The supervisory board discusses the strategy and the risks associated with the business each year, and, on the basis of reports, assesses the structure and operation of the internal risk management and control systems .
Supervisory Board
Audit Committee
Management Board BinckBank Business Units
CommitteeRisk
Risk Management
(escalation to AC)
Compliance
(escalation to AC)
IT security
(escalation to CEO)
Finance & Control
(escalation IAD
to AC)
Internal Control Treasury
Committee
Operational CommitteeRisk
Retail
Marketing & Sales Operations
IT
Treasury
1st line ‘of defence’ 2nd line ‘of defence’
Professional Services
3rd line ‘of defence’
External Accountant
Regulators (DNB/AFM)
Financialstatements2009124
Audit Committee
The Audit Committee is responsible for overseeing the structure and operation of the system of internal control and risk management measures and for monitoring the implementation of the external auditor’s recommendations and the functioning of the Internal Audit Department .
Risk management committees Treasury Committee
The Treasury Committee is concerned primarily with the management of liquidity risk and interest-rate risk and determines the investment policy for interest-rate-related operations . This relates to matters such as strategic allocation of freely available funds to the investment portfolio and determination of the funds to be held in cash .
Operational Risk Committee
Operational risk management has been delegated to a separate risk committee, which consists of representatives of line management and specialist support departments . This committee manages risks relating to human factors and the structuring of business processes, such as IT security risk, legal risk and compliance risk . Its principal tasks include decision-making on sound and controlled operation, coordination and promotion of operational risk control and the structuring of the main business processes . The framework of standards and guidelines within which these decisions are made has been configured by specialist support departments which support decision-making and policy implementation by line management .
Risk Committee
BinckBank’s Risk Committee concerns itself primarily with the management of credit risk . The Risk Committee addresses such matters as collateralised lending policy and client acceptance during its meetings . The Risk Manager has the option of referring issues upwards to the Audit Committee .
Risk management departments Risk Management department
The Risk Management department is responsible for the day-to-day implementation of the policy formulated by the Risk Committee for the management of credit and market risk, and reports directly to the executive board (CFO) and the Risk Committee .
Finance & Control department
The Finance & Control department is responsible for the timely administration and reporting of financial data to internal and external stakeholders . This includes all mandatory reporting to DNB and AFM . The Finance &
Control department reports directly to the executive board (CFO) . Compliance department
The Compliance department is responsible for monitoring compliance with the applicable codes of conduct and the relevant securities legislation and regulations, and is concerned primarily with management of integrity risk . Through its code of conduct, insider trading regulations and whistleblowers’ charter, BinckBank demonstrates the importance it attaches to values such as integrity and reliability .
Internal Control department
The Internal Control department exists to facilitate operational improvement, by supporting the business units in defining their administrative organisation and internal control structures and verifying the existence of risk control measures .
Annualreport2009125 IT Security department
The IT Security department is responsible for formulating and implementing information security policy . The IT Security department may refer issues upwards to the Chairman of the executive board .
Internal Audit Department (IAD)
The IAD is an independent function that is separate from the line organisation and the internal control built into the different areas of the business processes . The IAD exists to facilitate operational improvement by examining and assessing the management of critical processes . The IAD reports to both the Chairman of the executive board and the Audit Committee .
Capital management
The aim of capital management at BinckBank is to maintain a sound solvency position, seeking constantly to strike the right balance between the equity capital it holds and the risks to which a fast-growing company is exposed . Since the introduction of Basel II (2008), BinckBank uses the complementary method to determine the adequacy of its capital . This involves holding capital for the complementary risks identified by BinckBank, such as interest-rate risk, concentration risk, margin risk and counterparty risk, in addition to the minimum capital requirements prescribed under Pillar I . The adequacy of this internal capital requirement under Pillar II is tested on a regular basis, which may lead to higher or lower internal capital requirements . The testing process is known as the ICAAP (Internal Capital Adequacy Assessment Process) . BinckBank uses ICAAP to determine its internal capital (or ICAAP capital) . The result of the ICAAP is expressed as the Pillar II solvency ratio . As a capital target, BinckBank has indicated that it strives to achieve a solvency ratio of at least 12% and Tier 1 capital of at least €100 million .
Capital adequacy
BinckBank continuously assesses the adequacy of its capital . During 2009 it emerged that, as a result of strong growth in business operations, the risks and the capital requirement under Pillar II had increased . Under Pillar II, BinckBank needs to hold additional capital to absorb increases in interest-rate risk, concentration risk and margin risk . As a result, the solvency ratio fell from 13 .6% at 31 December 2008 to 13% at year-end 2009 . The increase in interest-rate risk was the result of growth in the investment portfolio, which in turn was due to the increase in customer deposits . Customer deposits rose by more than €342 million (20%) during 2009 . In addition to the increase in interest-rate risk, the concentration risk in the collateralised lending portfolio also rose . There was a sharp increase in collateralised lending since the beginning of the year of €182 million, representing an 80% increase and reduced diversification of the collateral . The increase in concentration led to a higher internal capital requirement for credit risk . The capital requirement under Pillar I is expressed in the BIS ratio . The capital adequacy of the internal capital requirement under Pillar II is expressed in the Pillar II solvency ratio . BinckBank continuously assesses the adequacy of its capital under Pillar I and Pillar II .
Financialstatements2009126
Calculation of equity capital and actual Tier 1 capital
31 December 2009 31 December 2008
x e 1,000 x e 1,000
Issued share capital 7,607 7,709
Share premium 386,978 392,395
Treasury shares (18,097) (5,628)
Other reserves 56,710 50,020
Unappropriated profit 47,161 33,145
Total equity 480,359 477,641
Less: goodwill (152,929) (152,929)
Less: other intangible assets (192,537) (220,920)
Less: fair value reserve (13,789) (8,832)
Less: proposed dividend (23,582) (16,190)
Core capital 97,522 78,770
Less: equity investments in financial subsidiaries (1,953) (1,475)
Total available capital (A) - Tier 1 95,569 77,295
Credit risk - Pillar I 13,391 13,545
Market risk (= currency risk) 197 138
Operational risk 27,933 22,351
Total required capital (B) - Pillar I 41,521 36,034
Interest-rate risk 8,906 6,100
Credit risk - Pillar II 7,266 3,400
Liquidity risk 975 -
Total required capital - Pillar II 17,147 9,500
Total required capital (C) - Pillar I + II 58,668 45,534
BIS ratio (= A/B x 8%) 18.4% 17.2%
Solvency ratio (= A/C x 8%) 13.0% 13.6%
Credit risk
Credit risk is the risk that a counterparty and/or issuing institution involved in trading in or issuing a financial instrument will default on an obligation and thus harm BinckBank financially . Credit risk relates to items included in the balance sheet under banks, financial assets (including collateralised lending) and other assets . With these balance sheet items, the most important consideration is the creditworthiness of the counterparty (except collateralised lending, because these items are fully covered by securities as collateral) .
Lending
BinckBank lends to central governments, regional government if guaranteed by central government, central banks and other banks and credit institutions with a credit rating equal to or better than F1 (Fitch or equivalent) . These are short-term loans with terms ranging from one day to a maximum of one month . BinckBank is exposed to counterparty risk (the risk of default by a counterparty to which credit has been extended) . BinckBank extends credit to counterparties within a system of limits for each counterparty that are
Annualreport2009127 set in advance by the Treasury Committee . Lending to counterparties by the Treasury department is governed
by strict rules, in accordance with treasury policy, and observes internally set limits on both the amount and term of loans to approved counterparties . The resultant credit risk is monitored via regular credit reviews . Investment portfolio - bonds
When assessing the creditworthiness of the investments in bonds, use is made of the long-term credit ratings published by rating agencies . New investments must have a rating of AA- or higher . The credit rating of securities paper must be at least A- .
Collateralised loans
Via the client agreement, BinckBank offers clients loans against securities collateral . Loans can be used to cover the margin requirement, purchase securities or furnish bank guarantees against the brokerage account . In all these cases, BinckBank is exposed to credit risk with respect to the client . Given the nature of the loans and the quality of the collateral provided the credit risk is limited . In the case of lending against the collateral of financial instruments, the amount of credit advanced depends partly on the liquidity and price of the security in question . Credit monitoring is performed by the Risk Management department, which carries out automated checks using real-time prices . The credit risk therefore resides in movements in value of the collateral received . The Risk Management department closely monitors for undesirable concentration within client portfolios . Concentration risk arises when there is an excessive concentration of investments in specific funds for clients with non-diversified investment portfolios . The credit collateralised by securities is in this case overly dependent on one or more funds . The Risk Management department monitors such concentrations daily and takes action where necessary to moderate them .
Derivative positions held on behalf of clients (Note 19)
The clients of BinckBank can take positions in listed derivatives (options and futures) . The credit risk arising from taking short positions in options is covered by requiring clients to provide cover in the form of money and/or securities (margin requirements) . The Risk Management department monitors that clients continue to meet their margin requirements . At year-end 2009, the total margin requirement of clients was €217 million (2008: €181 million) .
Maximum credit risk
The table on the next page presents the maximum credit risk associated with the various financial instruments . The maximum credit risk is shown gross, without taking account of the effects of credit risk mitigation provided by set-off agreements and the collateral that has been furnished . The maximum credit risk in derivative positions for the account and risk of clients is shown by the margin requirement as described above, and is not included in the table on the next page .
Financialstatements2009128
31 December 2009 31 December 2008
x e 1,000 x e 1,000
Credit risk
Cash and balances with central banks 48,936 39,289
Banks 179,692 244,412
Financial assets at fair value through profit and loss 37,294 37,033
Available-for-sale financial assets 1,511,903 1,298,233
Loans and receivables 410,169 227,725
Held-to-maturity financial assets 8,329 12,558
Loans to associates - 1,200
2,196,323 1,860,450
Guarantees 3,217 3,086
2,199,540 1,863,536 The quality of the loans and advances and the provision for bad
debts are shown in the tables below:
Not yet due 410,039 227,168
Past due 805 1,034
Total 410,844 228,202
Bad debt provision (675) (477)
Net loans and receivables 410,169 227,725
Overdue items are residual items remaining after execution of the collateral (securities and bank guarantees) . The provision is formed on a case-by-case basis .
Loans and receivables by percentage covered:
< 25% of the value of the collateral 75,037 37,596
Between 25% and 50% of the value of the collateral 160,509 97,559
Between 50% and 75% of the value of the collateral 171,635 88,601
> 75% of the value of the collateral 2,858 3,412
Past due 805 1,034
410,844 228,202
There are no items in arrears or for which provisions have been recognised in any of the other categories of financial assets . Loans and receivables under renewed contracts
In the case of existing loans and receivables, it is possible for renewed contracts to be concluded with clients .
The new contracts are, however, periodically assessed for
compliance and to determine whether future payment is probable .
Loans and receivables under renewed contracts 74 173
Annualreport2009129 Sector concentration risk
The following table presents the credit risk, analysed by sector .
Credit risk as at 31 December 2009 x e 1,000
Financial institutions
Government/
government-guaranteed Private individuals
Other private
sector Total
Cash and balances with central banks - 48,936 - - 48,936
Banks 179,692 - - - 179,692
Financial assets at fair value through
profit and loss 37,294 - - - 37,294
Available-for-sale financial assets 842,742 617,215 - 51,946 1,511,903
Loans and receivables - - 410,169 - 410,169
Held-to-maturity financial assets - 8,329 - - 8,329
Investment in associates and joint
ventures - - - - -
1,059,728 674,480 410,169 51,946 2,196,323
Guarantees - - 2,622 595 3,217
1,059,728 674,480 412,791 52,541 2,199,540
Credit risk as at 31 December 2008 x e 1,000
Financial institutions
Government/
government-guaranteed Private individuals
Other private
sector Total
Cash and balances with central banks - 39,289 - - 39,289
Banks 244,412 - - - 244,412
Financial assets at fair value through
profit and loss 37,033 - - - 37,033
Available-for-sale financial assets 645,652 652,581 - - 1,298,233
Loans and receivables - - 227,725 - 227,725
Held-to-maturity financial assets - 12,558 - - 12,558
Investment in associates and joint
ventures - - - 1,200 1,200
927,097 704,428 227,725 1,200 1,860,450
Guarantees - - 2,521 565 3,086
927,097 704,428 230,246 1,765 1,863,536
Financialstatements2009130
Credit rating of financial assets
Assessment of the creditworthiness of the financial assets and liabilities is based on credit ratings provided by rating agencies .
Cash and loans to banks are classified on the basis of the short-term credit rating of rating agencies . The long-term rating is used for the investment portfolio . New investments must be rated at least AA- . Loans and receivables concern credit provided against collateral to private individuals and SME clients . These are not rated by credit rating agencies . Collateralised loans is not assessed on the basis of ratings, but on the quality of the collateral in securities .
Credit profile of financial assets as at 31 December 2009 (x e 1,000)
Short-term rating Long-term rating
Unrated Total
F1+ F1 AAA between
AA+ and AA-
between A+ and A-Cash and balances with
central banks 48,936 - 48,936
Banks 385 179,307 179,692
Financial assets at fair value
through profit and loss 37,294 - - 37,294
Available-for-sale financial
assets 1,237,025 274,878 - 1,511,903
Loans and receivables 410,169 410,169
Held-to-maturity financial
assets 8,329 - - 8,329
Loans to associates - -
Total 49,321 179,307 1,282,648 274,878 - 410,169 2,196,323 Credit profile of financial assets as at 31 December 2008 (x e 1,000)
Short-term rating Long-term rating
Unrated Total
F1+ F1 AAA between
AA+ and AA-
between A+ and A-Cash and balances with
central banks 39,289 - 39,289
Banks - 244,412 244,412
Financial assets at fair value
through profit and loss 37,033 - - 37,033
Available-for-sale financial
assets 1,154,808 88,124 55,301 1,298,233
Loans and receivables 227,725 227,725
Held-to-maturity financial
assets 12,558 - - 12,558
Loans to associates 1,200 1,200
Total 39,289 244,412 1,204,399 88,124 55,301 228,925 1,860,450
Annualreport2009131 Credit risk weighting and capital requirement
This table presents the credit risk weight with the capital requirement according to the standard method of Basel II .
Credit risk standard approach as at 31 December 2009 (x e 1,000)
Risk weight Credit risk mitigation
Risk-weighted
assets
Capital
require-0% 10% 20% 50% 75% 100% ment
Substi-tution (guaran-tees)
Collateral Claims or contingent claims on
central governments or central
banks 893,555 - - - - - - - - -
Claims or contingent claims on regional governments or local
authorities 7,958 - - - - - - - - -
Claims or contingent claims on
financial institutions 299 640,534 210,793 - - 2,412 106,865 8,549
Claims or contingent claims on
corporate clients - - 50,675 - - - 10,135 811
Retail claims or continguent
retail claims 299,587 - - - 412,660 - (2,412) (410,248) - -
Past due items - - - - - 130 - - 130 10
Other items - - - - - 50,262 - - 50,262 4,021
Total 1,201,399 640,534 261,468 - 412,660 50,392 - (410,248) 167,392 13,391
Credit risk standard approach as at 31 December 2008 (x e 1,000)
Risk weight Credit risk mitigation
Risk-weighted
assets
Capital
require-0% 10% 20% 50% 75% 100% ment
Substi-tution (guaran-tees)
Collateral Claims or contingent claims on
central governments or central
banks 702,039 - - - - - - - - -
Claims or contingent claims on regional governments or local
authorities 4,623 - - - - - - - -
Claims or contingent claims on
financial institutions 860 643,007 291,035 5,066 - - 2,140 - 125,469 10,037 Claims or contingent claims on
corporate clients - - - - - - - - - -
Retail claims or continguent
retail claims 273,225 - - - 229,689 - (2,140) (227,549) - -
Past due items - - - - - 557 - - 557 45
Other items - - - - - 43,290 - - 43,290 3,463
Total 980,747 643,007 291,035 5,066 229,689 43,847 - (227,549) 169,316 13,545
Currency risk
Currency risk is the risk presented by movements in the value of items denominated in foreign currencies due to movements in exchange rates . It is BinckBank’s policy not to take foreign exchange trading positions . Foreign exchange positions arising out of operating activities must be hedged the same day they become known . Because of the current system configuration within BinckBank, foreign exchange positions arising out of client transactions are not visible until the next trading day . The currency risk on these positions during this one trading day’s delay is regarded as an accepted risk . The maximum risk is e 103,000 .
Financialstatements2009132
Operational risk
Operational risk is generally the result of deficiencies in the daily processing and settlement of transactions with clients or other parties or in the procedures and actions designed to ensure prompt detection of errors, quantitative or qualitative deficiencies or limitations in human resources, deficient decision-making due to inadequate management information and non-compliance with internal control procedures .
The capital requirements are calculated using the basic indicator approach, which sets the capital requirement for operational risk at 15% of total revenues, as prescribed by the regulator . The calculation is normally
performed on the average of the revenues for the past three reporting years . In the light of its rapid growth, however, BinckBank computes the capital requirement under Pillar I at 15% of the revenues for the previous reporting year . In order to be able to follow the capital requirement for operational risk more closely during the year, an additional surcharge or reduction is discounted in the solvency ratio under Pillar II, taking account of the forecast total revenue .
31 December 2009 31 December 2008
x e 1,000 x e 1,000
Income from operating activities in the year 186,222 149,008
Income from operating activities in the previous year 149,008 158,085
Income from operational activities 2 years ago 158,085 122,181
Principle for calculation of operational risk according to Basel II
(average of last three years) 164,438 143,091
Principle used internally by BinckBank 186,222 149,008
Operational risk % (basic indicator approach) 15% 15%
Capital requirement for operational risk 27,933 22,351
The internal target is for annual losses on regular activities due to operational risk not to exceed 1% of gross commission income . Losses due to operational risk include:
• financial results on out-trades and compensation paid to clients;
• other direct loss due to faults in IT systems, automated information processing and operating processes . Losses due to operational risk in 2009 amounted to 0 .61% of total gross commission income and thus remained within the internal limit . Operational losses in 2008 came to 0 .86% .
Operational risk management is built into the structure of the organisation, which embodies a number of internal control measures and principles that BinckBank uses to manage operational risk . The main components are:
• Place the responsibility for managing operational risk as close as possible to the processes themselves, i .e . with the line management .
• Record the operating processes, risk management processes and organisational structure and their interrelationships in writing .
• Embed procedures for reporting and escalation to management .
• Implement controls within each process chain to ensure accurate information, together with performance and risk indicators .
• Learn from incidents and errors . Where possible, record the details of incidents that resulted (or nearly resulted) in losses and compare the records against the findings of risk assessments .
• Automated recording and execution of transactions and related audit trails as well as daily transaction and position reconciliation, including reporting to management .
Annualreport2009133
• Procedures for employee recruitment and mentoring and functional segregation and job descriptions for all employees and departments .
• Clear reporting lines, recording of required management information and regular internal consultation . Internal control and internal audit studies, compulsory “four-eyes” principle for representation and contractual binding of the company .
• Maintain a capital buffer for losses arising from unforeseen (uninsured) events and check the adequacy of the buffer with regular stress testing .
• Maintain an insurance portfolio including insurance policies for directors’ liability, company liability, professional liability, inventory, buildings and consequential loss .
IT risk forms part of the operational risk of BinckBank . IT risk is the current and future risk to BinckBank’s financial position and results posed by deficiencies in the technology employed . BinckBank is heavily dependent on IT in general and deficiencies in this area pose a significant threat to its financial position and results . The IT organisation is designed to manage this risk and incorporates a series of internal monitoring
IT risk forms part of the operational risk of BinckBank . IT risk is the current and future risk to BinckBank’s financial position and results posed by deficiencies in the technology employed . BinckBank is heavily dependent on IT in general and deficiencies in this area pose a significant threat to its financial position and results . The IT organisation is designed to manage this risk and incorporates a series of internal monitoring