Risk Management

Clear and effective individual decision-making authority, controlled risk-taking and monitoring by the Board of Directors, CEO and dedicated committees, form the cornerstone of risk management at Landsbankinn.

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Credit risk remained well within risk appetite in 2018. The book value of the Bank's credit portfolio increased by ISK 139 bn in 2018, mostly driven by lending to companies in fisheries and seafood and housing loans to retail customers. The fisheries and seafood sector has become the largest individual industry in the Bank’s credit portfolio. The Bank's total liquidity position and in foreign currency, and liquidity benchmarks, were well above regulatory requirements and the Bank’s risk appetite in 2018. The Bank’s market risk remains moderate and well within risk appetite, despite increased volatility in the market, and the CPI indexation imbalance on assets and liabilities decreased during the year.

All liquidity benchmarks well above regulatory limits

Risks in the Bank's operation are evaluated using several metrics based on the nature of each risk factor. These metrics are used to determine risk limits, analyse risk factors and changes to them, communicate information and manage risk. Economic capital (EC) represents the combined evaluation of all risk factors.

EC as a percentage of REA declines

The Bank's internal assessment of EC for credit risk (loans and claims on customers and financial undertakings) increased by 6% in 2018, due to increased lending. The rising quality of the portfolio tempered the effect on EC. EC for other risks changed but little during the year, with the exception of interest rate and inflation risk, where EC decreased considerably, and legal and political risk, where it increased slightly. Total EC increased slightly during the year, from ISK 98.6 bn to ISK 99.6 bn. The risk exposure amount (REA) also increased, yet the improved quality of the credit portfolio kept the EC percentage of REA to 10.0% at the end of 2018, as compared with 10.7% at year-end 2017. This is an extremely positive YoY change.

Landsbankinn's aggregate market risk was moderate and well within limits set by the Bank's risk appetite. The Bank's liquidity position was well in excess of Central Bank requirements, with the Bank's aggregate liquidity coverage ratio (LCR) being 158% at year-end 2018 and 534% in foreign currency.

Economic Capital
The blue line represents the ratio of EC to REA
Aggregate Liquidity Coverage Ratio
The Bank has adopted detailed risk rules and developed a governance structure that ensures a clear division of responsibility and monitoring of risk management.

Organisation of risk management

Risk management involves the identification, assessment and control of risks in the Bank's operation. The Bank shall adopt detailed risk rules and develop an effective internal governance structure that ensures a clear division of responsibility, risk management and follow-up on risk management.

As provided in the Bank’s risk policy, all pertinent risks in the operation are considered, both financial and otherwise, including credit risk, market risk, liquidity risk, concentration risk, operational risk, business risk, legal risk, reputational risk, conduct risk, compliance risk, information security risk, data risk and model risk.

Landsbankinn’s governance structure sets out the committee organisation and decision process on key risks, the decision-making authority of individuals, follow-up and control by the Board of Directors, CEO and individual committees.

The Board of Directors has determined a risk appetite which functions as a management tool that controls risk-taking and as a limit for aggregate risk in the Bank’s operational platform. Risk appetite is reviewed at least annually or as needed to reflect the Bank’s risk-taking objectives at each time.

In the management of risk relating to IT, Landsbankinn aims to limit such risk through clear procedures in the operation, maintenance, development and testing of IT systems and hardware. Key to Landsbankinn’s monitoring of information security risk is a risk assessment of the main assets on which its IT framework is based. Landsbankinn bases its policy on information security on cultivating trust and integrity in its customer relationships. Landsbankinn strives to maximise data and information system security with an eye to confidentiality, accuracy and availability. Compliance with the ISO 27001 standard on information security management is one of the tools that guides these efforts.

Risk management involves processes that combine the Bank’s risk appetite and business plan. The process consists of both self-assessment and risk assessment which are utilised in further analysis and management of risk. Strategy is also based on risk appetite and risk management. As a result, risk policy is an integral part of the Bank’s operation and risk management is a dynamic process implemented throughout the Bank on the back of a robust risk culture.

Overview of Landsbankinn's 2018 risk appetite metrics

Risk factor Metric
Credit risk
Expected loss
Average probability of default
Loss given default
Sector concentration
Borrower concentration
Market risk
Interest rate and indexation risk in the banking book
Indexation risk
Liquidity risk  Aggregate LCR -total
Aggregat LCR - FX
Operational risk Operational scope - Real changes to REA base
Funding risk  Net stable funding ratio
Economic capital targets

Active internal controls

Active internal controls form one of the cornerstones of robust risk governance and are conducive to the Bank operating in accordance with its risk policy and risk appetite. A total of 58 employees work in Landsbankinn's internal control functions; within the Risk Management division, in Compliance (a special function directly under the CEO), and in Internal Audit.

Internal control is a process shaped by the management and employees of Landsbankinn. Internal control comprises all actions taken with the aim to support, manage, mitigate or monitor certain activities and in so doing increase the likelihood of the Bank attaining set goals.

Landsbankinn seeks to maintain good relations with regulators and to ensure that information disclosure is at all times accurate. In 2018, a total of 357 cases were logged in Landsbankinn's document management system in relation to communications with the FME and the Central Bank, not counting regular reporting.

Further information in risk report

Landsbankinn has in recent years published a risk report that complies with the disclosure requirements of Pillar 3 of the Basel III rules on the capital requirements of financial undertakings. The report provides in-depth information on all aspects of the Bank's risk management and risk assessment methods.

The risk report is intended to present a true and fair picture of the Bank's position and it includes key information on scope, exposures, risk assessment process, equity position and other important and related factors.

Landsbankinn published a risk report on 7 February 2019. The report is in English.

Number of logged cases, regular filings excluded

  • The FME 335
  • The Central Bank 22

Regular reports

  • The FME
    38 reports with 121 filings
  • The Central Bank
    24 reports with 186 filings; in addition, one report is filed daily