The Danish FSA has approved Danske Bank's CRD application
Please see the company announcement regarding the approval.
On November 26, Danske Bank received the Danish FSA’s approval to apply the most advanced internal ratings-based approach (IRB Advanced) to calculate credit risk when determining the Group’s solvency.
The application was considered by the Financial Business Council at a meeting on 12 November, and the Bank subsequently received an overall approval to use the new rules from 1 January 2008. There will be a two-year transition period until the new rules take full effect on 1 January 2010 in accordance with the general CRD rules.
Why has the Bank decided to apply the internal ratings-based approach?
The approval means that there will be a much better correlation between the risk models for business management and performance measurement that the Bank has been using since 1999 and the models used to calculate its regulatory capital requirement.
Under the current capital adequacy rules, the risk-weighting of an exposure was calculated using only a few very general factors. Under the new CRD rules, the risk weighting of a loan is calculated using a number of factors, for instance the customer’s rating, the maturity and the collateral provided. This ensures that there will be a much higher correlation between the risk the Bank undertakes and the capital it must set aside to cover the risk.
Applying the IRB approach to the financial results for the first nine months of 2007 would reduce the risk-weighted assets under Pillar I based on TTC parameters by 27% and based on PIT parameters by almost 40%.
The decline is due to the high quality of the credit portfolio, including the substantial portfolio of mortgage credit loans. Owing to the transitional provisions of the CRD, only 10 per cent will have effect in 2008.
What is not covered by the IRB?
The approval covers the Danske Bank Group’s exposure to institutions and corporate and retail customers with the exception of the loan portfolios of Northern Bank, National Irish Bank and Sampo Bank. 84% of the loan portfolio of the Danske Bank Group will be covered by the internal ratings-based approach from 1 January 2008, calculated on the basis of the financial results for the first nine months of 2007.
The remaining 16% will be covered either by permanent exemptions (for instance the exposure classes “public counterparties” and “equities”) or by roll-out plans (for instance the portfolios of Northern Bank, National Irish Bank and Sampo Bank).
The Group’s shared IT platform has been an important factor for the implementation of CRD. The loan portfolios of Northern Bank and National Irish Bank have been migrated to the Bank’s central IT platform and a similar conversion is planned for Sampo Bank for Easter 2008. Consequently, these portfolios will not meet the CRD requirements, for instance, for use and historical data, until a later time.
Market risk and operational risk
Apart from the rules on credit risk, the CRD rules allow the use of internal methods to calculate both market risk and operational risk.
Danske Bank applies the most advanced method to calculate risk-weighted assets for market risk on group basis. In April 2007, the Danish FSA approved the Group’s new and updated Value-at-Risk model (VaR model).
The Danske Bank Group does not yet use internal models to calculate operational risk, but has chosen to apply the standardised approach (the medium-level method).