Risk management under Basel II and Pillar III disclosure

6. Stress testing

Stress testing is an integral part of risk management and, as such, is mandatory under the Basel Agreement. Within Pillar II stress testing is obligatory to assess the effect on capital of all types of risk to which the bank is exposed. If the outcome of an extreme but in any way probable stress scenario exceeds the actual capital, it means that BinckBank's risk appetite is exceeded and appropriate action has to be taken, in the form of risk-mitigating measures such as policy changes or insurance or by lowering the risk profile of its existing activities.

BinckBank performs regular stress tests on:

• credit risk:
  -   global recession: reduced creditworthiness of all counterparties
  -   falling stock markets: extreme loss of collateral value in the form of
      securities
  -   concentration risk: extreme falls in price of stocks in which investment
      is disproportionate
• operational risk:
  -   system failure
  -   authorisation errors
  -   extreme external events (natural disasters, terrorism etc.)
  -   operational failure
• business risk: sharply narrower margins and lower number of transactions, taking into account the effect of a possible impairment loss on Alex
• interest-rate risk: prescribed testing for a sudden change in interest rates of 200 basis points and a sudden change in interest rates based on historical data
• liquidity risk: negative publicity for BinckBank, causing a run on the bank

BinckBank's stress tests for credit risk can be performed at the same time, but the operational risk scenarios already include an accumulation of the same events which could be double-counted if summed for the maximum scenario. The same applies to interest-rate risk.

The figure below shows no additional capital requirement for business risk. The stress test for business risk indicates that BinckBank continues to generate a positive cash flow before impairment for the stress scenarios tested. The impairment test on the goodwill and intangible assets relating to the acquisition of Alex depresses the reported profit but does not reduce BinckBank's own funds in accordance with De Nederlandsche Bank's requirements.

The capital requirement for the maximum stress scenario is € 34.7 million, which is well within the actual capital of € 77.3 million.