of a forced sale.
Market Risk
The bank strives to minimize any losses that may occur resulting from unforeseen developments on financial markets.
Policy:
The BANK of Greenland’s market risk is managed by means of previously established limits on a large number of risks.
Positions in shares and foreign currency are based on a framework related to the bank’s capital base.
As of 31December 2013, the bank’s portfolio of shares amounted to DKr 47.826m of which DKr 31.681m is invested in sector shares (shares in companies owned collaboratively by a number of financial enterprises).
Positions ininterest claimsmust be keptwithin a giveninterest rate riskof a maximum of3%.At the end of2013, the total interest rate risk amounted to 0.6% ofcore capital after deductions. The bankhas outsourced themanagement of its portfolioof bonds, and the administrator of this portfolio issubject to a riskframeworkwith amaximumdurationof 1.5 years.
The BANK of Greenland has a limited position in foreign currency. The bank’s risk in foreign currency at the end of December 2013, when measured by currency indicator 1, amounts to DKr 32.210m, or 4.0% of its core capital after deductions.
Calculation and monitoring take place daily, and both the Board of Management as well as the Board of Directors receives timely reports based on previously established guidelines.
Liquidity Risk
The BANK of Greenland seeks to maintain adequate liquidity contingency equivalent to 125% of the requirements stipulated in the Danish Act on Financial Enterprises. The bank’s minimum requirement for liquid adequacy is 75%.
At the end of2013, the bank’s adequacy was 219.5%.
Policy:
The BANK of Greenland’s liquidity contingency is managed by maintaining sufficient quantities of liquidfunds, ultra-liquid securities, as well as its ability to take advantage of lines and committed lines..
The BANK of Greenland has a strong capital base and profit on its deposits. Despite this strength, the bank has arranged for a committed line of credit with another credit institution.
Calculation and monitoring take place daily, and both the Board of Management as well as the Board of Directors receives timely reports based on previously established guidelines.
Operational Risk
The BANK of Greenland strives to limit its operational risks with due regard for the costs of such limitations.
Policies:
The BANK of Greenland has set up policies and a contingency plan for physical disasters and for IT shutdowns. The bank’s IT operations are run from Bankernes EDB Central (BEC), located in Denmark, and the bank follows the instructions and recommendations issued by BEC. The bank does not develop its own IT systems.
As at the end of 2013, the bank has outsourced the following areas:
Internal auditing
Clearing
Balances with debitors and creditors
Foreign payments
Customer orders
Risk on Capital Base
The BANK of Greenland maintains a strong capital base and a solvency ratio at the end of December 2013 of 21.0%. At the end of 2012, the bank’s solvency ratio was 20.2%
Calculation and monitoring take place monthly, and both the Board of Management as well as the Board of Directors receives timely reports based on previously established guidelines.
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Capital Base
The bank’s capital base at the end of 2013
(In DKr 1,000)
Core capital
Share capital180,000
Profit brought forward611,835
Deferred and activated tax assets0
Core capital after
the primary deduction791,835
Other deductions0
Half of the capital total share, etc.
>10%
0
Core capital including hybrid core
capital after deductions791,835
Supplementary capital
Reserves for appreciation16,882
Capital basebefore deductions808,717
Deduction in core capital
Half of the capital total share, etc.
>10%0
Capital base after deductions808.717
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Solvency Requirement and Capital Base Adequacy
In accordance with current legislation, the Board of Directors and the Board of Management determine The BANK of Greenland’s individual solvency requirements. Determination of the solvency requirement is constantly being evaluated by the Board of Management and the Board of Directors. These discussions are based on a memo containing a proposal on the size of the solvency requirement, including proposals on the choice of stress variables, stress levels, growth expectations and other relevant areas of risk. The Finance Manager is responsible for writing this memo.
Furthermore, the Board of Directors has thorough discussion at least once a year on the method for calculating the bank’s individual solvency requirements, including the risks and stress levels that should be taken into account when calculating the solvency requirement.
The BANK of Greenland has implemented a model for calculating its solvency requirements based on a template designed by The Danish Association of Local Credit Institutions and the Danish Financial Supervisory Authority’s (FSA) “Guidelines on Capital Base Adequacy and Solvency Requirements for Credit Institutions”. The management believes that, by employing this model, the bank will be able to calculate a solvency requirement that is adequate to cover the bank’s risks.
In this model, capital is set aside in four sets of risks (credit risk, market risk, operational risk and other risks). The first part of the model contains a number of stress tests that “stress” the individual accounting items by means of different variables.
The stress tested variables measured when determining the solvency requirement:
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Solvency Requirement and Capital Base Adequacy
Capital for covering credit risks
Impairment of loans, etc.
4.27% (group 3-credit institution)
calculated on loans and
guarantees before impairments and provisions for loss
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Solvency Requirement and Capital Base Adequacy
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Solvency Requirement and Capital Base Adequacy
Capital for covering
market risks
Fall in share prices
Rise in interest rates
Currency risk
Risk on derivatives
30%, though 15% on shares, etc. in sector shares
1.35% on trading portfolios and 1% outside of trading portfolios. At the same time, the short interest (less than 1 year) is displaced by 0.7 percentage points in one direction and the long interest (more than 1 year) is displaced by 0.7 percentage points in the opposite direction.
2.25% currency indicator 1 (Euro)
12% currency indicator 1 (other)
8% of positive market value
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Solvency Requirement and Capital Base Adequacy
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Solvency Requirement and Capital Base Adequacy
Capital for covering other risks:
General decrease in net income from interest12%
General fall in net income fromCharges17%
Price decreases on own property18%
It is the bank’s management is responsible for defining which risks The BANK of Greenland should be able to withstand and therefore which variables require stresstesting.
In the first instance, the stresstests are an attempt to subject figures in the accounts of The BANK of Greenland to a number of negative events in order to determine how the bank would react in a given scenario.
The results of these tests are then included in the solvency requirement model in such a manner that The BANK of Greenland, as a minimum, needs to maintain capital robust enough to cover a deficit that would appear in the event that the scenario in question were real. The overall effect of the stresstest on the solvency requirement is calculated by including the impact of the profit (or loss) on the bank in relation to weighted items. In this manner, a measure for the amount of capital needed for the bank to survive the scenario in question is calculated.
Apart from the areas of risk included in the stresstest, there are many risks that The BANK of Greenland has found relevant to include in its evaluation of its solvency requirement.
Other risks evaluated when determining the solvency requirement:
Further capital to cover credit risks
- Growth in loans and advances
- 100 largest exposures
- Customers sufferring from financial difficulties
- Geographic concentration
- Commercial concentration
- Concentration of collateral
- Unexploited credit facilities
- Retail segmentation
- Major raw materials projects
Further capital to cover market risks
Capital for operational risk
Further capital to cover other risks
- Strategic risks
- Reputational risks
- Risks related to the bank’s size
- Real property risks
- Capital acquisition
- Liquidity risks
- Winding down risks
- External risks associated with legislation and compliance
- Other – recruitment, method risk, etc.
The determination of the impact these risks have on the solvency requirement are either calculated directly from supplementary calculations or evaluated by the management as impacting the solvency requirement.
The risk factors included in the model are, in the opinion of The BANK of Greenland, sufficient to cover all the risk required by legislation that the bank’s management is required to take into account when determining its solvency requirement as well as the risks that the management decides The BANK of Greenland has incurred.
Furthermore, the Board of Directors as well as the Board of Management evaluates the extent to which the capital base at the bank is sufficient to support coming activities. At The BANK of Greenland, this evaluation is part of the general determination of the bank’s solvency requirement. The management evaluates on an on-going basis, and at least once a year, the manner in which expectations for growth impact the calculation of the solvency requirement. In concrete terms, this means that the management must estimate future growth rates, the average solvency weight of this growth and the margin of earnings after tax.
Solvency Margin at the End of December 2013
Capital base after deductionDKr.808,717,000
Capital adequacyDKr.402,181,000
Solvency margin in DKr.DKr.406,536,000
Solvency ratio21.0%21.0%
Solvency requirement 8+ model 10.4%
Solvency requirement probability model 9.4%
Solvency margin inpercentage points 10.6% 11.6%
As of 2013, the method of calculation for individual solvency requirements has been changed to the 8+ model. This calculation is based on 8% to which extra information may be added, e.g. customers suffering from financial difficulties.
The BANK of Greenland's Calculated Capital and Solvency Requirements; Old and New Model
DKr 1,000 / Probability Model / Credit Reserve Model (8+)Capital
Requirement / Solvency
Requirement / Capital
Requirement / Solvency
Requirement
Credit Risk / 301,572 / 7.83 %
Market Risk / 21,666 / 0.56 %
Operational Risk / 48,951 / 1.27 %
Other / -10,631 / -0.28%
Credit Risk / 284,042 / 7.35 %
Market Risk / 23,094 / 0.60 %
Operational Risk / 50.018 / 1,30 %
Other / 45,027 / 1.17%
Capital and Solvency Requirement / 361,558 / 9.38 % / 402,181 / 10.42 %
The new solvency rules are not yet in force in Greenland. However, the bank intends to follow them. Until these rules come into force, the bank will calculate its solvency requirements by means of the Probability Model as well as the Credit Reserve Model.
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