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Notes to the Consolidated Financial Statements
46. Risk management framework (continued)
The Bank's Risk Managment Division is responsible for managing risk within the Bank through setting and enforcing limits. Subsidiaries of the Bank
have their own risk management functions, but the Risk Management Division receives information on exposures from the subsidiaries and collates
them into Group exposures.
The Compliance Department ensures that the Group follows its rules on securities trading and insider trading and that operations comply with the
Act on Securities Transactions, the Act on Actions to Combat Money Laundering and Terrorist Financing, and other relevant legislation and
regulations. This department also concentrates on Group adherence to codes of ethics and on limiting market abuse, minimising conflicts of interest
and ensuring best practice. Such compliance is one of the Group's support functions and is integral to its corporate culture.
Internal audit is part of the Group's risk management framework as well as being an aspect of the surveillance system. The purpose of internal audit
in the risk management process is to confirm that risk management is functioning and is sufficient for the Group. The effectiveness of the Group's
risk management and risk assessment procedures, including the ICAAP process, is evaluated by internal audit and the findings are reported to the
Board of Directors. Internal audit activities extend to every operating unit, including the Bank's subsidiaries.
47. Risk management division
The Risk Management Division has seven units.
• The Credit Management Unit is responsible for risk assessment and secondary voting on credit applications for customers with exposures exceeding
the credit limits of individual business units and customers which have been classified yellow, orange or red (see Note 53). Secondary voting on
decisions exceeding the limits of the Risk Management Division is referred to the Bank’s Credit Committee, as if there are any disagreements
between the division and other units on credit decisions.
• The Credit Risk Monitoring Unit is responsible for monitoring the Bank‘s credit portfolio. This is done by operating an early warning system which
classifies customers and transfers them between the categories standard/watchlist and restructuring. The unit also works with other units on large
exposure and impairment analysis.
• The Asset, Liability and Market Risk Unit is responsible for the risk arising in the Bank‘s investment banking activities. The types of risks are liquidity
risk, interest rate risk, foreign exchange rate risk, equity risk and commodity risk.
• The Operational Risk Unit is responsible for ensuring that Group operational risks are captured and that the Group implements, maintains and
monitors an effective operational risk management framework.
• Internal Risk Models Unit's role is to provide, develop and maintain the Bank‘s internal models and related processes to measure risk, including
linking risk to capital; as well as to support the implementation of such models and processes within the Bank.
• The Report and Risk Analysis Unit is responsible for credit risk reporting to regulators and within the Bank. The department is an architect for credit
risk data warehousing, liaises with IT regarding credit risk and is responsible for ad hoc credit risk analysis as well as portfolio analysis.
• The Economic Research Unit is responsible p for the analysis y of the external domestic and international economic environment relevant to the Bank’s
operations. The analysis provides support to management in planning, risk management and decision-making. The main task of the department
within the risk management context is to design and analyse the macroeconomic scenarios which are applied in the stress testing process.
48. Risk policy and appetite
The Board of Directors of the Bank is responsible for overall policy on risk, ensuring that it conforms to the Group's strategy, its capital adequacy
goals and risk appetite, and the experience of its management. The CEO is responsible to the Board for daily operations, managing Group risk through
committees. Managing directors report to the CEO on the activities of their division and compliance with the risk policies of the Group. Two aspects
of this involved the Board of Directors approving a new credit policy as well as updating various risk based rules of the Bank in 2010. The Group has
an established process in place for defining its risk appetite and the approval of risk policies for all risks.
49. Effects of the financial crisis
Due to economic conditions in Iceland following the events of October 2008, the Group has been experiencing uncertainty about borrowers' ability
to pay back their loans. The uncertainty was especially prevalent in the case of loans denominated in foreign currencies granted to borrowers with
limited or no income in foreign currencies. In general, the uncertainty about borrowers' ability to pay back their loans has decreased, in part due to
the implementation of solutions for individuals and companies. In addition, the uncertainty regarding the currencies of denomination and interest
rates of lease and loan agreements has decreased as a result of the rulings of the Supreme Court of Iceland and new legislation as described in Note
4(i).
The Group has adopted various measures to assist individuals and corporations experiencing payment difficulties. As indicated by the number of
customers experiencing payment difficulties and utilising the Group’s solutions there has been a significant financial impact of these solutions. Due
to the fact that the loan book was acquired at a deepdiscount, the impact on the Group's financial performance has so far been limited but has left
the Group with limited room for further general write-down of loans.
NBI hf. Consolidated Financial Statements 2010 52
All amounts are in ISK million
152 Ársreikningur 2010 Allar upphæðir eru í milljónum króna