Effective and clear risk management was put to the test at the Bank under altered operating conditions in 2020. Clear decision-making processes and authority were decisive, contributing to long-term profitability based on solid foundations.
The Bank’s risk was for the most part within risk appetite in 2020. Credit risk measures exceeded risk appetite slightly during the year, because of the deteriorating position of companies experiencing difficulties as a result of Covid-19. The Bank’s capital adequacy ratio remains strong at year-end, or 25.1%, well above its capital requirement of 18.8%. The Bank's liquidity position, in total, in foreign currencies and in individual currencies remains good and above regulatory requirements. The Bank's aggregate liquidity coverage ratio (LCR) was 154%, 105% in ISK and 424% in foreign currencies at year-end. Market risk remains low and well within risk appetite. The Bank has in recent years emphasised having contingency plans in place. In February 2020, the Bank’s main contingency plans had been updated with regard for pandemics and human resource crisis. The Bank was thus prepared when the need to activate the appropriate plans arose, and the plans proved effective. As of March 2020, a majority of the Bank’s employees has worked outside of conventional work stations without any material adverse impact on its operation or service.
Credit risk increased in 2020, partly due to a higher probability of default on lending, mainly in companies in the travel sector, but also due to growth of the credit portfolio. The book value of lending increased by ISK 133 bn in 2020, or the equivalent of 11.7% between years. Lending growth is mostly driven by an increase in housing loans to individuals, where growth amounted to ISK 126 billion in 2020. The fisheries and seafood sector remains the largest individual industry in the Bank’s credit portfolio. Loans to that sector grew by ISK 28.4 bn in 2020 due in part to new lending and depreciation of the ISK against foreign currencies.
Impairment amounted to ISK 12 billion in 2020, as compared to ISK 4.8 billion the previous year. Increased impairment is for the most part a result of higher expected credit loss (ECL) in Stages 1 and 2. Risks in the Bank's operation are evaluated using several metrics based on the nature of each risk factor. These metrics are used to determine risk limits, analyse risk factors and changes to them, communicate information and manage risk. Economic capital (EC) represents the combined evaluation of all risk factors.
The Bank's internal EC assessment was ISK 110 billion at year-end 2020, up by ISK 11.8 billion between years. The increase mainly represents increased EC for credit risk, which increased by ISK 10.4 billion. No material changes were made to the Bank’s methodology to calculate internal capital assessment in 2020. The Bank’s risk exposure amount (REA) also increased slightly alongside lending growth in 2020 and EC was 9.8% of REA at the end of the year as compared with 9.6% at year-end 2019.
Organisation of risk management
The Bank has adopted detailed risk rules and developed a governance structure that ensures a clear division of responsibility and monitoring of risk management.
Risk management involves the identification, assessment and control of risks in the Bank's operation. Landsbankinn sets detailed risk rules and effective internal governance structure that ensures a clear division of responsibility, risk management and follow-up on risk management.
As provided in the Bank’s risk policy, pertinent risks in the operation are considered, both financial and otherwise, including credit risk, market risk, liquidity risk, concentration risk, operational risk, business risk, legal risk, reputational risk, conduct risk, compliance risk, information security risk, data risk and model risk.
Landsbankinn’s governance structure sets out the committee organisation and decision process on key risks, the decision-making authority of individuals, follow-up and control by the Board of Directors, CEO and individual committees.
The Board of Directors has determined a risk appetite which functions as a management tool that controls risk-taking and as a limit for aggregate risk in the Bank’s operational platform. Risk appetite is reviewed at least annually or as needed to reflect the Bank’s risk-taking objectives at each time.
Landsbankinn bases its policy on information security on cultivating trust and integrity in its customer relationships. We strive to maximise the security of data and IT systems with regard for confidentiality, accuracy and availability, based among other things on compliance with the ISO 27001 standard on information security.
Risk management involves processes that combine the Bank’s risk appetite and business plan. The process consists of both self-assessment and risk assessment which are utilised in further analysis and management of risk. Strategy is also based on risk appetite and risk management. As a result, risk policy is an integral part of the Bank’s operation and risk management is a dynamic process implemented throughout the Bank on the back of a robust risk culture.
Active internal control
Active internal control forms one of the cornerstones of robust risk governance and is conducive to the Bank operating in accordance with its risk policy and risk appetite.
Internal control is a process shaped by the management and employees of Landsbankinn. Internal control comprises all actions taken with the aim to support, manage, mitigate or monitor certain activities and in so doing increase the likelihood of the Bank attaining set goals.
Landsbankinn endeavours to maintain good relations with regulators and to ensure that information disclosure is at all times accurate.
Overview of measurement of Landsbankinn's risk appetite
|Credit risk||Expected loss|
|Average probability of default|
|Loss given default|
|Interest rate and indexation risk in the banking book|
|LCR - total|
|LCR - ISK|
|LCR - FX|
|Operational risk||Operational scope - Real change to RWA base|
|Information technology risk|
|Funding risk||Net stable funding ratio - total|
|Net stable funding ratio - FX|
|Economic capital targets|
Further information in risk report
Landsbankinn publishes a risk report that provides in-depth information on all aspects of the Bank's risk management and risk assessment methods. The report complies with the disclosure requirements of Pillar 3 of Basel III rules on the capital requirements of financial undertakings.