Effective risk management is a key factor in the bank's long-term profitability and stability. Risk management involves analysis, assessment and managing risk factors in the bank's operations, with effective arrangements for dealing with risk and/or communicating information on its existence. The bank applies best practice in its risk management.
The proportion of loans in arrears for over 90 days dropped from 2.3% to 1.8% in 2015. Defaults of individuals and households decreased most, from 4.1% in 2014 to 2.7% in 2015. The high quality of new credit also contributed to reducing average probability of default.
Landsbankinn's market risk remained stable and within the limits of its risk appetite in 2015. The bank continued to reduce its exposure in unlisted equities while at the same time increasing its financial market activities. The bank's liquidity ratio (LCR) is well above the mandatory minimum. The overall LCR is 113% and in foreign currency 360%, both exceeding the requirements set by the Central Bank of Iceland.
Landsbankinn has adopted targets for risk appetite and risk limits in 2016. Although the current market circumstances appear favourable, there are indications of increased external risk in the bank's operating environment. This includes macroeconomic conditions and steps towards the removal of capital controls which are expected in the first half of 2016.
Clear and effective authorisations to individual employees for decision-making, controlled risk-taking and supervision by the Board of Directors, CEO and committees of the bank are the cornerstones of risk management. Landsbankinn has adopted a detailed risk policy and built up a governance system which ensures clear responsibility and follow-up in risk management.
Work continued in 2015 on further reinforcing Landsbankinn's risk management by improving internal work processes and analysing and disseminating information on the bank's main risk factors.
Measurement of risk appetite and risk limits for the major risk factors in the bank's operations is part of its daily management. This has proven very useful as a tool to increase portfolio quality, improve its composition and reduce risk. Risk appetite does not only apply to risk limits but also provides guidance on the attitude towards risk in operations which bank employees need to adopt.
The bank's risk limits always accord with external laws and rules, where these exist, but the bank also itself defines a great number of risk limits which are not enshrined in laws or regulations. Landsbankinn has set itself targets for financial position, asset quality, exposures and acceptable long-term profitability. To achieve its targets, the bank only undertakes risk which it understands, can measure and can meet.
In determining risk appetite, the bank sets limits concurrently for the main aspects of credit, market, liquidity, funding and operational risk, which vary in their detail depending their individual characteristics and diversity. The objective of reducing risk in operations will continue to guide the bank's actions.
||Average probability of default (PD)|
|90 days in arrears|
|Non-trading-book interest rate risk|
|Liquidity risk||Liquidity coverage ratio (LCR) – total|
|Liquidity coverage ratio – FX|
|Funding risk||Funding ratio (NSFR)|
Risk factors are assessed using measures suited to their nature. These measures are used, for instance, to set risk limits, analyse risk factors and changes in them, communicate information and manage risk. The combined measurement of all risk factors produces an assessment of economic capital.
In recent years Landsbankinn has published a risk report satisfying the bank's requirements for information disclosure under Basel II. The report describes in detail all aspects of the bank's Risk Management and the methods applied by the bank in assessing risk.
The Risk Report is intended to present a clear picture of the bank's position and includes, for instance, key information on the scope of risk, large exposures, risk-assessment process, capital position and other important aspects.