MAINFIRST BANK AG BASEL III Pillar 3 - Disclosures as at 31 December 2014
BASEL III PILLAR 3 - DISCOSURES AS AT 31 DECEMBER 2014 1 INTRODUCTION GENERAL The main purpose of this document is to set out MainFirst Bank AG s (the Bank) Pillar 3 disclosures on risk management and capital as at 31 December 2014. Please also refer to the MainFirst Bank AG Annual Report 2014 (Annual Report). Pillar 3 disclosures are provided to meet the regulatory disclosure requirements of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) referred to together as CRD IV, which came into effect on 1 January 2014. CRD IV has the effect of implementing the international Basel III agreement in the European Union. This regulatory framework is supplemented by a number of technical standards issued by the European Banking Authority. Prior to 2014 the Pillar 3 disclosures were presented in accordance with 26a KWG (Banking Act) and Solvency Regulation. This framework was superseded by the implementation of CRD IV, described above, and as a result the Bank capital position is presented on a different basis to that reported in 2013. BASIS AND FREQUENCY OF DISCLOSURES MainFirst Bank AG, as an approved credit institution, is supervised in Germany by the Federal Financial Supervisory Authority (BaFin). The BaFin receives information on the capital adequacy of, and sets capital requirements for the Bank. The Bank does not form and is not part of a regulatory consolidated group. The capital and risk disclosures required under Pillar 3 are required to be produced at least annually and published in conjunction with the date of publication of the Annual Report. MainFirst Bank AG has an accounting reference date of 31 December and these disclosures are made as at 31 December 2014. These disclosures are not subject to audit and have been produced solely for the purposes of satisfying the Pillar 3 regulatory requirements. All numbers in this report are in euros and have been rounded to the nearest thousand, unless otherwise stated. MEANS OF DISCLOSURES These disclosures are published on the MainFirst corporate website (www.mainfirst.com). 2 RISK MANAGEMENT POLICIES AND OBJECTIVES The Bank s activities are exposed to a range of risks for which the Bank has in place a range of controls, procedures and governance which seek to identify, quantify, monitor and manage these risks. RISK MANAGEMENT PRINCIPLES The Bank is prepared to actively take risks in connection with the business and as such the following principles underpin risk management within the Bank: Risk is taken within a defined risk appetite; Every risk taken needs to be approved within the risk management framework; 1
Risk taken needs to be adequately rewarded; and Risk should be continuously monitored and managed. The Board expect employees to exhibit behaviours that maintain a strong risk culture and assess them for this as part of the overall performance and compensation process. RISK GOVERNANCE Responsibility for management of risks resides with the individual businesses that give rise to them. At least annually, the Board reviews the material risks and considers the results of the work of the various individuals, functions and committees in mitigating the risks and making the appropriate disclosures. MainFirst Bank AG maintains a Compliance and Internal Audit department. The Compliance department is an independent control and assurance function which manages the Bank s compliance risk management framework. Internal Audit provides independent assurance to senior management and the Board on the adequacy and effectiveness of the financial control and risk management framework. The Board is supported by a Risk and Capital Committee that is responsible for supervising risk levels and acting as interface between front office management and Board. RISK MANAGEMENT TOOLS The Bank uses a range of quantitative and qualitative methodologies for assessing and managing risks: Risk-weighted assets form the key factor in determining the Bank s regulatory capital adequacy as reflected in the Common Equity Tier 1 capital ratio. Economic capital measures the amount of capital that is required to absorb losses arising from risk exposures. Economic capital is calculated for counterparty defaults, market and operational risk. The Bank uses the value-at-risk approach to derive quantitative measures for the trading book market risks. For a given portfolio, value-at-risk measures the potential future loss (in terms of market value) that, under normal market conditions, is not expected to be exceeded with a defined confidence level in a defined period. For operational risk the Bank determines the potential loss from scenario analyses, where we apply loss events to determine the range of potential losses following such events. Risk bearing capacity: the internal capital adequacy is assessed as the ratio of total capital supply divided by total capital demands. The internal capital adequacy is calculated under a liquidation and going concern approach. Stress testing and scenario analysis: Counterparty defaults; market and operational risks are subject to stress tests reflecting certain downturn scenarios including the simulation of a hypothetical reputational, legal or regulatory loss event. Reverse stress tests: In addition to the regular stress tests, reverse stress tests were implemented. Unlike regular stress testing, the result of the simulation is determined in advance representing a sustained threat to the Bank. These measures are viewed as complementary to each other and in aggregate define the framework, by which all risks are measured and monitored. The Board views risk controlling as a dynamic iterative process and continually seeks to improve it. KEY RISKS FACED The main risks faced by the Bank are credit risk, market risk, liquidity risk and operational risk. 2
MainFirst Bank AG s current credit rating of A+ from the German Deposit Protection Fund reflects its strong and conservative risk culture. The Bank has a strong capital position, positive cash generation, and no leverage. 3 CAPITAL REGULATORY CAPITAL Tier 1 capital comprises capital that allows a firm to continue its activities and helps prevent insolvency. Tier 1 can be sub-divided into Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1). The Bank s CET1 capital consists of ordinary share capital, retained earnings and other reserves, deductions include intangible assets. The Bank does not hold AT 1 capital. The Bank s capital supply is detailed in the table below: 31 December 2014 CRD IV 31 December 2013 CRD III Paid up share capital 10,200 10,200 Retained earnings 19,936 18,648 Funds for general banking risk 1,000 1,000 Deduction for other intangible assets (13) (20) Total CET 1 31,123 29,828 Other deductions (i) - (13) Total Tier 1 / Eligible capital 31,123 29,815 (i) Investments in associates below the threshold are risk weighted at 250% under CRD IV and deducted from CET 1 under CRD III LERVERAGE RATIO CRD IV requires firms to calculate a non-risk based Leverage Ratio, to supplement risk-based capital requirements. The leverage ratio measures the relationship between the capital resources of the organisation and its total assets. The purpose of monitoring and managing this metric is to enable Regulators to constrain the build-up of excessive leverage. The leverage ratio is calculated based on the Bank s Tier 1 capital defined according to CRD IV on an end point basis (assuming the full impact of CRD IV requirements on Tier 1 capital were in force with no transitional provisions). Exposures are defined as the total of on and off balance sheet exposures less the deductions applied to Tier 1 capital. The Basel Committee has implemented a monitoring period which runs to January 2017, during which time a minimum leverage ratio of 3% should apply. This limit will be reassessed in 2017 before becoming mandatory in 2018. As at 31 December 2014 MainFirst Bank AG s leverage ratio was 36%: 31 December 2014 Total assets as per published financial statements 86,787 Exclusion of items already deducted from the capital measure (13) 3
Leverage ratio exposure 86,774 Tier 1 capital 31,123 Leverage ratio (min 3%) 35.9% 4 CAPITAL REQUIREMENTS The capital resources requirement of the Bank for regulatory reporting purposes is the total of the credit risk, market risk and operational risk capital requirements. MainFirst Bank AG has elected to adopt the standardised approach for credit risk to calculate the minimum credit risk capital requirement under Pillar 1 of CRD IV. Under the standardised approach firms must calculate the minimum credit risk capital requirement as 8 per cent of the total risk weighted exposures. Risk weights are determined by using the applicable regulatory risk weights (4 key weights: 20%, 50%, 100%, 150%; and 0% for AAA sovereigns, 35% for mortgages, 75% for retail). The Bank calculates its market risk capital requirement in accordance with CRR Title IV. Market risk is due to foreign exchange position risk which arises as a result of movements in currencies. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including legal risk. The Bank has adopted the Basic Indicator Approach for calculating the capital requirements for operational risk. Under the Basic Indicator Approach the capital requirement is set at 15% of the net interest and non-interest income, averaged over the last three years. If the income in any year is negative or zero, that year is not considered in the average. 31 December 2014 Institutions 7,082 Corporates 2,449 Associates 63 Other items (i) 2,448 Total credit risk capital requirement 12,042 Foreign exchange (ii) 1,374 Total market risk capital requirement 1,374 Total operational risk capital requirement 89,074 Total capital requirement 102,490 Total CET 1/Tier 1/Eligible Capital 31,123 Ratio (min 8%) 30.4% (i) Other items as per CRR article 134 include accrued income, settlement accounts, fee debtors, tax, prepayments and other debtors (ii) Calculated as per CRR article 352 CRD IV requires banks to have a minimum ratio of capital to risk weighted assets of 8%, with at least 4.5% of this capital in the form of CET 1 capital, and 6% in the form of Total Tier 1 capital. In addition, BaFin might impose specific minimum capital ratios which may be higher than these levels. 4
5 CREDIT RISK Credit risk is defined as the risk of a counterparty failing to complete its contractual obligations when they fall due. The Bank is exposed to counterparty risk arising from brokerage activities (primarily though potential losses incurred in replicating a trading contract with a new counterparty) and from its financing activities, including deposits with banks and financial institutions, derivative transactions and other financial instruments. PAST DUE AND IMPAIRED ASSETS A financial asset is past due when the counterparty has failed to make a payment when contractually due. An exposure is classified as impaired when the carrying value exceeds the amount expected to be recovered through use or sale or as non performing when the principal interest on fees remain unpaid more than 90 days after the due date. The Bank assesses its financial assets for indication of impairment. Indicators of impairment may include, but are not restricted to: non-payment of interest, a fall in credit worthiness or a reduction of cover/collateral. There have been no exposures classified as impaired as of 31 December 2014. PROVISIONS The Bank makes specific impairment provisions for potential recoverability of debts. The Board determines whether it is necessary to make a provision against a credit exposure on a case-by-case basis. There have been no credit losses incurred during 2014 and no provisions were required as of 31 December 2014. GROSS CREDIT EXPOSURES, RISK-WEIGHTED ASSETS AND CAPITAL REQUIREMENTS Credit risk exposure Risk weighted assets Capital requirement Institutions 34,340 7,082 566 Central government and ventral banks 10,292 - - Corporates 2,449 2,449 196 Regional governments or local authorities 351 - - Associates 25 63 5 Other items 2,448 2,448 196 Total 49,905 12,042 963 6 INTEREST RATE RISK IN THE NON-TRADING BOOK Interest rate risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market interest rates. The Bank has minimal exposure to fluctuations in interest rates as it does not hold assets with fixed interest rates as of 31 December 2014. 5
7 EQUITY RISK Equity risk is the exposure to loss arising from banking book equity-type positions. These investments are classified as financial assets and valued as long term assets at cost less any impairment. Impairments are recognised in profit or loss; valuation gains are not recognised until they are realised. As of 31 December 2014 the Bank s equity exposure comprises of holdings in MainFirst-managed funds of T 93 and investments in associates of T 25. The cumulative realised losses from sales during the year were T 331. Total unrealised gains were T 3 as of 31 December 2014. There have been no impairment losses during 2014. 8 OPERATIONAL RISK Operational risk is the risk of direct or indirect loss arising from a variety of causes associated with the Bank's processes, personnel, technology and infrastructure. The operational risk is measured by the following categories: Risk related to the loss of key personnel; Risk arising from inadequate or failed internal processes; IT-/Infrastructure risk; and Losses incurred through disaster or fraudulent activities. The Bank's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Bank's reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity. The operational risk risk-weighted asset as at 31 December 2014 is T 89.074. 9 ASSET ENCUMBRANCE The Bank does not hold encumbered assets as of 31 December 2014. 10 REMUNERATION The following disclosures are required under the CRR Part 8 (Article 450) in respect of the Bank s Material Risk Takers for 2014. COMPENSATION COMMITTEE The Group has an established Compensation Committee consisting of the three Supervisory Board members of MainFirst Bank AG and two executive Directors of MainFirst Holding AG. Their responsibilities include recommending to the Board the Bank s policy on remuneration, overseeing the remuneration governance framework and ensuring that remuneration arrangements are consistent with effective risk management and regulatory requirements. MATERIAL RISK TAKERS Material Risk Takers (MRTs) are the members of the Board and Supervisory Board and employees whose professional activities could have a material impact on the Bank s risk profile. A total of 121 individuals have been identified as MRTs in 2014. 6
LINK BETWEEN PAYMENT AND PERFORMANCE The Bank s employee remuneration is made up of fixed pay and variable performance-related pay. Fixed pay is principally comprised of salaries and fees. All MRTs receive either a salary (for employees) or fees (for Supervisory Board Members) that reflect their responsibilities and the level of experience and expertise needed to undertake their roles. Fixed pay also includes appropriate pensions and benefits in kind. Variable performance-related pay is principally comprised of annual bonus awards. Supervisory Board Members do not receive variable performance-related pay. The overall size of the annual pool for variable performance-related pay is a material component of the total remuneration expense. It is set by the Group Compensation Committee and Board by reference to the ratio of bonus charge to prebonus profit before tax and a total compensation expense to net revenue ratio. This ensures that the aggregate spend on compensation is directly linked to the Bank s financial performance. MRTs who are permanent employees are eligible to be considered for an annual bonus award each year. Bonuses for all employees take account of overall Group, team and individual performance against agreed objectives. In this context, performance typically includes financial and non-financial measures, risk performance and any other relevant factors. For senior management and employees receiving larger bonus awards, a significant proportion of their annual bonus award is deferred. QUANTITATIVE DISCLOSURES MRT aggregate remuneration by type: Senior Management Other MRTs Fixed pay 2,653 14,167 Current year cash bonus 1,242 2,333 7