Risk ManageMent2010
The Danske Bank Group is Denmark’s largest financial services organisation and one of the major players in the nordic region. The Group offers customers in Denmark and its other markets a broad range of services in banking, mortgage finance, insurance, leasing, real estate agency and investment management.
Danske Bank is an international retail bank that operates in 15 countries with a focus on the nordic region. It has a leading market position in Denmark; it is one of the larger banks in northern Ireland and Finland; and it has a challenger position in the other markets: sweden, norway, Ireland and the Baltics.
The Group serves customers through various distribution channels, including nation-wide branch networks, contact centres, the Internet and mobile telephony, depending on the complexity of custo-mers’ needs. The Group’s products are based on a shared IT and service platform that lays the foundation for an efficient centralisation of risk management, finan-cial follow-up and product development.
The Group also has branches in london, Hamburg, warsaw and moscow. a sub-sidiary in luxembourg caters to private banking customers, and another in st. Petersburg serves corporate banking customers. The Group also has offices in the major international financial centres and in Denmark’s largest export markets.
The Group offers life insurance and pension products through Danica Pension and mortgage finance through Realkredit Danmark.
altogether, the Group serves more than 5 million customers and a significant share of public sector and institutional customers. more than 2.3 million custo-mers take advantage of online self-service options.
The Group’s well-trained and professional staff offers individual services tailored to customers’ needs and desires. The Group employs a total of more than 21,000 people.
The Danske Bank Group’s business model
3 DANSKE BANK RISK MANAGEMENT 2010 2010 IN BRIEf
COntents
4 1. 2010 in brief
6 2. Risk organisation
15 3. Capital management
32 4. New regulations
38 5. Credit risk
64 6. Counterparty risk
69 7. Market risk
85 8. Liquidity risk
93 9. Operational risk
98 10. Insurance risk
106 11. Pension risk
111 12. Consolidation
114 13. Definitions
121 Appendix A
Disclosures required under the Danish Executive Order
on Capital Adequacy (Pillar III)
the objective of Risk Management 2010 is to inform shareholders and other stakeholders of the Danske Bank Group’s risk and capital management policies, including risk management methodologies and practices.
Risk Management 2010 is a translation of the original document in the Danish language (Risikostyring 2010). In case of discrepancies, the Danish version prevails.
4 2010 IN BRIEf DANSKE BANK RISK MANAGEMENT 2010
1. 2010 in brief
The year 2010 was yet another challenging year for the financial sector, Danske Bank and our custom-ers. After the extreme financial crisis at the end of 2008 and the beginning of 2009, we saw economic recovery in most markets in 2010. But there were great differences in the strength of the recovery in the various national economies.
The recovery was generally stronger than had been expected at the beginning of 2010, and growth es-timates for Denmark also rose during the year. The public budget deficits, the weak economies and the turbulence in the capital markets necessitated rescue packages for Greece and Ireland. Other indebted EU countries also face fiscal tightening and growth rates that are likely to be very weak in the near future. The Group’s home markets are expecting economic growth, but it will generally be modest.
The Group’s main source of income – its banking activities – showed robust earnings before impair-ment charges. In Denmark, a decline in impairment charges supported a healthy rise in profit. The Group’s activities in Sweden and Norway generated satisfactory results. At the units in Ireland and Northern Ireland, however, impairment charges remained high, and both units posted losses.
At the end of 2010, total credit risk exposure from lending activities was DKK 2,363 billion, against DKK 2,301 billion at the end of 2009. Retail lending rose 3%, and corporate lending fell 2% during the year. Retail customers accounted for 37% of credit exposure from lending activities, corporate custom-ers for 38%, financial counterparties for 19% and public sector customers for 6%. Of the corporate exposure, small and medium-sized enterprises accounted for 68%.
The Group’s bond holdings, calculated as the carrying amount, totalled DKK 422 billion, which was in line with the level at the end of 2009. Most of the bond holdings are liquid and can be used as collater-al for loans provided by central banks. The bond holdings thus constitute part of the Group’s liquidity reserve.
Most of the bonds are Danish mortgage bonds, Swedish covered bonds and other covered bonds under public supervision. Some 29% of the Group’s holdings consisted of government bonds, mainly issues from the Nordic countries, Germany, France, the UK and the US. Government bonds issued by Ireland, Portugal, Italy, Greece and Spain amounted to only 1.5% of the total bond exposure, calculated as the carrying amount.
In the spring and summer of 2010, the financial markets exhibited high volatility because of the European debt crisis, but Scandinavian banks, including Danske Bank, were not adversely affected by these events.
In the autumn of 2010, the Danish financial sector monitored the Danish liquidity market carefully upon the expiry of “Bank Package I”. The expiry of the state guarantee had no adverse effect on the Group’s liquidity position.
5 DANSKE BANK RISK MANAGEMENT 2010 2010 IN BRIEf
At the end of 2010, the Group’s total capital ratio was 17.7% and its solvency need was 10.7%. It thus had a massive capital buffer that, at DKK 59.7 billion, was 65% above the solvency need. The Group’s tier 1 capital ratio was 14.8%, and its core tier 1 capital ratio was 10.1%.
A natural reaction to the financial crisis is a demand for tighter and better regulation of the financial sector. This is a topic that will be high on the agenda in 2011 and onwards. In 2010, the Basel Com-mittee announced new increases in capital requirements (Basel III). With its solid liquidity and capital positions, Danske Bank is well prepared to meet the requirements. Nonetheless, the Group continues its efforts to optimise its liquidity and capital structure.
The Danske Bank Group estimates that its current core tier 1 capital ratio will be reduced by around 1.2 percentage points when calculated on the basis of fully phased-in Basel III rules. One-third of the reduction will come from a rise in risk-weighted assets, and two-thirds from deductions from core tier 1 capital.
For the leverage ratio, the Basel Committee has announced a requirement of 3% for tier 1 capital in relation to total exposure, although it will not be a formal requirement until 2018. Danske Bank’s provisional estimate is that in 2010 its leverage ratio, adjusted for Basel III, was about 3.6%.
The liquidity requirement in the Basel III framework, as it stands now, will necessitate significant changes in the Group’s funding structure and the composition of the liquidity buffer. Two of the main reasons for the changes are limited opportunities for including mortgage bonds in the buffer and non-recognition of funding with a term to maturity of less than one year.
The EU Commission is expected to make a proposal (CRD IV) in mid-2011 for the implementation of Basel III. It will then be sent to the EU Parliament and the Council of the European Union with a view to its implementation in the member states at the beginning of 2013. The actual form of the final rules to which the Group will be subject is thus uncertain.
6 RISK ORGANISATION DANSKE BANK RISK MANAGEMENT 2010
2. RIsk ORGanIsatIOn
7 2.1 Risk organisation
8 2.1.1 Board of Directors
9 2.1.2 Executive Board
9 2.2 Risk monitoring
10 2.3 Risk committees
12 2.4 Risk management
12 2.4.1 Group Risk
12 2.4.2 Group finance
12 2.4.3 Group Credit
13 2.4.4 Business units
13 2.5 Reporting
7 DANSKE BANK RISK MANAGEMENT 2010 RISK ORGANISATION
On 1 January 2010, the Danske Bank Group created Group Risk as a separate function and appointed a chief risk officer (CRO), who reports to the chairman of the Executive Board (the Group CEO). The CRO has overall responsibility for the Group’s risk policies and for reviewing risk across risk catego-ries, types and organisational units.
In December 2010, the Danish FSA issued an executive order on the governance and management of financial institutions. The executive order clarifies boards of directors’ obligations as presented in the Danish Financial Business Act and sets forth requirements for effective business governance and liquidity management. For the Danske Bank Group, the executive order does not necessitate any significant changes in management organisation or practice.
2.1 risk organisation
Danske Bank’s rules of procedure for the Board of Directors and the Executive Board (the “Rules of Procedure”) specify the responsibilities of the two boards and the division of responsibilities between them. The Rules of Procedure and the two-tier management structure, which were developed in accordance with Danish legislation, are central to the organisation of risk management and the policy on the delegation of authority in the Group.
The Board of Directors lays down overall policies, while the Executive Board is in charge of the Group’s day-to-day management. The risk and capital management functions are separate from the credit assessment and credit-granting functions.
The Group’s management structure reflects the statutory requirements governing listed Danish compa-nies in general and financial services institutions in particular.
8 RISK ORGANISATION DANSKE BANK RISK MANAGEMENT 2010
BOARD OF DIRECTORS
CREDIT AND RISK COMMITTEE
ALL RISK COMMITTEE
OPERATIONAL RISK COMMITTEE
AUDIT COMMITTEE
EXECUTIVE BOARD’S CREDITCOMMITTEE
GROUP FINANCE
RISK CAPITAL & FRAMEWORK
BUSINESS UNITS
LOCAL CREDIT DEPARTMENTS
MARKET RISKMANAGEMENT
EXECUTIVE BOARD
INTERNAL AUDIT
CREDIT CORPORATE BANKING
CREDIT PORTFOLIOMANAGEMENT
CENTRAL CREDIT, BANKING ACTIVITIES
GROUP CREDIT
REMUNERATION COMMITTEE
LOCAL RISK COMMITTEES
GROUP TREASURY
RISK ORGANISATION OF THE DANSKE BANK GROUP
GROUP RISK
MGT. OF RISK PARAMETERS AND MODELS COMMITTEE
CREDIT METHODS & PROCESS
LIQUIDITY
ASSET AND LIABILITY MGT. COMMITTEE
Established by the Board of Directors
Established by the Executive Board
2.1.1 board of Directors
The Board of Directors must ensure that the Group is organised properly. As part of this duty, it ap-points the members of the Executive Board, the group chief auditor and the secretary to the Board of Directors.
In accordance with Danske Bank’s Rules of Procedure, the Board of Directors sets out the overall risk policies and limits for all material risk types. In addition, the largest credit facilities are submitted to the Board of Directors for approval. The Board also decides on general principles for managing and monitoring risk, and it reviews the risk policies and limits annually.
Regular reporting enables the Board of Directors to monitor whether the overall risk policies and limits are being complied with and whether they meet the Group’s needs. In addition, the Board regularly reviews reports analysing the Group’s portfolio, including data on industry concentrations.
9 DANSKE BANK RISK MANAGEMENT 2010 RISK ORGANISATION
The Board of Directors consists of six to ten members elected by the general meeting and a number of employee representatives as stipulated by Danish statutory rules. At the end of 2010, the Board con-sisted of 15 members, including five employee representatives.
The Board meets about 12 times a year according to a schedule that is set for each calendar year. Once or twice a year, the Board holds an extended meeting to discuss the Group’s strategy.
The group chief auditor, who is head of the Group’s Internal Audit department, reports directly to the Board of Directors. Internal Audit is responsible for determining whether the Group’s administra-tive and accounting policies are satisfactory, that there are written business procedures for all areas of activity, that adequate internal control procedures are in place, and that IT use is controlled in accordance with the control policies adopted.
2.1.2 executive board
The Executive Board is responsible for the day-to-day management of the Group as stated in the Rules of Procedure. The Executive Board sets forth specific risk instructions and supervises the Group’s risk management practices. It reports to the Board of Directors on the Group’s risk exposures and approves credit applications up to a defined limit.
The Executive Committee, headed by the Group CEO, functions as a coordinating forum. Its purpose is to provide an overview of activities across the Group, including a focus on the collaboration between support functions and product suppliers on the one hand and individual units and country organisa-tions on the other.
2.2 risk monitoring
On the basis of the general risk policies and limits defined by the Board of Directors, specific risk instructions are prepared for all the main business units. These instructions are used to lay down busi-ness procedures and control procedures for the various units and for the Group’s system development work.
Every quarter, the Group assesses its risk profile in accordance with the risk instructions for its major business units. The Group conducts risk management at the customer and industry levels as well as on the basis of geographical location and collateral type. Risk monitoring is based on the following central risk areas:
• Credit risk, including counterparty risk• Market risk• Liquidity risk• Operational risk• Insurance risk
10 RISK ORGANISATION DANSKE BANK RISK MANAGEMENT 2010
2.3 risk committees
The Board of Directors has set up a number of committees to supervise specific areas and to prepare cases for consideration by the full Board. Under Danish law, board committees do not have independ-ent decision-making authority but rather serve in a consulting role. The committees include the Credit and Risk Committee, the Remuneration Committee and the Audit Committee (see the table below).
COMMITTEES ESTABLISHED BY THE BOARD Of DIRECTORS
Credit and Risk Committee This committee functions as a consulting panel on significant credit exposures submitted to the Board of Directors for approval. It also reviews trends in the credit quality of the Group’s loan portfolio and evaluates special renewal applications and facilities. The committee has a consulting role on the management of all risks to which the Group is exposed and reviews the Group’s risk management practices.
Remuneration Committee This committee monitors trends in the Group’s salary and bonus framework. It also monitors incentive programmes to ensure that they promote ongoing, long-term shareholder value creation.
Audit Committee This committee examines accounting, auditing and security issues. These are issues that the Board, the committee itself, the group chief auditor or the external auditors think deserve attention before they are brought before the full Board. The committee also reviews the internal control and risk management systems.
The Executive Board has established three committees that are in charge of ongoing risk management: the All Risk Committee, the Executive Board’s Credit Committee and the Operational Risk Committee (see the table below).
11 DANSKE BANK RISK MANAGEMENT 2010 RISK ORGANISATION
COMMITTEES ESTABLISHED BY THE EXECUTIVE BOARD
All Risk Committee This committee is responsible for managing all risk types across the Group. Its responsibilities include the following:
• Setting targets for the capital ratios and capital composition
• Managing the balance sheet
• The funding structure
• General principles for measuring, managing and reporting the Group’s risks
• Risk policies for business units
• The overall investment strategy
• Capital deployment
In addition, the committee evaluates risk reports to be submitted to the Board of Directors or one of its committees. The All Risk Committee consists of members of the Executive Board and the heads of Group Risk, Danske Markets, Group Treasury and Credit Portfolio Management (under Group Credit). It meets 10 to 12 times a year.
Executive Board’s Credit Committee
Credit applications that exceed the lending authorities of the business units must be submitted to the Executive Board’s Credit Committee for approval. The local credit departments of the business units review these applications before the heads of the departments submit them to the Executive Board’s Credit Committee.
The committee consists of members of the Executive Board and the management team of Group Credit. It is also in charge of preparing operational credit policies and makes decisions on credit applications involving issues of principle. The Board of Directors determines the lending authorities. The Executive Board’s Credit Committee participates in decisions on the valuation of the Group’s loan portfolio in connection with the determination of loan impairment charges.
Operational Risk Committee
This committee assists the Executive Board in its functions and processes related to operational risk management. The committee’s responsibilities include the following:
• Identifying, monitoring and managing the Group’s current and potential opera-tional risk exposures
• Handling “critical risks”, that is, risks that, in the view of business unit manage-ments or the committee itself, require follow-up and further reporting
• following up on reviews by and reports from financial supervisory authorities and informing the Executive Board of issues affecting the Group’s operational risks
• following up on reports prepared by Internal Audit and informing the Executive Board of unusual circumstances
• Preparing management information on issues such as IT security, physical security, business continuity and compliance
The Operational Risk Committee is headed by a member of the Executive Board and includes managers of all major support functions and resource areas, including IT, and the Group Business Development department.
The Group has also set up various sub-committees for specific risk management areas, such as the Asset and Liability Management Committee and the Management of Risk Parameters and Models Committee. The sub-committees consist mostly of senior management.
The committees are intended to assist the Executive Board and the Board of Directors in ensuring strict risk management in the Group and to ensure that risk management and risk reporting always comply with statutory regulations and the Group’s general principles for such practices.
In 2009, the Group established local risk committees in its subsidiaries and major business units in order to further strengthen risk management. Their purpose is to ensure compliance with the policy that the Board of Directors and the Executive Board have set.
The committees, which are chaired by the heads of the units, convene at least four times a year.
12 RISK ORGANISATION DANSKE BANK RISK MANAGEMENT 2010
2.4 risk management
Responsibility for the day-to-day management of risks in the Group is divided between Group Risk, Group Finance, Group Credit and Group Treasury. The Group has established a functional separation between units that enter into business transactions with customers or otherwise expose the Group to risk on the one hand, and units in charge of overall risk management on the other.
2.4.1 Group risk
Group Risk has overall responsibility for the Group’s risk policies and for monitoring and reporting on risks across risk types and organisational units. The head of Group Risk, the chief risk officer, reports directly to the Group CEO and is a member of the Executive Committee.
Group Risk supports the rest of the risk management organisation in their risk management practices and reporting. This includes reviewing the Group’s risk infrastructure on the basis of the experience from the recent financial and economic crisis, among other things. Group Risk serves as the secretariat of the All Risk Committee and chairs the Risk Parameters and Models Committee, which approves the Group’s use of risk models, the results of backtests, changes to parameters and other matters.
In addition, Group Risk serves as a referral resource for the local risk committees and is responsible for the Group’s relations with international rating agencies.
2.4.2 Group finance
Group Finance oversees the Group’s financial reporting, budgeting, risk management and strategic business analysis, including the tools used by the business units for performance follow-up and analy-sis.
The department is also in charge of the Group’s investor relations, corporate governance, capital struc-ture and M&A activities. In addition, it is responsible for the day-to-day management of operational risk and market risk as well as the compilation of risk-weighted assets and the Group’s ICAAP (see section 3).
2.4.3 Group Credit
Group Credit has overall responsibility for the credit process at all of the Group’s business units. This includes responsibility for developing credit classification and valuation models and for ensuring that they are used in day-to-day credit processing at the local units. The local credit departments report to Group Credit.
Group Credit is also responsible for implementing and validating credit risk parameters and for back-testing credit risk parameters.
Group Credit is in charge of determining the portfolio limits for specific industries and countries and the quarterly process of calculating the impairment of exposures. It also monitors the credit quality of the Group’s loan portfolio by monitoring trends in unauthorised excesses and overdue payments, new approvals of credit to weak customers and other factors.
Group Credit reports to executive management on developments in the Group’s credit risk. The depart-ment is also responsible for preparing management information about credits, for monitoring credit approvals at the business units, and for determining the requirements for the Group’s credit systems and processes.
13 DANSKE BANK RISK MANAGEMENT 2010 RISK ORGANISATION
2.4.4 business units
Risk areas such as market risk and liquidity risk are managed centrally in the organisation. New measures from local regulators, however, have led the Group to increase the degree of decentralisation, especially of liquidity risk management.
For credit risk, lending authority for specific customer segments and products has been granted to the individual business units. The business units carry out the fundamental tasks required for optimal risk management. These include updating the necessary registrations about customers that are used in risk management tools and models as well as maintaining and following up on customer relationships.
Each business unit is responsible for preparing carefully drafted documentation before undertaking business transactions and for recording the transactions properly. Each unit is also required to update information on customer relationships and other issues as may be necessary.
The business units must also ensure that all risk exposures comply with specific risk limits as well as the Group’s other guidelines.
2.5 reporting
The Group allocates considerable resources to ensuring ongoing compliance with the approved risk limits and to risk monitoring. It has set guidelines for reporting to relevant management bodies, in-cluding the Board of Directors and the Executive Board, on developments in risk measures, the credit portfolio, non-performing loans and the like.
The Board of Directors receives risk reports quarterly (see the table below). The Group’s ICAAP report is also submitted quarterly to the Board of Directors for approval. Once a year, an expanded ICAAP report is submitted for approval together with a thorough analysis of the Group’s risk profile.
14 RISK ORGANISATION DANSKE BANK RISK MANAGEMENT 2010
PRINCIPAL REPORTING TO THE BOARD Of DIRECTORS
ANNUAL REPORTING
Risk policy Review of the overall risk policy, including a consideration of whether any revisions are required.
ICAAP Evaluation of the preferred risk profile and the solvency need. The report contains the conclusions drawn from stress testing, including the effect of various scenarios on expected losses and capital needs. This report is an expanded version of the ICAAP report submitted quarterly.
Risk management framework Thorough analysis of the Group’s risk profile, including identification and descrip-tion of the Group’s risks and an update on the use of risk management models and parameters.
Credit portfolio quality Analysis of impairment charges and losses by business unit and of portfolio break-downs by rating category, size, business unit, etc.
QUARTERLY REPORTING
ICAAP Evaluation of the preferred risk profile and the solvency need. The report contains the conclusions drawn from stress testing, including the effect of various sce-narios on expected losses and capital needs.
Key figures from the credit portfolio An overview of credit-quality indicators focusing on unauthorised excesses and overdue payments, the number of upgrades and downgrades in the classification system, and trends in lending volumes.
Market risk Analysis of the Group’s current equity, fixed income and currency positions as well as reports on the utilisation of board-approved limits since the preceding report.
Large exposures An overview of exposures equal to or exceeding 10% of the Group’s capital base and the sum of these exposures, including the percentage of the capital base it represents.
Industry analyses Industry research used for credit renewals, covering some 30 industries. In addi-tion to reviewing general developments in an industry, these reports evaluate the Group’s aggregate exposure to the industry.
Liquidity risk Report on limits for operational liquidity risk.
The heads of Group Finance, Group Risk and Group Credit are members of the Executive Committee and receive risk reports covering all risks through their positions on the risk committees established by the Executive Board.
The All Risk Committee evaluates risk reports to be submitted to the Board of Directors or one of its committees. It also receives periodic reports on the Group’s solvency and reviews information on risk trends at the group level and at the business units.
The Operational Risk Committee reviews trends in the Group’s key operational risks on an ongoing basis and follows up on the progress of concrete action plans regarding these risks. The committee also receives reports and recommendations on key risk indicators.
3. CaPItaL ManaGeMent
17 3.1 Capital management
18 3.2 Risk identification
19 3.3 The capital requirement and the internal capital need
21 3.3.1 Calculation of the capital requirement and the internal capital need
22 3.4 Danske Bank’s internal assessment of its solvency need
23 3.4.1 The solvency need
24 3.4.2 Stress tests
25 3.4.2.1 Stress test methodology and scenarios
27 3.4.2.2 Example: CEBS’s stress test
28 3.4.2.3 Management intervention
28 3.5 The Danske Bank Group’s capital base
29 3.5.1 Shareholders’ equity adjusted for prudential filters
30 3.5.2 Statutory deductions from the capital base
31 3.5.3 Hybrid capital and subordinated debt included in the capital base
16 CAPITAL MANAGEMENT DANSKE BANK RISK MANAGEMENT 2010
The Group’s capital management policies and practices support the Group’s business strategy and ensure that the Group is sufficiently capitalised to withstand severe macroeconomic downturns. In ad-dition, the policies and practices ensure that the Group complies with regulatory capital requirements and support the Group’s credit rating.
The Group’s capital base consists of tier 1 capital and tier 2 capital. At the end of 2010, the capital base amounted to DKK 149.7 billion and the total capital ratio was 17.7%, with DKK 124.8 billion, or 14.8 percentage points, deriving from tier 1 capital.
At the end of 2010, the Group’s solvency need – that is, a capital base that is adequate in terms of size, type and composition to cover the Group’s risks – amounted to DKK 90.0 billion, or 10.7% of risk-weighted assets (RWA). The Group’s actual capital base thus contains a very large capital buffer of DKK 59.7 billion.
In 2008, the Group suspended its capital targets because of increased uncertainty about the economic crisis and expectations of stricter statutory requirements for the level and quality of capital.
The Group bases its total capital need on an assessment of the capital requirements under the current capital adequacy and transitional rules, and on a critical assessment of the effects of future regulation, including CRD IV.1
The Group aspires to improve its credit ratings, which are important for its access to liquidity and for the pricing of its long-term funding.
In setting its capital targets, the Group considers the following criteria:
• capital requirements under the CRD and current transitional rules• draft minimum regulatory capital requirements• rating target• expected growth and earnings• dividend policy• stress test scenarios
In 2010, the CEBS (Committee of European Banking Supervisors) issued a number of stress test recommendations, most of which the Group already fulfils. The financial crisis highlighted the need to further develop and improve the Group’s stress testing methodology, however. The Group is in the process of improving its current approach and expects to be in compliance with the CEBS’s recom-mendations by the end of 2011.
In 2010, Danske Bank took part in the stress tests initiated by the CEBS in cooperation with the local FSAs. More than 90 banks participated in the exercise. Danske Bank performed well on the test in comparison with the other banks, even in the most severe scenario, “Adverse scenario after sovereign shock”, in which the Group stood in the top 25% of the banks tested.
Danske Bank uses mainly the internal ratings-based (IRB) approach to calculate the RWA for credit risk. In 2010, the Group initiated a number of measures that will strengthen its IRB approach. They in-cluded revisions and improvements to models and parameters, including a new approach to determin-ing TTC PD.2 The Group also uses capital add-ons if the results of the model calculations appear not to be sufficiently conservative.
1 See section 4 on the new regulations and their effects on the Group.
2 Through-the-cycle probability of default.
17 DANSKE BANK RISK MANAGEMENT 2010 CAPITAL MANAGEMENT
3.1 Capital management
Credit institutions incur financial losses when risks materialise. The first line of defence against such losses is the institution’s earnings. In a given year, if the earnings are not sufficient to cover the losses, the losses are covered by the capital buffer, that is, that part of the capital that exceeds the bank’s sol-vency need.
The Group’s capital management policies and practices ensure that the Group has sufficient capital to cover the risks associated with its activities. To this end, the Group uses advanced approaches for all significant risk types in combination with adjustments based on expert assessments, if necessary.
The Group develops its capital management framework over time, comparing it with international guidelines and best-practice recommendations on an ongoing basis. The Group monitors national and international measures that may influence its capital position and its capital management framework.
The Group’s capital management is based on the internal capital adequacy assessment process (ICAAP). The Group’s ICAAP, including the ICAAP for its subsidiaries, helps to give a clear picture of the Group’s capital and the risks throughout the entire Group.
The regulatory framework for the Group’s capital management practices is rooted in the CRD,3 which consists of three pillars:
• Pillar I contains a set of mathematical formulas for the calculation of RWA for credit risk, market risk and operational risk. That capital requirement is 8% of RWA.
• Pillar II contains the framework for the contents of the ICAAP, including the identification of a credit institution’s risks, the calculation of the capital need and stress testing. It also covers the supervisory review and evaluation process (SREP), which is a dialogue between an institution and the financial supervisory authority on the institution’s ICAAP.
• Pillar III deals with market discipline and sets forth disclosure requirements for risk and capital management.
While Pillar I entails the calculation of risks and the capital requirement on the basis of uniform rules for all banks, the ICAAP in Pillar II takes into account the individual characteristics of a given bank and covers all relevant risks types, including risks not addressed in Pillar I.
As part of the ICAAP, management identifies the risks the Group is exposed to for the purpose of as-sessing its risk profile. After the risks have been identified, the Group determines the means by which they will be mitigated, which are usually business procedures, contingency plans and other measures. Finally, the Group determines what risks will be covered by capital. In the ICAAP, the Group also de-termines its solvency need on the basis of internal models for economic capital and other means, and it conducts stress tests to make certain it always has sufficient capital to support its chosen business strategy.
3 The CRD is an EU directive that sets forth the rules for capital adequacy at credit institutions. The directive was based on Basel II, which is a set of international guidelines for credit institutions’ capital adequacy.
18 CAPITAL MANAGEMENT DANSKE BANK RISK MANAGEMENT 2010
3.2 risk identification
The Group is involved in a number of business activities. These activities can be divided roughly into five segments: banking, market, asset management, insurance and group-wide activities. The latter category covers management activities that are not specific to any of the first four business segments but broadly support them all. Each of these activities entails various risks, which fall into the seven main categories of the Group’s risk management framework.
RISK IDENTIfICATION ACROSS ACTIVITIES
Activities
Banking activities √ √ √ √ √Market activities √ √ √ √ Asset management √ √ Insurance (Danica) √ Group-wide activities √ √
Liquidity ri
sk
Credit
risk
Mark
et risk
Insurance ri
sk
Business risk
Pension risk
Operatio
nal risk
Danske Bank Group’s risks
Note: Insurance risk in the Danske Bank Group is defined as all risks related to Danica Pension.
The regulatory framework for Pillar II includes 17 risk items that, according to Danish legislation,4 must be assessed in the ICAAP. The table below shows the relation between these 17 regulatory items (the rows in the table) and the Group’s seven risk categories (the columns in the table) and also shows which of the 17 regulatory items are treated in the Group’s stress tests.
Regulatory items
General, including strategic plans √ √ √ √ √ √ √ √Earnings √ √ √Growth √Credit risk √ √Market risk √ √Concentration risk √ √ √Group risk √ √Liquidity risk √ √Operational risk √ √Control risk √ Business size √ Settlement risk √ √ Strategic risk √ √Reputational risk √ √ √Interest rate risk on assets outside the trading book √ √External risks √ √ √Other √ √
Credit
risk
Stress te
st
Mark
et risk
Operatio
nal risk
Business risk
Liquidity ri
sk
Insurance ri
sk
Pension risk
Danske Bank Group’s risksRISK ITEMS ASSESSED IN THE ICAAP
4 The Danish Executive Order on Capital Adequacy, annex 1.
19 DANSKE BANK RISK MANAGEMENT 2010 CAPITAL MANAGEMENT
3.3 The capital requirement and the internal capital need
Danske Bank has two approaches to the calculation of its capital need: a regulatory approach and an internal approach.
The regulatory approach, which relates to the capital requirement under Pillar I, is based on fixed, uniform rules for covering the Group’s risks in accordance with the Basel II guidelines. The regulatory requirement is defined as 8% of RWA for credit risk, market risk and operational risk.
Besides being used to determine the Group’s capital requirement, RWA are also used as the denomina-tor in key risk measures such as the tier 1 capital ratio, the total capital ratio, and the solvency need ratio, which according to Danish law is the adequate capital base divided by RWA calculated accord-ing to Basel II.
At 31 December 2010, the Group’s RWA under Pillar I amounted to DKK 844 billion, against DKK 834 billion at 31 December 2009.
The chart below shows the change in RWA from 2009 to 2010.
(DKK billions) CHANGE IN RWA
600
700
800
900
1,000
1,100
At 31 Dec. 2009
Lending growth
Counter-party risk
Other Credit quality
At 31 Dec. 2010
Danske Bank uses economic capital as well as the Pillar I+ approach to calculate its capital need. Pillar I+ is based on Pillar I but also takes into account other risks besides those included under Pillar I. The table below shows the differences between Pillar I risks and other risks in Pillar I+ on the one hand and economic capital on the other.
20 CAPITAL MANAGEMENT DANSKE BANK RISK MANAGEMENT 2010
CRD Pillar I+ Economic capital
CRD Pillar I
Credit risk
RWA depends on internal rating models - PD, LGD and Cf
Through-the-cycle (TTC) PD
Downturn LGD and Cf
Assumes granular portfolio
One-factor model
EC depends on internal rating models - PD, LGD and Cf
Point-in-time (PIT) PD
Point-in-time (PIT) LGD and Cf
Takes concentrations into account
Country-specific factors
Market riskGeneral risk, specific risk
and commodity risk
Internal model for general risk, incl. floor risk. Standardised approach
for commodity risk and specific risk
Operational risk Pillar I model on the basis of activity
Additional risks
Pension risk Internal model
Insurance risk Pillar I (part of credit risk) Internal model
Business risk Internal model
Interest rate risk on banking book (IRR BB)
Internal model Part of market risk
The Group uses economic capital as an internal method of measuring its capital need over a one-year horizon. After calculating economic capital with internal models, it makes a qualitative assessment of whether supplementary capital (add-ons) is necessary.
The Group’s economic capital is the amount of capital needed to cover unexpected losses over the next year. The Group uses a confidence level of 99.97% for internal purposes, reflecting its long-term ambition to maintain an AA rating. In the calculation of its capital need, the Group uses a 99.9% confidence level, in line with the level used to determine the capital requirement for credit risk under Pillar I.
While determining the capital requirement under Pillar I+ and economic capital, if the results of the model calculations are not sufficiently conservative, the Group evaluates whether there is a need for capital add-ons. This may be the case, for example, if the Group believes that the approach under the Pillar I rules is not conservative enough, or if the economic capital calculated or macroeconomic uncertainty raises similar doubts.
(DKK billions)
FROM ECONOMIC CAPITAL (EC) TO PILLAR I+
7.7
2.43.0
2.1 4.9 4.8
9.5 0.4 3.02.4
16.6
73.467.5
90.0
40
50
60
70
80
90
EC Insuran-ce risk
Pensionrisk
Businessrisk
Marketrisk
Add-on Other Creditrisk
Pillar I IRRBB Businessrisk
Pensionrisk
Add-on Pillar I+
Note: “IRRBB” is interest rate risk on the banking book, that is, on items outside the trading book. “Add-on” is capital supple-ments because of model and macroeconomic uncertainty. “Other” represents deductions regarding insurance activities.
21 DANSKE BANK RISK MANAGEMENT 2010 CAPITAL MANAGEMENT
The Group’s approaches to calculating the capital requirement under Pillar I and the internal capital need in the form of economic capital are described below.
3.3.1 Calculation of the capital requirement and the internal capital need
Credit riskDanske Bank uses mainly the advanced IRB approach (A-IRB)5 to calculate the capital requirement for credit risk under Pillar I. Its use of this approach was approved by the Danish Financial Super-visory Authority (the Danish FSA) in cooperation with other national FSAs. The Group was granted permanent exemption from the A-IRB for certain exposures, including exposures to governments and equities. The Group also has an IRB exemption for exposures at Northern Bank and Sampo Bank and for retail exposures at National Irish Bank. For these exemptions, the Group uses the standardised approach.
The Pillar I approach to credit risk considers risk from a bottom-up perspective and ignores the com-position of the Group’s portfolio, whereas the internal credit risk model for the calculation of econom-ic capital is a top-down model that takes into account correlations between portfolios. Correlations can reveal concentration risk, which increases overall risk, or diversification which reduces risk. The internal model identifies sector and geographical concentrations, while the Pillar I approach assumes that the portfolio consists of small exposures to many debtors.
Economic capital is a point-in-time (PIT) estimate and thus reflects the Group’s current risk, unlike the regulatory capital requirement, which is based on through-the-cycle (TTC) parameters, which reflect an average over a business cycle, and downturn parameters. Economic capital therefore tends to react more sharply to changes in the business cycle than the regulatory requirement under Pillar I. PIT PD parameters6 are lower than TTC PDs7 in periods of macroeconomic recovery and higher than TTC PDs during macroeconomic downturns.
0
1
2
3
4
5
Point-in-time PD (customer-weighted)
Through-the-cycle PD (customer-weighted)
(%) PROBABILITY OF DEFAULT, CORPORATE CUSTOMERS
January 2008
January 2009
January 2010
January 2011
The financial crisis posed a challenge for Danske Bank’s models and parameters, especially the credit risk models and parameters, and this led to an increased focus on improving and further developing the current model apparatus.
5 The advanced ratings-based approach.
6 Point-in-time probability of default represents the probability that a customer will default on a loan within the next 12 months.
7 Through-the-cycle probability of default is PIT PD converted to a steady-state parameter, that is, to an average over the business cycle.
22 CAPITAL MANAGEMENT DANSKE BANK RISK MANAGEMENT 2010
From 2005 to 2007, the Group hedged part of the credit risk on Realkredit Danmark’s loans on prop-erty by entering into credit default swaps (CDSs). In practice, a CDS contract means that the Group is protected against any credit losses on the portfolio above a certain amount.
Under the transitional rules on required capital (80% of Basel I), the weighting used on loans hedged by CDS contracts is reduced in comparison with the weighting of loans without CDS contracts. Over-all, this meant lower RWA and a lower capital requirement for the Group. Under the CRD rules (Basel II), on the other hand, the CDS contracts will not reduce RWA and hedge accounting is not used.
Market riskDanske Bank calculates the capital requirement under Pillar I for general and specific market risks. Economic capital for market risk consists of capital for general and specific markets risks and for floor risk as well. The Group uses the internal VaR model to calculate general market risk for both Pillar I and economic capital, and it uses the standardised approach to calculate specific risk in both cases. In accordance with the Group’s strategy of using more advanced methods for all the main risk areas, the Group plans to implement an internal model for specific risk in 2011. The Group also uses an internal model to calculate economic capital for floor risk.
Operational riskThe Group uses the standardised approach to calculate both the capital requirement under Pillar I and economic capital for operational risk. The standardised approach is based on the Group’s income, and it is calculated as a percentage of average income over three years. The percentage ranges from 12% to 18%, depending on the business area.
Other risksOther risks that are covered in the calculation of economic capital and the capital need under Pillar I+ are pension risk, business risk and insurance risk (risk at Danica Pension). The Group uses internal models to calculate the capital need for these risk types. Insurance risk is covered mainly by a deduc-tion from the capital base.
Danske Bank calculates capital for business risk in accordance with the “earnings at risk” method. The basis for this calculation is the past three years’ observed quarterly earnings. The calculation takes into account that the earnings before loan impairment charges must exceed, at a 99.9% confidence level, expected credit losses plus add-ons that represent a stressing of the current level of expected losses.
3.4 Danske bank’s internal assessment of its solvency need
The ICAAP under Pillar II includes the Group’s calculation of its solvency need.
An important part of the process of determining the solvency need is evaluating whether the cal-culation takes into account all material risks to which the Group is exposed. The Group makes this evaluation in relation to both Pillar I+ and economic capital. The Group uses qualitative add-ons to the solvency need if the result of the model calculations appears not to be sufficiently conservative, for example, if the Group believes there is a need for a more conservative approach than what is pre-scribed by the Pillar I rules or economic capital. It has established a process in which the add-ons are quantified on the basis of input from internal experts. The capital add-ons are additive, although they may overlap one another, and the process thus represents a conservative and careful assessment of the Group’s solvency need.
The Group does not set aside capital for liquidity risk but rather mitigates it by stress test analyses, contingency plans and other measures. The Group recognises that a strong capital position is neces-sary for maintaining a strong liquidity position.
23 DANSKE BANK RISK MANAGEMENT 2010 CAPITAL MANAGEMENT
The Group assesses the overall capital need on the basis of internal models and ensures that it is using the proper risk management systems. The ICAAP also includes capital planning to ensure that the Group always has sufficient capital to support its chosen business strategy. Stress testing is used in capital planning.
An expanded ICAAP report is submitted to the Board of Directors for approval once a year, and the Board also receives quarterly ICAAP reports. As part of the ICAAP, the Board of Directors also evalu-ates an annual report that describes the Group’s risk profile.
3.4.1 The solvency need
According to Danish law, all credit institutions must disclose their solvency need. For the Group, this requirement applies to Danske Bank A/S and Realkredit Danmark A/S.
The solvency need is the capital base of the amount, type and composition needed to cover the risks to which an institution is exposed. Danske Bank calculates it as the highest of the following measures:
• The capital requirement according to the Group’s internal economic capital model • The capital requirement under Pillar I plus a supplement to address the risks that are not covered
by Pillar I (that is, Pillar I+)• The capital requirement under the transitional rules8 of the CRD (based on Basel I)
The Group assesses whether the capital level is sufficiently conservative on an ongoing basis.
At the end of 2010, the Group’s solvency need was determined according to Pillar I+ and amounted to DKK 90.0 billion, or 10.7% of RWA. The capital base at that date was DKK 149.7 billion, or 17.7% of RWA, which meant that the Group had a substantial capital buffer of DKK 59.7 billion.
(DKK billions) SOLVENCY NEED RATIO AND TOTAL CAPITAL RATIO, END-2010
Economic capital
Pillar I+ Transitional rules
Capital buffer
Capitalbase
Solvency need ratio
DKK 59.7 billion
0
40
80
120
160
8 The transitional rules, which apply until the end of 2011, stipulate that credit institutions’ capital requirement must be at least 80% of the requirement under Basel I.
24 CAPITAL MANAGEMENT DANSKE BANK RISK MANAGEMENT 2010
The solvency need can be broken down into capital for the most important risk types. The table below shows the Group’s internal measure of its solvency need (“internally estimated solvency need”), which is the Group’s economic capital at a 99.9% confidence level.
DANSKE BANK’S SOLVENCY NEED
At 31 December 2010 (DKK billions) (% of RWA)
Credit risk 51.4 6.1
Market risk 6.6 0.8
Operational risk 7.0 0.8
Other factors 8.4 1.0
Internally estimated solvency need 73.4 8.7
Shortfall in relation to Pillar I+ 16.6 2.0
Shortfall in relation to transitional floor - -
Solvency need 90.0 10.7
At the end of 2010, Danske Bank’s economic capital amounted to DKK 73.4 billion. The capital for credit risk represented 65% of this amount and was the largest component of economic capital.
3.4.2 Stress tests
Danske Bank uses macroeconomic stress tests in the ICAAP in order to project capital need and capital levels in various unfavourable scenarios. Stress tests are an important means of analysing its risk profile since they give management a better understanding of how the Group’s portfolios are affected by macroeconomic changes, including the effects of negative events on the Group’s capital. The tests support the Group’s compliance with the regulatory capital requirement, and they are an important tool in internal capital planning. In 2010, the Group took part in stress tests initiated by the CEBS and the Danish FSA. The results showed that the Group had adequate capital in all the scenarios.
Stress testing covers material risks and enables the Group to assess what effect unfavourable economic trends will have on various risk types. The Group uses stress tests in the ICAAP and also for individu-al risk types (mainly in sensitivity analyses).
25 DANSKE BANK RISK MANAGEMENT 2010 CAPITAL MANAGEMENT
3.4.2.1 Stress test methodology and scenarios
When the Group uses stress tests in capital planning, stress is applied to risks, income and costs. Stressing income affects the Group’s capital, while stressing risk exposures affects the capital need. This means that the stress tests quantify the effect on the capital buffer. The stress test methodology consists of four parts.
NET TRADING INCOME
NET INTEREST INCOME
FUNDING COSTS
NET INCOME FROM INSURANCE BUSINESS
CREDIT LOSSES
MARKET RISK
CREDIT RISK
OPERATIONAL RISK
OTHER TYPES OF RISK
P/L
RISK
GDP
SCENARIO
OUTPUT GAP SHARE PRICES
UNEMPLOYMENT
EXCHANGE RATES INTEREST RATES
INFLATION COMMODITY PRICES
PROPERTY PRICES
EFFECT OF STRESS TEST SCENARIOS ON EARNINGS AND RISK
STEP 1 STEP 2 STEP 3 STEP 4
SCENARIORESULT
CAPITAL BASE
CAPITAL NEED
This first step is to define and prepare the relevant internal stress test scenarios. This is done by Group Finance and Danske Research. Each scenario consists of a set of macroeconomic variables. The scen-arios are generally used both at the group level and for subsidiaries, and scenarios are also developed specifically for subsidiaries. The scenarios are submitted to the All Risk Committee and the Board of Directors’ Credit and Risk Committee for approval. The Group also has a base case scenario that repre-sents its forecast of financial trends in the years ahead. It also carries out a number of regulatory stress tests, the most important of which are shown in the table below.
26 CAPITAL MANAGEMENT DANSKE BANK RISK MANAGEMENT 2010
DANSKE BANK’S MOST IMPORTANT STRESS TEST SCENARIOS
Scenario Description
Mild recession A geopolitical crisis dampens global demand temporarily. This scenario assumes slight economic contraction in the first year followed by a recovery. In the subse-quent years, growth will be lower than assumed in the base case scenario.
Severe recession The scenario assumes a deep international recession with a significant slump in global trade, which entails lower export demand. Domestic investment, consump-tion and house prices fall. Central banks around the world adopt a more expansion-ary monetary policy stance, and interest rates fall.
Regulatory scenarios Danish fSA: Base case + two stress test scenarios.
CEBS: Base case + two stress test scenarios.
The next step is determining what effects the scenarios have on the various risk types. For credit risk, the Group uses statistical models that transform the macroeconomic scenarios into loss levels. The models are used to stress the probability of default (PD) for each customer, causing higher loan impair-ment charges and a greater need for capital. The exposure is stressed further by subjecting customers’ collateral to stress, that is, a reduction in the value of collateral.
For other risk types, such as market risk, insurance risk and pension risk, the Group uses scenario-specific variables on the current market positions, and this can cause a decline in the market values. The changes in market value are considered losses that reduce the Group’s earnings and capital.
The Group takes a holistic approach to stress testing and sees the effect of a change in the variables on the Group’s earnings and capital as a whole. For example, a rise in interest rates will have an adverse effect on the balance of the Group’s bond holdings and will also cause credit losses. On the other hand, it will cause an increase in net interest income as well. The Group’s stress tests entail an overall assessment of such contradictory effects.
When the scenarios have been translated, the results can be calculated. Risks, earnings and the cost structure are stressed, as described above. On the basis of the results, the Group can calculate its capi-tal and capital need under each scenario.
The chart below shows a stylised example of a scenario projecting capital and the capital need.
(%) PROJECTED CAPITAL AND CAPITAL NEED IN STRESS TEST SCENARIO
0
2
4
6
8
10
12
1 2 3 4 5 6 7 8 9 10 11 12 13Years
Capital base
Solvency need
Capital bufferCapital buffer
27 DANSKE BANK RISK MANAGEMENT 2010 CAPITAL MANAGEMENT
The results and the methodology are evaluated and discussed by the Group’s experts and management in order to ensure consistency and reliability.
The financial crisis highlighted the need to further develop the stress test methodology. For example, Danske Bank’s projections of loan impairment charges proved to be lower than the actual charges during the crisis. In the past year, the Group improved parts of the stress testing methodology, includ-ing the projection of loan impairment charges, losses on market risk and the stress applied to RWA, in order to improve the capital projections. The Group is also working to break down the results and thus help improve the basis for management decisions and produce more detailed analyses.
The CEBS released new stress testing recommendations (GL 32). Danske Bank fulfils most of these recommendations. The Group continues to work to improve the current stress test method, however, partly by preparing and implementing “reverse stress testing” as part of its risk management.9 Danske Bank expects to meet all the CEBS’s recommendations by the end of 2011.
3.4.2.2 example: CebS’s stress test
In 2010, Danske Bank took part in the stress tests initiated by the CEBS, with the cooperation of the national FSAs. More than 90 banks participated in the exercise.
Danske Bank performed well on the test, even in the most severe scenario, “Adverse scenario after sovereign shock”, in which the Group stood in the top one-fourth. The result confirmed the Group’s strong financial position.
1.24.6
0.7
4.7
0.1
11.7 10.0
0
5
10
15
20
2009 Profit beforeloan impairment
charges*
Losseson tradingportfolio
Loanimpairment
charges
Tax, pension,dividend,
etc.
Changesin RWA
2011 E
(%)
* Excluding losses on trading portfolio.
EFFECT ON TIER 1 CAPITAL RATIO IN THE CEBS'S MOST SEVERE SCENARIO "SOVEREIGN SHOCK"
Note: The tier 1 capital ratio is calculated according to the transitional rules for Basel II on the basis of 80% of RWA under Basel I.
Danske Bank performed well in comparison with the other banks that took part in the CEBS’s stress test. This was the case even though the Group was affected relatively severely, since the CEBS’s most severe scenario included stressing government bonds in the trading book but not government bonds in the banking book. Danske Bank usually has a smaller proportion of bonds outside the trading book than the other banks have.
9 “Reverse stress testing” identifies the types of event that could lead to a breakdown of a bank’s business model.
28 CAPITAL MANAGEMENT DANSKE BANK RISK MANAGEMENT 2010
3.4.2.3 Management intervention
The Group’s stress test scenarios do not take into account that in such situations management has opportunities to implement a number of measures to strengthen the Group’s capital, including cost management, lending margin increases and capital contingency plans.
During the financial crisis, the Group increased its lending margins by more than 50 basis points. This took place in the Group’s banking activities, where it increased the margins on loans with long maturi-ties in particular.
The effects of increased lending margins and reduced lending are shown in the chart below, which shows the trend in the tier 1 capital ratio after management intervention in the CEBS’s “sovereign shock” scenario.
TIER 1 CAPITAL RATIO IN THE CEBS'S MOST SEVERE SCENARIO AFTER MANAGEMENT INTERVENTION
9
10
11
12
0.00 0.05 0.10 0.15 0.20 0.25
(%)
Increase in lending margin (percentage points)
No reduction in lending over 2 years 15% reduction in lending over 2 years
The chart shows how the tier 1 capital ratio changes under the scenario if Danske Bank increases the lending margin or reduces lending over two years. If the Group does nothing, the tier 1 capital ratio under the scenario will be 10.0% at the end of 2011. On the other hand, if the Group increases the lending margin by 20 basis points, for example, while reducing lending by 15%, the tier 1 capital ratio under the scenario will be 11.7% instead of 10% at the end of 2011.
Besides influencing earnings and reducing lending, the Group can also reduce costs and pursue other measures.
3.5 The Danske bank Group’s capital base
The Danske Bank Group’s capital base, on which the total capital ratio is calculated, consists of tier 1 capital and tier 2 capital. The various components of the capital base are described in the following sections.
Tier 1 capital consists of core tier 1 capital and hybrid capital less statutory adjustments. Core tier 1 capital consists of shareholders’ equity adjusted for prudential filters. Tier 2 capital consists of subor-dinated debt less statutory adjustments.
29 DANSKE BANK RISK MANAGEMENT 2010 CAPITAL MANAGEMENT
DANSKE BANK GROUP’S CAPITAL BASE
At 31 December (DKK millions) 2010 2009
Share capital 6,988 6,988
Retained earnings after deduction of intangible assets and deferred tax assets 75,116 69,166
Non-controlling interests, pro rata consolidated companies 3,002 2,984
Core tier 1 capital 85,106 79,138
Hybrid capital 42,208 41,099
Deduction for insurance subsidiaries -2,422 -2,308
Other deductions -55 -
Tier 1 capital 124,837 117,929
Subordinated debt, excluding hybrid capital 26,710 31,969
Revaluation of real property 675 753
Deduction for insurance subsidiaries -2,422 -2,308
Other deductions -55 -
Tier 2 capital 24,908 30,414
Capital base 149,745 148,343
Core tier 1 capital ratio 10.1 9.5
Tier 1 capital ratio 14.8 14.1
Total capital ratio 17.7 17.8
3.5.1 Shareholders’ equity adjusted for prudential filtersIn accordance with Danish statutory provisions, the Group’s shareholders’ equity is subject to the following adjustments (prudential filters) after tax:
• Domicile property is recognised at estimated fair value. Revaluation to a value above the purchase price is recognised as tier 2 capital.
• The corridor method for treating pension obligations in accordance with IAS 19 is not used in the capital base calculations. Instead, pension obligations are recognised as the present value of expected future payments calculated by external actuaries.
• The carrying amounts of intangible assets, including goodwill, and deferred tax assets, are deduct-ed.
The Group’s adjusted shareholders’ equity also includes special reserve funds totalling DKK 3.0 billion in two companies (LR Realkredit A/S and Danmarks Skibskredit A/S) that are consolidated on a pro rata basis in the solvency calculations but treated as associated undertakings in the Group accounts. These reserve funds cannot be distributed but can be used to cover any losses at the companies after their other reserves.
The Group’s adjusted shareholders’ equity equals its core tier 1 capital.
30 CAPITAL MANAGEMENT DANSKE BANK RISK MANAGEMENT 2010
DANSKE BANK GROUP’S CORE TIER 1 CAPITAL
At 31 December (DKK millions) 2010 2009
Shareholders’ equity 104,742 100,659
Revaluation of real property 1,253 1,275
Revaluation of property exceeding purchase price, transferred to tier 2 capital -675 -753
Pension obligations at fair value -73 -1,155
Intangible assets of banking operations -22,666 -23,140
Deferred tax assets -1,548 -2,223
Tax effect adjustments 1,071 1,491
Non-controlling interests, pro rata consolidated companies 3,002 2,984
Adjusted shareholders’ equity (core tier 1 capital) 85,106 79,138
Note: The item “Non-controlling interests, pro rata consolidated companies” does not refer to non-controlling interests in the usual sense of the term but to special reserve funds at LR Realkredit A/S and Danmarks Skibskredit A/S.
3.5.2 Statutory deductions from the capital base
The Group’s tier 1 and tier 2 capital are each subject to statutory deductions equal to half of the follow-ing:
• Danica’s capital requirement, less the difference between Danica’s capital base and the carrying amount of Danske Bank’s capital holdings in Danica.10 The difference between Danica’s capital base and the carrying amount of Danske Bank’s holdings corresponds to Danica’s supplementary capital.
• Capital holdings in other credit and financing institutions that represent more than 10% of the share capital of the institutions, excluding capital holdings in subsidiaries and associated under-takings in the form of certain financing institutions.
• Expected losses calculated according to the CRD less impairment charges, if expected losses exceed impairment charges. This deduction was not relevant for the Group in 2010 or 2009.
CAPITAL BASE DEDUCTIONS fOR INSURANCE SUBSIDIARIES
At 31 December (DKK millions) 2010 2009
Capital requirement at Danica 7,987 7,791
Less the difference between
Danica’s capital base 22,078 22,046
Danske Bank’s holdings 19,221 19,215
Danica’s holding of Danske Bank shares etc. 286 344
Deduction for insurance subsidiaries 4,844 4,616
Deductions for holdings in other credit institutions 110 -
Total deductions, divided equally between tier 1 and tier 2 capital 4,954 4,616
10 The carrying amount of Danske Bank’s holdings in Danica less the total deduction for Danica in the Group’s capital base is included in the RWA calculation at a 100% weighting.
31 DANSKE BANK RISK MANAGEMENT 2010 CAPITAL MANAGEMENT
3.5.3 Hybrid capital and subordinated debt included in the capital base
The Group’s hybrid capital amounted to DKK 42.2 billion at the end of 2010.
This includes the hybrid capital that Danske Bank A/S and Realkredit Danmark A/S raised from the Danish state in May 2009: DKK 24.0 billion and DKK 2.0 billion, respectively. The loans can be count-ed as up to 35% of tier 1 capital before the deductions of investments in insurance companies and the difference between expected losses and loan impairment charges. Danske Bank A/S’s loan may not be redeemed until 11 April 2014, unless a separate agreement is made, and on a similar basis, Realkredit Danmark A/S’s loan may not be redeemed until 11 May 2012. From these dates until 10 May 2014, the loans can be redeemed at par, on the condition that the tier 1 capital ratio is at least 12.0% or that the loans are replaced by other capital of the same or a higher loss-absorbing capacity. From 11 May 2014 to 10 May 2015, the loans can be redeemed at a price of 105, and afterwards, at a price of 110.
Other hybrid capital amounts to DKK 16.2 billion and may be repaid only upon the Group’s initiative. This capital can be counted as up to 15% of tier 1 capital before deductions from tier 1 capital.
Early redemption of the Group’s hybrid capital in every case requires the Danish FSA’s approval.
At the end of 2010 and 2009, all of the hybrid capital except for certain minor issues from Sampo Bank could be counted as tier 1 capital.
At the end of 2010, the Group’s subordinated debt, which can be included in the capital base as tier 2 capital in accordance with the Danish Financial Business Act, amounted to DKK 26.7 billion. Tier 2 capital may not exceed 50% of the capital base.
According to the Danish Financial Business Act, the most important differences between hybrid capi-tal and subordinated debt included in tier 2 capital are as follows:
• Hybrid capital may not mature until at least 30 years after issuance and in practice usually has perpetual maturity. There is no minimum term for subordinated debt, but in practice the term is usually at least six years. The amount of subordinated debt that can count as tier 2 capital declines 25%, 50% and 75% when the time to maturity is less than three years, two years and one year, respectively.
• Subordinated debt is senior to hybrid capital.• If a company does not have free reserves, interest accrual on hybrid capital ceases until free
reserves are re-established.• Hybrid capital may not be subject to early redemption until at least five years after disbursement,
except for hybrid capital received from the Danish state, which may be redeemed after three years. There is no minimum term for early redemption of subordinated debt, but in practice it is usually after at least three years.
In 2009, the EU introduced rules on hybrid capital in the CRD (CRD II). These stricter rules took effect in Denmark on 1 July 2010. The Danske Bank Group’s existing hybrid capital does not fulfil the provi-sions of the new rules but is covered by the transitional provisions. According to the transitional rules in the Danish Financial Business Act, hybrid capital received before 1 July 2010 that was in compli-ance with national statutory regulations in force at the time can be included in tier 1 capital on un-changed terms until 31 December 2019. From 1 January 2020 to 31 December 2029, it can be counted as up to 20% of tier 1 capital; and from 1 January 2030 to 31 December 2039, it can be counted as up to 10% of tier 1 capital.
For a further description of the individual issues of the Group’s hybrid capital and subordinated debt, see note 31 in Annual Report 2010.
32 NEW REGULATIONS DANSKE BANK RISK MANAGEMENT 2010
4. new ReGuLatIOns
33 4.1 Basel III
33 4.1.1 Core tier 1 capital, adjusted for Basel III
35 4.1.2 Definition of instruments that can be included in the capital
base under Basel III
35 4.1.3 Leverage ratio, adjusted for Basel III
36 4.1.4 Liquidity
36 4.2 Solvency II
36 4.3 Other measures
37 4.4 Expiry of the state guarantee
33 DANSKE BANK RISK MANAGEMENT 2010 NEW REGULATIONS
As a consequence of the financial crisis, a number of new international regulatory measures have been proposed. The Group followed the process closely throughout 2010.
The Group supports measures that strengthen the resilience of the financial sector and believes that Basel III and other initiatives generally meet this criterion.
This section describes the most important measures and, when possible, evaluates their significance for the Group.
4.1 basel iii
In 2010, there was much attention on the Basel Committee’s so-called Basel III guidelines on the regu-lation of banks. The final Basel III guidelines were announced in December 2010. The EU Commission is expected to make a proposal (CRD IV) in mid-2011. It will then be sent to the EU Parliament and the Council of the European Union. The EU member states are expected to implement CRD IV in domestic legislation before the end of 2012 so that it can take effect at the beginning of 2013.
Basel III contains markedly stricter requirements for capital as well as new liquidity requirements. Danske Bank’s solvency and liquidity are generally strong in relation to the coming requirements, but the Group works continually to optimise both its liquidity and its capital structure. On the liquidity issue, however, Basel III is problematic in relation to the Danish mortgage credit system. Besides creat-ing special challenges for credit and mortgage credit institutions, the liquidity requirements may affect the stability of the Danish exchange rate policy and will lead to higher borrowing costs for customers.
4.1.1 Core tier 1 capital, adjusted for basel iii
The new capital standards will cause a sharp rise in the minimum capital requirement for credit institutions. The minimum capital requirement for core tier 1 capital (which does not include hybrid capital) will be phased in gradually from the current 2% of risk-weighted assets to 7% in 2019. The 7% requirement will include a “capital conservation buffer” of 2.5%, and if a bank does not maintain the buffer, restrictions will be placed on its dividend payments, among other things.
The Basel III proposal also contains a stricter definition of the capital that may count as core tier 1 capital and for the calculation of risk-weighted assets.
On the basis of the proposals, the Danske Bank Group estimates that its current core tier 1 capital ratio of 10.1% will be reduced by around 1.2 percentage points when calculated on the basis of fully phased-in Basel III rules.
34 NEW REGULATIONS DANSKE BANK RISK MANAGEMENT 2010
(%)CORE TIER 1 CAPITAL RATIO, ADJUSTED FOR BASEL III
10.18.9
0.80.4
0
3
6
9
12
Core tier 1capital ratio
Deductionsfrom core tier 1
capital
Increase inRWA
Core tier 1capital ratio,
adjusted for Basel III
The reduction in the core tier 1 capital ratio is owing partly to a rise in RWA for counterparty risk and market risk. This factor reduces the ratio by 0.4 of a percentage point. There is some uncertainty about the precise effect on RWA, however. Note that the stricter rules for RWA for market risk in Basel III have been incorporated in the CRD III rules, which are expected to take effect by the end of 2011.
The remaining part of the reduction, 0.8 of a percentage point, derives from deductions from core tier 1 capital, particularly a deduction of the Group’s investment in Danica. The Group expects that in the future the full amount of the current deduction of DKK 4.8 billion for Danica will be taken from core tier 1 capital. Today, half of the amount is deducted from core tier 1 capital and half from tier 2 capital. The total amount deducted from the capital base is thus not expect-ed to change under Basel III. See section 3.5.2 for a calculation of the deduction for Danica according to the current legislation.
In accordance with EU rules, the Group is defined as a financial conglomerate. The EU Commission is expected to make a proposal for a major revision of the directive on financial conglomerates in 2011 or 2012. This may cause a change in the rules in Denmark on conglomerates’ treatment of insurance sub-sidiaries in solvency calculations, including rules on the inclusion of insurance subsidiaries’ subordi-nated debt. Danica raised subordinated debt of DKK 3 billion that, according to the prevailing rules, reduces the deduction from Danske Bank’s capital base.
In Basel III, the Basel Committee also proposed a counter-cyclical buffer of up to 2.5% of RWA, but only if lending growth in the economy in relation to GDP deviates from the long-term trend and only when the national authorities in question believe that such lending growth may pose economic risks for the society. The Danske Bank Group has noted that the Basel Committee is considering whether the buffer requirement can be met with other loss-absorbing capital than shareholders’ equity and that, until such a possibility is adopted, it must be met with shareholders’ equity.
35 DANSKE BANK RISK MANAGEMENT 2010 NEW REGULATIONS
4.1.2 Definition of instruments that can be included in the capital base under basel iii
One of the key objectives of Basel III is to strengthen the quality of the instruments (besides share-holders’ equity) that can be included in the capital base. The Basel Committee has therefore proposed stricter criteria for the inclusion of instruments in tier 1 capital and tier 2 capital.
In relation to the definitions of tier 1 capital and tier 2 capital, the only instruments that can be included are those where there is no incentive for the issuer to redeem them, in the form of step-up interest rate clauses, for example. Most of Danske Bank’s current hybrid capital and subordinated debt has moderate incentives for redemption in the form of step-up interest rate clauses, so if they are to be included, they must be covered by transitional rules. Such transitional rules, including their relation to the transitional rules for capital instruments under CRD II, are expected to be part of the EU Com-mission’s pending proposals for CRD IV.
According to the Basel Committee, instruments that no longer qualify as tier 1 capital or tier 2 capital will be phased out over a 10-year period beginning on 1 January 2013. In addition, instruments that carry an incentive for redemption will be phased out at their effective maturity dates. Existing public sector capital injections will be grandfathered until 1 January 2018.
4.1.3 Leverage ratio, adjusted for basel iii
The leverage ratio is also part of Basel III. In contrast to the Basel II approach to calculating RWA, the leverage ratio does not take into account the fact that different activities on financial institutions’ bal-ance sheets have different degrees of risk.
The Basel Committee announced a requirement that tier 1 capital constitute at least 3% of the total exposure. According to the Committee, it will not be a specific Pillar I requirement until 2018, how-ever. The Danske Bank Group estimates that at the end of 2010 its leverage ratio, adjusted for Basel III terms, was 3.6% and that it is thus already well prepared for the future requirement at the level set by the Committee.
The EU Commission is expected to present a proposal on the leverage ratio, including more detailed definitions of the individual components, in mid-2011 (CRD IV). There is thus some uncertainty about the final definition, so the current estimate must be understood with this qualification. In the section below, the definition of the Group’s leverage ratio has been adjusted to reflect the definition in Basel III. That is why the figures differ from those in Risk Management 2009.
The Group’s leverage ratio improved slightly from the end of 2009 to the end of 2010. Retained earn-ings strengthened tier 1 capital and thus improved the leverage ratio, although this factor was partly offset by a moderate rise in adjusted total assets.
THE DANSKE BANK GROUP’S LEVERAGE RATIO, ADJUSTED fOR BASEL III
At 31 December (DKK millions) 2010 2009
Total assets 3,213,886 3,098,477
Deduction related to Basel II netting of derivatives and repos -118,900 -134,484
Deduction of intangibles -22,936 -23,037
Deduction of insurance assets (insurance contracts and unit-linked contracts) -239,912 -211,976
Adjusted total assets excluding off-balance-sheet items 2,832,138 2,728,980
Guarantees and loan commitments 262,100 260,693
Offers and revocable credit facilities 395,752 344,245
Adjusted total assets 3,489,990 3,333,918
Tier 1 capital 124,837 117,929
Leverage ratio according to Basel III (%) 3.6 3.5
36 NEW REGULATIONS DANSKE BANK RISK MANAGEMENT 2010
The Group’s balance sheet includes insurance activities at Danica and mortgage lending at Realkredit Danmark. In its leverage ratio, the Group omits the insurance activities at Danica because the Basel Committee’s guidelines apply only to credit institutions. On the other hand, the Group includes the lending activities at Realkredit Danmark in its leverage ratio.
Realkredit Danmark’s mortgage loans are match-funded through the issuance of Danish mortgage bonds and are governed by the strict Danish legislation on mortgage credit institutions. The Group is therefore exposed to only a limited degree of risk from Realkredit Danmark’s lending. If the mortgage loans at Realkredit Danmark were included as risk-weighted assets, the Group’s leverage ratio would be 0.8 of a percentage point higher, a significant improvement.
4.1.4 Liquidity
The final form of the liquidity requirements at the EU level has not yet been determined. The require-ments under Basel III would mean that Danish mortgage bonds are not recognised as liquid assets to a sufficient degree, among other things.
If the requirements are based on Basel III, as it appears, it will create a need for significant changes in the Group’s funding structure and the composition of the liquidity buffer. Two of the main reasons are limited opportunities for including mortgage bonds in the buffer and a lack of recognition of funding with a remaining maturity of less than one year.
A lack of consideration for the special conditions in Denmark – besides causing special challenges for credit and mortgage credit institutions – may also affect the stability of the exchange rate policy and cause higher borrowing costs for customers.
The Group expects some clarification about the rules for Europe in mid-2011 upon the formulation of CRD IV.
4.2 Solvency ii
Looking ahead to 2012, when the new international solvency rules, Solvency II, take effect, the requirements for capital strength in the insurance area will be the focus of attention. The rules are intended to increase customers’ security. The capital requirements will generally be higher. Danica is well prepared to comply with the new rules.
4.3 Other measures
In 2010, the EU reached agreement on the creation of a new supervisory structure. The new structure, which took effect on 1 January 2011, is intended to strengthen the supervision of the financial markets and institutions across the EU and to promote competition.
The new arrangement will entail, among other things, three new EU supervisory bodies: for banking, securities markets, and insurance and pensions. These organisations will have authorisations in a number of areas, including the possibility of issuing binding technical standards that require compli-ance in the member states.
The Group welcomes the new EU supervisory structure and fully supports the measures that help to strengthen supervision and collaboration on supervision across the EU member states.
In November 2010, the G20 countries agreed on a set of recommendations and a schedule for the regu-lation and supervision of so-called Systemically Important Financial Institutions (SIFIs).
37 DANSKE BANK RISK MANAGEMENT 2010 NEW REGULATIONS
The recommendations state that the SIFIs – initially, only global SIFIs – must have a higher loss- absorbing capacity than the minimum requirements in Basel III, among other things. According to the recommendations, a group of global SIFIs that will be subject to this stricter regulation and supervi-sion should be identified by the middle of 2011.
The Group’s position is that any requirements placed upon SIFIs must be based on a clear set of inter-national rules in order to avoid competitive distortions because of local differences in the treatment of SIFIs. The EU Commission is expected to present proposals in 2011.
4.4 expiry of the state guarantee
On 1 June 2010, the Danish Parliament adopted rules on the management of distressed financial insti-tutions after the expiry of “Bank Package I” (the general state guarantee) on 30 September 2010.
Upon expiry of the guarantee, the Group’s payment of an annual guarantee commission of DKK 2.5 bil-lion and its liability for distressed banks’ losses were also discontinued. Other things being equal, the expiry of the guarantee will bring a sharp reduction in the Group’s expenses.
The expiry of Bank Package I and the unrest caused by high national debt in several countries did not have an adverse effect on the Group’s liquidity position.
38 CREDIT RISK DANSKE BANK RISK MANAGEMENT 2010
5. CReDIt RIsk
39 5.1 The credit management organisation
39 5.2 The credit process
40 5.3 Credit policies
41 5.4 The approval process and lending authorities
41 5.5 Portfolio management
42 5.6 Risk classification
43 5.6.1 Rating of customers
43 5.6.2 Credit scoring of personal customers
44 5.7 Risk mitigation
44 5.8 The impairment process
46 5.9 The collection process and repossessed assets
46 5.9.1 Repossessed assets
46 5.10 The credit portfolio
48 5.10.1 Credit exposure relating to lending activities
54 5.10.2 The trend in credit exposure in 2010
56 5.11 Migration analysis
59 5.12 Risk concentration
60 5.13 Loan impairment charges in 2010
39 DANSKE BANK RISK MANAGEMENT 2010 CREDIT RISK
The Danske Bank Group offers loans, credits, guarantees and other products as part of its business model and thus undertakes credit risk.
Credit risk is the risk of losses arising because counterparties or debtors fail to meet all or part of their payment obligations. Included in credit risk is the risk of losses because an entire country may en-counter financial difficulties or losses because of political decisions regarding such matters as nation-alisation and expropriation.
The risk of losses because of customers’ defaults on derivatives transactions is called counterparty risk, and it is treated separately in section 6.
At the end of 2010, 84% of the Group’s risk-weighted assets under Pillar I were allocated to credit risk. At the end of 2010, the total credit exposure amounted to DKK 3,402 billion, with DKK 2,363 billion coming from lending activities and DKK 428 billion coming from trading and investing activities.
5.1 The credit management organisation
Group Credit has overall responsibility for the credit process in all of the Group’s business units. The managers of the local credit departments report to Group Credit. Local credit committees were estab-lished at the major retail Banking Activities units on 1 January 2011. On the basis of locally prepared criteria, the local credit committees process credit applications that exceed the lending authorities of the Banking Activities unit in question. The committees consist of representatives of Group Credit and the Banking Activities units.
Group Credit has established specialist functions to manage credit processing for selected industries and for customers representing exposures over a certain level.
5.2 The credit process
The Group’s credit management process is based on guidelines and policies set forth by the Board of Directors. The process must ensure a match between customers’ creditworthiness and the lending authorities granted to credit officers. Thus, when a customer’s creditworthiness declines, the lending authority is reduced. The Group’s central monitoring of credit exposures is managed with the Group’s credit system, which contains information on the size and utilisation of all facility types and on the estimated realisation value of collateral after a haircut.
40 CREDIT RISK DANSKE BANK RISK MANAGEMENT 2010
DANSKE BANK GROUP’S CREDIT PROCESS
LOAN APPLICATION eBanking Branch Contact centre
LOAN PROCESSING
Credit system Exposure data Score/rating
Other customer data
APPROVALAdviser/
Credit officerAutomatic
ESTABLISHMENT Automatic loan establishment and disbursement
fOLLOW-UPOngoing reassessment
of score/ratingAdviser contact Unauthorised excess
processing
Non-performing Performing
CLOSING Central collection Loan redeemed
5.3 Credit policies
The Board of Directors sets the overall policies for the Group’s credit risk exposure. The key features of the credit risk policies are described below.
The Group aims to build long-term relationships with its customers. The vast majority of credits are granted on the basis of an understanding of the customer’s financial circumstances and of special as-sessments of market conditions.
The Group’s ongoing monitoring of developments in the customer’s financial situation enables it to assess whether the basis for the credit has changed. The facilities should match the customer’s credit-worthiness, financial position and assets, and customers should be able to substantiate their repay-ment ability.
The Group assumes risks only within the limits of applicable legislation and other rules, including rules on good practices for financial undertakings. In order to mitigate credit risk, the Group requires collateral appropriate to the product segment. Collateral is usually required for credit facilities with a long term to maturity (typically more than five years) and for financing fixed assets.
41 DANSKE BANK RISK MANAGEMENT 2010 CREDIT RISK
The Group exercises caution before granting credit facilities to businesses or individuals if it is obvious that there will be practical difficulties maintaining contact with the customer. The Group is particularly cautious in granting credits to businesses in troubled or cyclical industries. In managing country risk, the Group exercises particular caution when assuming risk in countries with an unstable economic or political climate.
When processing customers’ and the Group’s own orders in the liquidity, currency and securities mar-kets, the Group collaborates extensively with other major financial institutions.
5.4 The approval process and lending authorities
Credit granting is operationalised by means of a hierarchical lending authority structure in which Group Credit, acting on behalf of the Executive Board, delegates lending authorities and sets guide-lines for the business units.
Lending authorities depend on the business unit, branch category and employee category and are also divided into authorities for mortgage financing and other financing. Lending authority limits at the individual business units are adjusted to market conditions.
When processing credit applications, the Group uses a comprehensive global electronic credit file sys-tem. For each application, the Group gathers various information that is used as the basis of decision. The information includes the following:
• Overview of the facility and collateral • Financial analysis data or financial data from the annual tax assessments of personal customers • Supplementary comments on the application • Credit portfolio category • Classification • Company profile • Risk profile of the customer • Credit bureau information • Overview of the Group’s total exposure to the customer and customer group
The Group uses an automatic authorisation control system. In combination with the credit applica-tion and approval system, this system ensures that the credit approvals made by individual managers and employees do not exceed their delegated lending authorities. System authorisation breaches are reported to the next lending authority level on an ongoing basis.
5.5 Portfolio management
The Group monitors credit facilities centrally through its credit systems, at the customer level as well as the portfolio level.
Monitoring at the customer levelThe Group registers the customers’ classifications, data on the limits and utilisation of all facility types, and information on the estimated realisation value of collateral after the deduction of a haircut. The Group sets limits individually according to the customer classification and the collateral pro-vided. At least once a year, it reviews all exposures above a certain amount and updates the files with new financial information and other information.
Customers who exhibit a weak financial performance are transferred to a watch list so that the Group can monitor them more closely and reduce the risk of losses. A watch list of larger customers is re-viewed regularly by the Board of Directors.
42 credit risk dANske BANk risk MANAGeMeNt 2010
When a large customer shows signs of financial difficulty, one of the Group’s workout functions takes over the credit process. The workout process is conducted by the credit department to which the customer belongs. The workout function prepares an action plan with clear operational steps that it judges necessary to respond to the challenges that the customer faces.
Unauthorised excesses above the approved limits are automatically referred to the customer’s adviser, who takes the appropriate action. For customers with high ratings, the Group may accept excesses for a limited period. If the Group does not accept an excess, it starts an automated reminder procedure. If the excess is not repaid, the procedure may lead to debt recovery proceedings. Claims submitted for debt recovery are transferred to the debt management department in the country in question.
Monitoring at the portfolio level In addition to credit risk management at the individual customer level, the Group manages credit risk at the portfolio level. The Group manages portfolios for individual industries by determining a portfolio category and limit for each industry on the basis of total exposure, credit quality and industry outlook. The portfolio monitoring and reporting system enables the Group to manage portfolios actively and to focus on specific industries and business units.
The Group reviews selected industries and analyses the risk profile on an ongoing basis. The analyses determine the need for specific actions and changes in portfolio strategy, policies or limits. The portfolio research reports are presented to the Executive Board’s Credit Committee.
The Group also monitors the general trends and outlook at the industry level. Industry research reports are submitted to the Board of Directors and, in an abridged form, to the business units.
Finally, in collaboration with the major banking units, Group Credit monitors and reviews credit quality on a quarterly basis and reports on various credit portfolio characteristics. The Group takes steps to counteract any negative developments in the portfolios. Detailed monitoring reports are sent to the business units’ credit departments, and general reports are submitted to the Executive Board’s Credit Committee.
5.6 Risk classification
As part of the credit process, the Group classifies customers according to risk and updates the classification upon receipt of new information about them.
The main objectives of risk classification are to rank the Group’s customer base according to risk and to estimate the probability of default (PD) of each customer. The risk classification process also ensures a shared understanding across the Group of the credit risk that customers pose.
The Group’s master scale consists of 11 main rating categories. Most of the categories are divided into two or three subcategories, making a total of 26 rating categories. In the following section, the term “rating categories” refers to the 11 main categories of the master scale, which covers both ratings and credit scores.
In its credit risk management process, the Group uses pointintime (PIT) estimates for risk classification. These PIT PD estimates are based on inputs that are sensitive to the underlying business cycle, and the PD estimates will thus change over a business cycle. Since the underlying PD bands of the master scale are fixed, the percentage of customers within each PD band will vary in accordance with the effects of the business cycle. During a recessionary period, a customer’s PIT PD will thus increase and the customer will migrate to a lower rating category on the master scale. The migration effect of using the PIT PD will thus be larger than if the classification were based on the throughthecycle PD.
Rating process The Group uses a number of rating models that it has developed for classifying customers in the various industries. It has established regular procedures to ensure that the correct model is used for a given customer.
43 dANske BANk risk MANAGeMeNt 2010 credit risk
Customer ratings are reassessed periodically. Large business and financial customers’ ratings are reassessed more frequently than those of smaller customers. The reassessments are based on new information, including financial statements, budgets and other information that affects customers’ creditworthiness.
Group Credit is responsible for the overall rating process. It is also responsible for validating the rating models and processes, among other things. The validation is conducted independently of the rating process.
Group Credit rates the largest customers, while smaller customers are rated by the local units’ credit departments. Group Credit ensures that the part of the process that is carried out locally follows the same overall guidelines as the process used at the head office for the largest customers. Two persons are always involved in a rating decision: a rating officer who recommends the rating and a senior rating officer with authority to approve the rating.
After a rating reassessment has been approved, the rating applies until new information appears and the rating is reassessed again.
5.6.1 Rating of customers
Business customers (a category that consists of large corporate customers as well as small and mediumsized enterprises) are rated in a process managed by the Group’s credit organisation. Customer advisers can provide factual information for the process but have no influence on the outcome. This ensures that the rating is made independently of the adviser.
The key components of the model used to rate customers build on the customer’s financial statements and include an assessment of the customer’s prospects. The model allows the inclusion of qualitative information such as the earnings outlook for the industry and an evaluation of the company’s management. On the basis of this input, the model proposes a rating, but the final rating is based on input from expert assessments as well.
Ratings are approved in accordance with a delegation hierarchy. Ratings of customers whose facilities do not exceed a given level are approved by the credit department of the business unit. If the facilities exceed this level, the rating is referred to Group Credit for approval. Ratings of customers who apply for facilities that require the approval of the Board of Directors are submitted to a member of the Executive Board’s Credit Committee for approval.
For other financial customers, the formal rating process is identical to the one for business customers described above, and the final rating is also based on expert assessments.
The Group’s ratings of sovereign counterparties and individual central banks are based on external ratings from the international rating agencies. Ratings of local governments and other local authorities are based on expert assessments. The Group follows rules based on local conditions that it has defined for each country.
5.6.2 Credit scoring of personal customers
The Group assigns credit scores to customers who are not rated. These customers include personal customers and certain SMEs. The Group has developed statistical models based on the information it possesses about customers that predict the likelihood that a customer will default on its payment obligations to the Group.
The credit score represents the risk of loss on an exposure on the basis of welldefined characteristics of the customer’s financial situation. Customer advisers use the credit scores in granting loans and in pricing. Since the accessibility of data about personal customers varies from country to country, the Group has developed personal customer models for each market in which it operates.
44 credit risk dANske BANk risk MANAGeMeNt 2010
The models ensure that the Group always has an updated credit score for each customer. The score is based on either application data (for new customers) or behavioural data (for existing customers). Scores are updated monthly. Customer downgrades are made in accordance with certain rules, for example after a period of arrears.
5.7 Risk mitigation
A key element in the Group’s credit policy is reducing risks in the loan portfolio by entering various risk-mitigating agreements. For many loan products, collateral is required by statutory regulations, as in mortgage finance, or is standard market practice.
The most important means of mitigating risk that the Group uses are pledges, sureties and guarantees. The most common types of collateral the Group receives, measured by collateral value, are mortgages on real property and financial assets in the form of shares or bonds.
The initial valuation of the collateral takes place during the credit approval process, when the Group collects information that enables it to make a sound valuation. In compliance with local statutory regulations, the Group regularly reassesses the value of the collateral.
The value of collateral is based on the capital adequacy rules, and it is calculated as the estimated amount at which it can be sold on the valuation date between two independent parties, adjusted for a haircut and the remaining debt on any senior claims. For the most common collateral types, the Group uses models to estimate value. For collateral types for which there is no valuation model, the Group calculates the value manually.
The haircut is a measure of the risk that the Group will not be able to obtain proceeds from the sale of the collateral equal to the expected market value. The haircut thus includes maintenance costs in the period when the asset is for sale, fees for external advisory services and any loss in value. For real property, haircuts depend on the property type, condition, location and other criteria and usually range from 20% to 40% of the property’s market value. For listed securities, the haircut is calculated with an internal model based on 20-day price volatility. For unlisted securities, the haircut is 100%.
In some cases, the Group receives guarantees or sureties for credit facilities. Many are provided by companies or persons related to the debtor. Because of the default correlation, no independent value is attached to such guarantees.
The Group conducts backtests of its valuation models annually and supplements them by quarterly validations of the models. The Group also evaluates the validity of external inputs on which the valua-tion models are based.
5.8 The impairment process
The Group conducts impairment tests quarterly, assessing all credit facilities for objective evidence of impairment (OEI). The Group has defined a set of risk events that qualify as OEI. The events are based on the Group’s interpretation of IAS 39.
Some risk events are registered automatically in the Group’s systems, and others are registered manu-ally by credit officers and customer advisers on a regular basis. Both local and central credit depart-ments conduct OEI assessments.
All impairment charges are based on cash flows discounted according to the effective interest method. The Group’s system calculates impairment charges for small loans automatically, taking into account the discounted market value of the collateral after a haircut. Impairment charges for all medium and large exposures with OEI are assessed by a senior credit officer. Property valuations are estimated as market values at which two independent parties would agree to trade.
45 DANSKE BANK RISK MANAGEMENT 2010 CREDIT RISK
individual impairment charges When OEI appears for a facility, the Group applies it to all the customer’s facilities and calculates the impairment charge on the basis of the total exposure. Sometimes OEI for one customer can be applied to other customers when the customers have a “financial relationship”, for example if they are part of the same corporate group.
Customers with OEI but not in default are downgraded to the Group’s rating category 10.
Customers with OEI who are in default are downgraded to category 11. For personal customers, OEI usually consists of the issuance of a debt collection reminder letter or a facility’s becoming 90 days past due. For business customers, OEI usually appears when the customer is in severe financial dif-ficulties, in need of financial restructuring, or subject to suspension of payments or bankruptcy.
The calculation of impairment charges on customers in rating category 10 is based on a scenario model. The model’s two main scenarios are financial restructuring and bankruptcy. In the restructur-ing scenario, the Group assumes that the customer is a “going concern”, although the current debt is too high in relation to the cash flow. The credit officer’s best estimate of the amount of debt that the borrower will be able to service in a future financial restructuring serves as a foundation for the im-pairment charge. On the other hand, if restructuring is not a possibility, the credit officer assumes that default and bankruptcy will occur, and the impairment charge is based on the exposure less the net present value of the expected proceeds from realising the collateral and other assets.
During the collection process, if the Group determines that a loss is unavoidable, the loan in question is written off, either partly or fully. If the Group later arranges a payment agreement for a loan that has been written off, the loan is recognised in the balance sheet as a new loan at a value equal to the net present value of the payment agreement. Amounts that are repaid are recognised immediately as a decrease in loan impairment charges in the income statement.
Collective impairment charges Loans and advances without OEI are included in collective assessment of the need for impairment charges. Collective impairment charges are calculated for loans with similar credit characteristics when a deterioration of the expected payment stream from the group has occurred without an adjust-ment of the credit margin in the agreed-upon interest rate. The charges are based on a degradation of customers’ rating classifications over time (migration). Customers are divided into groups according to their current ratings. Groups of facilities whose ratings have improved are included in the calcula-tions.
When external market information indicates that an impairment event has occurred, even though it has not yet materialised in ratings, the Group registers an “early event” impairment charge. Early events represent an expected rating change because of deteriorating market conditions in an industry. If a rating downgrade does not occur as expected, the charge is reversed.
Collective impairment charges are calculated as the difference between the carrying amounts of the loans and advances in the portfolio and the present value of estimated future cash flows. According to the amortised cost method, the value of a portfolio cannot exceed the value at the initial recognition less the amounts repaid during the period from initial recognition to the balance sheet date. Collective impairment charges are calculated by Group Credit.
The accumulated impairment charges constitute the allowance account. Part of the allowance account is reserved for future interest income based on the effective interest method.
46 CREDIT RISK DANSKE BANK RISK MANAGEMENT 2010
5.9 Customers in default and and repossessed assets
The Group registers customers with amounts past due as being in default when it appears unlikely that the customers will fully repay all obligations to the Group. The Group uses a definition of default consistent with the requirements of the CRD (90 days past due).
Danish legislation on the disclosure of information between the companies of a financial group does not permit the dissemination of sensitive information about personal customers. This also applies to information that may lead to the registration of default status. A personal customer default in one Group unit, therefore, will not necessarily lead to a default marking in other Group companies.
This stipulation does not apply to business customers, so for these customers, default status may in certain circumstances lead to default on all amounts due to the Group.
A default situation in a group of related customers requires an individual assessment of whether default should be registered for each customer in the group. In this context, if a customer or a cus-tomer’s creditors have filed for bankruptcy, or if a customer has notified the courts of a suspension of payments, begun negotiations for financial restructuring or taken similar steps, the Group considers it unlikely that the customer will fully repay all obligations.
If a personal customer overdraws his or her account or is in arrears, a file is set up and the customer’s adviser decides whether or not to accept the unauthorised excess or arrears. For many good custom-ers, the Group accepts excesses or arrears for a limited period for practical reasons. If the excesses or arrears are not accepted, a reminder procedure is initiated. The procedure may lead to debt recovery proceedings through the courts within 90 days of the claim.
Customers in default are downgraded to the lowest level of the Group’s classification system (rating category 11), even if there is full collateral for the outstanding amount.
5.9.1 repossessed assets
The Group generally has no interest in taking over assets from customers. If a customer shows signs of default, the Group will begin by seeking a solution that can improve the customer’s financial situation, including restructuring the customer’s finances and financing.
If it is not possible to improve the customer’s financial situation, the Group assesses whether to subject the customer’s asset to a forced sale or whether the asset could be realised later at a higher net gain. The repossession of any assets must be approved by the local credit department, and the Group will attempt to sell the asset as soon as possible.
5.10 Credit portfolio
The Group’s credit exposure consists of balance sheet items and off-balance-sheet items that involve credit risk less the allowance account. Most of the exposure derives from lending activities in the form of loans with and without collateral. Placements managed by the Group’s trading and investment units also involve credit risk. A segment of credit risk concerns OTC derivatives and is designated as counterparty risk. Counterparty risk, including risk management and modelling, is treated in section 6. Both counterparty risk and the credit risk exposure from securities placements mainly at trading and investment units are included in the overall management of credit risk on the counterparty’s total exposure, including direct lending. For capital adequacy purposes, credit risk on securities in the trad-ing book is not treated as credit risk but as market risk (see section 7 on market risk).
47 DANSKE BANK RISK MANAGEMENT 2010 CREDIT RISK
The Group is exposed only to a limited extent to the risk on some balance sheet items. This is the case with assets under customer-funded investment pools, unit-linked investment contracts and insurance contracts. The risk on such assets under pools and unit-linked investment contracts is borne solely by customers, while the risk on assets under insurance risk is borne primarily by customers. The Group’s risk on insurance contracts is described in section 10, which treats insurance risk.
At the end of 2010, the total carrying amount of the Group’s exposure was DKK 3,402 billion. Some DKK 2,363 billion derived from lending activities both in and outside Denmark, DKK 334 billion derived from counterparty risk on derivatives, and DKK 428 billion derived from other trading and investing activities, such as trading in bonds and other financial instruments.
BREAKDOWN Of CREDIT EXPOSURE (CARRYING AMOUNTS)
2010 Total
Credit risk, lending
activities
Counter-party risk
(derivatives)
Credit risk, other trading
and lending activities
Insurance risk
Contracts, full risk
assumed by customers
Balance sheet items:
Demand deposits with central banks
25,662
25,662
-
-
-
-
Due from credit institutions and central banks
89,619
89,619
-
-
-
-
Repo loans with credit institutions and central banks
138,481
138,481
-
-
-
-
Trading portfolio assets 641,993 - 333,743 308,250 - -
Investment securities 118,556 - - 118,556 - -
Loans and advances at amortised cost
978,250
978,250
-
-
-
-
Repo loans 168,481 168,481 - - - -
Loans and advances at fair value
701,715
701,715
-
-
-
-
Assets under pooled schemes and unit-linked investment contracts
59,698
-
-
-
-
59,698
Assets under insurance contracts
217,515
-
-
-
217,515
-
Off-balance-sheet items:
Guarantees 90,290 90,290 - - - -
Irrevocable loan commitments shorter than 1 year
61,551
61,551
-
-
-
-
Irrevocable loan commitments longer than 1 year
109,407
109,407
-
-
-
-
Other unutilised commitments 852 - - 852 - -
Total 3,402,070 2,363,456 333,743 427,658 217,515 59,698
48 CREDIT RISK DANSKE BANK RISK MANAGEMENT 2010
2009 Total
Credit risk, lending
activities
Counter-party risk
(derivatives)
Credit risk, other trading
and lending activities
Insurance risk
Contracts, full risk
assumed by customers
Balance sheet items:
Demand deposits with central banks 23,929 23,929 - - - -
Due from credit institutions and central banks 109,236 109,236 - - - -
Repo loans with credit institutions and central banks 93,120 93,120 - - - -
Trading portfolio assets 620,052 - 313,387 306,665 - -
Investment securities 118,979 - - 118,979 - -
Loans and advances at amortised cost 981,079 981,079 - - - -
Repo loans 146,063 146,063 - - - -
Loans and advances at fair value 688,473 688,473 - - - -
Assets under pooled schemes and unit-linked investment contracts 45,909 - - - - 45,909
Assets under insurance contracts 196,944 - - - 196,944 -
Off-balance-sheet items:
Guarantees 86,825 86,825 - - - -
Irrevocable loan commitments shorter than 1 year 70,736 70,736 - - - -
Irrevocable loan commitments longer than 1 year 101,959 101,959 - - - -
Other unutilised commitments 1,173 - - 1,173 - -
Total 3,284,477 2,301,420 313,387 426,817 196,944 45,909
In addition to the credit exposure relating to lending activities, the Group has made loan offers and granted revocable credit facilities for DKK 396 billion (2009: DKK 344 billion). These items are includ-ed in the calculation of risk-weighted assets in accordance with the CRD. See appendix A, the section on credit risk, 12, which contains a bridge between the credit exposure relating to lending activities and the exposure used in the calculation of RWA (exposure at default, or EAD).
5.10.1 Credit exposure relating to lending activities
At the end of 2010, credit exposure amounted to DKK 2,363 billion, against DKK 2,301 billion at the end of 2009. The change was caused mainly by increased lending to personal and financial customers. The rise in lending to personal customers was owing to higher demand for home financing products because of low interest rates. The increase in exposure to financial customers was owing mainly to higher repo lending. In the beginning of 2010, there was increased demand from corporate customers, but demand declined in the second half of the year. Lending to public sector customers rose from the level the year before.
49 DANSKE BANK RISK MANAGEMENT 2010 CREDIT RISK
CREDIT EXPOSURE, LENDING ACTIVITIES
At 31 December 2010 (DKK millions)
Personal customers
Commercial customers
financial customers
Governments
Total
Due from credit institutions and central banks - 36 151,765 101,961 253,762
Loans and advances (ex repo loans) 448,716 436,191 54,363 38,980 978,250
Repo loans - 3,469 153,293 11,719 168,481
Loans and advances at fair value 418,764 276,463 3,707 2,781 701,715
Guarantees 5,735 63,169 19,924 1,462 90,290
Loan commitments 132 107,127 58,402 5,297 170,958
Total 873,347 886,455 441,454 162,200 2,363,456
At 31 December 2009 (DKK millions)
Personal customers
Commercial customers
financial customers
Governments
Total
Due from credit institutions and central banks - - 125,946 100,339 226,285
Loans and advances (ex repo loans) 430,560 460,286 63,935 26,298 981,079
Repo loans - 12,626 128,794 4,643 146,063
Loans and advances at fair value 411,482 272,189 3,325 1,477 688,473
Guarantees 5,214 56,031 24,328 1,252 86,825
Loan commitments 174 106,313 62,979 3,229 172,695
Total 847,430 907,445 409,307 137,238 2,301,420
50 credit risk dANske BANk risk MANAGeMeNt 2010
The Group’s banking activities are defined on the basis of geographical markets, while the Danske Mar-kets business unit involves mainly international financial customers. Other Activities includes leasing and asset management. For lending and guarantees, elimination takes place across the business units under Other Activities.
key fiGures BrokeN dowN By BusiNess uNit
Banking Activities
totalAt 31 december 2010 (dkk millions) denmark finland sweden Norway
Northern ireland ireland Baltics
danske Markets
other Activities
credit exposure 1,071,229 194,101 248,372 197,295 51,872 62,678 25,314 439,065 73,530 2,363,456
Loans and guarantees 1,037,173 170,793 201,631 173,689 50,681 61,241 21,504 300,011 -77,987 1,938,736
commercial property industry 110,018 15,579 58,805 32,806 9,406 15,569 2,029 172 1,075 245,459
residential property loans 511,279 77,059 61,417 69,101 14,817 25,843 11,678 - - 771,194
Past due loans (%) 0.4 1.0 0.1 0.5 0.7 1.2 3.1 - - -
impaired loans (%) 2.6 3.0 0.9 1.5 6.8 21.8 8.2 1.1 1.0 2.7
segment in default (%) 33.5 37.1 54.0 28.4 52.0 61.9 58.9 93.3 43.7 46.8
impairment ratio (bp) 72 16 8 2 246 811 96 -21 - 71
Banking Activities
totalAt 31 december 2009 (dkk millions) denmark finland sweden Norway
Northern ireland ireland Baltics
danske Markets
other Activities
credit exposure 1,109,062 193,155 210,138 186,538 50,843 72,942 29,149 386,587 63,006 2,301,420
Loans and guarantees 1,143,704 168,143 174,018 164,297 50,590 70,176 24,617 217,759 -110,864 1,902,440
commercial property industry 109,670 16,407 48,741 34,367 10,146 17,900 2,655 491 1,715 242,092
residential property loans 506,255 73,634 48,892 58,033 14,212 27,385 11,062 - - 739,473
Past due loans (%) 0.5 1.2 0.2 0.4 0.6 2.2 3.5 - - -
impaired loans (%) 2.1 2.0 0.6 1.5 5.7 16.4 7.9 1.6 1.1 2.4
segment in default (%) 47.3 69.0 63.5 52.5 62.4 61.0 71.4 61.8 - 55.2
impairment ratio (bp) 88 102 29 41 277 746 1,107 149 - 135
Note: the loan impairment ratio is defined as impairment charges for the year as a percentage of loans and guarantees at the end of the year.
51 DANSKE BANK RISK MANAGEMENT 2010 CREDIT RISK
The industry breakdown below shows the Group’s credit exposure broken down by industry and customer segment. The breakdown follows the Global Industry Classification Standard (GICS), sup-plemented by the Personal Customers, Subsidised Housing Companies and Central and Local Govern-ments categories.
CREDIT EXPOSURE, LENDING ACTIVITIES, BROKEN DOWN BY INDUSTRY
Banking Activities
TotalAt 31 December 2010 (DKK millions) Denmark finland Sweden Norway
Northern Ireland Ireland Baltics
Danske Markets
Other Activities
Central and local governments 16,678 4,082 2,496 1,223 6,964 1,902 562 101,817 26,476 162,200
Subsidised housing companies 98,130 6,790 6,242 2,813 767 142 - 35 61 114,980
Banks 24,382 1,648 8,236 3,114 214 114 3,757 137,818 11,638 190,921
Diversified financials 17,524 3,344 12,541 7,250 53 1,504 605 136,043 7,310 186,174
Other financials 1,894 69 1,447 554 584 118 175 57,346 2,172 64,359
Energy and utilities 12,685 11,083 3,719 9,101 434 54 968 75 356 38,475
Consumer discretionary and consumer staples 115,493 16,997 24,193 18,028 9,761 9,689 2,204 1,753 5,093 203,211
Commercial property 110,018 15,579 58,805 32,806 9,406 15,569 2,029 172 1,075 245,459
Construction, engineering and building products 12,446 7,124 4,948 2,383 3,968 3,241 416 130 1,773 36,429
Transportation and shipping 23,522 6,080 7,263 32,022 711 252 908 173 2,292 73,223
Other industrials 40,933 9,803 14,681 9,367 919 1,188 698 460 5,270 83,319
IT 5,323 1,488 5,977 2,397 49 84 30 37 256 15,641
Materials 12,830 11,828 11,127 4,515 1,099 1,254 423 560 2,586 46,222
Health care 10,837 1,835 5,652 1,189 549 342 103 2,631 1,522 24,660
Telecommunication services 1,759 1,271 1,170 117 3 265 232 9 10 4,836
Personal customers 566,775 95,080 79,875 70,416 16,391 26,960 12,204 6 5,640 873,347
Total 1,071,229 194,101 248,372 197,295 51,872 62,678 25,314 439,065 73,530 2,363,456
52 CREDIT RISK DANSKE BANK RISK MANAGEMENT 2010
Banking Activities
TotalAt 31 December 2009 (DKK millions) Denmark finland Sweden Norway
Northern Ireland Ireland Baltics
Danske Markets
Other Activities
Central and local governments 28,979 3,179 2,368 953 6,213 1,373 194 75,243 18,736 137,238
Subsidised housing companies 97,934 8,196 6,125 2,924 697 186 - 152 1,671 117,885
Banks 34,806 3,077 7,986 4,947 261 285 4,504 109,265 7,915 173,046
Diversified financials 19,384 4,501 6,418 5,743 65 880 581 135,559 7,279 180,410
Other financials 5,367 753 1,635 519 623 132 373 46,449 - 55,851
Energy and utilities 11,274 7,025 3,489 12,901 51 192 567 991 337 36,827
Consumer discretionary and consumer staples 123,153 16,977 21,129 18,421 9,326 12,495 3,300 1,228 6,970 212,999
Commercial property 109,670 16,407 48,741 34,367 10,146 17,900 2,655 491 1,715 242,092
Construction, engineering and building products 12,228 5,287 4,630 1,893 4,383 4,221 610 484 2,342 36,078
Transportation and shipping 26,281 5,824 6,242 24,766 716 345 589 708 2,599 68,070
Other industrials 38,609 11,652 13,657 10,152 1,059 1,946 1,348 2,395 5,785 86,603
IT 5,429 1,732 4,453 1,387 47 157 78 162 154 13,599
Materials 15,109 11,952 10,268 4,211 978 1,673 505 954 2,481 48,131
Health care 13,161 2,975 5,476 1,763 459 610 151 12,488 1,289 38,372
Telecommunication services 2,166 1,549 2,423 155 6 282 37 18 153 6,789
Personal customers 565,512 92,069 65,098 61,436 15,813 30,265 13,657 - 3,580 847,430
Total 1,109,062 193,155 210,138 186,538 50,843 72,942 29,149 386,587 63,006 2,301,420
Most of the Group’s credit exposure derives from credit facilities secured on real property, and most of this exposure in turn derived from home mortgage loans to personal customers.
COLLATERAL RECEIVED
At 31 December 2010 Collateral
(DKK millions) TotalReal
property OtherCredit
exposure
Total un - secured credit
exposure
Unsecured portion
(%)
Banking Activities Denmark 719,463 684,223 35,240 1,071,229 351,766 33
Segment from Realkredit Danmark 597,842 597,842 - 702,412 104,570 15
Banking Activities finland 117,109 100,409 16,700 194,101 76,992 40
Banking Activities Sweden 144,715 111,207 33,508 248,372 103,657 42
Banking Activities Norway 122,426 93,210 29,216 197,295 74,869 38
Banking Activities Northern Ireland 31,239 30,021 1,218 51,872 20,633 40
Banking Activities Ireland 40,221 38,974 1,247 62,678 22,457 36
Banking Activities Baltics 13,251 11,989 1,262 25,314 12,063 48
Other 425,525 2,480 423,045 512,595 87,070 17
Total 1,613,949 1,072,513 541,436 2,363,456 749,507 32
53 DANSKE BANK RISK MANAGEMENT 2010 CREDIT RISK
At 31 December 2009 Collateral
(DKK millions) TotalReal
property OtherCredit
exposure
Total un - secured credit
exposure
Unsecured portion
(%)
Banking Activities Denmark 710,533 664,797 45,736 1,109,062 398,529 36
Segment from Realkredit Danmark 579,582 579,582 - 707,496 127,914 18
Banking Activities finland 107,760 94,457 13,303 193,155 85,395 44
Banking Activities Sweden 119,817 92,240 27,577 210,138 90,321 43
Banking Activities Norway 111,687 81,912 29,775 186,538 74,851 40
Banking Activities Northern Ireland 30,981 29,615 1,366 50,843 19,862 39
Banking Activities Ireland 47,998 46,385 1,613 72,942 24,944 34
Banking Activities Baltics 15,984 13,932 2,052 29,149 13,165 45
Other 348,461 2,454 346,007 449,593 101,132 22
Total 1,493,221 1,025,792 467,429 2,301,420 808,199 35
Note: “Other” collateral consists mainly of custody accounts and securities.
The Group uses the loan-to-value (LTV) ratio to manage its credit exposure in the residential property loan portfolio. The LTV ratio is defined as the relation between the value of the remaining debt and the market value of the collateral. Only credit facilities on which the Group has a collateral agreement are included in the compilation.
LTV: LOANS TO PERSONAL CUSTOMERS BROKEN DOWN BY BUSINESS UNIT
At 31 December 2010 % Avg. LTV 2010
(%)
Avg. LTV 2009
(%)(DKK millions) 0-20 20-40 40-60 60-80 80-100 > 100 Totalt
Banking Activities Denmark 176,837 147,904 105,907 59,127 18,114 3,390 511,279 66.9 68.8
Segment from Realkredit Danmark 144,251 122,645 88,996 49,176 13,318 - 418,386 65.6 67.5
Banking Activities finland 30,155 22,607 14,573 7,018 2,069 637 77,059 62.4 64.8
Banking Activities Sweden 21,261 17,731 12,555 6,828 1,862 1,180 61,417 68.9 70.2
Banking Activities Norway 25,255 22,014 14,568 5,407 933 924 69,101 62.8 62.6
Banking Activities Northern Ireland 5,689 3,844 2,405 1,373 685 821 14,817 72.4 69.2
Banking Activities Ireland 7,959 6,534 4,801 2,979 1,667 1,903 25,843 83.7 74.9
Banking Activities Baltics 2,670 2,332 1,921 1,464 1,102 2,189 11,678 96.2 82.8
Total 269,826 222,966 156,730 84,196 26,432 11,044 771,194 67.3
Total 2009 256,171 211,046 148,236 81,919 32,519 9,582 739,473 68.5
Note: In the breakdown, every krone lent is categorised according to its seniority in the total debt on the individual property. for each property, the average LTV is calculated on the basis of the last krone lent.
At the end of 2010, the Group’s holding of repossessed properties consisted of the following: 164 at Realkredit Danmark; 156 at Banking Activities Finland; 42 at Banking Activities Northern Ireland; and 212 at Banking Activities Baltics. The level of repossessions remains very low from a histori-cal perspective. At the end of 2010, the value of the properties held for sale that were repossessed in Denmark amounted to DKK 564 million (end-2009: DKK 84 million) and the amount for properties repossessed outside of Denmark amounted to DKK 126 million (end-2009: 110 million).
54 CREDIT RISK DANSKE BANK RISK MANAGEMENT 2010
0
1,500
3,000
4,500
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
REPOSSESSED PROPERTIES AT REALKREDIT DANMARKNumber
Stock Repossessed during the year Year-end
Note: Stock indicates the number of repossessed properties held at the end of the year. The repossessed properties are the gross number repossessed during the year.
5.10.2 The trend in credit exposure in 2010
Credit exposure to personal customers rose 3% to DKK 873 billion. Low interest rates affected demand for home financing products, particularly at the Nordic Banking Activities units.
The credit quality of personal customers in Denmark was stable, with rising demand, particularly for home financing products. In Sweden and Norway, the credit quality of personal customers improved, while the credit quality of personal customers in Finland was affected somewhat adversely by an increase in unemployment. At Banking Activities Ireland and Banking Activities Northern Ireland, credit quality was adversely affected by rising unemployment, higher interest rates and lower dispos-able income.
At the end of 2010, home financing loans amounted to DKK 771 billion (2009: DKK 739 billion), with Realkredit Danmark accounting for 54% (2009: 56%).
At Banking Activities Denmark, the demand for residential property loans was directed towards interest-reset loans, among other things. At the end of 2010, such loans with a remaining maturity of less than five years represented 65% of the personal customer portfolio at Realkredit Danmark.
Most of the collateral provided by personal customers consisted of real property. At the end of 2010, the value of the collateral received from personal customers, adjusted for haircuts, amounted to DKK 707 billion (2009: DKK 673 billion).
In Denmark, a decline in arrears at Realkredit Danmark, taken in isolation, indicated improving credit quality.
55 DANSKE BANK RISK MANAGEMENT 2010 CREDIT RISK
Generally lower activity at Banking Activities units led to a decline in exposure to corporate custom-ers. At the end of the year, this exposure amounted to DKK 886 billion, against DKK 907 billion at the end of 2009. The decline occurred among both large and small corporate customers.
Credit exposure to the real property sector, defined as commercial construction and real property, amounted to DKK 245 billion (2009: DKK 242 billion), with property developers accounting for DKK 12.2 billion (2009: DKK 13.6 billion). The sector was affected strongly by the low activity level, which led to difficult conditions in Denmark and Ireland in particular. In Denmark, the market continued to be affected by high vacancy rates resulting from overheating in the years preceding the financial crisis. At the end of the year, exposure to the property sector at Banking Activities Denmark amounted to DKK 110 billion, with DKK 93 billion from Realkredit Danmark. Loans provided by Realkredit Danmark involved property financing for which the Group received full collateral. The average LTV of this portfolio was 74% at the end of 2010 (2009: 75%). The remainder of the exposure to the property sector at Banking Activities Denmark involved mainly construction loans and bridge financing.
At Banking Activities Ireland, exposure to the property sector amounted to DKK 9.4 billion, or 18% of total exposure at the unit. A sharp drop in property prices because of low activity and a lack of liquidity had an adverse effect on the credit quality of the portfolio. The drop in property prices was reflected in the haircut at which the state property company, the National Asset Management Agency (NAMA), acquired the assets.
The credit quality of SMEs worsened over the year, especially at Banking Activities Denmark, Bank-ing Activities Ireland and Banking Activities Northern Ireland. In the latter two regions, the decline in quality was owing mainly to the property sector, while the decline in Denmark was owing mainly to the agricultural sector.
At the end of 2010, the total exposure to the agricultural sector amounted to DKK 69 billion, with DKK 56 billion from Banking Activities Denmark. Disadvantageous terms of trade, high gearing and falling property prices put additional pressure on earnings and liquidity in the sector. Lending to the agricul-tural sector from Realkredit Danmark amounted to DKK 45 billion at the end of 2010. The average LTV of this portfolio rose from 64% at the end of 2009 to 73% at the end of 2010, mainly because of falling property prices. The Group intensified its monitoring of the agricultural sector in Denmark.
0
20
40
60
80
100
120
140
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
3-MONTH DELINQUENCY RATE FOR PERSONAL CUSTOMERS AT REALKREDIT DANMARK1990 = index 100
56 CREDIT RISK DANSKE BANK RISK MANAGEMENT 2010
5.11 Migration analysis
At the end of 2010, the average exposure-weighted probility of default (PD), excluding public sector and financial customers, was 1.63% (2009: 1.43%). The PD levels were influenced by a negative trend among small and medium-sized enterprises, especially in Denmark. At the end of the year, 80% of the portfolio had an average PD of 0.18% (2009: 0.20%).
RATINGS BROKEN DOWN BY BUSINESS UNIT
At 31 December 2010 (DKK millions)
Rating category
Banking Activities
Denmark finland Sweden NorwayNorthern
Ireland Ireland BalticsDanske
MarketsOther
Activities Total
1 26,588 578 1,099 83 5,808 - - 107,351 17,250 158,757
2 89,253 6,066 16,170 7,097 1,101 405 1,528 58,239 5,601 185,460
3 152,884 17,997 30,177 20,321 1,459 2,633 205 157,732 4,879 388,287
4 135,474 33,599 46,796 40,850 3,747 3,054 3,861 31,935 12,857 312,173
5 188,311 35,463 61,868 44,232 6,746 12,732 3,513 30,754 16,180 399,799
6 170,027 34,129 46,125 40,715 7,720 7,596 1,518 38,913 6,835 353,578
7 150,614 38,710 28,525 29,201 10,643 7,134 3,174 5,971 4,253 278,225
8 95,131 17,838 13,261 9,307 8,785 10,934 5,942 1,825 4,120 167,143
9 34,842 3,873 2,151 2,485 2,344 4,556 3,495 1,519 821 56,086
10 18,683 3,681 1,012 2,150 1,688 5,198 855 322 413 34,002
11 9,422 2,167 1,188 854 1,831 8,436 1,223 4,504 321 29,946
Total 1,071,229 194,101 248,372 197,295 51,872 62,678 25,314 439,065 73,530 2,363,456
At 31 December 2009 (DKK millions)
Rating category
Banking Activities
Denmark finland Sweden NorwayNorthern
Ireland Ireland BalticsDanske
MarketsOther
Activities Total
1 29,411 1,228 - - 4,746 - - 108,964 10,769 155,118
2 78,474 8,441 5,198 2,316 1,014 828 2,559 52,066 8,450 159,346
3 198,493 23,284 19,834 10,206 1,218 3,529 215 133,203 6,233 396,215
4 154,984 33,404 37,711 24,877 3,413 4,587 1,316 28,682 12,286 301,260
5 201,689 37,086 52,864 42,683 7,416 13,814 2,445 16,508 7,773 382,278
6 148,093 34,694 44,166 56,181 7,443 9,766 1,913 24,543 4,947 331,746
7 157,892 29,481 30,871 33,011 11,420 10,588 6,731 7,008 5,454 292,456
8 86,202 16,623 14,847 11,507 9,150 12,643 7,911 7,772 5,213 171,868
9 30,395 5,070 3,359 2,915 2,103 5,229 3,753 1,663 1,187 55,674
10 12,355 1,191 470 1,351 1,099 4,669 659 2,361 694 24,849
11 11,074 2,653 818 1,491 1,821 7,289 1,647 3,817 - 30,610
Total 1,109,062 193,155 210,138 186,538 50,843 72,942 29,149 386,587 63,006 2,301,420
57 DANSKE BANK RISK MANAGEMENT 2010 CREDIT RISK
Rating category Upper PD Lower PD
1 0.00 0.01
2 0.01 0.03
3 0.03 0.06
4 0.06 0.14
5 0.14 0.31
6 0.31 0.63
7 0.63 1.90
8 1.90 7.98
9 7.98 25.70
10 25.70 99.99
11 100.00 100.00
The migration analysis in this section is based on the Group’s master scale and thus on PIT PD estimates. Since the PD bands on the scale are static, the migration effect increases in recessionary periods. The migration analysis in the next section does not cover customers with evidence of impair-ment, that is, customers in rating categories 10 and 11.
58 CREDIT RISK DANSKE BANK RISK MANAGEMENT 2010
Measured by volume, the ratings of 64% of the corporate customer portfolio was unchanged during the year. Altogether, the percentage of upgrades was higher than the percentage of downgrades in the corporate customer portfolio, mainly because of large corporates. At the end of 2010, the average exposure-weighted PD for business customers was 2.27% (end-2009: 2.04%). For SMEs, the average exposure-weighted PD was 2.66% (end-2009: 2.40%).
RATING MIGRATION OF BUSINESS CUSTOMERS(No. of customers)
21%
24%
55%
0
20,000
40,000
60,000
80,000
- 4+ - 3 - 2 - 1 0 1 2 3 4+
Downgrades Upgrades
0
150,000
300,000
450,000
600,000
- 4+ - 3 - 2 - 1 0 1 2 3 4+
Downgrades Upgrades
17%
19%
64%
Unchanged Upgrades Downgrades
(DKK millions)
Unchanged Upgrades Downgrades
Note: The rating migration analysis covers only customers with a drawn credit facility who were active on 31 December 2010 and excludes customers for which evidence of individual impairment exists. The figure shows changes in customers’ ratings from 1 January to 31 December 2010.
59 DANSKE BANK RISK MANAGEMENT 2010 CREDIT RISK
Altogether, 35% of the personal customer portfolio, measured by volume, had an unchanged classifi-cation in 2010. Most of the personal customers who were downgraded were in Denmark, Ireland and Northern Ireland. At the end of 2010, the average exposure-weighted PD for personal customers was 0.99% (2009: 0.79%).
RATING MIGRATION OF PERSONAL CUSTOMERS
0
150,000
300,000
450,000
600,000
-4+ -3 -2 -1 0 1 2 3 4+
(No. of customers)
(DKK millions)
0
100,000
200,000
300,000
400,000
-4+ -3 -2 -1 0 1 2 3 4+
33%
29%
38%
32%
33%
35%
Downgrades Upgrades
Downgrades Upgrades
Unchanged Upgrades Downgrades
Unchanged Upgrades Downgrades
Note: The rating migration analysis covers only customers with a drawn credit facility who were active on 31 December 2010 and excludes customers for which evidence of individual impairment exists. The figure shows changes in customers’ ratings from 1 January to 31 December 2010.
5.12 risk concentration
The Group uses the risk concentrations it identifies in the credit portfolio as an element in credit risk management. Risk concentrations arise in the credit portfolio as an inevitable consequence of the Group’s business strategy. The most important concentrations the Group identified were exposure to customers in Denmark and exposure from property-related lending.
Exposure to customers in Denmark, which consisted primarily of mortgage loans provided by Realkredit Danmark, represented 53% of total exposure (2009: 54%). Most of these loans are secured on real property. Denmark is one of the Group’s main markets, and the Group has an extensive knowl-edge of the market that it uses actively in managing its risk concentration.
60 credit risk dANske BANk risk MANAGeMeNt 2010
Property-related lending to personal customers represented 33% of total lending exposure (2009: 32%), and property-related lending to business customers represented 10% (2009: 11%). The Group generally secures this exposure with a mortgage on the property. The Group determines the value of the mortgage less a deduction that represents the risk associated with the particular type of property.
According to section 145 of the Danish Financial Business Act, exposure to a single customer or a group of related customers – after the deduction of particularly secure claims – may not exceed 25% of the capital base. The Group has defined internal limits to manage large exposures, which it monitors daily. The internal limits are approved by the All Risk Committee.
The rules on the treatment of large exposures were amended on 31 December 2010 in accordance with a change to an EU directive. One of the changes is that exposures to credit institutions must carry a 100% weighting rather than a reduced 20% weighting as under the previous rules. According to transitional provisions, however, until 31 December 2012, institutions may still apply a reduction in weighting of 80% to exposures to credit and other institutions that originated no later than 31 Decem-ber 2009.
Partly because of the changes in the Danish Executive Order on Large Exposures, the number of expo-sures that constitute more than 10% of the capital base at the end of 2010 rose to four. According to the previous version of the Danish Executive Order on Large Exposures, which applied until 30 December 2010, there were two large exposures. At the end of 2009, the Group had two exposures that constituted more than 10% of the capital base.
LArGe eXPOsUres
At 31 december (dkk millions)
2010 exposures calculated in
accordance with section 145
2009 exposures calculated in
accordance with section 145
Number 4 2
exposure >20% of capital base - -
exposure between 10% and 20% of capital base 65,610 36,952
total 65,610 36,952
Note: exposures for 2010 are calculated in accordance with section 145 of the revised danish executive Order on Large exposures, which took effect on 31 december 2010.
5.13 Loan impairment charges in 2010
Loan impairment charges totalled DKK 13.8 billion in 2010, against DKK 25.7 billion in 2009. The decline was owing mainly to lower charges in the Nordic markets, except for Banking Activities Den-mark, because of improved macroeconomic conditions. The Group expects the charges to remain high in Ireland.
QUArterLY treNd iN LOAN iMPAirMeNt cHArGes
2010 total total
(dkk millions) Q1 Q2 Q3 Q4 2010 2009
collective impairment charges 651 460 -428 -582 101 2,587
individual impairment charges 3,556 2,998 3,429 3,621 13,604 22,602
Write-offs charged directly to income statement 172 153 384 236 945 821
received on claims previously written off 179 187 295 297 958 471
interest income, effective interest method 73 55 -7 4 125 138
total 4,273 3,479 3,083 2,982 13,817 25,677
impairment ratio (bp) 89 71 64 62 71 135
Note: the impairment ratio is defined as loan impairment charges for the year divided by loans, advances and guarantees (at 31 december).
61 DANSKE BANK RISK MANAGEMENT 2010 CREDIT RISK
At the end of 2010, 97% of the portfolio consisted of claims that were neither past due nor impaired. The allowance account for loans subject to individual impairment charges amounted to DKK 39.2 bil-lion, or 90% of the total allowance account.
Impairment charges
(DKK millions) Allowance account, total Individual Collective
At 1 January 2009 15,858 11,190 4,668
New impairment charges 29,028 26,357 2,671
Reversals of impairment charges from previous periods 3,839 627 3,212
Write-offs debited to allowance account 4,470 4,470 -
foreign currency translation 363 76 287
Other items 155 155 -
At 31 December 2009 37,095 32,681 4,414
New impairment charges 21,158 18,984 2,174
Reversals of impairment charges from previous periods 7,453 5,380 2,073
Write-offs debited to allowance account 7,969 7,969 -
foreign currency translation 917 864 53
Other items 21 21 -
At 31 December 2010 43,769 39,201 4,568
62 CREDIT RISK DANSKE BANK RISK MANAGEMENT 2010
LOAN IMPAIRMENT CHARGES, BREAKDOWN BY BUSINESS UNIT
Credit exposure
Loan impairment
charges, 2010
Impaired
Allowance account
At 31 December 2010 (DKK millions) Total Past due
Not in default In default
Banking Activities Denmark 1,071,229 4,165 18,683 9,422 19,293 7,485
Banking Activities finland 194,101 1,967 3,681 2,167 2,664 277
Banking Activities Sweden 248,372 309 1,012 1,188 1,253 169
Banking Activities Norway 197,295 964 2,150 854 1,512 42
Banking Activities Northern Ireland 51,872 348 1,688 1,831 3,078 1,247
Banking Activities Ireland 62,678 751 5,198 8,436 9,564 4,969
Banking Activities Baltics 25,314 773 855 1,223 2,892 207
Other 512,595 211 735 4,825 3,513 -579
Total 2,363,456 9,488 34,002 29,946 43,769 13,817
Credit exposure
Loan impairment
charges, 2009
Impaired
Allowance account
At 31 December 2009 (DKK millions) Total Past due
Not in default In default
Banking Activities Denmark 1,109,062 5,239 12,355 11,074 13,496 10,049
Banking Activities finland 193,155 2,385 1,191 2,653 2,545 1,723
Banking Activities Sweden 210,138 390 470 818 1,182 509
Banking Activities Norway 186,538 799 1,351 1,491 1,404 676
Banking Activities Northern Ireland 50,843 292 1,099 1,821 2,006 1,399
Banking Activities Ireland 72,942 1,629 4,669 7,289 7,002 5,238
Banking Activities Baltics 29,149 1,020 659 1,647 2,985 2,725
Other 449,593 1,296 3,055 3,817 6,475 3,358
Total 2,301,420 13,050 24,849 30,610 37,095 25,677
Note: “Impaired” exposures contain exposures that have occasioned individual impairment charges, and the need for impair-ment charges is assessed individually – that is, exposures in rating categories 10 (not in default) and 11 (in default). “Past due” contains exposures that have excesses but that have not occasioned individual impairment charges.
The allowance account for exposure to the commercial property segment rose 18% to DKK 11.9 bil-lion. The increase was owing mainly to falling commercial property values in Ireland.
Upon the expiry of the Danish Bank Package I on 30 September 2010, the Group had booked impair-ment charges for its entire share of the first tranche, or DKK 3.3 billion. The charges related to the banks segment.
The agricultural sector, which is part of the consumer discretionary and consumer staples segment, suffered from adverse market conditions. Especially in Denmark, the agricultural industry experienced a continuation of declining property prices and high debt, which placed a burden on operating earn-ings.
63 DANSKE BANK RISK MANAGEMENT 2010 CREDIT RISK
LOAN IMPAIRMENT CHARGES, INDUSTRY BREAKDOWN
Credit exposure
Loan impairment
charges, 2010
Impaired
Allowance account
At 31 December 2010 (DKK millions) Total Past due
Not in defaultt In default
Central and local governments 162,200 6 - - 2 2
Subsidised housing companies 114,980 148 121 1,606 836 539
Banks 190,921 - - 6 3,421 1,345
Diversified financials 186,174 165 1,045 4,524 4,310 -258
Other financials 64,359 12 - 627 124 140
Energy and utilities 38,475 14 59 30 23 -39
Consumer discretionary and consumer staples 203,211 1,061 6,910 2,365 6,702 2,077
Commercial property 245,459 1,368 12,697 9,775 11,931 3,849
Construction, engineering and building products 36,429 185 1,856 1,974 2,862 1,126
Transportation and shipping 73,223 220 1,451 193 1,366 60
Other industrials 83,319 364 3,204 283 2,395 634
IT 15,641 83 90 72 514 133
Materials 46,222 271 2,139 627 1,894 672
Health care 24,660 67 43 40 110 25
Telecommunication services 4,836 1 - 8 73 -20
Personal customers 873,347 5,523 4,387 7,816 7,206 3,532
Total 2,363,456 9,488 34,002 29,946 43,769 13,817
Note: “Impaired” exposures contain exposures that have occasioned individual impairment charges, and the need for impair-ment charges is assessed individually – that is, exposures in rating categories 10 (not in default) and 11 (in default), “Past due” contains exposures that have excesses but that have not occasioned individual impairment charges,
Credit exposure
Loan impairment
charges, 2009
Impaired
Allowance account
At 31 December 2009 (DKK millions) Total Past due
Not in defaultt In default
Central and local governments 137,238 2 - - - -
Subsidised housing companies 117,885 183 400 695 398 269
Banks 173,046 - - 1,707 2,061 1,681
Diversified financials 180,410 214 2,869 3,922 6,005 3,648
Other financials 55,851 12 - 472 185 166
Energy and utilities 36,827 38 - - 150 -3
Consumer discretionary and consumer staples 212,999 1,909 3,451 2,438 5,406 2,746
Commercial property 242,092 2,250 7,670 10,548 10,073 8,024
Construction, engineering and building products 36,078 272 2,603 1,719 2,921 1,563
Transportation and shipping 68,070 881 1,707 56 1,432 617
Other industrials 86,603 729 2,663 650 1,858 1,631
IT 13,599 46 - - 732 269
Materials 48,131 119 990 299 1,475 1,044
Health care 38,372 48 - 53 111 -73
Telecommunication services 6,789 118 2 12 59 39
Personal customers 847,430 6,229 2,494 8,039 4,229 4,056
Total 2,301,420 13,050 24,849 30,610 37,095 25,677
64 COUNTERPARTY RISK DANSKE BANK RISK MANAGEMENT 2010
6. COunteRPaRty RIsk
65 6.1 Counterparty risk management
66 6.1.1 Risk mitigation
67 6.2 Capital requirement
68 6.3 Counterparty risk management in the future
65 DANSKE BANK RISK MANAGEMENT 2010 COUNTERPARTY RISK
The Danske Bank Group enters into transactions involving OTC derivatives and securities financing instruments, for example repurchase and reverse transactions, and thus takes on counterparty risk. Some 4% of the Group’s risk-weighted assets (RWA) are allocated to counterparty risk.
The Group’s counterparty risk management is intended to reduce the financial loss if the counterparty to a transaction goes bankrupt before the final settlement of the transaction.
Counterparty risk entails a risk of financial loss for both parties to a transaction. This is because the market value of a transaction changes over time with changes in underlying market factors and can fluctuate between positive and negative market values. The Group incurs a financial loss if the coun-terparty goes bankrupt and the transaction, after netting and the realisation of collateral, has a positive value for the Group.
The market values of derivatives are part of the trading portfolio, while the principal amounts of repo and reverse transactions are part of the credit exposure in lending activities.
6.1 Counterparty risk management
At the end of 2009, the Group implemented a new Trading Line System, which is the backbone of the internal counterparty risk management. The system covers many aspects of the risk management process: assignments of lines, monitoring and control of line utilisations, management of master agree-ments, management reporting, and so on.
The Group has developed an internal model to calculate counterparty risk. It is a Monte Carlo simu-lation model, which simulates 1,000 scenarios of the changes in the market values of transactions (which transactions are to be understood in the remainder of this section as OTC-traded derivatives and repo and reverse transactions). Counterparty risk on derivative transactions is expressed by the potential future exposure (PFE) measure. The exposure or utilisation is calculated for each customer as the net sum of the following elements:
• The netted current market values of all transactions with the customer.• The value of collateral pledged or received for the portfolio.• The estimated potential changes in netted market values and collateral in the remaining lifetime of
the transactions.
The netting of the market values and the estimated changes in these values are based on legal master agreements that the Group has signed with counterparties. For master agreements that have an associ-ated collateral agreement, the expected value of the collateral pledged or received is also included in the daily calculation of the current credit exposure.
66 COUNTERPARTY RISK DANSKE BANK RISK MANAGEMENT 2010
The potential change in the netted market values is determined by means of the internal simulation model in which the PFE consists of the largest exposure that the Group can expect at the time of the calculation, at a confidence level of 97.5%. It assumes that all transactions remain in force until the original expiry date. The internal model is used for almost 90% of all transactions.
In calculating exposures on transactions in products for which the Group does not use the internal model, the potential change in market value is determined as a percentage (add-on) of the nominal principal amount. The add-ons represent a conservative margin in comparison with the risk that the internal simulation model would have calculated.
6.1.1 risk mitigation
To mitigate counterparty risk, the Group generally requires closeout netting framework agreements. This enables the Group to net the positive and negative replacement values of contracts if the counter-party defaults. For professional counterparties, collateral management agreements are often attached to the master agreements as well, in order to reduce the credit risk on unsecured financial transactions. The Group’s policy is to promote the use of closeout netting agreements and mutual collateral manage-ment agreements.
Mutual collateral management agreements contain threshold amounts and a minimum amount for the transfer of collateral. Collateral to be provided or received is generally determined on a daily basis. The collateral takes the form of cash, government bonds or mortgage bonds with high ratings. At the end of 2010, more than 85% of the Group’s collateral management agreement holdings consisted of cash.
The Group’s increased focus on counterparty credit risk management also included an improvement of the collateral management system and processes. In the past year, the number of collateral manage-ment agreements grew 35% to more than 800.
The table below shows the effect of netting and collateral on the exposure (measured as PFE).
POTENTIAL fUTURE EXPOSURE (PfE)
At 30 September (DKK millions) 2010
PfE gross 639,034
PfE after netting 334,368
PfE after netting and collateral 121,247
Note: PfE is based on all derivatives and repos with counterparty risk.
67 DANSKE BANK RISK MANAGEMENT 2010 COUNTERPARTY RISK
6.2 Capital requirement
The Group currently calculates the capital requirement for counterparty credit risk according to the current exposure method. The exposure on a specific transaction thus equals the sum of the current exposure, which is defined as the higher of the replacement cost and zero, plus a supplementary regu-latory measure of the PFE determined as a percentage of the notional value of the contract. The per-centage is stipulated by the Danish FSA, and it depends on the product type and the time to maturity. If there is a netting agreement, the positive and negative replacement costs are netted. And if there is a collateral agreement, the exposure can be further reduced.
In the financial statement, the positive value of derivatives amounted to DKK 334 billion. The differ-ence between this amount and the value of derivatives for solvency purposes is owing mainly to the PFE supplement that is included in the value of derivatives for solvency purposes. For reverse repos, the amount in the financial statement is the principal amount of the transaction, while the value for solvency purposes takes collateral into account.
COUNTERPARTY RISK EXPOSURE (EAD) BY CURRENT EXPOSURE METHOD
2010 2009
At 31 December (DKK millions) Derivatives Repos Total Derivatives Repos Total
EAD before netting 612,560 609,024 1,221,584 547,429 453,434 1,000,863
Netting benefits 402,418 - 402,418 373,525 - 373,525
EAD after netting 210,142 609,024 819,166 173,904 453,434 627,338
Collateral held 32,222 566,370 598,592 3,464 430,072 433,536
EAD after netting and collateral 177,920 42,654 220,574 170,440 23,362 193,802
Note: Counterparty credit risk exposure (EAD) is based on derivatives and repos. “EAD” stands for “exposure at default”.
Calculated according to the current exposure method and measured by EAD after netting, counterparty risk amounted to 26% of total credit risk. Measured in RWA and taking into account both netting and collateral, it amounted to 5% of total credit risk. See appendix A for further information about credit risk measured in EAD and RWA. Most of the Group’s counterparties in derivatives trading have high ratings (see the table below).
COUNTERPARTY RISK EXPOSURE (EAD) fOR DERIVATIVES ACCORDING TO THE CURRENT EXPOSURE METHOD, BROKEN DOWN BY RATING CATEGORY
At 31 December (DKK millions) 2010 2009
1 19,409 16,235
2 55,519 50,198
3 91,472 71,791
4 21,622 15,286
5 11,814 9,033
6 4,855 5,490
7 3,185 3,610
8 1,415 1,408
9 327 536
10 431 238
11 93 79
Net counterparty risk exposure (EAD) after netting 210,142 173,904
Note: The table does not include repos.
68 COUNTERPARTY RISK DANSKE BANK RISK MANAGEMENT 2010
6.3 Counterparty risk management in the future
The improvement of the Group’s counterparty risk management can be seen, from both the technical and process perspectives, as the first step in the Group’s application to use an internal model for the capital requirement calculation. This work will continue in 2011.
The increased focus on credit value adjustment (CVA) from a regulatory as well as a trading perspec-tive will also have implications for future counterparty risk management at the Group. The CVA is influenced by two components:
• The credit quality of the counterparty and any changes in it.• Changes in the exposure owing to changes in the mark-to-market or the composition of the
portfolio.
CVA is already taken into consideration in the pricing of derivatives and in the fair value calcula-tion for accounting purposes. When the regulatory requirements and the effect of CVA on the capital requirement are clearer, the Group will review the entire process from trading to counterparty risk management, taking CVA into consideration.
The Group is following the developments in the establishment and regulation of central clearing parties (CCPs) and intends to become member of the relevant CCPs.
69 DANSKE BANK RISK MANAGEMENT 2010 MARKET RISK
7. MaRket RIsk
70 7.1 Policy and authorisations
71 7.2 Monitoring
71 7.3 Use of models
72 7.4 Market risk exposures
72 7.5 Interest rate risk
74 7.6 Bond holdings and spread risk
74 7.6.1 Bond holdings
77 7.6.2 Bond spread risk
77 7.7 foreign exchange risk
78 7.8 Equity market risk
78 7.9 Other market risks
78 7.10 Value at Risk
80 7.10.1 Backtesting
81 7.10.2 Stress testing
82 7.11 Model validation
83 7.12 Capital requirement
84 7.13 Revisions to the capital requirement rules
70 MARKET RISK DANSKE BANK RISK MANAGEMENT 2010
The Group markets, trades and takes positions in products that entail a variety of market risk compo-nents. Most of the Group’s trading and position-taking activities involve relatively simple products, and during the past couple of years, the Group has experienced great demand for products of this type that address customers’ risk management needs.
Interest rate products represent the largest trading and position-taking volumes, followed by listed shares and foreign exchange instruments. Inflation-linked products and commodities are less signifi-cant asset classes in the Group’s trading and position-taking activities.
At the end of 2010, 5% of the Group’s risk-weighted assets were related to market risk, mainly interest rate and equity market risk.
In the beginning of 2010, conditions in the financial markets became more normal after the disruptions of the financial crisis in 2008 and the first half of 2009. In the spring of 2010 uncertainty arose again, and there was a risk that the financial crisis would resume as budget deficits in several European countries became the focus of attention from investors and the media and Greece struggled to secure its future funding options. The eurozone countries’ hesitation in finding a solution to the sovereign debt crisis contributed to the uncertainty in the financial markets.
In May the eurozone countries and the IMF agreed on a rescue package for Greece, and the financial markets began to look forward for signs of global recovery. When conclusive signs of recovery did not materialise in the summer, however, fears of a double-dip recession arose, together with returning anxiety about the possible spread of the sovereign debt crisis to other countries. Towards the end of the year, the financial markets were still dominated by the sovereign debt crisis in several European countries.
Under these macroeconomic conditions, interest rates were historically low during most of 2010, while bond spreads were very volatile, reflecting uncertainty in the various national economies. The equity markets also saw much volatility during the year. Share prices changed markedly as signs of economic recovery were subject to differing interpretations.
The revisions to the Capital Requirements Directive adopted by the EU in 2010 (CRD III) require banks to hold additional capital to cover their market risks, including both general and specific market risks. Some of the changes that concern market risk have already been implemented in the Group’s inter-nal Value at Risk (VaR) model, and others are planned. Among the expected changes that will affect market risk is the implementation of a new stressed VaR figure, which the Group expects will increase its capital requirement for general risk by DKK 1-2 billion. The revisions are expected to take effect in national legislation before the end of 2011.
Because of the Group’s low interest rate risk in 2010 and the low interest rate levels, changing volatili-ties had a relatively strong effect on the backtesting of the internal model calculations. The Group is therefore working to implement volatility as an explicit risk factor in the internal model.
7.1 Policy and authorisations
The Group’s market risk management covers all of its assets, liabilities and off-balance-sheet items. The Board of Directors sets the overall risk policies for the Group’s market risk exposures, including overall instructions and risk limits.
Taking on market risk is an integral part of the Group’s business strategy. The banking activities that involve market risk derive mainly from the Group’s providing all its products to Nordic customers and core products to customers and counterparties outside the Nordic region. Besides the exposure to market risk from servicing customers, the Board of Directors has set authorisations that allow the trading units to take positions for their own accounts and at their own risk. The Group also takes on market risk as part of treasury management that supports the procurement and day-to-day manage-ment of liquidity. On the basis of the overall risk limits, the Executive Board sets market risk limits for the business units with sufficient expertise – Danske Markets and Group Treasury.
71 DANSKE BANK RISK MANAGEMENT 2010 MARKET RISK
Market risk in Banking Activities units is transferred to Danske Markets or managed under Group Treasury’s limits as part of the treasury position.
The Group’s overall market risk limits do not apply to the market risks associated with pension plans. The market risk on the assets in which Danica Pension’s equity is invested and on assets allocated to Danica’s policyholders is discussed in section 10, while the market risk relating to the Group’s defined benefit pension plans is treated in section 11.
7.2 Monitoring
Risk policies lay the foundation for written business procedures as well as reconciliation and control procedures for the relevant business units.
The Group carries out market risk measurement, monitoring and management reporting on a daily basis. It also conducts intraday spot checks of the risks in the individual business units. The Group calculates current market risk exposures with internally developed systems that are linked to the trad-ing systems and cover all of its risk positions.
Day-to-day risk monitoring includes setting limits for business units and sub-units.
7.3 Use of models
The Group uses both conventional risk measures and mathematical and statistical measures, such as Value at Risk, to calculate market risk exposures as well as economic and regulatory capital. These measures also include interest rate floor risk, which is described in further detail below. The calcula-tions are used for the following purposes:
• Reporting to Group management on a regular basis• Reporting on regulatory capital for general risk as well as related backtest results to the Danish FSA• Day-to-day management at the business units
The Group also develops in-house pricing models. The models are used for pricing and risk man-agement of financial products that cannot be valued directly on the basis of quoted market prices or standardised financial models. See section 7.11 for a description of the validation of these models.
72 MARKET RISK DANSKE BANK RISK MANAGEMENT 2010
7.4 Market risk exposures
The table below shows the Group’s market risk at the end of 2010 and 2009 calculated according to conventional risk measures (except for foreign exchange risk, for which VaR is used) for trading as well as banking book positions.
MARKET RISK, CONVENTIONAL MEASURES
At 31 December (DKK millions) 2010 2009
Interest rate risk (parallel shift of the yield curve of 1 percentage point) 496 1,165
foreign exchange risk (VaR, confidence level of 95%, 10-day horizon) 23 11
Equity market risk, listed shares (net position) 1,131 460
Equity market risk, unlisted shares (net position) 3,886 3,313
Mortgage spread risk (basis point value) 68 74
Government spread risk (basis point value) 4 24
Credit spread risk on corporate bonds (basis point value) 3 2
Inflation rate risk (change in traded inflation of 1 percentage point) 20 94
Commodity risk (10% change in commodity prices) - -
The table shows that the key risk exposure components changed considerably from the end of 2009 to the end of 2010. Interest rate risk fell more than 50% while the net position in listed shares doubled. The overall bond spread risk (the sum of mortgage, government and credit spread risk) declined, mainly because of lower exposure to government bonds. Inflation risk also fell.
7.5 interest rate risk
Interest rate risk is the risk of losses caused by changing interest rates. Most of the Group’s interest rate risk derives from activities that involve marketing, trading and position-taking in a variety of interest-rate-related products in the Group’s various local markets. Most of these activities involve relatively simple interest rate products such as swaps, bonds, futures and standard interest rate options.
The Group’s Banking Activities units offer fixed rate deposits, loans and other interest-rate-related products. Much of the resulting interest rate risk is hedged and treated according to the rules of fair value hedge accounting. The interest rate risk on the following fixed rate items is not hedged for accounting purposes, however, but is managed on a daily basis by Group Treasury:
• A portfolio of fixed rate mortgage loans in Denmark• Fixed rate loans and advances provided by Banking Activities units in Finland, Ireland, Northern
Ireland and the Baltics• Operational and financial leasing• Positions resulting from interest rate payments on Realkredit Danmark loans (monthly interest rate
payments that are not passed on to bondholders until the end of the quarter or year)• Positions related to asset/liability management• Bonds in the held-to-maturity portfolio
In addition, the Group has a structural interest rate risk exposure in its Banking Activities units in Northern Ireland, Ireland and Finland. This risk derives from demand deposits. The exposure has an element of fixed interest rate risk because the interest rate has been stable at a very low level for a long time, and the portfolio has been stable and is expected to remain so. The Group models this risk as cash flow from a liability amortised over a five-year period. This results in an implicit average dura-tion for the deposits of 2.5 years. The risk is included in the Group’s interest rate risk calculations and thus in day-to-day risk management.
73 DANSKE BANK RISK MANAGEMENT 2010 MARKET RISK
The chart below shows the monthly trend in the Group’s interest rate risk, measured as the effect of a general 1 percentage point increase in interest rates. As the chart shows, interest rate risk was gener-ally lower in 2010 than in 2009.
(DKK millions)GROUP INTEREST RATE RISK
-500
0
500
1,000
1,500
2,000
2,500
3,000
J F M A M J J A S O N D J F M A M J J A S O N D
2009 2010
Most of the Group’s interest rate risk derives from positions in Danish kroner and euros.
The Group also measures yield curve risk, which is the risk of losses arising because interest rates for various terms change independently of one another. The yield curve risk is measured individually for the various terms. The table below shows the yield curve risk resulting from an increase of 1 percent-age point for four term ranges.
YIELD CURVE RISK (INCREASE Of 1 PERCENTAGE POINT)
At 31 December (DKK millions) < 2 year 2-5 years 5-10 years > 10 years Total
2009 -159 1,052 -245 -152 496
2008 1,029 -76 391 -179 1,165
For units that trade in interest rate options, the measures mentioned above are supplemented with a number of key figures that express the sensitivity of option values to underlying parameters such as vega and theta. Vega expresses the sensitivity of option values to changes in the expected future vola-tility of the underlying instrument, and theta expresses sensitivity to changes in time to expiry.
interest rate floor riskFloor risk is a type of interest rate risk on deposits whose interest rates depend on the central banks’ policy rates and on which the Group cannot always reduce the interest rate when the central bank reduces the policy rate.
Interest rate floor risk is defined as the risk of a loss of earnings on deposits as market interest rates approach zero, and it is not treated as a part of ordinary interest rate risk. It is measured as the effect of a 1 percentage point drop in rates on net interest income over a 12-month period.
Only the portfolio of liabilities is relevant to floor risk because loans and advances are always priced above market interest rates. Even if market interest rates were to drop to their theoretical minimum of zero, these assets could still be priced at a margin above the market rates.
74 MARKET RISK DANSKE BANK RISK MANAGEMENT 2010
interest rate risk on shareholders’ equityThe shareholders’ equity is included in the consolidated financial statements as a non-interest-bearing liability, but theoretically it is exposed to interest rate risk. The derived theoretical interest rate sensi-tivity is symmetrical for rising and declining interest rates. This risk is not hedged and is not included in the calculation of the Group’s interest rate risk. The implied interest rate on the liquidity from the shareholders’ equity is the Group’s standard variable Danish kroner rate (comparable to the overnight rate).
7.6 bond holdings and spread risk
7.6.1 bond holdings
The Group’s bond holdings totalled DKK 422 billion, calculated as the carrying amount. Excluding Danica Pension’s holdings, the amount was DKK 407 billion.
In calculating its bankruptcy risk on the bond holdings, the Group takes into account unsettled trans-actions and hedge transactions, which results in a total exposure of DKK 274 billion, disregarding the Group’s holding of its own issues. Negative holdings may appear in the tables below because unsettled trades are taken into account.
Most of the bonds are Danish mortgage bonds, Swedish covered bonds and other covered bonds under public supervision.
The bond holdings constitute part of the Group’s liquidity reserve, most of which can be used as col-lateral for loans provided by central banks.
Government bond holdings amounted to about DKK 15 billion and consisted mainly of issues from the Nordic countries and core EU countries such as Germany, France and the UK.
At the end of 2010, the Group’s exposure to government bonds issued by Ireland, Portugal, Italy, Greece and Spain amounted to about DKK 5 billion (end-2009: DKK 1 billion). The change in exposure to these countries was owing to fluctuations in the holdings because of ordinary trading activity.
The carrying amount of the bonds was DKK 6 billion (end-2009: 3 billion), or 1.5% of total bond expo-sure, calculated as the carrying amount.
About DKK 9 billion of the holdings consisted of short-dated instruments (commercial paper and the like) issued primarily by banks in Scandinavia and France.
About DKK 22 billion of the holdings were corporate bonds, including bonds issued by banks.
75 DANSKE BANK RISK MANAGEMENT 2010 MARKET RISK
The table below shows the exposure to the bond holdings broken down by type, external rating and country. Altogether, the Group reduced its exposure to bonds in 2010, particularly its exposure to cen-tral and local government bonds and Swedish covered bonds.
While the Group reduced most of its bond holdings, its exposure to Danish mortgage bonds increased by about 20% because of a large holding of short-dated bonds linked to interest-reset loans.
BOND PORTfOLIO BROKEN DOWN BY TYPE AND EXTERNAL RATING CATEGORY
At 31 December 2010 (DKK millions)
Central and local
govern-ment
bonds
Quasi- govern-
ment bonds
Danish mortgage
bonds
Swedish covered
bonds
Other covered
bonds
Short-dated bonds
(CP etc.)
Cor-porate bonds Total
AAA 5,221 7,768 158,824 8,551 11,309 1,025 5,049 197,747
AA+ 972 - 26,222 - 2,667 95 435 30,391
AA 1,487 - - - 1,563 860 1,950 5,860
AA- 1,985 - 10,402 - 12 530 2,150 15,079
A+ 686 - - 76 - 2,722 3,865 7,349
A 523 - 329 - - 1,027 1,439 3,318
A- 264 - - - - 28 1,639 1,931
BBB+ 1,609 - - - - 57 1,250 2,916
BBB 205 - - - 24 820 1,690 2,739
BBB- 316 - - - - - 562 878
Sub-inv.-grade or unrated 1,957 164 238 5 - 1,470 2,065 5,899
Total 15,225 7,932 196,015 8,632 15,575 8,634 22,094 274,107
At 31 December 2009 (DKK millions)
Central and local
govern-ment
bonds
Quasi- govern-
ment bonds
Danish mortgage
bonds
Swedish covered
bonds
Other covered
bonds
Short-dated bonds
(CP etc.)
Cor-porate bonds Total
AAA 68,745 5,684 96,696 33,268 15,038 3,288 7,562 230,281
AA+ 521 - 58,386 - 4,141 2 540 63,590
AA 1,195 - 4,604 - 3,269 1,488 2,001 12,557
AA- 1,068 - - - 357 4,311 2,312 8,048
A+ 1,192 - - 2,336 - 2,654 1,490 7,672
A 286 - 193 - 76 1,275 975 2,805
A- 69 - - - - 625 1,193 1,887
BBB+ - - - - - 13 1,296 1,309
BBB 190 - - - 1 1,266 2,798 4,255
BBB- 348 - - - - - 103 451
Sub-inv.-grade or unrated 41 154 149 45 - 1,685 3,340 5,414
Total 73,655 5,838 160,028 35,649 22,882 16,607 23,610 338,269
76 MARKET RISK DANSKE BANK RISK MANAGEMENT 2010
BOND PORTfOLIO BROKEN DOWN BY TYPE AND COUNTRY
At 31 December 2010 (DKK millions)
Central and local
govern-ment
bonds
Quasi- govern-
ment bonds
Danish mortgage
bonds
Swedish covered
bonds
Other covered
bonds
Short-dated bonds
(CP etc.)
Cor-porate bonds Total
Denmark 9,522 - 196,015 - - 608 2,577 208,722
finland 4,152 1,235 - - 164 249 1,109 6,909
Sweden 10,535 - - 8,632 - 2,526 4,515 26,208
Norway 2,841 - - - 888 3,149 3,421 10,299
Ireland 1,609 - - - 90 112 562 2,373
UK 3,964 2 - - 7,693 113 1,792 13,564
Germany -16,998 800 - - -477 98 912 -15,665
Spain 777 - - - 4,908 257 215 6,157
france -7,343 - - - 1,811 674 704 -4,154
Italy 1,971 - - - - 215 30 2,216
North America 3,179 4,800 - - 232 14 3,647 11,872
Other 1,016 1,095 - - 266 619 2,610 5,606
Total 15,225 7,932 196,015 8,632 15,575 8,634 22,094 274,107
At 31 December 2009 (DKK millions)
Central and local
govern-ment
bonds
Quasi- govern-
ment bonds
Danish mortgage
bonds
Swedish covered
bonds
Other covered
bonds
Short-dated bonds
(CP etc.)
Cor-porate bonds Total
Denmark 24,316 - 160,028 - - 147 903 185,394
finland 1,603 4 - - 460 1,236 394 3,697
Sweden 28,376 - - 35,649 - 3,010 1,793 68,828
Norway 789 - - - 990 6,205 3,377 11,361
Ireland 186 - - - 136 149 4,365 4,836
UK 904 - - - 11,360 870 2,148 15,282
Germany 15,321 779 - - -702 361 3,228 18,987
Spain -702 - - - 6,266 1,625 -25 7,164
france -3,372 - - - 2,980 1,686 1,148 2,442
Italy 1,191 - - - - 218 - 1,409
North America 3,425 4,417 - - 430 60 3,589 11,921
Other 1,618 638 - - 962 1,040 2,690 6,948
Total 73,655 5,838 160,028 35,649 22,882 16,607 23,610 338,269
77 DANSKE BANK RISK MANAGEMENT 2010 MARKET RISK
7.6.2 bond spread risk
Positions in bonds are exposed to spread risk. The bond spread reflects the additional net yield an investor can earn on securities with a given credit quality and liquidity compared with a reference rate (such as a swap rate). Bond spread risk thus measures the change in value due to changes in the market’s assessment of the credit quality and liquidity.
For internal management purposes, the Group divides bond spread risk into three sub-categories:
• Mortgage spread risk: bond spread risk on mortgage bonds and covered bonds• Government spread risk: bond spread risk on government bonds and government-guaranteed bonds • Credit spread risk: bond spread risk on corporate bonds
The mortgage bond market is one of the pillars of the financial markets in Denmark, and the Group has a relatively large holding of Danish mortgage bonds. It also has holdings of Swedish mortgage bonds and other European covered bonds. Most of the Group’s bond spread risk can thus be attributed to bonds issued for real property financing.
The Group’s management of the bond exposure is based on the individual credit assessment and approval of issuer lines for nominal amounts of bond holdings supplemented by limits on the price sensitivity to a change of 1 basis point (BPV) in the bond spread.
Besides the current rating, the Group’s management of government spread risk includes an assessment of market information on expectations about future risk. Key factors are the rating agencies’ expecta-tions about future ratings (the rating outlook), the spread on credit default swaps for the issuer, and the spread to the yield on the equivalent German government bonds. The assessment of government bond risk is thus based on additional criteria besides simply the current rating.
At the end of 2010, the total bond spread risk amounted to DKK 75 million and was thus somewhat lower than at the end of 2009. The decline was owing mainly to lower exposure to government spread risk because of a smaller holding of government bonds. The Group also reduced its exposure to mort-gage spread risk by shifting to bonds with a lower BPV.
For capital requirement purposes, bond spread risk is part of specific risk, for which the Group uses the standardised approach under the CRD.
7.7 foreign exchange risk
Foreign exchange risk is the risk of losses on foreign currency positions caused by changes in ex-change rates. The Group measures and manages foreign exchange risk at the group level on the basis of a VaR calculation incorporating all currency positions, including currency options. The VaR figure represents the maximum loss within 10 days at a confidence level of 95%, assuming unchanged posi-tions. The calculations are made with the internal VaR model (see section 7.10).
At lower organisational levels, the risk is managed on the basis of the net exposure to each currency. For units that trade in currency options, the Group also calculates a number of key figures that express the sensitivity of option values to underlying parameters such as theta (time to expiry) and vega (vola-tility).
Earnings at units outside Denmark are denominated in local currency and are therefore subject to for-eign exchange risk. The Group hedges this risk against Danish kroner.
At the end of 2010, foreign exchange risk totalled DKK 23 million, against DKK 11 million at the end of 2009.
78 MARKET RISK DANSKE BANK RISK MANAGEMENT 2010
7.8 equity market risk
Equity market risk is the risk of losses caused by changing equity prices. It is calculated as the net value of long and short positions in equities and equity-based instruments that are subject to various risk limits. Equity market risk management distinguishes between risk on listed and unlisted shares. The risk on positions in individual companies is measured and monitored separately.
For units trading in equity options, the Group also calculates the maximum standardised loss due to equity price changes of up to +/- 20% as well as theta (time to expiry) and vega (volatility).
For unlisted shares, the Group distinguishes between ordinary open positions, unutilised commit-ments to private equity funds, and banking-related investments. Banking-related investments comprise equity holdings in financial infrastructure and payment service activities.
The Group’s net positions in listed and unlisted shares increased in 2010. While the position in un-listed shares rose moderately, the holding of listed shares more than doubled.
7.9 Other market risks
The Group’s market risk consists mainly of interest rate risk, bond spread risk, equity market risk and foreign exchange risk. The Group also trades and takes positions in inflation-linked products and to a lesser extent in commodities.
inflation rate riskInflation rate risk is the risk of losses caused by changes in the traded future inflation rates. The value of a few of the Group’s products depends on changes in inflation. The Group has therefore set limits on losses caused by changes in traded future inflation rates. Risk is measured as the loss caused by a change in traded future inflation rates of 100 basis points. At the end of 2010, inflation rate risk amounted to DKK 20 million, against DKK 94 million at the end of 2009.
Commodity riskCommodity risk is also subject to limits and is measured as the expected loss on commodity positions caused by changes of +/-10% in individual commodity indices. The Group’s commodity risk is limited and relates primarily to energy products.
7.10 Value at risk
The Group uses VaR in the management of interest rate, foreign exchange and equity market risks. Inflation risk is modelled as part of interest rate risk, but the internal VaR model does not cover com-modity risk. Bond spread risk is not included either, since the purpose of the VaR model is to quantify the general market risk.
The Group uses a historical simulation model to estimate VaR. The main advantages of this method are that it uses full revaluation and makes no assumptions regarding loss distribution. This gives more accurate results for non-linear products than simpler methods do. The Group’s VaR model is based on two years’ historical market data. Each calculation is based on one thousand scenarios represent-ing possible future outcomes of the risk factors. On this basis, the Group calculates an empirical loss distribution that is used to determine the VaR. For example, a confidence level of 95% corresponds to the fiftieth-largest loss in the distribution.
The scenarios are generated by means of a so-called bootstrap method. To construct a ten-day scenario, ten independent drawings are made from a dataset of two years’ historical daily returns. The drawings are generated at random, and 70% of the scenarios are based on the latest year of historical market data. Each outcome contains all the risk factors so that the correlation is maintained. The risk factors used are interest rates, equity indices and exchange rates.
79 DANSKE BANK RISK MANAGEMENT 2010 MARKET RISK
The internal VaR model is used for various purposes – risk monitoring, the calculation of the capital requirement for general market risk and the calculation of economic capital:
Risk monitoring Capital requirement Economic capital
Horizon 10 days 10 days 1 year
Confidence level 95% 99% 99.97%
The table below shows the VaR measure used for internal risk monitoring. VaR is broken down by risk type, and the table also shows the diversification benefit from using VaR as a total risk measure rather than treating each risk type separately. The figures cover all of the Group’s risk portfolios.
VALUE AT RISK (CONfIDENCE LEVEL Of 95%, 10-DAY HORIZON)
2010 2009
(DKK millions) Risk category
Avg. VaR
Minimum VaR
Maximum VaR 31 Dec.
Avg. VaR
Minimum VaR
Maximum VaR 31 Dec.
Interest rate risk 134 66 231 125 189 46 422 140
foreign exchange risk 23 5 49 23 18 3 40 11
Equity market risk 278 199 380 221 325 249 448 282
Diversification benefit -111 -100 -188 -183
Total VaR 324 190 485 269 344 215 571 250
Since the minimum and maximum readings for the various risk types do not occur on the same days, these values are not shown under the diversification benefit.
The chart below shows the daily VaR for the Group in 2009 and 2010. In 2010, total VaR peaked in the second quarter, although it did not reach the level from the beginning of 2009. The chart also shows that the portion of total VaR owing to interest rate risk declined in the period.
(DKK millions)
DAILY VaR 2009 AND 2010 (CONFIDENCE LEVEL OF 95%, 10-DAY HORIZON)
0
100
200
300
400
500
600
2009 2010
Foreign exchange riskInterest rate risk TotalEquity risk
80 MARKET RISK DANSKE BANK RISK MANAGEMENT 2010
7.10.1 backtesting
The Group conducts backtests daily to document the accuracy of the internal VaR model. The back-testing compares 1-day VaR calculated on trading book positions with the hypothetical profit or loss resulting from keeping these positions unchanged until the following business day (no intraday trading is included). If the hypothetical loss exceeds the predicted possible loss (VaR), an exception has occurred. Since the VaR figures used for backtesting are based on a confidence level of 99% (as in the calculation of the capital requirement), the expected number of exceptions per year is 2 to 3. The backtest results for 2009 and 2010 are shown in the chart below.
(DKK millions)BACKTEST RESULTS, P/L EFFECT
-400
-300
-200
-100
0
100
200
300
2009 2010
Lower VaR
P/L effect
In 2009 the model performed well, and from Q1 2009 to Q2 2010 there were three exceptions in the backtest, all in 2010. This picture changed in August 2010, when the backtest showed three new exceptions that were caused mainly by large changes in interest rates. Because of the Group’s low interest rate risk in 2010 and the low interest rate levels, changing volatilities had a relatively strong effect on the backtesting of the internal model calculations, and this influenced two of the exceptions in 2010. It therefore proved appropriate to model volatility as an explicit risk factor in the internal model, and the Group is currently working on this.
81 DANSKE BANK RISK MANAGEMENT 2010 MARKET RISK
7.10.2 Stress testing
As a supplement to the daily calculation of VaR and the more conventional risk figures, the Group per-forms stress tests and sensitivity analyses on a regular basis. Some of these tests are part of the daily limit control, while others are performed weekly or quarterly.
Stress test scenarios feature changes in interest rates, exchange rates, equity prices and bond spreads. Such changes affect the Group’s earnings directly through value adjustments. The scenarios are often based on large changes in a single risk factor or on conditions that reflect historical periods of econom-ic or financial crisis, combined with factors relevant under the current market conditions. In addition, some scenarios are constructed so that they are consistent with the set of scenarios that is applied across the Group’s business units.
The Group’s periodical stress tests and sensitivity analyses also include scenarios with extreme market developments as defined by the CEBS in the spring of 2010, as well as hypothetical scenarios involv-ing extreme financial or macroeconomic events.
In 2010 the Group’s stress testing framework was expanded to include stressed VaR calculations made with the internal VaR model. The amendments to the CRD in 2010 (CRD III) dictate that stressed VaR must be calculated with historical data from a period of substantial volatility in the financial markets. Stressed VaR covers only positions in the trading book, and it is currently based on market data from the beginning of 2008 to March 2009. Trial calculations indicate that the stressed VaR figure to be used in the calculation of the capital requirement in the current market situation will exceed the daily VaR for the Group by 50-100% on average.
82 MARKET RISK DANSKE BANK RISK MANAGEMENT 2010
7.11 Model validation
Certain of the Group’s financial instruments cannot be valued by means of market prices. Instead, they are valued on the basis of pricing models developed by Danske Markets. As shown in the table below, only a few types of financial instrument are measured on the basis of unobservable inputs.
fINANCIAL INSTRUMENTS CARRIED AT fAIR VALUE
31 December 2010 (DKK millions)Quoted prices
Observable input
Non-observable input Total
financial assets
Derivatives 4,117 321,236 8,390 333,743
Trading portfolio bonds 286,270 20,490 - 306,760
Trading portfolio shares 1,140 - 350 1,490
Investment securities, bonds 100,309 4,017 - 104,326
Investment securities, shares 1,010 - 2,363 3,373
Loans and advances at fair value - 701,715 - 701,715
Assets under pooled schemes and unit-linked investment contracts 59,698 - - 59,698
Assets under insurance contracts 184,650 4,028 4,410 193,088
Total 637,194 1,051,486 15,513 1,704,193
financial liabilities
Derivatives 3,859 305,969 9,108 318,936
Obligations to repurchase securities 158,981 445 24 159,450
Bonds issued by Realkredit Danmark 555,486 - - 555,486
Deposits under pooled schemes and unit-linked investment contracts - 67,277 - 67,277
Total 718,326 373,691 9,132 1,101,149
31 December 2009 (DKK millions)Quoted prices
Observable input
Non-observable input Total
financial assets
Derivatives 8,245 297,610 7,532 313,387
Trading portfolio bonds 275,518 29,693 525 305,736
Trading portfolio shares 589 - 340 929
Investment securities, bonds 98,449 9,890 - 108,339
Investment securities, shares 462 - 1,709 2,171
Loans and advances at fair value - 688,473 - 688,473
Assets under pooled schemes and unit-linked investment contracts 45,909 - - 45,909
Assets under insurance contracts 158,138 9,731 3,795 171,664
Total 587,310 1,035,397 13,901 1,636,608
financial liabilities
Derivatives 7,827 293,384 6,209 307,420
Obligations to repurchase securities 70,797 2,350 - 73,147
Bonds issued by Realkredit Danmark 517,055 - - 517,055
Deposits under pooled schemes and unit-linked investment contracts - 53,133 - 53,133
Total 595,679 348,867 6,209 950,755
83 DANSKE BANK RISK MANAGEMENT 2010 MARKET RISK
Group Finance is responsible for validating the models developed by Danske Markets. A model must be validated before Danske Markets can trade in new types of product that are priced and risk-man-aged with the model.
The purpose of the validation process is to test, independently of the business unit, whether the model is properly implemented and whether its stability and quality are sufficient to enable the Group to price and risk-manage the financial products in question in a satisfactory manner.
Despite thorough testing, errors and model flaws may still occur. Group Finance has therefore estab-lished guidelines for quantifying the risk on valuation with models designed to handle various deriva-tive products. This amount, which is called the model reserve, is recalculated on a regular basis.
In addition to this validation process, the Group has established procedures to monitor and validate the market data used to calculate market values and risk. Market data controls are carried out at the end of each month and once during the month.
The results and potential corrections from the market-data validation process are submitted to the managements of Group Finance and Danske Markets at the end of the month. At the end of each quarter, a more detailed report is submitted to the Executive Board.
The Group has generally strengthened its governance of the validation of models and market data significantly in recent years.
7.12 Capital requirement
In the calculation of the capital requirement for market risk, the Group distinguishes between general and specific risks and between items in the trading book and items outside the trading book.
The Group uses the internal VaR model to calculate the capital requirement for general risk on items in the trading book and also for foreign exchange risk on items outside the trading book. Since com-modity risk is not covered by the internal VaR model, the Group uses the standardised approach under the CRD.
The calculation of the capital requirement for specific risk is based on the standardised approach. In accordance with the Group’s strategy of using more advanced models for all the main risk areas, the Group plans to implement an internal model for specific risk in 2011.
The table below shows the capital requirements for general risk and specific risk at the end of 2010 and 2009.
CAPITAL REQUIREMENTS fOR GENERAL RISK AND SPECIfIC RISK
(DKK millions)
2010 2009
General risk,
internal model
General risk,
standard-ised
approach
Specific risk,
standard-ised
approach Total
General risk,
internal model
General risk,
standard-ised
approach
Specific risk,
standard-ised
approach Total
Interest rate risk 573 - 2,645 3,218 647 - 2,715 3,362
Equity market risk
90 - - 90 105 - - 105foreign exchange risk
166 - 177 343 235 - 71 306
Commodity risk - 30 - 30 - 103 - 103
Diversification benefit 224 - - 224 313 - - 313
Total VaR 605 30 2,822 3,457 674 103 2,786 3,563
84 MARKET RISK DANSKE BANK RISK MANAGEMENT 2010
Outside the trading book, the Group has no commodity risk and only limited foreign exchange risk.
Economic capital for market risk is used for internal reporting as well as for the ICAAP under Pillar II, and it is calculated by means of several models. For general market risk, except commodity risk, the Group uses its internal VaR model, and it also uses an internal model for interest rate floor risk. For commodity risk and specific risk, it uses the standardised approach under the CRD.
7.13 revisions to the capital requirement rules
The Basel Committee’s revised guidelines for market risk were adopted by the EU in 2010, and they are expected to take effect by the end of 2011. The revisions will require banks to hold additional capital to cover their market risks, including both general and specific market risks.
Some of the changes regarding market risk have already been implemented in the Group’s internal VaR model, and others are planned. The change regarding market risk that is expected to lead to the largest rise in the capital requirement is the inclusion of a new stressed VaR figure based on historical data from a period of substantial volatility. This change alone may increase the capital requirement for general risk by DKK 1-2 billion.
85 DANSKE BANK RISK MANAGEMENT 2010 LIQUIDITY RISK
8. LIquIDIty RIsk
87 8.1 Control and management
88 8.1.1 Operational liquidity risk
88 8.1.2 Liquidity stress testing
88 8.1.3 Twelve-month liquidity
89 8.1.4 Structural liquidity risk
90 8.1.5 funding sources
91 8.2 Collateral provided by the Group
91 8.3 Requirements from the authorities and related matters
86 LIQUIDITY RISK DANSKE BANK RISK MANAGEMENT 2010
Liquidity management at the Danske Bank Group is intended to ensure that the Group at all times has sufficient liquidity to meets its obligations. The Group has arranged its liquidity management structure to meet this objective by ensuring that its financing is robust and can withstand even improbable situa-tions that would have a substantial adverse affect on its liquidity.
The Danske Bank Group’s liquidity position remains very strong. The survival horizon determined by the Group’s internal liquidity stress tests is very long, significantly beyond the Group’s target. The Group has obtained this positive liquidity position by raising a substantial amount of long-dated financing in recent years, and the trend in the loan-deposit ratio has also been favourable. These developments also help the Group prepare to meet the future regulatory requirements for liquidity.
In the spring and summer of 2010, the financial markets exhibited high volatility because of the Euro-pean debt crisis, but Scandinavian banks, including Danske Bank, were not affected by these events.
In the autumn, the Group monitored the Danish liquidity market carefully upon the expiry of the Dan-ish Bank Package I at the end of September. The expiry of the state guarantee did not have an adverse effect on the Group’s liquidity position. It does bring a sharp reduction in the Group’s expenses.
During the past year, both national and international bodies, such as the Basel Committee, the EU Commission, the Danish central bank and the Danish FSA, have been preparing new regulations and stricter supervision concerning the calculation and reporting of banks’ liquidity risk. The super-visory authorities in certain countries where Danske Bank operates, particularly the UK FSA, have implemented additional regulations on liquidity.
One of the main elements of the new regulation is the Basel Committee’s guidelines on new liquidity measures, specifically the Liquidity Coverage Ratio (LCR) and a Net Stable Funding Ratio (NSFR).
The LCR stipulates that banks must have a liquidity buffer that ensures a survival horizon of at least 30 days in case of serious liquidity stress, which is defined by the Committee. According to the Com-mittee, the LCR must be reported to the supervisory authorities beginning on 1 January 2012. It will be implemented in an observation phase that runs until 1 January 2015, after which it will become bind-ing for credit institutions.
The NSFR is intended to ensure a sound funding structure by promoting more long-dated funding. The NSFR stipulates that banks must at all times have stable funding for one year ahead that equals the amount of their illiquid assets. According to the Basel Committee, the NSFR will become a binding requirement on 1 January 2018. The Committee is proposing a similar observation phase for reporting to the supervisory authorities from 1 January 2012 until the requirement takes effect.
The final forms of the LCR and the NSFR at the EU level are not yet clear, but some clarification is expected after mid-2011. If they are based on the Basel Committee’s final guidelines from December 2010 and implemented in that form, they will necessitate significant changes in the Group’s funding structure and the composition of the liquidity buffer. Two reasons for this are that the possibility of including mortgage bonds in the liquidity buffer will be limited and that the NSFR does not recognise funding with a remaining maturity of less than one year.
The new liquidity requirements are expected to affect Danish credit institutions generally because of the significance of mortgage bonds as liquidity management resources in the financial sector. These bonds should be fully recognised as liquidity management resources in the formulation of the new EU rules.
87 DANSKE BANK RISK MANAGEMENT 2010 LIQUIDITY RISK
8.1 Control and management
Taking on liquidity risks is an integral part of the Group’s business strategy.
The Board of Directors determines the overall approach to liquidity risk, including the profile of the Group’s liquidity risk exposure and liquidity risk limits. It also defines the overall calculation method and responsibilities for each segment of liquidity risk in accordance with the profile.
The All Risk Committee supplements limits set by the Board of Directors with further targets for li-quidity risk management. The Asset Liability Committee (ALCO) oversees liquidity risk management, and Danske Markets is responsible for day-to-day liquidity management.
Group Treasury ensures that the Group’s structural liquidity profile enables the Group to comply with the limits set out by the Board and meet the targets set by the All Risk Committee. Group Treasury reports to ALCO, the All Risk Committee and the Board of Directors on the liquidity targets. Group Finance reports on the liquidity limits to ALCO, the All Risk Committee and the Board of Directors.
In calculating liquidity risks, the Group excludes Realkredit Danmark and Danica Pension. At Realkredit Danmark, the financing of mortgage loans by the issuance of listed mortgage bonds with matching conditions has eliminated liquidity risk in all material respects. Danica’s balance sheet contains long-term life insurance liabilities and assets, much of which is invested in easily marketable bonds and shares.
Since both companies are subject to statutory limits on their exposures to Danske Bank A/S, their liquidity is not included in group-level liquidity management.
At the group level, liquidity management is based on the monitoring and management of the Group’s short-term and long-term liquidity risks, and it is organised around the four issues set out in the table below.
THE DANSKE BANK GROUP’S LIQUIDITY MANAGEMENT
Operational liquidity risk buffer management
Liquidity stress testing
12-month liquidity Structural liquidity risk
Objective Ensure a liquidity buffer sufficient to absorb the
net effects of current transactions
Identify and measure
immediate liquidity risk
Measure the Group’s dependence on
the interbank and capital markets
Ensure that the Group does not create an
unnecessarily large need for funding in
future periods
Be able to cover payments as they fall due
Ensure that there is sufficient time to respond to a crisis
Protect against market disruption
and maintain the business model
Protect the Group by diversifying
the funding sources
Management tool Board limit All Risk target All Risk target All Risk target
Monitoring / control Group finance Group Treasury Group Treasury Group Treasury
Department responsible Danske Markets ALCO ALCO ALCO
Model Gap analysis Gap analysis Gap analysis Ratio/Gap analysis
88 LIQUIDITY RISK DANSKE BANK RISK MANAGEMENT 2010
8.1.1 Operational liquidity risk
The Group’s operational liquidity risk management is intended mainly to ensure that the Group al-ways has a liquidity buffer that can absorb the net effects of current transactions and changes in liquid-ity in the short term. For liquidity management purposes, the Group distinguishes between liquidity in Danish kroner and liquidity in other currencies. Liquidity is calculated on the basis of known future receipts and payments from current transactions. The calculation includes the estimated effects on the Danish kroner liquidity of the Danish government’s receipts and payments. Bond holdings that can be used in repo transactions with central banks are considered liquid assets. To take account of the poten-tial risk of drawings under irrevocable loan commitments, the Group factors in the unutilised portion of the facilities in the calculation of liquidity risk.
The Group uses limits to manage operational liquidity risk. Separate limits are set for liquidity in Danish kroner and liquidity in non-Danish currencies. The Group’s strong position in the Danish market gives it a deposit surplus that is a valuable and stable source of funding. In addition to lim-its set by the Board of Directors and the All Risk Committee, the Asset/Liability Committee has set overnight targets for each key currency. The Group also monitors the maturity profiles of commercial paper, certificates of deposit and medium-term notes to ensure that the maturing liabilities do not become too large at any particular time.
8.1.2 Liquidity stress testing
The Group conducts stress tests to measure its immediate liquidity risk and to ensure that it has enough time to respond to potential crises. The stress testing, which is conducted monthly, covers a time horizon of up to six months. The tests estimate liquidity risk in various scenarios, including three standard scenarios: a scenario specific to the Group, a general market crisis and a combination of the two. It also conducts a “stress-to-fail” test.
The analyses are based on the assumption that the Group does not reduce its lending activities. This means that existing lending activities are maintained and require funding. Most of the Group’s un-encumbered bond holdings can be used as collateral for loan facilities with central banks and are thus considered liquid assets. Scenario -specific haircuts are used on the bond portfolio. Potential liquidity outflows from unutilised but irrevocable loan commitments are also factored in.
The degree of possible refinancing of the Group’s funding sources varies depending on the scenario in question as well as on the specific funding source. To analyse the stability of the funding, the Group breaks down deposits into personal/corporate, core/non-core and term/non-maturing as well as geo-graphically according to the Group’s position in each market.
The Group monitors the diversification of funding sources by product, currency, maturity and counter-party to ensure that its funding base provides the best possible protection if the markets come under pressure.
The Group was able to remain within its internal stress test targets throughout 2010.
8.1.3 Twelve-month liquidity
In its “Bank Financial Strength Ratings: Global Methodology”, Moody’s Investors Service has set various classification requirements for banks’ liquidity management. One requirement is that a stress test of the 12-month liquidity curve must generally be positive. Liquidity calculations must assume, among other factors, that the Group is cut off from the capital markets and that refinancing in the mar-kets is not possible. This means that issued bonds, issued commercial paper and subordinated debt will not be refinanced at maturity. On the other hand, the stable deposit base will remain an available funding source. The analysis also assumes only a moderate reduction in business activities. The Group monitors its liquidity reserves to ensure that it is robust against a loss of access to the capital markets.
89 DANSKE BANK RISK MANAGEMENT 2010 LIQUIDITY RISK
The Group’s liquidity position, measured by the 12-month liquidity curve, has improved significantly since the end of 2008 and is now positive more than 12 months ahead. This means that the Group’s liquidity buffer is large enough for the Group to survive at least 12 months without access to the capi-tal markets. The improvement reflects better funding conditions and the funding initiatives the Group has taken to strengthen liquidity.
12-MONTH LIQUIDITY(DKK billions)
0
100
200
300
400
-100
Months
1 2 3 4 5 6 7 8 9 10 11 12
At 31 December 2010
At 31 December 2009
At 31 December 2008
8.1.4 Structural liquidity risk
The Group manages its structural liquidity risk on the basis of its long-term liquidity mismatch. The aim is to avoid an unnecessarily large need for funding in the future. Quantifying structural liquidity risk is important when the Group plans its funding activities.
Structural liquidity risk management is based on a breakdown by maturity of the Group’s assets, li-abilities and off-balance sheet items. The Group bases its calculations on the contractual due dates of individual products but takes into account that some balance sheet items have maturities that make their actual due dates deviate materially from their contractual due dates. The maturities of such items are therefore modified to provide a more accurate view of their actual behaviour. This includes demand deposits from the personal segment, which are considered a relatively stable funding source although contractually such deposits are very short-term funding. Potential liquidity outflows from unutilised but irrevocable loan commitments are also factored in.
The Group’s large bond holdings, which have varying terms to maturity, are also a significant compo-nent in the calculation of structural liquidity. Most of the portfolio is ultra-liquid and can be used as collateral in repo transactions with central banks (91% at the end of 2010). The unencumbered part is therefore included in the calculation as immediate liquidity. On the other hand, bond holdings that are used as collateral for the settlement of the Group’s current transactions, for instance clearing, are classified as illiquid bonds and are excluded from immediate liquidity.
As part of the management of structural liquidity risk, the Group breaks down its liquidity position by variables such as currency, product, business area and organisational unit. The calculations show that the Group has a structural liquidity surplus in Danish kroner – from surplus deposits and a large liquid bond portfolio – and has structural funding needs in other currencies.
90 LIQUIDITY RISK DANSKE BANK RISK MANAGEMENT 2010
8.1.5 funding sources
The Group monitors its funding mix to make sure that it is well diversified in terms of sources, maturi-ties, currencies and other factors, as shown in the tables below. A well-balanced portfolio of liabilities generates a stable flow of funding and provides protection against market disruptions.
Like the Group’s substantial deposits from the retail market, its comprehensive and well-established funding programmes in Europe and the US are essential to liquidity management. Covered bonds play an increasingly important role in the funding. At 31 December 2010, the Group had issued covered bonds (excluding Danish mortgage bonds) for an amount equivalent to DKK 120 billion. The bonds are currently based on Danish, Norwegian, Swedish and Finnish loans, and there is still substantial unexploited potential for covered bond issues.
The tables below also include the match-funding of loans provided by Realkredit Danmark through the AAA-rated Danish mortgage finance system.
BREAKDOWN Of fUNDING BY TYPE Of LIABILITY
(%) 2010 2009
Central banks 4 6
Credit institutions 5 4
Repo transactions 6 6
Short-dated bonds 7 7
Long-dated bonds 8 11
Covered bonds 5 4
Danish mortgage bonds 24 23
Deposits (corporate) 20 19
Deposits (personal) 14 13
Subordinated debt 3 3
Shareholders’ equity 4 4
Total 100 100
The Group monitors deposits and amounts due from credit institutions to ensure that exposures to individual counterparties are also acceptable from a liquidity perspective.
BREAKDOWN Of fUNDING BY CURRENCY
(%) 2010 2009
DKK 47 43
EUR 20 25
USD 13 13
SEK 7 7
GBP 5 4
CHf 2 2
NOK 4 4
Other 2 2
Total 100 100
Danica’s balance sheet items (long-term life insurance liabilities and assets, much of which is invested in easily marketable bonds and shares) are not included in the funding listed above.
91 DANSKE BANK RISK MANAGEMENT 2010 LIQUIDITY RISK
8.2 Collateral provided by the Group
Through a number of mutually binding agreements, the Group has undertaken to provide collateral if the fair value of current transactions changes to its detriment.
The Group has entered into other agreements in which the counterparty has made it a condition that the Group maintain its present rating. A downgrade could mean that the obligations under the con-tracts in question must be fulfilled or that securities must be provided as collateral. The table below shows the loss of liquidity for the Group under four scenarios involving downgrades of the Group’s long- and short-term debt. It also shows how much the Group would have to raise by fulfilling its ob-ligations under the contracts or providing collateral or supplementary collateral under the scenarios. The number in parentheses after the rating indicates the number of notches by which the rating is reduced from its current level in the various scenarios.
LOSS Of LIQUIDITY If THE GROUP’S PRESENT RATINGS ARE DOWNGRADED, 31 DECEMBER 2010
Moody’s (short-term)
S&P (short-term)
Moody’s (long-term)
S&P (long-term)
Supplementary collateral
(DKK billions)
Scenario 1 P-1 A-1 A1 (1) A- (1) 0.3
Scenario 2 P-2 (1) A-2 (1) A1 (1) A- (1) 12.4
Scenario 3 P-2 (1) A-2 (1) A2 (2) BBB+ (2) 16.8
Scenario 4 P-2 (1) A-2 (1) A3 (3) BBB (3) 17.1
Realkredit Danmark’s bond issues have Aaa and AAA ratings from Moody’s and Standard & Poor’s, respectively. A downgrade of these ratings could potentially affect Realkredit Danmark’s position in the market but would not require an immediate provision of collateral.
8.3 requirements from the authorities and related matters
The external liquidity requirements that apply to the Group are set forth in section 152 of the Danish Financial Business Act, which states that a credit institution’s liquidity must equal at least each of the following:
• 15% of the debt obligations that, regardless of any disbursement conditions, the institution must pay on demand or at less than one month’s notice
• 10% of the institution’s total debt and guarantee obligations, excluding subordinated loan capital infusions that can be counted as part of the capital base
Liquidity includes cash on hand, fully secured and liquid demand deposits at other credit institutions and insurances companies, and holdings of secure, easily negotiable, unleveraged securities and credit instruments.
The Group’s liquidity remained well above the required level throughout 2010.
In 2010, the Danish FSA introduced the so-called “regulatory diamond”, which includes targets for funding and liquidity.
In its original form, the target on funding stipulated that a bank’s loans may not exceed deposits by more than 25%. That is, the funding ratio must be below 1.25. Stable funding does not necessarily consist of deposits alone, however. The FSA therefore changed the definition of stable funding to include issued bonds with a maturity above one year, among other things, and it also lowered the requirement for the funding ratio to 1.0. The new funding ratio target thus means that lending may not exceed stable funding.
92 LIQUIDITY RISK DANSKE BANK RISK MANAGEMENT 2010
The liquidity target states that banks must have surplus liquidity that is 50% above the regulatory requirement in the Danish Financial Business Act, section152.
Stress testsIn addition to the new requirements in the regulatory diamond, the FSA and the Danish central bank (Nationalbanken) have asked large credit institutions in Denmark to conduct stress tests based on standard assumptions that are defined by the FSA and the central bank. The Group began conducting the tests in June 2010. The test is defined as severe market stress under which refinancing of interbank and capital market funding is not possible combined with significant retail deposit outflows. The stress test has no specific survival target.
93 DANSKE BANK RISK MANAGEMENT 2010 OPERATIONAL RISK
9. OPeRatIOnaL RIsk
94 9.1 Policy
95 9.2 Measurement and control
97 9.3 Capital requirement
97 9.4 Operational risk and stress testing
94 OPERATIONAL RISK DANSKE BANK RISK MANAGEMENT 2010
The Danske Bank Group is exposed to operational risks in the form of possible losses resulting from inappropriate or inadequate internal procedures, human or system errors, or external events; opera-tional risks include legal risks.
Operational risks are often associated with one-off events, such as failure to observe business or work-ing procedures, defects or breakdowns of the technical infrastructure, criminal acts, fire and storm damage, and litigation. Operational risks are thus non-financial risks.
The Group’s operational risk management process involves a structured and uniform approach across the Group. It includes risk identification and assessments, monitoring according to key risk indicators, controls and risk mitigation plans.
In its qualitative approach to operational risk management, the Danske Bank Group has chosen to include both indirect and direct effects as well as an assessment of whether a given event affects the Group’s share price. This approach is intended to improve the basis for decisions and the prioritisa-tion of risks.
Direct effects are actual monetary losses, while indirect effects include effects on reputation from negative media coverage or the loss of customers, for example. The indirect effects have no influence on the Group’s capital requirements, which are calculated according to the standardised approach, while the direct effects are used to validate the capital requirement determined by the standardised approach.
In 2010, the Group continued to focus on mitigating group-wide operational risks and also expanded day-to-day operational risk management in all subsidiaries, business units and support functions.
9.1 Policy
The Group’s operational risk policies cover the following activities:
• Identifying, monitoring and managing the Group’s current and potential operational risk exposure • Handling “critical risks”, that is, risks that, in the view of business unit management or the Opera-
tional Risk Committee(ORCO), require follow-up and further reporting • Following up on reports and visits from financial supervisory authorities and informing the Execu-
tive Board of issues that involve the Group’s operational risks• Preparing management information on issues such as IT security, physical security, business conti-
nuity and compliance with legislation in these areas
The Group has other policies, including policies on security, control and compliance, that also support operational risk management.
In addition, the Group has policies regulating other operational risk areas, such as a policy for using insurance as a risk mitigation measure and guidelines for outsourcing.
95 DANSKE BANK RISK MANAGEMENT 2010 OPERATIONAL RISK
9.2 Measurement and control
Once a year, the Group conducts a thorough risk identification survey in its subsidiaries, business units and support functions and compiles a list of the key operational risks. The subsidiaries, business units and support functions – in collaboration with the Group’s Operational Risk department – assess the effect of each risk, including both direct and indirect effects and the effect of a given event on the Group’s share price. The Group includes indirect effects in the assessments because they can have significant long-term ramifications. Some of the largest risks fall into the categories of IT risks, internal and external fraud, liability for advisory services, and loss or theft of confidential data.
The Group manages its largest operational risks in a process that includes controls, risk mitigation and monitoring of risk indicators. Operational risk considerations are included in the Group’s daily work, for example the work on the Group’s business procedures. The chart below shows the process from risk identification to mitigation plans for the Group’s largest risks. The process starts with risk identi-fication and assessment, then the creation of a Top Risk list. After the appointment of the risk owners, the work to identify the key risk indicators and to create the mitigation plans begins. When the risk owners complete their mitigation plan, they can recommend that the risks be accepted, transferred or mitigated by internal means.
RISK ASSESSMENT PROCESS fROM RISK IDENTIfICATION TO PREPARATION Of MITIGATION PLANS
Business units, subsidiaries and
support functions
Risk identification
Group finance (Operational Risk)
Determination of risk owner and creation of Top Risk list
Business units, subsidiaries and
support functionsKRI identification
Creation of mitigation plans
ORCO Mitigation of the risk Acceptance of the risk Transfer of the risk
Business units, subsidiaries and
support functions
Implementation Outsourcing
Purchase of insurance
The risk identification and assessment processes are updated once a year. New risks are identified, and risks that have become irrelevant are removed from the set of risks that are monitored. All the top risks are monitored in a quarterly report to ORCO that includes the three or four most significant indicators for each risk on a list of the top 30 risks, among other things.
96 OPERATIONAL RISK DANSKE BANK RISK MANAGEMENT 2010
Each subsidiary, business unit and support function is responsible for the daily monitoring of opera-tional risks and for reducing and preventing losses resulting from exposure to operational risks.
The Group’s operational risk losses are registered in the Operational Risk Information System (ORIS). Losses are categorised according to the Basel II event categories for operational risk, and both direct losses and direct gains are registered. The Group is a member of the Operational Risk Exchange Association (ORX).
After relatively high losses in 2009, operational risk losses stabilised at a low level. Measured by the number of events, external fraud still accounted for most of the losses: 56% of total loss events in 2010, against 55% in 2009. External fraud consists of events such as bank robberies, card skimming and document falsification.
0
10
20
30
40
50
60
External fraud
Execution, delivery and
process management
Clients,products
and businesspractices
Businessdisruption
and systemfailures
Damageto physical
assets
Internalfraud
Employmentpractices and
workplacesafety
% of all events 2010 % of all events 2009
BREAKDOWN OF LOSS EVENTS %
Note: Based on Basel II event categories.
Measured by amount, external fraud accounted for 32% of the total operational risk loss in 2010, against 70% in 2009.
0
20
40
60
80
(%) BREAKDOWN OF LOSS AMOUNTS
External fraud
Execution, delivery and
process management
Clients,products
and businesspractices
Businessdisruption
and systemfailures
Employmentpractices and
workplacesafety
Damageto physical
assets
Internalfraud
% of loss amounts 2010 % of loss amounts 2009
Note: Based on Basel II event categories.
97 DANSKE BANK RISK MANAGEMENT 2010 OPERATIONAL RISK
9.3 The capital requirement
The Group uses the standardised approach of the Capital Requirements Directive (CRD) to calculate risk-weighted assets for operational risk.
The calculation is based on a single indicator: income. Risk-weighted assets are calculated as a per-centage of income at a rate ranging from 12% to 18%, depending on the business activity, as defined in the CRD.
Operational events resulting in credit losses are part of the credit risk calculation.
9.4 Operational risk and stress testing
In 2010, the Group once again designed a stress test involving an IT breakdown. The main mitigating factors for this scenario are preventive measures and contingency plans rather than capital.
The stress test scenario consists of a three-day IT breakdown during which no systems are accessible and both customers and employees are unable to execute transactions. The effects of the breakdown include both customer defections and direct losses such as losses resulting from compensatory fee waivers.
98 INSURANCE RISK DANSKE BANK RISK MANAGEMENT 2010
10. InsuRanCe RIsk
99 10.1 How Danica’s results affect the Group’s income statement
100 10.2 Key risk factors
101 10.3 Control and management
101 10.3.1 Market risk
103 10.3.2 Life insurance risks
103 10.3.3 Operational risk
103 10.4 Risk exposure and sensitivity analyses
105 10.5 Capital requirement
99 DANSKE BANK RISK MANAGEMENT 2010 INSURANCE RISK
Insurance risk in the Danske Bank Group consists of all the risks at the companies in the Danica group. The main risks are market risk and life insurance risk. Market risk involves the risk of losses on the investment of Danica’s equity and the risk of losses on insurance policies with guaranteed returns because of changes in the fair value of assets and liabilities. The risk of losses on insurance policies derives mainly from with-profits life insurance policies. Life insurance risk relates to life insurance and pension products, and it is affected by changes in mortality, disability, critical illness and the like.
In 2010, net income from insurance business amounted to DKK 2.1 billion, against DKK 2.8 billion in 2009. The result reflects a positive return on the investment of Danica’s equity and an investment re-turn on customers’ funds in Danica Traditionel of 5.8%, which together enabled the Group to book the risk allowance [as well as the shadow account balance of DKK 0.6 billion from 2008. In 2010, the risk allowance, which is calculated as a percentage of technical provisions, amounted to DKK 1.1 billion.
Towards the end of 2008, the Danish government reached an agreement with the Danish Insurance Association to ensure financial stability in the industry. One of the main components of the agreement was the inclusion of a supplement of half of the Danish mortgage bond spread to the maturity-depend-ent discount curve for liabilities that pension companies must use to calculate their obligations. In December 2010, the agreement was extended until the new Solvency II rules take effect.
10.1 How Danica’s results affect the Group’s income statement
Danica’s financial result appears on the Group’s income statement as the item “Net income from insurance business”. It consists mainly of the investment return on Danica’s equity and Danica’s risk allowance.
The risk allowance is the annual payment that Danica may book from its with-profits business. It amounts to 0.64% of the technical provisions (about DKK 1.1 billion). The risk allowance may be booked only if its technical basis permits and if the bonus potential of paid-up policies is not used for loss absorption. The technical basis for the risk allowance is essentially the investment return on poli-cyholders’ funds less the change in life insurance provisions. If the risk allowance cannot be booked, in whole or in part, the outstanding amount is transferred to a shadow account and can be booked in a financial year when the technical basis permits.
For further details on Danica’s contribution to the Danske Bank’s income statement, please see Danske Bank’s white paper on Danica Pension.
100 INSURANCE RISK DANSKE BANK RISK MANAGEMENT 2010
10.2 Key risk factors
Danica’s equity is exposed to possible losses on Danica’s own investments, on its health and accident insurance business, and on life insurance policies with guaranteed benefits or investment guarantees. The key risk factors for Danica’s equity are exposures to market risk and life insurance risk, and it is also exposed to operational risk.
MAIN RISK fACTORS AffECTING THE DANICA GROUP
Market risks Life insurance risks Operational risks
Interest rate
Equity
Credit spread
fX
Liquidity
Counterparty
Concentration
Longevity
Mortality
Disability
Concentration
IT
Legal
Administrative
fraud
Insurance risk is related mainly to life insurance and pension products and to a lesser extent to insur-ance against critical illness and health insurance. Most of the risk on life insurance and pension prod-ucts derives from with-profits policies in Denmark, with unit-linked policies in Denmark, Sweden, Norway and Ireland accounting for a smaller share.
DANICA’S TWO TYPES Of LIfE INSURANCE POLICY
With-profits policies (Danica Traditionel) Unit-linked policies (Danica Link and Danica Balance)
A Danish with-profits policy has a guaranteed benefit based on a technical rate of interest (0.5% on 1 January 2011). The policyholders’ savings earn a rate of interest that is set at the discretion of the life insurance company and that can be changed at any time. The difference between the technical rate of interest and the actual interest accrued on policyholders’ savings is termed the “bonus”. A bonus is guaranteed for policies with technical rate of interest of 0.5%, but not for policies with higher rates.
The distribution of all profits and losses to policyholders is regulated by the Danish Executive Order on the Contribution Principle. The contribution principle, which was amended on 1 January 2011, entails a division of insurance contracts into groups with the same interest rates, insurance risks and costs. Each group has its own capital buffer (collective bonus potential).
All profits and losses after interest payments to policyhold-ers, the risk allowance and changes in insurance provisions are transferred to the collective bonus potential. The collec-tive bonus potential is owned jointly by the customers in the group in question and serves as a risk buffer.
A unit-linked policy is a policy in which the investments are allocated to policyholders, who can decide whether to select investments themselves or let the life insurance company select them.
for unit-linked policies, the policyholder receives the actual return on the investments rather than a fixed rate of inter-est, and the policyholder carries all the investment risk unless a guarantee is attached to the policy.
Danica offers two types of guarantee to unit-linked policy-holders: for Danica Link, a watermark-based guaranteed benefit (a guarantee of 95% of all pension contributions and positive investment returns less expenses and insurance premiums); and for Danica Balance, a minimum 0% return guarantee.
Risks related to unit-linked business are considered very minor because most of the risks are carried by the policyholders or hedged with financial derivatives.
Danica’s foreign activities account for less than 10% of its total provisions, and they offer mainly unit-linked products without guarantees. The risk on these activities is thus very minor. The remainder of this section concerns Danica’s activities in Denmark.
101 DANSKE BANK RISK MANAGEMENT 2010 INSURANCE RISK
The table below shows the life insurance provisions broken down by the Danish business segments.
DANICA’S BALANCE SHEET BROKEN DOWN BY BUSINESS SEGMENT
At 31 December 2010 (DKK billions) Danica Traditionel Unit-linkedHealth and
accident insurance
Collective bonus potential 1.7
Bonus potential of paid-up policies 11.0
Other provisions 167.8 44.7 8.2
Total provisions for insurance and investment contracts 180.5 44.7 8.2
At 31 December 2009 (DKK billions) Danica Traditionel Unit-linkedHealth and
accident insurance
Collective bonus potential 2.8
Bonus potential of paid-up policies 14.2
Other provisions 164.3 34.1 8.1
Total provisions for insurance and investment contracts 181.3 34.1 8.1
Danica’s equity is not directly exposed to the with-profits business since losses are first absorbed by two capital buffers: the collective bonus potential and the bonus potential of paid-up policies.
The collective bonus potential is a capital buffer owned by the policyholders but not yet allocated to individual policies. The bonus potential of paid-up policies is the sum of the differences between each policyholder’s savings and the net present value of the policyholder’s guaranteed benefits.
If the year’s investment return on customers’ funds does not cover the guaranteed benefits for with-profits policies, changes in life insurance provisions and any other obligations, then the shortfall is covered first by the collective bonus potential and subsequently by the bonus potential of paid-up policies. If the bonus potentials are insufficient to cover the shortfall, funds are allocated from equity.
10.3 Control and management
Danica’s Board of Directors defines the overall principles for Danica’s risk management, and the man-agement monitors Danica’s risks on an ongoing basis to ensure compliance with these principles. In addition, Danica’s Board of Directors determines Danica’s investment strategy and follows up on the results. The management prepares the specific investment plans.
10.3.1 Market risk
Market risk for the insurance business consists of the risk of losses on investments of Danica’s equity and the risk of losses on policies with guarantees arising because the fair value of Danica’s assets and liabilities changes. Such changes in value can be caused by changes in interest rates, exchange rates, equity prices, property values, credit spreads and market liquidity as well as by issuer or counterparty defaults. Liabilities carry interest rate risk owing to the guarantees issued. For example, if market interest rates drop, the market value of liabilities increases.
102 INSURANCE RISK DANSKE BANK RISK MANAGEMENT 2010
With-profits businessTo ensure that the return on customers’ funds matches the guaranteed benefits of with-profits policies, Danica monitors market risks on an ongoing basis. It conducts internal stress tests to ensure that it can withstand significant losses on its equity market and credit exposure and substantial changes in inter-est rates. Interest rate risk not covered by the bond portfolio is hedged with financial derivatives.
Credit spread risk is limited since about 67% of the bond portfolio consists of government and mort-gage covered bonds with high ratings (AA to AAA). The remaining bond portfolio carries credit spread risk, which is hedged and managed in the same way as equity market risk.
Concentration risk and counterparty risk are very limited because of internal investment restrictions and because of collateral management agreements for financial derivatives.
Most bonds in Danica’s bond portfolio are denominated in Danish kroner and euros, and most of the non-euro foreign exchange risk is hedged.
Early transfer or surrender by policyholders may require Danica to sell some of its holdings, thus exposing itself to the risk of a low sales price. Danica reduces this liquidity risk by investing much of its funds in liquid bonds and shares. Furthermore, liquidity risk is very modest, since the time of payment upon surrender and transfer can be adapted to the situation in the financial markets to some extent.
Because of the change in the contribution principle on 1 January 2011, the collective bonus potential, in contrast to previously, is now divided among groups with the same interest rate, insurance risk and costs. This will cause an increase in the risk on Danica’s equity, other things being equal. Danica has therefore prepared new investment strategies and hedging arrangements for each group, and this has limited the increase in the risk.
Unit-linked businessFor about 85% of the unit-linked policies, the policyholders bear all the investment risk. The remain-ing 15% of policyholders have investment guarantees. The guarantees apply only at the time of retire-ment and are paid for by an annual fee. Danica manages the risk on financial guarantees in Danica Link with financial derivatives and by adjusting the investment allocation during the last five years before maturity. It manages the risk on guarantees in Danica Balance by adjusting the investment al-location for the individual policies. Because of these hedging and risk management strategies, Danica considers the investment risk on guarantees in unit-linked products to be very minor.
Danica’s own investmentsIn addition to market risk to which policyholders’ savings are exposed, Danica’s equity investments are also exposed to market risks, as are investments related to health and accident insurance. Danica’s Board of Directors has set a separate investment strategy for its equity, which is invested primarily in short-term bonds.
The investments related to health and accident insurance follow essentially the same investment strategy as the one used for customers’ funds allocated to with-profits policies, since the benefits are similar.
103 DANSKE BANK RISK MANAGEMENT 2010 INSURANCE RISK
10.3.2 Life insurance risks
Life insurance risks are related to mortality, disability, illness and similar factors. For example, an increase in longevity lengthens the period during which benefits are payable under certain pension plans. Similarly, changes in mortality, illness and recoveries affect life insurance and disability bene-fits. Longevity, or increased life expectancy, is the most significant life insurance risk factor for Danica.
Danica subjects its life insurance risks to ongoing actuarial assessment in order to calculate insurance obligations and make relevant business adjustments. For life insurance policies, Danica calculates the insurance obligations according to expected mortality rates based on empirical data from its own insurance portfolio. These rates reflect a likely increase in life expectancy in the future. In the cal-culation of life insurance provisions, for example, in addition to the observed life expectancy today, Danica assumed a further increase in life expectancy of 1.4 years for a 65-year-old man and 1.1 years for a 65-year-old woman. A 65-year-old man is thus expected to live an additional 20 years, while a 65-year-old woman is expected to live an additional 22 years.
For health and personal accident policies, Danica calculates insurance obligations according to expec-tations for future recoveries and reopenings of old claims. The expectations are based on empirical data from Danica’s own insurance portfolio, and they are updated regularly.
To mitigate life insurance risk, Danica uses reinsurance to cover a small portion of the risks related to mortality and disability. Danica also reinsures the risk of losses due to disasters.
10.3.3 Operational risk
Operational risks include risks of losses resulting from defects in IT systems, legal disputes, inad-equate or erroneous procedures, and fraud. Danica limits its operational risks by using business procedures and internal controls that are updated and adjusted to its current business conditions on an ongoing basis.
10.4 risk exposure and sensitivity analyses
It is a regulatory requirement in Denmark that insurance companies report the results of a set of sensi-tivity analyses commonly known as the red traffic light scenario to the Danish Financial Supervisory Authority.
The red traffic light scenario tests the effect of changes in interest rates, equity prices, property prices, exchange rates and counterparty risk. A company is said to have red light status if it does not have sufficient capital to cover 1% of the life insurance provisions when stressed in the red traffic light sce-nario. Note that the red traffic light scenario is a combined scenario, meaning that all the stress factors occur at the same time. If a company is in red light status, the Danish FSA will become involved in its financial management.
The table below shows the effect on Danica’s equity, the collective bonus potential and the bonus potential of paid-up policies caused by each of the stress tests in the red traffic light scenario. (Credit spread risk and risks posed by changes in mortality, longevity and disability are not part of the sce-nario but are shown as supplementary information.)
For example, a 12% decline in equity prices results in a total loss of DKK 2.0 billion, of which the collective bonus potential absorbs DKK 1.7 billion. Since not all of the policyholders’ losses can be covered by the collective bonus potential, the bonus potential of paid-up policies covers DKK 0.1 billion. The remaining loss of DKK 0.2 billion is covered by the equity since it derives from losses on investments of the equity and on investments related to health and accident insurance.
104 INSURANCE RISK DANSKE BANK RISK MANAGEMENT 2010
SENSITIVITY ANALYSIS fOR DANICA
At 31 December 2010 (DKK billions)
Change in collective bonus
potential
Loss absorbed by bonus potential of
paid-up policiesChange in
equity
Interest rate increase of 0.7 of a percentage point -0.4 - -0.3
Interest rate decline of 0.7 of a percentage point -0.1 - 0.4
Decline in equity prices of 12% -1.7 -0.1 -0.2
Decline in property prices of 8% -1.2 - -0.2
foreign exchange risk (VaR 99.0%) -0.3 - -
Loss on counterparties of 8% of RWA -1.7 -0.6 -0.2
Increase in credit spread of 1.0 percentage point -1.2 - -
Decrease in mortality of 10% -1.5 - -
Increase in mortality of 10% 1.4 - -
Increase in disability of 10% -0.1 - -
At 31 December 2009 (DKK billions)
Change in collective bonus
potential
Loss absorbed by bonus potential of
paid-up policiesChange in
equity
Interest rate increase of 0.7 of a percentage point -0.5 - -0.3
Interest rate decline of 0.7 of a percentage point 0.8 - 0.3
Decline in equity prices of 12% -1.1 -0.6 -0.2
Decline in property prices of 8% -1.0 -0.2 -0.1
foreign exchange risk (VaR 99.0%) -0.2 - -
Loss on counterparties of 8% of RWA -1.1 -0.9 -0.1
Increase in credit spread of 1.0 percentage point -0.8 - -
Decrease in mortality of 10% -1.0 -0.4 -
Increase in mortality of 10% 1.3 - -
Increase in disability of 10% -0.1 - -
Of the two interest rate scenarios, the rate increase is the more severe for Danica. The combined effect of all traffic light stress tests (including an interest rate increase but not a decline) would be to reduce Danica’s equity by DKK 0.6 billion.11
Danica has never had red light status and has significant capital strength, as shown in the chart below, in which the capital buffer is compared with the solvency requirement before and after the red traffic light scenario.12
11 Note that the combined effect may differ from the sum of the equity losses in the table, since the bonus poten-tials can be used only once.
12 On 30 June 2010, Danica Pension’s two subsidiaries Danica Pension I and Danica Liv III were merged into Danica Pension. The merger increased the solvency requirement by about DKK 0.6 billion. The excess capital base was unaffected.
105 DANSKE BANK RISK MANAGEMENT 2010 INSURANCE RISK
0
10
20
30
40
50
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Collective bonus potential Bonus potential of paid-up policies
Excess capital base Solvency requirement
Actual capital
Red traffic light scenario
RED TRAFFIC LIGHT SCENARIO FOR THE DANICA GROUP(DKK billions)
10.5 Capital requirement
Danica is subject to the capital requirement in the solvency rules for insurance companies. At 31 December 2010, Danica’s capital requirement was DKK 8.0 billion, against DKK 7.8 billion at the end of 2009.
Note that the Danske Bank Group makes a deduction from its capital base equal to Danica’s capital requirement less the difference between Danica’s capital base and the carrying amount of the Group’s capital holdings in Danica (see section 3.5.2).
In addition to the regulatory capital requirement, Danica must calculate its individual solvency need, that is, its risk-based need for capital. All Danish insurance companies, like credit institutions, are required to maintain a capital base equal to or greater than the larger of the regulatory capital require-ment and the individual solvency need.
Danica has developed a model for stress testing all relevant risk factors, including equity prices, prop-erty prices, interest rates and mortality rates. The individual capital adequacy ratio is calculated as the total capital requirement after stress testing, adjusted for the use of the collective bonus potential and the bonus potential of paid-up policies.
Solvency iiSolvency II is the European risk-based solvency regime for insurance companies, and it is expected to take effect on 31 December 2012.
The standard model for calculating the solvency requirement under Solvency II was tested in the Quantitative Impact Studies (QIS 5) from August to November 2010. Danica participated at both the group level and the company level for each unit in the Danica group. No clear conclusion has been reached on the results yet because several major issues must still be resolved. For example, the meth-ods for calculating life insurance provisions for with-profits polices are unclear, and any changes may have significant effects.
Solvency II also sets forth new rules for eligible capital for insurance companies. Danica has a solid capital base consisting of DKK 19.1 billion tier 1 capital, DKK 3.0 billion supplementary capital (tier 2 capital), and no tier 3 capital. Danica does not expect to need additional capital because of the imple-mentation of Solvency II.
106 PENSION RISK DANSKE BANK RISK MANAGEMENT 2010
11. PensIOn RIsk
107 11.1 Pension plans
108 11.2 Control and management
109 11.3 Use of models
110 11.4 Capital requirement
107 DANSKE BANK RISK MANAGEMENT 2010 PENSION RISK
Pension risk arises because of the Group’s liability for defined benefit pension plans. Valuation is uncertain because this type of pension plan entails protracted obligations and is based on actuarial assumptions. Pension risk includes risks of the following:
• Lower-than-expected returns on invested funds• Changes in actuarial assumptions, including the assumptions about the discount rate and inflation,
that cause an increase in the pension obligations• Longer-than-expected life expectancy among members
The Group’s risk management is intended to reduce risk partly by defining the business objectives, including limits of exposure, as measured by VaR.
For accounting purposes, defined benefit pension plans are valued according to IFRS (IAS 19).
Before making the year-end IFRS valuation of its pension obligations, the Danske Bank Group con-ducts a full review of the assumptions underlying the calculation. At the end of 2010, the Group made minor adjustments to the parameters it uses, including inflation and the discount rate, in order to match current market conditions more closely.
11.1 Pension plans
Basically, there are two types of pension plan:
Defined contribution pension plansA defined contribution plan is a post-employment benefit plan under which the employer pays fixed contributions into a separate entity and afterwards has no further obligations. The pension entitlement accumulated by the employee depends on the size of the contributions agreed upon, the performance of invested pension funds and associated expenses. Accordingly, the employee bears the risk relating to the future pension benefits. The benefits may be influenced, for example, by unfavourable develop-ments in the financial markets that affect the pension assets under management. The Group thus has no pension risk on defined contribution plans, and contributions to such plans are expensed at the time they are made. Defined benefit pension plans In defined benefit plans, the pension agreement contains a provision stipulating the pension ben-efit that the employee will be entitled to receive upon retirement. The benefit is typically stated as a percentage of the employee’s salary immediately before retirement, but it can also be a percentage of the average salary during the entire period of employment. The pension benefit is typically payable for the rest of the employee’s life, and this increases the employer’s uncertainty about the amount of the future obligations. The employer’s gross obligation, less the value of plan assets, is recognised as a liability. The liability and pension expenses are measured actuarially.
108 PENSION RISK DANSKE BANK RISK MANAGEMENT 2010
11.2 Control and management
The Group’s defined benefit plans are funded mainly by contributions made by the Group and the em-ployees in question to independent pension funds. The pension funds’ boards of directors tend to the members interests in accordance with the prevailing articles of association and provisions, and they manage the assets by investing the contributed amounts in such a way that the contributions and the expected returns cover future pension payments.
In addition, the Group has unfunded defined benefit pension plans that are recognised directly on the balance sheet.
The Group’s defined benefit pension obligations consist of pension plans in Northern Ireland, Ireland and Sweden as well as a number of small pension plans in Denmark. All these plans are closed to new members except for the Swedish plan, which is a hybrid plan that limits the amount of the salary on which the benefit is based. The table below gives an overview of the various plans.
THE GROUP’S DEfINED BENEfIT PENSION PLANS
At 31 December 2010 Northern Ireland Ireland Denmark Sweden
Current pension plan
Defined contribution
Cash balance
Defined contribution
Hybrid
Status of defined benefit plan
Closed to new members in
2004
Closed to new members in
2008
Closed to new
members
Open to new
members
Gross liability (DKK billions)* 6.6 2.3 1.8 1.3
Members: Active
Deferred
Pensioners
Total
1,488
2,101
1,500
5,089
589
635
342
1,566
11
0
214
225
1,264
1,053
457
2,774
Note: Members in Sweden are covered by the occupational pension plan for the Swedish banking sector (the BTP plan). The plan is a collectively negotiated occupational pension plan established by the Swedish banking association (Bankinstitutens Arbetsgivareorganisation) and the employees’ union (Finansförbundet). In Norway, finland and the Baltics, the Group operates defined contribution plans.
*In Norway, since winding up of the Norwegian defined benefit plan in 2005, the Group has an early retirement pension liability. The liability amounted to DKK 0.1 billion at 31 December 2010.
A key element of the Group’s risk management strategy is using derivative instruments to mitigate in-terest rate and inflation risks. The Group minimises pension risk by matching expected future pension obligations with the return on derivatives and the associated underlying assets.
Because of the complexity of the pension obligations, the Group does not use its normal limit structure when monitoring pension risk. Instead, it manages market risk on pension plans according to special follow-up and monitoring principles called “business objectives”.
The Group has established procedures to be followed in case of deviations from these objectives. The All Risk Committee has defined risk targets for the Group’s pension funds. To follow up on the objec-tives, the Group uses quarterly risk reports that analyse the financial status of the individual plans by means of sensitivity analyses and the Value at Risk (VaR) measure. It sets specific limits for the accept-able levels of risk exposure.
On the basis of the average actuarial assumptions, the Group’s net pension obligation at the end of 2010 was DKK 0.2 billion, against DKK 1.9 billion a year before. The change was owing mainly to a rise in the value of the assets caused by higher share and bond prices as well as the Group’s contri-butions to the plans. The gross obligations rose slightly because of several factors, including a slight decline in the average discount rate.
109 DANSKE BANK RISK MANAGEMENT 2010 PENSION RISK
DEfINED BENEfIT PENSION PLANS
(DKK millions) 2010 2009
Present value of unfunded pension obligations 241 339
Present value of fully or partly funded pension obligations 11,937 11,539
fair value of plan assets 11,960 9,988
Net pension obligation at 31 December 218 1,890
Actuarial gains/losses not recognised in the net pension obligation -39 -1,103
Net pension obligation according to IfRSs at 31 December 179 787
Average actuarial assumptions at 31 December (%) 2010 2009
Discount rate 5.2 5.4
Return on plan assets 5.8 5.9
Inflation rate 2.9 3.0
Salary adjustment rate 3.8 3.8
Pension adjustment rate 3.0 3.1
Note: Life expectancies of members at 31 December 2010 were assumed to be 86.4 years (2009: 85.9 years) for a 60-year-old man and 88.3 years (2009: 88.4 years) for a 60-year-old woman.
The difference between the Group’s net pension obligation (non-corridor) and the net pension obli-gation according to IFRSs was owing to accumulated negative market value adjustments of DKK 39 million. These adjustments included changes in actuarial assumptions, such as a revised discount rate and new inflation and salary growth estimates, which are not taken into account in the IFRS obligation because the Group uses the corridor principle set out in IAS 19.
11.3 Use of models
The Group’s defined benefit pension obligation is calculated as the present value of the pension ben-efits earned to date. The calculation is based on several factors.
fACTORS USED TO CALCULATE DEfINED BENEfITS
Demographic factors financial factors
Mortality rate Interest rates
Staff turnover rate future salary and benefit levels
Disability rate Inflation rate
Early retirements Expected return on plan assets
Defined benefit plans are exposed particularly to interest rate and investment risks and increases in life expectancy because the benefits will typically be payable many years into the future.
The Group uses various calculation methods to determine its pension obligations that each serve a specific purpose, for example compliance with the local authorities’ minimum requirements and the compilation of the consolidated accounts.
110 PENSION RISK DANSKE BANK RISK MANAGEMENT 2010
METHODS Of CALCULATING THE GROUP’S PENSION OBLIGATIONS
The pension fund’s internal calculation method
IfRS rules for consolidated financial statements
Capital management principles
Risk management principles
Purpose Compliance with local funding requirements
Measurement of the operating effects and inclusion in Group accounts
Capital and solvency requirements
Quarterly follow-up on “business objectives” and monitoring
Discount factor
Primarily a dual discount rate
Yield on corporate bond with AA rating and the same duration as the pension obligation
Yield on corporate bond with AA rating and the same duration as the pension obligation
Zero coupon yield curve
Comment Provides basis for the amount of the Group’s contributions
The net obligation is adjusted for the corridor
The non-corridor net obligation is deducted from the capital base
VaR is used as an indicator
Actuarial assumptions other than the discount rate may vary from method to method.
The Group calculates market risk on defined benefit plans on a quarterly basis. For each pension plan, the calculations include the sensitivity of the net obligation to changes in interest rates, equity prices and life expectancy (see the table below). The net funding obligation expresses the difference between the market value of the assets and the present value of the pension obligations.
SENSITIVITY ANALYSIS
(DKK millions) Change Effect 2010 Effect 2009
Equity prices -20% -995 -895
Interest rates +1/-1% +1,144/-895 +1,066/-697
Life expectancy +1 year -331 -256
To supplement the sensitivity analysis, the Group calculates the risk in the individual pension plans, expressed as VaR at a confidence level of 99.97% and a time horizon of one year. In this scenario, share price volatility (20%) and the correlation between interest rates and share prices (25%) are set at values reflecting normal market data. The duration of the pension obligations is reduced by half since empirical data show that inflation risk reduces the interest rate risk on the obligations by about 50% over the long term. In 2010, the Group validated the choice of input parameters underlying the pen-sion model.
At the end of 2010, VaR amounted to DKK 2,650 million (end-2009: DKK 2,425 million). The increase was owing mainly to a rise in the pound sterling exchange rate and an adjustment of the derivatives portfolio in the Irish pension plan.
Follow-up and reporting are based on a model that Danske Markets also uses when advising custom-ers in the life insurance and pension fields. The model includes assumptions about trends in the yield curve, share prices and the correlation between interest rates and share prices. Input for the analysis of liabilities is based on demographic and economic assumptions regarding the gross obligation. The assets in the plan portfolio as well as their duration and the convexity are also included in the model.
11.4 Capital requirement
In accordance with the Danish FSA’s rules, pension obligations are measured in the Group’s solvency calculation at fair value. Accumulated actuarial gains or losses that are not included (according to the corridor method) are added to or deducted from shareholders’ equity, after which the defined benefit pension obligations are included in the calculation as the net value of the obligations and associated assets. Pension risk is covered by the ICAAP (see section 3).
111 DANSKE BANK RISK MANAGEMENT 2010 CONSOLIDATION
12. COnsOLIDatIOn
112 CONSOLIDATION DANSKE BANK RISK MANAGEMENT 2010
Risk Management 2010 is based on the definition of the Danske Bank Group used in Annual Report 2010. This definition complies with IFRSs. According to IFRSs, Danske Bank A/S’s subsidiaries are the companies in which it has direct or indirect control over financial and operating policy decisions. Danica is consolidated in the Group’s accounts.
According to EU rules, the Group is defined as a financial conglomerate. On this basis, in the consoli-dated accounts, Danica’s capital requirement, less the difference between Danica’s capital base and the carrying amount of the holding, is deducted from the Group’s capital base. In accordance with the Danish Executive Order on the Contribution Principle, Danica Pension has notified the Danish FSA of its profit policy. According to the contribution principle and the profit policy, policyholders both receive the return on allocated assets and take on the associated risk. Danica’s risk management prac-tices, as well as the various types of risk that it has taken on as an integral part of its activities and that affect assets and liabilities allocated to policyholders, are presented in section 10.
In its solvency calculations, the Group consolidates Danmarks Skibskredit A/S and LR Realkredit A/S on a pro rata basis, whereas, for accounting purposes and in risk reporting, it treats the two companies as associated undertakings, that is, in accordance with the equity method. The Group has holdings of 24% and 31%, respectively, in the two companies. Danmarks Skibskredit A/S offers shipowners and other shipping companies loans secured by mortgages on vessels. As of mid-2010, the company had total assets of DKK 90 billion and a solvency ratio of 13.6%. LR Realkredit A/S provides mortgage loans primarily for subsidised housing and other subsidised properties. As of mid-2010, the company had total assets of DKK 13 billion and a solvency ratio of 27.6%.
Companies that the Group has taken over because of defaulted obligations have been consolidated in the accounts and will be sold as soon as market conditions permit. They are not consolidated in the solvency calculations, but the holdings are treated as unlisted shares in the calculation of risk-weight-ed assets.
restrictions on dividend payments from subsidiaries All credit institutions and insurance operations under the supervision of national FSAs are subject to local statutory provisions on the required capital base. These provisions restrict dividend payouts.
Forsikringsselskabet Danica Skadeforsikringsaktieselskab af 1999 is the parent company of Danica Pension. Danica Pension is a life insurance company. Statsanstalten for Livsforsikring, which was pri-vatised in 1990, is now part of Danica Pension. Under the terms of the privatisation, Danica Pension must meet the legitimate bonus expectations of the policyholders. This entails an obligation to allocate part of the profits to policyholders who were previously policyholders of Statsanstalten for Livsfor-sikring if Danica Pension’s equity exceeds its statutory solvency requirement by a certain amount. The obligation to distribute the extra bonus will exist as long as policies established with Statsanstalten for Livsforsikring are effective at Danica Pension, but extra bonuses are expensed only in years in which the excess equity is of sufficient size. In addition, it is the intention not to distribute dividends for a period of at least 25 years from 1990. Paid-up capital and interest thereon may, however, be distrib-uted.
The table below shows the differences between the general consolidation principles and those used in solvency calculations. It shows only major subsidiaries that are currently active.
113 DANSKE BANK RISK MANAGEMENT 2010 CONSOLIDATION
CONSOLIDATION PRINCIPLES
Solvency calculations Consolidation of accounts
ConsolidationCapital
deductionAssociated
undertakingsfull Pro rata full
Danske Bank A/S, Copenhagen
Credit institutions
Realkredit Danmark A/S, Kgs. Lyngby x x
Sampo Bank plc, Helsinki x x
Sampo Housing Loan Bank plc, Helsinki x x
Northern Bank Limited, Belfast x x
Danske Bank International S.A., Luxembourg x x
Danmarks Skibskredit A/S, Copenhagen x x
LR Realkredit A/S, Copenhagen x x
ZAO Danske Bank, Saint Petersburg x x
insurance operations
forsikringsselskabet Danica, Skadeforsikrings- aktie selskab af 1999, Copenhagen x x
Danica Pension, Livsforsikringsaktieselskab, Copenhagen x x
Danica Pension försäkringsaktiebolag, Stockholm x x
Danica Pensjonsforsikring AS, Trondheim x x
Danica Life Ltd., Dublin x x
investment and real property operations etc.
Danica Ejendomsselskab ApS, Copenhagen x x
Danske Capital AS, Tallinn x x
Danske Capital Norge AS, Trondheim x x
Danske Capital Sverige AB, Linköping x x
Danske Corporation, Delaware x x
Danske Invest Management A/S, Copenhagen x x
Danske Leasing A/S, Birkerød x x
Danske Markets Inc., Delaware x x
Danske Private Equity A/S, Copenhagen x x
fokus Krogsveen AS, Trondheim x x
home a/s, Åbyhøj x x
National Irish Asset finance Ltd., Dublin x x
UAB Danske Lizingas, Vilnius x x
foreclosed companies (risk-weighted) x
114 DEfINITIONS DANSKE BANK RISK MANAGEMENT 2010
13. DeFInItIOns
115 DANSKE BANK RISK MANAGEMENT 2010 DEfINITIONS
All risk Committee The All Risk Committee is responsible for managing all risk types across the Group. Its responsibilities include the following:
• Setting targets for the capital ratios and capital composition• Managing the balance sheet• The overall funding structure• Setting the general principles for measuring, managing and reporting the Group’s risks• Risk policies for business units• The overall investment strategy• Capital deployment
In addition, the committee evaluates risk reports to be submitted to the Board of Directors or one of its committees. The committee consists of members of the Executive Board and the heads of Group Risk, Danske Markets, Group Treasury and Credit Portfolio Management (under Group Credit). It meets 10 to 12 times a year.
ALCOThe Asset/Liability Committee (ALCO) is a forum for monitoring and discussing issues in the follow-ing areas:
• Asset/liability management: developments in the Group’s balance sheet• Liquidity risk: follow-up and models• Funding: strategy, planning and decision making• Market risk: reporting and follow-up on stress tests and backtests
To the extent necessary, the ALCO refers these matters to the relevant bodies, such as the All Risk Committee. Group Credit, Group Finance, Danske Markets and Group Treasury are represented on the ALCO.
business risk Business risk is the risk of losses originating from changes in external or internal circumstances that harm the Group’s reputation or profits without affording an opportunity for a compensatory adjust-ment in expenses. Business risk involves primarily events that are outside the control of the Group. This type of risk results in losses that are not related to other types of risk. Its effects take the form of an unexpected drop in earnings or an unexpected rise in expenses.
Capital requirement The regulatory capital requirement is 8% of risk-weighted assets.
Commodity risk Commodity risk is the risk of losses caused by changes in commodity prices.
116 DEfINITIONS DANSKE BANK RISK MANAGEMENT 2010
Conversion factorThe conversion factor (CF) is the expected utilisation of a given facility at the time of default and is used in the calculation of the exposure at default (EAD). The CF estimates are based on in-house default data. As in the LGD estimation, the Group makes estimates of both point-in time (PIT) and down-turn parameters.
Counterparty risk Counterparty risk is the risk of loss resulting from a customer’s default on over-the-counter (OTC)derivatives contracts.
Country risk Country risk is the risk of losses arising from economic difficulties or political unrest in a country, including the risk of losses resulting from nationalisation, expropriation and debt restructuring.
CrD rules The European Union’s Capital Requirements Directives (2006/48/EC and 2006/49/EC) including amendments, which are incorporated in the Danish Executive Order on Capital Adequacy of 28 Octo-ber 2010. The CRD rules are based on the Basel II guidelines.
Credit riskCredit risk is the risk of losses arising because counterparties fail to meet all or part of their payment obligations to the Danske Bank Group. Credit risk includes country, dilution and settlement risks. The credit risk on (OTC) derivatives contracts, which is also called counterparty risk, is the risk of losses resulting from a customer’s default on derivatives contracts with the Group.
Credit spread risk Credit spread risk is the risk of losses caused by changes in spreads on credit bonds.
Danica Group The Danica Group conducts the Danske Bank Group’s activities in the life insurance and pensions market.
Danske Markets Danske Markets is responsible for the Danske Bank Group’s activities in the financial markets.
Danske research Danske Research, the Danske Bank Group’s research department, prepares analyses of economic and financial factors of importance to the Group and its customers.
Defined benefit pension plans In defined benefit plans, the pension agreement contains a provision stipulating the pension benefit that the employee will be entitled to receive on retirement. The benefit is typically stated as a per-centage of the employee’s salary immediately before retirement, but it can also be a percentage of the average salary during the entire period of employment. The pension benefit will typically be payable for the rest of the employee’s life, and this increases the employer’s uncertainty about the amount of the future obligations.
Defined contribution pension plans A defined contribution plan is a post-employment benefit plan under which the employer pays fixed contributions into a separate entity and afterwards has no further obligations. The pension entitlement accumulated by the employee depends on the size of the contributions agreed upon, the performance of invested pension funds and associated expenses.
117 DANSKE BANK RISK MANAGEMENT 2010 DEfINITIONS
economic capital Economic capital is the amount of capital, calculated with the Group’s own models, required to cover unexpected losses caused by credit risk over the next year at a confidence level of 99.9%. The calcu-lation of economic capital takes into account all relevant types of risk, including concentration and migration risks, as well as diversification within the individual risk types. The aggregation across risk types does not take into account the potential benefit from diversification among various risk types.
The calculation of economic capital to cover credit risk is based on point-in-time parameters for PD, LGD and CF, and it will therefore fluctuate with the business cycle. Stress tests are intended to identify the effects of such fluctuations.
equity market risk Equity market risk is the risk of losses caused by changes in equity prices.
foreign exchange risk Foreign exchange risk is the risk of losses on the Group’s foreign currency positions caused by changes in exchange rates.
executive board’s Credit Committee The Executive Board’s Credit Committee consists of members of the Executive Board and the manage-ment team of Group Credit.
Credit applications that exceed the lending authorities of the business units must be submitted to the Executive Board’s Credit Committee for approval. The local credit departments of the business units review these applications before the heads of the departments submit them to the Executive Board’s Credit Committee.
The committee is also in charge of preparing operational credit policies and approving or reject-ing credit applications involving issues of principle. The Board of Directors determines the lending authorities. In addition, the Executive Board’s Credit Committee participates in decisions on the valua-tion of the Group’s loan portfolio in connection with the determination of impairment charges.
executive Committee The Executive Committee, which is headed by the Group CEO, functions as a coordinating forum. It oversees activities across the Group with particular attention to the interaction between support func-tions and product suppliers on the one hand, and individual units and country organisations on the other. The Executive Committee does not take part in the credit approval process.
floor risk Floor risk is the risk of a loss of earnings on deposits because market interest rates approach zero. It is measured as the effect of a 1 percentage point drop in rates on net interest income over a 12-month period.
General risk General risk is the risk of losses on trading book positions because of general changes in market prices or rates, including interest rates, exchange rates, equity prices and commodity prices.
Government spread risk Government spread risk is the risk of losses arising because of changes in spreads on government bonds and other government-guaranteed bonds.
118 DEfINITIONS DANSKE BANK RISK MANAGEMENT 2010
Group Credit Group Credit has overall responsibility for the credit process at all of the Group’s business units. This includes responsibility for developing credit classification and valuation models and for ensuring that they are used in the day-to-day credit approval process at the local units. The local credit departments report to Group Credit.
Group finance Group Finance oversees the Group’s financial reporting, budgeting, risk management and strategic business analysis, including the tools used by the business units for performance follow-up and analy-sis. The department is also in charge of the Group’s investor relations, corporate governance, capital structure and M&A activities as well as the day-to-day management of operational risk and market risk.
Group risk Group Risk has overall responsibility for the Group’s risk policies and for monitoring and reporting on risks across risk types and organisational units. The head of Group Risk, the chief risk officer, reports directly to the Group CEO and is a member of the Executive Committee.
Group Risk supports the rest of the risk management organisation in risk management practices and reporting.
Group Treasury Group Treasury oversees the Group’s treasury management and supports the procurement and day- to-day management of liquidity,
iCAAP The Group’s Internal Capital Adequacy Assessment Process (ICAAP) includes an evaluation of the capital needed under Pillar II. In the ICAAP, the Group identifies and measures its risks and ensures that it has sufficient capital in relation to its risk profile. The process also ensures that adequate risk management systems are used and further developed. As part of the ICAAP, the Group calculates the solvency need, partly by means of internal models, and performs stress tests to ensure that it has sufficient capital to support the chosen business strategy.
Once a year the full ICAAP report is submitted to the Board of Directors for approval, and the report is updated quarterly in a condensed format.
ifrSs International Financial Reporting Standards.
inflation rate riskInflation rate risk is the risk of losses caused by changes in the traded future inflation rates.
insurance risk Insurance risk in the Danske Bank Group is defined as all types of risk in the Danica group, including market risk, life insurance risk, business risk and operational risk.
interest rate risk Interest rate risk is the risk of losses caused by changes in interest rates.
Leverage ratioThe leverage ratio is defined as tier 1 capital divided by adjusted total assets. In contrast to the Basel II approach to calculating RWA, the leverage ratio does not take into account the fact that different activities on credit institutions’ balance sheets have different degrees of risk.
119 DANSKE BANK RISK MANAGEMENT 2010 DEfINITIONS
Liquidity risk Liquidity risk is defined as the risk of losses arising because
• the Group’s funding costs increase disproportionately• lack of funding prevents the Group from establishing new business• lack of funding ultimately prevents the Group from meeting its obligations
Loss given default Loss given default (LGD) is the expected loss on an exposure calculated as the percentage of the ex-pected facility utilisation that will be lost if a customer defaults. The Group makes a downturn adjust-ment to reflect the losses identified in a downturn period. The downturn adjustment reflects the most severe economic conditions in the estimation period, and these estimates are used in the calculation of the Group’s risk-weighted assets.
Market risk Market risk is the risk of losses caused by changes in the market value of financial assets, and off-bal-ance-sheet items liabilities resulting from changes in market prices or rates.
Mortgage spread risk Mortgage spread risk is the risk of losses arising because of changes in spreads on mortgage-related bonds.
Operational risk Operational risk is the risk of losses resulting from inappropriate or inadequate internal procedures, human or system errors, or external events. It includes legal risk but not strategic and reputational risks.
Operational risk CommitteeThe Operational Risk Committee assists the Executive Board in its functions and processes related to operational risk management. The committee’s responsibilities include the following:
• Identifying, monitoring and managing the Group’s current and potential operational risk exposure.• Handling “critical exposures”, that is, exposures that, in the view of business unit managements
or the committee itself, require follow-up and further reporting.• Following up on reviews by and reports from financial supervisory authorities and informing
the Executive Board of issues that involve the Group’s operational risks. Following up on reports prepared by Internal Audit and informing the Executive Board of unusual circumstances.
• Preparing management information on issues such as IT security, physical security, business con-tinuity and compliance.
OriS Operational Risk Information System.
Pension riskPension risk arises because of the Group’s liability for defined benefit pension plans. Valuation is uncertain because this type of pension plan entails protracted obligations and is based on actuarial assumptions. Pension risk includes risks of the following:
• Lower-than-expected returns on invested funds• Changes in actuarial assumptions, including the assumptions about the discount rate and infla-
tion, that cause an increase in the pension obligations• Longer-than-expected life expectancy among members
120 DEfINITIONS DANSKE BANK RISK MANAGEMENT 2010
Probability of default Probability of default (PD) is a credit risk parameter. Point-in-time (PIT) PD represents the probability that a customer will default on a loan within the next 12 months. The prediction of default is based on inputs that are sensitive to the underlying business cycle. This produces PD estimates that reflect changes in general economic factors. In a given portfolio, the overall PIT PD level thus changes over time. In the rating categories of the Group’s master scale, the underlying PD bands defining each rating category are fixed, and over time the percentage of customers within each rating category will vary ac-cording to the effect of the business cycle on the model input. The calculated PIT PD is converted to a through-the-cycle (TTC) PD , which is used in the calculation of the Group’s risk-weighted assets. The TTC PD level is based on steady-state macroeconomic data.
risk policies To ensure that the Group’s business units comply with the approved risk limits, the Board of Directors has adopted overall risk policies regulating all risk taking by the Group. On the basis of the overall risk policies, operational risk policies are prepared for the main business units and submitted to the Group’s All Risk Committee for approval.
rWA Risk-weighted assets for credit risk, market risk and operational risk.
Settlement risk Settlement risk is the risk arising when payments are settled, for example payments for currency transactions and trades in financial instruments, including derivatives. The risk arises when the Group remits payments before it can ascertain that the counterparty has fulfilled its obligations.
Solvency needThe solvency need is a capital base that is adequate in terms of size, type and composition to cover the risks to which an institution is exposed. In Danish legislation. The solvency need ratio is defined as the solvency need in relation to risk-weighted assets. Danske Bank calculates it as the highest of the following measures:
• The capital requirement according to the Group’s internal economic capital model • The capital requirement under Pillar I plus a supplement to address risks that are not covered by
Pillar I (that is, Pillar I+)• The capital requirement under the transitional rules of the CRD (based on Basel I)
Solvency need ratioThe solvency need divided by risk-weighted assets
Solvency ii The new risk-based solvency regime for European insurance companies.
Specific risk Specific risk is the risk of losses in the trading book portfolio that can be attributed to the specific issuer of a financial instrument.
SreP Supervisory Review and Evaluation Process.
Total capital ratio Total capital base divided by risk-weighted assets.
Var Value at Risk. Used for calculating market risk.
aPPenDIX aDIsCLOsuRes RequIReD unDeR tHe DanIsH eXeCutIVe ORDeR On CaPItaL aDequaCy (PILLaR III)
General requirements 123
Sections 1-2 (CRD, annex XII, part 2, points 1-2)
The capital base and capital requirements 123
Sections 3-4 (CRD, annex XII, part 2, points 3-4)
Solvency need 125
Sections 5-10
(disclosures not required by the CRD but under Danish legislation)
Counterparty risk 126
Section 11 (CRD, annex XII, part 2, point 5)
Credit risk 127
Sections 12-14 (CRD, annex XII, part 2, points 6-8)
Other risks 142
Sections 15-20 (CRD, annex XII, part 2, points 9-14)
The use of special instruments or methodologies 148
Sections 21-23 (CRD, annex XII, part 3, points 1-3)
122 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
This appendix addresses the disclosure requirements stipulated by the Capital Requirements Directive (CRD, 2006/48/EC) and the Danish Executive Order on Capital Adequacy of 28 October 2010 (annex 20).
The organisation of the contents follows that of annex 20 to the Danish Executive Order on Capital Adequacy. For each item, a cross-reference to the corresponding requirement of the CRD is shown in parentheses. Each item contains either a reference to the section of Risk Management 2010, with the disclosure in question, or explanatory material.
123 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
General requirements Section 1 (CRD, annex XII, part 2, point 1) The Group’s risk management objectives and policies are described in Risk Management 2010. The general risk management objectives and policies are described in sections 2 and 3 of the report, and the objectives and policies for each risk type are described in sections 5-11.
Section 2.a (CRD, annex XII, part 2, point 2(a))The name of the credit institution to which the requirements of the directive apply is Danske Bank A/S.
The disclosures in this appendix and in Risk Management 2010 are based on Group figures, except for the figures relevant to sections 5-10 of the Danish Executive Order an Capital Adeqacy. Those figures are based on the relevant legal entity (Danske Bank A/S and Realkredit Danmark A/S).
Section 2.b (CRD, annex XII, part 2, point 2(b)) For information on the differences between the general consolidation principles and those used in the solvency calculations, see Risk Management 2010, section 12.
Section 2.c (CRD, annex XII, part 2, point 2(c)) Note that disclosure requirements concerning any impediments to the quick transfer of capital resources or repayment of debts between the parent company and its subsidiaries must be seen in rela-tion to cases where competent authorities in the EU have granted an exemption to a credit institution’s exposure to a counterparty in the same group in the institution’s calculation of risk-weighted assets (that is, the exposure can be given a zero weighting). The Danish FSA does not allow this.
For a description of limitations on Danske Bank’s subsidiaries’ dividend distributions, see also Risk Management 2010, section 12.
The capital base and capital requirementsSection 3.a-e (CRD, annex XII, part 2, point 3(a)-(e)) For information on the capital base, see Risk Management 2010, section 3.5.
Section 4.a (CRD, annex XII, part 2, point 4(a)) For information on the methods of calculating the solvency need and solvency need ratio, see Risk Management 2010, sections 3.2-3.4.
Section 4.b-e (CRD, annex XII, part 2, point 4(b)-(e)) and section 9.a-g (CRD, annex XII, part 2, point 9).
124 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
CAPITAL REQUIREMENT AND RISK-WEIGHTED ASSETS
Capital requirements Risk-weighted assets
(DKK millions) 2010 2009 2010 2009
Credit risk:
IRB approach:
Institutions 1,318 1,420 16,481 17,750
Corporate customers 21,912 24,311 273,895 303,885
Retail exposures secured by real property 6,916 5,131 86,446 64,136
Qualifying revolving retail exposures 330 383 4,131 4,783
Other retail exposures 1,804 2,281 22,550 28,512
Securitisation 3,006 3,120 37,572 39,001
Non-credit-obligation assets 1,318 986 16,474 12,329
IRB approach, total 36,604 37,632 457,549 470,396
Standardised approach for credit risk:
Central governments and central banks 9 29 112 357
Regional governments and local authorities 66 29 831 363
Administrative bodies and non-commercial undertakings 25 11 314 138
Institutions 166 164 2,071 2,046
Corporate customers 10,131 9,520 126,634 118,994
Retail customers 3,071 2,840 38,390 35,502
Exposures secured by real property 3,054 2,892 38,170 36,156
Past due items 638 577 7,977 7,218
Securitisation positions 37 65 464 813
Other items and non-credit-obligation assets 251 244 3,143 3,055
Standardised approach for credit risk, total 17,448 16,371 218,106 204,642
Counterparty credit risk 2,980 2,300 37,246 28,744
Credit risk, total 57,032 56,303 712,901 703,782
Market risk:
Exposures with position risk: instruments of debt 2,645 2,715 33,057 33,933
Exposures with position risk: equities and the like 177 71 2,212 887
Exposures with position risk: commodities 30 103 378 1,284
Exposures with delivery and similar risks 6 - 78 9
Internal models (VaR) exposure 605 674 7,559 8,420
Total foreign exchange position - - - -
Total market risk 3,463 3,563 43,284 44,533
Total operational risk 7,042 6,874 88,025 85,927
Total risk-weighted assets 844,210 834,242
Total capital requirement 67,537 66,739
125 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
individual solvency need (disclosures not required by the CrD but under Danish legislation)Section 5.a-b. For information on the methods of calculating the solvency need and solvency need ratio, see Risk Management 2010, sections 3.2-3.4.
The general methodology for the Group is the same for the individual legal entities, including Danske Bank A/S and Realkredit Danmark A/S.
Sections 6-10.In compliance with the Danish Executive Order on Capital Adequacy, the solvency need and the solvency need ratio for the legal entities Realkredit Danmark A/S and Danske Bank A/S (the parent company of the Danske Bank Group) are shown in the table below. The other figures shown in this ap-pendix are based on consolidated figures (for the Danske Bank Group).
The difference between the solvency need for the Danske Bank Group and the solvency need for Danske Bank A/S is due to differences in the regulatory treatment of the Group and the parent com-pany, respectively.
See Risk Management 2010, sections 3.2-3.4, for a description of the elements included in the calcula-tions.
BREAKDOWN Of DANSKE BANK’S SOLVENCY NEED
Danske Bank Group Danske Bank A/S
At 31 December 2010 (DKK billions) (% of RWA) (DKK billions) (% of RWA)
Credit risk 51.4 6.1 51.4 7.7
Market risk 6.6 0.8 6.6 1.0
Operational risk 7.0 0.8 7.0 1.1
Other risks 8.4 1.0 8.4 1.2
Internally estimated solvency need and ratio 73.4 8.7 73.4 11.0
Shortfall in relation to Pillar I+ 16.6 2.0 2.2 0.4
Shortfall in relation to transitional floor - - - -
Solvency need and solvency need ratio 90.0 10.7 75.6 11.4
Capital base 149.7 17.7 145.5 21.9
Capital buffer 59.7 7.0 69.9 10.5
Note: The solvency need is calculated under the ICAAP. “Solvency need” corresponds to the Danish term “Individuelt solvensbe-hov”, and “Internally estimated solvency need” corresponds to the Danish term “Internt opgjort solvensbehov” as used in the Danish Executive Order on Capital Adequacy. The internally estimated solvency need represents the Group’s economic capital.
126 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
BREAKDOWN Of REALKREDIT DANMARK’S SOLVENCY NEED
Realkredit Danmark Group Realkredit Danmark A/S
At 31 December 2010 (DKK billions) (% of RWA) (DKK billions) (% of RWA)
Credit risk 10.7 9.3 10.7 9.3
Market risk 0.1 0.1 0.1 0.1
Operational risk 0.6 0.5 0.6 0.5
Other risks 0.3 0.3 0.3 0.3
Internally estimated solvency need and ratio 11.7 10.2 11.7 10.2
Shortfall in relation to Pillar I+ 0.1 0.1 0.1 0.1
Shortfall in relation to transitional floor 13.0 11.2 13.0 11.2
Solvency need and solvency need ratio 24.8 21.5 24.8 21.5
Capital base 45.4 39.4 45.4 39.4
Capital buffer 20.6 17.9 20.6 17.9
Note: The solvency need is calculated under the ICAAP. “Solvency need” corresponds to the Danish term “Individuelt solvensbe-hov”, and “Internally estimated solvency need” corresponds to the Danish term “Internt opgjort solvensbehov” as used in the Danish Executive Order on Capital Adequacy. The internally estimated solvency need represents the Group’s economic capital.
Counterparty riskIn this appendix, counterparty risk covers derivatives and repo transactions. In Risk Management 2010, section 5, repo loans are included under credit risk.
Section 11.a (CRD, annex XII, part 2, point 5(a))When calculating risk-weighted assets for counterparty risk, the Group uses the mark-to-market ap-proach described in the Danish Executive Order on Capital Adequacy.
The Group also takes counterparty risk into account in its calculation of economic capital,which is included in the ICAAP under Pillar II (see Risk Management 2010, section 3.4). In economiccapital, counterparty risk is calculated as the effective Expected Positive Exposure (eEPE), which is then multiplied by α. The multiplier α, which is set at 1.4, expresses the effect of using an expected exposure instead of the stochastic exposure in a full simulation of eEPE.
Counterparty risk is part of the general credit process, including the approval of lines (see Risk Man-agement 2010, sections 5.2, 5.10 and 6).
Section 11.b (CRD, annex XII, part 2, point 5(b)) For information on the policies, see Risk Management 2010, section 6.1.
Section 11.c (CRD, annex XII, part 2, point 5(c))Information on the policies on wrong-way risk is not relevant since the Group uses the mark-to-market method.
Section 11.d (CRD, annex XII, part 2, point 5(d))For information on the effect of the collateral that the company must provide if its credit rating is downgraded, see Risk Management 2010, section 8.2.
Section 11.e-f (CRD, annex XII, part 2, point 5(e)-(f))For information on counterparty risk exposure (EAD), including netting benefits, netted current credit exposure and collateral, see Risk Management 2010, section 6.2.
127 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
For information on the gross value of derivatives with positive fair value, see Danske Bank’s Annual Report 2010, note 16.
Section 11.g (CRD, annex XII, part 2, point 5(g))The Group did not use credit derivative hedges for counterparty risk exposures in 2010.
Section 11.h (CRD, annex XII, part 2, point 5(h))For a breakdown of credit derivatives into bought and sold derivatives, see Danske Bank’s Annual Report 2010, note 16.
Section 11.i (CRD, annex XII, part 2, point 5(i))Not relevant in relation to α, since the Group uses the mark-to-market method.
128 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
Credit riskIn this appendix, the Group reports exposure values as exposure at default (EAD). Risk Management 2010 (section 5), on the other hand, is based on accounting data. The table below shows the difference between credit exposure based on accounting data and credit exposure based on EAD at the end of 2010.
fROM CREDIT EXPOSURE TO EXPOSURE AT DEfAULT (EAD)
(DKK millions) 2010
Credit exposure, lending activities 2,363,456
Shares and bonds 57,158
Offers and other credit facilities 395,752
Counterparty risk (reverse repo) -306,962
LR Realkredit A/S and Danmarks Skibskredit A/S 18,950
Other 98,601
Unweighted exposure 2,626,955
Adjustment for Cf 318,195
Credit exposure (EAD) 2,308,760
Breakdown by capital requirement approach:
IRB approach 1,775,854
Standardised approach 532,906
Credit exposure (EAD) 2,308,760
Section 12.a (CRD, annex XII, part 2, point 6(a)-(b)) For accounting purposes, impaired debts are debts for which objective evidence of impairment exists, and the amount of the impairment charge is determined individually. They are exposures in rating categories 10 and 11.
For accounting purposes, past due amounts are debts in rating categories 5-9 that are in arrears or have unauthorised excesses.
129 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
Section 12.b-c (CRD, annex XII, part 2, point 6(c))
CREDIT EXPOSURE (EAD)(DKK millions)
2010 2009
At 31 December Average At 31 December
IRB approach:
Institutions 95,628 79,857 80,264
Corporate customers 810,612 806,124 793,158
Retail exposures secured by real property 665,956 651,482 623,654
Qualifying revolving retail exposures 41,313 42,976 45,442
Other retail exposures 114,552 123,359 129,656
Securitisation 31,317 33,478 35,261
Non-credit-obligation assets 16,476 20,507 14,911
IRB approach, total 1,775,854 1,757,783 1,722,346
Standardised approach for credit risk:
Central governments and central banks 211,843 195,586 206,010
Regional governments and local authorities 4,156 3,206 2,255
Administrative bodies and non-commercial undertakings 1,573 1,774 693
Multilateral development banks 133 131 127
International organisations - - -
Institutions 7,835 8,750 8,835
Corporate customers 133,902 132,393 126,684
Retail customers 60,092 56,108 53,702
Exposures secured by real property 102,015 103,030 103,302
Past due items 5,171 5,284 5,391
Securitisation positions 1,089 1,208 1,460
Other items and non-credit obligation assets 5,097 4,904 4,918
Standardised approach for credit risk, total 532,906 512,374 513,377
Total credit exposure for credit risks, (EAD) 2,308,760 2,270,157 2,235,723
Note: Average exposure for 2010 is a simple average based on quarterly observations for each exposure category.
130 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
Section 12.d (CRD, annex XII, part 2, point 6(d))
GEOGRAPHICAL BREAKDOWN Of CREDIT EXPOSURE (EAD)
At 31 December 2010 (DKK millions) Denmark finland Sweden Ireland UK Baltics NorwayRest of Europe
North America
Rest of the world
No residence Total
IRB approach:
Institutions 39,612 968 8,985 3,891 9,825 3 2,469 19,347 5,773 4,755 - 95,628
Corporate customers 401,233 13,793 154,287 42,161 15,325 749 119,329 32,424 26,717 4,594 - 810,612
Retail exposures secured by real property 543,283 26 49,647 38 901 16 67,117 3,016 687 1,225 - 665,956
Qualifying revolving retail exposures 35,751 4 1,851 5 85 6 3,046 315 92 158 - 41,313
Other retail exposures 67,063 4 31,725 6 2,077 10 11,165 1,770 302 430 - 114,552
Securitisation - 337 73 - 12,790 - - 9,731 8,351 35 - 31,317
Non-credit-obligation assets - - - - - - - - - - 16,476 16,476
IRB approach, total 1,086,942 15,132 246,568 46,101 41,003 784 203,126 66,603 41,922 11,197 16,476 1,775,854
Standardised approach for credit risk:
Central governments and central banks 156,698 12,858 19,427 2,264 7,328 3,225 7,818 2,076 45 104 - 211,843
Regional governments and local authorities - - - 115 1,481 - 2,560 - - - - 4,156
Administrative bodies and non-commercial undertakings - 1,539 - - 34 - - - - - - 1,573
Multilateral development banks - - - - 50 - - 83 - - - 133
Institutions 4,483 1,280 16 - 275 331 - 853 1 596 - 7,835
Corporate customers 38,117 60,503 1,210 106 22,745 9,692 389 1,054 56 30 - 133,902
Retail customers 3,639 30,590 10 7,520 5,294 12,960 1 39 14 25 - 60,092
Exposures secured by real property 5 69,219 4 19,806 12,755 6 2 102 54 62 - 102,015
Past due items - 2,051 - 1,109 1,991 4 - 11 1 4 - 5,171
Securitisation positions - 1,089 - - - - - - - - - 1,089
Other items and non-credit-obligation assets - - - - - - - - - - 5,097 5,097
Standardised approach for credit risk, total 202,942 179,129 20,667 30,920 51,953 26,218 10,770 4,218 171 821 5,097 532,906
Total credit exposure (EAD) 1,289,884 194,261 267,235 77,021 92,956 27,002 213,896 70,821 42,093 12,017 21,573 2,308,760
131 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
Section 12.d (CRD, annex XII, part 2, point 6(d))
GEOGRAPHICAL BREAKDOWN Of CREDIT EXPOSURE (EAD)
At 31 December 2010 (DKK millions) Denmark finland Sweden Ireland UK Baltics NorwayRest of Europe
North America
Rest of the world
No residence Total
IRB approach:
Institutions 39,612 968 8,985 3,891 9,825 3 2,469 19,347 5,773 4,755 - 95,628
Corporate customers 401,233 13,793 154,287 42,161 15,325 749 119,329 32,424 26,717 4,594 - 810,612
Retail exposures secured by real property 543,283 26 49,647 38 901 16 67,117 3,016 687 1,225 - 665,956
Qualifying revolving retail exposures 35,751 4 1,851 5 85 6 3,046 315 92 158 - 41,313
Other retail exposures 67,063 4 31,725 6 2,077 10 11,165 1,770 302 430 - 114,552
Securitisation - 337 73 - 12,790 - - 9,731 8,351 35 - 31,317
Non-credit-obligation assets - - - - - - - - - - 16,476 16,476
IRB approach, total 1,086,942 15,132 246,568 46,101 41,003 784 203,126 66,603 41,922 11,197 16,476 1,775,854
Standardised approach for credit risk:
Central governments and central banks 156,698 12,858 19,427 2,264 7,328 3,225 7,818 2,076 45 104 - 211,843
Regional governments and local authorities - - - 115 1,481 - 2,560 - - - - 4,156
Administrative bodies and non-commercial undertakings - 1,539 - - 34 - - - - - - 1,573
Multilateral development banks - - - - 50 - - 83 - - - 133
Institutions 4,483 1,280 16 - 275 331 - 853 1 596 - 7,835
Corporate customers 38,117 60,503 1,210 106 22,745 9,692 389 1,054 56 30 - 133,902
Retail customers 3,639 30,590 10 7,520 5,294 12,960 1 39 14 25 - 60,092
Exposures secured by real property 5 69,219 4 19,806 12,755 6 2 102 54 62 - 102,015
Past due items - 2,051 - 1,109 1,991 4 - 11 1 4 - 5,171
Securitisation positions - 1,089 - - - - - - - - - 1,089
Other items and non-credit-obligation assets - - - - - - - - - - 5,097 5,097
Standardised approach for credit risk, total 202,942 179,129 20,667 30,920 51,953 26,218 10,770 4,218 171 821 5,097 532,906
Total credit exposure (EAD) 1,289,884 194,261 267,235 77,021 92,956 27,002 213,896 70,821 42,093 12,017 21,573 2,308,760
132 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
GEOGRAPHICAL BREAKDOWN Of CREDIT EXPOSURE (EAD)
At 31 December 2009 (DKK millions) Denmark finland Sweden Ireland UK Baltics NorwayRest of Europe
North America
Rest of the world
No residence Total
IRB approach:
Institutions 24,125 470 9,681 5,064 9,668 13 4,379 19,607 2,994 4,263 - 80,264
Corporate customers 395,240 16,447 136,401 45,633 22,381 796 113,044 36,676 22,460 4,080 - 793,158
Retail exposures secured by real property 519,162 31 40,332 28 965 29 57,497 3,232 736 1,642 - 623,654
Qualifying revolving retail exposures 40,010 5 1,654 7 102 8 2,994 356 105 201 - 45,442
Other retail exposures 87,201 7 26,960 5 1,883 16 10,741 2,035 300 508 - 129,656
Securitisation - 314 63 - 13,507 - - 11,141 10,120 116 - 35,261
Non-credit-obligation assets - - - - - - - - - - 14,911 14,911
IRB approach, total 1,065,738 17,274 215,091 50,737 48,506 862 188,655 73,047 36,715 10,810 14,911 1,722,346
Standardised approach for credit risk:
Central governments and central banks 173,222 13,955 2,785 2,720 5,458 2,873 4,227 511 74 185 - 206,010
Regional governments and local authorities - - - - 1,371 - 884 - - - - 2,255
Administrative bodies and non-commercial undertakings - 509 - - 183 - 1 - - - - 693
Multilateral development banks - - - - 50 - - 77 - - - 127
Institutions 3,685 3,506 16 - 275 428 - 344 1 580 - 8,835
Corporate customers 33,394 54,152 2,077 112 23,414 12,042 478 914 90 11 - 126,684
Retail customers 2,204 27,795 9 3,432 5,312 14,897 1 35 7 10 - 53,702
Exposures secured by real property 3 64,199 10 26,412 12,467 3 3 81 51 73 - 103,302
Past due items - 2,402 - 1,038 1,898 4 - 44 2 3 - 5,391
Securitisation positions - 1,460 - - - - - - - - - 1,460
Other items and non-credit-obligation assets - - - - - - - - - - 4,918 4,918
Standardised approach for credit risk, total 212,508 167,978 4,897 33,714 50,428 30,247 5,594 2,006 225 862 4,918 513,377
Total credit exposure (EAD) 1,278,246 185,252 219,988 84,451 98,934 31,109 194,249 75,053 36,940 11,672 19,829 2,235,723
133 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
GEOGRAPHICAL BREAKDOWN Of CREDIT EXPOSURE (EAD)
At 31 December 2009 (DKK millions) Denmark finland Sweden Ireland UK Baltics NorwayRest of Europe
North America
Rest of the world
No residence Total
IRB approach:
Institutions 24,125 470 9,681 5,064 9,668 13 4,379 19,607 2,994 4,263 - 80,264
Corporate customers 395,240 16,447 136,401 45,633 22,381 796 113,044 36,676 22,460 4,080 - 793,158
Retail exposures secured by real property 519,162 31 40,332 28 965 29 57,497 3,232 736 1,642 - 623,654
Qualifying revolving retail exposures 40,010 5 1,654 7 102 8 2,994 356 105 201 - 45,442
Other retail exposures 87,201 7 26,960 5 1,883 16 10,741 2,035 300 508 - 129,656
Securitisation - 314 63 - 13,507 - - 11,141 10,120 116 - 35,261
Non-credit-obligation assets - - - - - - - - - - 14,911 14,911
IRB approach, total 1,065,738 17,274 215,091 50,737 48,506 862 188,655 73,047 36,715 10,810 14,911 1,722,346
Standardised approach for credit risk:
Central governments and central banks 173,222 13,955 2,785 2,720 5,458 2,873 4,227 511 74 185 - 206,010
Regional governments and local authorities - - - - 1,371 - 884 - - - - 2,255
Administrative bodies and non-commercial undertakings - 509 - - 183 - 1 - - - - 693
Multilateral development banks - - - - 50 - - 77 - - - 127
Institutions 3,685 3,506 16 - 275 428 - 344 1 580 - 8,835
Corporate customers 33,394 54,152 2,077 112 23,414 12,042 478 914 90 11 - 126,684
Retail customers 2,204 27,795 9 3,432 5,312 14,897 1 35 7 10 - 53,702
Exposures secured by real property 3 64,199 10 26,412 12,467 3 3 81 51 73 - 103,302
Past due items - 2,402 - 1,038 1,898 4 - 44 2 3 - 5,391
Securitisation positions - 1,460 - - - - - - - - - 1,460
Other items and non-credit-obligation assets - - - - - - - - - - 4,918 4,918
Standardised approach for credit risk, total 212,508 167,978 4,897 33,714 50,428 30,247 5,594 2,006 225 862 4,918 513,377
Total credit exposure (EAD) 1,278,246 185,252 219,988 84,451 98,934 31,109 194,249 75,053 36,940 11,672 19,829 2,235,723
134 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
Section 12.e (CRD, annex XII, part 2, point 6(e))
INDUSTRY BREAKDOWN Of CREDIT EXPOSURE (EAD)
At 31 December 2010 (DKK millions) Cen
tral
and
loca
l go
vern
men
ts
Sub
sidi
sed
hous
ing
com
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Ban
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Oth
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Ene
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and
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Con
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IRB approach:
Institutions - - 72,306 8,794 14,528 - - - - - - - - - - - - 95,628
Corporate customers - 66,903 - 50,153 11,584 31,991 71,513 212,903 71,068 61,755 158,478 14,794 35,445 20,928 3,097 - - 810,612
Retail exposures secured by real property - 5,214 - 617 23 56 4,086 5,421 1,312 393 4,061 195 359 535 7 643,677 - 665,956
Qualifying revolving retail exposures - - - - - - - - - - - - - - - 41,313 - 41,313
Other retail exposures - 2,018 - 695 45 139 6,108 1,056 2,678 1,335 4,770 712 810 999 31 93,156 - 114,552
Securitisation - - - 19,696 11,621 - - - - - - - - - - - - 31,317
Non-credit-obligation assets - - - - - - - - - - - - - - - - 16,476 16,476
IRB approach, total - 74,135 72,306 79,955 37,801 32,186 81,707 219,380 75,058 63,483 167,309 15,701 36,614 22,462 3,135 778,146 16,476 1,775,854
Standardised approach for credit risk:
Central governments and central banks 116,335 - 6,483 23 80 514 573 - 422 552 86,496 - - 364 1 - - 211,843
Regional governments and local authorities 3,795 - - - 2 357 - - - - 2 - - - - - - 4,156
Administrative bodies and non-commercial undertakings 8 - 744 2 - - 47 567 4 26 82 3 89 1 - - - 1,573
Multilateral development banks - - 50 83 - - - - - - - - - - - - - 133
Institutions - - 2,393 141 5,301 - - - - - - - - - - - - 7,835
Corporate customers - 3,537 901 4,851 21,249 5,982 7,187 20,086 11,746 2,990 44,411 840 7,394 1,891 837 - - 133,902
Retail customers - 809 - 98 46 18 1,340 636 639 202 5,674 81 132 149 3 50,265 - 60,092
Exposures secured by real property - 2,257 - 13 5 1 180 273 153 29 125 11 8 80 - 98,880 - 102,015
Past due items - 34 1 11 6 6 190 1,279 393 30 202 36 37 18 - 2,928 - 5,171
Securitisation positions - - - - 1,089 - - - - - - - - - - - - 1,089
Other items and non-credit-obligation assets - - - - - - - - - - - - - - - - 5,097 5,097
Standardised approach for credit risk, total 120,138 6,637 10,572 5,222 27,778 6,878 9,517 22,841 13,357 3,829 136,992 971 7,660 2,503 841 152,073 5,097 532,906
Total credit exposure (EAD) 120,138 80,772 82,878 85,177 65,579 39,064 91,224 242,221 88,415 67,312 304,301 16,672 44,274 24,965 3,976 930,219 21,573 2,308,760
135 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
Section 12.e (CRD, annex XII, part 2, point 6(e))
INDUSTRY BREAKDOWN Of CREDIT EXPOSURE (EAD)
At 31 December 2010 (DKK millions) Cen
tral
and
loca
l go
vern
men
ts
Sub
sidi
sed
hous
ing
com
pani
es
Ban
ks
Div
ersi
fied
finan
cial
s
Oth
er fi
nanc
ials
Ene
rgy
and
utili
ties
Con
sum
er
disc
reti
onar
y an
d
cons
umer
sta
ples
Com
mer
cial
pr
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ty
Con
stru
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Tele
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IRB approach:
Institutions - - 72,306 8,794 14,528 - - - - - - - - - - - - 95,628
Corporate customers - 66,903 - 50,153 11,584 31,991 71,513 212,903 71,068 61,755 158,478 14,794 35,445 20,928 3,097 - - 810,612
Retail exposures secured by real property - 5,214 - 617 23 56 4,086 5,421 1,312 393 4,061 195 359 535 7 643,677 - 665,956
Qualifying revolving retail exposures - - - - - - - - - - - - - - - 41,313 - 41,313
Other retail exposures - 2,018 - 695 45 139 6,108 1,056 2,678 1,335 4,770 712 810 999 31 93,156 - 114,552
Securitisation - - - 19,696 11,621 - - - - - - - - - - - - 31,317
Non-credit-obligation assets - - - - - - - - - - - - - - - - 16,476 16,476
IRB approach, total - 74,135 72,306 79,955 37,801 32,186 81,707 219,380 75,058 63,483 167,309 15,701 36,614 22,462 3,135 778,146 16,476 1,775,854
Standardised approach for credit risk:
Central governments and central banks 116,335 - 6,483 23 80 514 573 - 422 552 86,496 - - 364 1 - - 211,843
Regional governments and local authorities 3,795 - - - 2 357 - - - - 2 - - - - - - 4,156
Administrative bodies and non-commercial undertakings 8 - 744 2 - - 47 567 4 26 82 3 89 1 - - - 1,573
Multilateral development banks - - 50 83 - - - - - - - - - - - - - 133
Institutions - - 2,393 141 5,301 - - - - - - - - - - - - 7,835
Corporate customers - 3,537 901 4,851 21,249 5,982 7,187 20,086 11,746 2,990 44,411 840 7,394 1,891 837 - - 133,902
Retail customers - 809 - 98 46 18 1,340 636 639 202 5,674 81 132 149 3 50,265 - 60,092
Exposures secured by real property - 2,257 - 13 5 1 180 273 153 29 125 11 8 80 - 98,880 - 102,015
Past due items - 34 1 11 6 6 190 1,279 393 30 202 36 37 18 - 2,928 - 5,171
Securitisation positions - - - - 1,089 - - - - - - - - - - - - 1,089
Other items and non-credit-obligation assets - - - - - - - - - - - - - - - - 5,097 5,097
Standardised approach for credit risk, total 120,138 6,637 10,572 5,222 27,778 6,878 9,517 22,841 13,357 3,829 136,992 971 7,660 2,503 841 152,073 5,097 532,906
Total credit exposure (EAD) 120,138 80,772 82,878 85,177 65,579 39,064 91,224 242,221 88,415 67,312 304,301 16,672 44,274 24,965 3,976 930,219 21,573 2,308,760
136 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
INDUSTRY BREAKDOWN Of CREDIT EXPOSURE (EAD)
At 31 December 2009 (DKK millions) Cen
tral
and
loca
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IRB approach:
Institutions - - 58,692 7,157 14,415 - - - - - - - - - - - - 80,264
Corporate customers 113 53,434 - 62,183 11,262 31,995 68,926 198,617 78,149 55,141 155,592 13,083 36,368 23,401 4,894 - - 793,158
Retail exposures secured by real property - 4,508 2 607 20 47 3,976 5,333 1,374 353 4,002 184 346 498 6 602,398 - 623,654
Qualifying revolving retail exposures - - - - - - - - - - - - - - - 45,442 - 45,442
Other retail exposures - 1,075 - 879 60 155 7,173 1,061 2,878 1,696 5,432 785 842 1,063 29 106,528 - 129,656
Securitisation - - - 31,136 3,932 - - - - 193 - - - - - - - 35,261
Non-credit-obligation assets - - - - - - - - - - - - - - - - 14,911 14,911
IRB approach, total 113 59,017 58,694 101,962 29,689 32,197 80,075 205,011 82,401 57,383 165,026 14,052 37,556 24,962 4,929 754,368 14,911 1,722,346
Standardised approach for credit risk:
Central governments and central banks 108,482 - 3,990 30 10 266 149 633 418 372 91,363 - - 294 - - - 206,007
Regional governments and local authorities 2,070 - - - - 185 - - - - - - - - - - - 2,255
Administrative bodies and non-commercial undertakings 168 - - 2 - 36 299 55 6 - 22 1 93 11 - - - 693
Multilateral development banks - - 50 77 - - - - - - - - - - - - - 127
Institutions - - 2,114 199 6,523 - - - - - - - - - - - - 8,836
Corporate customers 16 4,173 959 4,300 19,623 3,604 6,851 17,995 10,259 3,040 45,078 1,026 6,564 2,209 987 - - 126,684
Retail customers - 798 - 93 44 17 1,344 477 632 218 3,755 78 139 135 4 45,970 - 53,704
Exposures secured by real property - 2,207 - 14 5 4 286 353 195 37 682 15 15 66 1 99,422 - 103,302
Past due items - 103 35 15 6 9 460 1,305 375 25 224 55 65 2 - 2,712 - 5,391
Securitisation positions - - - - 1,460 - - - - - - - - - - - - 1,460
Other items and non-credit-obligation assets - - - - - - - - - - - - - - - - 4,918 4,918
Standardised approach for credit risk, total 110,736 7,281 7,148 4,730 27,671 4,121 9,389 20,818 11,885 3,692 141,124 1,175 6,876 2,717 992 148,104 4,918 513,377
Total credit exposure (EAD) 110,849 66,298 65,842 106,692 57,360 36,318 89,464 225,829 94,286 61,075 306,150 15,227 44,432 27,679 5,921 902,472 19,829 2,235,723
137 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
INDUSTRY BREAKDOWN Of CREDIT EXPOSURE (EAD)
At 31 December 2009 (DKK millions) Cen
tral
and
loca
l go
vern
men
ts
Sub
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IRB approach:
Institutions - - 58,692 7,157 14,415 - - - - - - - - - - - - 80,264
Corporate customers 113 53,434 - 62,183 11,262 31,995 68,926 198,617 78,149 55,141 155,592 13,083 36,368 23,401 4,894 - - 793,158
Retail exposures secured by real property - 4,508 2 607 20 47 3,976 5,333 1,374 353 4,002 184 346 498 6 602,398 - 623,654
Qualifying revolving retail exposures - - - - - - - - - - - - - - - 45,442 - 45,442
Other retail exposures - 1,075 - 879 60 155 7,173 1,061 2,878 1,696 5,432 785 842 1,063 29 106,528 - 129,656
Securitisation - - - 31,136 3,932 - - - - 193 - - - - - - - 35,261
Non-credit-obligation assets - - - - - - - - - - - - - - - - 14,911 14,911
IRB approach, total 113 59,017 58,694 101,962 29,689 32,197 80,075 205,011 82,401 57,383 165,026 14,052 37,556 24,962 4,929 754,368 14,911 1,722,346
Standardised approach for credit risk:
Central governments and central banks 108,482 - 3,990 30 10 266 149 633 418 372 91,363 - - 294 - - - 206,007
Regional governments and local authorities 2,070 - - - - 185 - - - - - - - - - - - 2,255
Administrative bodies and non-commercial undertakings 168 - - 2 - 36 299 55 6 - 22 1 93 11 - - - 693
Multilateral development banks - - 50 77 - - - - - - - - - - - - - 127
Institutions - - 2,114 199 6,523 - - - - - - - - - - - - 8,836
Corporate customers 16 4,173 959 4,300 19,623 3,604 6,851 17,995 10,259 3,040 45,078 1,026 6,564 2,209 987 - - 126,684
Retail customers - 798 - 93 44 17 1,344 477 632 218 3,755 78 139 135 4 45,970 - 53,704
Exposures secured by real property - 2,207 - 14 5 4 286 353 195 37 682 15 15 66 1 99,422 - 103,302
Past due items - 103 35 15 6 9 460 1,305 375 25 224 55 65 2 - 2,712 - 5,391
Securitisation positions - - - - 1,460 - - - - - - - - - - - - 1,460
Other items and non-credit-obligation assets - - - - - - - - - - - - - - - - 4,918 4,918
Standardised approach for credit risk, total 110,736 7,281 7,148 4,730 27,671 4,121 9,389 20,818 11,885 3,692 141,124 1,175 6,876 2,717 992 148,104 4,918 513,377
Total credit exposure (EAD) 110,849 66,298 65,842 106,692 57,360 36,318 89,464 225,829 94,286 61,075 306,150 15,227 44,432 27,679 5,921 902,472 19,829 2,235,723
138 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
Section 12.f (CRD, annex XII, part 2, point 6(f))
MATURITY BREAKDOWN Of CREDIT EXPOSURE (EAD)
2010 2009
At 31 December (DKK millions) < 1 year≥ 1 year
< 2 years≥ 2 years < 3 years
≥ 3 years < 4 years
≥ 4 years < 5 years ≥ 5 years
No maturity Total < 1 year
≥ 1 year < 2 years
≥ 2 years < 3 years
≥ 3 years < 4 years
≥ 4 years < 5 years ≥ 5 years
No maturity Total
IRB approach:
Institutions 2,739 43,338 2,948 34 603 45,966 - 95,628 3,721 35,671 2,027 681 184 37,980 - 80,264
Corporate customers 360 305,704 51,378 18,617 16,651 417,902 - 810,612 1,689 249,554 30,412 21,767 15,004 474,732 - 793,158
Retail exposures secured by real property
- 50,806 3,959 4,245 4,096 602,850 - 665,956 - 32,734 2,672 3,244 3,216 581,788 - 623,654
Qualifying revolving retail exposures - 41,313 - - - - - 41,313 - 2,579 490 314 238 41,821 - 45,442
Other retail exposures - 41,769 10,800 4,766 3,650 53,567 - 114,552 2 29,244 11,307 7,823 4,889 76,391 - 129,656
Securitisation - - - - - 31,317 - 31,317 - 393 380 483 1,779 32,226 - 35,261
Non-credit-obligation assets - - - - - - 16,476 16,476 - - - - - - 14,911 14,911
IRB approach, total 3,099 482,930 69,085 27,662 25,000 1,151,602 16,476 1,775,854 5,412 350,175 47,288 34,312 25,310 1,244,938 14,911 1,722,346
Standardised approach for credit risk:
Central governments and central banks 4,295 121,408 4,283 1,537 2,545 77,775 - 211,843 4,959 107,700 2,335 1,585 2,038 87,393 - 206,010
Regional governments and local authorities - 876 1,525 3 1 1,751 - 4,156 - 23 296 18 - 1,918 - 2,255
Administrative bodies and non-commercial undertakings
- 488 65 30 13 977 - 1,573- 27 51 28 4 583 - 693
Multilateral development banks - - - - - 133 - 133 - - - - - 127 - 127
Institutions 1,523 3,053 178 41 1 3,039 - 7,835 1,469 2,709 33 404 90 4,130 - 8,835
Corporate customers - 40,569 6,909 3,498 2,603 80,323 - 133,902 - 32,895 5,310 2,372 1,972 84,135 - 126,684
Retail customers - 21,922 1,566 943 915 34,746 - 60,092 - 17,930 1,058 787 712 33,215 - 53,702
Exposures secured by real property - 41,607 2,670 2,030 2,330 53,378 - 102,015 - 52,389 1,854 2,205 2,256 44,598 - 103,302
Past due items - 1,983 69 91 70 2,958 - 5,171 - 2,479 37 59 47 2,769 - 5,391
Securitisation positions - - - - - 1,089 - 1,089 - - - - - 1,460 - 1,460
Other items and non-credit-obligation assets - - - - - - 5,097 5,097 - - - - - - 4,918 4,918
Standardised approach for credit risk, total 5,818 231,906 17,265 8,173 8,478 256,169 5,097 532,906 6,428 216,152 10,974 7,458 7,119 260,328 4,918 513,377
Total credit exposure (EAD) 8,917 714,836 86,350 35,835 33,478 1,407,771 21,573 2.308,760 11,840 566,327 58,262 41,770 32,429 1,505,266 19,829 2,235,723
139 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
Section 12.f (CRD, annex XII, part 2, point 6(f))
MATURITY BREAKDOWN Of CREDIT EXPOSURE (EAD)
2010 2009
At 31 December (DKK millions) < 1 year≥ 1 year
< 2 years≥ 2 years < 3 years
≥ 3 years < 4 years
≥ 4 years < 5 years ≥ 5 years
No maturity Total < 1 year
≥ 1 year < 2 years
≥ 2 years < 3 years
≥ 3 years < 4 years
≥ 4 years < 5 years ≥ 5 years
No maturity Total
IRB approach:
Institutions 2,739 43,338 2,948 34 603 45,966 - 95,628 3,721 35,671 2,027 681 184 37,980 - 80,264
Corporate customers 360 305,704 51,378 18,617 16,651 417,902 - 810,612 1,689 249,554 30,412 21,767 15,004 474,732 - 793,158
Retail exposures secured by real property
- 50,806 3,959 4,245 4,096 602,850 - 665,956 - 32,734 2,672 3,244 3,216 581,788 - 623,654
Qualifying revolving retail exposures - 41,313 - - - - - 41,313 - 2,579 490 314 238 41,821 - 45,442
Other retail exposures - 41,769 10,800 4,766 3,650 53,567 - 114,552 2 29,244 11,307 7,823 4,889 76,391 - 129,656
Securitisation - - - - - 31,317 - 31,317 - 393 380 483 1,779 32,226 - 35,261
Non-credit-obligation assets - - - - - - 16,476 16,476 - - - - - - 14,911 14,911
IRB approach, total 3,099 482,930 69,085 27,662 25,000 1,151,602 16,476 1,775,854 5,412 350,175 47,288 34,312 25,310 1,244,938 14,911 1,722,346
Standardised approach for credit risk:
Central governments and central banks 4,295 121,408 4,283 1,537 2,545 77,775 - 211,843 4,959 107,700 2,335 1,585 2,038 87,393 - 206,010
Regional governments and local authorities - 876 1,525 3 1 1,751 - 4,156 - 23 296 18 - 1,918 - 2,255
Administrative bodies and non-commercial undertakings
- 488 65 30 13 977 - 1,573- 27 51 28 4 583 - 693
Multilateral development banks - - - - - 133 - 133 - - - - - 127 - 127
Institutions 1,523 3,053 178 41 1 3,039 - 7,835 1,469 2,709 33 404 90 4,130 - 8,835
Corporate customers - 40,569 6,909 3,498 2,603 80,323 - 133,902 - 32,895 5,310 2,372 1,972 84,135 - 126,684
Retail customers - 21,922 1,566 943 915 34,746 - 60,092 - 17,930 1,058 787 712 33,215 - 53,702
Exposures secured by real property - 41,607 2,670 2,030 2,330 53,378 - 102,015 - 52,389 1,854 2,205 2,256 44,598 - 103,302
Past due items - 1,983 69 91 70 2,958 - 5,171 - 2,479 37 59 47 2,769 - 5,391
Securitisation positions - - - - - 1,089 - 1,089 - - - - - 1,460 - 1,460
Other items and non-credit-obligation assets - - - - - - 5,097 5,097 - - - - - - 4,918 4,918
Standardised approach for credit risk, total 5,818 231,906 17,265 8,173 8,478 256,169 5,097 532,906 6,428 216,152 10,974 7,458 7,119 260,328 4,918 513,377
Total credit exposure (EAD) 8,917 714,836 86,350 35,835 33,478 1,407,771 21,573 2.308,760 11,840 566,327 58,262 41,770 32,429 1,505,266 19,829 2,235,723
140 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
Section 12.g (CRD, annex XII, part 2, point 6(g))For an industry breakdown of impaired loans and past due but not impaired loans, see Risk Manage-ment 2010, section 5.13.
Section 12.h (CRD, annex XII, part 2, point 6(h))For a geographical breakdown of impaired loans and past due but not impaired loans, see Danske Bank’s Annual Report 2010, p. 125.
Section 12.i (CRD, annex XII, part 2, point 6(i)) For a specification of changes in the allowance account as well as write-offs charged directly to the income statement and payments received on claims previously written off, see Risk Management 2010, section 5.13.
Disclosure requirements under the standardised approachSection 13.a-b (CRD, annex XII, part 2, point 7(a)-(b))
RATING AGENCIES USED fOR VARIOUS EXPOSURE CATEGORIES
At 31 December 2010 S&P Moody’s fitch
Regional governments and local authorities x x x
Administrative bodies and non-commercial undertakings x x x
Multilateral development banks
Institutions x x x
Corporate customers x x x
Retail customers
Exposures secured by real property
Past due items and unauthorised excesses
Covered bonds
Securitisation positions x x x
Other items and non-credit-obligation assets
Section 13.c (CRD, annex XII, part 2, point 7(c)) The Group follows the CRD rules on the use of credit assessments from external credit assessment institutes (ECAIs) for the determination of risk weightings. These rules also apply to securitisation exposures for which the Group uses the ratings-based method (IRB approach).
If only one credit assessment is available from one of the Group’s designated ECAIs for a rated expo-sure, the credit assessment is used to determine the risk weight of that exposure.
If there are two credit assessments available for a rated exposure from the Group’s designated ECAIs and they result in differing risk weightings, the higher risk weight is assigned.
If more than two credit assessments are available from designated ECAIs for a rated exposure, the two assessments generating the two lowest risk weightings are used. If the two lowest risk weightings dif-fer, the higher of the two is assigned. If the two lowest risk weightings are identical, this risk weight is assigned.
Section 13.d (CRD, annex XII, part 2, point 7(d)) Not relevant since the Group complies with the standard published by the Danish FSA for converting external credit assessments to the appropriate credit quality level.
141 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
Section 13.e (CRD, annex XII, part 2, point 7(e))
CREDIT EXPOSURE (EAD) TO COUNTERPARTIES WHEN EXTERNAL RATINGS ARE USED
At 31 December 2010 (DKK millions) Credit quality level
Central governments and central banks
Corporate customers
Total (after risk mitigation)
Collateral (risk mitigation)
1 45 - 45 -
2 - 227 227 -
3 - 180 180 -
4 6 507 513 -
5 4 - 4 -
6 - - - -
Total 55 914 969 -
CREDIT EXPOSURE (EAD) TO COUNTERPARTIES WHEN EXTERNAL RATINGS ARE USED
At 31 December 2009 (DKK millions) Credit quality level
Central governments and central banks
Corporate customers
Total (after risk mitigation)
Collateral (risk mitigation)
1 5,521 265 5,786 -
2 74 603 677 -
3 266 78 344 -
4 - 272 272 -
5 12 - 12 -
6 - - - -
Total 5,873 1,218 7,091 -
CREDIT EXPOSURE (EAD) TO COUNTERPARTIES WHEN COUNTRY-RISK CLASSIfICATIONS ARE USED (OECD)
At 31 December 2010 (DKK millions)
Country-risk classification
Central governments
and central banks
Regional governments
and local authorities
Administrative bodies and non-
commercial undertakings Institutions
Total (after risk
mitigation)Collateral
(risk mitigation)
0 211,692 4,156 1,573 4,447 221,868 1
1 - - - 948 948 -
2 - - - 252 252 -
3 1 - - 54 55 -
4 2 - - 518 520 -
5 - - - 10 10 -
6 84 - - 18 102 -
7 9 - - 60 69 -
Total 211,788 4,156 1,573 6,307 223,824 1
142 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
CREDIT EXPOSURE (EAD) TO COUNTERPARTIES WHEN COUNTRY-RISK CLASSIfICATIONS ARE USED (OECD)
At 31 December 2009 (DKK millions)
Country-risk classification
Central governments
and central banks
Regional governments
and local authorities
Administrative bodies and non-
commercial undertakings Institutions
Total (after risk
mitigation)Collateral
(risk mitigation)
0 196,996 2,254 693 7,543 207,486 7
1 - - - 1 1 -
2 97 - - 417 514 -
3 2,671 - - 510 3,181 -
4 203 - - 314 517 -
5 1 - - 6 7 -
6 164 - - 7 171 -
7 6 - - 37 43 -
Total 200,138 2,254 693 8,835 211,920 7
Risk Management 2010, section 3.5, contains a more detailed presentation of deductions from the capital base. The exposures mentioned above occasion no deductions from the capital base.
Disclosure requirements under the internal ratings-based methodSection 14.a-b (CRD, annex XII, part 2, point 8) The Group complies with the minimum requirements for using its own estimates of PDs for exposures under the advanced IRB approach, including specialised lending. The Group does not assign the risk weightings for specialised lending referred to in section 82 of appendix 8 to the Danish Executive Order on Capital Adequacy (CRD, annex VII, part 1, point 6), and the disclosure requirement is not relevant.
The Danish FSA has granted the Group a permanent exemption from the advanced IRB approach for equities, and the disclosure requirement concerning individual risk-weighting methods for equities is not relevant.
Other risksMarket riskSection 15 (CRD, annex XII, part 2, point 9) For information on the capital requirement for market risk, see section 4.b-e (CRD, annex XII, part 2, point 4(b)-(e)).
Section 16.a.1-3 (CRD, annex XII, part 2, point 10(a)(i)-(iii)) For information on the VaR models, see Risk Management 2010, sections 7.3 and 7.10.
Section 16.b (CRD, annex XII, part 2, point 10(b)) For the calculation of general risk for interest rate risk, equity risk and foreign exchange risk, the Group uses an internal model based on VaR. The Danish FSA approved the Group’s VaR model in 2004. In 2007, the Group was permitted to apply a more sophisticated method based on historical simulations.
Section 16.c (CRD, annex XII, part 2, point 10(c)) For information on validation and controls, see Risk Management 2010, section 7.11.
Section 16.d (CRD, annex XII, part 2, point 10(d)) For information on VaR, see Risk Management 2010, section 7.10.Section 16.e (CRD, annex XII, part 2, point 10(e)) For information on VaR, see Risk Management 2010, section 7.10.
143 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
Operational risk Section 17.a (CRD, annex XII, part 2, point 11(a)) For information on methods of evaluating the solvency requirements, see Risk Management 2010, sec-tions 3.2-3.4 and 9.
Section 17.b (CRD, annex XII, part 2, point 11(b)) Not relevant since the Group uses the standardised approach for operational risk.
equity exposures outside the trading bookSection 18.a (CRD, annex XII, part 2, point 12(a)) Equity exposures outside the trading book consist of long-term investments, unutilised commitments to private equity funds and banking-related investments.
Equities outside the trading book are valued at fair value, with value adjustment in the income state-ment. Associated undertakings, on the other hand, are recognised in accordance with the equity method. None of the associated undertakings is listed on a stock exchange.
Section 18 b-d (CRD, annex XII, part 2, point 12(c)-(e))
EXPOSURES TO EQUITIES OUTSIDE THE TRADING BOOK
At 31 December 2010 (DKK millions)Balance
sheet value fair valueRealised
gains/lossesUnrealised
gains/losses
Net position in listed equities 118 118 - 8
Unlisted equities:
Banking-related investments 1,924 1,924 6 869
Unutilised commitments, private equity 523 523 - -
Other unlisted equities 1,426 1,426 49 27
Total 3,991 3,991 55 904
Note : Listed equities are valued at the latest market price available.
EXPOSURES TO EQUITIES OUTSIDE THE TRADING BOOK
At 31 December 2009 (DKK millions)Balance
sheet value fair valueRealised
gains/lossesUnrealised
gains/losses
Net position in listed equities 132 132 1 -7
Unlisted equities:
Banking-related investments 1,293 1,293 5 282
Unutilised commitments, private equity 623 623 - -
Other unlisted equities 1,261 1,261 24 -92
Total 3,309 3,309 30 183
Note : Listed equities are valued at the latest market price available.
144 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
interest rate risk on positions outside the trading book Section 19.a (CRD, annex XII, part 2, point 13(a)) For a description of interest rate risk, see Risk Management 2010, section 7.5.
Section 19.b (CRD, annex XII, part 2, point 13(b))
GROUP INTEREST RATE RISK IN THE BANKING BOOK
At 31 December (DKK millions) 2010 2009
DKK 229 278
EUR -141 -59
GBP -64 -39
NOK 18 19
USD 3 7
EEK -1 4
LTL 4 1
Other 2 1
Total 50 212
Securitisation In order to mitigate the potential risk of credit losses under stressed conditions and to reduce the capital requirement, the Group entered into structured transactions to hedge part of the credit risk on Realkredit Danmark mortgage loans in the period from 2005 to 2007.
Three transactions based on corporate mortgage loans were called in January 2010, leaving two trans-actions based on mortgages on private residential property. These transactions currently cover a net amount of DKK 142 billion.
The transactions comply with the rules on reduced weighting (as guarantees) under the capital ade-quacy rules applicable until 2007 (Basel I) and thus resulted in capital relief. Because of the extension of the 80% Basel I floor, the transactions will continue to provide a reduction in the capital needed as long as the 80% limit applies. According to the CRD rules (Basel II), the transactions do not qualify for reduced weighting, and hedge accounting is not used.
The transactions will significantly limit the potential credit losses on Realkredit Danmark’s retail port-folio if the current level of credit losses continues or rises in a stressed macroeconomic environment.
The disclosure below focuses on securitisation activities that qualify for reduced weighting under the CRD rules.
Section 20.a-c (CRD, annex XII, part 2, point 14(a)-(c)) The Group acts as originator of the exposure included under section 20.g-h. This relates to the syn-thetic transactions that Sampo Bank entered into in 2006 to hedge credit risk on loans to SMEs of EUR 1 billion. The exposure qualifies for reduced weighting under the CRD rules. The transactions are structured so that they will be phased out during the transition from Basel I to Basel II.
The Group does not act as sponsor except for a limited part of the activities originally entered into through Polonius, a company that is now closed (included under section 20.i-j).
For other exposures included under section 20.i-j, the Group acts mainly as liquidity provider or swap provider (in relation to ABCP and ABS programmes). In addition, the Group acts as investor for part of the activities originally entered into through Polonius.
Section 20.d (CRD, annex XII, part 2, point 14(d)) The Group uses the following methods for its securitisation exposures:
145 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
For the exposure included under section 20.g, the Group uses the standardised approach; this applies to the transaction that Sampo Bank entered into in 2006.
For all other exposures, the Group uses the ratings-based method (IRB approach).
Section 20.e (CRD, annex XII, part 2, point 14(e)) For accounting purposes, the Group treats exposure in the form of loan commitments to securitisation entities as lending activities. This means that, if it is likely that the loan commitment will be drawn, if the obligation can be reliably measured, and if the net present value of the expected payments dis-counted at the interest rates agreed upon is negative, then a liability equal to this amount is recog-nised.
For drawn loan commitments, the Group recognises an impairment charge if objective evidence of impairment appears after the commitment was made.
For the securitisation activities in which the Group acts as originator (the exposures shown under sec-tion 20.g-h), the Group retains the first-loss tranche. The Group recognises an impairment charge on the hedged lending portfolio if there is objective evidence of impairment of the portfolio. If it is virtu-ally certain that payments will be received under the CDS, the Group recognises an asset representing the net present value of the expected payments.
Section 20.f (CRD, annex XII, part 2, point 14(f)) The Group uses the credit rating agencies (ECAIs) shown in the table below to rate its securitisation positions, which are broken down by securitisation category.
ECAIS USED fOR SECURITISATION POSITIONS
At 31 December 2010
Securitisation category Moody’s Standard & Poor’s fitch Ratings
Residential mortgages x x x
Commercial mortgages x x x
Credit card receivables x x x
Leasing
Loans to corporates or SMEs x x
Consumer loans x x x
Trade receivables
Securitisations/resecuritisations x x x
Other assets x x x
146 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
Section 20.g (CRD, annex XII, part 2, point 14(g))
TOTAL OUTSTANDING AMOUNT Of SECURITISED EXPOSURE (EAD) BROKEN DOWN INTO TRADITIONAL AND SYNTHETIC TRANSACTIONS
At 31 December (DKK millions) 2010 2009
Securitisation category Traditional Synthetic Traditional Synthetic
Residential mortgages - - - -
Commercial mortgages - - - -
Credit card receivables - - - -
Leasing - - - -
Loans to corporates or SMEs - 1,096 - 2,033
Consumer loans - - - -
Trade receivables - - - -
Securitisations/resecuritisations - - - -
Other assets - - - -
Total - 1,096 - 2,033
Section 20.h (CRD, annex XII, part 2, point 14(h))
PAST DUE, IMPAIRED AND DEfAULTED AMOUNTS fOR SECURITISED EXPOSURES (EAD)
At 31 December (DKK millions) 2010 2009
Past due Past due
Securitisation category31-60
days61-90
days> 90 days Impaired
31-60 days
61-90 days
> 90 days Impaired
Residential mortgages - - - - - - - -
Commercial mortgages - - - - - - - -
Credit card receivables - - - - - - - -
Leasing - - - - - - - -
Loans to corporates or SMEs 1 6 1 16 7 3 4 56
Consumer loans - - - - - - - -
Trade receivables - - - - - - - -
Securitisations/ resecuritisations
- - - - - - - -
Other assets - - - - - - - -
Total 1 6 1 16 7 3 4 56
147 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
Section 20.i (CRD, annex XII, part 2, point 14(i))
AGGREGATE AMOUNT Of RETAINED OR PURCHASED SECURITISATION POSITIONS (EAD)
At 31 December (DKK millions)
Securitisation category 2010 2009
Residential mortgages 13,662 15,026
Commercial mortgages 12,858 13,385
Credit card receivables 108 103
Leasing - -
Loans to corporates or SMEs 1,544 1,991
Consumer loans 566 528
Trade receivables - -
Securitisations/resecuritisations 1,600 3,231
Other assets 979 997
Total 31,317 35,261
A total of 44% of the securitisation position under section 20.i-j was super senior at the end of 2010.
Section 20.j (CRD, annex XII, part 2, point 14(j))
AGGREGATE AMOUNT Of RETAINED OR PURCHASED SECURITISATION POSITIONS (EAD), BROKEN DOWN BY RISK-WEIGHT BAND
At 31 December (DKK millions)
Risk-weight band 2010 2009
≤ 10% 20,263 21,062
>10 ≤ 20% 1,856 2,495
>20 ≤ 50% 4,372 4,792
>50 ≤ 100% 81 -
>100 ≤ 650% 65 772
>650 < 1,250% - -
1,250% / deduction 4,680 6,140
Total 31,317 35,261
Section 20.k (CRD, annex XII, part 2, point 14(k))Not relevant since the Group has not securitised any qualifying revolving exposures.
Section 20.l (CRD, annex XII, part 2, point 14(l))Not relevant since in 2010 the Group did not enter into any securitisation activities to hedge credit risk on exposures that qualify for reduced weighting under the CRD.
148 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
The use of special instruments or methodologies Section 21.a (CRD, annex XII, part 3, point 1(a))For information on permission and exemptions, see Risk Management 2010, section 3.3.
Section 21.b.1 (CRD, annex XII, part 3, point 1(b)(i))For a description of internal credit assessment (risk classification), see Risk Management 2010, section 5.6.
Section 21.b.2 (CRD, annex XII, part 3, point 1(b)(ii))The Group uses internal estimates in its day-to-day credit management and for calculating economic capital. See also Risk Management 2010, section 3.3.
Section 21.b.3 (CRD, annex XII, part 3, point 1(b)(iii))The Group includes all collateral to which a value is assigned in accordance with its internal pro-cedures. The internal procedures fulfil the minimum requirements under the CRD. Guarantees are included if they imply lower risk weightings than the original exposure.
In addition, collateral is volatility-adjusted (by means of a haircut) in order to take into account price volatility and the expected costs of compulsory sales.
Section 21.b.4 (CRD, annex XII, part 3, point 1(b)(iv))The Group has determined an annual process for reviewing and following up on compliance with the minimum requirements under the IRB in relation to the rating system. This process includes reporting to management and Internal Audit. The rating system is also validated on a regular basis, independ-ently from the rating process. For information on internal credit assessment (risk classification), see also Risk Management 2010, section 5.6.
Section 21.c.1-4 (CRD, annex XII, part 3, point 1(c)(i)-(iv))For a description of internal credit assessment (risk classification), see Risk Management 2010, section 5.6.
Section 21.c.5 (CRD, annex XII, part 3, point 1(c)(v))Not relevant since the Danish FSA has granted the Group a permanent exemption from the advanced IRB approach for equities.
Section 21.d (CRD, annex XII, part 3, point 1(d))The Group does not use the foundation IRB approach (F-IRB) for any asset class. The exposures shown below are included in the Group’s advanced IRB portfolio.
CREDIT EXPOSURE (EAD), IRB PORTfOLIO
At 31 December (DKK millions) 2010 2009
Institutions 95,628 80,264
Corporate customers etc. 810,612 793,158
Retail exposures secured by real property 665,956 623,654
Qualifying revolving retail exposures 41,313 45,442
Other retail exposures 114,552 129,656
Securitisation 31,317 35,261
Non-credit-obligation assets 16,476 14,911
Total credit exposure (EAD) 1,775,854 1,722,346
149 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
Section 21.e.1 (CRD, annex XII, part 3, point 1(e)(i))The tables below show breakdowns by rating category.
CREDIT EXPOSURE (EAD) BY RATING CATEGORY
At 31 December 2010 (DKK millions) Institutions
Corporate customers
etc.
Retail exposures
secured by real
property
Qualifying revolving
retail exposures
Other retail exposures
Securiti-sation Total
1 5,381 472 20,539 4,138 3,916 17,455 51,901
2 35,212 17,712 70,809 9,025 9,685 3,709 146,152
3 21,756 71,611 80,692 8,123 16,510 2,079 200,771
4 9,596 126,761 100,644 4,856 16,853 2,961 261,671
5 18,736 164,227 129,088 4,182 15,679 368 332,280
6 1,760 147,682 109,273 3,003 11,975 65 273,758
7 1,745 123,437 87,954 3,735 18,237 - 235,108
8 1,231 64,712 49,287 3,392 14,768 310 133,700
9 74 34,180 8,944 638 3,744 2,287 49,867
10 - 32,388 3,589 92 974 2,069 39,112
11 137 27,430 5,137 129 2,211 14 35,058
Total 95,628 810,612 665,956 41,313 114,552 31,317 1,759,378
CREDIT EXPOSURE (EAD) BY RATING CATEGORY
At 31 December 2009 (DKK millions) Institutions
Corporate customers
etc.
Retail exposures
secured by real
property
Qualifying revolving
retail exposures
Other retail exposures
Securiti-sation Total
1 4,301 407 9,400 2,604 2,438 21,582 40,732
2 18,412 22,282 50,327 7,297 4,977 2,553 105,848
3 21,850 65,105 102,853 8,117 13,050 2,537 213,512
4 10,595 109,897 108,449 5,856 18,561 1,677 255,035
5 15,353 145,178 143,615 6,370 23,300 193 334,009
6 4,475 167,971 67,505 4,378 16,941 511 261,781
7 1,258 116,490 95,070 5,311 24,688 - 242,817
8 2,057 80,070 32,940 4,427 18,363 1,469 139,326
9 99 33,752 6,640 769 4,018 1,396 46,674
10 - 25,544 2,319 141 940 3,343 32,287
11 1,864 26,462 4,536 172 2,380 - 35,414
Total 80,264 793,158 623,654 45,442 129,656 35,261 1,707,435
150 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
Section 21.e.2 (CRD, annex XII, part 3, point 1(e)(ii))
CREDIT-EXPOSURE-WEIGHTED (EAD) AVERAGE LGD BY RATING CATEGORY
At 31 December 2010 (%) Institutions
Corporate customers
etc.
Retail exposures
secured by real
property
Qualifying revolving
retail exposures
Other retail exposures Total
1 30 38 12 33 25 19
2 20 40 12 34 22 20
3 30 24 13 36 20 20
4 35 28 13 38 21 22
5 26 24 14 39 22 21
6 41 19 15 40 24 18
7 35 21 16 42 26 20
8 35 19 16 42 29 20
9 48 18 18 43 33 19
10 36 23 18 44 31 23
11 50 30 19 49 42 29
Total 26 23 14 37 24 20
CREDIT-EXPOSURE-WEIGHTED (EAD) AVERAGE LGD BY RATING CATEGORY
At 31 December 2009 (%) Institutions
Corporate customers
etc.
Retail exposures
secured by real
property
Qualifying revolving
retail exposures
Other retail exposures Total
1 46 31 12 29 24 24
2 25 37 12 31 25 22
3 27 24 12 32 22 19
4 33 26 13 35 23 21
5 25 21 15 34 24 24
6 29 19 14 36 25 19
7 22 18 15 37 28 18
8 27 22 15 39 29 22
9 59 21 15 39 31 21
10 37 20 17 43 31 20
11 70 25 17 46 41 28
Total 25 22 14 34 26 23
151 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
Section 21.e.3 (CRD, annex XII, part 3, point 1(e)(iii))
CREDIT-EXPOSURE-WEIGHTED (EAD) AVERAGE RISK WEIGHT BY RATING CATEGORY
At 31 December 2010 (%) Institutions
Corporate customers
etc.
Retail exposures
secured by real
property
Qualifying revolving
retail exposures
Other retail exposures
Securiti-sation Total
1 9 19 1 1 3 9 5
2 9 15 1 1 2 9 5
3 13 13 2 1 3 10 7
4 15 17 4 2 5 22 11
5 23 21 6 5 10 41 15
6 76 26 11 9 17 357 19
7 75 38 21 20 29 - 31
8 92 52 43 42 43 1,325 51
9 207 77 98 105 68 1,325 138
10 198 122 108 138 81 1,325 183
11 251 81 159 298 100 1,325 95
Total 17 34 13 10 20 208 27
CREDIT-EXPOSURE-WEIGHTED (EAD) AVERAGE RISK WEIGHT BY RATING CATEGORY
At 31 December 2009 (%) Institutions
Corporate customers
etc.
Retail exposures
secured by real
property
Qualifying revolving
retail exposures
Other retail exposures
Securiti-sation Total
1 16 17 1 1 3 10 8
2 12 15 1 1 3 13 6
3 10 13 1 1 3 10 6
4 15 20 3 2 6 15 11
5 20 23 6 4 10 106 14
6 36 31 9 7 17 277 25
7 49 41 18 16 30 - 30
8 67 66 37 38 43 1,325 80
9 192 105 76 85 58 1,325 156
10 206 117 103 135 80 1,325 160
11 197 74 169 333 141 - 98
Total 20 38 10 11 22 246 30
152 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
Section 21.e.4 (CRD, annex XII, part 3, point 1(e)(iv))
UNUTILISED COMMITMENTS
At 31 December 2010 (DKK millions) Institutions
Corporate customers
etc.
Retail exposures
secured by real
property
Qualifying revolving
retail exposures
Other retail exposures
Securiti-sation Total
1 8,096 636 698 6,089 3,022 8,253 26,794
2 19,520 26,662 3,006 12,620 4,005 1,719 67,532
3 30,230 53,544 4,227 10,748 6,908 749 106,406
4 4,448 95,322 3,629 5,411 7,421 849 117,080
5 12,361 88,153 2,604 3,799 7,137 271 114,325
6 2,282 45,648 1,297 2,366 5,931 - 57,524
7 828 27,903 1,539 2,884 10,352 - 43,506
8 547 12,231 928 2,135 4,328 - 20,169
9 171 2,387 270 221 787 - 3,836
10 - 1,354 45 30 119 - 1,548
11 151 1,119 35 58 162 - 1,525
Total 78,634 354,959 18,278 46,361 50,172 11,841 560,245
UNUTILISED COMMITMENTS
At 31 December 2009 (DKK millions) Institutions
Corporate customers
etc.
Retail exposures
secured by real
property
Qualifying revolving
retail exposures
Other retail exposures
Securiti-sation Total
1 6,113 570 381 3,794 1,853 9,966 22,677
2 27,568 23,682 877 10,129 2,406 604 65,266
3 32,755 51,747 2,262 10,829 5,719 1,240 104,552
4 5,664 82,141 2,585 6,554 7,195 1,256 105,395
5 2,070 56,534 3,055 5,567 8,813 - 76,039
6 3,165 46,934 1,965 3,395 6,259 - 61,718
7 477 21,324 1,523 3,554 9,126 - 36,004
8 1,061 16,620 736 2,656 4,656 24 25,753
9 192 3,365 96 238 560 - 4,451
10 - 1,674 15 29 112 161 1,991
11 3,483 753 32 53 147 - 4,468
Total 82,548 305,344 13,527 46,798 46,846 13,251 508,314
153 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
EXPOSURE-WEIGHTED AVERAGE CONVERSION fACTORS BY RATING CATEGORY
At 31 December 2010 (DKK millions) Institutions
Corporate customers
etc.
Retail exposures
secured by real
property
Qualifying revolving
retail exposures
Other retail exposures
Securiti-sation Total
1 39 65 65 65 54 100 67
2 40 52 64 66 43 100 53
3 35 59 64 65 40 100 52
4 56 59 65 61 39 100 58
5 59 54 63 62 39 100 54
6 40 59 62 61 42 - 56
7 51 61 59 61 48 - 57
8 32 57 59 57 47 - 54
9 30 59 57 63 49 - 56
10 - 56 56 55 42 - 54
11 30 17 11 - 19 - 18
Total 42 57 63 64 43 100 56
EXPOSURE-WEIGHTED AVERAGE CONVERSION fACTORS BY RATING CATEGORY
At 31 December 2009 (DKK millions) Institutions
Corporate customers
etc.
Retail exposures
secured by real
property
Qualifying revolving
retail exposures
Other retail exposures
Securiti-sation Total
1 56 69 68 67 62 100 78
2 47 62 69 68 51 100 56
3 45 59 62 66 42 100 55
4 65 62 64 64 41 100 61
5 51 60 65 63 41 - 58
6 60 60 63 61 43 - 58
7 45 57 62 61 43 - 54
8 63 67 61 59 47 100 62
9 50 57 61 62 50 - 56
10 - 59 59 59 46 100 62
11 50 15 14 - 22 - 42
Total 49 61 64 65 44 100 59
Section 21.f (CRD, annex XII, part 3, point 1(f))See section 21.e.1-4. (CRD, annex XII, part 3, point 1(e)(i)-(iv)).
154 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
Section 21.g (CRD, annex XII, part 3, point 1(g))
AcTuAl vAluE ADjuSTMENTS (IRB PoRTfolIo)
At 31December (DKK millions) 2010 2009
Institutions 1,509 2,010
corporate customers etc. 10,375 12,880
Retail exposures secured by real property 759 778
Qualifying revolving retail exposures 179 65
other retail exposures 1,316 3,957
Securitisation 18 3,610
Non-credit-obligation assets - -
Total 14,156 23,300
Note: Actual value adjustments are defined as new individual impairment charges plus write-offs charged directly to the income statement. The portfolio is the IRB portfolio.
Section 21.h-i (CRD, annex XII, part 3, point 1(h)-(i))For the purpose of calculating risk-weighted assets under the IRB approach, the Group uses parameter values (through-the-cycle PD and downturn LGD and CF parameters) based on historical data. The tables in this section are based on these parameters.
The asset class non-credit-obligation assets is not included in the tables in this section because the risk weight is set at 100% in accordance with the rules for the IRB approach. The securitisation asset class is not included either because the Group uses mainly the ratings-based method (using external ratings) for these exposures and therefore does not use internal estimates.
EXPEcTED loSS vS. AcTuAl vAluE ADjuSTMENTS
At 31December (DKK millions) Institutions
corporate customers
etc.
Retail exposures
secured by real
property
Qualifying revolving
retail exposures
other retail exposures Total
2010
Actual value adjustments 1,509 10,375 759 179 1,316 14,138
Expected loss (El) 2,096 13,476 875 226 1,916 18,589
2009
Actual value adjustments 2,010 12,880 778 65 3,957 19,690
Expected loss (El) 192 8,768 873 239 1,518 11,590
Note: Actual value adjustments and Expected loss are not directly comparable. Actual value adjustments are defined as new in-dividual impairment charges plus write-offs charged directly to the income statement. Expected loss is defined as the expected loss at the beginning of the period (1 january) on the basis of PD (through-the-cycle), lGD (downturn) and cf (downturn) for exposures that have not defaulted. for defaulted exposures, the expected loss equals the loan impairment charge.
155 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
The probability of default (PD) represents the probability that a customer will default on a loan within the next 12 months.
PROBABILITY Of DEfAULT (PD)
(%) Institutions
Corporate customers
etc.
Retail exposures
secured by real property
Qualifying revolving
retail exposures
Other retail exposures Total
2010
Outcome 0.27 2.81 0.64 0.89 2.08 1.09
Estimate 0.43 2.33 0.50 1.11 1.75 1.09
2009
Outcome 0.31 3.78 0.64 0.59 1.99 0.96
Estimate 0.52 1.72 0.61 1.15 1.84 1.15
Note: figures are simple averages based on the number of customers. Estimates are based on through-the-cycle parameters as estimated at the beginning of the year.
Loss given default (LGD) represents the loss on an exposure calculated as the percentage of the facil-ity’s expected utilisation that will be lost if a customer defaults.
LOSS GIVEN DEfAULT (LGD)
(%) Institutions
Corporate customers
etc.
Retail exposures
secured by real property
Qualifying revolving
retail exposures
Other retail exposures Total
2010
Outcome 26 22 14 47 45 40
Estimate 17 27 17 48 40 38
2009
Outcome 18 21 11 40 42 35
Estimate 39 22 16 47 38 36
Note: figures are simple averages based on the number of facilities. Estimates are based on downturn parameters as esti-mated at the beginning of the year for facilities defaulted during the year in question. Outcomes are based on defaults for the year in question and include write-offs on defaults that have been settled and individual impairment charges on defaults not yet settled.
156 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
The conversion factor (CF) represents the percentage of credits not yet drawn that is expected to be drawn.
CONVERSION fACTOR (Cf)
(%) Institutions
Corporate customers
etc.
Retail exposures
secured by real property
Qualifying revolving
retail exposures
Other retail exposures Total
2010
Outcome - 43 61 58 54 57
Estimate - 55 69 72 68 70
2009
Outcome 21 35 49 48 45 47
Estimate 69 53 64 68 61 65
Note: figures are simple averages based on the number of facilities. Estimates are based on downturn parameters as esti-mated at the beginning of the year for facilities defaulted during the year in question. Outcomes are based on defaults for the year in question.
Credit risk mitigation Section 22.a (CRD, annex XII, part 3, point 2(a))Amounts due to and from the Group are offset when the Group has a legally enforceable right to set off a recognised amount and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
Section 22.b (CRD, annex XII, part 3, point 2(b))For information on valuation procedures, see Risk Management 2010, section 5.7.
Section 22.c (CRD, annex XII, part 3, point 2(c))For a description of the main types of collateral received, see Risk Management 2010, section 5.7.
157 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
Section 22.d (CRD, annex XII, part 3, point 2(d))
CREDIT EXPOSURE (EAD) COVERED BY GUARANTORS OR CREDIT DERIVATIVES, BY RATING CATEGORY Of COUNTERPARTY
At 31 December 2010 (DKK millions) 1 2 3 4 5 6 7 8 9 10 11 Total
IRB approach:
Institutions 787 256 129 24 21 19 42 - - - - 1,278
Corporate customers etc. 60 - 1,074 - - - - - - - - 1,134
Retail exposures secured by real property - - - - - - - - - - - -
Qualifying revolving retail exposures - - - - - - - - - - - -
Other retail exposures - - - - - - - - - - - -
Securitisation - - - - - - - - - - - -
Non-credit-obligation assets - - - - - - - - - - - -
IRB approach, total 847 256 1,203 24 21 19 42 - - - - 2,412
Standardised approach for credit risk:
Central governments and central banks 26,666 21,182 140 126 815 - 6,406 4 - - - 55,339
Regional governments and local authorities - 74 5 - - - - - - - - 79
Administrative bodies and non-commercial undertakings 650 - - - - - - - - - - 650
Multilateral develop-ment banks - - - - - - - - - - - -
Institutions - 36 7 - - - 1,329 - - - - 1,372
Corporate customers etc. - - - - - - 150 - - - - 150
Retail customers - - - - - - 9 - - - - 9
Exposures secured by real property - - - - - - - - - - - -
Past due items and unauthorised excesses - - - - - - - - - - - -
Securitisation positions - - - - - - 1,089 - - - - 1,089
Other items and non-credit-obligation assets - - - - - - - - - - - -
Standardised approach for credit risk, total 27,316 21,292 152 126 815 - 8,983 4 - - - 58,688
Total credit exposure (EAD) 28,163 21,548 1,355 150 836 19 9,025 4 - - - 61,100
158 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
CREDIT EXPOSURE (EAD) COVERED BY GUARANTORS OR CREDIT DERIVATIVES, BY RATING CATEGORY Of COUNTERPARTY
At 31 December 2009 (DKK millions) 1 2 3 4 5 6 7 8 9 10 11 Total
IRB approach:
Institutions 80 324 361 22 30 99 710 1 - - - 1,627
Corporate customers etc. 1 1 179 - - - - - - - - 181
Retail exposures secured by real property - - - - - - - - - - - -
Qualifying revolving retail exposures - - - - - - - - - - - -
Other retail exposures - - - - - - - - - - - -
Securitisation - - - - - - - - - - - -
Non-credit-obligation assets - - - - - - - - - - - -
IRB approach, total 81 325 540 22 30 99 710 1 - - - 1,808
Standardised approach for credit risk:
Central governments and central banks 41,210 21,143 1,873 - 697 - 5,586 5 - - - 70,514
Regional governments and local authorities - 58 - - - - 2 - - - - 60
Administrative bodies and non-commercial undertakings - - - - - - - - - - - -
Multilateral develop-ment banks - - - - - - - - - - - -
Institutions - 2 34 1,662 - - 1,987 - - - - 3,685
Corporate customers etc. - - - - - - 533 - - - - 533
Retail customers - - - - - - - - - - - -
Exposures secured by real property - - - - - - - - - - - -
Past due items and unauthorised excesses - - - - - - - - - - - -
Securitisation positions - - - - - - 1,460 - - - - 1,460
Other items and non-credit-obligation assets - - - - - - 2 - - - - 2
Standardised approach for credit risk, total 41,210 21,203 1,907 1,662 697 - 9,570 5 - - - 76,254
Total credit exposure (EAD) 41,291 21,528 2,447 1,684 727 99 10,280 6 - - - 78,062
159 DANSKE BANK RISK MANAGEMENT 2010 APPENDIX A
Section 22.e-g (CRD, annex XII, part 3, point 2(e)-2(g))
CREDIT EXPOSURE (EAD) SECURED ON RECOGNISED COLLATERAL (AfTER VOLATILITY ADJUSTMENT)
At 31 December 2010 (DKK millions) Guarantees
Credit derivatives
Eligible financial
collateralReal
property
Other eligible
collateral Total
IRB approach:
Institutions 1,278 - 222 2,025 1,888 5,413
Corporate customers etc. 1,134 - 11,801 258,621 62,749 334,305
Retail exposures secured by real property - - - 535,720 - 535,720
Qualifying revolving retail exposures - - - - - -
Other retail exposures - - 5,875 - 32,916 38,791
Securitisation - - - - - -
Non-credit-obligation assets - - - - - -
IRB approach, total 2,412 - 17,898 796,366 97,553 914,229
Standardised approach for credit risk:
Central governments and central banks 55,339 - 1 - - 55,340
Regional governments and local authorities 79 - - - - 79
Administrative bodies and non-commercial under-takings 650 - - - - 650
Multilateral development banks - - - - - -
Institutions 291 1,081 - - - 1,372
Corporate customers etc. - 150 1,670 - - 1,820
Retail customers - 9 992 - - 1,001
Exposures secured by real property - - - 102,015 - 102,015
Past due items and unauthorised excesses - - 10 2,613 - 2,623
Securitisation positions - 1,089 - - - 1,089
Other items and non-credit- obligation assets - - - - - -
Standardised approach for credit risk, total 56,359 2,329 2,673 104,628 - 165,989
Total credit exposure (EAD) 58,771 2,329 20,571 900,994 97,553 1,080,218
160 APPENDIX A DANSKE BANK RISK MANAGEMENT 2010
CREDIT EXPOSURE (EAD) SECURED ON RECOGNISED COLLATERAL
At 31 December 2009 (DKK millions) Guarantees
Credit derivatives
Eligible financial
collateralReal
property
Other eligible
collateral Total
IRB approach:
Institutions 1,627 - 284 1,251 2,283 5,445
Corporate customers etc. 181 - 13,810 232,073 61,911 307,975
Retail exposures secured by real property - - - 511,114 - 511,114
Qualifying revolving retail exposures - - - - - -
Other retail exposures - - 5,456 - 28,476 33,932
Securitisation - - - - - -
Non-credit-obligation assets - - - - - -
IRB approach, total 1,808 - 19,550 744,438 92,670 858,466
Standardised approach for credit risk:
Central governments and central banks 70,514 - 9 - - 70,523
Regional governments and local authorities 60 - - - - 60
Administrative bodies and non-commercial under-takings - - - - - -
Multilateral development banks - - - - - -
Institutions 2,034 1,651 - - - 3,685
Corporate customers etc. - 533 1,812 - - 2,345
Retail customers - - 796 - - 796
Exposures secured by real property - - - 103,302 - 103,302
Past due items and unauthorised excesses - - 35 2,497 - 2,532
Securitisation positions - 1,460 - - - 1,460
Other items and non-credit- obligation assets - 2 - - - 2
Standardised approach for credit risk, total 72,608 3,646 2,652 105,799 - 184,705
Total credit exposure (EAD) 74,416 3,646 22,202 850,237 92,670 1,043,171
Section 23 (CRD, annex XII, part 3, point 3)Not relevant since the Group uses the standardised approach for operational risk.
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