Disclosure Report According to 26a of the German Banking Act (KWG) and the German Solvency Ordinance (SolvV) as at 31 December 2008

Transcription

1 Disclosure Report According to 26a of the German Banking Act (KWG) and the German Solvency Ordinance (SolvV) as at 31 December 2008

2 2 Disclosure Report 2008

3 Contents 1 Preamble 4 2 Application 5 3 Risk Management Risk Management Strategies and Processes Risk Management Structure and Organisation Hedging and Mitigation Risk Reporting Types of Risk Credit Risk Investment Risk Market Price Risk Liquidity Risk Operational Risk 10 4 Capital Structure and Adequacy Capital Structure Capital Adequacy Approaches for Ascertaining Capital Requirements Capital Requirements per Risk Type Capital Ratios Risk-Bearing Capacity Security Mechanisms at Association Level 18 5 Disclosures on Risk Types Credit Risk Credit Risk Management Credit Portfolio Structure Risk Provisions Information on IRBA Exposures Information on Standard Risk-Weighted CRSA and IRBA Exposures Derivative Counterparty Default Risk Positions and Netting Positions Credit Risk Mitigation Techniques Securitisations Investment Risk Investment Risk Management Quantitative Information on Investment Risk Market Price Risk Market Price Risk Management Quantitative Information on Market Price Risk Special Information on the Interest Rates Risk in the Banking Book Liquidity Risk Liquidity Risk Management Quantitative Information on Liquidity Risk Operational Risk Operational Risk Management Quantitative Information on Operational Risk 55 Schedule of Tables 56 Schedule of Abbreviations 57 3

4 1 Preamble 4 The German Solvency Ordinance (SolvV) entered into force on 1 January This regulation spells out the regulations governing the capital adequacy of institutes, groups of institutions and financial holding groups demanded by 10 of the German Banking Act (KWG) and supersedes the previous Principle I. The Solvency Ordinance transposes the European standards prescribed in the Banking Directive and the Capital Adequacy Directive into national law. The European standards in turn are based on the international Basel II set of regulations issued by the Basel Committee on Banking Supervision. Requirements relating to the regular disclosure of qualitative and quantitative information to enhance market discipline are defined in Pillar III of Basel II. The aim is to create transparency as to the risks entered into by the institutes. Pillar III thus supplements the minimum capital requirements of Pillar I and the supervisory review process of Pillar II. In Germany, the disclosure requirements were generally implemented in the revised 26a of the German Banking Act. These requirements were spelled out in Part 5 of the Solvency Ordinance in 319 to 337. This report as at 31 December 2008 constitutes the first-time disclosure of qualitative and quantitative information in accordance with the Solvency Ordinance by Norddeutsche Landesbank Girozentrale, Hanover, (NORD/LB) as the superordinate institute in the NORD/LB Group for the regulatory group. In 2007 the bank utilised the interim provision pursuant to 339 Paragraph 9 of the Solvency Ordinance, and thus applied the regulations pertaining to Principle I. Disclosure in accordance with the Solvency Ordinance is generally aligned towards a group approach. This means that member companies in the Group are not obliged to disclose such information separately. The disclosure report is an auxiliary document supplementing the Annual Report of the NORD/LB Group prepared on the basis of International Financial Reporting Standards (IFRSs) and the individual annual reports of Group member institutes prepared on the basis of the German Commercial Code (HGB). Norddeutsche Landesbank Luxembourg S.A. is an exception in this case since the bank prepares its annual financial statements in accordance with IFRSs. Information on equity is disclosed on the one hand, while on the other hand significant risks and the corresponding system of risk management as well as methods of risk control are described. The NORD/LB Group currently considers the risk of counterparty default (credit risk and investment risk), market price risk, liquidity risk and operational risk to be significant. Quantitative information contained in this report is based on the German Commercial Code which currently constitutes the basis for preparing regulatory reports in accordance with the Solvency Ordinance in the NORD/LB Group. Norddeutsche Landesbank Luxembourg S.A., is an exception in this case too, since its quantitative information is based on Lux GAAP (information on equity) or on IFRSs. For further information about risk beyond regulatory Solvency Ordinance requirements, this report contains a few references to the risk report which is part of the NORD/LB Group s management report. In accordance with 320 Paragraph 1 of the Solvency Ordinance, this disclosure report is published in the Investor Relations/Reports section of the NORD/LB website. Publication of the report was announced in the electronic German Federal Register ( in accordance with 320 Paragraph 2 of the Solvency Ordinance.

5 Application 2 Application Solvency Ordinance requirements bourg), and Deutsche Hypotheken- In accordance with 323 Paragraph 1 for disclosure refer to regulatory bank (Actien-Gesellschaft), Hanover No. 2 of the Solvency Ordinance, groups of institutes in accordance (Deutsche Hypo), are included in Table 1 contains an overview of the with 10a of the German Banking this report as significant Group insti- regulatory group of significant insti- Act. However, in terms of risk tutes. Qualitative and quantitative tutes included in the NORD/LB Group aspects, only significant entities in information thus all refers to this and information on how they are the group of institutes are included regulatory basis of consolidation. treated in the IFRS basis of consoli- in disclosure. The institutes are Particularities of the individual Group dation. selected on the basis of a concept institutes are explicitly stated. of materiality which is regularly reviewed so that changes in the From the point of view of the entire regulatory group are taken into Group, the other institutes account account for disclosure purposes. for an insignificant quantitative proportion of individual risk. The Based on this concept, NORD/LB, group of significant Group institutes Bremer Landesbank Kreditanstalt is at present identical with the group Oldenburg Girozentrale, Bremen of significant institutes in the IFRS (Bremer Landesbank), Norddeutsche basis of consolidation. Group is Landesbank Luxembourg S. A., hence the term used below to refer Luxembourg (NORD/LB Luxem- to both the regulatory group and 5 the group according to IFRSs. Table 1: Consolidation matrix for the NORD/LB Group Regulatory treatment IFRS consolidation Type of institute Name Consolidation Full Proportionate Deduction method Riskweighted investments Full Measured using equity method Bank (parent company) Norddeutsche Landesbank Girozentrale Bank Bremer Landesbank Kreditanstalt Oldenburg Girozentrale Bank Norddeutsche Landesbank Luxembourg S.A. Bank Deutsche Hypothekenbank (Actien-Gesellschaft)

6 The independent market image NORD/LB Luxembourg sees itself measured using the equity method. of the four significant Group insti- as an exclusive partner for private 56 entities included in the regula- tutes highlights the focus on their investors focussing on interna- tory basis of consolidation are not own products and regions while, tional investments; the bank is consolidated according to IFRSs. at the same time, the close ties a modern business with an estab- within the Group constitute a lished corporate culture and the A complete list of equity holdings significant success factor. Below is tact essential for providing per- in accordance with 313 Para- a description of each institute. sonal consulting services. NORD/LB graph 2 of the German Commercial has a 100 per cent shareholding in Code is published in the electronic NORD/LB is a registered public NORD/LB Luxembourg. German Federal Register institute (AöR) in Germany, with ( registered offices in Hanover, Deutsche Hypo, which has been Braunschweig and Magdeburg. Its listed on the stock exchange Insignificant Group institutes head office is in Hanover. NORD/LB since 1900, is a well-positioned from a risk aspect result in differ- is the Landesbank for the federal mortgage bank with a rising ences between the figures in the states of Lower Saxony and Sax- volume of commercial real estate disclosure report and those in the ony-anhalt. In these two federal business. The bank has more than Annual Report of the NORD/LB states and in Mecklenburg-West- 300 employees at five domestic Group. Differences may also occur ern Pomerania the bank performs locations and branches in Amster- because German Commercial Code the functions of a central and dam, London, Madrid and Paris. figures are used in the disclosure clearing bank for the savings banks NORD/LB holds all the share capital report and IFRS figures in the (Girozentrale). NORD/LB operates and the voting rights of Deutsche consolidated financial statements 6 in the business segments of the Hypo. and because other effects of con- savings bank network, private and solidation are not included. commercial customers, corporate In addition to the four significant customers, structured finance institutes in the NORD/LB Group In the NORD/LB Group there are (comprising real estate finance, stated above, the basis of consoli- currently no limitations or other ship and aircraft finance and dation under regulatory law and significant restrictions on the structured finance) and financial IFRSs comprises another 112 transfer of funds or liable equity in markets (comprising institutional insignificant entities from a risk accordance with 323 Paragraph 1 customers/sales, capital markets, point of view in which NORD/LB No. 3 of the Solvency Ordinance. treasury and asset/liability holds direct and indirect partici- management). pating interests. These include There are no exceptions in the eleven banks, a financial services NORD/LB Group relating to com- Bremer Landesbank is the largest institution, 56 financial enterprises, pliance with specific Banking Act regional bank between the Ems two insurance companies and provisions for subsidiary Group and Elbe rivers. It assumes the 42 other entities. member institutes defined in the roles of Landesbank, central bank waiver regulation in 2a of the for savings banks and commercial Of these institutes, 24 are fully Banking Act, for example instruc- bank. Bremer Landesbank is consolidated under regulatory law, tions concerning equity, large- owned by NORD/LB, which holds 37 are subject to the deduction scale loans and internal control 92.5 per cent of the share capital, method and 19 are exempted from systems according to 25a Para- and the federal state of Bremen inclusion in the Group report in graph 1 of the Banking Act. with a 7.5 per cent shareholding. accordance with 31 Paragraph 3 of the German Banking Act. 32 There were no subsidiaries in the NORD/LB Luxembourg was founded entities included in the IFRS basis NORD/LB Group which are subject in 1972 as an independent public of consolidation are not consoli- to the deduction method and limited enterprise under Luxem- dated under regulatory provisions. report insufficient capital in accor- bourg law. Since 1975 the bank has 37 companies are fully consolidated dance with 323 Paragraph 2 of been a full subsidiary of NORD/LB. according to IFRSs and 19 are the Solvency Ordinance.

7 Risk Management 3 Risk Management 3.1 Risk Management Strategies and Processes focus here is on credit risk, reflecting the strategic focus of the NORD/LB Group on customer-oriented lending This provides the significant Group companies with instruments essential for controlling, monitoring and business. The Group risk strategy was communicating risks at operative The business activities of a bank revised in 2008 and discussed with level. These instruments, all of them inevitably involve undertaking risks. the supervisory bodies after it had standardised throughout the Group, From a business point of view, the been passed by the Managing Board. are each described in detail in a risk NORD/LB Group defines risk as being manual or in corresponding docu- potential direct or indirect financial The risk strategies of the significant mentation. The NORD/LB risk manual losses due to unexpected negative companies in the Group are in each serves as a guideline for the entire differences between the actual case defined in accordance with Group. and projected results of business the business model, the business activities. Identifying, analysing, strategy and the provisions of the The NORD/LB Group has imple- measuring, monitoring, managing Group risk strategy policy and are mented a risk organisation system and reporting these risks are funda- reviewed at least once a year. They that complies with the risk policies mental to the sustained success contain information on risk policy, on embedded in the risk strategies of of an enterprise. the organisation of the risk manage- the principal institutes. The risk ment process and on sub-strategies organisation comprises structures to The framework for structuring this for risks relating to significant bank- guarantee the regulated interaction risk management process is specified ing risks. Amendments to the busi- of all the divisions involved in the 7 for banks and groups of banks in ness or risk strategies are resolved process of risk control. Furthermore, the Minimum Requirements for Risk by the respective director and are efficient risk processes with clearly Management (MaRisk) on the basis discussed in the supervisory bodies. defined tasks and authorities ensure of 25a of the German Banking Act. smooth procedures backed up In accordance with these require- Risk strategies aim at achieving an by an adequate IT infrastructure and ments, proper business organisation optimal method of controlling and qualified employees. An effective includes defining strategies on the monitoring all the relevant types of internal control and monitoring basis of procedures for ascertaining risk and a transparent presentation system ensures compliance. The and securing risk-bearing capacity, of these risks to the management, aim is to consistently optimise the which comprises both risks and the the supervisory bodies and other risk organisation and to adapt it to capital available for covering these third parties with a justified interest. current requirements. risks. They form the basis for risk control and roughly comprise the measures The risk strategies of the significant The risk policy of the NORD/LB Group and instruments described in more institutes in the NORD/LB Group is characterised by a responsible detail in the risk manual. comprise standard principles con- handling of risk. The Group risk strat- cerning structures and processes in egy, drafted with this in mind, over- On the basis of a standard risk- risk management and control which rides the risk strategies of the signifi- bearing capacity model for the entire have been laid down for the entire cant companies in the NORD/LB Group, risk strategies, which are Group. Group. Its core element is the risk- based on the current situation and bearing capacity model, on the basis take into account the scheduled busi- of which willingness to take risk is ness operation, focus on securing specified and risk capital is allocated the risk-bearing capacity of the indi- to the significant types of risk. The vidual companies and of the Group in future.

8 The NORD/LB Group has implemented cross-division risk control processes. The sub-processes apply 3.2 Risk Management Structure and Organisation monitoring system. The aims of internal auditing also include contributing towards securing the effectiveness, to all types of risk: economic viability and orderliness of Responsibility for risk control in business activities conducted. It also Risk identification: identification the NORD/LB Group lies with the facilitates the optimisation of busi- and classification of risks taken Managing Board of NORD/LB; the ness processes and of controlling Risk analysis: quantitative and Board also specifies the risk strategy and monitoring procedures. qualitative risk assessment for the NORD/LB Group. The Chief Risk measurement: regular Risk Officer (CRO) in the Managing Within the scope of enhancing measurement of risk in uniform Board bears responsibility for draw- Group-wide monitoring instruments, procedures ing up and implementing the risk the internal auditing departments Risk monitoring: regular mon- strategy in cooperation with the of NORD/LB, Bremer Landesbank, itoring of risk limits; review of the front office directors. The monitoring NORD/LB Luxembourg and Deutsche general risk profile and non- of quantifiable risks as well as risk Hypo cooperate closely on the basis quantifiable risks reporting at Group level is also the of a standard auditing policy and Risk management: handling risk, responsibility of the Managing Board. a matrix for analysing audit findings. e.g. avoiding, mitigating or Responsibility lies with the respec- assuming risk tive Group Managing Board member Furthermore, the Group Risk Commit- Reporting: regular reports and or the risk director at individual tee (GRC) was set up in the reporting ad-hoc reports on the risk situation institute level. period as a central instrument for combining the management of risk 8 Activities for the ongoing optimisa- The structure and organisation of at individual and portfolio levels. tion of the risk organisation include risk management in the NORD/LB This committee replaces the previous improvement to the internal control Group complies with the MaRisk loan planning committee. The GRC system geared to establishing requirements. The process of risk is made up of the Chief Risk Officer, uniform process and risk-oriented management is subject to constant the directors of the front offices divi- structures and procedures. Detailed review and improvement. Adjust- sions, the Heads of Generalia, Risk descriptions of the processes relating ments made cover organisational Management, Credit Risk Control and to risk management and risk control measures, adjustments to proce- Research/Economy and the credit are laid down in the risk manual and dures for quantifying risk and the back office departments at NORD/LB the relevant working instructions. continuous updating of relevant as well as the risk directors of the parameters. The updating and further significant subsidiaries. Other mem- Reference is made to Section 5 on development of the risk-bearing bers are involved as the need arises. the individual types of risk for more capacity model and the regular The GRC focuses on examining the detailed information on risk manage- review of the risk strategies of overall portfolio of the NORD/LB ment strategies and processes in NORD/LB and the NORD/LB Group Group while at the same time taking accordance with 322 of the Solvency are the responsibility of the General account of all the significant types of Ordinance. Bank Risk Management Division at risk and enhancing integration within NORD/LB. the Group. A risk-related, process-independent Reference is made to Section 5 on examination of the effectiveness the individual types of risk for more and adequacy of risk management is detailed information on the structure carried out by the bank s Internal and organisation of risk management Auditing department. As a Managing in accordance with 322 of the Board instrument, the examination Solvency Ordinance. constitutes a part of the internal

9 Risk Management 3.3 Hedging and Mitigating Risk Various measures for hedging and mitigating risk are undertaken, depending on the type of risk in question. Reference is made to Section 5 on the individual types of risk for more detailed information on covering and mitigating risk in the system of risk management in accordance with 322 of the Solvency Ordinance. 3.4 Risk Reporting The quarterly reports drawn up by the Risk Controlling Division on the risk-bearing capacity (risk-bearing capacity reports) constitute the main instrument for risk reporting to the Managing Board and the supervisory bodies at full bank level. The management approach is employed for risk reporting. Internal and external risk reports are always based on the same terms, methods and data. In addition to risk reporting for the entire bank, data relating to the individual types of risk is regularly reported to the Managing Board and to bodies, committees and specialised bank divisions. Reference is made to Section 5 on the individual types of risk for details on reporting within the system of risk management in accordance with 322 of the Solvency Ordinance. 3.5 Types of Risk Credit Risk Credit risk is an element of counterparty default risk. It defines the risk of loss involved when a borrower defaults or when the credit rating of a borrower deteriorates. Counterparty risk is included under the credit risk position and describes the risk which results when the default of a counterparty means that an unrealised profit from a pending trade can no longer be earned (replacement risk) or if the default of a counterparty in a delivery-versus-payment transaction means that the consideration for an advance delivery already made is not be received (settlement risk). In addition to counterparty-related credit risks, a country risk exists in the case of cross-border capital transfer services, involving the risk that, despite the ability and the willingness of individual borrowers to make repayment, a loss occurs as a result of overriding government hindrances (transfer risk) Investment Risk Investment risk is another component of counterparty default risk and defines the risk of incurring losses when making equity available to third parties Market Price Risk Market price risks are potential losses which may be incurred as a result of changes in market parameters. The NORD/LB Group distinguishes market price risk as interest rate risk, currency risk, share price and fund price risk, volatility risk and commodity risk. Interest rate risk occurs when the value of a position or a portfolio reacts to changes in one or more interest rates or full interest rate curves and when these changes subsequently lead to impairment of the position. Prepayment risk and credit spread risk are components of interest rate risk. Prepayment risk arises for products for which the repayment structure has not been specified in a contract (e.g. securitisations for which repayment is based on the underlying assets) and which are at the same time not subject to variable interest rates. Credit spread risk arises from changes in the interest rate premium for issuers (for securities) or reference entities (for credit derivatives) added to the riskfree interest rate when measuring the fair value of a position. Currency risks (or exchange rate risks) arise when the value of a position or portfolio reacts to changes in one or more currency exchange rates and if changes in the exchange rates could impair the position. Share price risks occur when the value of a position or a portfolio reacts to changes in one or more share prices or indices and if these changes in share prices or indices could impair the position. Fund price risks occur when the value of a position or portfolio reacts to changes to one or more fund prices. 9

10 10 Volatility risks result from options and refer to potential changes in the value of the derivative portfolios as a result of market fluctuations in the volatilities applied for valuing the options. Commodity risk bears no particular relevance in the NORD/LB Group Liquidity Risk Liquidity risks are risks which may result from malfunctions in the liquidity of individual market segments, unexpected events in lending or investment business or deterioration in the bank s own refinancing conditions. Liquidity risks are defined as classical liquidity risk, refinancing risk and market liquidity risk. Classical liquidity risk is the risk that the NORD/LB Group is not able to fulfil its obligations. A potential cause may be a general disruption in liquidity on money markets which affects individual institutes or the entire financial market. Above all else, market disruptions could mean that significant asset categories may no longer be used as collateral. On the other hand, unexpected events in the bank s own lending and investing business may also result in a shortage of liquidity. The focus of the NORD/LB Group approach is on the next twelve months. Refinancing risk is the risk of a decline in earnings of the NORD/LB Group due to the worsening of the bank s own refinancing conditions on the money market or capital market. The most significant cause in this case is a change in how other market players assess the bank s creditworthiness. All terms to maturity are considered for this type of risk Operational Risk Operational risks are defined as the risk of incurring losses as a result of the inadequacy or failure of internal procedures, employees and technology or losses which occur as a result of external influences. Besides covering legal risks, this definition implicitly covers reputation risks as consequential or secondary risks. Strategic risks and business risks are not included. Market liquidity risk defines potential losses to be borne by the Group if transactions need to be concluded at conditions which are not in line with fair market value due to a lack of liquidity in individual market segments. Market liquidity risks may primarily result from securities positions in the trading and banking books.

11 Structure and Adequacy of Capital 4 Capital Structure and Adequacy 4.1 Capital Structure Contributions from silent partners market yield plus a standard are eligible as core capital in accor- market risk premium which is fixed The components of capital of the dance with 10 Paragraph 4 of the on the date of issue. Interest NORD/LB Group included in the German Banking Act. The contracts payments are excluded in certain summary according to 10a Para- are worded differently as follows: cases. graph 6 of the German Banking Act A temporary contribution comprise the core capital and the Indefinite contributions without to mature at the end of 2011 supplementary capital allocated to any cancellation privilege on the ( 44 million) the Group entities as well as certain part of the subscribers (altogether deductions. 1,600 million), issued in 2005 The special item for general banking and The amount of relevant risks in accordance with 340g of the Aggregated core capital as at interest is either fixed at the capi- German Commercial Code serves to 31 December 2008 amounts to tal market yield on the date of reinforce the capital of the NORD/LB 7,235 million and primarily com- issue plus a standard market risk Group. prises share capital paid in, other premium or it is only fixed for eligible reserves, contributions from the first few years of the term as Asset-side differences result for all silent partners, a special item for already described, after which the regulatory participating interests general banking risks according to it varies on an annual basis and which are fully or proportionately 340g of the German Commercial amounts to the respective capital consolidated and whose carrying Code and asset-side differences of market yield plus a standard mar- amount in the superordinate entity 11 which 50 per cent may be recog- ket risk premium which is fixed exceeds the total of that partici- nised. on the date of issue. Interest pating interest s share capital and payments are excluded in certain reserves. Half of these asset-side Share capital paid in comprises cases and in some cases such differences (altogether approx. 48 the capital stock of NORD/LB as the payments are at the discretion of million) are included as core capital. superordinate entity (approx. 1,085 the issuer s sponsors. million), shares in the share capital Indefinite contributions with a Furthermore, for solvency purposes, or capital stock of subordinate enti- cancellation privilege for the sub- half of the deducted shown below ties (approx. 39 million) and an scribers (a total of around 784 are deducted from the core capital indefinite contribution to capital in million) issued in 1994, 1996, (a total of 780 million). The result- accordance with 15 Paragraph , 1999 and Contribu- ing core capital for solvency pur- of the NORD/LB state treaty (approx. tions are mainly redeemable by poses amounted to a total of 6, million). This investment is the subscribers and by the issuer million as at 31 December subject to variable interest rates to at the earliest at the end of the the amount of the respective capital tenth calendar year after issue on Aggregated supplementary capital market yield plus a risk premium observance of a two-year period as at 31 December 2008 amounts to fixed for a period of five years in of notice. The amount of interest 3,325 million and primarily com- each case. is either fixed in line at the capital prises the following components: market yield on the date of issue Other eligible reserves comprise plus a risk premium for the term Provision reserves according to capital reserves and retained earn- until the earliest possible cancella- 340f of the German Commercial ings. tion date or it is fixed for the first Code (approx. 101 million). few years of the term after which Participatory capital liabilities it varies on an annual basis and (altogether approx. 822 million), amounts to the respective capital which have an original term to

12 12 maturity of at least ten years or which are partly indefinite. The amount of interest is calculated as the capital market yield on the date of issue or prolongation plus a standard market risk premium. The requirements for inclusion in supplementary capital according to 10 Section 5 of the German Banking Act have been fulfilled. Subordinated liabilities (amounting to approx. 2,450 million) with original terms to maturity of ten years or more. The amount of relevant interest is calculated as the capital market yield on the date of issue or prolongation plus a standard market risk premium. Requirements for inclusion in supplementary capital according to 10 Section 5a of the German Banking Act have been fulfilled. The half of asset-side differences must be deducted (altogether approx. 48 million). The assetside differences indicated above, half of which are recognised as core capital, are in turn deducted from supplementary capital. Furthermore, for solvency purposes, half of the deductions shown below is deducted from supplementary capital (a total of 781 million). The resulting core capital for solvency purposes amounts to 2,544 million as at 31 December The deductions from core capital and supplementary capital amounted to 1,561 million as at 31 December 2008 and comprise the carrying amounts of participating interests in accordance with 10 Paragraph 6 Clause 1 Nos. 1 and 5 of the German Banking Act receivables from subordinated liabilities under 10 Paragraph 6 Clause 1 No. 2 of the German Banking Act deficits in bad debt allowances under 10 Paragraph 6a No. 1 of the German Banking Act. For solvency purposes, half each of the total of these deductions is deducted from core capital and supplementary capital. Table 2 shows the components of capital in the regulatory capital structure in accordance with 324 Paragraph 2 of the Solvency Ordinance. Table 2: Capital structure Components of capital (in million) Share capital paid in 1,176 Other eligible reserves 2,711 Contributions from silent partners 2,428 Special item for general banking risks in accordance with 340g of the German Commercial Code 888 Other capital components less other deductions according to 10 Paragraph 2a Clause 2 of the German Banking Act 32 Aggregated core capital according to 10 Paragraph 2a of the German Banking Act 7,235 Aggregated supplementary capital according to 10 Paragraph 2b of the German Banking Act and tier three funds according to 10 Paragraph 2c of the German Banking Act 3,325 Total capital deductions according to 10 Paragraph 6 and 6a of the German Banking Act 1,561 of which deficits in bad debt allowances and anticipated loss amounts according to 10 Paragraph 6a No. 1 and 2 of the German Banking Act. 234 Aggregated amount of modified available equity according to 10 Paragraph 1d of the German Banking Act and eligible tier three funds according to 10 Paragraph 2c of the German Banking Act 8,999

13 Structure and Adequacy of Capital 4.2 Capital Adequacy The private banking exposure class NORD/LB currently employs simple is currently still treated as partial risk weights for special financing Approaches for use and is gradually being trans- in the case of aircraft financing with Ascertaining Capital ferred to the IRBA (NORD/LB in 2009 comparatively short lease terms Requirements and Bremer Landesbank until 2012). and with limited remaining value In the Corporates exposure class, risks (operating leases). These air Credit Risks the system of partial use is likely craft loans are given a risk weight in Since 1 January 2008, the NORD/LB to be used for the segment of minor accordance with Appendix 1 Table 14 Group has at all times applied the customers without a current account of the Solvency Ordinance, depend- basic IRB approach (IRBA) for calcu- until the end of ing on the remaining term and the lating the amount of capital required risk weight category. At Bremer Lan- for credit risk. In November 2008 Exposures for which no internal desbank the elementary approach NORD/LB was subjected to a regula- rating procedure is available due for special financing is not used. tory examination for the purpose to a gap in methodology are usual Aircraft loans are being phased out of extending authorisation to the treated as partial use. A regular at Bremer Landesbank. Simple risk retail portfolio for which the credit system of rating controls ensures weights for special financing are not risk standard approach (CRSA) was that the target level of rating cover of relevant at NORD/LB Luxembourg initially applied in Bremer 92 per cent will be achieved by or at Deutsche Hypo. Landesbank will be leaving its retail portfolio in the CRSA on an interim The CRSA is used for individual In the case of securitisation trans- basis until 2012 at the latest. business segments at NORD/LB actions, the choice of a method for Luxembourg, i.e. for savings bank calculating capital requirements Promotional institutes, the Skandi- guaranteed lending business, cur- CRSA or IRBA is made on the basis 13 finanz subsidiary, insurers and rent account overdrafts, Lombard of pool receivables at NORD/LB, Bremer Landesbank real estate loans loans and business transacted with Bremer Landesbank and Deutsche for commercial property abroad as Südwestbank. Permanent partial use Hypo. Relevant details can be seen well as private banking transactions was authorised by the Luxembourg in Section on procedures for conducted by Deutsche Hypo are Financial Supervisory Authority determining risk-weighted exposure temporarily excluded from the IRBA. CSSF (Commission de Surveillance values as well as on rating agencies Exposures excluded from the IRBA du Secteur Financier). named for securitisations. Securi- for an indefinite period are shown in tisation transactions are not relevant the CRSA. Deutsche Hypo currently uses the for NORD/LB Luxembourg. CRSA for receivables from central governments, local authorities and corporates that are not included in the system for rating real estate customers (temporary partial use). IRBA authorisation is to be extended to cover the named exposure classes until 2010.

14 Investment Risk and Investment Funds NORD/LB always handles participating interests in the IRBA system, apart from the transition rules and exceptions defined in the Solvency Ordinance. Participating interests that were held in the portfolio prior to 1 January 2008 are treated according to 338 Paragraph 4 of the Solvency Ordinance in accordance with the CRSA grandfathering rule. Participating interests that are not covered by grandfathering are for the time being indefinitely exempted from the IRBA in accordance with 70 No. 2 or No. 9 of the Solvency Ordinance and are also backed by equity in accordance with CRSA regulations. Compliance with the materiality threshold is consistently monitored. Investment funds in the banking book are always handled in accordance with the transparency method. If transparency is not possible, investment shares are allocated to the participating interests exposure class. These positions are then included in the calculation of capital at the simple risk weight for participating interests in accordance with 98 of the Solvency Ordinance. Investment funds are not relevant for NORD/LB Luxembourg Market Price Risk In terms of market price risk, NORD/LB has employed an internal risk model for general interest rate risk and for general and special share price risks for calculating regulatory capital since this method was authorised by the Federal Financial Supervisory Authority in The standard approach is used for special interest rate risks and for currency risks. Bremer Landesbank generally uses the standard approach, in particular the duration method, for general interest rate risk. The same applies for NORD/LB Luxembourg, although in this case, share price risk is irrelevant. For Deutsche Hypo (non-trading book institute), only currency risk plays a role and this is treated according to the standard approach. Since commodity risk bears no particular relevance in the NORD/LB Group, no method was implemented here Operational Risk The standard approach is used in the NORD/LB Group to calculate minimum capital requirements for operational risk. At Deutsche Hypo, capital requirements were calculated using the basic indicator approach until 31 December Relevant details in this case can be seen in Section on operational risk management strategies and processes.

15 Structure and Adequacy of Capital Capital Requirements per Risk Type Table 3 shows the regulatory capital requirements in accordance with 325 Paragraph 2 Nos. 1 4 and 330 Paragraph 1 of the Solvency Ordinance for the NORD/LB Group, broken down by significant types of risk and the methods employed. Table 3: Capital requirements Capital requirement (in million) 1. Credit risk 6,684 CRSA credit risks 1,200 Central governments 7 Regional governments and local authorities 40 Other public-sector entities 48 Multilateral development banks International organisations Banks 37 Covered bonds issued by banks 2 Corporates 708 Retail 279 Exposures secured by real estate 45 Investment certificates 1 Other exposures 5 Past due exposures IRBA credit risks 5,053 Central governments and central banks 35 Banks 1,013 Retail Corporates 3,894 Other non-credit-obligation assets 111 Securitisation transactions 233 CRSA securitisation transactions 36 IRBA securitisation transactions 197 Participating interests 198 CRSA shares 172 IRBA shares 26

16 Capital requirement (in million) 2. Market price risk 248 Market price risk in the standard approach 123 of which: interest rate risk 87 share price risk currency risk 36 commodity risk other Market price risk in the internal model approach Operational risk 254 Operational risk in the basic indicator approach 16 Operational risk in the standard approach 238 Operational risk in the advanced measurement approach Total 7, Capital Ratios As shown in Table 4 in accordance with 325 Paragraph 2 No. 5 of the Solvency Ordinance, the total capital ratio and the core capital ratio of the significant NORD/LB Group institutes exceed the regulatory minimum capital ratios of eight per cent for total capital and four per cent for core capital as at the balance sheet date. Regulatory capital adequacy was given throughout the entire reporting period.

17 Structure and Adequacy of Capital Table 4: Capital ratios Total capital Core capital (in %) ratio ratio Consolidated bank group NORD/LB Group Parent company (as a single institute) Norddeutsche Landesbank Girozentrale Subsidiaries Bremer Landesbank Kreditanstalt Oldenburg Girozentrale Norddeutsche Landesbank Luxembourg S.A Deutsche Hypothekenbank (Actien-Gesellschaft) Risk-Bearing Capacity quacy Assessment Process (ICAAP) Calculations of available capital The risk-bearing capacity model in accordance with Basel II and the resources have been based on val- constitutes the methodical basis for MaRisk. Besides providing the ues in accordance with the SolvV 17 monitoring compliance with risk required evidence that an adequate since the beginning of the reporting strategies in the NORD/LB Group. amount of capital is available, the period. When calculating risk poten- This monitoring is carried out at model also serves to verify consis- tial, the risk types of credit, invest- Group level by the Risk Control Divi- tency between risk strategies and ment, market price, liquidity and sion at NORD/LB and by respective specific business activities. operational risk are distinguished, risk control unit at individual insti- with credit risk by far the most sig- tute level. Analyses conducted on the basis nificant of these risk types. of the risk-bearing capacity model The aim of the model is to aggregate compare, in an aggregated form and The risk-bearing capacity model and duly present the risk-bearing on a quarterly basis, the risks (risk was drafted by NORD/LB in close capacity, both at individual bank and potential) and the defined risk capi- cooperation with the other signifi- at Group level. The monitoring and tal of the individual institutes or of cant subsidiaries and is jointly report process is conducted regularly the Group. In the model, risk capital developed with these subsidiaries. and guarantees that NORD/LB bod- and risk potential are determined The identity of the basic methods ies are promptly informed about for four different risk scenarios with and their presentation provides for the risk-bearing capacity situation. varying, declining degrees of proba- aggregation to achieve a Group The permanent development of the bility of occurrence. In turn, risk capi- value, in this case involving the con- model also enhances risk-related tal and risk potential always grow servative addition of risk potential, corporate management. step by step. The three internally taking account of consolidation defined scenarios were specified in effects, while risk capital is fully con- The NORD/LB Group employs a sce- compliance with the requirement of solidated. nario-based risk-bearing capacity a going concern. Regulatory require- model which fulfils both the require- ments in accordance with ICAAP ments of the Internal Capital Ade- are implemented in the fourth step.

18 Quotients resulting from risk capital Utilisation of available risk capital The joint liability scheme combines and risk potential, the risk cover with risk potential in the ICAAP for the individual protection schemes ratios, serve as a measure for deter- the NORD/LB Group may be seen in a united protection system within mining risk-bearing capacity, which in the risk report included in the the Savings Bank Financial Group. is given as of an ICAAP risk cover Annual Report of the Group. The Savings Bank Financial Group ratio of 100 per cent. In alignment thus assumes responsibility for the with a conservative approach, it was Security Mechanisms portfolio of its institutes and com- specified at Group level for the ICAAP at Association Level pletely covers customers deposits model that the risk cover ratio was In addition to an adequate supply of from its own resources ( 12 of the not to fall below the 125-per cent available capital, other mechanisms German Deposit Guarantee and level. This meant that an additional at association level are in place to Investor Compensation Act). This buffer was defined. At an individual secure the institute. makes the joint liability scheme a institute level on the other hand, the symbol of cooperation and internal requirement of a risk cover ratio of NORD/LB is included in the security stability within the Group. at least 125 per cent specified in reserve of the Landesbanken and the respective risk strategy not only giro centres and is also covered by As a member of the security reserve applies for ICAAP; it also applies the protection system of the Savings of the Landesbanken and giro for internally defined levels. This Bank Financial Group. In addition centres, Bremer Landesbank is also indicator is designed to ensure that to the security reserve of the Landes- covered by the joint liability scheme the regulatory requirement of an banken and giro centres, this protec- of the Savings Bank Financial Group. adequate supply of capital is met at tion system comprises twelve other NORD/LB Luxembourg is also all times and that capital distribution protection schemes which have been secured as a subsidiary of NORD/LB. 18 is optimised in future with a view to consolidated in accordance with Deutsche Hypo joined the security generating target yields. their statutes under the umbrella of reserve on 1 January the German Association of Savings Within this framework, each signifi- Banks and Giro Banks (Deutsche cant Group company specifies its Sparkassen- und Giroverband). own allocation of capital among the five most significant types of risk and The aim of the protection scheme informs its supervisory body accord- of the Savings Bank Financial Group ingly or discusses the respective risk is to recognise risks and jeopardising strategy with the supervisory body. situations among the member institutes as early as possible and to initi- Operative risk management and ate counter-measures. In this case the monitoring of risk are carried the joint liability scheme operates out locally in the significant Group a risk monitoring system with which companies. The essential level of the risk positions of participating transparency and consistency at institutes are monitored by the mon- Group level is secured by a Group- itoring committees of their respec- wide risk control system in align- tive protection schemes. These com- ment with 25a Paragraph 1a of the mittees in turn report to a central German Banking Act, which pro- transparency committee which actively integrates the subsidiaries watches over the general risk situa- or sub-groups into the Group risk tion of the joint liability scheme. control system.

19 Disclosures on Risk Types 5 Disclosures on Risk Types 5.1 Credit Risk The key risk indicators of expected The methods and procedures for loss and unexpected loss are applied risk quantification are coordinated Credit Risk Management for quantifying counterparty default between the risk controlling units risk (credit risk and investment risk). in the significant Group institutes Credit Risk Management Expected loss is determined on the in order to ensure standardisation Strategies and Processes basis of default probabilities, taking throughout the Group. The ongoing Lending business and the manage- into account recovery rates. The risk management and control of current ment of credit risk in the NORD/LB premium, which must be collected risks are carried out locally in the Group is a core competence which in order to cover expected loss, is Group companies. must be permanently developed and calculated with Group-wide standard extended. It is the NORD/LB Group s methods Credit Risk Management mission to position itself as a reliable Structure and Organisation lending bank for its customers. Unexpected loss is quantified Group- A risk-based organisational structure wide with the help of a credit risk and the functions, responsibilities In order to do justice to the specific model for four different confidence and authorisation of departments requirements of each business levels and a time frame of one year. which deal with risk processes are segment, NORD/LB has stipulated Calculations are based on the Gordy clearly defined at employee level. financing policies for the individual model, which is used by the Basel In accordance with the MaRisk, segments which are binding guide- Bank Supervisory Committee for processes in the lending business lines for new business transacted modelling capital requirements are characterised by a clear organi- 19 by the relevant front office depart- within the framework of Basel II. sational separation of front office ments. The focus here is on conclud- and risk management departments, ing agreements with customers with The credit risk model determines right through to management level. a good to very good credit rating. contributions made by individual borrowers and investment compa- At NORD/LB the front office depart- Recognising critical situations in nies towards unexpected loss at ments conduct operative financing good time is the key to the effective portfolio level, which together add business relating to customers, management of credit risks. For this up to unexpected loss for the full properties and projects on a national reason a number of processes, sys- portfolio. In this case probabilities and international level within a tems and instructions are in place, of default (PDs) resulting from the framework of specified limits. They for portfolios and for individual bor- internal rating procedure and loss are primarily responsible for the core rowers, and these interact to form given default (LGD) relating to spe- tasks of acquisition and sales and a system for the early recognition cific transactions are applied. The are relieved of administrative tasks. and effective management of risks standard guidelines under Basel II The front office departments are or the initiation of measures to limit are generally applied in defining the responsible for an initial vote, for these risks. New products, markets remaining model parameters. setting terms and conditions and and sales channels in lending busi- for earnings. In the case of low-risk ness are introduced in a new product The model is supported by the exposures of minor volumes, the process (NPP), which ensures that application of the Large Exposure front office departments will in some the essential examining depart- Management limit model in order cases also bear sole responsibility ments are all involved. to adequately map and control for the risk (unilateral authorisation) concentration risks in the portfolio. as well as responsibility for analysing and observing these risks.