BANK SEPAH INTERNATIONAL plc PILLAR 3 DISCLOSURES As at 31 March 2019
Registered Number 04189598
Pillar 3 Disclosures as at 31 March 2019
Contents 1 Introduction ...... 3 2 Governance ...... 4 2.1 Audit Committee ...... 5 2.2 Risk Committee ...... 5 2.3 Remuneration Committee ...... 6 Executive Management Committee ...... 6 2.4 ...... 6 2.5 Credit Committee ...... 6 2.6 Asset & Liability Committee ...... 6 3 Capital Resources ...... 7 4 Capital Assessment ...... 8 5 Risk Management ...... 9 5.1 Risk Register ...... 9 5.2 Principal Risks ...... 9 6 Leverage ratio ...... 19 7 Remuneration Code ...... 20
2 Pillar 3 Disclosures as at 31 March 2019
PILLAR 3 DISCLOSURES 1 Introduction Bank Sepah International plc (“the Bank” or “BSIP”) is a public company limited by shares (company number 04189598) and is domiciled and incorporated in the UK with its registered office at 5-7 Eastcheap, London EC3M 1JT. It is a wholly-owned subsidiary of Bank Sepah, regulated by the Central Bank of Iran. The Bank is authorised under the terms of the Financial Services and Markets Act 2000 and regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). BSIP's activities are predominantly trade-related (e.g. letters of credit, structured trade finance, discounting of trade obligations) with a focus on European trade with Iran.
Unless otherwise noted, the figures stated in this document relate to the financial position as at 31 March 2019 and denominated in Euros, the Bank’s reporting currency and should be read in conjunction with the Annual Report and Accounts. Where relevant, subsequent disclosure has been added to detail post balance sheet events that have occurred between the financial year-end and publication of this document.
The Bank continued to maintain strong capital and liquidity positions. . The Bank increased its bond portfolio during the year to provide further High-Quality Liquid Assets (HQLA), under a Board-approved mandate. The Bank has a conservative approach to corporate lending, seeking strong enforceable security. BSIP ends the year with capital and liquidity positions comfortably above regulatory minimum levels.
The Bank has adopted the PRA’s implementation of the EU’s Capital Requirements Directive IV (CRD). The CRD framework consists of three Pillars:
Pillar 1 sets out the Bank’s minimum capital requirements based on credit, market and operational risk exposures;
Under Pillar 2, the Bank assesses the internal risk management process and considers whether additional capital is required to cover risks not included in Pillar 1 (Pillar 2A) and the risks to which the firm may become exposed over a forward-looking planning horizon (Pillar 2B). It is intended to encourage firms to develop, and improve, risk management techniques in monitoring and managing their risks. The Pillar 2 framework includes an Internal Capital Adequacy Assessment Process (ICAAP), carried out by firms, to review and assess their own view of the appropriate level of additional capital required. An updated ICAAP was produced during the past year and reflects the Bank’s updated view of its risks. The Bank summarises and discloses these risks in this report. The Bank’s assessment of Pillar 2B results in a higher capital assessment than the Regulatory Requirement and the Board’s policy is to manage above this level. However Pillar 2B is not intended to be maintained at all times, unlike Pillar 1 and Pillar 2A, but is a buffer that can be drawn upon in extreme circumstances and
Pillar 3 requires banks to disclose key elements of their risks, capital and risk management procedures.
This disclosure document has been prepared by the Bank in accordance with EU legislation, UK regulatory guidance and best practice as issued by the Bank for International Settlements. Disclosures are prepared on an annual basis after the conclusion of the audit of the Annual Report and Financial Statements and published on the Bank’s website, www.banksepah.co.uk.
The information contained in this disclosure has been approved by the Board but is not subject to external audit.
The Bank continues to monitor all risks to which it is exposed and these risks, the capital deemed required to cover them, and the procedures in place to manage them, are noted in this disclosure.
This year the Bank has adopted the most recent supervisory guidance, including: The Basel Committee on Banking Supervision’s Pillar 3 disclosure requirements – updated framework and The European Banking Authority’s Guidelines on the disclosure of non-performing and forborne exposures.
3 Pillar 3 Disclosures as at 31 March 2019
2 Governance The board of directors (the Board) comprises five non-executive directors, of which two are independent, and an executive director, the Managing Director. The independent directors have a mixture of , financial and banking skills and regulatory experience. Board and executive committees (see overleaf) consist of directors and senior management with a variety of relevant skills and experience to ensure that no undue reliance is placed upon any one individual. The Board meets regularly throughout the year and for specific ad hoc purposes. It convened fourteen times during the year to 31 March 2019.
The Board delegates day-to-day management responsibilities to the Managing Director. The Managing Director chairs three management committees which have terms of reference approved by the Board. These are the Executive Management Committee (EMC), the Credit Committee, and the Asset and Liability Committee (ALCO). These committees are responsible for approving procedures documenting Policy documents approved by the Board.
The Board defines the Bank’s risk appetite, proposes and approves policies and sets authority limits This is documented in the Risk Appetite Statement (RAS) and a Risk Framework document which is reviewed at least annually by the Board. The Board has three sub-committees each of which is chaired by a non- executive director. These are the Audit Committee, the Risk Committee and the Remuneration Committee. The Risk and Audit committees, which are each chaired by an independent non-executive director, generally meet in advance of regular Board meetings to review specific topics and make recommendations to the Board.
Board
Audit Risk Committee Remuneration Committee Committee
Executive Credit Asset / Liability Management Committee Committee Committee
4 Pillar 3 Disclosures as at 31 March 2019
2.1 Audit Committee
The Audit Committee comprises four non-executive directors and is chaired by an independent non- executive director. It held four meetings during the year.
The Audit Committee is responsible for:
Assisting the Board in discharging its responsibilities and making all relevant disclosures forthe financial reporting of the Bank; reviewing the systems for internal control; monitoring the processes for internal audit and the external audit.
making recommendations on the internal, and external, auditors’ appointment and remuneration; discussing any matters arising and recommendations made by the internal and external auditors; reviewing accounting, financial and regulatory compliance and
The Audit Committee undertakes an annual evaluation of the independence and objectivity of the external auditors and the effectiveness of the audit process
2.2 Risk Committee
The Risk Committee is responsible for reviewing the Risk Register on a periodic basis, the key regulatory documents including the ICAAP, the Individual Liquidity Adequacy Assessment Processes (ILAAP), the Recovery and Resolution Plan (RRP), and the Risk Appetite Statement (RAS) and oversight of the Chief Risk Officer.
The Risk Committee is comprised of three UK-based non-executive directors and the Managing Director; it is chaired by an independent non-executive director. Its purpose is to:
Safeguard the independence and oversee the performance of the Risk and Compliance function; Assess the performance of the Chief Risk Officer and the Chief Compliance Officer;
Formulate and support the Board’s corporate governance responsibilities in relation to credit risk, market risk, operational risk and enterprise risk management and Review the Bank’s risk management and compliance policies and internal controls relating to the management of risks and compliance
The Risk Appetite Statement articulates the level and types of risk that the Bank is willing to accept, or avoid, consistent with its Regulatory Business Plan. It includes qualitative statements as well as quantitative measures covering capital, liquidity and other relevant measures as appropriate. It also addresses other risks such as IT security, reputational risk and business conduct risk.
The Bank has separate Compliance and Risk functions. Compliance provides management reports to the Executive Management Committee (EMC); Risk provides monthly reports to the Credit Committee covering credit risk and the EMC for operational risk and ALCO for asset liability management. Separately, specific reports are submitted to Audit and Risk Committees, and the Board.
The Bank adopts a "three lines of defence" operating model. Risks are owned by the responsible business department which has its own procedures, the first line of defence; these roles and mitigants are recorded in the Risk Register. They are reviewed and monitored by the control functions, Compliance and Risk, which are the second line. The effectiveness of the first and second lines of defence is reviewed by the third line of defence: the external auditors within the context of the statuatory audit and the internal auditors, at the direction of the Audit Committee.
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2.3 Remuneration Committee
The Remuneration Committee reviews the remuneration of the Managing Director, the HR framework and the appointment of senior staff
The Remuneration Committee is comprised of the three UK-based non-executive directors and the non- voting Managing Director and is responsible for setting remuneration for employees.
2.4 Executive Management Committee
EMC is the oversight and decision making body for the day to day operations of the Bank.
It oversees the effective implementation of the Bank’s strategy as directed by the Board, makes policy recommendations to the Board on all business and operational matters outside Asset & Liability Committee and Credit Committee and approves procedures.
EMC has delegation from the Board, within limits, to authorise officers of the Bank to enter contracts, review new lines of business and human resource requirements.
It is chaired by the Managing Director and meets at monthly intervals or as required by the business.
2.5 Credit Committee
The Credit Committee has delegated authority, from the Board, to approve counterparty, group and country exposures up to specified limits and to oversee the credit risk management of the Bank. This committee has the following additional main responsibilities:
To agree and recommend to the Risk Committee credit risk appetite, credit risk policy and related procedures; To agree and recommend to the Risk Committee the Bank’s methodologies on credit risk measurement, credit ratings, measurement of Expected Cash Flows and ensure the resulting implementation; To recommend to the Risk Committee, if appropriate, any credit exceptions that are outside the Bank’s credit risk appetite for the Board’s approval; and Appraisal and recommendation of new products and processes from a credit risk perspective.
The Credit Committee is chaired by the Managing Director and meets at least once a month, or more frequently if required by the business, for “ad hoc” meetings.
2.6 Asset & Liability Committee
The Asset & Liability Committee (“ALCO”) has delegated responsibility from the Board for the Bank’s strategies on liquidity, asset & liability management, and market risk management. The Committee is responsible for establishing, monitoring and overseeing the control of liquidity risk and market risk. The Committee:
Reviews and recommends to the Risk Committee the Bank’s liquidity risk appetite, contingency funding plan and other liquidity and market risk related policies and procedures; Reviews and recommends risk appetite and limits relating to currency risk, interest rate risk and liquidity risk to the Risk Committee; Reviews business and market developments and the impact that this may have on the balance sheet and liquidity, funding and capital management positions; Reviews and monitors liquidity against regulatory guidelines and consider corrective actions where necessary ALCO is chaired by the Managing Director and meets monthly, or more frequently, depending on the market conditions and the prevailing liquidity headroom.
6 Pillar 3 Disclosures as at 31 March 2019
3 Capital Resources The Bank’s regulatory capital resources at 31 March 2019 amounted to €165,781k, comprised as follows:
31 03 2019 €'000 Share Capital 160,000,000 Ordinary shares of €1 each 160,000
Retained earnings 7,415
Total equity 167,415
Less : Deductions from capital (1,634)
Common equity tier 1 capital (CET1) 165,781
All capital is Common Equity Tier 1 capital; there is no Tier 2 or Tier 3 capital. There have been no capital distributions during the year.
Share Capital
The Bank’s authorised share capital at 31 March 2019 is
5,000,000 ordinary shares of £1 each 200,000,000 ordinary shares of $1 each 200,000,000 ordinary shares of €1 each
Of which €160,000,000 is issued and fully paid.
Retained Earnings:
These comprise audited retained earnings as at 31 March 2019.
7 Pillar 3 Disclosures as at 31 March 2019
4 Capital Assessment
The Bank’s internal capital assessment at 31 March 2019 under Pillars 1 and 2 amounted to €43,321k and was comprised as follows:
2019 €’000 Pillar 1:
Credit risk 13,894 Market risk 192 Operational risk 697
Total Pillar 1 capital 14,783
Pillar 2 28,538
Total Internal Capital Assessment 43,321
Common equity tier 1 capital (CET1) 165,781
C apital surplus 122,460
Capital Cover 383%
The internal capital Assessment is greater than the Bank’s required regulatory capital assessment comprising the Total Capital Requirement (TCR) (formerly, Individual Capital Guiadance (“ICG”)) and the additional regulatory buffers.
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5 Risk Management
The Risk Management is formalised in the Bank’s Risk Management Framework (RMF) which describes the way risks are identified, assessed, monitored and mitigated. It also records responsibilities for the maintenance and continuing development of the Framework and for monitoring adherence to it.
5.1 Risk Register
BSIP identifies all material risks incurred in its business and records these within the Risk Register. The purpose is also to monitor the likelihood and impact of risks occurring throughout BSIP, the inherent risk and the impact of controls to mitigate the probability of risk losses
The Risk Register covers all the key risks outlined in this document by using both top-down review by senior management and bottom-up contribution by all risk-owning departments.
The Risk Register sets out all relevant risks for the Bank’s current operations, and details the risk type, risk definition and management information category, probability of risk occurrence and the impact thereof. All risks are quantified and categorised according to likelihood of the risk event and its impact using a Red/Amber/Green (RAG) system. Total estimated scores are calculated for pre- control measures (“inherent risk”), and postcontrol measures (“Mitigated risk”). Control assessment considers effectiveness of each control measure. The result of this comparison reflects the inherent risks are mitigated by appropriate controls to reduce the impact and/or probability of risk occurring.
The Risk Register is reviewed quarterly by the Risk Committee. It is open to all departments to propose new risk factors, evaluations and relevant mitigations by proposing changes to EMC.
The Risk Register is designed to be used dynamically. If, during the normal course of business outside the usual quarterly reporting time, a new risk emerges, it is the responsibility of the head of the relevant department to alert the risk department; the risk department will consider adjusting the risk register. The head of department has responsibility to oversee implementation of the control mechanism in accordance with mitigated risk section of the register.
The Bank monitors the above core banking risks for incorporation into the Internal Capital Assessment and the Internal Liquidity Assessment.
In particular, the risks noted below have been reviewed during the ICAAP process and, where appropriate, have been quantified as a capital charge (Pillar 2) for internal capital assessment purposes. These are considered to be the most salient risks that the bank faces incremental to the Pillar 1 charges.
5.2 Principal Risks
The Principal risks facing the Bank are the following: Credit risk Market risk Operational risk Regulatory risk and Political/Sanctions risk
These, along with other risks identified by the Bank, are documented in more detail below:
9 Pillar 3 Disclosures as at 31 March 2019
a) Credit Risk
Credit risk is the risk that counterparties will be unable to meet their obligations to the Bank, as and when they fall due, which may result in financial loss. These defaults may be at the following levels:Counterparty Group or Country
The risk profile of the asset portfolio is reviewed by the Credit Committee which meets formally on a monthly basis and on other occasions as required. Limits are set according to Counterparty, Group and Country. The Bank uses the standardised approach for calculating risk weighted assets. For credit risk, the Bank has an internal scorecard for estimating probability of default (“PD”). This has been mapped to external credit assessment institutions, , to ensure that the PD ranges for the 20 internal BSIP credit ratings are appropriate. The internal ratings are monitored on an ongoing basis to ensure that the ranges are relevant to the assessed risk of the exposures.
In April 2018, the Bank introduced processes to ensure that IFRS 9 metrics are monitored on a monthly basis and reviewed, quarterly, by appropriate personnel. The Risk function presents updated expected credit loss data to the Credit Committee.Where necessary, issues are escalated to the Board.
Under IFRS9 exposures are separated into three stages:
Stage 1 - as soon as the financial instrument is purchased Stage 2 - if the credit risk has increased significantly Stage 3 - if the credit risk has increased to the point that it is considered credit-impaired
The Bank moves an exposure from Stage 1 to Stage 2 once payment is 30 days overdue (“impaired”) and from Stage 2 to Stage 3 if payment is 90 days overdue (“in default”) unless the payment is sanctions related and the copunterparty has the credit capacity to make reapyment . A formal review of all outstanding counterparty exposures is taken at least once a year and at the financial year end. Figures are shown in the financial statements net of IFRS 9 expected loss.
As at 31 March 2019 €2,171k of expected credit loss for stage 3 loans was shown in the accounts against loans to the value of €5,122k and were made up as followed:
Net Total Impairment Carrying Exposure Provisions Value
€’000 €’000 €’000
Loans and advances to customers 5,122 (2,171) 2,951 Total 5,122 (2,171) 2,951
This provision relates to one counterparty exposure in the energy sector.
No customer at the year-end has entered into arrangemnets which would constitute forbearance with the Bank, nor were any assets encumbered.
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Credit quality of assets
The table below shows the credit quality of the Bank’s assets at the carrying values:
Stage 1 Stage 2 Stage 3 Total Collective Collective Specific € ‘000 € ‘000 € ‘000 € ‘000
Cash and cash equivalents 190,531 1,747 - 192,278 Loans and advances to banks 129,716 8,733 - 138,449 Loans and advances to customers 11 - 2,951 2,962 Debt instruments 10,198 - - 10,198 Other assets 13,225 - - 13,225 Total 340,199 10,480 2,951 357,112
Credit Risk Mitigation Techniques – overview
The following table shows the carrying value, including all credit risk mitigation techniques used to reduce credit risk:
Exposures Exposures Exposures unsecured carrying secured by collateral secured by collateral: amount secured amount €’000 €’000 €’000 Loans (including credit equivalent amount) 91,430 49,981 49,981 Debt securities 10,198 - - Cash held with other banks 88,700 103,578 80,019 Others 13,225 - - Total 203,553 153,559 130,000
There are no exposures that are subject to financial guarantees or secured by credit derivatives.
The following table illustrates the effect of credit risk mitigation on exposures and risk weighted assets. RWA density provides a synthetic metric on the riskiness of each portfolio.
Credit Risk Exposure and Credit Mitigation Effects
Asset Classes Exposure before CCF Exposure post CCF RWA & RWA and CRM and CRM density
On Off On Off Credit RWA Balance Balance Balance Balance RWA density Sheet Sheet Sheet Sheet Exposure amount amount amount amount Amount €’000 €’000 €’000 €’000 €’000 Sovereigns & their central banks 66,460 - 66,460 - 38,845 22.36% Banks 273,344 - 143,344 - 118,676 68.32% Regulatory retail portfolio 11 - 11 - 11 0.01% Past due loans 2,951 - 2,951 - 2,951 1.70% Corporate SMEs 9,425 - 9,425 - 9,425 5.43% Other assets 4,921 - 4,921 - 3,799 2.18% Total 357,112 - 227,112 - 173,707 100.00%
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Credit Ratings
The Bank uses principally an external credit assessment institution for country risk, Capital Intelligence Ratings (“CI”), in order to calculate its risk weighted assets under the standardised approach, in compliance with the credit quality assessment scale. CI is a privately-owned, independent, international credit rating agency since 1982 with a focus on the Middle East and North Africa region. CI is recognised as an External Credit Assessment Institution (ECAI) within the European Union and in a number of jurisdictions in the Middle East.
The Bank also uses various publicly available credit ratings for other ratings.
The following table shows the breakdown of credit risk exposures by asset class and risk weight, corresponding to the risk of the exposure.
Exposures by asset classes and risk weights – on Balance Sheet
Risk Weight Total net credit exposures (post-CCF and post-CRM) Asset Class 0% 10% 20% 35% 50% 75% 100% 150% €’000 Sovereigns & 25,199 - 1,007 - 3,222 - 37,032 - 66,460 their central banks Banks - - 33,648 - 5,978 - 93,240 10,478 143,344 Regulatory ------11 - 11 retail portfolio Past-due ------2,951 - 2,951 loans Corporate ------9,425 - 9,425 SME Other assets 1,121 - - - - - 3,800 - 4,921 Total 26,320 - 34,655 - 9,200 - 146,459 10,478 227,112
Further analysis of the financial assets can be found in notes 11 and 26 of the Annual Report, a copy of which can be obtained from the registered office of the Bank.
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Exposures by Industry type
The distribution of exposures at carrying value by industry type is:
Industry €’000
Banks 273,344 Sovereigns and central banks 66,460 Energy 2,951 Payment agencies 9,425 Retail 11 Other assets 4,921
Total Exposure 357,112
Less Undrawn Commitments -
Total exposure per Balance Sheet 357,112
Geographical breakdown of exposures
The following table shows on-balance sheet exposures for credit risk assets post CCF and CRM, segregated into geographical areas; there were no off-balance sheet assets at 31 March 2019.
Exposure Corporate Total net Class SME Credit Banks Sovereign Corporate Retail Other exposure Country €’000 €’000 €’000 €’000 €’000 €’000 €’000 Iran 63,335 37,032 2,951 - - - 103,318 Germany 55,752 25,199 - - - - 80,951 UK 14,729 - - 9,425 11 4,921 29,086 Other countries 9,528 4,229 - - - - 13,757
Total 143,344 66,460 2,951 9,425 11 4,921 227,112
Exposure to “Other countries” has increased during the year as investments have been made, predominantly, in bonds issued by European banks and sovereigns.
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Total and average net amount of exposures
The following table details the average and net exposure over the period by exposure class:
Exposure Class Net value of exposures at Average net exposures over 31.3.2019 the period
€’000 €’000 Central governments or central banks 66,460 97,180 Banks 143,344 120,938 Corporates 12,376 7,225 - Of which SMEs 9,425 3,928 - Exposures in default 2,951 3,297 Retail 11 20 Other 4,921 6,567
Total 227,112 231,930
Balances held at central banks were reduced during the year and placed with European banks and UK payment agencies.
Concentration Risk
Credit concentration risk is the risk of losses arising as a result of concentrations of exposures due to imperfect diversification. This imperfect diversification can arise from:
The small size of a portfolio; A large number of exposures to specific obligors (single name concentration) and Imperfect diversification with respect to economic sectors, regions, industries and / or products.
The Bank’s core business has a focus on trade finance and syndicated loans, based upon Iran, so there will always be raised sovereign exposure, and sectoral exposure to the Iran banking corporate sector, in normal trading conditions. The capital add-on factor is based upon credit risk weighted assets (€173,707k). The Bank has a history of lending to both Iranian state-owned banks and businesses.
Risk HHI Pillar 2A Charge % €’000
Single Counterparty 4.00 6,948 Country 0.80 1,390 Sector 2.00 3,474
Total Pillar 2A Credit Concentration 11,812
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b) Market Risk
BSIP’s reporting and main active currency and liquidity resources are in euros. Market risk for the Bank arises from the change in value expressed in the reporting currency of assets and liabilities denominated in currencies other than euros, due to the effect of exchange rate movements, where these positions are unhedged. Gains and losses are recognised immediately in the Statement of Comprehensive Income.
The foreign exchange position risk requirement in Pillar 1 is calculated in accordance with the PRA’s Foreign Currency Position Risk Requirement as follows:
calculating the net open position in each currency; converting each net position into base currency equivalent at spot rates of exchange; calculating the total of all net short, and net long, positions, separately, with the higher of the two totals shall be the institution’s overall net foreign exchange position.
The net open currency positions of the Bank at 31 March 2019 were as follows
€000 EURO JPY CHF GBP USD Other Total
Assets 349,491 - 4 4,586 4,670 61 358,788 Liabilities 351,444 171 33 2,235 4,894 11 358,788 Net Currency position (1,953) (171) (29) 2,351 (224) 50 -
The overall net foreign exchange position as at 31 March 2019, amounted to €2,401k. The Bank’s Pillar 1 foreign exchange minimum capital risk requirement is therefore €192k.
The Bank has not allocated capital against market risks other than FX as it is does not maintain any trading positions.
c) Operational Risk
Operational risk is the risk of loss to the Bank resulting from inadequate or failed internal processes, people and systems, or from external events other than credit, market and liquidity risk. The definition includes legal and compliance risks and the political / policy risks that affect the Bank’s ability to obtain services necessary for its business operations, such as correspondent banking, payment services or custody agents. It does not, however, include reputational or strategic risks. In common with other financial institutions, these risks include (but are not limited to) fraud, human error, IT failure, data theft and damage.
To mitigate against these risks, the Bank has processes, procedures and controls in place along with a Business Continuity plan. Data backups are taken daily and stored off-site. The recovery plan is updated on an annual basis.
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Operational Risk – Historical Losses
Year ending 31 March 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 Ten-year average €’000 €’000 €’000 €’000 €’000 €’000 €’000 €’000 €’000 €’000 €’000 Total amount of ------4,462 - - 446 operational losses net of recoveries Total number of ------3 - - - operational risk losses Total amount of excluded ------operation risk losses Total number of ------exclusions Total amount of ------operational losses net of excluded losses
The Bank collates loss data pertaining to all operational risk losses. For the purposes of the above table, BSIP’s threshold is a loss of €20,000 for an operational risk event loss
Operational risk is split into conduct and non-conduct risk:
i. Conduct Risk
Conduct risk arises from the potential failures such as o anti-money laundering procedures, regulatory or legal compliance failures as well as internal or external fraud, which may in turn lead to damage of the Bank’s reputation; o misreporting regulatory numbers resulting in fines or the regulator taking remedial action; o poor training and o IT outages
ii. Non-Conduct Risk
Non-conduct risk are operational risks, excepting conduct risk.
The Bank has adopted the Basic Indicator Approach to calculate its operational risk capital; the calculation is shown below:
€000 2017 2018 2019 Net interest income 3,131 5,139 5,597 Net non-interest income - - 79 Total 3,131 5,139 5,676 Average for the 3 years 4,649 15% of the average over 3 years €697k
The Bank’s Pillar I capital requirement is therefore €697k to be held against operational risks.
d) Regulatory Risk
The banking sector in general is subject to greater scrutiny from the regulator in terms of regulatory returns and governance in recent years. Failure to ensure compliance with all reporting requirements and to maintain appropriate Governance could lead to fines and/or business restriction.This includes systems and controls for KYC and due diligence to mitigate the risk of financial crime.
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e) Political/Sanctions Risk
BSIP recognises that Iran is subject to residual sanctions, including those of the US and specific FATF guidance. This impacts the Banks reputational risk and limits the number of counterparts with whom it is able to undertake business. The continued threat of US action against Non-US firms undertaking business with Iranian firms or that involves Iranian interests restricts the Bank’s ability to develop its business as the Bank and its parent envisaged as a result of the Joint Comprehensive Plan of Action (JCPOA).
There is a possibility that the effect of sanctions is more widespread and impactful than first thought . There may also be more sanctions in the short- and medium-terms as the political rhetoric, and tension, increases. The inevitable effect of existing and future potential sanctions reduces, even more, banks and companies willing to deal with Iran, limiting future business. There is the potential for a deleterious effect upon the ability of the Bank to access services from businesses within the UK for fear of retribution from businesses with links to the US. There may also be a scenario that European sanctions may follow the US in withdrawing from the JCPOA.
f) Liquidity Risk
Liquidity risk is the risk that BSIP either does not have sufficient financial resources available to enable it to meet its obligations as they fall due (or can secure such resources only at excessive cost) or cannot meet the Bank’s regulatory liquidity requirements. This risk can be impacted by a range of Bank- specific and / or market-wide events.
g) Downgrade of Iranian credit risk exposure
Due to the nature of its business, the Bank is exposed to Iranian entities. A downgrade of the country may result in the need to increase the asset risk weighting for these exposures.
h) Reputational Risk
Reputational risk is the risk to earnings or capital that arises from negative public opinion.
Given the focus on Iran, both politically and economically, there are heightened risks following increased scrutiny on the sovereign and her overseas-incorporated banks. The Bank cannot control external perceptions of the bank and therefore this is a risk with limited mitigating factors.
i) Interest rate risk in the banking book
Interest rate risk is the risk of an adverse movement in interest rates, affecting a financial asset due to a fluctuation in interest rates.
The Bank, wherever practicable, seeks to match interest-bearing assets and liabilities. However, adverse movement in interest rates are most apparent in certain holdings with central bank’s balances, which are required for High Quality Liquid Asset purposes. The Bank is exposed to a higher negative interest charge on its Euro holdings
j) Failure of major counterparty
The Bank continues to seek to reduce its reliance upon single counterparties and to increase the diversity of its exposures. However, the Board acknowledge that, in the medium-term, the Bank will be restricted to a small number of counterparties and henceforth its exposure to this risk remains high.
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k) Access to European markets
The extent of the impact of the UK’s departure from the European Union (EU), and access to European markets, is currently uncertain. After the UK leaves the EU, there is also a possibility that branches of UK- based banks may not enjoy the same level of market access, as they currently do, resulting in lower levels of business activity for the Bank. There may also be a necessity to make the proposed branch in Europe into a third country branch, resulting in higher ongoing costs.
l) Strategic Business Risk
Business and strategic business risk can be defined as the risks that arise from potential changes in general business conditions, such as market environment, client behaviours and technological progress, which can affect the Bank’s earnings if the Bank is unable to adjust quickly to the same. The setting and implementation of an inappropriate strategy will impair profitability and may, in extreme circumstances, result in business failure.
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6 Leverage ratio
CRD IV requires firms to disclose a non-risk-based leverage ratio in addition to the calculation of risk-based capital requirements. The ratio is intended to limit the accumulation of excessive leverage in the banking sector which was widely considered to be a root cause of the 2007/2008 Global Financial Crisis.
The leverage ratio is calculated by dividing the Bank’s CET 1 capital by the total of on and off-balance sheet exposures.
The ratio has remained constant throughout the year and in accordance with bank risk appetite, there has been no requirement to manage excessive levels of leverage.
The leverage ratio calculation is set out below:
€’000
Total on balance sheet exposures 357,112
Total off balance sheet exposures -
Total Exposures 357,112
CET1 capital 165,781
Basel III leverage ratio 46%
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7 Remuneration Code
Remuneration Policy
The overall responsibility for the Bank’s remuneration strategy lies with the Board. The governance of remuneration arrangements is delegated by the Board of the Bank to the Remuneration Committee. The Remuneration Committee is responsible for the implementation of the remuneration policy and governance of all matters relating to remuneration within the Bank.
The Remuneration Committee has defined the Bank as a “Level Three” firm under the PRA Remuneration Supervisory Statement SS2/17 and has adopted a proportionate approach to its remuneration policy. The Remuneration Committee has reviewed the Bank’s remuneration policy to ensure compliance with the regulatory requirements as set out in the FCA Handbook.
The Bank remunerates all staff, independently of the level of seniority, through a combination of fixed and variable remuneration. The variable component, if any, is allocated to each individual and is discretionary and will depend on factors, which include individual performance, and the financial performance of the Bank. Remuneration is determined annually.
The Remuneration Committee decides each year if the profit, made by the Bank, is sufficient to provide variable remuneration rewards to all participating staff. If the profit is sufficient, a “bonus pool” amount will be allocated which will be awarded to the appropriate staff. Any awards made under the scheme qualify as “variable remuneration” as defined in the Code.
The Remuneration Policy is integrated into the Bank’s business and risk management framework and is aligned with the Bank’s objectives. Significant developments that may require change to the Remuneration Policy are discussed with the Executive Management Committee and any proposed changes are submitted to the Remuneration Committee for its review and approval.
Remuneration offered and paid by the Bank consists of the following elements:
Fixed remuneration
Fixed remuneration makes up the largest part of staff remuneration. The level applied to each position reflects the responsibility which it carries and the related skills required.
Performance-related bonus (variable remuneration)
The Bank pays a small part of employees’ remuneration by way of performance and profit-related variable remuneration. However, the award of any such variable remuneration is entirely at the discretion of the Remuneration Committee. The level of “performance” is determined by the Board, following the recommendations of the Managing Director and Chief Financial Officer.
The variable remuneration does not include deferred payments therefore no deferred payments were considered in respect of the variable remuneration during the financial year.
The Bank applies the Remuneration Code guidance that states that no individual staff member should have more than 33% of their total salary as ‘variable remuneration’.
One employee earned more than the Euro equivalent of £500k in combined fixed and variable remuneration in the year ending 31 March 2019.
20 Pillar 3 Disclosures as at 31 March 2019
Aggregate Quantitative Remuneration Disclosure – financial year ended 31 March 2019
As at 31 March 2019 the number of employees totalled 33, with 27 being eligible for variable remuneration awards in respect of their service during 2018-19 (non-executive directors* are not eligible for variable remuneration, nor are new entrants).
Business Areas Total Employees Fixed (€) Variable (€) Banking Operations & Support 19 1,281,768 109,967 Finance, Risk & Compliance 8 643,243 59,518 Directors * 6 729,909 - TOTAL 33 2,654,920 169,485
Employee type Total Employees Fixed (€) Variable (€) Material risk takers (MRTs) ** 10 1,332,631 74,823 Non-material risk takers 23 1,322,289 94,663 TOTAL 33 2,654,920 169,486
A breakdown of material risk takers (MRT)** by business area is not possible due to the small numbers involved as this would reveal individual confidential remuneration levels. There were no new sign-on and severance payments made during the financial year, paid out or reduced through performance adjustments.
Due to the nature, scale and low level of complexity of the Bank’s business, the Remuneration Committee does not consider it necessary to have a Deferred Remuneration Scheme (such as shares or share-linked instruments) for MRT staff which may require the Bank to adopt malus and clawback arrangements.
* Of the 6 directors, 4 are remunerated. The remaining 2 directors are based overseas.
** A material risk taker (MRT) is an employee of a CRR firm whose professional activities have a material impact on the firm’s risk profile, including any employee who is deemed to have a material impact on the firm’s risk profile in accordance with criteria set out in articles 3 to 5 of the Material Risk Takers Regulation.
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