Finance and risk management
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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 management 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 key performance indicators from 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 internal regulations and guidelines and is reviewed annually. Within the framework of the ILAAP, the liquidity coverage 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 147.6 per cent (2020: 149.3 %), 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 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 2021, the LLB Group had CHF 2.2 billion in equity capital (31.12.2020: CHF 2.1 billion). At 20.3 per cent (31.12.2020: 21.6 %), its Tier 1 ratio is well above the regulatory requirement and above its target of 14 per cent, which it had set itself during the StepUp2020 strategy.
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 12.2 billion, the lion’s share of loans made during the reporting year, namely 88.7per cent (31.12.2020: 898.7%), comprised credits secured by mortgages. We have managed to continually grow our market share of loans to customers. At the end of 2021, the volume of loans had increased to CHF 13.8 billion (31.12.2020: CHF 13.2 billion). We extend mortgages primarily within the market regions of Liechtenstein, north-eastern Switzerland and the region of Zurich.
The LLB Group has a special economic position in Liechtenstein and in eastern Switzerland. This came evident especially during the corona pandemic, when many companies in the region were facing considerable economic challenges. For this reason, it was important to us to provide bridging loans quickly and with a minimum of bureaucracy in 2020, the first year of the COVID-19 pandemic. No additional liquidity assistance was provided in 2021. We nevertheless continued to remain in close contact with our corporate clients. Where the liquidity situation was tight despite a sustainable business model, we gave targeted support in the form of interest or amortisation deferrals. Each individual case was examined according to specific defined criteria.
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.
High standards of lending
The LLB Group pursues a risk-conscious credit policy. It includes the differentiated and separate evaluation of loan applications, the conservative assessment of collateral values, the individual calculation of affordability as well as compliance with standard equity requirements. The different 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 approved by the Swiss Financial Market Supervisory Authority (FINMA). We also apply the EU guidelines on assessing, evaluating and processing mortgage secured loans. Since mid-2021, the guidelines of the European Banking Authority (EBA guidelines on loan origination and monitoring) have therefore been applied to new lending.
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:
- combating money laundering and financing of terrorism;
- implementing tax compliance within the framework of international agreements;
- complying with regulatory requirements and 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 internal 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 relationships. 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 instructed about regulatory changes, sensitised to indications of possible money laundering, and know and comply with the regulations of the respective target country when engaging 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 the LLB Group and is ensured through IT systems and trained and aware employees. The principles and policies on information security are set out in directives that are binding throughout the Group. Our data is protected by robust processes and advanced systems. Specialists continuously analyse new cyber threats and, depending on the risk, take appropriate defence measures. In future, these analyses and defensive measures will be developed further by the LLB Group’s new Cyber Defence Center. Targeted vulnerability management and penetration tests ensure a consistently high and appropriate 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. This helped to maintain alertness to the risks high.
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 management 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 most recently the case with the corona pandemic. Through the pandemic, the LLB Group’s BCM has been shown to be crisis-proof, efficient and comprehensive.
The way forward with the new ACT-26 strategy
Ensuring that risks and opportunities for the LLB Group are balanced carefully and in compliance with the law will be the key task of the Group CFO Division, also under the new ACT-26 corporate strategy (see chapter “ACT-26”). Rules and standards will continue to be implemented rigorously. Risk management is being strengthened in a targeted manner and also cyber defence and data protection are being scaled up.
“The Group CFO Division will ensure that opportunities and risks are balanced on our growth path. "
A particular focus is placed on the efficiency and automation of processes within finance and risk management. The organisation of the division will also reflect these strategic alignments: management of operational risks will be brought together in the new Business Risk Management Department. In future, this will include information security, data protection, cyber defence and the internal control system.