Risk Management

Clear and effective decision-making authority, controlled risk-taking and monitoring by the Board of Directors, CEO and dedicated committees form the cornerstone of risk management within Landsbankinn.

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Credit risk remained well within risk appetite in 2017. The book value of the Bank's credit portfolio increased by ISK 53 bn in 2017, mostly driven by lending to companies in the service sector and housing loans to retail clients. Real estate companies are the largest borrower by sector. The Bank's liquidity position remains very strong, both in foreign currency and Icelandic króna. Market risk is moderate and market risk factors have been stable throughout the year.

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 represents the combined evaluation of all risk factors.

The Bank's internal assessment of capital adequacy weighted by credit risk (loans and claims on customers and financial undertakings) increased by 11% in 2017. Significant growth of the credit portfolio is the main reason behind this increase with the rising quality of the portfolio tempering the effect. The effect of other risk factors on capital requirement diminished in general in 2017. 

Despite that, the growth of the credit portfolio causes figures at year-end 2017 to be similar to those of the previous year. The risk exposure amount (REA) also increased yet the improved quality of the credit portfolio and collateral led to the ratio of capital requirements to REA being 10.8% at the end of 2017 as compared with 11.8% at year-end 2016

Landsbankinn's aggregate market risk is moderate and well within limits set by the Bank's risk appetite. The Bank's liquidity position is strong and well in excess of Central Bank requirements, with the Bank's aggregate liquidity coverage ratio (LCR) being 157% at year-end 2017 and 931% in foreign currency.

Work has been under way in recent years to take new deposit and payment systems, managed by the Icelandic Banks' Data Centre, into use. The new systems were finally fully implemented towards the end of 2017. This is the largest software project Landsbankinn has participated in. Undertakings on this scale inevitably impact users and the Bank has emphasised limiting the inconvenience to customers.

Economic Capital
The blue line represents the ratio of EC to REA
Aggregate Liquidity Coverage Ratio
Clear and effective decision-making authority, controlled risk-taking and monitoring by the Board of Directors, CEO and dedicated committees form the cornerstone of risk management within Landsbankinn. The Bank has adopted detailed risk rules and developed a governance structure that ensures clear division of responsibility and monitoring of risk management.

Overview of Landsbankinn's 2017 risk appetite metrics

Risk factor Metric
Credit risk
Expected loss
Average probability of default
Loss given default
Sector concentration
Borrower concentration
Market risk
Interest rate and indexation risk in the banking book
Indexation risk
Liquidity risk  Aggregate LCR -total
Aggregat LCR - FX
Operational risk Operational scope - Real changes to REA base
Funding risk  Net stable funding ratio
Economic capital targets

Number of logged cases, regular filings excluded

  • The FME 500
  • The Central Bank 298

Regular reports

  • The FME
    20 reports with 63 filings
  • The Central Bank
    20 reports with 154 filings; in addition, one report is filed daily

Organisation of risk management

Measuring risk appetite and risk limits for the most significant risk factors in the Bank's operation is part of daily management. This has proven useful as a management tool to increase the quality of the Bank's asset portfolio, improve its composition and reduce risk. Risk appetite not only involves setting risk limits but functions as a guide to the stance the Bank's employees must adopt towards risk.

The Bank's risk limits comply with laws and regulations at any given time. In addition, the Bank sets numerous risk limits for its own operation, not provided for by law or rules. Landsbankinn has set own targets for its financial position, asset quality, exposure and acceptable long-term profitability. In the pursuit of its goals, the Bank only accepts risks that it understands, is able to evaluate and manage.

In determining risk appetite, risk limits are set for all major aspects of credit, market, liquidity, funding and operational risk, variously detailed according to the nature and variability of each risk factor. The aim is to continue maintaining a stable risk profile in the Bank's balance sheet.

Active internal control

Active internal control is one of the cornerstones of robust risk governance and is conducive to the Bank operating in accordance with its risk policy and risk appetite. A total of 61 employees work in Landsbankinn's internal control functions; within the Risk Management division, in Compliance (a special function directly under the CEO), and in Internal Audit.

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 seeks to maintain good relations with regulators and to ensure that information disclosure is at all times accurate. A total of 798 cases were logged in Landsbankinn's document management system in 2017, related to communications with the FME and the Central Bank, not counting regular filings.

Further information in risk report

Landsbankinn has in recent years published a risk report that complies with the disclosure requirements of Pillar 3 of the Basel II rules. The report provides comprehensive information on all aspects of the Bank's risk management and risk assessment methods.

The risk report is intended to present a true and fair picture of the Bank's position and it includes key information on scope, exposures, risk assessment process, equity position and other important and related factors.

Landsbankinn published its risk and capital management report for 2017 on 26 February 2018.