Risk is inherent in Landsbankinn’s entire activity and robust, sound risk management is key to its operation. Risk management involves identification, assessment, disclosure and control of all risks.
The past year was characterised by challenging conditions on securities and capital markets, as well as persistent inflation and interest rate hikes both domestically and abroad. Despite uncertainty in the external environment, key risk indicators show that the Bank’s position is very sound, providing the foundation for healthy activity and profitability.
In general, the Bank’s risk measurements and assessment of material risk factors are positive with a stable outlook for most risk factors. Loans past due in the Bank’s portfolio remain historically low, its capital ratio is strong and risk factors are generally within risk appetite at year-end 2022, having developed positively.
Credit risk continues to be the most significant risk in the Bank’s operation. The carrying amount of loans to customers increased by ISK 157 billion in 2022, with growth in both the retail and corporate portfolios.
In 2022, net release of credit impairment was just under ISK 2.5 billion (2021: ISK 7 billion release). The main reason for this release is the reversal of a specific collective allowance for loans to the travel industry and other corporates with pandemic-related moratoria and lower defaults than expected.
The second most significant risk in the Bank’s operation is operational risk, which includes numerous sub-risks. Cyberattacks aimed at customers in the form of phishing are an on-going threat both domestically and globally and the Bank continues to emphasise defending its customers. In 2022, operational risk due to the war in Ukraine emerged as an additional threat. Risk related to the war is relevant for Iceland’s ITC infrastructure and web connectivity with the rest of the world. The Bank has been certified under the ISO 27001 information security standard for 15 years. This certification, along with staff and customer education on information security, is one of the main pillars of the Bank’s cybersecurity.
At year-end 2022, the Bank’s total capital ratio of 24.7% was well above current regulatory requirement of 20.7%. The Bank’s liquidity position, in total, in foreign currencies and position of individual currencies is well above regulatory requirements as well as the Bank’s internal risk limits. The aggregate liquidity coverage ratio (LCR) was 134%, 99% in ISK and 351% in foreign currencies at year end. Market risk increased during the year, driven by increased uncertainty and fluctuations in all markets, yet remains well within the Bank’s risk appetite.
Risk factors in the Bank’s operation are assessed by various measurements, in line with their scope and nature, and these measurements provide the foundation for risk limits, analysis of risk factors, disclosure of information and risk management. A common measurement for all risk factors is the Bank’s internal assessment of economic capital (EC).
The Bank’s internal EC assessment was ISK 103 billion at year-end 2022, decreasing by ISK 1 billion from the previous year. The Bank’s risk-weighted exposure amount (RWEA) increased in 2022, in line with growth in the loan portfolio, and the ratio of EC to RWEA was 8.6% at year-end 2022 (2021: 9.1%).
Landsbankinn’s risk strategy
Landsbankinn has adopted a risk policy that provides a framework for the Bank’s risk management and risk appetite and forms the basis for long-term profitability and stability. The Bank’s risk policy also sets out the parameters for implementing risk culture, risk rules and governance that sets out decision and risk-taking authorisations, follow-up and control of risk management.
All main risks in the Bank’s operation are identified, assessed and measured, both financial and non-financial risks. The main risks in the Bank’s operation are credit risk, market risk, liquidity risk, concentration risk, operational risk, business risk, legal risk, reputational risk, conduct risk, compliance risk, IT risk, data risk, model risk and climate risk.
Landsbankinn’s governance structure sets out the main decision process on key risks, the decision-making and risk-taking authority of individuals, follow-up and control by the Board of Directors, CEO and individual Bank committees.
The Board of Directors has approved a risk appetite which reflects the Bank’s risk strategy and functions as a management tool that controls risk-taking, in addition to setting aims for aggregate risk in the Bank’s operation. Risk appetite is reviewed at least annually.
Active internal control
Active internal control forms one of the cornerstones of robust risk management and is conducive to the Bank operating in accordance with its risk policy and risk appetite.
Internal control is a process shaped by the Bank’s executives and employees and comprises all action 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 and constructive relations with regulators and to ensure accurate information disclosure.
Risk metrics in Landsbankinn’s risk appetite
The Bank’s main risk metrics are listed below. In addition, the Bank assesses and measures various other risk factors to support risk management and decision taking.
|Credit risk||Expected loss|
|Average probability of default|
|Concentration risk||Largest exposure (% of Tier 1 equity)|
|Total large exposures (% of Tier 1 equity)|
|Market risk||Total market risk|
|Liquidity and funding risk||LCR in Icelandic króna (ISK)|
|LCR in foreign currency|
|LCR - total|
|Net stable funding ratio - total|
|Capital adequacy risk||Total capital ratio|
|Operational risk||Real changes to RWA base|
|Profitability||ROE after taxes|
Further information in risk report
Landsbankinn publishes a risk report that provides in-depth information on all risk factors for the Bank and risk assessment methods.