Glossary

• risk appetite process
• overall structure of and development policy for the balance sheet
• targets for capital structure and solvency
• rating strategy
• overall funding structure
• general principles for measuring, managing and reporting on the Group’s risks
• risk policies for relevant business units
• overall risk exposure guidelines, for example for identifying and managing risk concentrations, and follow-up measures
• overall investment strategy
• capital deployment

The All Risk Committee consists of members of the Executive Board and the heads of Danske Markets and Risk Management.

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Business risk
The Group’s business risk is the risk of losses caused by changes in external or internal circumstances that have an adverse effect on its reputation or profits.

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Capital requirement
The capital requirement is calculated as 8% of risk-weighted assets.

Commodity risk
Commodity risk is the risk of losses caused by changes in commodity prices.

Conversion factor
The 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 downturn parameters.

Counterparty credit risk
Counterparty credit risk is the risk of losses on derivatives contracts resulting from a customer’s default.

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), incorporated in the Danish executive order on capital adequacy of 17 December 2009. The CRD rules are based on the Basel II guidelines.

Credit risk
Credit risk is the risk of losses arising because counterparties or debtors fail to meet all or part of their payment obligations to the Danske Bank Group. Credit risk includes country, dilution and settlement risk. The credit risk on derivatives contracts, which is also called counterparty credit risk, is the risk of losses on derivatives contracts resulting from a customer’s default.

Credit spread risk
Credit spread risk is the risk of losses caused by changes in credit spreads.

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Danica group
The Danica group encompasses 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.

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 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 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 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.

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Economic capital
Economic capital is the amount of capital, calculated with the Group’s own models, required to cover unexpected losses over the next year at a confidence level of 99.97%, which corresponds to an AA rating. The calculation of economic capital takes into account all relevant types of risk, including concentration and migration risk, 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 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 these fluctuations.

Equity market risk
Equity market risk is the risk of losses caused by changes in equity prices.

Exchange rate risk
Exchange rate 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 management team of Group Credits.

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 rejecting 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 valuation of the Group’s loan portfolio. This valuation is used to determine impairment charges.

Executive Committee
The Executive Committee constitutes the Group’s day-to-day executive management. It is headed by the Chairman of the Executive Board. The Executive Committee functions as a coordinating forum whose principal objective is to take an overall view of activities across the Group, focusing on the collaboration between support functions 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.

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General risk
General risk is the Group’s risk of losses on its positions because of general changes in market prices, including interest rates, exchange rates, equity prices and commodity prices. The capital requirement for general risk applies to all positions in the trading book. The capital requirement for exchange rate risk and commodity risk applies to positions outside the trading book as well.

Government spread risk
Government spread risk is the risk of losses caused by changes in the spreads between the government yield curve and the swap/money market interest rate curve.

Group Credits
The Group’s credit organisation is led by the head of the central credit department, Group Credits. Group Credits has overall responsibility for the credit process in 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 in the business units.

Group Finance
Group Finance oversees the Group’s financial reporting, budgeting, risk management and strategic business analysis, including the performance and analytical tools used by the business units.

The department is also in charge of the Group’s investor relations, corporate governance, capital structure and M&A activities. Risk Management is part of Group Finance. As the Group’s risk monitoring unit, Risk Management is responsible for the Group’s implementation of the CRD rules, risk models and risk analysis.

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ICAAP
In 2006, in preparation for the transition to the CRD, the Group established an Internal Capital Adequacy Assessment Process (ICAAP). This is a collection, expansion and validation of many assessments and considerations that had also been conducted earlier.

The Group’s ICAAP includes an evaluation of the capital needed under Pillar II (the “ICAAP result”). The ICAAP identifies and measures the Group’s 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.

The ICAAP report is updated quarterly in a condensed format, and once a year, the full ICAAP report is submitted to the Board of Directors for approval.

ICAAP result
The ICAAP result (in Danish, “Individuelt solvensbehov”) represents the capital needed on the basis of an evaluation of all the significant risks to which the Group is exposed. Besides the Pillar I risk types – credit, market and operational risk – the ICAAP result covers other factors such as pension risk, insurance risk and business risk. The Group assesses qualitative add-ons to the ICAAP result if relevant.

IFRSs
International Financial Reporting Standards.

Inflation rate risk
Inflation 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 floor risk
Interest rate floor risk is defined as the risk of a loss of earnings on deposits as 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.

Interest rate risk
Interest rate risk is the risk of losses caused by changes in interest rates.

Internally estimated ICAAP result
The internally estimated ICAAP result (in Danish, “Internt opgjort solvensbehov”) represents the Group’s economic capital.

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Leverage ratio
The leverage ratio is a simplified measure that is often used to compare banking institutions. It is defined as tier 1 capital divided by adjusted assets. In contrast to the Basel II approach for calculating RWA, the measure thus does not take into account the fact that different activities on financial institutions’ balance sheets have different degrees of risk.

Liquidity risk
Liquidity risk is defined as the risk of losses arising because

• use the Group’s funding costs increase disproportionately
• lack of funding prevents the Group from establishing new business
• lack of funding will ultimately prevent 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 expected facility utilisation that will be lost if a customer defaults. LGD is also estimated as a PIT parameter. The Group makes a downturn adjustment 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.

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Market risk
Market risk is the risk of losses arising because the fair value of the Group’s assets and liabilities varies with changes in market conditions.

Mortgage spread risk
Mortgage spread risk is the risk of losses arising because of changes in mortgage spreads.

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Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk.

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 operational risk exposures
• 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 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

ORIS
Operational Risk Information System.

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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 other words, in a given portfolio, the overall PIT PD level 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 according to the effect of the business cycle on the model input. The calculated PIT PD is converted to a through-the-cycle (TTC) PD used in the calculation of the Group’s risk-weighted assets. The TTC PD level is based on steady-state macroeconomic data.

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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.

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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 ratio
Total capital base divided by risk-weighted assets.

Solvency II
The European transition to a risk-based solvency regime for insurance companies.

Specific risk
The Group’s specific risk is the risk of losses in the trading book portfolio that can be attributed to the specific issuer of a financial instrument. The capital requirement for specific risk applies to all positions in the trading book.

SREP
Supervisory Review and Evaluation Process.

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Trading book
Positions held for trading purposes (that is, resale) and/or with the intention of benefiting in the short term from actual or expected differences between buying or selling prices. Positions hedging other trading book positions are also part of the trading book.

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US GAAP
US Generally Accepted Accounting Principles.

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VaR
Value at Risk. VaR is a statistical risk measure of the maximum loss that may, under normal market conditions, occur over a certain period of time at a certain confidence level. For example, a 95% 10-day VaR of DKK 1,000 means that there is a 95% probability that the loss will not exceed DKK 1,000 in the next 10-day period.

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Last updated on 15 February 2010