Grupo Bankinter The Third Pillar_ Market Discipline

Transcription

1 Grupo Bankinter The Third Pillar_ Market Discipline 31 December 2008

2 Index 0. Executive summary 1. General information requirements 1.1. Sphere of application 1.2. Risk strategies, objectives and management policies 1.3. Solvency ratio 2. Information on computable own funds 3. Information on own funds requirements 3.1. Minimum own funds requirements for credit risk Standard method Internal Ratings-Based method (IRB) 3.2. Minimum own funds requirements for counter-party risk, position risk and trading portfolio liquidity and exchange risk 3.3. Minimum own funds requirements for operating risk 3.4. Summary of the procedure applied to evaluate that internal capital is sufficient to cover current and future activities 4. Information on credit and dilution risks 4.1. Accounting definition of delinquency and deteriorated positions and description of the methods used to determine the value corrections for asset deterioration and risk and contingent commitment provisions 4.2. Total exposure value, without considering the effects of credit risk reduction 4.3. Average exposure value in 2008, divided into categories 4.4. Geographical distribution of exposures 4.5. Distribution of exposures by type of counter-party 4.6. Distribution of exposures by residual maturity 4.7. Breakdown of deteriorated transaction 4.8. Breakdown of deteriorated exposures by geographical area 2

3 4.9. Breakdown of deterioration loss and risk and contingent commitment provision movement Complementary information for exposures to which the standard method will be applied Complementary information for exposures to which the internal ratingsbased method (IRB) will be applied Ratings system structure and description of the internal ratings assignment process Exposure value Breakdown of enterprises category with own estimates of loss parameters in the event of loss-given default (LGD) Breakdown of retailers category Breakdown of enterprises category without own estimates of loss parameters in the event of default (LGD). Specialised financing exposures Asset deterioration-related losses Description of the factors that have influenced the losses suffered during the prior period Comparative analysis between the Bank s estimated losses and the results obtained Securitisation transactions Bank objectives in relation to its securitisation activity Functions performed by the Bank in securitisation processes Summary of the accounting policies as regards securitisation Breakdown of securitised assets bound to the securitisation framework Breakdown of securitised positions by type of exposure Credit risk reduction techniques Policies and procedures Value for each exposure category and exposure guarantee secured by guarantees in rem (STD and FIRB methods) Value for each exposure category and exposure guarantee secured by guarantees in rem or credit derivatives Information on counter-party credit risk 3

4 Guarantees in rem that the Bank would have to provide in the event of a reduction in its credit rating Credit derivatives 5. Information on trading portfolio market risk 6. Information on operating risk 7. Information on shareholdings and capital instruments not included in the trading portfolio 8. Information on interest rate risk of positions not included in the trading portfolio 8.1 Nature of the interest rate risk, key hypothesis, including the assumptions relative to early loan repayment and the evolution of deposits without fixed maturity, and calculation frequency of said risk 8.2 Variation in income, economic value or other relevant metric used by the entity s administration body to analyse the upward or downward swings in interest rates, in accordance to the management method for said risk established by the Bank, broken down by currency. 4

5 0- Executive summary The objective of this document, titled Information of Prudential Relevance, consists of the market information obligations described in Rule 109 et. seq. of Circular 3/2008 of the Bank of Spain, relative to the determination and control of minimum own funds. Circular 3/2008 represents the final implementation, within the sphere of credit institutions, of the legislation on own funds and supervision on a consolidated basis of financing institutions enforced by Act 36/2007, of 16 November, and which also includes Royal Decree 216/2008. This concludes the process to adapt the Spanish credit institution legislation to Community directives 2006/48/EC of the European Parliament and Council, of 14 June 2006, relative to access to credit institution activity and the exercise thereof, and 2006/49/EC of the European Parliament and Council, of 14 June 2006, relative to the adaptation of investment service company and credit institution capital. The two aforementioned Directives have carried out an in-depth review, following the equivalent Agreement adopted by the Basel Committee on Banking Supervision (known as Basel II), of the minimum capital requirements for credit institutions and their consolidated groups. The new approach expects regulatory own funds requirements to become more sensitive to the risks assumed by the entities in the course of their activity. Within the scope of the so-called Pillar 3 of Basel I, the new solvency regulation includes certain market information obligations, included in a single document titled Information of Prudential Relevance, aimed at standardising and favouring the dissemination of relevant information. The information to be disclosed is focused on those aspects considered key by the Bank s Management to the adequate comprehension of the Group s business profile, its risk exposure and its risk management model. 5

6 Bankinter, S.A. s Board of Directors, during their meeting of 18 March 2009, approved this document, determining that the frequency of publication thereof shall be annual and the place of publication shall be the corporate website. The information contained therein, insofar as it is not covered by the annual accounts audit, has been verified prior to its publication by the Internal Audit Division, which reports to the Audit and Regulatory Compliance Committee. This report relates to the consolidated Group of Bankinter credit institutions (hereinafter referred to as the Group or the Bank) and is based on December 2008 closing figures. 0.1-Risk management objectives and policies The Group carries out its banking activity in Spain and classifies the risks to which it is exposed under credit risk, market risk, interest rate risk, exchange rate risk, liquidity risk, operating risk and other significant risks to which the institution could be exposed, in accordance with Pillars I and II of the Basel II Framework. Risk management is based on the following principles: - The main objective of the risk function is that of contributing towards the sustainable maximisation of capital profitability and value creation over time, in turn preserving the Bank s solvency. - The risk function is independent from the business areas and is integrated within the Group s global strategy. - Calculation of the risk, the sanctioning and follow-up thereof is key to launching any new product or service. - Comprehensive risk management. - The importance of automatic sanctioning systems, new risk quantification methodologies and the use of technology in risk management systems. - The diversification of risk in customers, sectors, counter-parties and markets. - The relevance of the service quality factor in the risk function. Both the level and evolution of the Bank s risk profile are moderate, as a consequence of a conservative risk assumption policy and the active control and management thereof. At 31 December 2008, 72% of customer credit was covered by a real guarantee and the delinquency rate is substantially lower than the sector average. Given the Bank s risk profile, regulatory capital is currently greater than economic capital, due to which capital sufficiency review and planning by the Management focuses on regulatory capital, the situation and expected medium-term evolution of which is periodically reviewed. The Bank also has a rigorous Corporate Governance organisation and procedures and fulfils the practical totality of the recommendations contained in the Unified Code of Good Corporate Governance of the listed companies. 6

7 0.2 Internal rating systems Positions with customers are classified under internal credit risk categories. Each of these internal categories group together the positions which from the risk viewpoint are sufficiently homogeneous while being sufficiently differentiated from other categories, to allow their statistical modelling. A rating model is applied to each of these categories. In addition to calculating regulatory capital, the internal ratings are present in the transaction validation process, in certain alert and transaction recovery processes, and are being included in simulators that guide sales network decisions and prices and are used as a base for internal capital calculation processes and risk-adjusted profitability measurement systems. The internal rating models are developed by the Global Risk Management Department, approved by the Risk Committee and periodically reported to the Board of Directors. These models are subject to internal auditing and validation and must be authorised by the Bank of Spain. 0.3-Solvency ratio and minimum own funds requirements The Group s solvency ratio at 31 December 2008 was the following: (*) Transitory own funds requirements or lower-limit complement: additional requirements established in the 8th Transitory Provision of Circular 3/2008, pursuant to which own funds requirements must be equal to or greater than 90% in 2008 and 80% in 2009, which must be upheld if the regulations in force at 31/12/07 are maintained. Credit risk represents 92% of the minimum own funds requirements. In order to calculate these requirements, the Bank applies the standard method to certain asset categories and the internal ratings-based (IRB) method to those for which it has obtained the corresponding authorisation from the Bank of Spain. At 31 December 2008, 59% of credit risk-driven consumption of own funds corresponds to exposure categories to which the standard method is applied, and 41% to categories to which the internal ratings-based (IRB) method is applied. 7

8 In terms of exposure value, the standard approach is applied to 51% of exposure and the IRB approach to 49%. Taking only customer credit into account, internal ratingsbased methods are applied to 59% of the exposure. In accordance with the successive internal model application plan agreed with the Bank of Spain, in FY2009 the IRB method will be applied to asset categories currently subject to the standard method, large and very large enterprise portfolios being the most significant. 0.4-Credit risk The distribution of own funds requirements by category and approach is the following:, which corresponds to the following distribution of exposure value: 8

9 (*) Rest (STD) includes 7,900 million of exposure to central governments and banks that does not entail minimum own funds requirements. Based on the preceding graphs, we can observe that the enterprises category represents 34% of exposure, while its own funds consumption accounts for 65% of the total. On the other hand, the retailers category represents 36% of exposure and its own funds consumption represents 22%. As regards the categories subject to the IRB method, a breakdown of the most significant, their risk weight and average loss in the event of default are provided below: 0.5-Deteriorated assets Breakdown of doubtful risk by commercial segment, value corrections and deterioration losses recognised in the period is the following: 9

10 (*) The Other caption fundamentally includes the exposure value of the central governments and banks, institutions, guaranteed bonds, securitisation positions and other assets other than financial assets. Total Group asset deterioration-related losses grew 155% in FY2008, on the back of the economic downturn. However, the Bank maintains a delinquency ratio significantly below the sector average. 10

11 1- General information requirements 1.1- Sphere of application Bankinter s consolidated group of credit institutions, to which this report is applied, is comprised of the following entities: Dominant entity - Bankinter, S.A Globally integrated entities: - Bankinter Capital Riesgo, SGECR, S.A. - Bankinter Consumer Finance, E.F.C., S.A. - Bankinter Emisiones, S.A. - Bankinter Sociedad de Financiación, S.A. - Bankinter Consultoría, Asesoramiento y Atención Telefónica, S.A. - Arroyo Business Consulting Development, S.L - Intergestora, S.A. - Bankinter Gestión de Activos, S.G.I.I.C. - Hispamarket, S.A. - Intermobiliaria, S.A. - Bankinter Gestión de Seguros, S.A - Bankinter Venture Capital I, Venture Capital Fund - Bankinter 7 Mortgage Securitisation Fund - Bankinter 8 Asset Securitisation Fund - Bankinter 9 Asset Securitisation Fund - Bankinter 10 Asset Securitisation Fund - Bankinter 11 Mortgage Securitisation Fund - Bankinter 12 Mortgage Securitisation Fund - Bankinter 13 Asset Securitisation Fund - Bankinter 2 SME Asset Securitisation Fund - Bankinter 14 Mortgage Securitisation Fund - Bankinter 15 Mortgage Securitisation Fund - Bankinter 3 SME Asset Securitisation Fund - Bankinter 16 Asset Securitisation Fund - Bankinter 17 Asset Securitisation Fund - Bankinter Leasing 1, Asset Securitisation Fund - Bankinter 4 SMESF Asset Securitisation Fund - Bankinter 18 Asset Securitisation Fund Proportionally integrated entities: - Helena Activos Líquidos, S.L - Helena Activos Líquidos Internacional, S.L Entities to which the participation method is applied: - Aircraft, S. A (dependent entity but not consolidated due to its activity) - Línea Directa Aseguradora, S.A - Bankinter Seguros de Vida, S.A. de Seguros y Reaseguros - Techrules Escuela de Finanzas, S.A - Mercavalor, S.V., S. A. 11

12 - Eurobits Technologies, S.L. - Professional Future Materials, S.L. The insurance companies (Linea Directa Aseguradora, S.A. and Bankinter Seguros de Vida, S.A. de Seguros y Reaseguros), pursuant to Rule 9.e), paragraph 2, and Mercavalor, S.V, S.A, pursuant to Rule 9 d) are deducted from the own funds of those entities to which the participation method is applied. Note 12 of the Bankinter Group Annual Report information on the shareholdings and theoretical book value of all the companies that comprise the consolidated group of credit institutions. The main difference between the consolidated group of credit institutions described hereunder and the group of credit institutions defined in section 3 of rule 3 of the Bank of Spain Circular 4/2004 is that the consolidated group of credit institutions only includes, under the global or proportional integration methods, whichever applies, financial entities consolidated by activity, while the group of credit institutions includes any investee entity which it controls. On the other hand, for the purpose of applying the participation method to the public financial statements, Circular 4/2004 allows its application to both the associated entities and multi-group entities, while pursuant to Circular 3/2008, the proportional integration method will be applied to the multi-group entities in the case of financial entities consolidated by activity. In the case of Grupo Bankinter, the differences are summarised in the following table, and its impact for financial statement purposes is irrelevant: Investee entity Method applied to public financial statements (Circular 4/2004) Method applied for solvency purposes (consolidated Group of credit institutions) Aircraft, S.A Global integration Participation method Helena Activos Líquidos, S.L Helena Activos Líquidos Internacional, S.L Participation method Participation method Proportional integration Proportional integration There are no dependent entities not included in the consolidated group whose own funds are below the minimum required by the regulations applicable thereto. There is no, nor is there expected to be, any legal or practical obstacle relevant to the transfer of own funds or repayment of liabilities between the dependent entities and the dominant entity. 12

13 The Group requested from the Bank of Spain exemption for the individual fulfilment of own funds requirements for Bankinter, S.A and Bankinter Consumer Finance E.F.C., S.A. for the sake of efficiency and better management on considering that Grupo Bankinter s characteristics guarantee the adequate distribution of own funds between the parent company and the subsidiary and the free movement of flows and commitments within the Group between this subsidiary, the rest of subsidiaries and the parent company. The Bank of Spain authorised both exemptions in a document sent to the Bank on 8 October Risk strategies, objectives and management policies The Group carries out its retail banking activity in Spain and classifies the risks to which it is exposed under credit, market risk, interest rate risk, exchange rate risk, liquidity risk, operating risk and other significant risks to which the institution could be exposed, in accordance with Pillar I and II of the Basel II Framework. Exposure to these risks is relatively low, as shown by the compared evolution of its delinquency rate, the small size and conservative profile of its trading portfolio, the general policy for neutralising interest rate impacts on the balance sheet and the active management of liquidity, operating and other potential risks. The Bank also has a rigorous organisation and corporate governance procedures and is compliant with the practical totality of the recommendations contained in the Unified Good Governance Code of the listed companies. As regards credit risk, the low delinquency rates are the result of prudent acceptance, rigorous follow-up and efficient recovery policies, traditionally supported by first-line information systems. The exposure to structural interest rate risk is also low, given the Bank s policy relative to applying variable interest rates to active transactions and neutralising the impact of market variations by adopting the most adequate investment and hedging strategies. The exposure to trading portfolio market risk is very low, given the low limits established for this portfolio and the credit quality and simplicity of the instruments used. Operating risk management is proactively carried out by applying the most adequate risk control and prevention techniques. Risk management is based on the following principles, which constitute the basis of the general risk policy and govern the Bank s risk-related practice: - The main objective of the risk function is to contribute toward maximising capital profitability and value creation in a sustained manner over time, while preserving the Bank s solvency. - The risk function is independent of the business areas. - The risk function is integrated within the Bank s global strategy. - The determination of the risk, the sanctioning and follow-up thereof is key to launching any new product or service. 13

14 - Integrated risk management. - Importance of the automatic sanctioning systems, new risk quantification methodologies and use of technology in risk management systems. - Diversification of risk in customers, sectors, counter-parties and markets. - Relevance of the service quality factor to the risk function. In summary, both the level and evolution of the Bank s risk profile are moderate, as a consequence of a conservative risk assumption policy and the active control and management thereof Structure and organisation of the risk management function The Board of Directors determines the strategy and approves and supervises Grupo Bankinter s risk policy and internal control systems, notwithstanding the existence of the corresponding executive functions. The Board of Directors, through the fundamental support of two of its representative Committees, the Audit and Regulatory Compliance Committee and the Executive Committee, plays a guiding and supervisory role with regard to the accounting policies and internal control systems and procedures, in relation to all of the entity s risks. Bankinter s Audit and Regulatory Compliance Committee has, among other duties, that of driving and periodically reviewing the proper functioning of adequate internal control systems that will guarantee the entity s correct risk management, in addition to reviewing its general risk map and that of the Group. The Board of Directors, in conjunction with the Executive Committee, determines the Risk Policy strategy. As regards Credit Risk, the Board of Directors establishes the limits of the allocations made to the Risk Committee, sanctions or ratifies nondelegated credit risk transactions and is periodically informed of the Group s credit risk and insolvency hedge quality. In relation to Structural Risk (interest and liquidity risk) and Market Risk, it delegates the ongoing follow-up of decisions made on structural balance sheet risks (interest and liquidity risk), stock market risk and exchange rate risk of the Bank s institutional positions, in addition to the establishment of the financing policies, to the Assets and Liabilities Committee (ALCO). With respect to Operating Risk, it determines the level of risk that the entity is willing to assume, and approves the policies and management framework. The Assets and Liabilities Committee (ALCO), acts under delegation by the Board of Directors, as described in the preceding section. The entity s organisational structure is based on the principle of independence and segregation of functions between the business units and follow-up and risk control units. The Risk and Finance Area, the manager of which reports directly to the Managing Director, groups together all the Risk-related areas: 14

15 - Risk Department, which groups together the Bank s main risks (credit, market and operating). - Credit Risk is responsible for defining the risk policies associated to each of the segments. It has the power to sanction customer transactions within these. It is in charge of accepting and following up transactions. - Market Risk is responsible for controlling and following up structural (liquidity and interest and exchange rate risk) and market risks derived from institutional operating procedures and Trading. - Operating Risk is responsible for promoting and coordinating the procedures and tools necessary for identifying, controlling and managing operating risks. - Control, Follow-Up and Recoveries is responsible for leading and managing investment in accordance with Bank of Spain regulations, setting up and promoting automated systems to enhance management efficiency and ensure that sufficient controls are in place to guarantee credit portfolio quality. - Global Risk Management is responsible for developing, improving, controlling and following up internal models for the different categories of credit and economic capital risk, in addition to integrating these models in the Bank s global risk management, within the framework established by the Basel II Agreement. - Validation is responsible for validating advanced risk models and their results, a requirement for Bankinter to calculate its own funds needs according to internal model-based estimates. - Internal Audit, which reports directly to the Board s Audit and Regulatory Compliance Committee, evaluates the compliance of the policies approved by the Board, the procedures, risk management systems and internal control functioning. Notwithstanding the foregoing functions and responsibilities, risk management is carried out by the following Committees, which include the participation of the entity s Management: - Risk Committee. The Risk Committee authorises the limits of the powers delegated for credit risks to the Credit Risk Committee and Risk Committees of the different regional Organisations, sanctions individual or group risks and follows up the credit quality of the Bank s different lines of business, risk concentrations and evolution of the most sensitive sectors at each moment in time. Likewise, it authorises the implementation and follows up on the functioning of the statistical models which, in alignment with Basel II guidelines, are applied to risk management, including possible price or associated minimum margin guidelines. - Control Follow-Up and Recovery Committee. It follows up and controls the Bank s Risk portfolio, Incident and Delinquency evolution, each of the segments and Regional Organisations, and manages receipts and recoveries in order to minimise the impact of delinquency on the Bank. The main customers under incident conditions, delinquency and classified as to be extinguished are reviewed, and periodic follow-ups of specific segments are carried out. - Validation Committee. It meets periodically and has the fundamental objective of discussing and, where necessary, approving the different validation reports issued by the Validation Unit on advanced credit risk models. 15

16 - Operating Risk Committee: It promotes the implementation of Operating Risk management policies; it follows up projects aimed at mitigating significant operating risk; it is informed by the Operating Risk Unit and makes decisions, as required, on matters related to the evaluation and management of significant operating risks, especially contingency and business continuity plans Risk management processes, methods, measurement and reporting systems The Risk Committee approves the Delegated Powers circular, where the maximum percentages that can be reached per risk modality and term, and the delegated limits for each of the Loans Committees of the regional organisations and for the Credit Risk Loans Committee are established. The Loans Committees of the regional organisations may in turn delegate powers to the different centres that depend on these, with certain limitations. The main methods, procedures and systems used in group risk management are briefly expounded below. Credit risk management is increasingly based on the risk quantification methodologies promoted by the Basel II Agreement. To this end, the credit portfolio is classified under homogeneous groups called internal categories. These categories determine the type of internal management that will be applied to the transactions or persons that comprise these and, in particular, to which the internal model is applied. A mark or internal rating is assigned to each transaction or customer through each internal model. The models, based on statistical methodologies, allow the quantification of risk and better decisions to be made with regard to the acceptance of transactions (both automatically and manually), internal assignment of capital and price fixing. Rating is a fundamental element in automatic transaction sanctioning within automated risk systems. Likewise, it is used in manual sanctioning by risk teams. Bankinter has had advanced electronic file processing systems in place for many years, which allow the automatic sanctioning of risk transactions that fulfil certain requirements. As a result of a series of internal rules and validations, in which the rating plays a preponderant role, these systems issue an automatic sanction, indicating whether the transaction has been authorised or rejected, expediting the whole credit granting process and improving the entity s internal efficiency. This automation is applied preponderantly in the Individual Banking and SME segments. In Corporate Banking there is an electronic proposal processing tool which, although it does not currently sanction automatically, prepares a rating that is incorporated into the decisionmaking process as a fundamental part thereof. Those transactions which are not authorised by the automatic systems are electronically issued to the Risk Committees with sufficient powers for the individual analysis and sanctioning thereof, said actions being subsequently recorded in the systems. 16

17 The procedures established in terms of credit risk are: 1) Preparation and processing of proposals, on a specific electronic proposal for each business segment, which concludes with the sanctioning (acceptance or rejection) of the transactions. 2) Formalisation and Recording. Formalisation is based on sanction contents and Bankinter standards, with a homogeneous process executed according to customer segment and channel. The Application of Authorisations controls and guarantees that the transactions to be recorded have been previously authorised by the competent body. 3) Risk revision. At least one revision of the risk classifications granted to our customers will be carried out annually, regardless of whether these request new transactions or limit increases. 4) Control and Follow-Up. Once the customers asset positions have been formalised and recorded, these will be followed up in order to ensure adequate credit portfolio quality. Bankinter has a series of systems and applications in place to help the different managers to detect deterioration symptoms in the risk quality of their customers, with the objective of identifying delinquency problems in advance: a. Statistical customer alert system. b. Risk quality information system. c. Branch alert system. d. Risk prediction system. e. Deterioration of internal ratings. There are also applications for controlling the formalisation of transactions and the quality of the data entered into the risk systems: a. Automatic formalisation control system. b. Data reliability control system. 5) Recoveries and Delinquency Management. There is a robust process in place for managing transactions under incident conditions. In order to adequately manage delinquency, the Bank has a delinquency and forecasting application where the managers provide information on actions carried out, which allows a specific follow-up of negotiation status, customer commitments, terms and recovery percentage Risk measurement and information systems The aforementioned Credit Risk s information systems have real-time or periodic information based on their respective functionalities. Additionally, the entity has a comprehensive management information system, called Information Centre, integrated by all the necessary management-related information that is summarised below: With regard to credit risk: 17

18 - Credit risk situation by segments, products, business units and internal rating, from both the portfolio and transaction entry viewpoint. - Information by sectors and main customers and groups. - Investment terms and amounts matrix. - Specific information relative to mortgage risk: production by channel, segment, effort, LTV, rating and promotional risk. - Sanctioning system behaviour reports. With regard to structural and market risks, the management-related information has the following contents: - Interest rate Gap or Map. - Sensitivity to structural interest rate risk, both in terms of financial margin and economic value. - Liquidity Map or Gap, information and analysis of the specific interbank asset and liability situation and concentration of issue maturities and analysis of liquidity stress scenarios and planned sources of financing. - Value at Risk, applied to measure and control market risk exposure in an integrated and global manner by type of risk. - Stress Testing estimates or extreme scenario analysis, complementary to VaR, through which potential portfolio value loss due to extreme change scenarios in risk factors is quantified. As regards operating risk, the measurement and information thereof is based on risk maps, operating risk key indicators, contingency plans and loss databases. Risk integration and aggregation is carried out by means of economic capital techniques and the Management is periodically informed (see section on Internal Capital Evaluation) Hedging and risk reduction policies The Group s credit portfolio has high collaterisation, with 72% of customer credit secured by a guarantee in rem, mainly a mortgage guarantee, as mentioned in Note 9.b) of Grupo Bankinter s Annual Report. Of the part of the portfolio with a home mortgage guarantee and the holders of which are natural persons, representing more than 75% of the portfolio with a mortgage guarantee, 89% has a Loan to Value (LTV) of less than 80%, which indicates higher portfolio quality. Since 2003, the main principle of the automatic sanction policy has been maximum financing at 80% of LTV. In the case of natural persons, average mortgage risk portfolio LTV is 59%, maintaining the same percentage in production in Solvency ratio The Group s solvency ratio at 31 December 2008, applying the principles and rules established in Circular 3/2008, is the following: 18

19 (*) Transitory own funds requirements: lower-limit complement. The eighth transitory provision of Circular 3/2008 establishes that in 2008 and 2009 those Entities which, pursuant to the terms of chapters four and five of the Circular, are authorised to use the IRB method to calculate their credit risk-weighted exposures will maintain own funds requirements that will at all times be equal to or greater than 90% in 2008 and 80% in 2009, of the total amount of minimum own funds which shall be required of the Bank if the regulations applicable at 31 December 2007 remain in force. In the case of Grupo Bankinter, the lower limit of 90% entails additional own funds requirements of 66 million at 31/12/08. 19

20 2- Information on computable own funds The breakdown and composition of the computable own funds are the following: At 31 December 2008, the Group complies with all the own funds calculation limits established in Rule 11 of Circular 3/2008; therefore, there are no basic own funds or tier 2 own funds that are not computable due to exceeding said limits. Likewise, on said date, there are no computable auxiliary own funds. The characteristics of the main elements that comprise computable own funds are the following: (a) Capital 20

21 At 31 December 2008, Bankinter S.A. s share capital is represented by 405,893,880 registered shares with a book value of 0.3 Euros each, being fully subscribed and paid up. These shares have identical political and economic rights. (b) Reserves The breakdown of this caption is the following: (c) Other basic own funds according to Spanish legislation Includes an amount of 343,145 thousand stemming from issues of preferential shares that fulfil the regulatory requirements in order to be computable as basic own funds, in accordance with the authorisation issued by the Bank of Spain in FY2004. These shares are perpetual in nature and accrue a Euribor+0.03 rate, with a minimum of 4% and a maximum of 7%, conditioning the existence of distributable profit, in addition to the limitations imposed by Spanish legislation on credit entity own funds. (d) Additional tier 2 own funds At 31 December 2008, the Group has subordinated bonds in circulation with a current balance of 495,087 thousand, of which 480,687 thousand are computable as own funds to date. These liabilities fulfil the requirements established by legislation for their computability as tier 2 own funds, for which purpose the Bank of Spain obtained computability rating. 21

22 3- Information on own funds requirements 3.1- Minimum own funds requirements for credit risk The Bank applies the standard method to certain asset categories and the internal ratings-based (IRB) method to those for which it has obtained the corresponding authorisation from the Bank of Spain Standard method A breakdown of own funds requirements for the exposure categories to which the standard method is applied is provided below: Internal ratings-based (IRB) method A breakdown of own funds requirements for the exposure categories to which the IRB method is applied is provided below: 22

23 3.2- Minimum own funds requirements for counter-party risk, position risk and trading portfolio settlement and exchange risks (*) Pursuant to Rule 81.1, own funds requirements for exchange risk can be considered null when the sum of the net global positions in foreign currency and bullion do not exceed 2% of computable own funds. The Group does not maintain bullion positions Minimum own funds requirements for operating risk The minimum own funds requirements for operating risk, calculated based on the standard method, are the following: 3.4- Summary of the procedure applied to evaluate that internal capital is sufficient to cover current and future activities Evaluation of the sufficiency and planning of own funds is carried out from a dual viewpoint in Bankinter: Regulatory capital and Internal capital. Regulatory capital is that established at a given time by legislation, and especially by Bank of Spain Circular 3/2008 and additional provisions. Internal capital can be defined as the internal measurement of unexpected losses used by the Group to coherently aggregate and evaluate all of its risks and evolution in time. To this end, economic capital is used to measure all risks in those cases where materiality and methodology make it feasible or advisable. In the remaining cases, regulatory capital or expert estimates are used. Economic capital can be defined as the institution s potential unexpected loss, within a one-year horizon, with a degree of statistical trust (determined based on the rating desired by the entity), considering all the main risk classes. Given the Bank s risk profile, regulatory capital currently exceeds economic capital, due to which capital sufficiency revision and planning by the Management is focused 23

24 on regulatory capital. Economic capital-related data is mainly used to evaluate the evolution of the Bank s global risk profile, analyse significant differences with regulatory capital and allocate capital to the business units in accordance with their risk levels. Additionally, periodic stress testing is also carried out on the most significant risks that appear in the managing bodies. Periodically, at least every six months, economic capital calculations and stress testing are carried out which are presented to the Management as a basis for making decisions on the global risk of the business segments, their evolution and allocation of capital thereto. Likewise, the Bank periodically reviews its regulatory capital situation and planning and, based on expected capital ratio evolution, the Finance and Risks Department submits the corresponding action proposals. The results of these reviews are reported to the Board of Directors on a regular basis. 24

25 4- Information on credit and dilution risk 4.1- Accounting definition of delinquency and deteriorated positions and description of the methods used to determine the value corrections for asset deterioration and risk and contingent commitment provisions Grupo Bankinter s Annual Report (Note 5 g) and Appendix IX of Bank of Spain Circular 4/2004 include a detailed accounting definition of delinquency and the calculation of asset deterioration-related losses, in addition to the risk and contingent commitment provisions Total exposure value A breakdown of the exposure value of each relevant category is provided below: The application of risk reduction techniques does not have a significant impact on the classification of the exposure categories in the standard method Average exposure value in 2008, divided into categories The average exposure value in FY2008 for each category is the following: 25

26 4.4- Geographical distribution of exposures The geographical distribution of exposures is the following: The Rest caption of Centro Corporativo mainly includes the exposure value of the central governments and banks, institutions, guaranteed bonds, securitisation positions and other assets other than financial assets categories Distribution of exposures by type of counter-party The following breakdown includes the distribution of exposure value, considering as counter-party the commercial segment assigned by the Bank for management control purposes: 26

27 The Other caption mainly includes the exposure value of the central governments and banks, institutions, guaranteed bonds, securitisation positions and other assets other than financial assets categories. A breakdown by counter-party based on the internal categories used by the Bank is provided below: 27

28 4.6- Distribution of exposures by residual maturity A breakdown of exposure value by residual maturity is provided below. Securitisation positions are based on the final fund maturity date: 28

29 4.7- Breakdown of deteriorated exposure A breakdown of doubtful risks, value corrections and deterioration-related losses is provided below, following the definition contained in point 4.1 herein: Doubtful assets include doubtful for reasons other than delinquency to the amount of 57,131 thousand. The practical totality of risks classified as doubtful have been provisioned against deterioration Breakdown of deteriorated exposures by geographical area The breakdown of doubtful risks and their corresponding provisions by geographical area is provided below: 29

30 4.9- Breakdown of deterioration loss and risk and contingent commitment provision movement Note 9 and 18 of Grupo Bankinter s Annual Report include the breakdown and movement of asset deterioration-related value corrections and risk and contingent commitment provisions Complementary information for exposures to which the standard method will be applied The designated external rating agencies used are S&P, Moody s and Fitch. In the calculation of capital at , only external ratings have been used to assign the corresponding risk weighting to the securitisation bonds, which are included within the IRB approach. Exposures directly deducted from own funds amount to 60,367 thousand and correspond to financing aimed at the acquisition of shares or other computable securities as own funds of the Bank Complementary information for exposures to which the internal ratingsbased method (IRB) will be applied Ratings system structure and description of the internal ratings assignment process A) Authorisation by the Bank of Spain for the use of the IRB method or for the successive application thereof The Bank of Spain has authorised the Bank to use internal rating models to calculate the capital requirements for credit risk at 31 December 2008, of the following portfolios: - Home mortgage natural persons - Personal loans - Small enterprises - Medium-sized enterprises (1) - Project financing (Developers) (2) (1) LGD estimates; EAD regulatory parameters. (2) Weightings based on the twenty-fifth Rule, section 9 of Circular 3/2008. Likewise, the Bank of Spain has authorised Bankinter to implement a successive application plan that envisages the incorporation in 2009, prior specific authorisation, of the following models and calculations: 30

31 - Second home mortgages - Obsidiana cards - Bankinter cards - Rest of transactions natural persons - Large enterprises - Very large enterprises - LGD estimates on Large enterprises and Very large enterprises - EAD estimates on Mid-sized enterprises, Large enterprises and Very large enterprises The authorisations granted by the Bank of Spain for the use of advanced models are subject to Bankinter s correction of the weaknesses found and implementation of improvements following a plan that must be communicated to the supervisor. In this regard, Bankinter currently complies, and will continue to do so, with the commitments acquired in this process. Likewise, Bankinter has also been authorised by the Bank of Spain to permanently apply the standard method to portfolio-related exposures: - Public Sector Central Government - Public Sector Territorial Administration - Financial Entities - Equity Securities B) Structure of the internal rating systems Bankinter s Annual Report, under the section Internal risk quantification models (page 119 et. seq.), describes the relevant categories, ratings and risk structure by category and credit rating. As indicated therein, customer positions are classified under internal credit risk categories. Each of these internal categories groups together the positions which, from the risk viewpoint, are sufficiently homogeneous while being sufficiently differentiated from other categories, in order to allow the statistical modelling thereof. A rating model is applied to each of these categories. No relationship is established between the internal and external ratings. The number of portfolio customers with external ratings is very low. The comparison between the different internal rating models is made based on a master scale described on page 121 of the Annual Report. In addition to the calculation of regulatory capital, the internal ratings are present in the transaction acceptance process, either forming part of the automatic sanction algorithms or as information decision-making in manual transaction sanctioning; form part of certain alert and transaction recovery processes; are being incorporated into the simulators that guide sales network price-related decisions; are used as a 31

32 base for internal capital calculation processes; and are being incorporated into the risk-adjusted profitability measurement systems at business and customer level. With regard to the reduction in credit risk, in retail transactions the guarantees form part of the rating algorithm in some models (loan-to-value in mortgage guarantees) or transaction sanction algorithms. In other cases, they are present in the severity estimate. In the case of corporate transactions, guarantees in rem are included in LGD calculations. For the purposes of regulatory capital calculation, personal guarantees are applied in accordance with the provisions established in Circular 3/2008, determining the own funds requirements of each transaction based on the most solvent intervening party. The internal rating models are developed by the Models Unit that reports to the Global Risk Management Department, and approved by the Risk Committee. These models are subject to internal auditing and validation, and to the supervisor s validation. These actions are carried out respectively by the Internal Audit Department and the Internal Validation Unit, which ensures an independent review process. The Internal Audit Department verifies the quality and integrity of the databases and the processes followed for model construction, the adaptation of the technological environment in which they operate and the adequate integration in the management thereof. The Internal Validation Unit carries out a critical examination of model construction and review, and issues its independent opinion, based on and upgraded according to whether the models function as expected and whether the results obtained are adequate for the different uses to which they are applied. The review, maintenance, audit, validation and approval of the models is carried out at least once a year based on a protocol established to guarantee the proper functioning thereof. C) Description of the internal rating assignment process In the case of exposures relating to natural persons, a) With regard to retail exposures secured by real estate mortgages, the Bank has had a study and automatic sanction system in place for many years which processes the transactions. It is electronically connected to an information module that applies the rating model and, in accordance with the information entered in the credit proposal, assigns a rating to the transaction. This rating forms part of the algorithm that automatically sanctions the transaction, authorising, rejecting or deriving it to a manual sanction procedure. In this manner, the rating is fully integrated in the risk acceptance process. There is a small number of transactions which due to their characteristics must be processed outside of this system. These transactions are assigned a rating at the time of their formalisation and recording. In this manner, all the 32

33 transactions related to this kind of risk with a risk model authorised by the supervisor have ratings and corresponding internal risk measurements. b) Eligible renewable retail exposures: in these transactions rating models are used, the use of which for regulatory capital, at 31 December 2008, has not yet been approved by the supervisor. Therefore the standard method is temporarily being applied to these. c) In relation to the rest of the retail exposures relating to natural persons, the process is similar to that described in section a) for transactions with internal models approved by the supervisor. In the case of exposures relating to enterprises, Bankinter has different acceptance processes and systems depending on the business segment. They all take transaction and customer characteristics and derive them to the transaction rating module, which assigns a rating based on the internal model that corresponds to these in accordance with their characteristics. This rating forms part of the sanction rule that determines the transaction as being authorised, rejected or not sanctionable (in which case the rating is reported and the transaction is derived to a manual sanctioning process). When the sanction is manual, the rating forms part of the information that is considered in the authorisation or rejection of the transaction, and it is electronically associated to the transaction when, in the event of having been approved, it is formalised. The Bank reviews the ratings assigned at least once a year, and these are also upgraded whenever an event that can affect customer risk quality occurs (mainly new transactions, change in subjective evaluation, modification of their balance and withdrawal due to default). In the case of financing for real estate development, the process is similar to that described above. In particular, we must point out that Bankinter has a rigorous acceptance process in place, wherein a comprehensive subjective questionnaire relative to the customer s characteristics and the promotion to be financed serves as a basis for rating the transaction, which is included as information of relevance to the transaction sanction decision. In all the transactions pertaining to categories with an internal model, both for natural and legal persons, the rating and risk components and their upgrades, once electronically associated to each contract, are fully integrated in the related information and can be used in other management processes (regulatory capital calculation, internal capital, risk-adjusted profitability measurement systems, credit portfolio follow-up, etc.) Exposure value Exposure value is included below, differentiating whether own loss estimates are used in the event of default (AIRB) or not (FIRB). 33

34 Breakdown of enterprises category, with own estimates of loss parameters in the event of default (LGD) The breakdown of the main exposure included in the enterprises category is the following: Breakdown of retailers category The breakdown of the main exposures included in the retailers category is the following: 34

35 Breakdown of enterprises category without own estimates of loss parameters in the event of default (LGD). Specialised financing exposures Pursuant to Rule 25.9 of 3/2008, for specialised financing exposures with respect to which the Bank cannot calculate own PD estimates, the following risk weights are applied: Asset deterioration-related losses The breakdown of asset deterioration losses in FY2008 for exposures to which the IRB approach is applied, including both specific and generic provisions (estimated amounts), is the following: 35

36 Total Group asset deterioration-related losses grew 155% in FY2008, spearheaded by the economic downturn. However, the Bank maintains a delinquency index significantly below the sector average, as shown in the following graphs, which are included in the Presentation of 4Q08 Results (available from the Bank s corporate website): Description of the factors that have influenced the losses suffered during the prior period 36

37 2008 heralded the start of a new economic period characterised by global financial turbulence, which has impacted the liquidity of Financial Institutions, the main loss factor in Spain being the increase in delinquency. The financial crisis, which began in 2007, has erupted into a full-blown global recession, affecting Spain both directly and indirectly, spurred by reduced activity in Europe, its main export market. The reduction in economic activity measured in terms of GDP growth, in addition to the slump in the real estate sector, have been the main characteristics of the year. The sharp downturn in internal demand has been offset by the positive contribution of external demand. From the activity viewpoint, all sectors have slowed down although the construction sector has suffered the worst effects. Consumption indicators have fallen progressively, especially affecting the automobile sector, which reflects the lagging consumer trust indicator. This weakening in demand has resulted in lower investment in capital goods which, accompanied by the hardening of credit conditions, has led to a slowdown in corporate investment. The deterioration in employment indicators has directly affected consumer and enterprise trust. The job destruction initiated by the construction sector has extended to other sectors, which are also affected by lower external demand. The year has been clearly characterised by a redimensioning of the real estate sector, with a direct effect on period losses. The high indebtedness of developers and sharp slowdown in all housing-related activities are the basic causes of the impact on this sector of the economy. The excess supply of housing, with an already high stock, was one of the factors that triggered the sharp downturn in this activity. The slump in the real estate sector comes at a time of high leverage in sector companies which, in view of falling flat sales and stagnating property sales, has derived in the impossibility of fulfilling credit obligations with the banking sector. Triggered by the change in the real estate sector, the slowdown has subsequently spread to development-related construction companies, and especially in those industrial activities pertaining to the auxiliary construction sector. The services sector, which had performed well during the first half of the year, finally succumbed to the situation in the last quarter. The last quarter has started to show the first signs of unemployment, negatively affecting home mortgages, and especially impacting the production of the last few years. The rise in interest rates throughout 2008 has been another factor which has sparked an increase in delinquency and, ultimately, in losses. The indebtedness of families has grown until reaching a maximum level of 130% of available income. The plunge in interest rates in the last quarter will ease the level of effort to which the families are submitted Comparative analysis between the Bank s estimated losses and the results obtained The historical information currently available does not allow a significant evaluation of the results, on not having sufficient details for the full economic cycle, since 1990, which is used to estimate the regulatory components in the models. It is relevant to 37

38 note, in any case, that the estimates made in accordance to the supervisory indications include conservative criteria. 38

39 4.12- Securitisation transactions Securitisation, for the purpose of Circular 3/2008, is understood to be a financial transaction or mechanism by virtue of which the credit risk associated to an exposure or group of exposures is divided into two or more independently transferable tranches and which have the following characteristics: a) The transaction or mechanism payments will depend on the performance of the securitised exposure or group of exposures. b) The subordination of the tranches determines the distribution of losses during the period of validity of the transaction or mechanism. The evaluation of these characteristics for the purpose of determining the existence or non-existence of a securitisation transaction will be carried out considering both the legal form and economic base thereof. In order to apply the securitisation method set out in section four of chapter four of Circular 3/2008, in the case of originating entities, the securitisation must fulfil the significant and effective risk transfer requirements. Synthetic securitisation is that in which the division of credit risk into tranches and the transfer thereof is carried out by purchasing credit protection on the securitised exposures, either through credit derivatives or guarantees. Traditional securitisation is that which implies the economic transfer of the securitised exposures to a special-purpose securitisation vehicle that issues securities. The securities issued by said vehicle do not represent payments by the originated entity. In accordance with this definition, at 31/12/08 the Group currently has sixteen traditional securitisation transactions and one synthetic securitisation transaction, which fulfil the risk transfer characteristics stipulated by Circular 3/2008 for applying the established treatment for securitisations Bank objectives in relation to its securitisation activity In recent years traditional securitisations have played a relevant role in financing liquidity growth and management in the medium-long term. At 31 December 2008 the balance of securitised and sold bonds stands at 4,714 million (9% of total assets). Additionally, the Bank maintains more than 8,000 million in securitisation bonds in its portfolio, as a source of liquidity through the discount thereof in the European Central Bank. 39

40 In 2008, Bankinter launched three mortgage securitisations to the amount of 4,543 million, a SME loan securitisation to the amount of 400 million, and a leasing transaction securitisation for another 400 million. This totals 5,343 million. Additionally, the leasing securitisation represents the first time that the Bank sets up an open fund with recharge possibility during the two years following their creation. All of these securitisations have been maintained in the portfolio and, therefore, are not bound to the securitisation framework of Circular 3/2008. Additionally, in 2007 the Group launched the synthetic securitisation Castellana Finance, to the amount of 185,150 thousand. Through this transaction, completed on 7 July 2007, the Bank obtained protection against the first loss risk that it maintains in its balance sheet as a consequence of the fourteen mortgage securitisations carried out until that date. The underlying portfolio is comprised of lines of credit, loans and first loss bonds corresponding to the fourteen mortgage securitisations carried out until Functions performed by the Bank in securitisation processes The Bank intervenes in securitisation transactions as originating entity, participating in the initial agreement for the creation of the obligations or potential obligations of the debtor or potential debtor, and carries out the securitisation of the exposure. It also participates as counter-party in the payment agent and loan administrator contracts, in addition to counter-party in an interest rate swap contract by virtue of which the Fund will issue payments to Bankinter calculated on the reference interest rate for Participation Mortgage Loans, and as counter-party Bankinter will issue payments to the Fund calculated based on the Reference Interest Rate determined for the Bonds. The following table includes the current balance of the securitisation transactions carried out by the Bank: 40

41 Thousand Euros Removed from the balance sheet before Bankinter 1 Mortgage Securitisation Fund Bankinter 2 Mortgage Securitisation Fund 71,278 Bankinter 3 Mortgage Securitisation Fund 431,510 Bankinter 4 Mortgage Securitisation Fund 419,641 Bankinter 5 Mortgage Securitisation Fund 282,040 Bankinter 6 Mortgage Securitisation Fund 675,918 Bankinter 1 SMESF 33,048 2,002,386 Fully maintained on the balance sheet Bankinter 7 Mortgage Securitisation Fund 236,605 Bankinter 8 Asset Securitisation Fund 538,755 Bankinter 9 Asset Securitisation Fund 640,498 Bankinter 10 Asset Securitisation Fund 1,096,825 Bankinter 11 Mortgage Securitisation Fund 635,770 Bankinter 12 Mortgage Securitisation Fund 860,885 Bankinter 2 SME Asset Securitisation Fund 455,000 Bankinter 13 Asset Securitisation Fund 1,231,656 Bankinter 14 Mortgage Securitisation Fund 813,494 Bankinter 3 SME Asset Securitisation Fund 488,580 Bankinter 15 Mortgage Securitisation Fund 1,333,463 Bankinter 16 Asset Securitisation Fund 1,862,106 Bankinter 17 Asset Securitisation Fund 949,384 Bankinter Leasing I, Asset Securitisation Fund 362,994 Bankinter 4 SMESF, Asset Securitisation Fund 345,079 Bankinter 18 Asset Securitisation Fund 1,486,123 13,337,217 The breakdown of the securitisation bond treasury stock at 31 December 2008 is the following: 41

42 Thousand Euros BK10 ASF 84,049 Bk 11 MSF 22,098 BK 12 MSF 874,367 BK 2 SME ASF 14,387 BK 13 ASF 40,609 BK 14 MSF 833,213 BK 3 SMESF ASF 434,294 BK 15 MSF 1,395,070 BK 16 ASF 1,922,464 BK17 ASF 972,829 BK Leasing I, ASF 400,023 BK 4 SMESF ASF 400,023 BK 18 ASF 1,500,034 Rest of securitisations 67,550 8,961, Summary of the accounting policies as regards securitisation The accounting treatment as regards securitisation is established in the Valuation Rules included in the Group s annual accounts, Note 5. i) of the Annual Report, which summarises the provisions of Bank of Spain Circular 4/ Breakdown of securitised assets bound to the securitisation framework Of the securitisation transactions included in the first table of point , the only ones that fulfil the significant and effective risk transfer requirements and, consequently, can be treated under the method set out in section four of chapter four of Circular 3/2008 are set out below. The rest of the transactions will be included in the assets, receiving for the purpose of own funds, the same treatment as if the securitisation had never existed. 42

43 (*) Secured by the synthetic securitisation Castellana Finance; although these are maintained on the balance sheet, deterioration provisions will only be made for the retained amount of initial losses and value of the derivatives that comprise the transaction, the total recognised deterioration loss in FY2008 being 3 million, and the total deterioration provision being 34 million Deterioration losses recognised in FY1008 are insignificant Deterioration provision includes both specific and generic provision With respect to the synthetic securitisation Castellana Finance, broken down in point , only class D bonds are maintained in the portfolio, to the amount of 2.8 million, which is provisioned 100% Breakdown of securitised positions by type of exposure In order to calculate risk-weighted exposure, the IRB Securitisation Method described in Rule 61 of Circular 2/2008 is used, and S&P, Moody s and Fitch have been used as external rating agencies. 43

44 In FY2008 no securitisation transactions were performed that fulfil the necessary requirements for the securitisation treatment set out in section four of chapter four of Circular 3/2008. A breakdown of securitisation positions at 31/12/08 by type of exposure and their corresponding consumption of own funds is provided below. 44

45 45

46 4.13- Credit risk reduction techniques Policies and procedures The risk policy determines that the property that is the object of the mortgage must be located in consolidated areas, and must have sufficient liquidity to guarantee the rapid sale thereof. This same criteria is applicable to both homes and premises and offices that serve as a guarantee on credit risk. There is a robust mortgage process in place where the valuations form the basis thereof. Valuation companies, which must be approved by the Bank of Spain and not be an activity carried out by a subsidiary of the Bank, are periodically selected. Another of the basic aspects for ensuring correct valuation is the random choice of the valuation company in charge thereof, which is fundamental in guaranteeing an independent process. Among the types of guarantees in rem accepted by Bankinter, we must firstly highlight that on the first home, both resulting from the purchase thereof and given to guarantee enterprise transactions. Secondly, we must highlight the guarantee on premises and offices, having minimum exposure to guarantees on properties. There is also a small percentage of guarantees on deposits and securities, which mainly belong to the IBEX index, which guarantees the liquidity thereof. Credit risk portfolio diversification is one of the basic pillars of the risk policy. In this regard, from the activity viewpoint, the greatest economic sector by risk does not exceed 10% of the Bank s risk, thereby ensuring good credit quality. With regard to derived products, the Bank s policy is to have collateral security agreements signed with the main counter-parties (see point ) Value for each exposure category and exposure guarantee secured by guarantees in rem (STD and FIRB methods) At 31/12/2008 the Bank has only applied as guarantees in rem under the standard approach mortgage guarantees to the amount of 1,271,574 thousand, of which 1,226,229 thousand correspond to the exposures with regard to natural persons or enterprises guaranteed by residential or commercial real estate category and 45,345 thousand are included in the delinquent exposures category Value for each exposure category and exposure guarantee secured by personal guarantees or credit derivatives The only significant credit derivative of the Bank is the synthetic securitisation explained in the section on Securitisations. 46

47 With respect to signature guarantees, the amounts considered by category are the following: Category Signature guarantee Enterprises 461,247 Retailers 98,023 TOTAL 559, Information on counter-party credit risk The breakdown and composition of own funds exposure and requirements for counter-party risk is the following, applying the market price valuation method established in Rule 73 of Circular 3/2008. Own funds requirements for counter-party risk represent 1% of total own funds requirements, thus being insignificant. The operating limits fixed for each counter-party (Enterprise and/or Group) are approved by Bankinter s Risk Committee on recommendation of the Credit Risk Division, being subsequently ratified by the Executive Committee or Board of Directors if the limits exceed 25 million or 50 million, respectively. The Risk Provision for each Counter-Party (Enterprise and/or Group) figure is determined by the sum of risk consumption assigned to each transaction based on certain conditions (essentially: type of transaction, risk parameter and terms) fixed by the Credit Risk Division which, in general, can be summarised under: - Transactions not subject to market value: a risk parameter (percentage) of the nominal value of the transaction. - Transactions subject to market value: market value at a given date plus a credit risk add-on (internally determined as a percentage of the nominal, taking different variables into account: product, underlying, deadline, etc.). 47

48 Guarantees in rem that the Bank would have to provide in the event of a reduction in its credit rating In the event of a fall in the Bank s rating, the regulation of the Securitisation Funds originated thereby foresees the possibility of adopting guarantee measures with respect to those contracts related to the Funds in which the Bank is a counter-party. Specifically, it refers to contracts for the fund accounts, administration, subordinated line of credit, swap and payment agency. On the other hand, as part of the ISDA agreements that the Bank has signed for the derivatives activity with most of the counter-parties, there are collateral security agreements (CSA) that establish a guarantee payment/collection operating procedure based on position portfolio valuation. In this manner, in the event of default by any of the parties, these guarantees will cover the market value of the positions. These guarantee settlements establish minimum amounts for payments/collections; the market standard establishes that these thresholds are directly linked to the credit rating of both the Bank and the counter-parties. A discount in these would imply, in the event of having to provide a guarantee, that it would be made based on a lower threshold, and therefore the amount due would be higher. In the case of the Bank, it is considered that the amount would not be significant for current CSAs at 31712/ Credit derivatives There is only one significant credit derivatives transaction, the synthetic securitisation detailed in section 4.12 of Securitisations. 48

49 5- Information on trading portfolio market risk Pursuant to Rule 82 of Circular 3/2008, trading portfolio is considered, for the purpose of own funds, as being that comprised of all the positions in financial instruments and raw materials that the entity maintains for trading purposes or that serve as a hedge for other portfolio elements. The trading portfolio defined in Rule 22 of Circular 4/2004 (for the purpose of financial statements), is comprised of financial assets and liabilities that fulfil any of the following characteristics: Financial assets 1) Are originated or acquired with the objective of being executed in the short term. 2) Form part of a financial instrument portfolio that is jointly identified and managed so that there is evidence of recent actions in order to obtain short-term gains. 3) Are derived instruments that do not fulfil the definition of financial guarantee contract nor have been designated as hedge accounting instruments. Financial liabilities 1) Have been issued with the intention of reacquiring them in the near future. 2) Are short value positions. 3) Form part of a financial instrument portfolio that is jointly identified and managed so that there is evidence of recent actions in order to obtain short-term gains. 4) Are derived instruments that do not fulfil the definition of financial guarantee contract nor have been designated as hedge accounting instruments. At 31/12/2008, following prudence criteria, the Group considers as trading portfolio for own funds requirements purposes the trading portfolio established by Circular 4/2004. The amount of own funds requirements for each type of risk is the following: 49

50 6- Information on operating risk The Group calculates own funds requirements for operating risk using the standard method, in accordance with the communication sent to the Bank of Spain on 23 September A breakdown of the consumption of own funds for said risk is provided below: 7- Information on shareholdings and capital instruments not included in the trading portfolio The shareholding and capital instruments portfolio not included in the trading portfolio is considered of little relevance, both in terms of exposure and perceived risk profile and, on this basis, pursuant to Rule 24.4 c) of Circular 3/2008 the standard method is permanently applied. The accounting policies and valuation methods applied are described in Note 5 of Grupo Bankinter s Annual Report. 50