Risk management

Risk management is one of the cornerstones of Bankinter's competitive strategy. The Bank has a risk management model of proven effectiveness that is in line with regulatory standards and best international practices, in proportion to the scale and complexity of its business activities. The ultimate responsibility for risk management resides in the Board of Directors, which approves the risk strategy and, in particular, defines the Risk Appetite Framework, which establishes:

• The type and levels of the different risks that the Group considers reasonable to take on in developing its business strategy.
• A set of metrics and key indicators to monitor and manage risks. They cover variables such as risk levels and cost, return, liquidity and capital.A tolerance level and limit are established for each metric which, if reached, lead to the adoption of corrective measures.

The risk strategy is divided into categories: the risk appetite statement and the risk management principles:

• Risk appetite statement. Bankinter carries out its business activities with a prudent risk profile, pursuing a stable balance sheet and a recurring and sound income statement, to maximise the bank's long-term value.
• Risk management principles. The risk appetite and tolerance that the Group assumes are in line with, among others, the following principles:
  • Strategies, policies, organisation and management systems are prudent and well-suited to the size, environment and complexity of the Bank’s activities, based on high-quality banking practices.
  • The Bank’s actions respect and are in line with established requirements, limits and regulatory restrictions, ensuring proper compliance with current legislation at all times.
  • Maintenance of a low or moderate exposure to credit risk, with a non-performing loan ratio in the lowest range of the Spanish financial system.
  • Appropriate hedging of problematic assets.
  • Appropriate return on capital invested to ensure minimum return on the risk-free rate throughout the cycle.
  • Maintain a low level of market risk, such that in stress scenarios the losses generated have a limited impact on the Bank’s income statement.
  • Intense growth in priority strategic segments of medium and large enterprises.
  • Balance of the lending portfolio of individuals and legal entities.
  • Balanced growth in retail financing resources.
  • Diversification of sources of wholesale financing, both from the point of view of instruments and markets, and maintenance of a balanced maturity profile.
  • Optimisation of the cost of retail financing, maintaining a balance between the return on the loan and market rates.
  • Use of a risk diversification policy to avoid excessive concentration levels that might translate into difficulties for the Bank.
  • Limitation on business activities in industries that may pose a risk to the Bank’s sustainability, such as industries related to property development or construction, or that may have a negative impact on its reputation and/or respectability.
  • Moderate appetite for interest rate risk.
  • Maintain a very small structural position in foreign currencies.
  • Strengthened control of the Bank's reputational position (Good Corporate Governance and systemic risks, etc.).
  • Desire to round out the level of service that Bankinter offers its customers, both in Private Banking and Enterprise Banking, offering limited-risk investment banking services.
  • Optimisation of the efficiency ratio.
  • Maximisation of the creation of value for shareholders throughout the cycles through both dividends and increases in share price, all on a strong base of capital and liquidity.
  • Maintain Common Equity Tier 1 (CET1) within the fluctuation band set by the Bank and higher than the regulatory minimums..
    
    

Bankinter also has a corporate governance model that is in line with the most demanding supervisory standards. To stimulate and reaffirm its solid risk culture, it has a highly qualified team supported by advanced information systems.

Three lines of defence

In 2016, Bankinter completed its shift towards an internal control model based on three lines of defence:

1. The business units, which are responsible for control in their area and executing the measures established in risk standards and regulations.

2. The special control units. This line of defence oversees the quality and execution of the controls by the business units in the first line of defence, determines any necessary mitigating and improvement measures and promotes the correct implementation thereof.

3. The Internal Audit unit, which performs an independent review, verifies compliance with and the efficiency of corporate policies and provides information on the control model.

Supervision

Consolidation continued in 2016 of the Single Supervision Mechanism (SSM), the body led by the European Central Bank which began operations in November 2014 and which, among other functions, establishes the minimum capital requirements for European credit institutions. Against this backdrop, Bankinter received the lowest capital requirement of Spanish banks and one of the lowest for European institutions subject to direct supervision by the SSM.

Accordingly, the Bank of Spain published Circular 4/2016, which strengthens the criteria relating to credit risk methodologies, procedures and management, and lists the demanding requirements to apply internal models in the individual and group estimate of provisions. Bankinter was the first bank to inform the supervisor of the effective application of internal models to estimate the provisions of its lending portfolio.