To ensure good risk management, Norion Bank has devised an operational structure based on three lines of defence. The purpose of this organization is to clarify roles and responsibilities within risk and compliance. The model differentiates between functions that own and manage risk and compliance (the first line of defence), functions that monitor these (the second line of defence) and functions are responsible for independent review and supervision (the third line of defence). 

Through its operations, Norion Bank is exposed to various kinds of material risks that must be managed, primarily credit risk, market risk (currency risk and exchange rate risk), operational risk, liquidity and financing risk and business risk. 

Credit risk 

Credit risk refers to the risk that Norion Bank does not receive payment as agreed and/or makes a loss due to the inability of a counterparty to fulfil its obligations. Credit risk also includes a credit-related concentration risk, referring to the risk stemming from large individual exposures or significant exposures to groups of counterparties for which the probability of default is driven by reliance on a common underlying factor, such as a sector or geographic area. Credit risk primarily arises through the lending operations and the financing solutions offered by Norion Bank to private individuals and companies. Credit exposures to private individuals are chiefly attributable to Norion Banks personal loans, credit cards and payment solutions for e-commerce and stores. Norion Banks factoring, corporate lending and property financing give rise to credit exposures towards companies. 

Credit risk is managed at Group level through an established credit policy and set of instructions. These governance documents cover all of Norion Banks credit exposures toward private individuals and companies. The credit process assumes that all credits provided are based on credit analyses and are proportionate to the customer’s repayment ability. Norion Banks applies specifically designed credit assessment procedures with adapted credit analyses and scoring templates depending on product, credit amount and country. Norin Banks credit department actively monitors the development in each credit portfolio, based on identified risk factors. All in all, Norion Bank has a well-diversified, well-balanced credit portfolio. Diversification within and between sectors and lending segments is strived for and contributes to limited credit-related concentration risks.

Market risk 

Market risk includes interest rate risk, currency risk and other price risks and refers to the risk that Norion Banks earnings, equity or value is reduced as a result of changes in the general interest rate situation, exchange rates and/or other price changes. Norion Bank is exposed to currency risk, as some of its assets and liabilities are reported in currencies other than the functional currency. Interest rate risk rises through customers requesting different fixed interest periods on deposits and loans. 

The framework that governs how Norion Bank manages market risks is documented in the company’s Finance Policy Collector uses currency derivatives to reduce currency risk, and regular monitoring is carried out to ensure minimized risk exposure. Norion Bank mainly offers variable interest rates on loans and deposits, thereby limiting interest rate risk. Any loans and deposits that are subject to fixed interest periods have relatively short maturities, resulting in good maturity matching for fixed interest periods. 

Operational risk 

Operational risk relates to the risk of losses resulting from errors or inadequacies in internal procedures and processes, human error or defective systems. External events and legal risks are also included in the definition of operational risk. Operational risk is a natural part of all operations, and it is neither possible nor cost effective to fully eliminate all operational risks. 

Norion Bank continuously strives to minimize operational losses, using the internal rules for the management of operational risk as its starting point. Norion Bank strives to achieve a structured and proactive manner of working with risk analyses and risk-reducing measures. To facilitate the work on identifying, evaluating and assessing operational risks, Norion Bank regularly reports and follows up on incidents, self-assessments and various risk indicators. Nevertheless, if the operations should be seriously disrupted, continuity and recovery plans have been put in place to handle the incident as quickly as possible and to minimize its effects. 

Liquidity and funding risk 

Liquidity and funding risk refers to the risk of not being able to honour payment obligations on their maturity dates. Liquidity and funding risk can also be expressed as a lack of funding on reasonable terms and conditions. A liquidity risk arises if Norion Bank cannot borrow the funds required at a reasonable cost or dispose of assets at a reasonable price. 

Norion Banks primary source of funding is deposits from the public, which is a relatively stable source of funding from a behavioural perspective. Norion Banks management of liquidity and funding issues is based on an established Finance Policy. To maintain sufficient liquidity, Norion Bank has a liquidity reserve and both short- and long-term loan programmes. Norion Bank monitors the liquidity situation continuously and uses various limits and stress tests to ensure that the liquidity reserve remains satisfactory with regard to the amount and the composition required to satisfy future liquidity requirements. 

Business risk 

Business risk refers to the risk of reduced earnings due to changes in volumes or interest margins or other price changes. Business risk may arise due to factors in the external business environment, such as changes in the competitive environment, customer behaviour or technological developments. 

Norion Bank prepares three-year plans to see how a change in the current situation may affect the following three years, and a financial forecast is prepared at least once per year and revised as necessary. These forecasts are used as a basis for preparing sales targets, and any deviations are followed up regularly over the year. Norion Bank is of the view that there is sufficient stability in the generation of income and good cost control The operations conducted are well-diversified and the financial results are not entirely dependent on a specific product or a single business area. The business risk is illustrated in a comprehensive way by the fluctuations in the income statement arising in regularly conducted scenario simulations and stress tests.