Risk Management and Capital Adequacy Report Pillar 3

155 Pages·2015·2.61 MB·English

by  Marion Cutting

Risk Management and Capital Adequacy Report
Pillar 3 – 2014
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Table of contents
Introduction 3
Swedbank in brief 3
Economic environment 4
CRO’s statement 5

1. Risk governance 6
Risk profile 6
Enterprise Risk Management Policy 7
Three lines of defence 7
Risk appetite and framework 7

2. Capital requirements 10
Highlights 2014 10
Capital requirements 10
Capital planning 12
Regulatory environment – impact on Swedbank 13

3. Credit risks 17
Highlights 2014 17
Credit risk exposures 18
Capital requirements for credit risk 23
Credit risk exposures – by business segment 25
Credit risk exposures – by sector 31
Management of credit risk 39
Measurement of credit risk 43
Counterparty risk 48

4. Market risks 51
Highlights 2014 51
Market risk exposures 51
Management of market risks 54
Measurement of market risk 55
Capital requirements for market risks 56

5. Liquidity risks 57
Highlights 2014 57
Funding and liquidity strategy 57
Management of liquidity risk 60
Measurement of liquidity risk 61

6. Operational risks 63
Highlights 2014 63
Management of operational risk 64
Capital requirements for operational risk 66

7. Group-wide stress tests 69
Highlights 2014 69
Internal Capital Adequacy Assessment Process – Pillar 2 70
The adverse ICAAP scenario 71
Impact on Swedbank – simulation results 72
REA and capital assessment results 73
Management interventions 73
The European Banking Authority’s pan-European stress test 74
The European Central Bank’s stress test 74
Externally performed stress tests 74

Swedbank Consolidated Situation: Appendix 76
Definitions 112

Subsidiaries: Appendices
Swedbank Estonia Consolidated Situation Appendix Estonia CS 1
Swedbank Latvia Consolidated Situation Appendix Latvia CS 1
Swedbank Lithuania Consolidated Situation Appendix Lithuania CS 1
Swedbank Mortgage AB Appendix Swedbank Mortgage 1

SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2014
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Introduction
This Risk Management and Capital Adequacy Report 2014 (Pillar 3 report) provides
information on Swedbank’s capital adequacy and risk management. The report is based on
regulatory disclosure requirements set out in the Capital Requirements Regulation (Regulation
(EU) 575/2013) and the SFSA regulation FFFS 2014:12.
Information in this report pertains to conditions as of 31 December 2014 for Swedbank
Consolidated Situation (see Definitions table in Appendix) if not otherwise stated.
Furthermore, this report includes information for significant subsidiaries (Estonia, Latvia,
Lithuania on consolidated basis as well as Swedbank Mortgage) in accordance with Article 13
in the Capital Requirements Regulation.
The report is part of the capital adequacy framework that builds on three pillars:
• Pillar 1 provides rules for how to calculate minimum capital requirements for credit risk,
market risk and operational risks. The calculation can either be done using prescribed
standardised risk measures or based on the bank’s own internally used risk measures.
Swedbank must fulfil certain requirements in order to use its own internally used risk
measures and must seek approval from the SFSA and local supervisors in other countries
where it operates.
• Pillar 2 requires institutions to prepare and document their own internal capital
adequacy assessment process (ICAAP). All relevant sources of risk must be taken into
account, that is, not only those already included when calculating the minimum capital
requirement for credit, market and operational risks. In cooperation with local supervisors,
the SFSA will make an assessment of the banks’ ICAAP and may impose additional capital
requirements for “Pillar 2 risks”, meaning risks not covered by the Pillar 1 calculation.
• Pillar 3 requires institutions to disclose comprehensive information about their risks, risk
management and associated capital. For Swedbank this is done in the form of this report.
Information about the Swedbank corporate governance structure and measures undertaken to
manage operations in the consolidated situation is presented in the Swedbank Corporate
Governance Report. Information about the Swedbank Board of Directors including
directorships and recruitment policy is also disclosed in the Swedbank Corporate Governance
Report. Information about risk implications of the remuneration process (and aggregate as
well as granular quantitative information on remuneration) is disclosed in the document
“Information about remuneration in Swedbank 2014” which is published in conjunction with
the Annual General Shareholders Meeting. All documents mentioned above, as well as the
policy on diversity, are available on www.swedbank.com.
This report is submitted by Swedbank AB, a public limited liability company with registration
number 502017-7753. This document has not been audited and does not form part of
Swedbank AB’s audited financial statements.
Swedbank in brief
Swedbank is a full-service bank available to all households and businesses in its region. With
over 8 million private customers and more than 600,000 corporate and organisational
customers across its operations, Swedbank is the largest bank in Sweden based on number of
customers. The customers are served by 470 branches in 11 countries. Swedbank has four
home markets – Sweden, Estonia, Latvia and Lithuania – and a presence in neighbouring
markets such as Denmark, Finland and Norway to support our client base in these markets.
Swedbank also operates in key financial hubs such as the U.S., China and Luxembourg.

SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2014
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Swedbank is discontinuing operations in Russia.
Swedbank consists of four main business segments: (i) Swedish Banking, (ii) Baltic Banking (iii),
Large Corporates & Institutions, and (iv) Group Functions & Other. Swedish Banking is divided
into six business areas which are: (i) the North Region, (ii) the Central Region, (iii) the
Stockholm Region, (iv) the Eastern Region, (v) the Western Region and (vi) the South Region.
Economic environment
The recovery in the global economy decelerated during 2014, but with significant differences
between countries and regions. The US and UK performed well, while growth in the euro area
was weaker than expected. Growth rates in emerging markets also slowed down. Falling
commodity prices and a low utilisation rate led to low global inflation, contributing to record
low interest rates. A sharp fall in oil prices and continued decline in inflation expectations has
been a growing challenge for monetary policy. In the US, the Fed finished quantity-easing
programs in October, while in the euro area the European Central Bank (ECB) started to
introduce unconventional monetary policy actions to avoid a deflationary trend. Similar
actions have been taken in other economies with low or no inflation, such as Japan.
The Swedish economy was surprisingly resilient during 2014, although the global recovery
was weak. It was largely driven by a robust growth in private consumption and investments in
housing, while Swedish exports were to some extent negatively affected by weak demand
from the euro area. In Q3, Sweden’s GDP increased by 2.1% compared with the corresponding
period in 2013. In Q4, the inflation rate in Sweden continued to decline and in December, the
inflation rate was -0.3%, largely driven by lower energy prices. The Swedish labour market
had a strong performance, with new jobs created primarily in the private service sector. In
December, the Riksbank decided that the repo rate needed to remain at 0% and the Riksbank
also announced that further measures might be necessary.
The Baltic economies managed the weaker external demand and impacts from the geopolitical
crisis in Russia relatively well. In Q3, the annualised growth rate was 2.2% in Estonia, 2.4% in
Latvia and 2.7% in Lithuania. Higher wage increases and rising employment supported a
robust private consumption. On 1 January 2015, Lithuania became a member of the EMU,
which means that all the Baltic countries are now members of the monetary union.

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Low risk and strong capital base in a challenging
environment

“2014 was another strong year for Swedbank. Our capital base continued to strengthen on
the back of stable profit generation and solid asset quality, as we continued to decrease risk in
our balance sheet. The asset quality in the credit portfolio has shown strong resilience during the
year with low loan losses. Impaired loans have also continued to decrease as we have now
disposed almost all legacy portfolios from the financial crisis.
In 2014, Swedbank received the awaited approval from the SFSA to use the advanced IRB
approach for corporate exposures in Sweden and Norway, which contributed to increasing our
CET1 capital ratio. We are now one of the highest capitalised banks in Europe. Our strong capital
position is confirmed by both the ICAAP stress test and stress tests conducted by the EBA, the
Riksbank and the SFSA. Our liquidity position is also strong, thanks to proactive funding
activities and solid investor demand for our bond issuances offerings. In a hypothetical scenario
of closed capital markets, our survival horizon stretches far beyond 12 months.
From the risk control perspective, our focus in 2014 has been to support responsible
business growth. This has been done through further embedding a strong business and risk
culture, but also by preventing undesired risks through e.g. further development of steering
tools and risk limit framework and through the use of a more sophisticated monitoring and
control structure. We have also focused on further improving prudent risk management during
operational changes. Another focus area has been the regulatory landscape and implementation
of new legislations, which is a key challenge for the whole industry.
Looking into 2015, we face several challenges in the external environment such as the
macroeconomic situation within the euro area showing slow growth and low interest rates. We
will need to handle a potential scenario with negative interest rates as well as effects from
quantitative easing actions. Geopolitical uncertainties such as the conflicts in Russia/Ukraine, the
Middle East and the relationship between Greece and the rest of the EU are other factors we are
taking into account. We are closely monitoring the low oil price and its impact on certain
industries, although a lower oil price is neutral or beneficial for most of our customers. We are
also allocating significant resources to managing the scope of new regulatory requirements
which continue to be a key challenge going forward.
Our operating environment thus presents us with a variety of factors to manage. However,
our solid capitalisation with one of the strongest CET1 capital ratios among European peers and
strong liquidity situation 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 and strong
capital base.”
Anders Karlsson
Chief Risk Officer

SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2014
1. Risk governance

The embedded risk culture and clear risk ownership in
business operations together with Swedbank’s
independent risk organisation secures professional risk
management and protects us from unintentional and
unnecessary risk-taking.
Risk profile
Swedbank defines risk as a potentially negative impact on the Group’s value which can arise
due to ongoing internal processes or future internal or external events. The concept of risk
includes the probability that an event will occur and the impact it could have on the Group’s
results, equity or value.
Swedbank’s strategy aims to create sustainable value for our customers, society, shareholders
and employees. The Enterprise Risk Management (ERM) Policy, decided by the Board, states
that our strategy is to maintain our low risk which is further concretised by the risk appetite
(see Enterprise Risk Management Policy, and Risk Appetite and Framework).
Swedbank’s customer base, which mainly consists of private individuals and small and
medium-sized companies in Sweden and in the Baltic countries, is the foundation for a credit
risk – Swedbank’s predominant risk – that is low. Our low-risk profile is confirmed by low
losses and a low level of impaired loans (0.41%), despite the challenging external environment
during 2014. Market risks were kept on a low level throughout the year in spite of volatile
markets. In terms of operational risks, no single large loss event occurred, and the accumulated
losses were again at low levels. Both our internal as well as external stress tests (performed
by the EBA, the Riksbank and the SFSA) confirm our low-risk profile. The CET1 capital ratio
(21.2%) is among the highest compared to European peers, and our survival horizon stretches
far beyond 12 months (See Chapter 5, Liquidity Risks, for further information).
To continuously secure a low risk, our operations are based on a foundation of professional
risk management and control. The risk framework has been developed to secure solid risk
awareness and business acumen within all parts of the bank. It originates from the Group’s
strategy and business planning process, in which risk-based planning is an integrated part.
Internal regulations and guidelines are developed to secure strong risk control and steering.
The Group’s risk tolerance framework includes risk limits applied for individual risk disciplines
from the Board further down to business areas for appropriate steering (See Risk Appetite and
Framework). The risk framework also includes well-developed origination standards for
prudent credit lending. Furthermore, an essential tool in the Group steering is the risk-adjusted
profitability which is followed up from the business area level down to individual customers
and contracts.
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Enterprise Risk Management Policy
Risk arises in all financial operations, and managing it well is central for success. A strong
common risk culture within Swedbank, with decision-making and responsibility kept close to
the customer, serves as the foundation for efficient risk management and, consequently, a
strong risk-adjusted return.
The Board has the ultimate responsibility for Swedbank Group’s risk-taking and capital
assessment. Through the Enterprise Risk Management (ERM) Policy, the Board provides
guidelines for the CEO on risk management and risk control, and how these functions should
support the business strategy. The ERM Policy specifies the risk appetite, the concept of three
lines of defence, the fundamental principles of risk management, and roles and responsibilities.
The Board has also established the Risk and Capital Committee (RCC), the Audit Committee
(AC) and the Remuneration Committee (RC) as support in matters related to risk management,
governance, capital requirements and remuneration respectively. For further information on
these committees, duties, reporting to committees and number of meetings during 2014, see
the Swedbank Corporate Governance Report available on www.swedbank.com.
Three lines of defence
Successful risk management requires a strong risk culture and a common approach that
permeates the entire Group. Swedbank builds its approach to risk management on the concept
of three lines of defence, signifying a clear division of responsibilities between the risk owner
(the business units), the control functions (Group Risk) and the Internal Audit.

Swedbank’s risk management

Risk appetite and framework
The ERM Policy states that Swedbank Group is to maintain a low risk profile, in terms of both
capital and liquidity. The long-term risk profile is to be managed so that a severely stressed
scenario, as defined in the annual Internal Capital Adequacy Assessment Process (ICAAP),
should not have a significant negative impact on the CET1 capital ratio. If the impact exceeds
the level established by the risk appetite, preventive measures must be taken to reduce the
risk.
The Board establishes the main principles for the Group’s risk management and decides on the
overall risk appetite. In order to ensure and improve risk approach in different operations, the
Board has also formulated risk appetites for each main risk type (see below). The risk appetites

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are further concretised by limits set by the CEO and complemented by CRO limits aimed at
identifying any potential limit breaches at an early stage. Business area limits, constituting the
last level in the risk limit framework, are decided by business area heads. The risk appetite and
limits are designed to secure that the Group sustains its low-risk profile, taking into account
the Group’s business operations. The risk limit framework structure includes clear escalation
principles in the event of any breaches of the risk appetite or limits.
The Group Risk organisation is tasked with ensuring that each key risk faced by the Group is
identified and properly managed by the relevant business owners, that decisions made on the
aggregated level are in line with the Group’s risk appetite, and that a holistic view on all
relevant risks is submitted to the Board as well as the CEO. The Risk organisation is also
responsible for providing the business organisation with operational guidance and support, in
part by developing and maintaining internal rules and guidelines in each risk category.
The CEO has established a special committee on Group level, the Group Risk and Compliance
Committee (GRCC), to assist him in matters related to all categories of risk and compliance. The
committee meets normally on a monthly basis (11 meetings in 2014) to review, monitor and
challenge the Group risk profile in terms of significant exposures, risk trends, stress tests,
losses, management actions and performance versus risk appetite, including compliance with
the risk limit framework. The GRCC also reviews and monitors the management of findings by
Compliance, Risk units, Internal Audit and External Audit to secure that these are appropriately
implemented. To further strengthen risk management arrangements in local business areas,
GRCC is supported by local Business Area Risk and Compliance Committees (BARCCs).
Individual BARCCs are established in all business areas and have the same setup on local level
as the GRCC for the Group. Clear escalation routines are implemented from the BARCCs to
GRCC to secure strong and effective risk management.
Credit risk
Swedbank maintains a well-diversified credit portfolio with a low risk profile. All credit
activities strive towards a long-term customer relationship and rest on sound business
acumen to achieve solid profitability and avoid credit expansion that may endanger long-term
stability.
A basic principle in Swedbank’s lending operations is that each business unit bears full
responsibility for its transactions and its associated credit risks. Each business unit develops
and maintains a balanced credit risk, which is achieved by lending to customers with a high
debt-service coverage ratio, by maintaining a strong collateral position and by having a
diversification within and between sectors and regions.
Counterparty risk arises as a result of hedging of own market risk and from customer-related
trading activities. The Group has a conservative approach when choosing interbank
counterparts, and ISDA agreements allowing netting and usage of credit support annexes
(CSAs) are almost always established. In the derivatives business, ISDA (or similar) agreements
are in general established with our customers. Furthermore, the Group restricts the extent of
its counterparty risk exposure through several actions such as setting counterparty limits and
FX settlement limits.
Market risk
The Group’s primary objective in financial markets is to satisfy the long-term needs of its
customers, and its secondary objective is to generate a return by means of position-taking.
Risk must always be weighed against expected return. Positions shall only be taken in
products or markets where the market risks are properly understood. No positions shall be
taken that could be deemed unethical or that could jeopardise the Group's reputation.
Liquidity and funding risk
Swedbank will maintain a conservative risk profile with resilience to both short-term and long-
term external stress and will maintain an adequate buffer of highly liquid assets to enable it to
withstand a prolonged period of liquidity stress without relying on forced asset sales or

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government intervention. Swedbank shall have a long-term, stable, well-diversified funding
and investor base with a wholesale funding that is well diversified across markets,
instruments and currencies. Furthermore, it shall strive to avoid maturity mismatch risk in
assets funded by unsecured funding. All non-liquid assets, not eligible for covered bond
issuance, shall be funded either through customer deposits or through wholesale funding with
a maturity, to the largest extent, matching or exceeding that of the assets.
In this context, management of liquidity risks is an integral part of Swedbank’s business
operation. Liquidity risk is measured, forecasted and analysed continuously, using various time
horizons, to ensure that the Group has adequate cash or cash-equivalents to meet its
obligations in a timely manner, without incurring substantially higher costs. The responsibility
for managing the Group’s liquidity lies with Group Treasury. Group Risk works independently
to identify all relevant aspects of liquidity risks, and is responsible for control, measurement,
monitoring and reporting liquidity risk exposure across the Group.
Operational risk
Swedbank shall not experience operational risk-related losses or incidents that have materially
negative impact on the Group’s funding, capitalisation and 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 the operations of the Group.
Operational risks are to be kept at the lowest possible level taking into account business
strategy, market sentiment, regulatory requirements, rating ambitions and the capacity to
absorb losses through earnings and capital. They shall be considered in business decisions and,
as far as possible, in the pricing of products and services. Managers shall ensure that the
operational risks inherent in their respective areas are identified, assessed and properly
managed in the day-to-day operations.
ALM and capital management
In addition to the ERM Policy, Swedbank’s Asset, Liability and Liquidity Policy sets out the
fundamental principles that apply for the Group’s processes and structures to identify and
manage the Group’s assets and liabilities to build an optimal balance-sheet structure, in order
to meet liabilities, absorb losses, safeguard shareholder returns and maintain public
confidence. The Group’s capital, funding and liquidity shall be managed in a way that does not
create disproportionate constraints on the governance or management of the Group.
The CEO has established a special committee on Group level, the Group Asset Allocation
Committee (GAAC), to assist him in issues related to the management of assets, liabilities and
the balance sheet structure. He has also established a central Treasury department in the
Group to operationally manage issues related to capital, liquidity and funding. Treasury works
as an internal bank and provides funding to the business areas, retains capital at Group level
or, as directed by shareholders or the Board, returns it to shareholders. To ensure that
Treasury can act as an internal bank, an adequate framework comprising principles and
instructions for capital allocation and internal fund-transfer pricing is maintained.

SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2014
2. Capital requirements

In 2014, Swedbank’s capitalisation continued to
strengthen for the seventh consecutive year. Swedbank’s
CET1 capital ratio is among the highest compared to
European peers. Our capitalisation makes us resilient
under the current regulatory framework and ensures that
we are well prepared for the future and able to support
our customers going forward.
Highlights 2014
Thanks to a stable earnings generation, combined with reduced risk exposure amount,
Swedbank’s already strong capitalisation has further improved. In June, Swedbank received the
awaited approval from the SFSA to use the advanced IRB approach for corporate exposures in
Sweden and Norway, which contributed to a decreased capital requirement and thereby an
increased Common Equity Tier 1 (CET1) capital ratio. Swedbank’s CET1 capital ratio was
21.2% as of year-end, which makes the Group well-positioned to meet both current and future
capital requirements. Internal stress tests also show that Swedbank remains resilient to crises,
not least the ICAAP with adverse scenarios more severe than any of the Swedish recessions in
modern times. Results from recent stress tests conducted by the European Banking Authority
(EBA), the Riksbank and the Swedish Financial Supervisory Authority (SFSA) also confirm
Swedbank’s strong risk and capital position.
Capital requirements
Capital adequacy rules express the legal requirement as to how much capital a credit
institution (such as a bank) must have in relation to the risk the institution faces. When
assessing its capital needs, Swedbank takes into consideration its current and future risk
profile, internal risk measurement and assessment of the risk capital needed. In addition to
capital requirements for credit, market and operational risk (i.e. Pillar 1), all other risks, such as
concentration risks, pension risks, earnings volatility risk and strategic risk, must be taken into
account when assessing the total capital need (i.e. as part of the Pillar 2 assessment).
Under the EU Capital Requirements Regulation (EU Regulation No 575/2013, CRR), a bank’s
total capital must be equivalent to at least the sum of the capital requirements for credit,
market and operational risks, including capital buffers and potential Pillar 2 add-ons. Banks
using the IRB approach shall, at all times, also hold own funds which equal or exceed 80% of
the total minimum amount of own funds that the institution would be required to hold under
Basel 1 rules (“Basel 1 floor”). Swedbank fulfils these requirements; see Appendix, section 2.
Other laws and regulations also apply; for example, the Swedish Banking and Finance Business
Act requires a minimum initial capital of EUR 5m. Considering the size of Swedbank’s capital, it
also complies with these regulations. Furthermore, Swedbank complies with the rules in the
CRR regarding large exposures, i.e. the limitation of exposures to individual customers or
groups of customers in relation to its total capital.