Pillar 3 Disclosures - Agricultural Bank of China · 2017-05-08 · ABCUK Pillar 3 Disclosures 2015...
Transcript of Pillar 3 Disclosures - Agricultural Bank of China · 2017-05-08 · ABCUK Pillar 3 Disclosures 2015...
Pillar 3 Disclosures
31 December 2015
ABCUK Pillar 3 Disclosures 2015
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It is the policy of Agricultural Bank of China (UK) (herein referred to as the “Bank” or
“ABCUK”) to maintain high standards of risk governance and a sound system of internal
control processes and procedures regarding risk management. This Pillar 3 Disclosures
document (herein referred to as the “Disclosures”) sets out the control standards and
procedures that exist in relation to this area.
This document has been prepared for informational purposes only by Agricultural Bank of China (UK) Limited
authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the
Prudential Regulation Authority, a subsidiary of Agricultural Bank of China Limited (for contact details see
www.uk.abchina.com). The information herein is provided as at the date of this document and subject to change
without notice. No part of this document, nor the fact of its distribution, should form the basis of, or be relied on
in connection with, any contract or commitment or investment decision whatsoever. This presentation is not an
advertisement of services provided by Agricultural Bank of China (UK) Limited and does not form any
fiduciary relationship. This document is not an investment research material.
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Table of Contents
1 Introduction .......................................................................................................................................... 3
1.1 Background ................................................................................................................................... 3
1.2. Ownership ............................................................................................................................... 3
1.3. Business Activities .................................................................................................................. 3
1.4. Location and Verification ....................................................................................................... 4
2 Risk Management Framework ............................................................................................................ 4
2.1. Risk Management Objectives ................................................................................................. 4
2.2. Corporate & Risk Governance ................................................................................................ 4
2.3. Risk Policies ............................................................................................................................ 5
3. Key Risks ................................................................................................................................................... 5
3.1. Credit Risk .............................................................................................................................. 5
3.1.1. Credit Risk ..................................................................................................................................... 5
3.1.2. Counterparty Credit Risk ............................................................................................................... 6
3.1.3. Analysis of Credit Risk and Counterparty Credit Risk .................................................................. 6
3.1.3.1.Exposure by Sector: ........................................................................................ 6
3.1.3.2.Exposure by Maturity: .................................................................................... 6
3.1.3.3.Exposure by Credit Ratings: ........................................................................... 7
3.1.3.4.Exposure by Country: ..................................................................................... 8
3.1.4.Credit Risk Mitigation ........................................................................................................... 8
3.1.5.Past Due & Impairment ......................................................................................................... 8
3.1.6 Credit Risk Weighted Exposures ........................................................................................... 9
3.2. Market Risk ............................................................................................................................. 9
3.3. Liquidity Risk ....................................................................................................................... 10
3.4. Operational Risk ................................................................................................................... 14
3.5. Compliance Risk ................................................................................................................... 14
3.6. Conduct Risk ......................................................................................................................... 14
3.7. Stress Testing and Scenario Analysis ................................................................................... 14
4. Capital Management .............................................................................................................................. 15
4.1. Own Funds ............................................................................................................................ 15
4.2. Internal Capital Adequacy Assessment Process (ICAAP) .................................................... 15
5. Remuneration Policies ............................................................................................................................ 16
5.1. Remuneration Committee ..................................................................................................... 16
5.2. Pay Performance ................................................................................................................... 16
5.3. Material Impact Staff Criteria ............................................................................................... 16
5.4. Expenditure for Material Impact Staff .................................................................................. 17
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1 Introduction
1.1 Background
The Disclosures in this report is prepared in accordance with the Basel III framework and Capital
Requirements Regulation and Capital Requirements Directive IV (“CRR” and “CRD”, collectively
“CRD IV”) which came into force from 1 January 2014. The rules are enforced in the UK by the
Prudential Regulatory Authority (PRA).
1.1.1. Under the Basel III framework there are three central elements or “Pillars”:
i) Pillar 1 – Minimum Capital Requirements with defined rules for the calculation of credit risk,
counterparty credit risk, market and operational risk. ii) Pillar 2 – Supervisory Review Process under which supervisors take a view on whether an
institution should hold additional capital against risks under Pillar 1 that are not fully captured
under Pillar 1. The institution’s internal models and assessments support this process. The details
of the assessment are contained in the Bank’s “Internal Capital Adequacy Assessment Process”
(“ICAAP”), elements of which are disclosed within this document.
iii) Pillar 3 – External communication of risk and capital information which complements the
Pillar 1 and Pillar 2 that allows market participants to assess the institution’s capital adequacy.
1.1.2. Together with the ABCUK 2015 Annual Report, the 2015 Pillar 3 Disclosures provide
information on the Bank’s material risks as part of the Pillar 3 framework. The Disclosures is
based upon the Bank’s financial position as of 31 December 2015. It provides details on its
risk profile, including business volumes by customer categories and risk classes, which form
the basis for the calculation of the capital requirement.
1.1.3. This report is updated and published annually. The aim is to provide additional information to
complement the Financial Statements, and should be read in conjunction with that
information, in particular the section on risk, liquidity and capital management and corporate
governance, as well as the Notes to the Financial Statements.
1.2. Ownership
1.2.1. Agricultural Bank of China (UK) Limited (“ABCUK”) is a UK incorporated Bank authorised
by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct
Authority (“FCA”) and the Prudential Regulation Authority.
1.2.2. Agricultural Bank of China Limited is the parent bank (the “Parent Bank”), registered in
Beijing China. The Parent Bank is the 100% shareholder of ABCUK.
1.3. Business Activities
ABCUK engages in the following activities:
i) Wholesale banking business: deposit taking; trade finance and international settlement; syndicated
lending; corporate lending and related activities.
ii) Global Market Business: foreign exchange trading; interest rate and foreign exchange derivatives;
bond investments and related activities.
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1.4. Location and Verification
This Disclosures is reviewed and approved through internally governance to publish on ABCUK’s
website (www.uk.abchina.com). Unless otherwise indicated, information contained within this
document has not been subject to external audit but has been reviewed by senior management and
approved by the Board.
2 Risk Management Framework
2.1. Risk Management Objectives
ABCUK’s risk management objectives are to identify and evaluate the risks that ABCUK faces,
formulate risk appetite and ensure business profile and plans are consistent with it, optimise risk
return decisions while establishing strong and independent review and challenge structures, and
ensure that business growth plans are properly supported by effective risk infrastructure, manage risk
profile to ensure that specific financial deliverables remain possible under a range of adverse business
conditions.
The ABCUK’s risk management framework is embedded in the Bank through the “Three Lines of
Defence” model, which defines the responsibilities and accountabilities for monitoring and complying
with the policies and procedures. The business units are responsible for the day to day management of
inherent risks in their businesses with Risk Department being the risk oversight function ensuring
procedural compliance and reviewing and updating of risk management policies and procedures. The
internal audit represents the third line of defence which provides independent assurance over the
adequacy and effectiveness of risk control across the Bank.
2.2. Corporate & Risk Governance
The Board and management of ABCUK are committed to ensuring robust, comprehensive procedures
and controls throughout the business. Senior management maintains a close “hands on” approach to
all aspects of the business on a day-to-day basis.
Risk management process is a continuous process of defined steps which enables continual
improvement in decision making by providing management with a greater insight into risks and their
impact.
Senior management through the Executive Committee and its sub-committees i.e. Credit Committee
and Asset & Liability Committee (“ALCO”) actively manage the risk through daily, weekly and
monthly monitoring and reporting on credit, market, operational and liquidity risk. The Risk
Department works closely with Financial Markets & Treasury Department and Corporate Banking
Department to ensure the adherence to the risk policies approved by the Board, in particular during
the process of credit approvals and reviews, and limits monitoring.
The Risk Committee and the Audit Committee are Board Committees. The Risk Committee takes
cognizance of the risk management employed at the executive level i.e. Credit Committee and ALCO,
and recommends risk framework, risk management policies and risk appetite for the Bank. The Risk
Committee provides overview of the Bank’s risk management to the Board. The Risk Committee is
chaired by an Independent Non-Executive Director and meets at least on a quarterly basis.
External and internal Audits ensure the effectiveness of internal control including financial
management, and regulatory compliance. These are monitored by the Board Audit Committee which
is chaired by an Independent Non-Executive Director.
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2.3. Risk Policies
ABCUK maintains risk policies which set out objectives, strategies and processes to manage the risks
that the Bank faces. The policies are updated periodically, with direct involvement of senior
management and the Board, to reflect changing business environment, the Bank’s risk strategies, and
capital and funding positions.
Under the risk framework that the Bank has adopted, risk appetite (the “Risk Appetite”) is in place
under the guiding principle of a prudent risk management approach. The Risk Appetite is articulated
through:
a system of quantitative and qualitative limits (including limits on capital utilisation, credit
risk, market risk, operational risk and liquidity risk).
low threshold of materiality for reporting of actual and potential risk events.
The Bank manages its individual and overall risk positions within its stated Risk Appetite.
3. Key Risks
3.1. Credit Risk
Credit risk is the risk that obligors or counterparties are unable to meet their obligations to the Bank.
Credit risk arises principally from lending, trading and investment activities involving on and off
balance sheet instruments. The Bank manages its credit risk during the course of transaction initiation,
credit approval, and post-transaction credit monitoring. The Bank’s strategy is to adopt a prudent
approach to credit exposure by investing in high quality transactions and lending to well-known and
highly respected corporate and financial institutional entities with sound credit ratings. Credit limits
are managed on individual and connected group obligors or counterparties, countries, sectors in
accordance with regulatory rules and the Bank’s risk policies.
Day to day management of credit risk is performed by the front office (Corporate Banking
Department and Financial Markets & Treasury Department) as the first line of defence in transaction
initiation and credit exposure monitoring. Risk Management performs appraisals of obligor or
counterparty credit quality and transaction risk for consideration by the Credit Committee. The Bank’s
credit policies require periodic and on-going monitoring of the credit worthiness of obligors or
counterparties, country risk and ratings developments.
As of the year end, the carrying amount of financial assets recorded in the financial statements, which
is net of impairment losses, represents the Bank’s exposure to credit risk as no collateral or other
credit enhancements are held. Credit risk exposure also encompasses undrawn credit exposures, off
balance sheet exposures and counterparty non-banking book exposures. No financial assets were
either past due or impaired at the year end.
3.1.1. Credit Risk Exposure
The credit exposure primarily arises from lending, trade finance, counterparty trading, investments
and treasury operations. Exposure to trading counterparty credit risk is disclosed in a separated section
as part of CRD IV requirements.
Credit Exposure includes all loans, claims, credit commitments (underwriting or purchase of a loan),
trade finance and contingent liabilities arising from on and off balance sheet transactions with an
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individual obligor or obligor group.
Credit risk of lending exposure is measured by the principal or book value of the relevant credit
facility.
Trade finance related transactions such as issuance of letters of credit and letters of guarantee,
acceptance, discounting and bill negotiation are measured as 100% loan equivalent. For confirmation
of letters of credit, loan equivalent factors (credit conversion factors) apply based on types of products,
tenor of exposure and creditworthiness of letter of credit issuers in accordance with regulatory
requirements.
3.1.2. Counterparty Credit Risk
A Counterparty Credit Risk (CCR) Exposure is the risk of financial loss in derivative, foreign
exchange trading or securities financing activities, due to a counterparty’s failure to perform at any
time from trade date to settlement date. It is the credit risk of the counterparty and is additionally
subject to market risk. The exposure is calculated based on the regulatory requirement. The CCR
RWA was USD $8.7mn as at 31 December 2015, which resulted in a PRR of USD $696k. The Credit
Risk Weighted Asset with Credit Valuation Adjustment (CVA) was USD $1.84m and the PRR was
USD $147k. The average weighting of these credit exposure were 52%
3.1.3. Analysis of Credit Risk Exposure and Counterparty Credit Risk
The credit risk tables in this section include exposure amounts by sector, geography, ratings, residual
maturity as at 31 December 2015.
3.1.3.1. Exposure by Sector:
EXPOSURE BY SECTOR ($ '000)
SECTOR EXPOSURE % EXPOSURE %
FI 364,078.6 62.4% 314,250.0 69.9%
Corporate 189,499.1 32.5% 107,621.0 23.9%
Sovereign 29,566.2 5.1% 28,000.0 6.2%
Grand Total 583,143.8 100.0% 449,871.0 100.0%
2015 2014
The exposure to financial institutions, corporates and sovereign accounts for 62.4%, 32.5% and 5.1%
respectively. Within financial institutions, the exposure is spread among Asia, UK, the mainland
Europe and Americas. See section 3.1.3.4 for the detail of exposure by country.
3.1.3.2. Exposure by Maturity:
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EXPOSURE BY MATURITY ($ '000)
MATURITY EXPOSURE % EXPOSURE %
Overnight 15,796.8 2.7% 39,486.0 8.8%
Overnight to 1 week 45,000.0 7.7% 600.0 0.1%
1 week to 1 month 127,303.7 21.8% 1,739.0 0.4%
1 month to 6 months 46,491.0 8.0% 90,367.0 20.1%
6 months to 1 year 34,742.1 6.0% 162,689.0 36.2%
1 Years to 2 years 8,000.0 1.4% 87,813.0 19.5%
2 years to 5 years 305,810.2 52.4% 67,177.0 14.9%
Total 583,143.8 100.0% 449,871.0 100.0%
2015 2014
The majority of the credit exposure is within 2 to 5 years maturity at 52.4%, while the credit exposure
within 1 years maturity accounted for 47.6%. The maturity profile in 2015 was more diversified than
that of the 2014. The change was driven by the increase in customers from the corporate sector. It also
reflects ABCUK’s approach of building a sustainable business profile.
3.1.3.3. Exposure by Credit Ratings:
Exposure % Exposure %
AAA 0.0 0.0% 0.0 0.0%
AA+ 25,000.0 4.3% 28,000.0 6.2%
AA 920.2 0.2% 45.0 0.0%
AA- 75,780.0 13.0% 2,922.0 0.6%
A+ 4,570.0 0.8% 14,006.0 3.1%
A 79,705.3 13.7% 169,094.0 37.6%
A- 135,933.1 23.3% 35,807.0 8.0%
BBB+ 50,978.6 8.7% 25,905.0 5.8%
BBB 47,244.3 8.1% 61,813.0 13.7%
BBB- 26,999.4 4.6% 50,432.0 11.2%
BB+ 60,483.5 10.4% 33,300.0 7.4%
BB 58,649.7 10.1% 14,982.0 3.3%
BB- 16,879.9 2.9% 13,565.0 3.0%
Total 583,143.8 100.0% 449,871.0 100.0%
2015 2014Exposure by Obligor Rating
($ '000)
It is ABCUK’s policy that no credit facility or exposure will be extended to an obligor or counterparty
which has a rating below Ba3/BB-. This policy is firmly established in the Bank’s operations. At the
end of December 2015, 76.7% of the total exposure was to investment grade credits, highlighting a
conservative approach. Exposures to obligors with BB- to BB+ increased slightly from 2014 to 2015.
This was mainly driven by the increase in customers from the corporate sector.
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3.1.3.4. Exposure by Country:
Exposure % Exposure %UNITED KINGDOM AA+ 108,033.2 18.5% 132,355.0 29.4%CHINA A+ 91,088.8 15.6% 169,987.0 37.8%UNITED STATES AA+ 84,461.9 14.5% 45,089.0 10.0%GERMANY AAA 63,553.3 10.9% 310.0 0.1%
AUSTRALIA AAA 56,379.0 9.7% 2,922.0 0.6%
NETHERLANDS AA+ 39,810.0 6.8% 20,000.0 4.4%SWITZERLAND AAA 36,920.0 6.3% 9,000.0 2.0%
RUSSIAN FEDERATION BB+ 30,545.0 5.2% 35,000.0 7.8%
FRANCE AA 29,592.9 5.1% 6,017.0 1.3%
HONG KONG AA+ 21,772.4 3.7% 29,090.0 6.5%
FINLAND AA+ 15,000.0 2.6% 0.0 0.0%JAPAN A 5,063.6 0.9% 51.4 0.0%
LUXEMBOURG AAA 920.2 0.2% 45.3 0.0%
SWEDEN AAA 3.8 0.0% 4.3 0.0%
BELGIUM AA- 0.0 0.0% 0.0 0.0%
Total 583,143.8 100.0% 449,871.0 100.0%
Exposure by Country
($ '000)
2015 2014Rating
The UK and China are the most significant countries that ABCUK has exposures, the remaining
exposure is well spread among other major economies. The exposure by country was more diversified
than the previous financial year, this reflects its business profile and strategies.
3.1.4. Credit Risk Mitigation
ABCUK’s credit approvals are fundamentally dependent on the creditworthiness of the obligors or
counterparties and the type of transaction arrangements. Risk mitigation mechanisms are employed to
minimize credit risk in the event of credit quality deterioration. This primarily includes netting,
guarantee and collateral and covenants.
Netting - the Bank has a netting agreement in place with its Parent Bank under which the
exposure to the Parent Bank can be netted off against the deposit or funding from the Parent
Bank. For reporting purposes, both gross exposure and net exposure are disclosed in monthly
Management Information and quarterly regulatory returns.
Cash collateral - ABCUK has signed CSA agreements (“Credit Support Annex”) with a
number of financial institutions in trading / derivative transactions, under which major
currencies (US Dollar, Euros) are used for margin settlement. Cash collateral is also used in
lending business where valuation is monitored.
Guarantees – the Bank employs guarantee as credit support in its lending to corporate clients
primarily in the form of Standby Letters of Credit (“SBLC”) provided by the Parent Bank
branches. In doing so, the credit risk is transferred to the guarantee provider, or the Parent
Bank in such case.
Covenants – financial and non-financial covenants may be incorporated in loan agreements.
The reported credit exposure in this section 3.1 has reflected the exposure after employing the risk
mitigation techniques.
3.1.5. Past Due & Impairment
ABCUK has established mechanism for identifying and reporting past due and impairment cases.
There was no facility identified for past due and impairment as at 31 December 2015.
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3.1.6. Credit Risk Weighted Exposures
ABCUK has adopted a Standardized Approach as set out by the PRA under which Credit risk
weighted exposures are calculated on the basis of the rating regime as prescribed in Standardised
Approach by PRA Supervisory Statement SS10/13.
Credit Risk RWA is calculated as follows:
CREDIT RISK ($ '000) Dec-15 Dec-14 % Change
On Balance sheet 239359.8 188854.0 26.74%
Off Balance Sheet: 39353.2 18419.0 113.66%
Risk Participation 11999.4 10169.0 18.00%
Trade Finance LC 0.0 0.0 0%
Undrawn Commitments 27353.9 8250.0 231.56%
Sub Total 278713.0 207273.0 34.47%
CREDIT RISK CCR
COUNTERPARTY CREDIT RWA: 8700.2 48100.0 -81.91%
COUNTERPARTY CREDIT RWA CRR: 696.0 3848.0 -81.91%
CREDIT RISK CVA
CVA - RWA 1840.1 15356.0 -88.02%
CVA CRR: 147.2 3593.0 -95.90%
TOTAL CREDIT RISK RWA 289253.3 270729.0 6.84%
TOTAL CREDIT RISK PRR 23140.3 21658.3 6.84% PRR-Position Risk Requirement
3.2. Market Risk
Market risk is the risk that arises from fluctuations in values of, or income from, assets, interest rates,
or exchange rates. The Bank manages the flow of business of its customers, predominantly, forex spot,
forwards and swaps. The Bank also takes a small number of open position although exposure is
limited and regularly monitored.
The Bank manages its market risk by taking equal and opposite derivative positions in the market.
This will not necessarily be done by matching individual trades, but by matching overall long and
short portfolio positions. However, there may necessarily be some areas where the Bank will
inevitably take market risk where precise hedging is not possible.
Market risk is managed by limits on market risk capital relating to exchange rate risk and interest rate
risk, in addition to specific limits on notional amount of net open position (foreign exchange). The
dollar value of basis point change, interest rate and stop loss limits are estimated monthly.
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Market Risk Exposure
Dec-15
USD'
GBP 1,603,040.4
CNY 460,341.3
EUR 704,523.9
HKD 42,116.9
JPY 60,770.3
SEK 3,828.3
Total 2,874,621.2
Risk Requirement Ratio 8.0%
Foreign currency PRR 229,969.7
Overall market risk exposure and required capital for ABCUK as at 31 December 2015 was:
MARKET RISK ($ '000) Dec-15 Dec-14 % Change
Interest Rate PRR
General Risk (Maturity Method)
Bonds
FX Forward Transactions 95.4 32.0 198.0%
Sub Total 95.4 32.0 198.0%
Foreign Currency PRR
Sub Total 230.0 87.0 164.3%
TOTAL INTEREST RATE PRR 95.4 32.0 198.0%
TOTAL FOREIGN EXCHANGE PRR 230.0 87.0 164.3%
TOTAL MARKET RISK RWA 4,066.7 1,477.0 175.3%
TOTAL MARKET RISK PRR 325.3 118.0 175.7% PRR-Position Risk Requirement
3.3. Liquidity Risk
The Bank defines liquidity risk as the risk that it is unable to meet its obligations as they fall due. As
it does not intend to apply for any liquidity modifications, the Bank will meet the PRA’s requirements
for self-sufficiency.
The Bank has two major sources of funding, intercompany loans from its Parent Bank and interbank
deposits taken both from the London market and from domestic Chinese banks. The intercompany
loans from Parent Bank are repayable on 180 day notice but these are not expected to be called in the
foreseeable future. This provides the Bank with a stable foundation for its liquidity in all market
conditions.
The Bank manages liquidity risk by holding unencumbered HQLA (High Quality Liquid Assets, e.g.
cash, US Treasury bonds and marketable securities) to cover total net cash outflows over a 30-day
period under stress scenarios.
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The Bank established a governance structure that ensures that its liquidity position is kept under close
review, principally under the Assets and Liabilities Committee. It has put in place a series of
quantitative limits to define its risk appetite. Liquidity stress testing is periodically carried out to
ensure there is sufficient resources to meet its obligations as they fall due. The Bank has developed a
Contingency Funding Plan which could be activated if its liquidity position deteriorated.
The following is the maturity analysis for financial assets and liabilities held by the Bank as of 31
December 2015.
31/12/2015
Within 1
month 1-3 months 3-12 months 1-5 years over 5 years Non-defined Total
(USD)
Assets
Cash and cash equivalents - - - - - 9,775,672 9,775,672
Placements with banks 192,963,725 - 10,000,000 117,483,358 - -
320,447,083
Derivative financial assets 27,129,485 - - - - - 27,129,485
Loans and advances to banks 20,000,000 185,875,191 75,000,000 - - - 280,875,191
Loans and advances to customers 12,059,457 3,102,281 - 227,276,664 - - 242,438,402
Available-for-sale
financial instruments - 6,000,000 29,588,063 120,005,745 - - 155,593,808
Other financial assets 14,288 1,694,908 644,570 - - - 2,353,766
Financial assets total 252,166,955 196,672,380 115,232,633 464,765,767 - 9,775,672 1,038,613,407
Liabilities
Deposits from banks 45,000,000 60,000,000 680,537,104 98,082,561 - - 883,619,664
Deposits from FI and customers 17,322,193 - - - - - 17,322,193
Derivative financial liabilities 24,758,670 - - - - - 24,758,670
Other financial liabilities 4,288 - 1,402,874 - - - 1,407,162
Financial liabilities total 87,085,151 60,000,000 681,939,978 98,082,561 - - 927,107,689
Net 165,081,804 136,672,380 (566,707,345) 366,683,206 - 9,775,672 111,500,718
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The table below analyses the Bank’s non-derivative financial liabilities into relevant maturity
grouping based on the remaining period at the balance sheet date to the contractual maturity date. The
amounts disclosed in the table are the contractual undiscounted cash flows.
31/12/2014
Within 1
month 1-3 months 3-12 months 1-5 years over 5 years Non-defined Total
(USD)
Assets
Cash and cash equivalents - - - - - 39,485,721 39,485,721
Placements with banks 8,050,000 25,000,000 - 117,483,358 - - 150,533,358
Derivative financial assets 36,649,420 - - - - - 36,649,420
Loans and advances to banks 43,557,142 64,344,782 206,426,069 20,000,000 - - 334,327,993
Loans and advances to customers 99,978,170 81,383,092 158,576,361 159,442,701 - - 499,380,324
Available-for-sale
financial instruments - - 20,950,000 17,295,576 - - 38,245,576
Other financial assets 130,125 483,106 4,925,014 - - - 5,538,245
Financial assets total 188,364,857 171,210,980 390,877,444 314,221,635 - 39,485,721 1,104,160,637
Liabilities
Deposits from banks 10,000,000 48,370,750 778,504,315 103,049,688 - - 939,924,753
Deposits from FI and customers 26,178,553 - 786,468 - - - 26,965,021
Derivative financial liabilities 27,370,193 - - - - - 27,370,193
Other financial liabilities 911,120 910,820 1,457,266 - - 39,863 3,319,069
Financial liabilities total 64,459,866 49,281,570 780,748,049 103,049,688 - 39,863 997,579,036
Net 123,904,991 121,929,410 (389,870,605) 211,171,947 - 39,445,858 106,581,601
31/12/2015
Within 1
month 1-3 months 3-12 months 1-5 years over 5 years Non-defined Total
(USD)
Liabilities
Deposits from banks 45,008,742 60,523,538 684,856,879 100,888,028 - - 891,277,187
Deposits from FI and customers 17,322,561 - - - - - 17,322,561
Other financial liabilities 4,287 - 1,402,875 - - - 1,407,162
Non-derivative financial liabilities total 62,335,590 60,523,538 686,259,754 100,888,028 - - 910,006,910
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31/12/2014
Within 1
month 1-3 months 3-12 months 1-5 years over 5 years Non-defined Total
(USD)
Liabilities
Deposits from banks 10,008,068 48,984,677 785,940,941 107,962,259 - - 952,895,945
Deposits from FI and customers 26,178,852 - 788,821 - - - 26,967,673
Other financial liabilities 911,120 910,820 1,457,266 - - 39,863 3,319,069
Non-derivative financial liabilities total 37,098,040 49,895,497 788,187,028 107,962,259 - 39,863 983,182,687
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3.4. Operational Risk
Operational risk is the risk arising from day-to-day operating activities which may translate into direct
or indirect loss. The risk includes inadequate or failed internal processes, people and systems or from
external events and includes legal risk. The primary operational risk arises from the potential for core
banking system breakdown and the need for the rapid recovery of operational data. Other operational
risks include front and back office errors, fraud, breaches in internal controls and external events,
resulting in financial loss or reputational damage. ABCUK employs the Basic Indicator Approach to
calculate operational risk capital requirement. The Bank manages these risks through appropriate risk
controls and loss mitigation actions. These actions are put in place through the policies, procedures,
contractual business continuity arrangements, training, and risk monitoring and reporting. The Bank
also uses a Risk Map in its operational risk management process.
3.5. Compliance Risk
Compliance risk is the failure to comply with laws, regulations, internal policies & procedures, or
industry standards of best practice, which may result legal and regulatory sanctions, financial loss or
reputational damage to the Bank. Compliance risk is wide ranging and evident in all of the bank’s
activities. A key area of compliance risk for the Bank is Anti-Money Laundering and Combating
Terrorist Financing (AML/CTF) . This risk is increased by the nature of the Bank’s primary business
of providing cross border Trade Finance services to wholesale clients based in high-risk jurisdiction.
In 2015 the Bank has focused on updating its Financial Crime Prevention Policy and the systems and
controls in this area. Further resources have been added to the Compliance Department and the
Corporate Banking Department to enhance ABCUK’s approach to managing AML/CTF.
The Head of Compliance, who reports directly to the CEO, is responsible for managing compliance
and regulatory risk, with challenge from the Non-Executive Directors and Board Committees. As part
of the Bank’s policy framework approach, Compliance policies are approved by the ABCUK Board.
3.6. Conduct Risk
Conduct Risk is the risk that business strategy, operations or conduct of a firm may produce poor
outcomes for customers. Conduct Risk within the Bank can arise as a result of an over aggressive
strategy, or poor management of sales processes and credit assessments or failure to comply with
other regulatory requirements.
Conduct risk is managed throughout the bank with the front line designating customer relationship
mangers to ensure fair treatment of customers. Risk and Compliance provide independent oversight
and guidance.
3.7. Stress Testing and Scenario Analysis
Part of the Bank’s obligation under the overall Pillar 2 rule is to identify the major sources of risk and
carry out stress tests and scenario analyses that are appropriate to the nature, scale and complexity of
those major sources of risk and to the nature, scale and complexity of the Bank business.
A scenario stress test contains simultaneous moves in a number of risk factors, where the Bank
believes that an event may occur in the foreseeable future. A stress test scenario can be based on a
significant market event experienced in the past (a historical scenario) or on a plausible market event
that has not yet happened (a hypothetical scenario).
In a portfolio-driven approach, initially vulnerabilities have been identified. Having determined
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these vulnerabilities, the Bank has worked backwards and formulated plausible scenarios under
which these vulnerabilities are stressed.
In event-driven scenarios, the scenarios have been formulated based on plausible events and how
these events might affect the relevant risk factors affecting the Bank’s activities.
4. Capital Management
4.1. Own Funds
Own Funds (also referred to as capital resources) is the type and level of regulatory capital that must
be held to enable the Bank to absorb losses. The Bank is required to hold own funds in sufficient
quantity and quality in accordance with CRD IV which sets out the characteristics and conditions for
own funds.
The Board has ultimate responsibility for the Bank’s capital management. Day to day responsibility
for capital planning and other aspects of capital management are carried out by the Finance
Department with stress testing and preparation of the Bank’s ICAAP falling within the remit of the
Risk Department. The ALCO is the main body responsible for monitoring all aspects of capital
planning.
During the year ended 31 December 2015 ABCUK complied with the capital requirements. The table
below summarizes the composition of regulatory capital for the ABCUK on a solo unconsolidated
basis as reported as at 31 December 2015.
($ '000) 2015 2014
Core Tier 1 capital 100,000.0 100,000.0
Paid-up shares 0.0 0.0
Share premium account 0.0 0.0
Retained earnings and other reserves 10,519.6 5,693.4
Preference Shares 0.0 0.0
Deduction from Tier 1 Capital 0.0 0.0
Total Core Tier 1 Capital 110,519.6 105,693.4
Tier 2 Capital 0.0 0.0
Subordinated debt 0.0 0.0
Collective provisions 0.0 0.0
Tier 2 Capital after deductions 0.0 0.0
Deductions from total Tier 1 Tier 2 Capital 0.0 0.0
Total Capital Resources 110,519.6 105,693.4
4.2. Internal Capital Adequacy Assessment Process (ICAAP)
ABCUK defines capital as the resources necessary to cover all relevant risks. The ICAAP document
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sets out the framework for the Bank's internal governance, and the operation of the risk and capital
management arrangements. In particular the document establishes the internal governance structure
and assurance framework, the risk management framework, the key risk areas that are relevant to
the Bank, the adequacy of Capital Resource and internal capital in relation to the overall risk
profile and hence the Bank’s overall ability to meet its liabilities as they fall due and the way in which
the ICAAP is used in the business.
The PRA has updated ABCUK’s Individual Capital Guidance (ICG) in early 2016. ABCUK calculates
and monitors its capital ratio and Capital Buffers on a regular basis. The results show that the Bank’s
capital remains sufficient to support the Bank’s activities and commitments; the capital well exceeds
the minimum regulatory requirements and remains consistent with the Bank’s strategic and
operational goals.
5. Remuneration Policies
5.1. Remuneration Committee
At ABCUK, Remuneration Committee is one of the Board Committees and which meets regularly to
set the principles and guidelines of remuneration policy, to review the effectiveness of performance
management and reward practices and to ensure compliance with regulatory requirements. The
Committee is responsible for reviewing and agreeing the general reward proposals to promote
effective risk management, preventing the occurrence of conflicts of interest and ensuring fair and
equitable treatment of all employees. The governance of remuneration issues is managed by the
Remuneration Committee and this process ensures the robust oversight of reward practices and
effective management of the need to link reward to the Risk Appetite of the Bank.
The Committee is chaired by an independent Non-Executive Director. Other voting members are the
other independent Non-Executive Directors and the CEO of the Bank.
5.2. Pay Performance
ABCUK Remuneration is based on competitive market rate salaries that compensate employees fairly
in terms of skills offered and responsibilities undertaken. Total remuneration consists of basic salary
plus an annual variable portion reflecting individual performance and contribution, in conjunction
with overall ABCUK performance.
Annual variable performance awards are designed to link business strategy with personal objectives
and performance. This is achieved through the annual appraisal process which is used to identify key
performance indicators and other objectively identified targets.
Oversight is applied to bonus pools and individual awards, which are designed to reflect individual
performance. Total annual compensation levels are reviewed by the Remuneration Committee.
5.3. Material Impact Staff Criteria
Material impact staff (Code staff) categories consist of:
i) senior management and risk-takers ii) staff engaged in control functions
iii) heads of control functions and support functions,
iv) anyone whose professional activities could have an impact on ABCUK’s risk profile.
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5.4. Expenditure for Material Impact Staff
For the year ending 31st December 2015, there were 14 identified Code members of staff, as defined
above.
Aggregate expenditure for Code staff was US$3,379,461.
Remuneration expenditure was divided between fixed and variable payments as follows:
Fixed pay - US$3,239,657.
Variable pay - US$139,804.