Risk Management and Capital Adequacy Report Pillar 3

163 Pages·2016·3.77 MB·English

by  Marion Cutting

Risk Management and Capital Adequacy Report
Pillar 3 – 2015
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Table of contents
Introduction 3
Swedbank in brief 4
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 2015 10
Capital requirements 10
Capital planning 13
Regulatory environment – impact on Swedbank 14

3. Credit risk 18
Highlights 2015 18
Credit risk exposures 19
Capital requirements for credit risk 27
Credit risk exposures – by business segment 29
Management of credit risk 34
Measurement of credit risk 37
Counterparty risk 42

4. Market risk 46
Highlights 2015 46
Market risk exposures 46
Management of market risks 49
Measurement of market risk 49
Capital requirements for market risks 50

5. Liquidity risk 52
Highlights 2015 52
Funding and liquidity strategy 52
Management of liquidity risk 55
Measurement of liquidity risk 56

6. Operational risk 59
Highlights 2015 59
Management of operational risk 60
Capital requirements for operational risk 63

7. Economic capital and stress tests 64
Highlights 2015 64
Economic Capital 64
Internal Capital Adequacy Assessment Process – Pillar 2 66
Stress tests 67
The adverse ICAAP scenarios 67
Impact on Swedbank – simulation results 68
Impact on Swedbank – REA and capital 69
Externally performed stress tests 70

Swedbank Consolidated Situation: Appendix 71
Definitions 113

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 - 2015
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Introduction
This Risk Management and Capital Adequacy Report 2015 (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 Swedish Financial Supervisory Authority (SFSA) regulation FFFS
2014:12.
Information in this report pertains to conditions as of 31 December 2015 for Swedbank
Consolidated Situation (see Definitions table in Appendix) if not otherwise stated. The
disclosure is made annually in conjunction with the date of publication of Swedbank’s Annual
Report. For items where Swedbank has assessed that more frequent disclosures are needed,
information is given in the interim reports.
Furthermore, this report includes information for significant subsidiaries (Estonia, Latvia, and
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. The SFSA will, together with the
regulatory supervisory college, 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. This report constitutes the demanded disclosure for
Swedbank.
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 regarding remuneration in Swedbank 2015”, which is published in conjunction
with the Annual General Shareholders Meeting. All documents mentioned above, as well as the
Policy on Gender Equality and 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 Risk Management and Capital Adequacy Report – Pillar 3 - 2015
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Swedbank in brief
Swedbank is a full-service bank available to all households and businesses in its home markets.
With over 7 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 419 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 financial hubs such as the U.S., South Africa and China.
Swedbank consists of four main business segments: (i) Swedish Banking, (ii) Baltic Banking (iii),
Large Corporates & Institutions, and (iv) Group Functions & Other.
Economic environment
A weaker recovery in advanced economies and a slowdown in emerging markets contributed
to lower global growth during 2015. The euro area recovery was in line with expectations,
and countries such as Spain and Italy performed better than expected. After two stable
quarters, the US growth surprised the market on the downside, showing lower activity and
capital spending not least in the oil sector. Despite lower-than-expected growth, US
unemployment continued to decline, spurring expectations that eventually led the Federal
Reserve to impose monetary policy tightening during late 2015, with the long-foreseen rate
increase materialising in December. In addition, the year featured a substantial slowdown in
emerging markets which can largely be attributed to a continued fall in commodity prices, not
least the low oil price, and to lower-than-expected demand from China. Taken together, the
expected monetary policy tightening in the US in combination with lower growth
expectations in China contributed to volatile equity markets during the end of 2015. However,
inflation surprised the market on the downside in most developed economies, despite
accommodative monetary policy practices spurring expectations of continued low interest
rates in the eurozone and elsewhere.
With a GDP of 3.5%, the Swedish economy performed above expectations and showed
strength as growth momentum was maintained throughout 2015, fuelled by increased
household consumption as well as housing-related investments. Looking forward, the
Riksbank’s unusually stimulative monetary policy is expected to persist in the near term, as are
risks related to investors’ search-for-yield behaviour. In addition, risks related to the trends in
the Swedish housing market remain elevated. The uncertain regulatory environment and the
slowdown in world growth and continued sluggish recovery in the euro area impose
challenges, as Sweden remains dependent on exports and external demand. In addition,
geopolitical tensions in the Middle East are expected to persist during the forthcoming year,
leading to a continued flow of immigrants to Europe. This poses a challenge as well as an
opportunity for Sweden, as governmental spending is likely to contribute to growth in the
short term. Macroeconomic challenges may arise in the medium term, depending on how
efficiently the integration of recent immigrants occurs. Reforming the labour market is
essential to secure future growth. The housing shortage, especially in the rural areas, must
also be resolved in the longer term; if this is accomplished, it will in turn somewhat mitigate
Sweden’s current demographic challenges.
In 2015, the Baltic economies continued to outperform most eurozone economies, as they
effectively managed weaker external demand and the impacts of the geopolitical tensions
with Russia. In addition, higher wage increases and rising employment supported a robust
private consumption. During 2015, the Estonian economy is expected to have grown by about
1.2%, the Latvian economy by 3.0%, and the Lithuanian economy by 1.7%, which can be
compared to overall eurozone growth of 1.5%.

SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2015
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Low risk, strong capital base and solid liquidity
situation in a challenging environment

“2015 proved to be another strong year for Swedbank. Our capital base continued to strengthen on
the back of stable profit generation and solid asset quality, while ensuring the bank’s low risk level in the
balance sheet. This was recognised as Swedbank’s rating was upgraded during the year. The asset quality in
the credit portfolio has shown strong resilience during a turbulent year, maintaining a low level of loan
losses.
Swedbank has been one of the highest capitalised banks in Europe for several years, and 2015 was no
exception. Our strong capital position is confirmed by the ICAAP stress test, by the Riksbank and the SFSA
stress tests performed during 2015, but also via the latest pan-European stress test performed by the
European Banking Authority. Our liquidity position is also equally 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 measure shows strength, as does the Net Stable Funding Ratio (NSFR).

From a risk control perspective, our focus in 2015 has been to support responsible and sustainable
business growth. This has been achieved through further embedding a strong business and risk culture, but
also by preventing undesired risks. This is accomplished through further development of steering tools and
the risk limit framework and also through the use of a more sophisticated monitoring and control structure.
We have further focused on prudent risk management during operational changes and by enhancing our
amortisation principles. Focus on the rapidly changing regulatory landscape and implementation of new
legislation has been important and is a key challenge for the industry as a whole. During 2015, Swedbank
took additional steps into the digitalised world and consequently enhanced risk control within the
information security area. During the past few years, the bank’s consistently executed controls, combined
with a higher awareness level by employees as well as customers, have been recognised and proven to be
efficient when compared to other Nordic and European countries.

Looking into 2016, we continue to allocate significant resources to manage the scope of new
regulatory requirements and digitalisation, which remain key challenges going forward. We also face several
challenges in the external environment, such as the macroeconomic situation within the euro area with
persistent slow growth and low interest rates. The bank will need to be able to manage a scenario with
continued negative interest rates as well as the effects of quantitative easing actions. Geopolitical tensions
such as the conflicts in Russia/Ukraine and in the Middle East, which are causing severe hardship for the
regions’ citizens, are other factors that we are taking into account. We are closely monitoring the low oil
price and its impact on relevant industries, although a lower oil price has a neutral or beneficial impact for
most of our customers.

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 banks and strong liquidity
position combined with our focus on low-risk assets puts us in a good position to meet these challenges.

With this report, we aim to provide readers with an open and clear view of how we work with risk
management at Swedbank and how we continue to ensure our low risk and strong capital base.”
Anders Karlsson
Chief Risk Officer

SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2015
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 society, customers, 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, 0.04%, and a low level of impaired loans, 0.40%, despite the challenging external
environment during 2015. 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 declined. Both our internal as well as external stress tests (performed by
the European Banking Authority, the Riksbank and the Swedish Financial Supervisory
Authority) confirm our low-risk profile. Swedbank’s Common Equity Tier 1 (CET1) capital ratio,
24.1%, is among the highest compared to European peers, and our Survival Horizon stretches
far beyond 12 months.
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 limit 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 2015, 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 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 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 the approach to risk in different
operations, the Board has also formulated risk appetites for each main risk type (see below).
The risk appetites are further substantialised by limits set by the CEO and complemented by

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CRO limits, aimed at identifying potential limit breaches at an early stage. Business area limits,
constituting the last level in the risk limit framework, are applied where relevant. 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
escalation principles in the event of any breaches of the risk appetite or limits.
The Group Risk organisation is responsible for ensuring that each key risk is identified,
analysed and properly managed. Decisions made on an aggregated level should always be in
line with the Group’s risk appetite. The Board as well as the CEO are regularly informed on the
overall and specific risk profile. 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 the Group Risk and Compliance Committee (GRCC), meeting monthly
(11 meetings in 2015), to assist him in matters related to all categories of risk and compliance,
i.e. 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 accurately managed. To further strengthen risk management arrangements in
group functions and local business areas, the GRCC is supported by local Risk and Compliance
Committees (BARCCs). Individual BARCCs are established in all business areas and relevant
group functions, and have the same setup on local level as the GRCC for the Group. Escalation
routines are implemented from the BARCCs to the GRCC to secure solid and efficient 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 strong business
acumen to achieve solid profitability and a sound credit expansion for 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 level for the respective credit portfolio, which is achieved
by lending to customers with a high debt-service coverage ratio, by maintaining a strong
collateral position and by portfolio 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. In the derivatives business, International Swaps and Derivatives Association
(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. No positions shall be taken that could
be deemed unethical or that could jeopardise the Group's reputation.
Liquidity and funding risk
Swedbank strives to maintain a conservative risk profile with resilience to both short-term
and long-term external stress and to 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 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

SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2015
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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.
Liquidity risk is measured, forecasted and analysed, using various time horizons, to ensure that
the Group has adequate cash or cash-equivalents to meet its obligations in a timely manner.
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 optimised 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 the Group Asset Allocation Committee (GAAC) to assist him in issues
related to the management of assets, liabilities, capital and the balance sheet structure. Group
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 - 2015
2. Capital requirements

In 2015, Swedbank’s capitalisation continued to
strengthen for the eighth consecutive year. Swedbank’s
CET1 capital ratio is among the highest compared to
European banks. 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 2015
Thanks to stable earnings generation, combined with a reduced risk exposure amount,
Swedbank’s already strong capitalisation further improved throughout the year. Swedbank’s
Common Equity Tier 1 (CET1) capital ratio was 24.1% as of year-end, which makes the Group
well-positioned to meet both current and future capital requirements. In February 2015,
Swedbank completed its first issuance of Additional Tier 1 capital instruments according to
new European capital regulations, to optimise its capital structure. Internal and external stress
tests also show that Swedbank remains resilient to crises, not least the Internal Capital
Adequacy Assessment Process (ICAAP), which incorporates adverse scenarios more severe
than any recent Swedish recessions.
Capital requirements
Capital adequacy rules express the regulatory requirement for how much capital a bank must
hold in relation to the risk the bank 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). Since 2014, Pillar 2 capital charges have
increased in importance as a supervisory tool, as the Swedish Financial Supervisory Authority
(SFSA) has introduced both a systemic risk buffer and a risk-weight floor for Swedish
mortgages within the Pillar 2 framework.
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 internal ratings-based (IRB) approach shall, at all times, also hold own funds equal to
or exceeding 80% of the total minimum amount of own funds that the bank 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. Furthermore, the CRR includes rules
regarding large exposures, i.e. the limitation of exposures to individual customers or groups of