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Contents 1 Introduction... 2 2 Capital Resources... 2 3 Approach to Assessing Adequacy of Internal Capital... 2 4 Credit Risk and Dilution Risk... 3 4.1 Standardised Approach to Credit Risk... 3 4.2 Use of External Credit Assessment Institutions... 3 4.3 Exposures before credit mitigation... 4 4.4 Credit risk mitigation... 4 4.5 Geographic distribution of exposures... 5 4.6 Exposures by industry sector... 7 4.7 Residual maturity breakdown of exposures... 7 4.8 Impaired and past due exposures... 8 5 Market Risk (Foreign Currency Position Risk Requirement)... 8 6 Exposures to interest rate risk in the non-trading book... 8 Page 1
1 Introduction This document sets out the Pillar 3 disclosures for Reliance Bank Limited, as required under BIPRU 11 of the FCA Handbook. All required disclosures are either included in this document or within the Bank s Annual Report and Accounts and are post-audit disclosures. These disclosures will be updated at least annually and are reviewed by the Bank s Board of Directors prior to being issued on the Bank s website together with the Bank s Annual Report and Accounts. 2 Capital Resources Reliance Bank Limited has a very simple capital structure and all capital resources qualify as Core Tier 1 capital. There are no deductions required to capital resources in respect of expected loss amounts. Capital Resources 31 March 2017 31 March 2016 Ordinary Share Capital 7,500 7,500 Profit & Loss Account Reserves 3,850 3,530 Deductions in respect of expected loss amounts Total Core Tier 1 Capital 11,350 11,030 Nil Nil 3 Approach to Assessing Adequacy of Internal Capital Reliance Bank Limited produces an ICAAP (Internal Capital Adequacy Assessment Process) report on an annual basis which represents the Bank s own assessment of its internal capital requirements. This report is approved by the Board of Directors and considers both regulatory capital requirements and an internal assessment of capital requirements. In terms of calculating regulatory capital requirements, the Bank adopts the standardised approach to credit risk and the basic indicator approach to operational risk. Reliance Bank does not have a trading book and has no equity exposures, commodity exposures, derivatives or securitisation. The Bank's approach to calculating its own internal capital requirements has been to take the minimum capital required for credit risk under Pillar 1 as the starting point, assess whether this is sufficient to cover credit risk, and then identify other risks and assess prudent levels of capital to meet them. The risk assessment is undertaken using a scorecard method to assess the likelihood of occurrence and potential impact. Estimates are further adjusted to take account of (a) the possible margin of error in assessing impact and (b) that in any one year the number of concurrent risks may well exceed the statistical average. Stress testing is an important part of the process in assessing risks and in establishing what would be a suitable Capital Planning Buffer. Results of risk assessments are collated into a central Risk Register to enable review and challenge by the Bank's Management Team on a regular basis. In terms of capital planning, the impact on capital adequacy of the Bank s rolling 3-Year Plan is modelled as part of the annual budgeting process. The Bank s capital adequacy position is reported to the Board on a quarterly basis. Page 2
4 Credit Risk and Dilution Risk 4.1 Standardised Approach to Credit Risk, the Bank s risk weighted exposure amounts in accordance with the standardised approach to credit risk were as follows: Exposure Class Exposure Risk Weighted Exposure 8% of RWAs Central Governments or Central banks 26,564 0 0 Financial Institutions 147,676 45,267 3,621 Corporates (after credit risk mitigation) 0 0 0 Retail 501 243 19 Secured on real estate property 42,373 14,775 1,182 Past due items 0 0 0 Other items 3,277 3,277 262 Total 220,391 63,562 5,084 4.2 Use of External Credit Assessment Institutions The Bank applies ratings from Fitch Ratings Inc in its calculation of risk weighted exposure amounts, in accordance with the standardised approach to credit risk. It has used Fitch ratings for a number of years and complies with the credit quality assessment scale proposed under the standardised approach. Fitch ratings are used for exposures to financial institutions and central governments or central banks. There are currently no corporate counterparties which are rated., the Bank s exposure values within each credit quality step were as follows: Exposure Class Central Governments or Central banks Financial Institutions step 1 Rating of AAA to AA-) step 2 Rating of A+ to A-) step 3 Rating of BBB+ to BBB-) step 4 Rating of BB+ to BB-) step 5 Rating of B+ to B-) step 6 Rating of CCC+ & below) 26,564 - - - - - 75,929 70,171 1,575 - - - Page 3
4.3 Exposures before credit mitigation Exposure Class Exposure as at 31/3/17 Avg Exposure in 2016/17 Central Governments or Central banks 26,564 27,569 Financial Institutions 147,676 160,914 Corporates (before credit risk mitigation) 22,719 24,034 Retail 501 505 Secured on real estate property 42,373 42,425 Past due items 0 10 Other items 3,277 3,187 Total 243,110 258,644 4.4 Credit risk mitigation The only credit risk mitigation applied to Reliance Bank s exposures relates to exposures to The Salvation Army Trustee Company Limited (SATCO) a Corporate customer and one of the Bank s two shareholders. Details of these exposures and the associated credit risk mitigation are disclosed in Notes 10(a) and 23 of the Report & Accounts. Page 4
4.5 Geographic distribution of exposures It is bank policy to restrict exposures, with the exception of exposures to financial institutions, to UK exposures only. There is the potential for there to be exceptions to this as a consequence of existing customers moving overseas. If ever overseas exposures to nonfinancial institutions were to exceed 10k individually or 50k in aggregate, details will be disclosed in this document. Exposures to Financial Institutions by country: Country Exposure UK 40,398 GERMANY 20,080 UAE 15,836 SWITZERLAND 10,044 QATAR 10,041 SWEDEN 10,032 USA 10,016 NETHERLANDS 10,014 CANADA 10,012 SINGAPORE 10,010 CHANNEL ISLANDS 1,193 Total 147,676 Exposure by Country Channel Islands SINGAPORE CANADA NETHERLANDS UK USA SWEDEN GERMANY QATAR UAE SWITZERLAND UK GERMANY UAE SWITZERLAND QATAR SWEDEN USA NETHERLANDS CANADA SINGAPORE Channel Islands Page 5
The Bank s mortgage portfolio is analysed in terms of geographical distribution within the UK. Mortgage Portfolio Geographical Distribution: Region of UK Exposure Greater London 4075 Outer Metropolitan 2617 South West 2606 North 2305 Outer South East 2198 Scotland 1932 Yorks & Humb 1777 East Anglia 1363 West Midlands 1140 East Midlands 1043 North West 374 Wales 65 Total 21,495 East Anglia North West East Midlands West Midlands Yorks & Humb Scotland Outer South East Exposure by Region of UK Wales North Greater London Outer Metropolitan South West Greater London Outer Metropolitan South West North Outer South East Scotland Yorks & Humb East Anglia West Midlands East Midlands North West Wales Page 6
4.6 Exposures by industry sector Industry Sector Secured on real estate property (includes Commitments) Retail (includes Commitments) Total Exposure Agriculture 260-260 Community Service / Charities 902 9 911 Construction 234 2 236 Education 822-822 Financial & Professional Services - 63 63 Manufacturing 1,337-1,337 Other Business - 10 10 Property Investment 5,109-5,109 Property Development 5,976-5,976 Property Housing Associations 2,532-2,532 Recreational - 20 20 Services 167 13 180 Non Salvation Army Religious Organisation 1,702-1,702 Wholesale & Retail 476 15 491 Total 19,517 132 19,649 4.7 Residual maturity breakdown of exposures Exposure Class Central Governments or Central banks On demand < 3 mths 3 mths < 1 yr 1 yr < 2 yrs 2 yrs < 5 yrs >5 yrs Total 26,563 - - - - - 26,563 Financial Institutions 8,861 47,324 91,491 - - - 147,676 Corporates (after credit risk mitigation) - - - - - - - Retail 245 1 13 16 192 22 489 Secured on real estate property 5,004 1 32 213 693 36,342 42,285 Past due items 4 - - - - - 4 Total 40,677 47,326 91,536 229 885 36,364 217,017 Page 7
This analysis excludes Other items of 3,277k, primarily fixed assets, which don t have a defined maturity. 4.8 Impaired and past due exposures Items are treated as past due if they are more than 90 days overdue. Past due items have a higher risk weighting applied when assessing capital requirements. Impaired loans are loans which it is anticipated may not be recoverable in full (which, in practice, means they become non-performing) unless the Bank considers it has adequate security to cover all balances outstanding plus a margin. Impairment reviews are undertaken for all financial assets, both on an individual and a collective basis. Reliance Bank makes specific provisions against doubtful receivables when the advance becomes non-performing unless the Bank is satisfied that the value of any security comfortably exceeds its exposure. The Report & Accounts contain disclosures on provisions for doubtful debts in Notes 4, 5, 10(a) and 10(b). All provisions for doubtful debts have been made on UK exposures to personal and business customers. 5 Market Risk (Foreign Currency Position Risk Requirement) Reliance Bank has very little market risk given that it does not operate a Trading Book. The Bank does, from time to time, have open positions in two foreign currencies US Dollars and Euros. These open positions are minimal (maintained at < 10k) and are deemed immaterial under Pillar 1. The capital requirement rounds down to nil as at March 2017. 6 Exposures to interest rate risk in the non-trading book Interest rate risk in the banking book arises from having a range of different assets and liabilities which have different re-pricing dates. The Bank s business model results in an excess of interest rate sensitive assets over and above interest rate sensitive liabilities due to the fact that there is a proportion of customer current accounts that do not receive interest and that capital and reserves are non-interest bearing. Whilst there are no absolute measures to control the effects of interest rate movements, protection is afforded by managing the maturity profile of customer balances and investment holdings and by maintaining margins, wherever possible, as rate changes occur. The Bank measures Interest rate risk by applying interest rate gap sensitivity analysis which assesses the impact on economic value of both an increase and decrease in interest rates of 200 basis points. Here, discounted cashflows are applied to assets and liabilities according to their re-pricing periods. This economic value analysis is completed on a quarterly basis and is reported each quarter to the Prudential Regulation Authority. Applying an increase in interest rates of 200 basis points increases the discounting applied to future cashflows which results in a fall in economic value of 619k as at 31 March 2017. Page 8