Risk Management and Capital Adequacy Report

162 Pages·2017·7.14 MB·English

by  Marion Cutting

Risk Management and
Capital Adequacy Report
Pillar 3 – 2017
0B 0B 0B 0B 0B 0B Table of contents
Page Page
Introduction 3 7.Stress tests and Economic Capital 78
Swedbank in brief 3 Highlights 2017 78
Economic environment 3 Economic Capital 78
CRO's statement 5 Internal Capital Adequacy Assessment Process –
79
Pillar 2
1.Risk governance 6 Stress tests 80
Risk profile 6 The adverse ICAAP scenarios 80
Policy on Enterprise Risk Management 6 Impact on Swedbank – simulation results 82
Three lines of defence 6 Impact on Swedbank – REA and capital 83
Risk appetite and framework 7 Externally performed stress tests 83
2.Capital requirements 9 Appendix A - Swedbank Consolidated Situation 84
Highlights 2017 9 Swedbank’s legal entity structure and business
85
Capital requirements 9 activities
Capital planning 12 Terminology and abbreviations 87
Regulatory environment - impact on Swedbank 12 A1 Transitional own funds disclosure 88
Differences between accounting 17 A2 Subordinated debt: Capital instruments 88
and regulatory exposure amounts main features
A3 Risk Exposure Amount split by business area 88
3.Credit risk 22
Risk appetite 22 Appendix B - Index of Graphs and Tables 89
Highlights 2017 22
Portfolio overview 25
Management of credit risk 28 Appendix C - Subsidiaries 92
Credit risk exposures 29 Swedbank Estonia Consolidated Situation 93
Credit quality of exposures 33 Swedbank Latvia Consolidated Situation 110
Mitigation of credit risk 37 Swedbank Lithuania Consolidated Situation 127
Measurement of credit risk 38 Swedbank Mortgage AB 144
Credit risk exposures in the standardised approach 42
Credit risk exposures in the IRB approach 44
Counterparty credit risk 54
4.Market risk 60
Risk appetite 60
Highlights 2017 60
Management of market risks 60
Measurement of market risk 61
Capital requirements for market risk 62
Market risk exposures 63
5.Liquidity risk 66
Risk appetite 66
Highlights 2017 66
Funding and liquidity strategy 66
Management of liquidity risk 70
Measurement of liquidity risk 70
6.Operational risk 75
Risk appetite 75
Highlights 2017 75
Management of operational risk 76
Capital requirements for operational risk 77
SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2017
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Introduction
This Risk Management and Capital Adequacy Report 2017 Information on Swedbank’s corporate governance structure
(Pillar 3 report) provides information on Swedbank’s risk and measures undertaken to manage the operations in the
management and capital adequacy. The report is based on consolidated situation, is presented in Swedbank’s Corporate
regulatory disclosure requirements set out in the Capital Governance Report. Furthermore, this report also presents
Requirements Regulation (Regulation (EU) 575/2013) and the information regarding Swedbank’s Board of Directors
Swedish Financial Supervisory Authority (SFSA) regulation including directorships and the recruitment policy. Information
FFFS 2014:12. concerning risk implications of the remuneration process (and
aggregate as well as granular quantitative information on
Information in this report pertains to the conditions for remuneration) is disclosed in the document “Information
Swedbank Consolidated Situation (see the Swedbank regarding remuneration in Swedbank 2017”, which is
Consolidated Situation table in Appendix A) as of 31 published in conjunction with the Annual General
December 2017 if not otherwise stated. The disclosure is Shareholders Meeting. All documents mentioned above, as
made annually in conjunction with the publication of well as the Policy on Gender Equality and Diversity, are
Swedbank’s Annual Report. For items where Swedbank has available on www.swedbank.com.
assessed that more frequent disclosures are needed, the
information is given in the interim reports. In this report This report is submitted by Swedbank AB, a public limited
Swedbank Consolidated Situation is referred to as Swedbank, liability company with registration number 502017-7753.
unless otherwise stated. This document has not been audited and does not form part of
Swedbank AB’s audited financial statements.
Furthermore, this report includes information for significant
subsidiaries (Estonia, Latvia, and Lithuania each on a This is the first time that Swedbank discloses information in
consolidated basis as well as Swedbank Mortgage) in accordance with EBA’s guidelines on disclosure requirements
accordance with Article 13 in the Capital Requirements under Part Eight of Regulation (EU) 575/2013. Hence, the
Regulation. majority of the tables presented in this report, i.e. the new
tables, will not include any comparison figures.
The report is part of the capital adequacy framework that
builds on three pillars: Swedbank in brief
• Pillar 1 provides rules for how to calculate minimum Swedbank is a full-service bank, available to all households
capital requirements for credit risk, market risk and and businesses in its home markets, having over 7 million
operational risks. The calculations can be done either by private customers and more than 600,000 corporate and
using prescribed standardised risk measures or by using organisational customers across its operations. The customers
the bank’s own internally used risk measures. Swedbank are served by 351 branches in Swedbank’s four home markets
must fulfil certain requirements in order to apply its own – Sweden, Estonia, Latvia and Lithuania – and a presence in
internal risk measures and must seek approval from the neighbouring markets such as Denmark, Finland and Norway.
SFSA and local supervisors in other countries where Swedbank also operates in financial hubs such as the United
Swedbank operates. States, Luxembourg and China.
• Pillar 2 requires institutions to prepare and document Swedbank consists of four main business segments: (i)
their own internal capital adequacy assessment process Swedish Banking, (ii) Baltic Banking (iii), Large Corporates &
(ICAAP). All relevant sources of risk must be taken into Institutions, and (iv) Group Functions & Other.
account, that is, not only those already included when
calculating the minimum capital requirement for credit, Economic environment
market and operational risks. The SFSA will, together
In 2017, the global economy gained momentum. The debt
with the regulatory supervisory college, make an
overhang from the financial crisis started to fade, boosting
assessment of the banks’ ICAAP and may impose
consumer spending and business investment, as well as
additional capital requirements for Pillar 2 risks, meaning
reducing pressure on government finances. In the US,
risks not covered by the Pillar 1 calculations.
economic growth picked up, growth in emerging markets
• Pillar 3 requires institutions to disclose comprehensive stabilised and the euro area experienced a strong cyclical
information about their risks, risk management and upswing. However, there are still risks to the global economic
associated capital. This report constitutes the demanded outlook, stemming predominantly from political factors such
disclosure for Swedbank. as heightened geopolitical tensions between the US and East
SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2017
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Asia, economic imbalances in emerging market economies and the Riksbank to reach its inflation target. Although prices
lasting financial sector weaknesses, in e.g. certain parts of the have risen, the Riksbank is likely to be cautious going forward.
eurozone. Swedbank expects that the Riksbank will increase its policy
rate -0.25 per cent at the end of 2018.
The US business cycle shows signs of maturing. The labour
market is strong and inflation is anticipated to rise. During At the end of last year, housing prices started to decline
2017, the Federal Reserve raised the policy rate three times following the introduction of the amortisation requirement in
and Swedbank expects three more hikes in 2018. The Federal 2016 and a sharp increase in housing supply, in particular of
Reserve also began reducing its balance sheet, a reduction high-end units in the larger cities. Construction increased
that will continue in 2018. Yet, against the backdrop of a substantially but the supply of new housing was dominated
fairly stable growth, there are still uncertainties in particular by relatively expensive condominiums and rentals. When it
regarding fiscal policy. In the short-term, this could lead to a comes to more affordable apartments, the shortage is still
boom-bust cycle and in the longer-term erode the US fiscal large. In 2018, a strong labour market, coupled with a higher
sustainability. Political uncertainties are expected to remain child allowance and a lower tax rate on pensions should
elevated due to the mid-term elections in November. support a solid disposable income development. Growth in
household consumption will dampen somewhat as the
Growth is rebounding in several of the larger emerging Riksbank is expected to start increasing rates in mid-2018.
economies. In China, however, economic stability is prioritised Although Sweden is enjoying favorable conditions for
and monetary policy is tightened to cool down the overheated continued growth, the political situation after the 2018
property market. While managing to keep growth numbers up, general election could be complicated. Economic policy could
amidst a structural shift towards services and domestic create uncertainty, not least for fiscal policy if growth slows
demand, US protectionism still poses a risk to the Chinese down and unemployment begins to rise. However, the main
economy. Growth in India suffered from the recent currency risks to the Swedish economy are high volatility on the
reform, but going forward, growth rates are expected to housing market and an unexpected slowdown in global
rebound. Commodity-producing countries, such as Brazil and growth. Overall, weakness in housing investment is expected
Russia, are benefitting from a cyclical upswing in prices but to be offset by increased external demand and the growth for
economic imbalances could be a significant medium-term drag 2018 is expected to remain at approximately 2.5 per cent.
on growth.
During 2017, all three Baltic economies grew at 3-4 per cent
The euro area economic growth rebound in 2017 was which was faster than expected. Stronger external demand
stronger than expected. Investments pick ed up which and robust domestic consumption raised enterprises’ turnover
contributed to increased growth and trade. Germany ’s and investment volumes, having a positive impact on the
business cycle is maturing but has not yet peaked and the labour market. In the forthcoming two years, investment will
outlook for France has improved. The Brexit process is a risk be pushed even higher by stronger demand and the
for sentiments across Europe and for long-term economic implementation of the EU structural funds’ projects.
prospects, in particular of the UK. T he ECB is sending Swedbank expects economic growth in the Baltic States to
increasingly upbeat signals, and asset purchases have been slow somewhat in 2018. Although local elections were held in
scaled back. Quantitative easing is expected to stop after Estonia in 2017, and general elections will be held in Latvia in
September 2018 and rate hikes are expected to start in the 2018, electoral outcomes will most likely not lead to
first half of 2019. The political risks related to the 2017 significant changes of economic policy. The general
European super-election year have abated, however risks of government budget deficits are expected to remain small in
political uncertainties still exist with popular votes coming up Estonia and Latvia (below 1 per cent of GDP) and a fiscal
in 2018. Not least the Italian general elections are seen as an surplus is foreseen in Lithuania 2018-2019. The main risks to
important political event. growth in the Baltics are external; political uncertainty in
Europe and Russia and shocks in the Scandinavian real estate
The Swedish economy slowed down in 2017 but remains market could affect the Baltic countries through financial
strong. The driving force shifted from domestic demand to linkages, lower export demand and declining incomes of the
export driven industrial production where Sweden is construction workers employed in the region. As to domestic
benefitting from improving growth prospects in its main risks, labour market pressures and excessive wage growth
trading partners. Employment, investment and consumer could strain competitiveness. Furthermore, additional bank
spending are expanding at a good pace, supported by low regulations may act as a drag on credit growth.
interest rates and fiscal policy. However, low wage increases
and subdued domestic cost pressures are making it harder for
SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2017
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Low risk profile, a strong capital base and a continued stable liquidity
situation amid uncertain external environment
“2017 proved to be yet another strong year for Swedbank. The capital base stayed strong on the back of stable
profit generation and solid asset quality, ensuring Swedbank’s low risk profile and high cost efficiency which is in line with
the bank’s strategy. The persistently strong asset quality in the credit portfolio in both Sweden and in the Baltics was
demonstrated by a continued low level of loan losses
Swedbank has been one of the best capitalised banks in Europe for several years, and 2017 was no exception. Our
strong capital position was confirmed by the 2017 ICAAP and the SFSA stress tests, but also via the latest pan-European
stress test performed by the European Banking Authority and the International Monetary Fund as part of their 2016
Financial Sector Assessment Process.
Our liquidity position is equally strong, due to proactive funding activities and stable investor demand for our bonds.
Even in a hypothetical scenario of closed capital markets, our Survival Horizon measure shows strength, as does the Net
Stable Funding Ratio (NSFR).
During the year, the downturn in the oil sector abated slightly. However, the oil and offshore market is still under
strain with charter rates, occupancy and investments at low levels. We continue our close dialogue with customers and take
proactive steps to reconstruct parts of that portfolio, taking the provisions where necessary to account for potential future
loan losses.
In 2017, Swedbank continued to fasten the digitalisation pace of the business. The first fully digitalised loan product
– unsecured consumer lending – was launched in February 2017. As the digitalisation of lending continues at full speed, new
expectations on Risk management capabilities emerge. Fully automated credit decisions and process controls are becoming
a norm and managing new risk types such as Model Risk is increasingly important. New regulations such as PSD2 and GDPR
simultaneously call for additional requirements on handling customer data and the assessment of risks related to third
parties. Several initiatives have been started to ensure that we have a good control of data and are prepared to work in a
more digitalised environment with advanced analytics techniques.
During the second half of 2017, after several years of substantial price increases, the Swedish housing market
started to cool down. The primary drivers behind the decline in prices are the increase of supply driven by a high
construction rate coupled with new amortisation requirements introduced by Swedish FSA. Swedbank’s risk in the housing
development segment is low. The lending to the developers has been prudent, focusing on projects with a large share of
pre-sold apartments and a sound amortisation culture.
Geopolitical risks remain high; the political situation in the US has increased the risk of policy mistakes, the upcoming
general election in Italy with yet another Eurosceptic party and the prevailing uncertainties regarding the UK’s withdrawal
from the EU are all examples of external risks that we monitor closely. The Swedish economy is strong and the economic
growth has exceeded expectations in all three Baltic countries. We continue to observe carefully any monetary policy
actions made by central banks.
Our operating environment presents us with a variety of factors to manage. However, our solid capitalisation with
one of the strongest CET1 capital ratios among European banks, and strong liquidity position combined with our focus on
low-risk assets, puts us in a good position to meet these challenges.
With this report, we aim to provide readers with an open and clear view of how we work with risk management at
Swedbank and how we continue to ensure our low risk profile.”
Helo Meigas
Chief Risk Officer
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1. Risk governance
Swedbank has a solid risk organisation constituted by three lines of defence. With
an independent and well established structure, the risk organisation is based on a
strong risk culture that ensures a professional risk management protecting
Swedbank from unintentional and unnecessary risk-taking.
Risk profile
Swedbank defines risk as a potentially negative impact on strategy and business planning process, in which risk-based
Swedbank’s value that can arise due to ongoing internal planning is an integrated part. Internal regulations and
processes or future internal or external events. The concept of guidelines are developed to secure strong risk control and
risk includes the probability that an event will occur and the steering. Swedbank’s risk framework includes risk limits
impact that this event could have on the Swedbank’s results, applied for each individual risk category, starting from the
equity or value. Board of Directors further down to the business areas for
appropriate steering (see “Risk Appetite and Framework”). The
The Policy on Enterprise Risk Management (ERM), established framework also includes well-developed origination standards
by the Board of Directors, states that Swedbank’s strategy is for prudent lending.
to maintain a low risk profile. The risk profile is further
concretised by the risk appetite of Swedbank (see “Policy on
Policy on Enterprise Risk Management
Enterprise Risk Management Policy” and “Risk appetite and
framework”) which has been defined by the Board of Directors
Risk arises in all financial operations, hence a profound
setting targets for the type and level of risk that Swedbank
understanding and solid management of risk is central for any
may expose itself to through its business activities;
successful business. A strong risk culture throughout
capitalisation, market risk, credit risk, funding and liquidity
Swedbank serves as the foundation for efficient risk
risk, operational risk, information risk, legal risk, compliance
management and, consequently, a strong risk-adjusted return.
risk, reputational risk, sustainability risk, insurance risk and
conduct risk. Swedbank’s risk appetite for the category “other The Board of Directors has the ultimate responsibility for
risks” is covered by the appetite for capitalisation. In 2017, Swedbank’s risk-taking and capital assessment. Through the
Swedbank’s risk profile corresponded well to the risk appetite Policy on Enterprise Risk Management (ERM), the Board
established by the Board of Directors. provides guidelines for the CEO on risk management and risk
control, and how these functions should support the business
Swedbank’s customer base, which mainly consists of private
strategy. Furthermore, the policy stipulates Swedbank’s risk
individuals and small and medium-sized companies in Sweden
appetite, the concept of three lines of defence, the
and in the Baltic countries, is the foundation for the low risk.
fundamental principles of risk management as well as roles
During 2017, Swedbank’s low-risk profile was confirmed by
and responsibilities within the risk organisation. The Board
the low losses in these segments, supported by the strong
has established a Risk and Capital Committee (RCC), an Audit
economic development in all four home markets. Market risks
Committee (AC) and a Remuneration Committee (RC) as
were kept on a low level, despite increased geopolitical risks
support in matters related to risk management, governance,
during the year. In terms of operational risks, no single large
capital requirements and remuneration, respectively. For
loss event occurred and the accumulated losses were lower
further information on these committees, duties, reporting to
than expected. Both internal and external stress test resulted
committees and number of meetings during 2017, see the
in a unanimous picture of Swedbank's adequate capitalisation
Swedbank Corporate Governance Report available on
and strong capacity to manage severe negative scenarios. The
www.swedbank.com/about-swedbank/management-and-
Equity Tier 1 (CET1) capital ratio of Swedbank is still among
corporate-governance/.
the highest of the European banks proving, for example, that
Swedbank is well-positioned to meet both current and future
capital requirements and that Swedbank’s business continues Three lines of defence
to grow.
Successful risk management requires a strong risk culture and
a common approach. Swedbank has built its approach to risk
In order to continuously secure a low risk level, Swedbank’s
management on the concept of three lines of defence,
operations are based on professional risk management and
signifying a clear division of responsibilities between the risk
control. A risk framework has been developed to ensure solid
owners and control functions, i.e. Group Risk, Compliance and
risk awareness and business acumen within all parts of
Internal Audit.
Swedbank. This framework originates from Swedbank’s

SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2017
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Swedbank’s risk management
Risk appetite and framework
The CEO has established a Group Risk and Compliance
The Policy on En terprise R isk M anagement states that
Committee (GRCC) to assist in matters related to all categories
Swedbank shall maintain a low risk profile in terms of capital
of risk and compliance. This includes reviewing, monitoring
and liquidity. The long-term risk profile shall be managed so
and challenging Swedbank’s risk profile in terms of significant
that a severely stressed scenario, as defined in the annual
exposures, risk trends, stress tests, losses, management
Internal Capital Adequacy Assessment Process (ICAAP), should
actions and performance versus risk appetite which includes
not have a significant negative impact on the CET1 capital
observance of the risk limit framework. The GRCC, with 11
ratio. If the impact exceeds the established risk appetite,
meetings held in 2017, also reviews and monitors the
preventive measures must be taken.
management of findings made by the Compliance
The Board of Directors establishes the main principles for organisation, Swedbank’s risk units, the Internal -and the
Swedbank’s risk management and decides on the overall risk External Audit functions, respectively, to secure that these
appetite. In order to ensure the approach to risk in different findings are accurately managed. In order to further
operations, the Board has also formulated risk appetites for strengthen the risk management arrangements, in both group
each main risk type (see below). The risk appetites are further functions and local business areas, the GRCC is supported by
substantiated by limits set by the CEO and complemented by local Risk and Compliance Committees (BARCCs). Individual
CRO limits with the purpose to identify potential limit BARCCs are established in all business areas and relevant
breaches at an early stage. Business area limits, constituting group functions and have the same setup on local level as the
the last level in the risk limit framework, are applied where GRCC. Escalation routines are implemented from the BARCCs
relevant. The risk appetite and limits are designed to secure to the GRCC in order to secure solid and efficient risk
that Swedbank s ustains its low-risk profile, taking into management.
account Swedbank’s business operations. The risk limit
Credit risk
framework structure includes escalation principles in the
event of any breaches of the risk appetite or limits. Swedbank maintains a well-diversified credit portfolio with a
low risk profile. All credit activities strive for a long-term
Swedbank’s risk organisation is responsible for ensuring that customer relationship and rest on strong business acumen to
each key risk is identified, analysed and properly managed. achieve solid profitability and a sound credit expansion for
Decisions made on an aggregated level should always be in long-term stability. A basic principle in Swedbank’s lending
line with Swedbank’s risk appetite. The Board, as well as the operations is that each business unit carries full responsibility
CEO, is regularly informed on the overall and specific risk for its transactions and its associated credit risks. Each
profile. Furthermore, the Board and the CEO are also regularly business unit strives to develop and maintain a balanced
provided with information regarding the functionality of credit risk level for the respective credit portfolio, which is
Swedbank’s risk limits and, in case of a breach, the actions achieved by lending to customers with high debt-service
needed to be taken to mitigate the breach. Swedbank’s risk capabilities, by maintaining a strong collateral position and by
organisation is responsible for providing the business portfolio diversification within and between sectors and
operations with guidance and support by developing and regions.
maintaining, for example, internal regulations and guidelines
for each risk category.
SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2017
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Counterparty risk
Counterparty risk arises as a result of hedging of own market regulatory requirements, rating ambitions and the capacity to
risk and from customer-related trading activities. Swedbank absorb losses through earnings and capital. They shall be
has a conservative approach when choosing interbank considered in business decisions and, as far as possible, in the
counterparts. In the derivatives business, International Swaps pricing of products and services. Managers shall ensure that
and Derivatives Association (ISDA), or similar agreements, are the operational risks inherent in their respective areas are
in general established with Swedbank’s customers. identified, assessed and properly managed in the day-to-day
Furthermore, Swedbank restricts the extent of its operations.
counterparty risk exposure through several actions such as
ALM and capital management
setting counterparty limits and FX settlement limits.
In addition to the Policy on Enterprise Risk Management, a
Market risk policy on Swedbank’s Asset, Liability and Liquidity has been
According to Swedbank’s Policy on Enterprise Risk established. This policy specifies the fundamental principles
Management, and the concept of three lines of defence, that shall apply for Swedbank’s processes and structures in
market risk-taking shall only be conducted by units granted order to identify and manage Swedbank’s assets and
permission by Swedbank’s CEO. The risk-taking is limited by a liabilities, hence enabling the maintenance of an optimised
certain risk appetite, established by Swedbank’s Board of balance-sheet structure that meets liabilities, absorbs losses,
Directors. Originating from the risk appetites, respectively, safeguards shareholder returns, and maintains public
risk limit structures have been created in order to protect confidence. Swedbank’s capital, funding and liquidity shall be
Swedbank against unintentional losses and excessive levels of managed so that it does not create disproportionate
market risk. constraints on the governance or management of Swedbank.
Liquidity risk and Funding The CEO has established the Group Asset Allocation
Swedbank strives to maintain a conservative risk profile with Committee (GAAC) to assist in issues related to the
resilience to both short-term and long-term external stress management of assets, liabilities, capital and the balance
and to maintain an adequate buffer of highly liquid assets to sheet structure. Group Treasury works as an internal bank and
enable it to withstand a prolonged period of liquidity stress provides funding to the business areas, retains capital at a
without relying on forced asset sales or government Group level or, as directed by shareholders or the Board,
intervention. Swedbank shall have a long-term, stable, well- returns it to shareholders. To ensure that Group Treasury can
diversified funding and investor base with a wholesale act as an internal bank, an adequate framework comprising
funding that is well diversified across markets, instruments principles and instructions for capital allocation and internal
and currencies. Furthermore, it shall strive to avoid maturity fund-transfer pricing is maintained.
mismatch risk in assets funded by unsecured funding. All non-
Compliance
liquid assets, not eligible for covered bond issuance, shall be
For governing, controlling and supporting the proper handling
funded, either through customer deposits, or through
of compliance matters, the CEO relies on Swedbank’s
wholesale funding with a maturity, to the largest extent,
Compliance organisation. The Compliance function is
matching or exceeding that of the assets.
responsible for providing assurance to the CEO and the Board
of Directors that Swedbank’s business is being conducted in
Liquidity risk is measured, forecasted and analysed, using
accordance with regulatory requirements applicable to the
various time horizons to ensure that the entire Group has
operations subject to authorisation. Compliance’s activities
adequate cash or cash-equivalents to meet its obligations in a
are planned and prioritised through a structured and
timely manner. The responsibility for managing the Group’s
documented process aimed at identifying the key compliance
liquidity lies with in Group Treasury. Group Risk works
risks in Swedbank. The current focus areas for Compliance are
independently to identify all relevant aspects of liquidity risks
internal governance, customer protection, market conduct,
and is responsible for controlling, measuring, monitoring and
ethics, and conflicts of interest, anti money-laundering
reporting of the liquidity risk exposure across Swedbank.
activities, counter-terrorist financing activities, and data
Operational risk protection.
Swedbank shall not experience operational risk-related losses
or incidents that have materially negative impact on
Swedbank’s funding, capitalisation or third-party credit rating.
The maximum level of operational risk is further defined in the
risk limits by a stated level of unexpected financial loss,
tolerable errors in the financial statement and as specific
qualitative statements which relate directly to Swedbank.
Operational risks are to be kept at the lowest possible level
taking into account business strategy, market sentiment,
SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2017
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2. Capital requirements
Swedbank continues to be one of the best capitalised financial institutions
globally with one of the highest CET1 capital ratios among European banks. The
strong capitalisation provides not only resilience ensuring that Swedbank is well
positioned to weather worse economic conditions and meet stricter capital
requirements, but also enables Swedbank to grow its business.
default, as described below. The capital charge will be imposed
Capital requirements
until the SFSA has approved the banks’ updates to their
Capital adequacy rules express the regulatory
models in response to the revised requirements.
requirement for how much capital a bank must hold in
relation to the risk the bank faces
Under the Capital Requirements Regulation (Regulation (EU)
No 575/2013, CRR), a bank’s total capital must be equivalent
Highlights 2017
to at least the sum of the capital requirements for credit,
market and operational risks, including capital buffers and
Swedbank’s Common Equity Tier 1 (CET1) capital ratio was
potential Pillar 2 add-ons. Banks using the internal ratings-
24.6% as of year-end, making Swedbank well-positioned to
based (IRB) approach were earlier required to, at all times, hold
meet both current and future capital requirements. Swedbank
own funds equal to or exceeding 80% of the total minimum
currently holds a 270 bps buffer to its CET1 capital
amount of own funds that the bank would be required to hold
requirement. Internal and external stress tests show that
under the Basel I rules (“Basel I floor”). However, the SFSA
Swedbank remains resilient to crises. Foremost, the Internal
announced on 16 October 2017 that as of 1 January 2018, the
Capital Adequacy Assessment Process (ICAAP), which
Basel I floor will no longer be a capital requirement in Sweden.
incorporates adverse scenarios more severe than any recent
This will not impact Swedbank considerably on a consolidated
Swedish recession, proves the strong resilience of Swedbank.
level since Swedbank currently still fulfills these requirements.
In May 2017, Swedbank issued EUR 650m in Tier 2 capital to
optimise its capital structure. The issuance was made to
Other laws and regulations are also relevant for Swedbank;
replace maturities of the same type of capital during fall 2017.
for example, the Swedish Banking and Finance Business Act
requires a minimum initial capital of EUR 5m. Furthermore, the
Capital requirements CRR includes rules regarding large exposures, i.e. the
limitation of exposures to individual customers or groups of
The capital adequacy rules stipulates the regulatory
customers in relation to total capital.
requirement for how much capital a bank must hold in relation
to the risk that the bank faces. When assessing its capital In brief, the total capital is the sum of the CET1 capital, the
needs, Swedbank takes into consideration its current and Additional Tier 1 (AT1) capital, and the Tier 2 (T2) capital. The
future risk profile, internal risk measurement and assessment CET1 capital is mainly comprised of shareholder equity after
of the risk capital needed. In addition to capital requirements various adjustments, while the Additional Tier 1 capital and
for credit, market and operational risk (i.e. Pillar 1), all other the Tier 2 capital are mainly constituted by subordinated debt.
risks, such as interest rate risk in the banking book, A reconciliation of shareholders’ equity (according to
concentration risks, pension risks, earnings volatility risk, and International Financial Reporting Standards, IFRS) and the
strategic risk must be taken into account when assessing the regulatory total capital is presented below in Figure 2-1.
total capital need (i.e. as part of the Pillar 2 assessment). In
recent years, the Pillar 2 capital charges have increased in Key figures
importance as a supervisory tool. In particular, the Swedish At year-end 2017, the CET1 capital ratio (i.e. the CET1 capital
Financial Supervisory Authority (SFSA) has introduced both a in relation to the risk exposure amount), was 24.6% (31
systemic risk buffer and a risk-weight floor for Swedish December 2016: 25.0%).
mortgages within the Pillar 2 framework. In 2016, the SFSA
also imposed a temporary additional Pillar 2 capital charge During 2017, Swedbank’s CET1 capital increased by SEK
related to revised requirements on banks’ internal models, 1.8bn, to SEK 100.51bn. The change was mainly attributable
requiring the banks to anticipate a higher frequency of to earnings, net of proposed dividend. The accounting for
economic downturns in their e stimates of probability of employee benefits (IAS 19) created volatility in the estimated
SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2017
10
pension liabilities and decreased the CET1 capital by In 2017, REA for credit valuation adjustment decreased by
approximately SEK 1.6bn. The changes in the CET1 capital are SEK 1.6 bn. The main drivers for the decrease were lower total
shown in Figure 2-2 below. Also, increased deduction of EAD, which decreased by 24% compared to 2016. As well as a
intangible assets decreased the CET1 capital with lower standard deviation of the EAD, meaning that exposures
approximately SEK 1.8bn, where the acquisition of PayEx were more uniform than in the end of 2016, thus resulted in a
contributed to the increase. further reduction of the CVA REA.
The risk exposure amount (REA) increased during 2017 by REA for market risks decreased by SEK 0.7 billion in 2017. The
SEK 14.2bn, to SEK 408.3bn (31 December 2016: SEK majority of the decrease was derived from the input to
394.1bn). The main driver of the increase was that during the internal model used when calculating market risk
2017, it was noted that the PD model for Large Corporates REA. The yearly update of the operational risk
underestimated the default frequency of certain exposures. calculation increased REA by SEK 0.2bn during the first
To account for this, Swedbank chose to retain more capital as quarter of 2017, mainly due to increased income levels within
of 2017, pending an approval of the updated model by the the business lines Commercial Banking and
Swedish FSA. This resulted in an increase in REA of SEK Asset Management. This affected the capital
27.6bn due to additional risk exposure amount in accordance requirement for operational risks, since it is calculated based
with article 3 in the CRR. on a rolling three-year average of revenues. Furthermore,
the acquisition of PayEx Group in August 2017 increased
Credit risk REA decreased during 2017 by SEK 12.4bn driven REA for operational risk by SEK 1.1bn.
by a decrease mainly in corporate exposures trough Swedish
Banking and LC&I. The total REA-effects from PD migrations On 31 December 2017, Swedbank’s leverage ratio was
constituted a decrease by SEK 1.0bn. Positive PD migrations 5.25% (31 December 2016: 5.4%). The Tier 1 capital
were mainly seen in exposures to Institutions in Group decreased by SEK 1.4bn to SEK 111.6bn. The change
Functions’ credit portfolios and Retail mortgage exposures in was mainly attributable to earnings, net of proposed
Swedish Banking’s credit portfolios. This was offset by dividend, and to maturities of the Additional Tier 1 capital in
negative PD migrations for Corporates exposures to LC&I. September 2017. The exposures included in the calculation of
the leverage ratio increased by SEK 28.7bn, please see
In 2017, REA decreased by SEK 3.4bn due to improved loss Table 2-7 for a full reconciliation of the leverage ratio.
given default (LGD) levels resulting from higher collaterals,
mainly for corporate customers in Swedish Banking and from
improved processes for handling collateral values. Changes in
exchange rates, mainly attributable to the Baltic credit
portfolio increased REA for credit risk by SEK 1.8bn due to
depreciation of the Swedish krona versus the euro.
Figure 2.1: Link between shareholders’ equity and total capital
SEKbn
140
133.4
130 13.7 125.3
120
-14.5 11.0 111.6
110
100.5
100 -15.9
-2.5
90
80
70
Shareholder's Proposed Goodwill & Other Total CET1 Additional Tier Total Tier 1 Tier 2 capital Total capital
equity dividend intangible adjustments Capital 1 capital Capital
assets CET1 capital
Increase Decrease
SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2017