Risk management

Risk is inherent in the Bank’s entire operation. Robust and sound risk management is key to the Bank’s operation and involves analysis, assessment and management of all risk factors.


While risk linked to the pandemic has affected the operation over the past two years, all main risk measurements show the Bank’s position to be very sound, both with regard to profitability and risk. Despite the many challenges brought by the pandemic, crisis management of the Bank, based on contingency plans and prior experience, has been successful and ensured more or less uninterrupted activities and services.

Risk measurements and the Bank’s assessment of material risk factors generally point to a stable and positive outlook. Loans past due are at a historical low, the Bank’s capital adequacy and liquidity ratios are strong, and all risk factors are within risk appetite at year end.

Credit risk continues to be the most significant risk in the Bank’s operations. The carrying amount of lending increased by ISK 114 billion in 2021, mainly due to growth in the mortgage portfolio. Favourable developments in credit risk measurements, such as decreasing probability of default and historically low past due ratios, were observed during the year. There is still some uncertainty about loans with moratoria applied in response to the pandemic and, at year-end 2021, the carrying amount of such loans was ISK 74 billion.

In 2021, loan impairment allowances decreased by ISK 7 billion, compared to an ISK 12 billion increase in 2020. Expected increased loan losses as a result of the pandemic have not materialised and the current outlook suggests that loan losses will eventually be lower than initially expected. The carrying amount of stage 3 loans decreased in 2021, which is explained by a low default rate during the year. The carrying amount of stage 2 loans also decreased during 2021, in line with an improved risk position.

At year-end 2021, the Bank’s capital adequacy was 26.6%, well above its capital requirement of 18.8%. The Bank’s liquidity position, in total, in foreign currencies and in individual currencies remains good and well above regulatory requirements. The aggregate liquidity coverage ratio (LCR) was 178%, 120% in ISK and 555% in foreign currencies at year-end. Total market risk remains low and well within risk appetite.

Risk factors in the Bank’s operation are assessed by various measurements, in line with their scope and nature, and these measurements provide the foundation for risk limits, analysis of risk factors, disclosure of information and risk management. A common measurement for all risk factors is the Bank’s internal assessment of economic capital (EC).

The Bank’s internal EC assessment was ISK 104 billion at year-end 2021, decreasing by ISK 5.5 billion from the previous year. The decrease is mainly due to a decrease in EC for credit risk, in line with an improved risk position. The Bank’s risk-weighted exposure amount (RWEA) increased in 2021, in line with growth in the loan portfolio, and the ratio of EC to RWEA was 9.1% at year-end 2021, compared to 9.8% the year before.

Landsbankinn’s risk strategy

The objective of Landsbankinn’s risk strategy is to establish a framework for risk management and risk appetite as they are key to long-term profitability and stability. The strategy sets out the parameters for implementing risk culture, risk rules and governance that sets out decision and risk-taking authorisations, follow-up and control by the Board of Directors, the CEO and individual Bank committees. All main risk factors in the Bank’s operation are identified, assessed and measured, both financial and non-financial risks. Risk factors for the Bank are credit risk, market risk, liquidity risk, operational risk, business risk, legal risk, reputational risk, conduct risk, compliance risk, IT risk, data risk, model risk and climate risk.

The Board of Directors has approved a risk appetite which reflects the Bank’s risk strategy and functions as a management tool that controls risk-raking, in addition to setting aims for aggregate risk in the Bank’s operation. Risk appetite is reviewed at least annually.

Identifying operational risk in the Bank’s activities

"In the Operational Risk department, which is part of the Risk Management division, we help the Bank’s employees to identify the operational risk in our activities and assist in risk management. Operational risk is the “youngest” risk banks are faced with. What separates operational risk from other risks like credit risk, market risk and liquidity risk is that operational risk originates in the Bank’s internal activities and incorporates all the non-financial risks that the classic risk factors do not include. When we do our job right, we are part of internal reform.

Active internal control

Active internal control forms one of the cornerstones of robust risk management and is conducive to the Bank operating in accordance with its risk policy and risk appetite.

Internal control is a process shaped by the Bank’s executives and employees and comprises all actions taken with the aim to support, manage, mitigate or monitor certain activities and in so doing increase the likelihood of the Bank attaining set goals.

Landsbankinn endeavours to maintain good and constructive relations with regulators and to ensure accurate information disclosure.

Risk metrics in Landsbankinn’s risk appetite

The Bank’s main risk metrics are listed below. In addition, the Bank assesses and measures various other risk factors to support risk management and decision taking.

Risk    Metric
Credit risk Expected loss
Average probability of default
Concentration risk Largest exposure (% of Tier 1 equity)
Total large exposures (% of Tier 1 equity)
Market risk Total market risk
Risk Metric
Liquidity and funding risk LCR in Icelandic króna (ISK)
LCR in foreign currency
LCR - total
Net stable funding ratio in foreign currency
Net stable funding ratio - total
Capital adequacy risk Total capital ratio
Operational risk Real changes to RWA base
ROE ROE after taxes

Further information in risk report

Landsbankinn publishes a risk report that provides in-depth information on all risk factors for the Bank and risk assessment methods.


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