Finance and risk management
Information checkedInformation geprüft Finance and risk management
Assuming risk goes hand in hand with the business of banking. Sustainable and methodical finance and risk management is essential to ensure the risks remain calculable. Our integrated approach has proven itself.
Sustainable finance management and anticipatory risk management: we attach very great importance to these at all levels of the organisation. As part of an integrated approach, risk management at the LLB Group includes dealing with legal and compliance risks as well as information security. The competences for the different areas of finance and risk management are bundled in the Group CFO Division.
The aim of our financial management is to create transparency at all levels of man-agement in order that costs and income can be managed in line with corporate strategy and in an efficient and timely manner. The key instruments are medium-term planning, the annual budgeting process, the Group's management information system and the planning and management of capital and liquidity.
Financial management includes the preparation of the financial statements in accordance with local laws and International Financial Reporting Standards (IFRS) as well as regulatory reporting.
The LLB Group has a prudent approach to risk, which is essential for protecting reputation, maintaining excellent financial strength and securing sustainable profitability. Our risk management is based on risk policy and encompasses the systematic identification and assessment, reporting, management and monitoring of credit risks, market risks, liquidity risks and operational risks as well as asset liability management (ALM). The LLB Group applies an appropriate organisational and methodological framework for assessing and managing risk (see chapter "Risk management" in the financial section).
Combating money laundering and the financing of terrorist or criminal activities as well as minimising regulatory risks, especially in cross-border business, are given highest priority in the LLB Group as part of risk management.
The LLB Group has in place robust strategies, policies, processes and systems that enable it to identify, measure, manage and monitor liquidity risk. The internal liquidity adequacy assessment process (ILAAP) is set down in inhouse regulations and guide-lines and is reviewed annually. Within the framework of the ILAAP, the liquidity cover-age ratio (LCR), as a binding regulatory liquidity reference figure, represents a material indicator both for liquidity risk assessment as well as liquidity risk management. The LCR ensures that credit institutions can cover their liquidity requirements in the case of a liquidity stress scenario within 30 calendar days. For the LLB Group, a minimum regulatory requirement of 100 per cent applies. With an LCR of 149.3 per cent (2019: 157 %), its ratio was substantially higher than that required under the regulations.
The Group-wide treasury manages the risks in the banking book that arise from banking activities, specifically liquidity, interest rate and foreign currency risks.
The LLB Group has in place sound, comprehensive and effective processes to assess and maintain on an ongoing basis adequate equity capital. The internal capital adequacy assessment process (ICAAP) is a key risk management instrument. The ICAAP is documented in the internal regulations and guidelines and is reviewed and revised annually on the basis of overall bank stress tests.
Solid equity base
A good equity base not only protects its reputation, but is also part of the financial management and credibility of a bank. Having a sufficiently high-quality equity base at its disposal is part of the LLB Group's identity. Its financial strength shall remain, as far as possible, unaffected by fluctuations in the capital markets.
LLB is considered to be of systemic importance to the Liechtenstein economy and subject to a regulatory minimum capital adequacy ratio of 12.5 per cent. We are targeting a Tier 1 ratio of over 14 per cent as a strategic objective. As at the end of 2020, the LLB Group had CHF 2.1 billion in equity capital (31.12.2019: CHF 2.1 billion). At 21.6 per cent (31.12.2019: 19.6 %), its Tier 1 ratio is well above the regulatory requirement and above its target of 14 per cent.
The LLB Group continues to enjoy a high level of financial stability and security on account of its solid equity base, which consists entirely of hard core capital. The comfortable capital situation gives it leeway to make acquisitions.
Rating confirms financial strength
Liechtensteinische Landesbank has had a deposit rating of Aa2 from rating agency Moody's since 2016. This means, according to Moody's, that it is one of the highest-rated banks in the world, is among the top range of Liechtenstein and Swiss banks and ranks well above the average of European financial institutions. The rating underlines LLB's stability and financial strength and is proof of our prudent finance and risk management.
We accompany private individuals, companies, small businesses and public institutions to finance their plans for the future.
At CHF 11.7 billion, the lion's share of loans made during the reporting year, namely 89 per cent (31.12.2019: 87 %), comprised credits secured by mortgages. We have managed to continually grow our market share of loans to customers. At the end of 2020, the volume of loans had increased to CHF 13.2 billion (31.12.2019: CHF 13.0 billion). We extend mortgages primarily within the market regions of Liechtenstein, north-eastern Switzerland and the region of Zurich.
The LLB Group is aware of its special economic position in Liechtenstein and in eastern Switzerland. For this reason, it was important to us to provide bridging loans quickly and with a minimum of bureaucracy during the corona pandemic. In addition, we gave targeted support to our corporate clients in the form of interest or amortisation deferrals where, despite a sustainable business model, the liquidity situation was tight. Each individual case was examined according to specific defined criteria. The total volume of liquidity assistance provided by the LLB Group in Switzerland and in Liechtenstein amounts to a good CHF 71 million.
Increased loan default risk through corona
The risk of loan defaults has risen due to the corona pandemic. The LLB Group has tak-en this development into account. We have subjected our credit positions to an addi-tional systematic risk-based analysis and increased risk provisioning. Overall, the state of the credit portfolio is very robust. The further development of risk provisioning will depend on how and when the economy starts to recover. We are monitoring the situation very closely and remain in close contact with our corporate clients.
High standards of lending
The LLB Group pursues a conservative credit risk policy. It includes the individual and differentiated evaluation of loan applications, the conservative assessment of collat-eral values, the individual calculation of affordability as well as compliance with standard equity requirements. The differentiated control processes help us to reliably fulfil our performance mandate (see chapter "Responsibilities for the economy, society and environment") and to take appropriate account of risks.
For real estate financing, we observe the Ordinance on Banks and Investment Firms (FL-BankV), which governs risk management in accordance with Art. 7a and Art. 21c ff of the Liechtenstein Banking Act. For mortgage financing in Switzerland, we observe the minimum requirements drawn up by the Swiss Bankers Association (SBA) and ap-proved by the Swiss Financial Market Supervisory Authority (FINMA). We also apply the EU guidelines on assessing, evaluating and processing mortgage secured loans.
Independent credit decisions
Within the LLB Group, credit competences are assigned according to the knowledge and experience of the decision-makers and the appropriate level and credit type. With the exception of standard business transactions, the authority to grant credit lies with the back office, i.e. the Group Credit Management and the superordinate Credit Committees. Credit decisions are thus made independently of market pressures and market targets. In this way, we are able to avoid conflicts of interest and objectively and independently assess risk in individual cases.
As part of the risk management of the LLB Group, the compliance organisation focuses not only on handling legal risks but also on three areas in particular:
- the fulfilling of legal obligations in connection with combating money launder-ing and terrorist financing;
- the implementation of tax compliance within the framework of the automatic exchange of information (AEOI), FATCA and QI as well as the withholding tax regime with Austria;
- the complying with regulatory requirements (among other things, in the areas of MiFID and cross-border) and the monitoring of employee transactions.
Compliance risks are seen as part of risk management at the LLB Group. It is based on the internationally recognised three lines of defence model:
- The first line of defence covers all the functions that are involved in conducting day-to-day business operations and, as a rule, have results-based objectives.
- The second line of defence – this includes the LLB Group's compliance organisation – carries out, independently of the market and the results, monitoring and control functions, and is responsible for ensuring compliance with applicable in-ternal and external regulations.
- In the third line of defence, the internal audit ensures the effectiveness of the controls.
Combating money laundering and terrorist financing
The risks of money laundering and terrorist financing are addressed as part of a strict, IT-supported process when establishing new or monitoring existing business relation-ships. The monitoring of transactions is performed on a systematic and risk-oriented basis.
Besides the activities in our onshore markets of Liechtenstein, Switzerland and Austria, we restrict our cross-border business to selected markets that are strategically and economically significant to LLB. This means the markets of Germany and the rest of Western Europe, the growth markets of Central and Eastern Europe as well as the Middle East.
The LLB Group's internal rulings and training ensure that employees are regularly trained on regulatory changes, sensitised to indications of possible money laundering, and know and comply with the regulations of the respective target country when en-gaging in cross-border activities.
Rules of conduct
We expect our corporate bodies and employees to comply with the applicable laws, regulations and guidelines, professional standards and our rules of conduct. These stipulate which transactions in financial instruments are not permitted for employees and corporate bodies. They also set out the general principles for employee transactions. How business relationships are supported by employees and corporate bodies is also clearly regulated, as is the acceptance of inducements and the exercise of secondary employment.
Dealing with cyber risks
Protection against cyber attacks has a very high priority for LLB and is ensured through IT systems and trained and aware employees. The principles and guidelines of the in-formation security programme are set out in directives that are binding throughout the Group. Our data is protected by robust processes and advanced systems. Special-ists continuously analyse new cyber threats and, depending on the risk, take appropriate countermeasures. External comparisons and penetration tests guarantee a consistently good and recognised level of security.
Given the increased cyber risks due to the corona pandemic, we regularly raised the awareness of staff, advisers and clients to the threat of cyber crime and specific fraud schemes during the reporting year in order to keep alertness to the risks high.
Within the digital-liechtenstein.li initiative, where LLB has a seat on the board, we are actively involved in developing a national cyber security strategy for Liechtenstein.
Internal control system
The internal control system (ICS) contributes to increasing risk transparency within the company as an integral part of our Group-wide risk management by monitoring the risks in the relevant business processes through effective control processes. The LLB Group applies standards that are customary in the banking industry to this sub-system of risk management.
Business continuity management (BCM)
A crisis or catastrophe requires critical decisions to be made, but cannot be done with the resources ordinarily available to management. Business continuity management (BCM) comes into play whenever preventative measures defined in the risk manage-ment processes do not work and the level of damage from an event could assume a scale that threatens the existence of the company. It identifies business-critical processes within the whole LLB Group, establishes BCM crisis management teams, draws up emergency plans and keeps senior management up to date with regular reports. This was the case during the reporting year with the corona pandemic. Through the pandemic, the LLB Group's BCM has been shown to be crisis-proof, efficient and comprehensive (see chapter "Corporate Center").