The Company aims to be risk aware and to actively manage its risks. The critical activities carried out by the organisation and the reliance on its good reputation mean that there is a strong emphasis on an appropriate range of controls.

The SBCI aims to manage risks in an informed and proactive manner, in accordance with its risk appetite, such that the level of risk is consistent with the underlying business activity and the SBCI understands and is able to manage or absorb the impact of the risk in the event that it materialises.

The principal risk categories identified and managed by the Company in its day-to-day business and which potentially have the greatest impact on the financial statements of the Company are credit risk, liquidity risk and market risk.

Risk Management Policy and Framework

The Board is responsible for setting the risk appetite and overseeing and guiding risk management activity across the SBCI. The Board has mandated that risk management be integrated and embedded into the tone and culture of the SBCI.

The Audit and Risk Committee is responsible for overseeing the implementation of the SBCI Risk Management Policy and Framework. The Audit and Risk Committee seeks to ensure that the SBCI’s risk management governance model provides appropriate levels of independence and challenge. The Audit and Risk Committee reports to the Board independently.

The SBCI’s Risk Management Policy and Framework is in accordance with the principles of the Code of Practice for the Governance of State Bodies 2009.

The SBCI relies on the services provided by the NTMA for certain elements of risk management, namely:

• business continuity management;
• compliance and legal services;
• counterparty credit risk management for cash management purposes;
• internal audit services.

First line of defence:

The SBCI management is responsible for the day-to-day management of risk and for ensuring that adequate controls are in place and operating effectively. Management will report on risk management to the Audit and Risk Committee. The following are the key steps used in the risk management process:

• Identify all risks that may affect/prevent the SBCI from achieving the objectives established by the Board and management, (taking into consideration any historical events/near misses which may have threatened the achievement of such objectives);
• For each risk, determine its initial impact and its probability of occurrence;
• For each risk, determine whether the risk can be accepted or will need to be transferred, reduced or avoided;
• For each risk, regardless of its impact or probability of occurrence, consider actions to reduce risk;
• Review residual impact/probability of occurrence and criticality status of the risk in light of the implemented actions/controls/mitigants;
• Review and monitor mitigating actions on an on-going basis.

Second line of defence:

The SBCI Risk function and the NTMA Compliance function, in respect of specific areas of responsibility, provide independent challenge and oversight to ensure implementation of the SBCI Risk Management Policy and Framework.

Third line of defence:

Internal Audit is the third line of defence and provides independent, reasonable, risk based assurance on the robustness of the SBCI’s risk management system, governance and the design and operating effectiveness of the internal control environment.

13.1 Credit risk

Credit risk is the risk of incurring financial loss as a result of default or credit migration of a counterparty to a particular transaction. In order to achieve its key objectives and fulfil its mandate, the SBCI must assume a certain level of credit risk.

As a fundamental principle, the SBCI will seek to do so in a prudent manner that assumes the minimum level of credit risk required to achieve its objectives, which is in line with the SBCI’s Risk Appetite Statement. Credit risk arises from the potential failure of an on-lender to fulfil its contractual obligations to the Company. The SBCI’s main credit risk arises from the performance of its on-lenders.

Credit risk is the most important risk to the Company’s business. The Company, therefore, carefully manages its exposure to credit risk. Credit risk is measured, assessed and controlled for all transactions or credit events entered into by the Company.

The SBCI endeavours to minimise its credit risk exposure by undertaking an extensive due diligence process in advance of any lending decisions. The Company’s credit risk management process includes the following:

• thorough assessment of each prospective on-lender, its management, operational capability, credit underwriting experience, financial performance, risk management, systems, product offering and repayment capacity;
• on-site visits and face to face meetings with management;
• assessment of the financial performance of the prospective on-lender by reference to available information, including audited accounts, management accounts and financial projections;
• independent commercial due diligence in respect of non-bank finance providers;
• independent legal due diligence;
• analysis of the on-lender’s repayment capacity, including clear and reasonable demonstration of the on-lender’s ability to meet its obligations and discharge the SBCI debt in full;
• independent risk review and sign off by the SBCI Head of Risk of each potential on-lender;
• obtaining adequate collateral in respect of loans (where appropriate), including fixed or floating charge security over assets of the on-lender;
• all credit decisions reserved to the Board, or appropriate committees of the Board;
• on-going monitoring and review of credit facilities;
• regular review of compliance with the respective covenants and undertakings and any terms and conditions imposed by the SBCI;
• formal on-lender review process which is carried out, at a minimum, on an annual basis on each approved on-lender;
• assessment of collateral requirements in the context of a number of factors including the financial strength of the on-lender.

The maximum exposure to credit risk for financial assets with credit risk at 31 December 2016 is €928.9m (2015: €872.2m). This maximum exposure to credit risk is presented by class of financial instrument below and also includes the loan commitments of the Company at financial year end:

	2016 €000	2015 €000
Loans and receivables	656,444	235,603
Cash and cash equivalents	21,544	120,642
	677,988	356,245
Loan commitments	251,000	516,000
	928,988	872,245

The below table sets out the credit quality of the financial assets of the Company. The analysis has been based on Standard & Poor’s ratings where applicable.

	2016 €000	2015 €000
AAA	-	114,999
A+	21,544	-
A	-	5,643
BBB- to BB+	601,328	235,603
Non-rated	55,116	-
	677,988	356,245

13.2 Liquidity risk

Liquidity risk is the risk that the Company is unable to meet all of its financial obligations as and when they fall due. It is the risk of loss arising from a situation where there will not be enough cash to fund day to day operations.

The Company’s liquidity risk management process includes:

• Adherence to the SBCI Liquidity and Market Risk Management Policy and associated limits;
• Management of day-to-day funding including the monitoring of future expected cash flows, e.g. future lending commitments, to ensure that requirements can be met as they fall due;
• Asset and liability management by monitoring the maturity profile within the Company’s Statement of Financial Position to ensure that sufficient cash resources are retained and or funding established where mismatches are likely to occur, thereby minimising the impact of liquidity outflows;
• Managing its liquidity risk by aligning, to the greatest extent possible, the maturity profile of its assets and liabilities thereby eliminating refinancing risk where possible. The SBCI sources long-term floating rate funding from its funders, and where possible it structures the tenor and repayment schedule of its loans to reflect that funding maturity profile;
• Maintaining a cash liquidity buffer to address any short-term liquidity needs that may arise.

The timing of the contractual repayments due by the Company are summarised in the below table. The amounts presented are undiscounted. Other liabilities of €14.3m (2015: €428k) (See Note 17) are also included. Amounts payable “no later than 1 year” consist of accrued interest and other liabilities, amounts payable “greater than 1 year” consist of principal loan repayments to funders.

13.3 (a) Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises two types of risk: interest rate risk and currency risk. Market risks arise from open positions in interest rate products which are exposed to general and specific market movements, and changes in the level of volatility of interest rates. The SBCI manages its market risk in accordance with the SBCI Liquidity and Market Risk Management Policy and associated limits.

Interest rate risk

The Company is exposed to interest rate risk on its loans and receivables and cash and cash equivalents. Where possible, the SBCI’s lending facilities reflect the interest rate risk profile of the underlying funding agreements in order to minimise incidents of material interest rate mismatches. Any residual risk will be identified, monitored and managed by the SBCI.

Given that the SBCI’s current risk profile for both funding and on-lending is on a six month floating rate basis, its interest rate risk exposure is limited. Any mismatches that arise are largely offset as interest rates are re-fixed. In the event of a large re-fixing mismatch or where the basis of the fixings are not matched, the SBCI will seek to hedge these positions.

The amounts exposed to interest rate risk at 31 December 2016 are detailed below:

	2016 €000	2015 €000
Financial assets
Cash and cash equivalents	21,544	120,642
Loans and receivables	656,444	235,603
	677,988	356,245
	2016 €000	2015 €000
Financial liabilities
Funding and borrowings	660,122	350,148

Currency risk

The SBCI is not directly exposed to currency risk, as all of its funding and lending activities are denominated in euro.

13.3 (b) Market risk measurement

Interest rate risk sensitivity

Information provided by the sensitivity analysis below does not necessarily represent the actual change in fair value that the Company would incur under normal market conditions because, due to practical limitations, all variables other than the specific market risk factor are held constant.

The following table represents the interest rate sensitivity arising from a 50 basis point increase or decrease in the interest rate. The risk is measured as the net present value (NPV) impact on the cash flows of the loans receivable and payable as a result of that change in interest rates. The interest rates are set as at 31 December 2016.

Interest Rate Sensitivity Analysis - a 50bp move

2016	+50bp €000	-50bp €000
Net cashflow impact	(520)	779
2015	+50bp €000	-50bp €000
Net cashflow impact	225	(659)

The interest rate sensitivities are not symmetric due to a number of factors including the maturity profile of the portfolio and the interest payment dates of the loans. The maturity profile of the portfolio is actively managed and will vary over time.

13.4 Capital management

The Company is not subject to externally imposed capital requirements. The Company is committed to ensuring it is adequately capitalised as there is a risk that inappropriate management of the Company’s capital will result in it being unable to absorb any potential credit losses. The SBCI’s paid-up share capital as at 31st December 2016 is €10m, which was provided by the SBCI’s sole shareholder, the Minister for Finance. In addition, the SBCI had available callable capital of €240m which it may call on at its discretion from the Minister for Finance, as provided for in the SBCI Act 2014. During December 2016, the Company informed the Minister for Finance that it required the Minister for Finance to subscribe for an additional €25m equity capital. The Minister for Finance subscribed for additional shares with a value of €25m in February 2017 (see Note 25).

The Company’s capital risk management process includes adhering to the capital adequacy requirements of the SBCI Risk Appetite Statement to ensure it remains adequately capitalised to absorb any potential losses. The Board reviews the capital adequacy as part of its regular review of risk reporting at each scheduled Board meeting.

13.5 Credit Guarantee Scheme

On 13th October 2016, the SBCI assumed the role of operator and manager of all schemes created under the Credit Guarantees Acts 2012 and 2016 on behalf of the Minister for JEI. The SBCI has no credit risk exposure to the credit guarantees issued under these Schemes. The SBCI’s role is solely administrative in nature, and the SBCI manages the operational risk arising from the processing of payments and claims under its internal processes and procedures.

13.6 Concentration risk

Concentration risk is the risk that the Company is exposed to any single exposure or group of exposures that has the potential to produce losses large enough to threaten the ability of the Company to continue operating as a going concern.

The Company manages this risk by adhering to the limits set out in the Risk Appetite Statement which has been approved by the Board and which is subject to regular review by the Board. The Risk Appetite Statement defines the maximum amounts of credit facilities to be committed to certain categories of borrower, both in absolute terms and also relative to the SBCI’s overall committed credit facilities. The Risk Appetite Statement also addresses the concentration risk among the SBCI’s funders by defining the maximum concentration permitted in terms of exposure to any one funder.

The measures are intended to ensure that the risk profile of the overall portfolio is appropriately diversified, and not unduly exposed to excessive concentration of risk.

The Company’s key geographic concentration of risk assets is in Ireland, and the key sectoral concentration of risk is to financial and non-financial institutions, arising from its statutory mandate to make credit available to entities and persons in the State, as set out in the SBCI Act 2014. The Company’s geographic concentration risk exposure from its loans and receivables is €656.4 million (2015: €235.6m).

The Company’s key concentrations of liabilities are to Irish and European funders.

< NOTE 12

NOTE 14 >