(Figures in NOK million)
On 22 August 2014, the Ministry of Finance stipulated amendments to the capital requirements regulations with effect from 30 September 2014. The amendments are adjustments implemented to comply with the EU’s new capital adequacy regulations for banks and investment firms (CRD IV/CRR) and entail the minimum requirement for common equity tier 1 capital ratio gradually increasing in the run up to 1 July 2016. SpareBank 1 SR-Bank has permission from the Financial Supervisory Authority of Norway to use internal measurement methods (Internal Rating Based Approach) for quantifying credit risk. The use of IRB requires the bank to comply with extensive requirements relating to organisation, expertise, risk models and risk management systems. In June 2013, SpareBank 1 SR-Bank applied for transition to Advanced IRB for the corporate portfolios that are currently reported according to Foundation IRB.
Investments in associated companies and joint ventures are recognised in the group using the equity method and in accordance with the acqui- sition method in the parent bank. The investments are treated identically for the purposes of determining the capital ratio except for the group’s investments in SpareBank 1 Boligkreditt, SpareBank 1 Næringskreditt and BN Bank. A proportionate consolidation is carried out for the group’s capital adequacy.
Parent bank Group
2013 2014 2014 2013
Tier 1 capital
- - Deferred tax, goodwill and other intangible assets -24 -43 - - Fund for unrealised gains, available for sale - - -409 -512 Deduction for allocated dividend -512 -409 -401 50% deduction for primary capital in other financial institutions -104 -353 -622 Deduction in expected losses IRB less loss provisions -676 -356 - 50% capital adequacy reserve -587
- Deduction common equity tier 1 capital for essential investments in financial institutions -326 -35 Value of derivative liabilities at fair value -48
11 541 12 628 Total common equity tier 1 capital 13 817 12 557 1 823 794 Tier 1 capital instruments 1 011 1 954 13 364 13 422 Total tier 1 capital 14 828 14 511
Tier 2 capital
- - Hybrid tier 1 capital in excess of 15% and 35% - - 2 100 2 069 Non-perpetual subordinated capital 2 697 2 451 -401 50% deduction for primary capital in other financial institutions -104 -353 50% deduction in expected losses IRB less loss provisions -356
-60 Deduction for essential investments in financial institutions -60
50% capital adequacy reserve -587 1 346 2 009 Total tier 2 capital 2 637 1 404 14 710 15 431 Net primary capital 17 465 15 915
Credit risk Basel II
18 771 21 786 Participation in enterprises SMB 21 789 18 771 28 175 30 354 Participation in specialised enterprises 32 685 28 175 8 467 8 429 Participation in other enterprises 8 789 8 467 550 1 011 Participation in mass market SMB 1 144 650 5 763 14 468 Participation in mass market - mortgage on real estate 20 661 10 713 663 823 Participation in other mass market 845 762 8 275 6 944 Equity positions - - 70 663 83 815 Total credit risk IRB 85 913 67 538 2 288 2 086 Debt risk 1 978 2 088 675 598 Equity risk 598 675 - - Currency risk - - 2 525 5 780 Participations calculated after other market risk 6 869 3 675
524 Weaker creditworthiness, counterparty (CVA) 1 127
4 738 4 760 Operational risk 6 220 5 713 - - Transitional scheme - 14 487 5 400 5 296 Participations calculated using standard method 17 484 20 362 -800 - Deduction from basis for calculation - -1 463 85 488 102 859 Risk-weighted balance sheet 120 189 113 075
4 629 Minimum requirement common equity tier 1 capital 4.5% 5 409 Buffer requirement
2 571 Capital conservation buffer 2.5% 3 005 3 086 System risk buffer 3% 3 606 5 657 Total buffer requirement for common equity tier 1 capital 6 610 2 342 Available common equity tier 1 capital after buffer requirement 1 798
17,21% 15,00% Capital ratio 14,53% 14,07% 15,63% 13,05% tier 1 capital ratio 12,34% 12,83% 1,57% 1,95% tier 2 capital ratio 2,19% 1,24% 13,50% 12,28% Common equity tier 1 capital ratio 11,50% 11,11% 17,21% 15,00% Capital ratio IRB 14,53% 16,14% 15,63% 13,05% Tier 1 capital ratio, IRB 12,34% 14,72% 13,50% 12,28% Common equity tier 1 capital ratio, IRB 11,50% 12,74% Continue note 5
assuming deliberate and acceptable risk. SpareBank 1 SR-Bank invests significant resources in developing risk management systems and processes that are in line with leading international practice. SpareBank 1 SR-Bank is exposed to various types of risk:
Credit risk: the risk of loss resulting from the customer’s inability or unwillingness to fulfil his obligations
Liquidity risk: the risk that the group is unable to refinance its debt or does not have the ability to fund increases in assets without significant additional costs
Market risk: the risk of loss due to changes in observable market variables such as interest rates, foreign exchange rates and securities markets
Operational risk: the risk of losses due to weak or inadequate internal processes or systems, human error or external incidents.
Ownership risk: the risk that SpareBank 1 SR-Bank bears if it suffers negative results from stakes in strategically owned companies and/or the need to inject fresh capital into these companies. Ownership is defined as companies in which SpareBank 1 SR-Bank has a significant stake and influence.
Compliance risk: the risk that the group incurs public sanctions/ penalties or financial loss as a result of failure to comply with legislation and regulations.
Business risk: the risk of unexpected income and cost variations due to changes in external factors such as market conditions or
government regulations
Reputation risk: the risk of a failure in earnings and access to capital because of lack of trust and reputation in the market, i.e. customers, counterparties, stock market and authorities
Strategic risk: the risk of losses resulting from the wrong strategic decisions.
Concentration risk: the risk of an accumulation of exposure to an individual customer, sector or geographical area arising. Sectoral concentration risk is exposure that can arise across different types of risk or business areas in the group, e.g. due to common underlying risk drivers such as the price of oil.
financial stability and prudent asset management. This is achieved through:
• A strong organisational structure characterised by high awareness of risk management
• A good understanding of what risks drive earnings
• Striving towards an optimal application of capital within the adopted business strategy
• Preventing unexpected single events from damaging the group’s financial position to a serious extent.
• Making the most of all synergy and diversification effects In order to ensure an effective and adequate process for risk and capital management, the framework is based on a variety of elements that reflect the manner in which the board and the executive management team run the group. The principal elements are described below.
The group’s strategic targets: SpareBank 1 SR-Bank shall be Southern and Western Norway’s most attractive supplier of financial services based on:
• Good customer experiences
• A strong team spirit and professionalism • Local roots and decision-making authority
• Financial strength, profitability and confidence in the market
Risk identification and analysis: The process for risk identification is based on the group’s strategic targets. The process is
forward-looking and covers all of the group’s significant risk areas. In areas where the effect of the established control and management measures is not considered satisfactory, improvement measures are implemented. Measures that reduce probability shall take
precedence over measures that reduce consequences.
Capital allocation: Return on economic capital is one of the most important strategic result measurements for the internal control of SpareBank 1 SR-Bank. This implies that capital is allocated to business areas in accordance with the calculated risk of the operation and the return on capital is monitored continuously.
The group’s risk is quantified, inter alia, through calculations of expected losses and the need for risk-adjusted capital to be able to cover any unexpected losses. Expected losses describe the loss that statistically must be expected in a portfolio over a 12-month period (long-term outcome). Risk-adjusted capital describes how much capital the group believes it needs to cover the real risk that the group has assumed.
The group has decided that the risk-adjusted capital shall, in principle, cover 99.99% of possible unexpected losses. In the case of the ownership risk associated with SpareBank 1 Gruppen AS, the group has chosen a confidence level of 99.5% as a result of the risk being, to a great extent, insurance risk with a different loss distribution. A confidence level of 99.5% for insurance risk is in line
with the international Solvency II regulations. Statistical methods has been used to calculate risk-adjusted capital where the group has adequate data. In other areas, the calculations are based on qualitative assessments.
Financial projections and stress tests: A projection is drawn up of the expected financial development based on the strategic picture and business plan, as is a projection of a situation involving a serious economic setback in the economy. The projections have a 5-year time horizon. In addition to this, an annual inverse stress test is conducted with the aim of assessing the magnitude of losses the group can bear before the group breaches critical limits for financial strength or funding. The purpose of the stress tests is to increase the understanding of how extreme, but credible, shocks affect the group’s profitability, funding situation and compulsory savings. The stress tests also provide a basis for assessing the vulnerability of portfolios or activities to such shocks, and for identifying weaknesses in the group’s risk strategies and process as a means of helping to develop risk reducing measures and plan contingency measures for crises.
Evaluation and measures: The analyses provide the executive management team and the board with sufficient understanding of the risk so that they can assess whether the group has an acceptable risk profile and ensure that the group is adequately capitalised in light of the risk profile and strategic targets.
SpareBank 1 SR-Bank prepares capital plans in order to achieve long-term and effective capital management and ensure that the group’s capital adequacy is acceptable taking into account the risk exposure. The capital plan takes into account both expected developments and a situation with a serious economic downturn over a number of years. SpareBank 1 SR-Bank has also prepared contingency plans for such critical situations.
Reporting and follow-up: The group’s overriding risk exposure and risk trends are followed up through periodic risk reports that are submitted to the executive management team and the board. General risk monitoring and reporting is performed by the Risk Management and Compliance Department which is organised independently of the business units. The department reports directly to the chief executive.
Organisation and organisational culture: SpareBank 1 SR-Bank aims to maintain a strong organisational culture characterised by a high level of risk management awareness. The corporate culture comprises management philosophy and the people in the organisation with their personal attributes, such as integrity, core values and ethics. It is difficult to compensate for an inadequate organisational culture by using other control and management measures. SpareBank 1 SR-Bank has established clear core values and a code of conduct and made the entire organisation aware of them.
SpareBank 1 SR-Bank seeks independence in its risk management and the responsibility for risk management is therefore split between various roles in the organisation.