Pillar 3 Disclosures - Agricultural Bank of China · 2017-05-08 · ABCUK Pillar 3 Disclosures 2015 Page 1 of 17 It is the policy of Agricultural Bank of China (UK) (herein referred

Pillar 3 Disclosures

31 December 2015

ABCUK Pillar 3 Disclosures 2015

Page 1 of 17

It is the policy of Agricultural Bank of China (UK) (herein referred to as the “Bank” or

“ABCUK”) to maintain high standards of risk governance and a sound system of internal

control processes and procedures regarding risk management. This Pillar 3 Disclosures

document (herein referred to as the “Disclosures”) sets out the control standards and

procedures that exist in relation to this area.

This document has been prepared for informational purposes only by Agricultural Bank of China (UK) Limited

authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the

Prudential Regulation Authority, a subsidiary of Agricultural Bank of China Limited (for contact details see

www.uk.abchina.com). The information herein is provided as at the date of this document and subject to change

without notice. No part of this document, nor the fact of its distribution, should form the basis of, or be relied on

in connection with, any contract or commitment or investment decision whatsoever. This presentation is not an

advertisement of services provided by Agricultural Bank of China (UK) Limited and does not form any

fiduciary relationship. This document is not an investment research material.

http://www.uk.abchina.com/


Page 2 of 17

Table of Contents

1 Introduction .......................................................................................................................................... 3

1.1 Background ................................................................................................................................... 3

1.2. Ownership ............................................................................................................................... 3

1.3. Business Activities .................................................................................................................. 3

1.4. Location and Verification ....................................................................................................... 4

2 Risk Management Framework ............................................................................................................ 4

2.1. Risk Management Objectives ................................................................................................. 4

2.2. Corporate & Risk Governance ................................................................................................ 4

2.3. Risk Policies ............................................................................................................................ 5

3. Key Risks ................................................................................................................................................... 5

3.1. Credit Risk .............................................................................................................................. 5

3.1.1. Credit Risk ..................................................................................................................................... 5

3.1.2. Counterparty Credit Risk ............................................................................................................... 6

3.1.3. Analysis of Credit Risk and Counterparty Credit Risk .................................................................. 6

3.1.3.1.Exposure by Sector: ........................................................................................ 6

3.1.3.2.Exposure by Maturity: .................................................................................... 6

3.1.3.3.Exposure by Credit Ratings: ........................................................................... 7

3.1.3.4.Exposure by Country: ..................................................................................... 8

3.1.4.Credit Risk Mitigation ........................................................................................................... 8

3.1.5.Past Due & Impairment ......................................................................................................... 8

3.1.6 Credit Risk Weighted Exposures ........................................................................................... 9

3.2. Market Risk ............................................................................................................................. 9

3.3. Liquidity Risk ....................................................................................................................... 10

3.4. Operational Risk ................................................................................................................... 14

3.5. Compliance Risk ................................................................................................................... 14

3.6. Conduct Risk ......................................................................................................................... 14

3.7. Stress Testing and Scenario Analysis ................................................................................... 14

4. Capital Management .............................................................................................................................. 15

4.1. Own Funds ............................................................................................................................ 15

4.2. Internal Capital Adequacy Assessment Process (ICAAP) .................................................... 15

5. Remuneration Policies ............................................................................................................................ 16

5.1. Remuneration Committee ..................................................................................................... 16

5.2. Pay Performance ................................................................................................................... 16

5.3. Material Impact Staff Criteria ............................................................................................... 16

5.4. Expenditure for Material Impact Staff .................................................................................. 17


Page 3 of 17

1 Introduction

1.1 Background

The Disclosures in this report is prepared in accordance with the Basel III framework and Capital

Requirements Regulation and Capital Requirements Directive IV (“CRR” and “CRD”, collectively

“CRD IV”) which came into force from 1 January 2014. The rules are enforced in the UK by the

Prudential Regulatory Authority (PRA).

1.1.1. Under the Basel III framework there are three central elements or “Pillars”:

i) Pillar 1 – Minimum Capital Requirements with defined rules for the calculation of credit risk,

counterparty credit risk, market and operational risk. ii) Pillar 2 – Supervisory Review Process under which supervisors take a view on whether an

institution should hold additional capital against risks under Pillar 1 that are not fully captured

under Pillar 1. The institution’s internal models and assessments support this process. The details

of the assessment are contained in the Bank’s “Internal Capital Adequacy Assessment Process”

(“ICAAP”), elements of which are disclosed within this document.

iii) Pillar 3 – External communication of risk and capital information which complements the

Pillar 1 and Pillar 2 that allows market participants to assess the institution’s capital adequacy.

1.1.2. Together with the ABCUK 2015 Annual Report, the 2015 Pillar 3 Disclosures provide

information on the Bank’s material risks as part of the Pillar 3 framework. The Disclosures is

based upon the Bank’s financial position as of 31 December 2015. It provides details on its

risk profile, including business volumes by customer categories and risk classes, which form

the basis for the calculation of the capital requirement.

1.1.3. This report is updated and published annually. The aim is to provide additional information to

complement the Financial Statements, and should be read in conjunction with that

information, in particular the section on risk, liquidity and capital management and corporate

governance, as well as the Notes to the Financial Statements.

1.2. Ownership

1.2.1. Agricultural Bank of China (UK) Limited (“ABCUK”) is a UK incorporated Bank authorised

by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct

Authority (“FCA”) and the Prudential Regulation Authority.

1.2.2. Agricultural Bank of China Limited is the parent bank (the “Parent Bank”), registered in

Beijing China. The Parent Bank is the 100% shareholder of ABCUK.

1.3. Business Activities

ABCUK engages in the following activities:

i) Wholesale banking business: deposit taking; trade finance and international settlement; syndicated

lending; corporate lending and related activities.

ii) Global Market Business: foreign exchange trading; interest rate and foreign exchange derivatives;

bond investments and related activities.


Page 4 of 17

1.4. Location and Verification

This Disclosures is reviewed and approved through internally governance to publish on ABCUK’s

website (www.uk.abchina.com). Unless otherwise indicated, information contained within this

document has not been subject to external audit but has been reviewed by senior management and

approved by the Board.

2 Risk Management Framework

2.1. Risk Management Objectives

ABCUK’s risk management objectives are to identify and evaluate the risks that ABCUK faces,

formulate risk appetite and ensure business profile and plans are consistent with it, optimise risk

return decisions while establishing strong and independent review and challenge structures, and

ensure that business growth plans are properly supported by effective risk infrastructure, manage risk

profile to ensure that specific financial deliverables remain possible under a range of adverse business

conditions.

The ABCUK’s risk management framework is embedded in the Bank through the “Three Lines of

Defence” model, which defines the responsibilities and accountabilities for monitoring and complying

with the policies and procedures. The business units are responsible for the day to day management of

inherent risks in their businesses with Risk Department being the risk oversight function ensuring

procedural compliance and reviewing and updating of risk management policies and procedures. The

internal audit represents the third line of defence which provides independent assurance over the

adequacy and effectiveness of risk control across the Bank.

2.2. Corporate & Risk Governance

The Board and management of ABCUK are committed to ensuring robust, comprehensive procedures

and controls throughout the business. Senior management maintains a close “hands on” approach to

all aspects of the business on a day-to-day basis.

Risk management process is a continuous process of defined steps which enables continual

improvement in decision making by providing management with a greater insight into risks and their

impact.

Senior management through the Executive Committee and its sub-committees i.e. Credit Committee

and Asset & Liability Committee (“ALCO”) actively manage the risk through daily, weekly and

monthly monitoring and reporting on credit, market, operational and liquidity risk. The Risk

Department works closely with Financial Markets & Treasury Department and Corporate Banking

Department to ensure the adherence to the risk policies approved by the Board, in particular during

the process of credit approvals and reviews, and limits monitoring.

The Risk Committee and the Audit Committee are Board Committees. The Risk Committee takes

cognizance of the risk management employed at the executive level i.e. Credit Committee and ALCO,

and recommends risk framework, risk management policies and risk appetite for the Bank. The Risk

Committee provides overview of the Bank’s risk management to the Board. The Risk Committee is

chaired by an Independent Non-Executive Director and meets at least on a quarterly basis.

External and internal Audits ensure the effectiveness of internal control including financial

management, and regulatory compliance. These are monitored by the Board Audit Committee which

is chaired by an Independent Non-Executive Director.

http://www.uk.abchina.com/


Page 5 of 17

2.3. Risk Policies

ABCUK maintains risk policies which set out objectives, strategies and processes to manage the risks

that the Bank faces. The policies are updated periodically, with direct involvement of senior

management and the Board, to reflect changing business environment, the Bank’s risk strategies, and

capital and funding positions.

Under the risk framework that the Bank has adopted, risk appetite (the “Risk Appetite”) is in place

under the guiding principle of a prudent risk management approach. The Risk Appetite is articulated

through:

a system of quantitative and qualitative limits (including limits on capital utilisation, credit

risk, market risk, operational risk and liquidity risk).

low threshold of materiality for reporting of actual and potential risk events.

The Bank manages its individual and overall risk positions within its stated Risk Appetite.

3. Key Risks

3.1. Credit Risk

Credit risk is the risk that obligors or counterparties are unable to meet their obligations to the Bank.

Credit risk arises principally from lending, trading and investment activities involving on and off

balance sheet instruments. The Bank manages its credit risk during the course of transaction initiation,

credit approval, and post-transaction credit monitoring. The Bank’s strategy is to adopt a prudent

approach to credit exposure by investing in high quality transactions and lending to well-known and

highly respected corporate and financial institutional entities with sound credit ratings. Credit limits

are managed on individual and connected group obligors or counterparties, countries, sectors in

accordance with regulatory rules and the Bank’s risk policies.

Day to day management of credit risk is performed by the front office (Corporate Banking

Department and Financial Markets & Treasury Department) as the first line of defence in transaction

initiation and credit exposure monitoring. Risk Management performs appraisals of obligor or

counterparty credit quality and transaction risk for consideration by the Credit Committee. The Bank’s

credit policies require periodic and on-going monitoring of the credit worthiness of obligors or

counterparties, country risk and ratings developments.

As of the year end, the carrying amount of financial assets recorded in the financial statements, which

is net of impairment losses, represents the Bank’s exposure to credit risk as no collateral or other

credit enhancements are held. Credit risk exposure also encompasses undrawn credit exposures, off

balance sheet exposures and counterparty non-banking book exposures. No financial assets were

either past due or impaired at the year end.

3.1.1. Credit Risk Exposure

The credit exposure primarily arises from lending, trade finance, counterparty trading, investments

and treasury operations. Exposure to trading counterparty credit risk is disclosed in a separated section

as part of CRD IV requirements.

Credit Exposure includes all loans, claims, credit commitments (underwriting or purchase of a loan),

trade finance and contingent liabilities arising from on and off balance sheet transactions with an


Page 6 of 17

individual obligor or obligor group.

Credit risk of lending exposure is measured by the principal or book value of the relevant credit

facility.

Trade finance related transactions such as issuance of letters of credit and letters of guarantee,

acceptance, discounting and bill negotiation are measured as 100% loan equivalent. For confirmation

of letters of credit, loan equivalent factors (credit conversion factors) apply based on types of products,

tenor of exposure and creditworthiness of letter of credit issuers in accordance with regulatory

requirements.

3.1.2. Counterparty Credit Risk

A Counterparty Credit Risk (CCR) Exposure is the risk of financial loss in derivative, foreign

exchange trading or securities financing activities, due to a counterparty’s failure to perform at any

time from trade date to settlement date. It is the credit risk of the counterparty and is additionally

subject to market risk. The exposure is calculated based on the regulatory requirement. The CCR

RWA was USD $8.7mn as at 31 December 2015, which resulted in a PRR of USD $696k. The Credit

Risk Weighted Asset with Credit Valuation Adjustment (CVA) was USD $1.84m and the PRR was

USD $147k. The average weighting of these credit exposure were 52%

3.1.3. Analysis of Credit Risk Exposure and Counterparty Credit Risk

The credit risk tables in this section include exposure amounts by sector, geography, ratings, residual

maturity as at 31 December 2015.

3.1.3.1. Exposure by Sector:

EXPOSURE BY SECTOR ($ '000)

SECTOR EXPOSURE % EXPOSURE %

FI 364,078.6 62.4% 314,250.0 69.9%

Corporate 189,499.1 32.5% 107,621.0 23.9%

Sovereign 29,566.2 5.1% 28,000.0 6.2%

Grand Total 583,143.8 100.0% 449,871.0 100.0%

2015 2014

The exposure to financial institutions, corporates and sovereign accounts for 62.4%, 32.5% and 5.1%

respectively. Within financial institutions, the exposure is spread among Asia, UK, the mainland

Europe and Americas. See section 3.1.3.4 for the detail of exposure by country.

3.1.3.2. Exposure by Maturity:


Page 7 of 17

EXPOSURE BY MATURITY ($ '000)

MATURITY EXPOSURE % EXPOSURE %

Overnight 15,796.8 2.7% 39,486.0 8.8%

Overnight to 1 week 45,000.0 7.7% 600.0 0.1%

1 week to 1 month 127,303.7 21.8% 1,739.0 0.4%

1 month to 6 months 46,491.0 8.0% 90,367.0 20.1%

6 months to 1 year 34,742.1 6.0% 162,689.0 36.2%

1 Years to 2 years 8,000.0 1.4% 87,813.0 19.5%

2 years to 5 years 305,810.2 52.4% 67,177.0 14.9%

Total 583,143.8 100.0% 449,871.0 100.0%

2015 2014

The majority of the credit exposure is within 2 to 5 years maturity at 52.4%, while the credit exposure

within 1 years maturity accounted for 47.6%. The maturity profile in 2015 was more diversified than

that of the 2014. The change was driven by the increase in customers from the corporate sector. It also

reflects ABCUK’s approach of building a sustainable business profile.

3.1.3.3. Exposure by Credit Ratings:

Exposure % Exposure %

AAA 0.0 0.0% 0.0 0.0%

AA+ 25,000.0 4.3% 28,000.0 6.2%

AA 920.2 0.2% 45.0 0.0%

AA- 75,780.0 13.0% 2,922.0 0.6%

A+ 4,570.0 0.8% 14,006.0 3.1%

A 79,705.3 13.7% 169,094.0 37.6%

A- 135,933.1 23.3% 35,807.0 8.0%

BBB+ 50,978.6 8.7% 25,905.0 5.8%

BBB 47,244.3 8.1% 61,813.0 13.7%

BBB- 26,999.4 4.6% 50,432.0 11.2%

BB+ 60,483.5 10.4% 33,300.0 7.4%

BB 58,649.7 10.1% 14,982.0 3.3%

BB- 16,879.9 2.9% 13,565.0 3.0%

Total 583,143.8 100.0% 449,871.0 100.0%

2015 2014Exposure by Obligor Rating

($ '000)

It is ABCUK’s policy that no credit facility or exposure will be extended to an obligor or counterparty

which has a rating below Ba3/BB-. This policy is firmly established in the Bank’s operations. At the

end of December 2015, 76.7% of the total exposure was to investment grade credits, highlighting a

conservative approach. Exposures to obligors with BB- to BB+ increased slightly from 2014 to 2015.

This was mainly driven by the increase in customers from the corporate sector.


Page 8 of 17

3.1.3.4. Exposure by Country:

Exposure % Exposure %UNITED KINGDOM AA+ 108,033.2 18.5% 132,355.0 29.4%CHINA A+ 91,088.8 15.6% 169,987.0 37.8%UNITED STATES AA+ 84,461.9 14.5% 45,089.0 10.0%GERMANY AAA 63,553.3 10.9% 310.0 0.1%

AUSTRALIA AAA 56,379.0 9.7% 2,922.0 0.6%

NETHERLANDS AA+ 39,810.0 6.8% 20,000.0 4.4%SWITZERLAND AAA 36,920.0 6.3% 9,000.0 2.0%

RUSSIAN FEDERATION BB+ 30,545.0 5.2% 35,000.0 7.8%

FRANCE AA 29,592.9 5.1% 6,017.0 1.3%

HONG KONG AA+ 21,772.4 3.7% 29,090.0 6.5%

FINLAND AA+ 15,000.0 2.6% 0.0 0.0%JAPAN A 5,063.6 0.9% 51.4 0.0%

LUXEMBOURG AAA 920.2 0.2% 45.3 0.0%

SWEDEN AAA 3.8 0.0% 4.3 0.0%

BELGIUM AA- 0.0 0.0% 0.0 0.0%

Total 583,143.8 100.0% 449,871.0 100.0%

Exposure by Country

($ '000)

2015 2014Rating

The UK and China are the most significant countries that ABCUK has exposures, the remaining

exposure is well spread among other major economies. The exposure by country was more diversified

than the previous financial year, this reflects its business profile and strategies.

3.1.4. Credit Risk Mitigation

ABCUK’s credit approvals are fundamentally dependent on the creditworthiness of the obligors or

counterparties and the type of transaction arrangements. Risk mitigation mechanisms are employed to

minimize credit risk in the event of credit quality deterioration. This primarily includes netting,

guarantee and collateral and covenants.

Netting - the Bank has a netting agreement in place with its Parent Bank under which the

exposure to the Parent Bank can be netted off against the deposit or funding from the Parent

Bank. For reporting purposes, both gross exposure and net exposure are disclosed in monthly

Management Information and quarterly regulatory returns.

Cash collateral - ABCUK has signed CSA agreements (“Credit Support Annex”) with a

number of financial institutions in trading / derivative transactions, under which major

currencies (US Dollar, Euros) are used for margin settlement. Cash collateral is also used in

lending business where valuation is monitored.

Guarantees – the Bank employs guarantee as credit support in its lending to corporate clients

primarily in the form of Standby Letters of Credit (“SBLC”) provided by the Parent Bank

branches. In doing so, the credit risk is transferred to the guarantee provider, or the Parent

Bank in such case.

Covenants – financial and non-financial covenants may be incorporated in loan agreements.

The reported credit exposure in this section 3.1 has reflected the exposure after employing the risk

mitigation techniques.

3.1.5. Past Due & Impairment

ABCUK has established mechanism for identifying and reporting past due and impairment cases.

There was no facility identified for past due and impairment as at 31 December 2015.


Page 9 of 17

3.1.6. Credit Risk Weighted Exposures

ABCUK has adopted a Standardized Approach as set out by the PRA under which Credit risk

weighted exposures are calculated on the basis of the rating regime as prescribed in Standardised

Approach by PRA Supervisory Statement SS10/13.

Credit Risk RWA is calculated as follows:

CREDIT RISK ($ '000) Dec-15 Dec-14 % Change

On Balance sheet 239359.8 188854.0 26.74%

Off Balance Sheet: 39353.2 18419.0 113.66%

Risk Participation 11999.4 10169.0 18.00%

Trade Finance LC 0.0 0.0 0%

Undrawn Commitments 27353.9 8250.0 231.56%

Sub Total 278713.0 207273.0 34.47%

CREDIT RISK CCR

COUNTERPARTY CREDIT RWA: 8700.2 48100.0 -81.91%

COUNTERPARTY CREDIT RWA CRR: 696.0 3848.0 -81.91%

CREDIT RISK CVA

CVA - RWA 1840.1 15356.0 -88.02%

CVA CRR: 147.2 3593.0 -95.90%

TOTAL CREDIT RISK RWA 289253.3 270729.0 6.84%

TOTAL CREDIT RISK PRR 23140.3 21658.3 6.84% PRR-Position Risk Requirement

3.2. Market Risk

Market risk is the risk that arises from fluctuations in values of, or income from, assets, interest rates,

or exchange rates. The Bank manages the flow of business of its customers, predominantly, forex spot,

forwards and swaps. The Bank also takes a small number of open position although exposure is

limited and regularly monitored.

The Bank manages its market risk by taking equal and opposite derivative positions in the market.

This will not necessarily be done by matching individual trades, but by matching overall long and

short portfolio positions. However, there may necessarily be some areas where the Bank will

inevitably take market risk where precise hedging is not possible.

Market risk is managed by limits on market risk capital relating to exchange rate risk and interest rate

risk, in addition to specific limits on notional amount of net open position (foreign exchange). The

dollar value of basis point change, interest rate and stop loss limits are estimated monthly.


Page 10 of 17

Market Risk Exposure

Dec-15

USD'

GBP 1,603,040.4

CNY 460,341.3

EUR 704,523.9

HKD 42,116.9

JPY 60,770.3

SEK 3,828.3

Total 2,874,621.2

Risk Requirement Ratio 8.0%

Foreign currency PRR 229,969.7

Overall market risk exposure and required capital for ABCUK as at 31 December 2015 was:

MARKET RISK ($ '000) Dec-15 Dec-14 % Change

Interest Rate PRR

General Risk (Maturity Method)

Bonds

FX Forward Transactions 95.4 32.0 198.0%

Sub Total 95.4 32.0 198.0%

Foreign Currency PRR

Sub Total 230.0 87.0 164.3%

TOTAL INTEREST RATE PRR 95.4 32.0 198.0%

TOTAL FOREIGN EXCHANGE PRR 230.0 87.0 164.3%

TOTAL MARKET RISK RWA 4,066.7 1,477.0 175.3%

TOTAL MARKET RISK PRR 325.3 118.0 175.7% PRR-Position Risk Requirement

3.3. Liquidity Risk

The Bank defines liquidity risk as the risk that it is unable to meet its obligations as they fall due. As

it does not intend to apply for any liquidity modifications, the Bank will meet the PRA’s requirements

for self-sufficiency.

The Bank has two major sources of funding, intercompany loans from its Parent Bank and interbank

deposits taken both from the London market and from domestic Chinese banks. The intercompany

loans from Parent Bank are repayable on 180 day notice but these are not expected to be called in the

foreseeable future. This provides the Bank with a stable foundation for its liquidity in all market

conditions.

The Bank manages liquidity risk by holding unencumbered HQLA (High Quality Liquid Assets, e.g.

cash, US Treasury bonds and marketable securities) to cover total net cash outflows over a 30-day

period under stress scenarios.


Page 11 of 17

The Bank established a governance structure that ensures that its liquidity position is kept under close

review, principally under the Assets and Liabilities Committee. It has put in place a series of

quantitative limits to define its risk appetite. Liquidity stress testing is periodically carried out to

ensure there is sufficient resources to meet its obligations as they fall due. The Bank has developed a

Contingency Funding Plan which could be activated if its liquidity position deteriorated.

The following is the maturity analysis for financial assets and liabilities held by the Bank as of 31

December 2015.

31/12/2015

Within 1

month 1-3 months 3-12 months 1-5 years over 5 years Non-defined Total

(USD)

Assets

Cash and cash equivalents - - - - - 9,775,672 9,775,672

Placements with banks 192,963,725 - 10,000,000 117,483,358 - -

320,447,083

Derivative financial assets 27,129,485 - - - - - 27,129,485

Loans and advances to banks 20,000,000 185,875,191 75,000,000 - - - 280,875,191

Loans and advances to customers 12,059,457 3,102,281 - 227,276,664 - - 242,438,402

Available-for-sale

financial instruments - 6,000,000 29,588,063 120,005,745 - - 155,593,808

Other financial assets 14,288 1,694,908 644,570 - - - 2,353,766

Financial assets total 252,166,955 196,672,380 115,232,633 464,765,767 - 9,775,672 1,038,613,407

Liabilities

Deposits from banks 45,000,000 60,000,000 680,537,104 98,082,561 - - 883,619,664

Deposits from FI and customers 17,322,193 - - - - - 17,322,193

Derivative financial liabilities 24,758,670 - - - - - 24,758,670

Other financial liabilities 4,288 - 1,402,874 - - - 1,407,162

Financial liabilities total 87,085,151 60,000,000 681,939,978 98,082,561 - - 927,107,689

Net 165,081,804 136,672,380 (566,707,345) 366,683,206 - 9,775,672 111,500,718


Page 12 of 17

The table below analyses the Bank’s non-derivative financial liabilities into relevant maturity

grouping based on the remaining period at the balance sheet date to the contractual maturity date. The

amounts disclosed in the table are the contractual undiscounted cash flows.

31/12/2014

Within 1


(USD)

Assets

Cash and cash equivalents - - - - - 39,485,721 39,485,721

Placements with banks 8,050,000 25,000,000 - 117,483,358 - - 150,533,358

Derivative financial assets 36,649,420 - - - - - 36,649,420

Loans and advances to banks 43,557,142 64,344,782 206,426,069 20,000,000 - - 334,327,993

Loans and advances to customers 99,978,170 81,383,092 158,576,361 159,442,701 - - 499,380,324

Available-for-sale

financial instruments - - 20,950,000 17,295,576 - - 38,245,576

Other financial assets 130,125 483,106 4,925,014 - - - 5,538,245

Financial assets total 188,364,857 171,210,980 390,877,444 314,221,635 - 39,485,721 1,104,160,637

Liabilities


Deposits from FI and customers 26,178,553 - 786,468 - - - 26,965,021

Derivative financial liabilities 27,370,193 - - - - - 27,370,193

Other financial liabilities 911,120 910,820 1,457,266 - - 39,863 3,319,069

Financial liabilities total 64,459,866 49,281,570 780,748,049 103,049,688 - 39,863 997,579,036

Net 123,904,991 121,929,410 (389,870,605) 211,171,947 - 39,445,858 106,581,601

31/12/2015

Within 1


(USD)

Liabilities


Deposits from FI and customers 17,322,561 - - - - - 17,322,561

Other financial liabilities 4,287 - 1,402,875 - - - 1,407,162

Non-derivative financial liabilities total 62,335,590 60,523,538 686,259,754 100,888,028 - - 910,006,910


Page 13 of 17

31/12/2014

Within 1


(USD)

Liabilities


Deposits from FI and customers 26,178,852 - 788,821 - - - 26,967,673

Other financial liabilities 911,120 910,820 1,457,266 - - 39,863 3,319,069

Non-derivative financial liabilities total 37,098,040 49,895,497 788,187,028 107,962,259 - 39,863 983,182,687


Page 14 of 17

3.4. Operational Risk

Operational risk is the risk arising from day-to-day operating activities which may translate into direct

or indirect loss. The risk includes inadequate or failed internal processes, people and systems or from

external events and includes legal risk. The primary operational risk arises from the potential for core

banking system breakdown and the need for the rapid recovery of operational data. Other operational

risks include front and back office errors, fraud, breaches in internal controls and external events,

resulting in financial loss or reputational damage. ABCUK employs the Basic Indicator Approach to

calculate operational risk capital requirement. The Bank manages these risks through appropriate risk

controls and loss mitigation actions. These actions are put in place through the policies, procedures,

contractual business continuity arrangements, training, and risk monitoring and reporting. The Bank

also uses a Risk Map in its operational risk management process.

3.5. Compliance Risk

Compliance risk is the failure to comply with laws, regulations, internal policies & procedures, or

industry standards of best practice, which may result legal and regulatory sanctions, financial loss or

reputational damage to the Bank. Compliance risk is wide ranging and evident in all of the bank’s

activities. A key area of compliance risk for the Bank is Anti-Money Laundering and Combating

Terrorist Financing (AML/CTF) . This risk is increased by the nature of the Bank’s primary business

of providing cross border Trade Finance services to wholesale clients based in high-risk jurisdiction.

In 2015 the Bank has focused on updating its Financial Crime Prevention Policy and the systems and

controls in this area. Further resources have been added to the Compliance Department and the

Corporate Banking Department to enhance ABCUK’s approach to managing AML/CTF.

The Head of Compliance, who reports directly to the CEO, is responsible for managing compliance

and regulatory risk, with challenge from the Non-Executive Directors and Board Committees. As part

of the Bank’s policy framework approach, Compliance policies are approved by the ABCUK Board.

3.6. Conduct Risk

Conduct Risk is the risk that business strategy, operations or conduct of a firm may produce poor

outcomes for customers. Conduct Risk within the Bank can arise as a result of an over aggressive

strategy, or poor management of sales processes and credit assessments or failure to comply with

other regulatory requirements.

Conduct risk is managed throughout the bank with the front line designating customer relationship

mangers to ensure fair treatment of customers. Risk and Compliance provide independent oversight

and guidance.

3.7. Stress Testing and Scenario Analysis

Part of the Bank’s obligation under the overall Pillar 2 rule is to identify the major sources of risk and

carry out stress tests and scenario analyses that are appropriate to the nature, scale and complexity of

those major sources of risk and to the nature, scale and complexity of the Bank business.

A scenario stress test contains simultaneous moves in a number of risk factors, where the Bank

believes that an event may occur in the foreseeable future. A stress test scenario can be based on a

significant market event experienced in the past (a historical scenario) or on a plausible market event

that has not yet happened (a hypothetical scenario).

In a portfolio-driven approach, initially vulnerabilities have been identified. Having determined

http://fshandbook.info/FS/glossary-html/handbook/Glossary/O?definition=G2220






Page 15 of 17

these vulnerabilities, the Bank has worked backwards and formulated plausible scenarios under

which these vulnerabilities are stressed.

In event-driven scenarios, the scenarios have been formulated based on plausible events and how

these events might affect the relevant risk factors affecting the Bank’s activities.

4. Capital Management

4.1. Own Funds

Own Funds (also referred to as capital resources) is the type and level of regulatory capital that must

be held to enable the Bank to absorb losses. The Bank is required to hold own funds in sufficient

quantity and quality in accordance with CRD IV which sets out the characteristics and conditions for

own funds.

The Board has ultimate responsibility for the Bank’s capital management. Day to day responsibility

for capital planning and other aspects of capital management are carried out by the Finance

Department with stress testing and preparation of the Bank’s ICAAP falling within the remit of the

Risk Department. The ALCO is the main body responsible for monitoring all aspects of capital

planning.

During the year ended 31 December 2015 ABCUK complied with the capital requirements. The table

below summarizes the composition of regulatory capital for the ABCUK on a solo unconsolidated

basis as reported as at 31 December 2015.

($ '000) 2015 2014

Core Tier 1 capital 100,000.0 100,000.0

Paid-up shares 0.0 0.0

Share premium account 0.0 0.0

Retained earnings and other reserves 10,519.6 5,693.4

Preference Shares 0.0 0.0

Deduction from Tier 1 Capital 0.0 0.0

Total Core Tier 1 Capital 110,519.6 105,693.4

Tier 2 Capital 0.0 0.0

Subordinated debt 0.0 0.0

Collective provisions 0.0 0.0

Tier 2 Capital after deductions 0.0 0.0

Deductions from total Tier 1 Tier 2 Capital 0.0 0.0

Total Capital Resources 110,519.6 105,693.4

4.2. Internal Capital Adequacy Assessment Process (ICAAP)

ABCUK defines capital as the resources necessary to cover all relevant risks. The ICAAP document


Page 16 of 17

sets out the framework for the Bank's internal governance, and the operation of the risk and capital

management arrangements. In particular the document establishes the internal governance structure

and assurance framework, the risk management framework, the key risk areas that are relevant to

the Bank, the adequacy of Capital Resource and internal capital in relation to the overall risk

profile and hence the Bank’s overall ability to meet its liabilities as they fall due and the way in which

the ICAAP is used in the business.

The PRA has updated ABCUK’s Individual Capital Guidance (ICG) in early 2016. ABCUK calculates

and monitors its capital ratio and Capital Buffers on a regular basis. The results show that the Bank’s

capital remains sufficient to support the Bank’s activities and commitments; the capital well exceeds

the minimum regulatory requirements and remains consistent with the Bank’s strategic and

operational goals.

5. Remuneration Policies

5.1. Remuneration Committee

At ABCUK, Remuneration Committee is one of the Board Committees and which meets regularly to

set the principles and guidelines of remuneration policy, to review the effectiveness of performance

management and reward practices and to ensure compliance with regulatory requirements. The

Committee is responsible for reviewing and agreeing the general reward proposals to promote

effective risk management, preventing the occurrence of conflicts of interest and ensuring fair and

equitable treatment of all employees. The governance of remuneration issues is managed by the

Remuneration Committee and this process ensures the robust oversight of reward practices and

effective management of the need to link reward to the Risk Appetite of the Bank.

The Committee is chaired by an independent Non-Executive Director. Other voting members are the

other independent Non-Executive Directors and the CEO of the Bank.

5.2. Pay Performance

ABCUK Remuneration is based on competitive market rate salaries that compensate employees fairly

in terms of skills offered and responsibilities undertaken. Total remuneration consists of basic salary

plus an annual variable portion reflecting individual performance and contribution, in conjunction

with overall ABCUK performance.

Annual variable performance awards are designed to link business strategy with personal objectives

and performance. This is achieved through the annual appraisal process which is used to identify key

performance indicators and other objectively identified targets.

Oversight is applied to bonus pools and individual awards, which are designed to reflect individual

performance. Total annual compensation levels are reviewed by the Remuneration Committee.

5.3. Material Impact Staff Criteria

Material impact staff (Code staff) categories consist of:

i) senior management and risk-takers ii) staff engaged in control functions

iii) heads of control functions and support functions,

iv) anyone whose professional activities could have an impact on ABCUK’s risk profile.


Page 17 of 17

5.4. Expenditure for Material Impact Staff

For the year ending 31st December 2015, there were 14 identified Code members of staff, as defined

above.

Aggregate expenditure for Code staff was US$3,379,461.

Remuneration expenditure was divided between fixed and variable payments as follows:

Fixed pay - US$3,239,657.

Variable pay - US$139,804.

Documents

Pillar 3 Disclosures - Agricultural Bank of China · 2017-05-08 · ABCUK Pillar 3 Disclosures 2015 Page 1 of 17 It is the policy of Agricultural Bank of China (UK) (herein referred