Banque Cantonale Vaudoise : Basel III Pillar 3 Report - 31 Dec. 2021

Basel III Pillar 3 Report

Market discipline

Basel III Pillar 3 Report at 31 December 2021

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TABLE OF CONTENTS
1.	Objective and scope of this report ..................................................................................	3
1.1	Disclosure policy .........................................................................................................	3
1.2	Scope ..........................................................................................................................	3
2.	Capital adequacy and liquidity........................................................................................	5
2.1	Key ratios ....................................................................................................................	5
2.2	Capital structure ..........................................................................................................	7
2.3	Risk-weighted assets ..................................................................................................	9
3.	Comprehensive risk management approach................................................................	10
3.1	Risk management objectives and governance..........................................................	10
3.2	Risk-taking strategy...................................................................................................	11
3.3	Classification of risks and risk-assessment principles...............................................	12
4.	Credit risk .....................................................................................................................	14
4.1	Credit-risk framework ................................................................................................	14
4.2	Loans and debt securities .........................................................................................	21
4.3	Counterparty credit risk .............................................................................................	38
5.	Market risk ....................................................................................................................	43
5.1	Market risk in the trading book ..................................................................................	43
5.2	Risk on equity securities in the banking book ...........................................................	45
5.3	Interest-rate risk in the banking book ........................................................................	46
5.4	Liquidity risk ..............................................................................................................	54
6.	Operational risk ............................................................................................................	60
6.1	Overview ...................................................................................................................	60
6.2	Compliance risk.........................................................................................................	61
6.3	Security risk...............................................................................................................	62
6.4	Principles governing the Bank's internal control system (ICS)..................................	62
7.	Climate-related risk.......................................................................................................	64
8.	Appendix.......................................................................................................................	68
8.1	Reconciliation of financial statements and regulatory exposure ...............................	69
8.2	Leverage ratio ...........................................................................................................	75
8.3	Disclosure map, analytical classifications, and abbreviations ...................................	77
8.4	Parent-company disclosures.....................................................................................	85

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1. OBJECTIVE AND SCOPE OF THIS REPORT

The objective of this report is to provide in-depth information on risk management at BCV Group to investors, analysts, ratings agencies and supervisory bodies. In particular, it describes the Bank's capital adequacy, its risk-assessment methods and the level of risk taken at BCV. This document was prepared in accordance with the Pillar 3 disclosure requirements set forth under the Basel III Accord, together with Circular 2016/1 "Disclosure - banks" published by the Swiss Financial Market Supervisory Authority (FINMA).1

1.1 Disclosure policy

For ease of access, this report is available in the investor relations section of BCV's website. It has been updated on a half-yearly basis ever since BCV became subject to Basel II on 1 January 2009. It is published within two months following the end of the first half of the financial year and within four months following the end of the financial year, in accordance with Swiss regulations (FINMA Circular 2016/1, margin number 40).

This version of the report corresponds to the closing of accounts on 31 December 2021.2 The description of the Bank's governance, methods, and processes reflects the situation at 31 December 2021; subsequent changes are not included.

The Bank's external auditor verifies, as a general rule every three years, compliance with financial disclosure requirements based on FINMA Circular 2013/3 "Auditing," and states its opinion in its detailed audit report. The data contained in the Bank's Pillar 3 reports are calculated in accordance with the Basel III Accord regulatory capital requirements. This calculation process was audited during FINMA's IRB approval process and is subject to oversight as part of the regulatory supervision process. Furthermore, BCV's Internal Audit Department periodically reviews the process for calculating capital requirements (Basel III Accord, §443).

The appendix to this report contains information that is useful for understanding this document, including a description of business segments and a list of abbreviations.

The figures contained in the tables have each been properly rounded depending on the number of significant digits used for the table; this may result in discrepancies between listed column and row totals and the sum of individual column or row items.

1.2 Scope

The parent company within BCV Group is Banque Cantonale Vaudoise, a corporation organized under public law with its headquarters in Lausanne. The parent company has a branch in Guernsey.

The companies that the Group is required to include in its regulatory reporting include companies over which BCV has control and companies in which it has significant influence over operations. These companies are fully consolidated. Significant influence is generally recognized by the Bank when it makes a profit from or bears the risks of a company's operations.

Companies in which BCV has significant influence but no outright control (holdings of 20%-50%) are accounted for using the equity method.

1The correspondence between the tables in this Pillar 3 report and those in the Basel Accord is given in the Appendix (Section 8.3.1).

2End-June figures are taken from BCV's interim financial statements, which are not audited by an independent auditor.

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The following companies are not included in the scope of consolidation:

• Holdings of no material significance in terms of financial reporting and risk;
• Significant holdings not held for strategic purposes and intended to be sold or liquidated within 12 months.

Table 1. Group companies included in the regulatory scope of consolidation At 31 December 2021, BCV Group

		Capital	Shareholding
Group companies included in the supervisory review	in millions	(%)
Private banks
Piguet Galland & Cie SA, Yverdon-les-Bains (Switzerland)	CHF	24.4	99.7
Fund-management companies
Gérifonds SA, Lausanne (Switzerland)	CHF	2.9	100.0
Gérifonds (Luxembourg) SA, Luxembourg	EUR	0.1	100.0
Société pour la gestion de placements collectifs GEP SA,	CHF	1.5	100.0
Lausanne (Switzerland)

The regulatory scope of consolidation did not change in 2021.

Companies taken into account for calculating capital requirements are the same as those included in the Group's consolidated accounts. All these companies are fully consolidated in the financial statements. No company is currently accounted for using the equity method. The Group has no subsidiaries in the field of insurance.

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2. CAPITAL ADEQUACY AND LIQUIDITY

Monitoring capital adequacy and liquidity is a key component of BCV's financial strategy. Management carefully considers the potential impact on the Bank's capital and liquidity ratios before making any major decisions about the Bank's operations and the orientation of its business.

The Executive Board monitors the capital and liquidity ratios monthly for the parent company. Both the Executive Board and the Board of Directors monitor these ratios every quarter for the parent company and every six months for the Group as a whole. FINMA monitors the parent company's capital adequacy and liquidity each quarter and the Group's capital adequacy and liquidity every six months using regulatory-required reports.

2.1 Key ratios

FINMA's capital ratio requirement3 is based on the Basel III Accord and is set forth in Article 41 of the Capital Adequacy Ordinance (CAO). The minimum required total capital ratio for BCV was 13.0% at 31 December 2021. It comprises the permanent requirement for a category 3 bank (12%) and an additional capital requirement (1%). The permanent requirement consists of the absolute minimum requirement for a banking license (8%) and the capital buffer for a category 3 bank (4.0%). The additional capital requirement is a temporary requirement set by FINMA in light of the extremely low interest rates. Given those low rates, and BCV's interest-rate-risk exposure as determined by FINMA, FINMA has set an additional capital requirement of 1% for BCV.

BCV Group's total capital ratio was 17.3% at 31 December 2021, higher than the regulatory requirement of 13.0%. The Bank's Common Equity Tier 1 (CET1) ratio was 17.2%, also above FINMA's requirement of 8.8%. The difference between the Bank's total capital ratio and CET1 ratio is due to the fact that its Tier 2 capital comprises reserves on debt and equity securities carried under financial investments and stated at lower of cost or market, subject to a limit of 45% of unrealized gains.

The leverage ratio4 was 5.6% at 31 December 2021 (see tables in Section 8.2). This ratio is above the regulatory requirement of 3% effective as of 1 January 2018.

BCV Group's liquidity coverage ratio (LCR) was an average of 157% in the second half of 2021, above the minimum regulatory requirement of 100% (see Section 5.4).

BCV Group's net stable funding ratio (NSFR) was 125% at 31 December 2021, above the minimum regulatory requirement of 100% in force since 1 July 2021 (see Section 5.4).

3The capital ratio is equal to regulatory capital divided by risk-weighted assets.

4The leverage ratio is equal to Tier 1 capital divided by the total exposure measure.

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