capital adequacy and risk management report (pillar 3) · pdf fileinto line with the new basel...

13Capital Adequacy and Risk Management report (Pillar 3)

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SEB GROUP, PILLAR 3 DISCLOSURE 2013

SEB is committed to maintaining public transparency with regard to its business, financial performance and risks. Extensive informa-tion is provided in financial reports, including the SEB Annual Report, quarterly Interim Reports and quarterly Fact Books. In this document, Capital Adequacy and Risk Management report (Pillar 3), SEB provides additional detailed information on capital ade-quacy and risk management.

About Basel Pillar 3The Basel II framework of international banking regulation was implemented in the European Union (EU) through capital require-ments directives from 2007 onwards, and translated into local law in member countries. In Sweden the Basel II framework has been in effect since 1 February 2007. The Basel II framework is based on three Pillars:● Pillar 1 – Minimum capital requirement: defines rules for the

calculation of credit, market and operational risk;● Pillar 2 – Supervisory review process: requires banks to under-

take an individual capital adequacy assessment process for other risks; and

● Pillar 3 – Market discipline: requires expanded disclosures to allow investors and other market participants to understand the risk profiles of individual banks.

The aim of Pillar 3 is to allow for market discipline to supplement the regulation of banks.

During 2013, the EU updated its capital requirements legislation into line with the new Basel III framework. The revised EU

legislation, comprising a Capital Requirements Directive (CRD IV) and Capital Requirements Regulation (CRR), is applicable from 1 January 2014. The full implementation of CRD IV and CRR will be reflected in SEB’s disclosures of information concerning capital adequacy and risk management in the coming year.

SEB’s approach to Pillar 3Together with the SEB Annual Report 2013, the Capital Adequacy and Risk Management report (Pillar 3) 2013 provides informa-tion on SEB’s material risks as part of the Pillar 3 framework. The information in this report is disclosed following Swedish FSA’s regulation FFFS 2007:5 - Finansinspektionen’s regulations and general guidelines regarding public disclosure of information concerning capital adequacy and risk management. The report provides details on the Group’s risk profile, including business volumes by customer categories and risk classes, which form the basis for the calculation of the capital requirement. The report provides additional information to complement the Annual Report, and should be read in conjunction with that information, in particular the Annual Report sections entitled Risk, liquidity and capital management and Corporate Governance in SEB, as well as the Notes to the financial statements. Disclosures in rela-tion to remuneration are included in those sections of the Annual Report.

The report is based upon the Group’s financial position as of 31 December 2013.

The information in this report is not required to be and has not been subject to external audit.

About this report

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The contents of this report follow Swedish regulation FFFS 2007:5 – Finansinspektionen’s regulations and general guidelines regarding public disclosure of information concerning capital adequacy and risk management.

FFFS 2007:5 Page

I. Risk Management SEB Financial Group of Undertakings Chapter 3 § 1-2 3Risk management objectives and guidelines Chapter 3 § 3 4 II. Capital Strategies and methods for regulatory and internal capital Chapter 4 § 3-5 5Stress testing 6Capital base Chapter 4 § 1-2 7Tier 1 capital contributions Chapter 4 § 2 8Capital requirements Chapter 4 § 6-10 9Capital ratios Chapter 4 § 4 10Significant subsidiaries Chapter 1 § 1 11The Basel III framework 12 III. Credit Risk Credit risk overview Chapter 5 § 2 13EAD by exposure class and geography Chapter 5 § 2 14Average risk weighting by exposure class and geography Chapter 5 § 3, 1 15EAD by industry and geography for IRB corporates Chapter 5 § 3, 2 15EAD by remaining maturity Chapter 5 § 3, 2 16Definition of impairment Chapter 5 § 1 17Impaired loans by industry Chapter 5 § 4-5 17Impaired loans by geography Chapter 5 § 4-5 18Provisions and write-offs on impaired loans Chapter 5 § 4-5 18Change of reserves for impaired loans Chapter 5 § 4-5 18Credit risk mitigation strategies Chapter 5 § 6 19Credit risk mitigation Chapter 5 § 7-8 20Standardised approach Chapter 5 § 13 21IRB approval and implementation plan Chapter 5 § 15 21Structure of risk class scale in PD dimension Chapter 5 § 16 22Credit risk rating and estimation Chapter 5 § 17 23IRB reported credit exposure by PD Chapter 5 § 18 24IRB reported exposures with own estimates of LGD Chapter 5 § 19 25IRB reported exposures with own estimates of CCF Chapter 5 § 20 25Comparison between expected and actual losses Chapter 5 § 23 26Counterparty risk in derivative contracts Chapter 6 27 IV. Securitisations Chapter 5a § 1-10 28Securitisation in banking book by rating category 29Securitisation in banking book by asset type 29Securitsation in trading book by rating category 29

V. Market Risk Trading book market risk Chapter 8 30Banking book market risk Chapter 9 § 1-2 32Equity exposures not included in the trading book Chapter 9 § 3-4 33 VI. Operational Risk Chapter 7 34 VII. Liquidity Risk Chapter 10 § 1-3 35

Contents

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SEB Financial Group of Undertakings

The Parent company is Skandinaviska Enskilda Banken AB (publ), corporate registration number 502032-9081

ConsolidationCompany Ownership, % Full Pro rata

Credit institutions

Möller Bilfinans AS, Oslo 51 ✔

Njord AS, Oslo 100 ✔

SEB Corporate Bank, PJSC, Kiev 100 ✔

SEB AG, Frankfurt am Main 100 ✔

SEB Bank JSC, St Petersburg 100 ✔

SEB Banka, AS, Riga 100 ✔

SEB bankas, AB, Vilnius 100 ✔

SEB Kort AB, Stockholm 100 ✔

SEB Leasing Oy, Helsinki 100 ✔

SEB Leasing, CJSC, St Petersburg 100 ✔

SEB Pank, AS, Tallinn 100 ✔

Skandinaviska Enskilda Banken S.A., Luxembourg 100 ✔

Skandinaviska Enskilda Ltd, London 100 ✔

Investment operations

Aktiv Placering AB, Stockholm 100 ✔

Key Asset Management (UK) Limited, London 100 ✔

Key Capital Management Inc, Tortola 100 ✔

SEB Asset Management America Inc, Stamford 100 ✔

SEB Asset Management S.A., Luxembourg 100 ✔

SEB Enskilda, UAB, Vilnius 100 ✔

SEB Fondbolag Finland Ab, Helsinki 100 ✔

SEB Fund Services S.A., Luxembourg 100 ✔

SEB Förvaltnings AB, Stockholm 100 ✔

SEB Investment Management AB, Stockholm 100 ✔

SEB Kapitalförvaltning Finland Ab, Helsinki 100 ✔

SEB Portföljförvaltning AB, Stockholm 100 ✔

SEB Securities Inc., New York 100 ✔

SEB Strategic Investments AB, Stockholm 100 ✔

Other operations

Antwerpen Properties AB, Stockholm 100 ✔

Baltectus B.V., Amsterdam 100 ✔

Bankomat AB, Stockholm 20 ✔

BDB Bankernas Depå AB, Stockholm 20 ✔

BGC Holding AB, Stockholm 33 ✔

I. Risk Management

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SEB Financial Group of Undertakings (Cont.)The Parent company is Skandinaviska Enskilda Banken AB (publ), corporate registration number 502032-9081

ConsolidationCompany Ownership, % Full Pro rata

Managing risk is a core activity in a bank and therefore fundamen-tal to long-term profitability and stability. Risk is closely related to business activities and business development and, therefore, to customer needs. Of the various risks that SEB assumes in provid-ing its customers with financial solutions and products, credit risk is the most significant.

SEB’s profitability is directly dependent upon its ability to eval-uate, manage and price the risks encountered, while maintaining an adequate capitalisation and liquidity to meet unforeseen events. To secure the Group’s financial stability, risk and capital-related issues are identified, monitored and managed at an early stage. They also form an integral part of the long-term strategic and business planning process.

The Group applies a robust framework for its risk management, having long since established independent risk control, credit analy-sis and credit approval functions supported by a toolbox of advanced internal models. Board supervision, an explicit decision-making structure, a high level of risk awareness among staff, common defini-tions and principles, controlled risk-taking within established limits and a high degree of transparency in external disclosures are the cornerstones of SEB’s risk and capital management.

Risk tolerance, policies and mandatesThe Board of Directors is responsible for setting the maximum acceptable levels of risks to be taken by the Group. This is formu-lated in a Risk Tolerance Statement, which is reviewed annually in connection with the annual approval of the Group’s business plan and applies to the entire Group. The Board’s Risk Tolerance State-

ment represents a long-term view of the boundaries within which the Board expects the Bank to operate. In order to monitor that the Bank operates within the Board’s limits, the President and the Group Risk Commitee has established a number of risk limits for the Group, divisions, and business areas within the boundaries of the Board’s risk tolerance, referred to as management’s risk appe-tite. SEB’s risk profile in relation to the management’s risk appetite is monitored and followed up regularly by Group Risk and pre-sented to the Group Risk Committee, management, the Board’s Risk and Capital Committee and the Board of Directors.

Risk organisation and responsibility The Board of Directors also defines the principles for management, reporting and control of risks in a comprehensive policy frame-work. These risk policies are supplemented by instructions issued by the Group Risk function. Risk mandates are established by the Board and allocated by board committees and executive manage-ment committees. A comprehensive risk management governance structure ensures that policies approved by the Board of Directors are effectively complied within all of SEB’s risk-taking activities.

The Board of Directors has the ultimate responsibility for the risk organisation and for the maintenance of satisfactory internal control, including appointment of the Chief Risk Officer. The Board establishes the overall risk and capital policies and monitors the development of risk exposure. The Board’s Risk and Capital Com-mittee works to ensure that all risks inherent in the Group’s activi-ties are identified, defined, measured, monitored and controlled in accordance with external and internal rules.

Risk management objectives and guidelines

Domena Property Sp. Z o.o., Warsaw 100 ✔

Enskilda Kapitalförvaltning SEB AB, Stockholm 100 ✔

Interscan Servicos de Consultoria Ltda, Sao Paulo 100 ✔

Parkeringshuset Lasarettet HGB KB, Stockholm 99 ✔

Postep Property Sp. Z o.o., Warsaw 100 ✔

SEB Hong Kong Trade Services Ltd, Hong Kong 100 ✔

SEB Internal Supplier AB, Stockholm 100 ✔

Skandinaviska Kreditaktiebolaget, Stockholm 100 ✔

The SEB Group comprises banking, finance, securities and insurance companies. The capital adequacy rules apply to each individual Group company that has a licence to carry on banking, finance or securities operations as well as to the consolidated Financial Group of Undertakings. Group companies that carry on insurance operations have to comply with capital solvency requirements, but are excluded in the capital adequacy reporting and are thus not listed above. The consolidated SEB Group should also comply with capital requirements concerning combined banking and insurance groups (“financial conglomerates”).

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Responsibility for day-to-day risk management within SEB rests with the divisions, Treasury Operations and support functions. Each of these have dedicated risk management organisations or, in the case of certain support functions, a dedicated risk manager.

The Chief Risk Officer is responsible for monitoring all of the risks in the Group, primarily credit risk, market risk, insurance risk, operational risk and liquidity risk and to this end manages units responsible for credit approval, risk aggregation and reporting and risk control, together referred to as the Group Risk function. The Risk Control unit works closely with the business operations within each division and at each site while maintaining its independence as part of the Group Risk function.

Subordinated to the Board of Directors and the President are committees with mandates to make decisions depending upon the type of risk. The Group Risk Committee is the highest creditgrant-

ing body within the Bank. However, certain matters are reserved for the Risk and Capital Committee of the Board.

The Group Asset and Liability Committee deals with issues relating to the overall risk level of the Group and its various divi-sions, and decides on risk limits and risk-measuring methods and capital management, among other matters. The Group Risk Mea-surement Committee assists management in assuring that all of the risk methods, tools and measurements are of sufficient quality and approved. This committee involves business persons, divi-sional risk managers and independent risk controllers and is chaired by senior management from the Group Risk function.

For further description of the Group’s strategies, processes, organisation, measurement and reporting for risk management, please refer to the Risk, Liquidity and Capital Management and the Corporate Governance sections of the Annual Report.

In order to understand the financial consequences of business decisions on all levels and how they affect shareholder value over time, SEB proactively manages three main aspects: (1) the growth, mix and risk of business volumes, (2) capital, funding and liquidity requirements driven by the business and (3) profitability. Targets are set and reviewed on a regular basis to manage and optimize resources in respect of these three aspects. Risks are only taken where SEB has an ability to understand, evaluate and manage the outcomes within the regulatory and economic capital limits.

SEB’s capital policy defines how capital management should support the business goals. Shareholders’ return requirements shall be balanced against the capital requirements of the regula-tors, the expectations of debt investors and other counterparties as regards SEB’s rating, and the economic capital that represents the total risk of the Group. Scenario stress testing is used to assess an extra safety margin over and above the formal capital model requirements – covering e.g. the potential of a sharp decline in the macroeconomic environment.

Good risk management notwithstanding, SEB must keep capi-tal buffers against unexpected losses. Capital targets are set both to ensure a sufficient stability to protect holders of the Group’s senior debt, and to support on-going business – also in severe times – by keeping a comfort buffer over legal requirements. SEB’s internal capital assessment combines the perspectives of legal requirements, market expectations, and economic capital. This model (internally labelled Capital At Risk, CAR) gives a more pre-cise and risk-sensitive measure for internal capital assessment than the regulatory pillar 1 measures.

Attribution of capital to divisions is an integral part of the regular planning process. The analysis is based upon actual and planned business volumes and risk development. The model is largely built on the platform established by the Basel II and III capital adequacy frameworks and calibrated to the Group’s capital targets.

The Chief Financial Officer is responsible for SEB’s Internal Capital Adequacy Assessment Process (ICAAP) with the purpose to assess capital requirements in relation to the Group’s risk profile, and to propose a strategy for maintaining the capital levels. This process is integrated with the Group’s business planning and is part of the internal governance framework and the internal control system. Together with continuous monitoring, and reporting of the capital adequacy to the Board, this ensures that the relationships between shareholders’ equity, economic capital, regulatory and rating-based requirements are managed in such a way that SEB does not jeopardise the profitability of the business and the finan-cial strength of the Group.

Capital is managed centrally, meeting also local requirements as regards statutory and internal capital. A clear governance pro-cess is in place for capital injections from the parent bank to sub-sidiaries. There are no legal restrictions for the capitalisation of the subsidiaries.

SEB has not encountered any material practical or legal impedi-ments to the transfer of non-restricted equity or other capital instruments.

Risk management objectives and guidelines (Cont.)

Strategies and methods for regulatory and internal capital

II. Capital

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SEB uses stress testing at all levels of its business, from the assess-ment of the risk of individual credit deals to portfolios of credit or market risk and finally in assessing the adequacy of capital and liquidity. The macroeconomic environment is a major driver of risk to SEB’s earnings and financial stability. SEB regularly performs dif-ferent stress tests on group- and subsidiary level, based on specific historical (e.g. 1 in 10 or 1 in 50 years) or hypothetical scenarios and based on adverse economic conditions.

Stress testing forms an important part of SEB’s long-term capi-tal adequacy assessment process and is an essential input to potential earnings volatility and capital and liquidity planning. Potential losses and the effect on available capital are evaluated together with the effect of a scenario on the level of risk weighted assets (RWA). The stressed available capital is then compared with the RWA, under both internal and regulatory capital rules, to assess the Group’s financial strength under much worse conditions than assumed in the business plan. Similarly, liquidity risk is regularly stressed to test the Bank’s ability to withstand externally generated liquidity squeezes.

SEB has developed a comprehensive and integrated stress testing framework, covering all main risks and with particular focus on the risk of credit losses. The Swedish FSA has assessed SEB’s stress testing framework to be compliant with the EBA Guidelines on Stress Testing (GL 32).

Credit riskKey economic criteria from recession scenarios are correlated with historical observed loss and default data used in the average through-the-cycle credit models. In the stressed scenarios, credit losses are increased (considering both specific and collective impairments) and average risk weights in credit portfolios are increased due to risk class migration. Both internal and external default and loss data are used together with historical and sce-

nario macroeconomic data to predict the effect on the Group’s existing portfolio considering default rates, recovery rates and col-lateral prices by country and by portfolio. In this way, the sensitivity of different parts of the portfolio can be identified, enabling the Group to manage risk more effectively. The effect of large expo-sures is also handled by simulating the effect of default by one or more of these despite their investment grade rating.

Market risk SEB uses both historical and forward-looking scenarios to stress test its portfolios. The scenarios are reviewed regularly and are part of the Group’s market risk appetite framework. The stress tests cover the main risk factors relevant to SEB’s portfolios.

Operational risk Key economic criteria from recession scenarios are correlated with historical observed operational loss levels both internally and externally to produce an “expected loss” for each adverse scenario. Individual highly unlikely scenarios of, for example, rogue trader events are also run as special cases to contrast their effect both during mild and severe downturns.

Business risk Key economic criteria from recession scenarios are correlated with historical observed trading and fee income levels together with projections of likely costs. Net interest income levels are also esti-mated using the scenario interest rate and credit margin data. Overall the result in most scenarios is a reduction of operating profit before credit, market and operational risk losses.

The projected losses are deducted from the estimated annual earnings in order to produce an estimated effect on available capi-tal resources. These stressed capital levels are compared to the RWA to produce estimated internal and regulatory capital ratios.

Stress testing

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Capital baseSEK m 31 Dec 2013

Total equity according to balance sheet (1) 122,814Proposed dividend (excl repurchased shares) -8,719Investments outside the financial group of undertakings (2) -67Other deductions outside the financial group of undertakings (3) -2,710

= Total equity in the capital adequacy 111,318 Adjustment for hedge contracts (4) -40Net provisioning amount for IRB-reported credit exposures (5) -345Unrealised value changes on available-for-sale financial assets (6) -1,734Exposures where RWA is not calculated (7) -647Goodwill (8) -4,085Other intangible assets -2,443Deferred tax assets -1,576

= Core Tier 1 capital 100,448 Tier 1 capital contribution (non-innovative) 4,448Tier 1 capital contribution (innovative) 9,801Investments in insurance companies (8) -6,538

= Tier 1 capital 108,159 Dated subordinated debt 6,739Deduction for remaining maturity -54Perpetual subordinated debt 613Net provisioning amount for IRB-reported credit exposures (5) -345Unrealised gains on available-for-sale financial assets (6) 1,515Exposures where RWA is not calculated (7) -647Investments outside the financial group of undertakings (2) -67Investments in insurance companies (8) -6,538

= Tier 2 capital 1,216 Pension assets in excess of related liabilities (9) -2,298

= Capital base 107,077 Specification of the net provisioning amount above Provisions and value adjustments for IRB-reported credit exposures 7,137Expected loss (EL) -7,827

Net provisioning amount (5) -690

(1) Total equity according to the balance sheet includes the current year’s profit.(2) Deductions for investments outside the financial group of undertakings should be made with equal parts from Tier 1 and Tier 2 capital.(3) The deduction consists of retained earnings in subsidiaries outside the financial group of undertakings.(4) The adjustment refers to differences in how hedging contracts are acknowledged according to the capital adequacy regulation, as compared with the preparation of

the balance sheet.(5) If provisions and value adjustments for credit exposures reported according to the Internal Ratings-Based approach fall short of expected losses on these exposures,

the difference should be deducted in equal parts from Tier 1 and Tier 2 capital. A corresponding excess can, up to a certain limit, be added to the Tier 2 capital.(6) For available-for-sale portfolios, value changes on debt instruments should not be acknowledged for capital adequacy. Any surplus attributable to equity instruments

may be included in the Tier 2 capital.(7) Securitisation positions with external rating below BB/Ba are not included in RWA calculations but are treated via deductions from Tier 1 and Tier 2 capital.(8) Goodwill relates only to consolidation into the financial group of undertakings. When consolidating the entire Group’s balance sheet further goodwill of SEK 5,721m

is created. This is included in the deduction for insurance investments.(9) Pension surplus, less tax and the amount of pension assets that are unrestricted for Bank use, is deducted from the total capital base.

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Subordinated debt qualifying as Tier 1 capital contribution (hybrid capital) as of 31 Dec 2013 Appropriated Nominal In Tier 1 Type of instrument Note Issue date Maturity First call date in event of Appropriated as amount (SEK m)

16c§: Innovative (a) 2004-03-19 Perpetual 2014-03-25 liquidation conditional capital USD 407m 2,62516c§: Innovative (a) 2005-03-23 Perpetual 2015-03-23 liquidation conditional capital USD 423m 2,72816c§: Innovative (b) 2007-12-17 Perpetual 2017-12-21 liquidation/regulatory breach conditional capital EUR 500m 4,44816b§: Non-innovative (b) 2009-10-01 Perpetual 2015-03-31 liquidation/regulatory breach conditional capital EUR 500m 4,448

Total 14,249 The type above refers to categories in FFFS 2007:1 regulations, Chapter 7 § 16. (a) conditions specify appropriation "in order to avoid liquidation". (b) conditions specify appropriation both "in order to avoid liquidation" and "in order to avoid regulatory breach", the latter referring both to potential pillar 1 and pillar 2

breaches.

For all issues, appropriation would occur by writing down the principal amount (together with accrued interest) and converting such amount into a conditional capital contri-bution.

Given the attributes of the issues, and the size of other Tier 1 capital components, the full value of the issued securities can be included as Tier 1 capital contribution accord-ing to regulations and transitionary rules.

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Capital requirementsSEK m 31 Dec 2013

Credit risk IRB approach: Institutions 1,796Corporates 26,299Retail mortgages 3,315Other retail exposures 850Securitisation positions 386Other exposure classes 113

Total credit risk IRB approach 32,759 Credit risk Standardised approach: Central governments and central banks 26Local governments and authorities 55Institutions 48Corporates 1,201Retail 1,851Exposures secured by real estate property 319Past due items 132Other exposure classes 1,101

Total credit risk Standardised approach 4,733 Market risk – Internal VaR model Foreign exchange rate risk, general interest rate risk, general equity price risk, commodities risk 2,237 Market risk Standardised approach Foreign exchange rate risk 519General interest rate risk and general equity price risk 40Specific interest rate risk 1,477Specific equity price risk 48Specific risk securitisation positions 16Collective investment undertakings 191

Total market risk Standardised approach 2,291 Operational risk Advanced Measurement approach 3,065 Summary Credit risk 37,492Market risk 4,528Operational risk 3,065

Total 45,085 Adjustment for flooring rules Additional requirement according to transitional flooring (1) 28,278

Total regulatory capital requirement 73,363

(1) Transitional regulation applicable in Sweden requires institutions to have a capital base not below 80 per cent of the capital requirement according to Basel I. The addition is made in consequence with this transitional regulation.

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Capital ratiosSEK m 31 Dec 2013

Capital resources Core Tier 1 capital 100,448Tier 1 capital 108,159Capital base 107,077 Capital adequacy without transitional floor (Basel II) Risk-weighted assets 563,559Expressed as capital requirement 45,085Core Tier 1 capital ratio 17.8%Tier 1 capital ratio 19.2%Total capital ratio 19.0%Capital base in relation to capital requirement 2.38 Capital adequacy including transitional floor Transition floor applied 80%Risk-weighted assets 917,040Expressed as capital requirement 73,363Core Tier 1 capital ratio 11.0%Tier 1 capital ratio 11.8%Total capital ratio 11.7%Capital base in relation to capital requirement 1.46 Capital adequacy with risk weighting according to Basel I Risk-weighted assets 1,157,095Expressed as capital requirement 92,568Core Tier 1 capital ratio 8.7%Tier 1 capital ratio 9.3%Total capital ratio 9.3%Capital base in relation to capital requirement 1.16

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Capital resources31 Dec 2013, amounts in SEK m Germany: SEB AG Estonia: SEB Pank AS Latvia: SEB Banka AS Lithuania: SEB Bankas AB

Available capital Tier 1 capital 14,239 6,235 3,473 6,057Capital base 18,567 6,288 3,473 6,237 Capital requirements Credit risk 6,917 1,792 1,707 2,677Market risk 254 14 25 393Operational risk 271 86 106 118

Total 7,442 1,892 1,838 3,188

Adjustment for flooring rules Additional requirement according to transitional flooring 960 1,035 0 0

Total capital requirements 8,402 2,927 1,838 3,188 Capital requirements as a percentage of risk-weighted asset 8% 10% 8% 8%Risk-weighted assets 105,024 29,272 22,981 39,845 Tier 1 capital ratio 13.6% 21.3% 15.1% 15.2%Total capital ratio 17.7% 21.5% 15.1% 15.7%Capital base in relation to capital requirement 2.21 2.15 1.89 1.96

The following table provides information on capital adequacy for banking subsidiaries of the Group, that are included in the consoli-dated Financial Group of Undertakings, and that are significant in terms of their size and potential impact on financial stability in their country of operation. The capital adequacy is reported for the respective banking subsidiary on a stand-alone basis, such that exposures to other companies within the SEB Group are not eliminated in the reporting.

In the capital adequacy reporting of the significant subsidiaries, credit risk follows the IRB and Standardised approaches as out-lined under the heading "IRB approval and implementation plan". Market risk is reported following the Standardised approach, while the Advanced Measurement approach is used for operational risk.

Significant subsidiaries

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The Basel III framework, in the form of the CRD IV/CRR regulatory package, was adopted by the European Parliament in June 2013 and applies from 1 January 2014. CRD IV covers the implementa-tion of buffer requirements as well as Pillar 2 requirements, while CRR contains the minimum capital requirements and all technical calculation standards. The CRR establishes explicit minimum levels for Common Equity Tier 1 and Tier 1 capital and requires banks to hold more and higher quality capital. RWA will mainly be affected by an additional so-called credit value adjustment requirement for OTC derivatives, new requirements for exposures on central counterparties, and an increase in risk-weights for

exposures on financial institutions. Key figures below show capital adequacy information according to Basel III.

In the Basel III framework it has been proposed that the risk-sensitive capital requirements should be complemented by a non-risk-based measure, a leverage ratio (calculated as Tier 1 capital/total assets including off balance sheet items) of 3 per cent. The effect of this measure will be analyzed during an observation period and then evaluated whether it should become mandatory in 2018. SEB’s leverage ratio as per 31 December 2013 was 4.2 per cent based on SEB’s interpretation of future regulation.

The Basel III framework

Capital adequacy according to Basel IIISEK m 31 Dec 2013

Capital resources Common Equity Tier 1 capital 89,826Tier 1 capital 102,462Capital base 108,260 Capital ratios Risk-weighted assets 598,324Expressed as capital requirement 47,866Common Equity Tier 1 capital ratio 15.0%Tier 1 capital ratio 17.1%Total capital ratio 18.1%Capital base in relation to capital requirement 2.26

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Credit risk overview Original exposure Average Capital Average risk 31 Dec 2013, SEK m pre CCF EAD exposure RWA requirement weighting

Institutions 149,796 136,200 149,910 22,454 1,796 16.5%Corporates 993,164 856,178 841,243 328,739 26,299 38.4% of which large corporates 703,822 584,572 577,320 226,766 18,141 38.8% of which SME corporates 271,268 254,473 246,857 91,501 7,320 36.0% of which specialised lending 18,073 17,133 17,066 10,472 838 61.1%Retail mortgages 444,370 436,342 430,259 41,433 3,315 9.5%Other retail exposures 27,513 27,215 26,577 10,619 850 39.0%Securitisation positions 12,381 12,381 13,249 4,827 386 39.0%Other exposure classes 21,634 18,964 18,483 1,418 113 7.5%

IRB approach 1,648,858 1,487,280 1,479,721 409,490 32,759 27.5%

Standardised approach 444,969 410,759 473,558 59,167 4,733 14.4%

Total 2,093,827 1,898,039 1,953,279 468,657 37,492 24.7%

Average risk weighting including defaults, repos and securities lending.

III. Credit Risk

The credit risk tables in this section include exposure amounts for off balance sheet items based on application of relevant credit conversion factors. The tables does not include exposures that are reported according to trading book rules.

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EAD by exposure class and geography31 Dec 2013, SEK m Sweden Denmark Norway Finland Estonia Latvia Lithuania Germany Other Total

Institutions 14,177 11,524 10,144 4,568 7 33 548 15,156 80,043 136,200Corporates 374,033 31,108 60,645 54,905 19,932 18,527 30,691 99,266 167,071 856,178Retail mortgages 394,378 97 345 17 14,095 7,102 17,698 220 2,390 436,342Other retail exposures 21,751 15 18 15 2,174 1,639 867 32 704 27,215Securitisation positions 12,381 12,381Other exposure classes 18,282 83 536 60 3 18,964

IRB approach 822,621 42,744 71,152 59,505 36,291 27,837 49,804 114,734 262,592 1,487,280 Central governments and central banks 10,346 1,407 15,088 4,511 2,633 6,564 6,271 35,056 148,588 230,464Local governments and authorities 29,849 57 7 2,146 1,093 29 1,122 63,579 388 98,270Administrative bodies, non- commercial undertakings 15 5,275 582 5,872Institutions 259 55 24 1 715 617 1,671Corporates 5,663 587 1,561 411 8 7 119 2,428 4,263 15,047Retail 15,278 3,515 5,775 650 2,034 457 857 161 2,224 30,951Exposure secured by real estate property 3,364 3 5,132 1 55 3 11 128 2,503 11,200Past due items 415 208 185 60 31 14 39 16 169 1,137Other exposure classes 4,960 156 498 87 988 2,090 3,084 282 4,002 16,147

Standardised approach 69,875 6,192 28,301 7,890 6,857 9,164 11,504 107,640 163,336 410,759

Total 892,496 48,936 99,453 67,395 43,148 37,001 61,308 222,374 425,928 1,898,039

Geographical distribution according to obligor’s domicile.

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Average risk weighting by exposure class and geography31 Dec 2013, SEK m Sweden Denmark Norway Finland Estonia Latvia Lithuania Germany Other Total

Institutions 18.3% 8.0% 11.1% 16.7% 122.2% 44.2% 39.6% 17.0% 17.8% 16.5%Corporates 28.7% 46.4% 39.9% 44.9% 61.3% 84.4% 77.1% 49.5% 34.5% 38.4%Retail mortgages 7.7% 38.1% 16.0% 16.1% 15.1% 41.9% 31.9% 9.3% 12.1% 9.5%Other retail exposures 39.1% 56.7% 45.0% 61.6% 42.3% 34.8% 42.6% 49.3% 29.9% 39.0%Securitisation positions 39.0% 39.0%Other exposure classes 6.0% 7.9% 43.1% 51.8% 23.9% 46.2% 64.6% 99.8% 32.3% 7.5%

IRB approach 18.2% 36.0% 35.6% 42.7% 42.1% 69.9% 60.0% 45.1% 29.4% 27.5%

Standardised approach 34.5% 61.8% 29.8% 14.7% 37.5% 17.3% 24.6% 2.8% 7.2% 14.4%

Total 19.5% 39.3% 34.0% 39.4% 41.4% 56.8% 53.4% 24.7% 20.9% 24.7%

Geographical distribution according to obligor’s domicile.Average risk weighting including defaults, repos and securities lending.

EAD by industry and geography for IRB corporates31 Dec 2013, SEK m Sweden Denmark Norway Finland Estonia Latvia Lithuania Germany Other Total

Business and household services 46,840 7,011 10,873 4,934 1,846 2,922 1,627 15,868 16,341 108,262Construction 6,563 456 105 1,256 513 855 869 1,928 2,383 14,928Finance and insurance 15,542 806 5,159 2,051 306 2 11 7,807 27,936 59,620Manufacturing 57,590 10,201 11,585 20,669 3,424 1,639 5,641 17,092 31,328 159,169Transportation 5,160 3,476 2,708 482 1,018 1,776 2,253 4,482 15,875 37,230Wholesale and retail 24,876 1,918 2,390 1,332 2,174 2,448 7,317 4,232 10,601 57,288Agriculture, forestry and fishing 4,875 1,001 33 1,365 1,464 545 62 32 9,377Mining, oil and gas extraction 1,394 7,785 395 17 104 51 11,624 21,370Electricity, gas and water supply 11,252 1,672 1,457 9,407 1,666 1,485 2,998 11,789 4,251 45,977Shipping 2,394 2,261 4,949 647 1,188 21 219 418 27,100 39,197Public administration 149 29 832 326 2 929 2,267Commercial real estate management 80,259 1,665 11,409 10,616 6,267 4,672 8,998 22,692 9,954 156,532Residential real estate management 59,489 744 578 418 8 11,761 1,295 74,293Housing co-operative associations 42,243 42,243Other 15,407 613 650 2,178 148 721 151 1,135 7,422 28,425

Total IRB corporates 374,033 31,109 60,646 54,904 19,932 18,527 30,690 99,266 167,071 856,178

Geographical distribution according to obligor’s domicile.

16


EAD by remaining maturity31 Dec 2013, SEK m < 3 months 3 < 6 months 6 < 12 months 1 < 5 years 5 years < Total

Institutions 52,605 8,086 10,128 41,448 23,933 136,200Corporates 138,478 60,806 103,459 436,124 117,311 856,178Retail mortgages 51,472 32,345 48,434 262,770 41,321 436,342Other retail exposures 5,311 1,825 4,203 6,538 9,338 27,215Securitisation positions 723 2,122 9,536 12,381Other exposure classes 105 57 18,401 401 18,964

Total IRB approach 247,971 103,119 185,348 749,403 201,439 1,487,280 Central governments and central banks 193,892 2,980 1,559 15,541 16,492 230,464Local governments and authorities 35,506 5,154 7,893 25,930 23,787 98,270Administrative bodies, non-commercial undertakings 126 1 229 477 5,039 5,872Institutions 1,493 9 169 1,671Corporates 7,368 952 2,144 4,413 170 15,047Retail 5,736 1,440 11,033 9,025 3,717 30,951Exposures secured by real estate property 629 580 804 5,171 4,016 11,200Past due items 202 188 635 73 39 1,137Other exposure classes 725 88 1,890 12,471 973 16,147

Total Standardised approach 245,677 11,392 26,356 73,101 54,233 410,759

Total 493,648 114,511 211,704 822,504 255,672 1,898,039

17


Loans and receivables are tested for impairment on each balance sheet date. A financial asset or group of financial assets is impaired if there is objective evidence of an event after the asset was ini-tially recognised (“loss event”) that will impact the future cash flow according to the contract. Events of this nature may include● restructuring of the loan where a concession is granted

due to the borrower’s financial difficulty● a default in the payment of interest or principal● it is probable that the borrower will go bankrupt

The impairment loss is measured as the difference between the carrying amount of the loan and the discounted value of the estimated future cash flow. A specific provision of equal size is recorded in an allowance account. As soon as it is possible to determine the amount that cannot be recovered from the bor-

rower or from a sale of collateral it is written off and the corre-sponding provision is reversed. Similarly, the provision is reversed if the estimated recovery value exceeds the carrying amount.

In addition to an individual impairment test, a collective assessment is made of all loans that have not been deemed to be impaired on an individual basis. Loans with similar credit risk char-acteristics are grouped together and assessed collectively for impairment. SEB’s internal risk classification system constitutes one of the components forming the basis for determining the total amount of the collective provision.

Certain homogeneous groups of individually insignificant cred-its (e.g., credit card claims) are valued on a portfolio basis only. Provision models have been established on the basis of historical credit losses and the status of these claims.

Definition of impairment

Impaired loans (gross) by industryTotal lending in corporate exposure classes

Impaired loans Impaired loans performing or 31 Dec 2013, SEK m past due >= 60 days past due < 60 days Total

Business and household services 266 11 277Construction 165 165Finance and insurance 3 3Manufacturing 724 9 733Transportation 101 3 104Wholesale and retail 326 45 371Agriculture, forestry and fishing 31 1 32Mining, oil and gas extraction 1 1Electricity, gas and water supply 5 27 32Shipping 158 158Property management 2,232 204 2,436Other 597 22 619

Total 4,609 322 4,931

18


Impaired loans (gross) by geographyTotal lending in corporate exposure classes

Impaired loans Impaired loans performing or 31 Dec 2013, SEK m past due >= 60 days past due < 60 days Total

Sweden 582 12 594Other Nordic 140 140Germany 1,338 98 1,436Estonia 279 12 291Latvia 459 459Lithuania 1,516 200 1,716Other Europe 121 121Other 174 174

TOTAL 4,609 322 4,931

Geographical distribution according to lending company’s country of domicile.

Provisions and write-offs on impaired loans and portfolio assessed loansSEK m Jan-Dec 2013

Provisions: Net collective provisions 774Specific provisions -756Reversal of specific provisions no longer required 381Net provisions for contingent liabilities 11

Net provisions 410 Write-offs: Total write-offs -3,755Reversal of specific provisions utilized for write-offs 2,067

Write-offs not previously provided for -1,688Recovered from previous write-offs 123

Net write-offs -1,565

Net credit losses -1,155

Change of reserves for impaired loans and portfolio assessed loansSEK m Collective reserves Specific reserves

Opening balance, 1 Jan 2013 4,704 4,165 Net collective provisions -774 Specific provisions 756Reversal of specific provisions utilized for write-offs -2,067Reversal of specific provisions no longer required -381Currency differences, group structure changes, reclassifications etc. 84 48

Closing balance, 31 Dec 2013 4,014 2,521

19


Credit approvals are based on an evaluation of the counterparty’s creditworthiness and the type of credit arrangement, both for a transaction and in total for that counterparty. Consideration is given to the counterparty’s current and projected financial condi-tion as well as to the protection given by covenants, collateral, etc. in the event of credit quality deterioration.

The most important credit risk mitigation techniques include different types of collateral arrangements, guarantees / credit derivatives and netting agreements. Real estate mortgages, high quality securities and cash represent the most common types of collaterals. Close-out netting agreements are widely used for derivative, repo and securities lending transactions (while on bal-ance sheet netting is a less frequent practice).

In the selection of a particular credit risk mitigation technique consideration is given to its legal enforceability, its suitability for the particular counterparty, and to the organisation’s experience and capacity to manage and control the particular technique.

For large corporate customers, credit risk is commonly miti-gated through the use of covenants, including negative pledges. Independent and professional credit analysis is particularly impor-tant for this customer segment. The Merchant Banking division has a credit analysis function that provides independent analysis and credit opinions to the division’s business units as well as to the credit committees.

Banks, securities firms and insurance companies are typically counterparties in more sophisticated risk mitigation transactions,

such as credit derivatives. SEB’s credit policy requires the credit derivative counterparty to be of high credit quality.

The credit portfolio is continually analysed for risk concentra-tions to geographical and industry sectors and to single large names, both in respect of direct exposures and indirect exposures in the form of collateral, guarantees and credit derivative protec-tion.

All non-retail collateral values are reviewed at least annually by the relevant credit committee. Collateral values for watch-listed engagements are reviewed on a more frequent basis. The general rule is that the value of the collateral shall be calculated on the basis of the estimated market value of the asset with a conserva-tive discount. The market value shall be documented by an inde-pendent external valuation or, when applicable, by a well justified internal estimate.

The general control process for various credit risk mitigation techniques includes credit review and approval requirements, spe-cific credit product policies and credit risk monitoring and control. The value of both the exposure and the mitigating collateral are monitored on a regular basis. The frequency depends on the type of counterparty, the structure of the transaction and the type of collateral. The control process does differ among instruments and business units. For example within the Merchant Banking division there is a collateral management unit responsible for the daily col-lateralisation of exposures in trading products, i.e. FX and deriva-tive contracts, repos and securities lending transactions.

Credit risk mitigation strategies

20


Credit risk mitigation Protection via Protection Of which, guarantees and via pledged financial 31 Dec 2013, SEK m EAD credit derivatives collaterals collaterals

Institutions 136,200 11,099 23,633 20,072

Corporates 856,178 61,610 331,474 25,034

Retail mortgages 436,342 162 436,342 103

Other retail exposures 27,215 107 1,758 87

Securitisation positions 12,381

Other exposure classes 18,964 2 1

Total IRB approach 1,487,280 72,978 793,209 45,297

Central governments and central banks 230,464 1,189 96 96

Local governments and authorities 98,270 49

Administrative bodies, non-commercial undertakings 5,872 42

Institutions 1,671 196

Corporates 15,047 29 29

Retail 30,951 102 103

Exposures secured by real estate property 11,200 11,200

Past due items 1,137 99

Other exposure classes 16,147

Total Standardised approach 410,759 1,476 11,526 228

Total 1,898,039 74,454 804,735 45,525

The table comprises only those mitigation arrangements that are eligible in capital adequacy reporting.

21


Credit quality step31 Dec 2013, SEK m Equivalent S&P rating Exposure

1 AAA/AA 326,4092 A 6673 BBB 1,5614/5 BB/B 876 CCC and worse 10

Total 328,734

The Standardised approach is used for exposures to central gov-ernments, central banks and local governments and authorities and for a number of minor portfolios. According to the regulation, either the rating from an export credit agency (such as the Swedish Export Credits Guarantee Board) shall be used, or, where not avail-able, the country rating from eligible credit assessment agencies such as Moody’s, S&P, Fitch and DBRS. In no case has it been nec-essary to apply an issue rating where an issuer rating was missing.

Following regulation, local authorities, e.g., in Sweden and Ger-many, are risk-weighted based on the rating of the corresponding central government, and not on the local authorities’ own rating.

The table displays Basel II reported exposures to central gov-ernments, central banks and local governments and authorities, broken down by credit quality.

Standardised approach

When calculating legal capital requirements, SEB has used inter-nally developed credit risk models for the majority of the non-retail portfolios (Foundation IRB) and for the Swedish retail mortgage portfolios (Advanced IRB) since 1 February 2007, when the Basel II framework came into force in Sweden, and since 2008 in the Baltics.

SEB has agreed a roll-out plan with the Swedish FSA and local supervisors for the remaining non-retail and retail portfolios of significant size. The remaining retail portfolios that are planned to report under Advanced IRB are primarily SEB Kort (excluding Swe-den) and Retail Sweden’s small corporates portfolio. In 2012, SEB AB was approved to use internal estimates of EAD, LGD and effec-

tive maturity for its real estate and shipping portfolios, making 80 per cent of its non-retail portfolio Advanced IRB. The ambition is to roll out the advanced non-retail models in Baltics during 2014 and Germany during 2015.

At year-end 2013, some 58 per cent of EAD was reported using the Advanced IRB approach (14 per cent at year-end 2007). The ultimate target is Advanced IRB reporting for all the Group’s credit exposures, except those to central governments, central banks and local governments and authorities, and excluding a small number of insignificant portfolios where IRB implementa-tion would be statistically unreliable and too costly.

IRB approval and implementation plan

EAD split by IRB Advanced, IRB Foundation and Standardised modelsPer cent

IRB Advanced

IRB Foundation

Standardised

IRB Advanced

IRB Foundation

Standardised

Dec 2013

Dec2007

Dec2008

Dec2011

Dec2009

Dec2010

Dec2012

100

80

60

40

20

0

22


For mortgages and other retail exposures, a scoring methodology is used when granting a credit and for assigning exposures to pools of homogenous default risk when calculating RWA. Details of scor-ing criteria and pool structures depend on the kind of business pursued, and differ between portfolios and countries.

All non-retail obligors on whom the Group has credit exposure are assigned an internal risk class that reflects the risk of default on payment obligations. The risk classification scale has 16 classes, with 1 being the best possible risk and 16 being the default class. Risk classes 1–7 are considered “investment grade”, while classes 13–16 are classified as “watch list”.

The table below gives lower and upper Probability of Default (PD) values for aggregates of SEB risk classes, and displays an approxi-mate relation to two rating agencies’ scales. Such relation is based on similarity between the method and the definitions used by SEB and these agencies to rate obligors, a similarity which in turn leads to reasonable correspondence between SEB’s mapping of risk classes onto PD values, and default statistics published by the agencies.

Risk classes are used as important parameters in the credit policies and the credit approval process (including decisions on credit lim-its), and for monitoring, managing and reporting the credit portfo-lio. The risk classification system is based on credit analysis, cover-ing business and financial risk. Financial ratios and peer group comparison are used in the risk assessment.

The risk classes and associated PD estimates are also a funda-mental input when calculating the economic capital attributable to exposures, thus linking into pricing and performance measure-ment processes. The Group’s overall economic capital is an impor-tant factor in SEB’s internal capital adequacy assessment process.

Likewise, estimates of Loss Given Default (LGD) parameters are linked to these applications. Processes for managing and recognis-

ing credit risk protection are outlined in following sections. The performance of the risk rating system itself is regularly

reviewed by the Group Risk Center in accordance with the Instruc-tion for approval, review, and validation of risk measurement sys-tems. The validation is done in order to both secure that SEB’s Risk Class Assignment (RCA) System is working satisfactorily and that it is used in accordance with external regulations, the internal rules and instructions. The discriminatory power and the through-the-cycle PD levels in SEB’s Master Scale are assessed and evaluated on a quarterly basis. The validation is performed by personnel within the bank who are independent of those responsible for risk class assignment of counterparties.

Structure of risk class scale in PD dimension

Risk class Lower PD Moody’s S&P

Investment grade 1 0.03% Aaa/Aa1 AAA/AA+ 2 0.03% Aa2/Aa3 AA/AA- 3 0.03% A1/A2 A+/A 4 0.05% A3 A- 5 0.09% Baa1 BBB+ 6 0.15% Baa2 BBB 7 0.21% Baa3 BBB-

On-going business 8 0.31% Ba1 BB+ 9 0.43% Ba2 BB 10 1.30% Ba3 BB- 11 2.00% B1 B+ 12 4.00% B2 B

Watch list 13 12.00% B3 B- 14 15.00% Caa1/Caa2 CCC+/CCC 15 25.00% Caa3 CCC- 16 100.00% Ca/C CC/D

23


Credit risk is calculated for all assets, both in the banking book and trading book. The methodology is aligned with the Basel II frame-work and addresses Probability of Default (PD), Exposure at Default (EAD), Maturity (M) and Loss Given Default (LGD).

SEB’s Risk Class Assignment (RCA) System is a tool for assign-ing risk classes between 1 and 16 to all types of non-retail obligors including corporates, property management, financial institutions and specialised lending. While SEB uses the same risk classes, PD scale and overall rating approach for all obligors, some fine-tuning of components is made to reflect the special characteristics of certain industries, for example financial institutions and shipping.

SEB’s RCA System is based on traditional methods of credit analysis covering business risk and financial risk, where the obli-gor’s circumstances are assessed against a set of descriptive defi-nitions. Financial ratios, peer group comparison and scoring tools are used to enhance the risk assessment of obligors. The RCA Sys-tem uses a template in the form of a risk class worksheet which is reviewed by SEB’s credit granting authorities in conjunction with review of the obligor and facilities in each credit application.

All risk classes are subject to a minimum annual review by a credit approval authority. Customers with higher-risk exposures (risk classes 13–16) are subject to more frequent reviews in order to identify potential problems at an early stage, thereby increasing the chances of finding constructive solutions.

Statistical analysis confirms that SEB’s risk classes historically have shown differentiated patterns of default, e.g. worse risk classes display higher default ratios than better risk classes in both good times and bad.

For retail exposures, assignment of exposures to PD pools is done via a scoring methodology where the most important factors are measures of payment behaviour. New exposures without a his-tory in the Bank are scored using publicly available information and well tested risk indicators.

The PD values are calculated as averages of the internal histori-cal observed default frequencies over one or more full credit cycles. In those geographies where internal data has been insuffi-cient, relevant external bankruptcy data has been used to extend the time series to span full credit cycles in order to predict a through-the-cycle level.

While SEB’s PD rating scale aims to rate each customer on a through-the-cycle basis, industry trends and movements in credit-worthiness of individual borrowers together tend to move the average risk class in line with the economic cycle. The movements in rating classes resulting from annual and more frequent re-rat-ings are referred to as “risk class migration”. SEB’s corporate and property management portfolios in the Nordic countries and Ger-many showed limited risk class migration in 2013. The Baltic port-folio improved slightly as the economies continued to stabilise.

EAD is measured in nominal terms (such as for loans, bonds and leasing contracts), as a percentage of committed amounts (undrawn credit lines, letters of credit, guarantees and other off–balance sheet exposures) and through current market values plus an amount for possibly increased exposure in the future, net of any eligible collateral (in the case of derivatives contracts, repos and securities lending).

LGD (Loss Given Default) and CCF (Credit Conversion Factor) estimates are based on the Group’s historical data together with relevant external data used e.g. for credit cycle calibration. LGD represents an estimation of loss on an outstanding exposure in case of default, and takes into account collateral provided, cus-tomer segment, etc. SEB bases its estimates on internal and exter-nal historical experience from at least 11 years and the specific details of each relevant transaction.

The Maturity parameter (M) is calculated as the effective matu-rity of every transaction.

SEB’s economic capital methodology for credit risk brings all risk parameters discussed above into play, combining them for use in a portfolio model which also considers risk concentrations in industrial and geographic sectors as well as in large individual exposures.

As a member of PECDC (Pan-European Credit Data Consor-tium), SEB participates in a data-sharing program where compari-son of historical EAD and LGD experience is possible with a large number of global banks. Pooled data is also used for estimating parameters for low default portfolios such as large corporates and banks. LGD estimates are set conservatively to reflect the condi-tions in a severe economic downturn.

Credit risk rating and estimation

24


IRB-reported credit exposures by PD Average 31 Dec 2013, SEK m Risk class PD EAD RWA risk weight

Institutions 1 0.03% 3,465 247 7.1% 2 0.03% 8,725 934 10.7% 3 0.03% 52,937 5,519 10.4% 4 0.05% 31,666 3,611 11.4% 5 0.09% 13,912 2,972 21.4% 6 0.15% 7,632 1,793 23.5% 7 0.21% 7,422 2,392 32.2% 8 0.31% 4,265 1,361 31.9% 9 0.43% 3,595 918 25.5% 10 1.30% 972 368 37.9% 11 2% 932 1,008 108.1% 12 4% 462 733 158.6% 13 12% 108 260 241.6% 14 15% 51 136 266.0% 15 25% 30 91 302.2% 16 100% 26 111 433.9%

Total Institutions 136,200 22,454 16.5%

Corporates 1 0.03% 6,587 101 1.5% 2 0.03% 12,040 1,103 9.2% 3 0.03% 56,336 6,654 11.8% 4 0.05% 71,732 9,055 12.6% 5 0.09% 60,486 10,724 17.7% 6 0.15% 82,210 20,386 24.8% 7 0.21% 105,127 31,002 29.5% 8 0.31% 149,276 48,266 32.3% 9 0.43% 151,811 61,843 40.7% 10 1.30% 84,012 60,428 71.9% 11 2% 24,543 20,910 85.2% 12 4% 25,953 25,702 99.0% 13 12% 9,981 15,457 154.9% 14 15% 4,978 8,747 175.7% 15 25% 3,511 6,978 198.7% 16 100% 7,595 1,383 18.2%

Total Corporates 856,178 328,739 38.4%

Retail mortgages 0 < 0.2% 235,925 6,530 2.8% 0.2 < 0.4% 102,515 7,070 6.9% 0.4 < 0.6% 0 0 0.0% 0.6 < 1.0% 52,262 8,409 16.1% 1.0 < 5.0% 30,300 8,907 29.4% 5.0 < 10% 5,867 4,100 69.9% 10 < 30% 4,088 4,135 101.1% 30 < 50% 2,083 1,616 77.6% 50 < 100% 1 0 34.4% 100% 3,301 666 20.2%

Total Retail mortgages 436,342 41,433 9.5%

25


IRB-reported credit exposures by PD (continued)

Other retail exposures 0 < 0.2% 6,654 414 6.2% 0.2 < 0.4% 3,804 897 23.6% 0.4 < 0.6% 1,761 557 31.7% 0.6 < 1.0% 4,047 1,932 47.7% 1.0 < 5.0% 7,816 5,007 64.1% 5.0 < 10% 1,631 1,039 63.7% 10 < 30% 587 678 115.5% 30 < 50% 22 28 129.6% 50 < 100% 46 62 135.3% 100% 847 5 0.6%

Total other retail exposures 27,215 10,619 39.0%

Securitisation positions AAA/Aaa 7,305 566 7.8% AA/Aa 1,806 153 8.5% A/A 1,364 308 22.6% BBB/Baa 1,331 1,567 117.7% BB/Ba 575 2,233 388.2%

Total Securitisation positions 12,381 4,827 39.0%

IRB-reported exposures with own estimates of LGD31 Dec 2013, SEK m Exposure amount LGD

Institutions unsecured 40,621 45.8%Corporates unsecured 316,218 36.2%Corporates real estate 222,461 13.8%Corporates shipping 45,258 12.7%Retail mortgages 436,342 12.1%Other retail exposures 27,215 40.3% LGD - Loss Given Default - statistically expected loss in the event of default, expressed as a percentage of exposure in the event of default.

IRB-reported exposures with own estimates of CCF31 Dec 2013, SEK m Original exposure Exposure after CCF Average CCF

Advanced IRB Corporates / Institutions 283,138 160,817 56.8%Advanced IRB retail Retail mortgages 23,143 15,080 65.2%Advanced IRB retail Other retail exposures 5,507 4,813 87.4%

CCF - Credit Conversion Factor - statistically expected exposure in the event of default, expressed as a percentage of a contract’s nominal amount.

26


Retail portfoliosIn 2013, 90 per cent of SEB’s Advanced IRB Retail portfolio was mortgage lending. The observed default frequency (ODF) for the SEB’s retail mortgage portfolio was 0.47 per cent, compared to the probability of default of 0.96 per cent (non-defaulted exposures only) estimated as of 31 December 2012. In Sweden, the ODF has been significantly below the long-term average expected default frequency. In the Baltics, the ODF was marginally lower than the probability of default as estimated at year-end 2012. The average recession-adjusted Loss Given Default at year-end 2012 was esti-mated to 14.2 per cent.

The expected loss for non-defaulted exposures, based on the PD and LGD above, was estimated to SEK 546m at end of year 2012 (0.13 per cent). In comparison (even though accounting data differs slightly in concept from the capital adequacy entities PD and LGD), total credit losses 2013 for the Group’s retail mortgages amounted to SEK 200m, some 0.05 per cent of the ingoing portfo-lio volume. This includes losses through outright defaults, as well as provisioning and build-up reserves for homogeneous groups of mortgage exposures.

Exposure at default for the retail mortgage portfolio is calculated using a credit conversion factor of 100 per cent except for undis-bursed loan commitments, where an estimate of disbursal rate is made. The volume of undisbursed commitments is insignificant in this portfolio.

Non-retail portfoliosIn 2013, the observed default frequency (ODF) for the non-retail portfolio, covering the corporates and institutions exposure classes, was 0.33 per cent, compared to the counterparty weighted PD of 1.61 per cent (non-defaulted exposures only) at year-end 2012. The ODF is curently significantly below the portfo-lio PD, mainly due to the economic recovery in the Baltic countries and the low default rates in Sweden. Since SEB was approved to use the Advanced IRB approach for its non-retail real estate and shipping exposures in 2012, a meaningful comparison between expected loss and actual loss is not possible.

Comparison between expected and actual losses

27


Derivative contractsCredit risk mitigation effects, SEK m 31 Dec 2013

Gross positive fair value of contracts 142,377Close out netting benefits -106,074

Value after close out netting benefits 36,303 Collateral benefits -10,135

Value after close out netting and collateral benefits 26,168

Overall Exposure At Default for credit risk in derivative contracts is SEK 91bn.This number is after netting benefits but before collateral benefits, and includes add-on for potential future exposure.

Credit derivativesNominal amounts, 31 Dec 2013, SEK m Reduces the risk Adds to the risk

Credit derivatives hedging exposures in own credit portfolios Credit default swaps 0 0 Total return swaps 0 0 Credit linked notes 0 0

Subtotal 0 0

Credit derivatives in trading operations Credit default swaps 3,319 2,513 Total return swaps 0 0 Credit linked notes 125 1,073

Subtotal 3,444 3,586

Total 3,444 3,586

Credit derivatives in the trading operations to a large extent represent hedges of bonds that are held for trading.

SEB enters into derivatives contracts primarily to support custom-ers in their management of financial exposures. Derivatives are also used to protect cash flows and fair values of financial asset and liabilities in SEB’s own book from market fluctuations.

Counterparty risk in derivative contracts is the risk of a coun-terparty not fulfilling its contractual obligations to SEB when a contract has a positive market value. Since market values fluctu-ate during the term to maturity, the uncertainty of future market conditions must be taken into account. This is done by applying an add-on to the current market value that reflects potential mar-ket movements for the specific contract. The total credit exposure on the counterparty, the credit risk equivalent, is the sum of the market value of the contract and the add-on.

Counterparty risk is reduced through the use of close-out net-ting agreements, where all positive and negative market values under an agreement can be netted at the counterparty level. The

netting agreement is often supplemented with a collateral agree-ment where the net market value exposure is reduced further by postings of collateral. Close-out netting is in place for the vast majority of counterparties, and collateral arrangements are used to a large extent.

Netting and collateral agreements could contain rating trig-gers. SEB has a very restrictive policy in respect of rating-based levels for thresholds and minimum transfer amounts. In addition, asymmetrical levels require specific approval from a deviation committee. Rating-based thresholds have only been accepted for a very limited number of counterparties. Further, rating triggered termination events are as a general rule not accepted. Deviations require approval from head of Group Financial Management.

For calculation of internal capital, SEB uses the Current Exposure Method, including schematic add-ons.

Counterparty risk in derivative contracts

28


SEB does not regularly securitise its assets and has no outstanding own issues. In addition, the Group does not operate any Asset Backed Commercial Paper (ABCP) conduit or similar structure. Thus, most of the securitisation RWA framework is of less rele-vance for the Group.

SEB provides liquidity facilities and term facilities to a small number of U.S. and European conduits; these can only be used for clients’ trade, lease or consumer receivables transactions and not for other assets.

As part of its diversified investment portfolio SEB holds securiti-sation positions in others’ issues. These are reported according to the External Rating approach, and the absolute majority consists of the most senior tranches. Some holdings have been downgraded from an original AAA but all are performing. Holdings with lower

than BB/Ba rating would receive a risk weight of 1.325 per cent but are instead, as prescribed in regulation, deducted from capital.

Securitisation positions (except those held for trading) are accounted for as available for sale assets or as loans and receiv-ables.

Interest rate risk in the structured bonds portfolio is of less importance, due to the absolute domination of floating rate bonds. The credit risk is diversified into several industries. There are no interest rate hedges or credit default swaps hedges.

The majority of bonds consist of the most senior tranches. All structured bonds are performing and amortise according to sched-ule. Stress tests are performed on a monthly basis which takes into consideration underlying levels of the position.

IV. Securitisations

29


Securitisation in trading book by rating category Total Of which Reported as risk-weighted assets 31 Dec 2013, SEK m exposure deducted Exposure Risk weight RWA

AAA/Aaa 153 0 153 7.4% 11sub BB/Ba 14 0 14 1,325.0% 189

167 0 167 119.9% 200

Securitisation in banking book by asset type Total Of which Reported as risk-weighted assets 31 Dec 2013, SEK m exposure deducted Exposure Risk weight RWA

Securitisation CLO. Collateralised loan obligations 5,313 0 5,313 7.9% 420 CMBS. Commercial mortgage backed securitisations 1,042 186 857 67.1% 575 CMO. Collateralised mortgage obligations 232 0 232 6.4% 15 RMBS. Residential mortgage backed securitisations 3,545 651 2,894 63.1% 1,826 of which sub-prime 97 97 (1,325%) (deducted) Securities backed with other assets 1,679 0 1,647 20.9% 345 Liquidity facilities 925 0 925 8.6% 79

Subtotal 12,736 837 11,867 27.5% 3,260

Resecuritisation CDO. Collateralised debt obligations 861 457 404 378.9% 1,532 CLO. Collateralised loan obligations 110 0 110 31.8% 35

Subtotal 971 457 514 304.9% 1,567

Grand Total 13,707 1,294 12,381 39.0% 4,827

Securitisation in banking book by rating category Total Of which Reported as risk-weighted assets 31 Dec 2013, SEK m exposure deducted Exposure Risk weight RWA

Securitisation AAA/Aaa 7,195 0 7,195 7.4% 532 AA/Aa 1,806 0 1,806 8.5% 153 A/A 1,255 0 1,255 15.3% 192 BBB/Baa 1,189 0 1,157 80.5% 931 BB/Ba 454 0 454 320.2% 1,453 sub BB/Ba 837 837 0 (1,325%) (deducted)

Subtotal 12,736 837 11,867 27.5% 3,260

Resecuritisation AAA/Aaa 110 0 110 31.8% 35 A/A 109 0 109 106.0% 116 BBB/Baa 174 0 174 366.2% 636 BB/Ba 122 0 122 641.7% 780 sub BB/Ba 457 457 0 (1,325%) (deducted)

Subtotal 971 457 514 304.9% 1,567

Grand Total 13,707 1,294 12,381 39.0% 4,827

30


In 2001, SEB received a supervisory approval to use its internally developed Value-at-Risk (VaR) model for calculating capital requirements. In 2011, a new generation of the VaR model was approved by the Swedish Financial Supervisory Authority for the parent bank and the subsidiary Skandinaviska Enskilda Banken S.A in Luxembourg. The enhanced VaR model is based on historical simulation uniformly for all the trading books and covers a wide range of risk factors. In 2012, SEB complemented the VaR model by a Stressed VaR calculation to comply with new regulatory requirements. The model has been approved by the Swedish Financial Supervisory Authority for the parent bank and the sub-sidiary Skandinaviska Enskilda Banken S.A in Luxembourg. The Stressed VaR calculations are performed with current positions but using market data from historically turbulent time periods.

Back testing is performed by comparing daily trading results against the daily VaR outcome. For this analysis, a theoretical result is calculated with updated market data whereas the end-of-day positions are kept unchanged. The result is calculated by per-forming a full revaluation of the positions using the updated mar-ket data. Back testing is used to verify that losses have not exceeded the VaR level significantly more than one per cent of the trading days, thus validating that the VaR model is estimating risk at a 99 per cent confidence level.

The VaR model is supplemented with measures of interest rate sensitivity, foreign exchange exposure and option activities. Sce-nario analyses and stress tests are performed on a regular basis as a complement to the above described risk measurements. Stress testing is a method that allows discovery of potential losses beyond the 99th percentile using further scenarios than those available in the simulation window. SEB stresses the portfolios by applying extreme movements in market factors which have been

observed in the past (historical scenarios) as well as extreme movements that could potentially happen in the future (hypo-thetical or forward-looking scenarios). Reverse stress tests are also performed for the total trading portfolio as well as for individual divisions and business units. This type of analysis provides man-agement with a view on the potential impact that large market moves in individual risk factors, as well as broader market scenar-ios, could have on a portfolio. Based on the Board’s Risk Tolerance Statement, SEB’s management has extended its risk appetite framework to include limits on stress test scenarios.

EU Directive 2006/49/EG is implemented in Swedish law and regulations, and is thus a binding constraint for the Group’s risk management of positions in the trading book. Market risks in the trading operations arise from the Group’s customer-driven trading activity, where SEB acts as a market maker for trading in the inter-national equity, foreign exchange and capital markets. The risks are managed at the different trading locations within a compre-hensive set of limits in VaR, stop-loss, volume measures for inter-est rate and currency risk. The risks are consolidated each day on a Group-wide basis by Market Risk Control for reporting to the Executive Management. Market Risk Control is present in the trading room and monitors limit compliance and market prices at closing, as well as valuation standards and the introduction of new products.

The table below shows the risk exposures by risk type. All risk exposures are well within the Board’s decided limits. The Group’s VaR in the trading operations averaged SEK 141m in 2013 com-pared to SEK 163m in 2012. The decrease compared to 2012 is mostly due to the gradual decrease of the volatility in the market. In Q4, the total VaR limit for the Trading Book decreased from SEK 800m to SEK 700m.

Trading book market risk

V. Market Risk

31


Value at Risk, Trading book (99 per cent, ten days)SEK m Min Max 31 Dec 2013 Average 2013 Average 2012

Commodities risk 6 33 15 15 12Credit spread risk 79 121 106 102 138Equity risk 14 66 19 29 66Foreign exchange risk 13 88 62 42 47Interest rate risk 39 98 44 65 118Volatilities risk 31 129 33 64 53Diversification -- -- -162 -175 -271

Total 94 199 117 141 162

Stressed Value at Risk (99 per cent, ten days) SEK m Min Max 31 Dec 2013 Average 2013 Average 2012

Commodities risk 14 89 36 38 18Credit spread risk 379 518 450 447 398Equity risk 58 212 131 112 160Foreign exchange risk 41 232 110 93 85Interest rate risk 111 444 317 276 259Volatilities risk 27 184 80 83 62Diversification -- -- -542 -532 -529

Total 318 777 582 517 454

Trading book back testing 2013 SEK m. Theoretical profit and loss vs. VaR on the 99% confidence level and 1 day holding period.

-UnwVaR adj

TheoPnL

UnwVaR adj

Theoretical profit and loss

VaR 1 dayJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

100

50

0

–50

–100

The VaR & Stressed VaR numbers shown in the tables above, are part of the input to the market risk capital requirements shown on page 9 (which are scaled up with regulatory multiplicators).

32


Market risks in the banking book mainly arise because of mis-matches in currencies, interest rate terms and periods in the bal-ance sheet, as well as from limited equity related holdings not part of trading activities. Treasury Operations has the overall responsi-bility for managing these risks, which are consolidated. Small mar-ket risk mandates are granted to subsidiaries where cost-efficient, in which case Treasury Operations is represented on the local Asset and Liability Committee for co-ordination and information sharing. The centralised operations create a cost-efficient match-ing of liquidity and interest rate risk in all non-trading related busi-ness.

Banking book market risk is monitored both from a value per-spective (Delta 1% and VaR) and from an income perspective (sensitivity in net interest income, NII).

The NII risk depends on the overall business profile, especially mismatches between interest-bearing assets and liabilities in terms of volumes and repricing periods (see below). The NII is also exposed to a “floor” risk. Asymmetries in pricing of products (deposit rates cannot really go below zero) create a margin squeeze in times of low interest rates, making it relevant to analyse

both “up” and “down” changes. SEB monitors NII risk but it is not assigned a specific limit in terms of market risk exposure. Further information is found in the table below of re-pricing periods for SEB’s assets and liabilities.

As concerns the value perspective, the Delta 1% measure is defined as the change in market value of the Group’s interest-bear-ing assets and liabilities arising from an adverse one percentage unit parallel shift in all interest rates in each currency. By year-end, this sensitivity amounted to SEK 1.53bn in the banking book.

The table below displays VaR for the banking book. The aver-age Banking Book VaR decreased by 36 per cent as compared to the average VaR in 2012, due to lower interest rate risk and lower credit spread volatility.

As a complement to VaR, foreign exchange risk is also mea-sured by Single and Aggregated FX. Single FX represents the single largest net position, short or long, in non-SEK currencies. Aggre-gated FX is arrived at by calculating the sum of all short non-SEK positions and the sum of all long non-SEK positions. Aggregated FX is the larger of these two absolute values.

Banking book market risk

Value at Risk, Banking bookSEK m Min Max 31 Dec 2013 Average 2013 Average 2012

Credit spread risk 108 222 214 159 248 Equity risk 18 27 26 24 29 Foreign exchange risk - 6 2 2 1 Interest rate risk 156 304 182 234 340 Volatilities risk 1 1 1 1 2 Diversification - - -108 -126 -160

Total 225 356 317 294 460

33


Investments in associates held by the venture capital organisation of the Group have in accordance with IAS 28 been designated as at fair value through profit or loss. Therefore, these holdings are accounted for under IAS 39.

All financial assets within the Group’s venture capital business are managed and its performance is evaluated on a fair value basis in accordance with documented risk management and investment strategies.

Fair values for investments listed in an active market are based on quoted market prices. If the market for a financial instrument is not active, fair value is established by using valuation techniques based on discounted cash flow analysis, valuation with reference to financial instruments that are substantially the same, or valua-tion with reference to observable market transactions in the same financial instrument.

Strategic investments in associates are on Group level accounted for using the equity method.

Some entities where the bank has an ownership of less than 20 per cent, have been classified as investments in associates. The reason is that the bank is represented in the board of directors and participating in the policy making processes of those entities.

Equity instruments measured at cost do not have a quoted market price in an active market. Further, it has not been possible to reliably measure the fair values of those equity instruments. Most of these investments are held for strategic reasons and are not intended to be sold in the near future.

In capital adequacy reporting the holdings detailed above are reported following the Standardised approach, in the Other items category.

Further information regarding accounting principles and valua-tion methodologies can be found in the Annual Report.

Equity exposures not included in the trading book Fair value of Unrealised Realised 31 Dec 2013, SEK m Book value Fair value listed shares gains/losses gains/losses

Associates (venture capital holdings) 1,101 1,101 -8 18Associates (strategic investments) 173 173 -5Other strategic investments 4,134 4,134 1,795 -15 86Seized shares 44 44

Total 5,452 5,452 1,795 -23 99

Repricing periods for the SEB Group’s overall balance sheet, 31 Dec 2013, SEK mAssets < 1 month 1 < 3 months 3 < 6 months 6 < 12 months 1 < 3 years 3 < 5 years 5 years < Non rate Insurance Total

Cash and cash balances with central banks 183,611 183,611Loans to credit institutions and central banks 68,807 6,983 6,882 4,709 7,392 3,707 2,806 690 647 102,623Loans to the public 258,500 200,289 102,427 142,016 330,615 148,777 107,272 12,672 1,302,568Other financial assets 154,547 17,176 24,180 31,483 117,600 56,111 98,222 21,622 324,847 845,788Other assets 11,616 0 0 0 535 259 328 17,897 19,609 50,244

Totalt 677,081 224,448 133,489 178,208 456,142 208,854 208,628 52,881 345,103 2,484,834

Liabilities and equity

Deposits from credit institutions 131,988 21,615 12,146 1,278 1,872 2,192 5,098 2 176,191Deposits and borrowing from the public 658,331 80,242 24,339 19,207 19,464 13,933 33,711 248 849,475Issued securities 47,567 127,526 151,122 28,830 172,003 140,678 69,026 47 736,799Other liabilities 54,706 3,335 5,595 3,432 48,151 33,581 92,531 26,157 332,067 599,555Total equity 122,814 122,814

TOTAL 892,592 232,718 193,202 52,747 241,490 190,384 200,366 149,268 332,067 2,484,834 Interest rate sensitive, net -215,511 -8,270 -59,713 125,461 214,652 18,470 8,262 -96,387 13,036Cumulative sensitive -215,511 -223,781 -283,494 -158,033 56,619 75,089 83,351 -13,036 0

34


SEB has received regulatory approval to use the Advanced Mea-surement Approach (AMA) to calculate the capital requirement for operational risk. This regulatory approval is a confirmation of the Group’s experience and expertise in operational risk management, including incident reporting, operational loss reporting, capital modeling and quality assessment of processes etc.

SEB’s AMA model is structured along the regulatory-defined business lines for operational risk. SEB quantifies operational risk with a loss distribution approach, using internal data and external statistics of operational losses that have occurred in the global financial sector. SEB’s business volume serves as a risk estimate in the modelling. Once the capital requirement for the Group has been calculated, it can be allocated throughout the Group in a fashion that is similar to the methodology used in the Stan-dardised approach – however using capital multipliers represent-ing each business line’s riskiness as assessed in the model. The quality of the risk management of the divisions, based upon their self-assessment, is taken into account as well. Efficient operational risk management results in a reduction of allocated capital and insufficient risk management results in an increase.

The capital requirement for operational risk is not affected by any external insurance agreement to reduce or transfer the impact of operational risk losses. The AMA model is used both for the

reporting of the legal capital requirement and for determining the internally allocated capital. The AMA model is also used to calcu-late economic capital for operational risk, but with a higher confi-dence level and with the inclusion of loss events relevant for the life insurance operations. The calculation of expected losses takes into account both internal and external loss statistics and is used as input for business planning and stress tests at all levels in the Group.

As a supporting tool, SEB uses an IT-based infrastructure for management of operational risk, security and compliance. All staff in the Group is required to use the system to register risk-related issues and management at all levels to identify, assess, monitor and mitigate risks. This facilitates management of operational risk exposures and minimises the severity of incidents in progress.

SEB is insured to a limited degree to cover for financial loss as a consequence of criminal acts committed with the intention of obtaining illegal financial gain, compensatory damages or settle-ments for financial loss caused by a negligent act, error or omis-sion, and damages or settlements caused by loss or damage to property or by bodily injury. However, SEB’s capital requirement for operational risk, as calculated in the AMA framework, is not affected by such external insurance to reduce or transfer the impact of operational risk losses.

VI. Operational Risk

35


Liquidity risk is defined as the risk that the Group, over a specific time horizon, is unable to refinance its existing assets or is unable to meet the demand for additional money. Liquidity risk also entails the risk that the Group is forced to borrow at unfavourable rates or is forced to sell assets at a loss in order to meet its payment commitments.

The aim of SEB’s liquidity risk management is to ensure that the Group has a controlled liquidity risk situation, with adequate cash or cash equivalents in all relevant currencies to timely meet its liquidity requirements in all foreseeable circumstances, without incurring substantial additional cost. Management of liquidity risk is governed by limits established by the Board which are further allocated by the Group Risk Committee. Liquidity limits are set for the Group, branches and specific legal entities as well as for expo-sures in certain currencies.

SEB maintains sufficient liquidity to meet current payment obligations while keeping liquidity reserves to meet any market disruptions.

The Board of Directors has adopted a comprehensive frame-work for the management of its short- and long-term liquidity requirements. Liquidity is managed centrally by Treasury Opera-tions, supported by local treasury centres in the Group’s major markets. Risk Control regularly measures and reports limit utiliza-tion as well as stress tests to the Group Risk Committee and the Risk and Capital Committee.

It is necessary to employ a range of customized methods and metrics, as there is no single metric that can comprehensively quantify liquidity risk. The metrics shall assess the structure of the balance sheet and cash flows. The cash flow metrics may also con-sider off-balance sheet items. Liquidity gaps shall be identified through measurement of cumulative net cash flows arising from the assets, liabilities and off-balance sheet positions of the Group in various time buckets. Cash flow gaps, cumulative and stand-alone in a specific time bucket provide insight to future cash flows of the Group. Thus, cash flow gaps are meaningful metrics when assessing liquidity risk as well as being input to other metrics.

Stress testing is conducted on a regular basis to identify sources of potential liquidity strain and to ensure that current

exposures remain within the established liquidity risk tolerance. The tests estimate liquidity risk in various scenarios, including both Group-specific and general market crises. The metric Survival hori-zon is measured on a combined stress scenario where SEB is both in market and unique stress, and measures how long SEB can meet its payments obligations given a defined stressed scenario. The stress test simulate the effects of less willingness by depositors and inter-bank lenders to extend their funding to the Group when it legally falls due. Internal stress tests are also complemented with the regulatory stress test Liquidity Coverage Ratio (LCR).

Structural liquidity risk refers to the liquidity risk in the Bank’s balance sheet structure and captures the underlying, more long-term, mismatch of assets and liabilities (and off-balance sheet exposures). The Core gap ratio measure core funds (liabilities with maturity beyond one year, including equity) in relation to illiquid assets (assets with maturity beyond one year) on an aggregated basis, and measures the extent to which the Group is funding illiq-uid assets with stable long-term funds. This ratio should always be above 100 per cent. The average level during 2013 was 114 per cent and, as of December 31, 2013, the level was 114 per cent. The average level during 2012, 2011 and 2010 was 115 per cent, 108 per cent and 106 per cent respectively. Core gap ratio is complemented with the regulatory metric Net Stable Funding Ratio (NSFR).

In order to monitor SEB’s wholesale funding dependence two balance sheet measures are used; Loan to Deposit ratio and Maturing funding ratio. Loan to Deposit ratio is defined as lending to the public less repos and debt instruments divided by deposits and borrowings from the public less repos. A low ratio means that lending is financed by deposits to larger extent meaning less reli-ance on other types of funding (typically wholesale funding). Maturing funding ratio is defined as liquid assets in relation to the sum of maturing wholesale funding and net interbank borrowings.

The liquidity measurement metrics are owned by Risk Control, a unit within Group Risk and independent from the business. These metrics are described in a liquidity risk measurement instruction which is subject to annual review and approval by the Group Risk Committee, thus ensuring that the measurement of

VII. Liquidity Risk

36


Q1 Q2 Q3 Q4

Liquidity coverage ratio development 2013Per cent

Q4

Q3

Q2

Q1

USDTotal EUR

400

300

200

100

0

Liquidity reserve by asset type1)

SEK bn

Other

Financials

Covered bonds

Covered bonds

Public bonds

Government bonds

Central bank deposits and o/n bank deposits20132012

Central bank deposits and overnight bank deposits

Government bonds Public bonds Covered bonds

Non-Financials Financials Other

1) According to the Swedish Bankers’ Association definition.

20132012

400

300

200

100

0

Structural liquidity risk by currencySEK bn

Other TotalUSDEURSEK

Assets excl. lending Deposits

Lending Equity & liabilities excl. deposits

3,000

2,000

1,000

0

-1,000

-2,000

- 3,000

Loan/deposit ratio 190 % 116 % 68 % 115 % 142 %

Liquidity reserve 46 134 136 30 346

Equity & Liability...

Deposits

Assets exl. lending

Lending

Loan to deposit ratioExcl repos and debt instruments.

Per cent

Allocated capital to divisions

2009 2010 2011 2012 2013

150

140

130

120

110

100

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