Ársskýrsla Landsbankans - Landsbankinn

Notes to the Consolidated Financial Statements
49. Effects of the financial crisis (continued)
Situations may differ between individuals and this calls for varying solutions, customised to fit the needs of each customer. Solutions are based on
an overall assessment of each customer’s financial situation. The Group provides several remedies for individuals experiencing financial difficulties
based on legislation or developed internally by the Group. The remedies variously consist of general measures and/or involve more extensive actions.
The Group has approved a framework to govern the financial restructuring of companies that have a business relation with the Group and are
experiencing financial difficulties. The framework is intended to elaborate on the government’s declaration, Act No. 107/2009 (on actions for the
benefit of individuals, households and companies due to the collapse of the banks and currrency) and Joint Rules on the Financial Restructuring of
Companies agreed upon by the members of the Icelandic Financial Services Association.
Credit risk
50. Credit risk
Credit risk is defined as the risk that a party to a financial instrument will cause a financial loss for the Group by failing to discharge its obligations.
Due to the effects of the financial crisis, there is rather high uncertainty concerning the recovery of the loan portfolio. This uncertainty is reflected
by traditional measures of credit risk.
Credit risk is the greatest single risk faced by the Group and arises principally from loans and advances to customers and from investments in debt
securities. However, it also arises from issued guarantees and letters of credit which commit the Group to pay a third party in the event of customer
inability to fulfil obligations. Guarantees and documentary credits are secured by the goods shipments they cover, thus representing a lower risk than
direct loans. Unused credit lines represent commitments to increase loans or guarantees. Conceivably, the Group could suffer losses equivalent to the
total of open credit lines. Credit risk also arises from derivative contracts where the Group can incur financial losses if the amount to be settled is
positive for the Group, after netting and realisation of collateral.
51. Credit risk management
The Group manages credit risk by setting limits on acceptable exposures to individual borrowers or groups of related borrowers. Such limits are
monitored and regularly reviewed. Credit risk is also managed by modifying authorised credit limits or acquiring preferable collateral for existing
client obligations.
The Group's p management g and control of credit risk is centralised. The Board of Directors sets the Groupp lendingg policy, p y with the purpose p p of
controlling overall Group exposure by the combined, comprehensive monitoring of indirect risk exposure through clients and direct claims of the
Bank and its subsidiaries.
Credit risk is managed by the Risk and Finance Committee, the Credit Committee and its sub-committees. The Risk Management Division manages,
monitors and measures credit risk and reports on credit risk quarterly to the managing directors and the Board of Directors. The lending policy
approved by the Board of Directors and the Risk and Finance Committee indicates the maximum allowable exposure to individual borrowers and
groups of related borrowers.
The CEO sets detailed lending rules based on the policy approved by the Board of Directors. Lending authorisation levels are well-defined and
incremental. Lending authorisations within the branch network vary according to branch size and the lending experience of credit officers, with
higher lending authorisations being granted to branch managers and corporate relationship managers. The highest lending authorisation in the Group
is in the hands of its Corporate Banking Division. Loans exceeding authorisations set by the lending rules require approval by the Credit Committee,
which may approve loans falling outside the authorisations stipulated in Group lending rules. The Credit Committee delegates and reviews employee
authorisation levels and is responsible for reviewing lending rules. Comprised of the Bank’s CEO and the managing directors of Corporate Banking
and Financial Operations, the Credit Committee meets regularly to discuss all credit decisions which exceed the authorisation levels of branches and
the Corporate Banking Division.
Changes to the composition of the Credit Committee have been proposed and will be implemented in 2011. New lending rules have been approved
by the Board of Directors and are in the process of being implemented. These changes aim to involve Risk Management Division to a larger extent
than before in the lending process as well as setting credit approval limits on business units and credit committees. These changes will emphasis
roles and responsibilities of all departments involved in the process.
NBI hf. Consolidated Financial Statements 2010 53
All amounts are in ISK million
Allar upphæðir eru í milljónum króna Ársreikningur 2010 153