Swedbank Risk and Capital Adequacy 2015

133 Pages·2017·3.87 MB·English

by  Marion Cutting

Risk Management and Capital Adequacy Report
Pillar 3 – 2016
0B 0B 0B 0B 0B 0B Table of contents
Page Page
Introduction 3 7. Stress tests and economic capital 64
Swedbank in brief 3 Highlights 2016 64
Economic environment 3 Economic Capital 65
CRO's statement 5 Internal Capital Adequacy Assessment Process –
66
Pillar 2
1. Risk governance 6 Stress tests 67
Risk profile 6 The adverse ICAAP scenarios 67
Enterprise Risk Management Policy 6 Impact on Swedbank – simulation results 68
Three lines of defence 6 Impact on Swedbank – REA and capital 69
Risk appetite and framework 7 Externally performed stress tests 70
2. Capital requirements 9 Appendix A - Swedbank Consolidated Situation 71
Highlights 2016 9 Definitions 78
Capital requirements 10 Terminology and abbreviations 80
Capital planning 12
Regulatory environment - impact on Swedbank 13 Appendix B - Index of Tables and Graphs 82
Capital adequacy tables 16
Appendix C - Subsidiaries 85
3. Credit risk 21 Swedbank Estonia Consolidated Situation 86
Risk appetite 21 Swedbank Latvia Consolidated Situation 98
Highlights 2016 21 Swedbank Lithuania Consolidated Situation 110
Credit risk in important sectors 22 Swedbank Mortgage AB 122
Credit risk exposures 24
Credit risk by business area 25
Management of credit risk 27
Measurement of credit risk 30
Capital requirements for credit risk 34
Credit risk exposures - retail exposure class (IRB) 35
Credit risk exposures - corporate exposure class (IRB) 37
Credit risk exposures - institutions exposure class (IRB) 39
Credit risk tables 40
Counterparty credit risk 43
4. Market risk 46
Risk appetite 46
Highlights 2016 46
Management of market risks 47
Measurement of market risk 47
Capital requirements for market risk 48
Market risk exposures 48
5. Liquidity risk 52
Risk appetite 52
Highlights 2016 52
Funding and liquidity strategy 53
Management of liquidity risk 56
Measurement of liquidity risk 56
Capital requirements for liquidity risk 59
6. Operational risk 60
Risk appetite 60
Highlights 2016 61
Management of operational risk 61
Capital requirements for operational risk 63
333

Introduction
This Risk Management and Capital Adequacy Report 2016 Swedbank Board of Directors including directorships and
(Pillar 3 report) provides information on Swedbank’s capital recruitment policy is also disclosed in the Swedbank Corporate
adequacy and risk management. The report is based on Governance Report. Information about risk implications of the
regulatory disclosure requirements set out in the Capital remuneration process (and aggregate as well as granular
Requirements Regulation (Regulation (EU) 575/2013) and the quantitative information on remuneration) is disclosed in the
Swedish Financial Supervisory Authority (SFSA) regulation document “Information regarding remuneration in Swedbank
FFFS 2014:12. 2016”, which is published in conjunction with the Annual
General Shareholders Meeting. All documents mentioned
Information in this report pertains to conditions as of 31 above, as well as the Policy on Gender Equality and Diversity,
December 2016 for Swedbank Consolidated Situation (see are available on www.swedbank.com.
Definitions table in Appendix A) if not otherwise stated. The
disclosure is made annually in conjunction with the date of This report is submitted by Swedbank AB, a public limited
publication of Swedbank’s Annual Report. For items where liability company with registration number 502017-7753.
Swedbank has assessed that more frequent disclosures are This document has not been audited and does not form part of
needed, information is given in the interim reports. Swedbank AB’s audited financial statements.
Furthermore, this report includes information for significant
subsidiaries (Estonia, Latvia, and Lithuania each on a Swedbank in brief
consolidated basis as well as Swedbank Mortgage) in
Swedbank is a full-service bank available to all households and
accordance with Article 13 in the Capital Requirements
businesses in its home markets. With over 7 million private
Regulation.
customers and more than 600,000 corporate and
organisational customers across its operations, Swedbank is
The report is part of the capital adequacy framework that
the largest bank in Sweden based on number of customers.
builds on three pillars:
The customers are served by 389 branches in Swedbanks four
• Pillar 1 provides rules for how to calculate minimum home markets – Sweden, Estonia, Latvia and Lithuania – and a
capital requirements for credit risk, market risk and presence in neighbouring markets such as Denmark, Finland
operational risks. The calculation can either be done using and Norway to support our client base in these markets.
prescribed standardised risk measures or based on the Swedbank also operates in financial hubs such as the U.S.,
bank’s own internally used risk measures. Swedbank South Africa and China.
must fulfil certain requirements in order to use its own
Swedbank consists of four main business segments: (i)
internally used risk measures and must seek approval
Swedish Banking, (ii) Baltic Banking (iii), Large Corporates &
from the SFSA and local supervisors in other countries
Institutions, and (iv) Group Functions & Other.
where it operates.
• Pillar 2 requires institutions to prepare and document
their own internal capital adequacy assessment process Economic environment
(ICAAP). All relevant sources of risk must be taken into
Growth in Europe and US was surprisingly resilience during
account, that is, not only those already included when
2016 amid global uncertainties. Labor market continued
calculating the minimum capital requirement for credit,
adding new jobs, inflation was picking up from low levels and
market and operational risks. The SFSA will, together
sentiment among businesses and consumers strenghend.
with the regulatory supervisory college, make an
Manufacturing and services PMIs and consumer confidence
assessment of the banks’ ICAAP and may impose
increased and pointed a stronger growth in coming months in
additional capital requirements for Pillar 2 risks, meaning
both Europe and the US. The effects of the financial crisis was
risks not covered by the Pillar 1 calculation.
slowly dissipated.
• Pillar 3 requires institutions to disclose comprehensive
information about their risks, risk management and In the US, the business cycle is maturing. The US has enjoyed
associated capital. This report constitutes the demanded 82 months of positive employment growth, the longest spell
disclosure for Swedbank. in history. With a strong labor market, and uptick in wages and
stronger balance sheets, the US consumer has become more
Information about the Swedbank corporate governance optimistic which will translate into higher growth in private
structure and measures undertaken to manage operations in consumption, a key determinant of US growth. In December
the consolidated situation is presented in the Swedbank 2016 Federal Reserve raised the reporate by 0.25 bp to 0.75
Corporate Governance Report. Information about the per cent and additional hikes is expected during 2017.
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Expectations are high that Trumponmics will deliver fiscal parts of the country. The introduction of amortization
stimulus and higher growth. requirements on new loans from last June led to a slight
slowdown in the housing market. Housing prices rose at a
In the euro zone, the business cycle is less mature than in more modest pace and credit growth to households cooled. A
Europe and there is hence more room for several more years strong labour market and low interest rates supported the
of catching up. Unemployment has come down signifacantly, private consumption. The number of newly registered cars
9.6 per cent in December last year lowest level since 2009. reached new record levels. Although labour market
The business cycle was supported by low interest rates and strengthened and number of employed increased by 72 000
the ECB quantitative easing which was extended to December last year the labour market is sharply divided. Unemployment
2017. The Brittish economy have shown a better performance is more than twice as high for foreign-born compared to
than expected although uncertainties about Brexit. native-born and the shortage of labour became increasingly
common in both the private and public sectors. The inflation
While growth was at a stronger footing in developed
rate has gradually increased and inflation expectations has
countries, emerging markets showed signs of weakness.
picked up, which was positive news for the Riksbank. Inflation
China is struggling to balance high debt with slowing growth.
rate in December (CPI) was 1.7 percent, the highest level in
India’s economy will take a hit following the currency reform,
four years. Riksbank decided in December for an extension of
abolishing of higher denominated bills. Russia and Brazil is
bond purchases by a further six months, but the decision was
bouncing back from recession and benefiting from higher
divided, with two members wanted to finish the purchases
commodity prices. Still fundamentals remain weak.
entirely. Besides better macro data and less support for
Commodity prices picked up last year after several years of
further monetary easing boosted the Swedish krona, which
decline. The oil price increased sharply from the low levels in
can cause headaches for the Riksbank to achieve the inflation
the beginning of 2016. OPEC decided to cut oil production for
target of 2 percent.
the first time since 2008 and the increase in metal prices was
boosted by expectations of higher US investments going In the Baltic countries, the increase in GDP slowed in 2016.
forward. This was most evident in Latvia where GDP growth at an
annual rate fell to 0.3 percent in the third quarter, against 2
Swedish economy showed robust growth in 2016, although
percent in the second quarter. In Lithuania the growth rate
the speed decelerated somewhat after a substantial strong
declined from 2.1 to 1.7 percent, while the economy improved
development in 2015. A fast growing population, which in
slightly in Estonia and grew by 1.3 percent. Fixed investment
January this year passed the 10 million inhabitants, was an
declined in all three Baltic countries, as a result of delayed
important driving engine in the Swedish economy. The
finanancial support from EU funds and subdued confidence
Riksbank's expansionary monetary policy, with a repo rate of -
among businesses and households. Private consumption
0.5 percent and the extension of bond purchases had also a
remained strong, driven by higher wages and falling
positive impact on growth. On average, GDP rose by 3.5
unemployment. At the end of the year improved macro
percent in average during last year's first three quarters
indicators for the Baltic economies as a result of the ongoing
compared with the same period in 2015. The domestic
recovery in the rest of Europe. Exports improved in the second
economy was the driving growth engine while it was still
half of last year and especially in Estonia. Inflation in the Baltic
sluggish for the export industry. Residential investments rose
countries has begun to increase due to higher prices,
by nearly 20 percent in 2016 and the number of apartment’s
especially of oil and food. In December, the inflation rate was
permits was at the highest level since the beginning of
2.2 percent in Estonia and Latvia, and 1.7 percent in Lithuania.
1970’s. The lack of housing is, however, troublesome in large

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Strenghtened low risk profile, strong capital base and solid
liquidity situation maintained despite the challenging low rate
environment

“2016 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 recognized as
Swedbank’s rating was upgraded during the year. The persistently strong asset quality in the credit portfolio in Sweden and in
the Baltics is demonstrated by the continued low level of loan losses. In Norway however, we will continue monitoring what we
perceive as an elevated risk level as a result of the volatile oil price and consequently a low level of investments. We have
worked together with our clients in the oil sector and taken proactive steps to restructure parts of our oil-related portfolio.
Where needed, necessary credit impairments have been taken aiming to comprise potential future loan losses.

Swedbank has been one of the highest capitalised banks in Europe for several years, and during 2016 that position was
strengthened even further. Our strong capital position is confirmed by the ICAAP stress test, by the Riksbank and the SFSA
stress tests performed during 2016. In addition several international stress test also verified Swedbanks strong position, such
as the pan-European stress test performed by the European Banking Authority and the International Monetary Fund as part of
their Financial Sector Assessment Process. Our liquidity position is equally strong, due to a 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, focus during 2016 has been to support responsible and sustainable business growth. This
has been achieved via proactive activities towards the business to strengthen and prevent undesired risks not least by actively
focusing on segments perceived as having an elevated risk. This has been accompanied by 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 as well as taken measures to support our clients in the
light of the Swedish housing market and the increased indebtness amongst private individuals. Focus on the rapidly changing
regulatory landscape and implementation of new legislation has been important and will continue to be omnipresent part of
financial institutions challenges. During 2016, Swedbank set additional focus on digitalisation, emphasizing risks stemming
from operating a digitalized bank in several areas such as credit risk, data privacy, fraud and cyber risk.
Looking into 2017, we continue to allocate significant resources to manage the scope of digitalisation but also the
regulatory requirements, which remain key challenges going forward. We also face several challenges in the external
environment, with persistant factors like slow growth in the euro area and the low interest rate enviroment. Geopolitical
tensions and effects stemming from UK invoking Article 50 as well the foreign policy of the newly inaugurated US president,
are other factors that we are taking into account. We are closely monitoring the oil price and its impact on relevant industries,
with special focus given to our Norwegian portfolio, although the lower oil price has a neutral or beneficial impact for most of
our customers in all four home markets.

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.”

Helo Meigas
Chief Risk Officer

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1. Risk governance
Swedbank´s independent risk organisation is shaped by the three lines of
defences and a strong embedded risk culture. This ensures professional risk
management and protects us from unintentional and unnecessary risk-taking.

Risk profile
Enterprise Risk Management Policy
Swedbank defines risk as a potentially negative impact on the
Group’s value which can arise due to ongoing internal Risk arises in all financial operations, and managing it well is
processes or future internal or external events. The concept of central for success. A strong common risk culture within
risk includes the probability that an event will occur and the Swedbank, with decision-making and responsibility kept close
impact it could have on the Group’s results, equity or value. to the customer, serves as the foundation for efficient risk
management and, consequently, a strong risk-adjusted return.
The Group shall work towards a sustainable social,
environmental and economic development together with its The Board has the ultimate responsibility for Swedbank
clients and other stakeholders. Group’s risk-taking and capital assessment. Through the
Enterprise Risk Management (ERM) Policy, the Board provides
The Enterprise Risk Management (ERM) Policy, decided by the
guidelines for the CEO on risk management and risk control,
Board, states that our strategy is to maintain Swedbank´s low
and how these functions should support the business
risk profile which is further concretised by the risk appetite
strategy. The ERM Policy specifies the risk appetite, the
(see Enterprise Risk Management Policy, Risk Appetite and
concept of three lines of defence, the fundamental principles
Framework).
of risk management, and roles and responsibilities. The Board
has also established the Risk and Capital Committee (RCC), the
Swedbank’s customer base, which mainly consists of private
Audit Committee (AC) and the Remuneration Committee (RC)
individuals and small and medium-sized companies in Sweden
as support in matters related to risk management,
and in the Baltic countries, is the foundation for the low credit
governance, capital requirements and remuneration
risk. Our low-risk profile is confirmed by low losses, and a low
respectively. For further information on these committees,
level of impaired loans, despite the challenging external
duties, reporting to committees and number of meetings
environment during 2016. Market risks were kept on a low
during 2016, see the Swedbank Corporate Governance Report
level throughout the year in spite of volatile markets. In terms
available on www.swedbank.com.
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 Three lines of defence
Authority, the Riksbank and the Swedish Financial
Supervisory Authority) confirm our low-risk profile. Successful risk management requires a strong risk culture and
Swedbank’s Common Equity Tier 1 (CET1) capital ratio, is a common approach that permeates the entire Group.
among the highest compared to European peers, and Swedbank builds its approach to risk management on the
correspondingly strong liquidity position. concept of three lines of defence, signifying a clear division of
responsibilities between the risk owners and control
To continuously secure the low risk level, our operations are functions, i.e. Group Risk, Compliance and Internal Audit.
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 lending.
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Swedbank’s risk management

includes reviewing, monitoring and challenging the Group risk
Risk appetite and framework profile in terms of significant exposures, risk trends, stress
tests, losses, management actions and performance versus
The ERM Policy states that Swedbank Group is to maintain a
risk appetite, including observance of the risk limit framework.
low risk profile, in terms of capital and liquidity. The long-term
The GRCC also reviews and monitors the management of
risk profile is to be managed so that a severely stressed
findings by Compliance, Risk units, Internal Audit and External
scenario, as defined in the annual Internal Capital Adequacy
Audit to secure that these are accurately managed. To further
Assessment Process (ICAAP), should not have a significant
strengthen risk management arrangements in group
negative impact on the CET1 capital ratio. If the impact
functions and local business areas, the GRCC is supported by
exceeds the established risk appetite, preventive measures
local Risk and Compliance Committees (BARCCs). Individual
must be taken.
BARCCs are established in all business areas and relevant
group functions, and have the same setup on local level as the
The Board establishes the main principles for the Group’s risk
GRCC for the Group. Escalation routines are implemented from
management and decides on the overall risk appetite. In order
the BARCCs to the GRCC to secure solid and efficient risk
to ensure and improve the approach to risk in different
management.
operations, the Board has also formulated risk appetites for
each main risk type (see below). The risk appetites are further
Credit risk
substantialised by limits set by the CEO and complemented by
Swedbank maintains a well-diversified credit portfolio with a
CRO limits, aimed at identifying potential limit breaches at an
low risk profile. All credit activities strive towards a long-term
early stage. Business area limits, constituting the last level in
customer relationship and rest on strong business acumen to
the risk limit framework, are applied where relevant. The risk
achieve solid profitability and a sound credit expansion for
appetite and limits are designed to secure that the Group
long-term stability. A basic principle in Swedbank’s lending
sustains its low-risk profile, taking into account the Group’s
operations is that each business unit bears full responsibility
business operations. The risk limit framework structure
for its transactions and its associated credit risks. Each
includes escalation principles in the event of any breaches of
business unit develops and maintains a balanced credit risk
the risk appetite or limits.
level for the respective credit portfolio, which is achieved by
The Group Risk organisation is responsible for ensuring that lending to customers with a high debt-service coverage ratio,
each key risk is identified, analysed and properly managed. by maintaining a strong collateral position and by portfolio
Decisions made on an aggregated level should always be in diversification within and between sectors and regions.
line with the Group’s risk appetite. The Board as well as the
Counterparty risk arises as a result of hedging of own market
CEO are regularly informed on the overall and specific risk
risk and from customer-related trading activities. The Group
profile. Further they are also regularly provided with
has a conservative approach when choosing interbank
information regarding the functionality of Swedbank’s risk
counterparts. In the derivatives business, International Swaps
limits and in case of breaches, the actions taken to mitigate
and Derivatives Association (ISDA) or similar agreements are
the breach The Risk organisation is responsible for providing
in general established with our customers. Furthermore, the
the business organisation with operational guidance and
Group restricts the extent of its counterparty risk exposure
support, in part by developing and maintaining internal rules
through several actions such as setting counterparty limits
and guidelines in each risk category.
and FX settlement limits.
The CEO has established the Group Risk and Compliance
Market risk
Committee (GRCC), (9 meetings during 2016) to assist in
According to the Group’s Risk-policy and the concept of three
matters related to all categories of risk and compliance. This

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lines of defense, market risk-taking shall only be conducted by considered in business decisions and, as far as possible, in the
units granted permission by Swedbank Group’s CEO. The risk- pricing of products and services. Managers shall ensure that
taking is limited by a certain risk appetite, established by the the operational risks inherent in their respective areas are
Group’s Board of Directors. Originating from the risk appetites, identified, assessed and properly managed in the day-to-day
respectively, risk limit structures have been created in order to operations.
protect Swedbank Group against unintentional losses and
excessive levels of market risk. ALM and capital management
In addition to the ERM Policy, Swedbank’s Asset, Liability and
Liquidity and funding risk Liquidity Policy sets out the fundamental principles that apply
Swedbank strives to maintain a conservative risk profile with for the Group’s processes and structures to identify and
resilience to both short-term and long-term external stress manage the Group’s assets and liabilities to build an optimised
and to maintain an adequate buffer of highly liquid assets to balance-sheet structure, in order to meet liabilities, absorb
enable it to withstand a prolonged period of liquidity stress losses, safeguard shareholder returns, and maintain public
without relying on forced asset sales or government confidence. The Group’s capital, funding and liquidity shall be
intervention. Swedbank shall have a long-term, stable, well- managed in a way that does not create disproportionate
diversified funding and investor base with a wholesale constraints on the governance or management of the Group.
funding that is well diversified across markets, instruments
and currencies. Furthermore, it shall strive to avoid maturity The CEO has established the Group Asset Allocation
mismatch risk in assets funded by unsecured funding. All non- Committee (GAAC) to assist in issues related to the
liquid assets, not eligible for covered bond issuance, shall be management of assets, liabilities, capital and the balance
funded either through customer deposits or through sheet structure. Group Treasury works as an internal bank and
wholesale funding with a maturity, to the largest extent, provides funding to the business areas, retains capital at
matching or exceeding that of the assets. Group level or, as directed by shareholders or the Board,
returns it to shareholders. To ensure that Treasury can act as
Liquidity risk is measured, forecasted and analysed, using an internal bank, an adequate framework comprising
various time horizons, to ensure that the Group has adequate principles and instructions for capital allocation and internal
cash or cash-equivalents to meet its obligations in a timely fund-transfer pricing is maintained.
manner. The responsibility for managing the Group’s liquidity
lies with Group Treasury. Group Risk works independently to Compliance
identify all relevant aspects of liquidity risks, and is For governing, controlling and supporting the proper handling
responsible for control, measurement, monitoring and of compliance matters, the CEO relies on Swedbank’s
reporting liquidity risk exposure across the Group. Compliance organisation. The Compliance function is
responsible for providing assurance to the CEO and the Board
Operational risk that the Group’s business is being conducted in accordance
Swedbank shall not experience operational risk-related losses with regulatory requirements applicable to the operations
or incidents that have materially negative impact on the subject to authorisation. Compliance’s activities are planned
Group’s funding, capitalisation and third-party credit rating. and prioritised through a structured and documented process
The maximum level of operational risk is further defined in the aimed at identifying the key compliance risks in the Group.
risk limits by a stated level of unexpected financial loss, The current focus areas for Compliance are internal
tolerable errors in the financial statement and as specific governance, customer protection, market conduct, ethics,
qualitative statements which relate directly to the operations conflicts of interest, anti money-laundering activities,
of the Group. counter-terrorist financing activities, and remuneration.
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

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2. Capital requirements
Swedbank’s capitalisation continued to strengthen for the ninth consecutive
year. Swedbank has one of the highest CET1 capital ratios compared to other
European banks. Our capitalisation makes us resilient and ensures that we are
well positioned to meet upcoming capital requirements proposed by
international standard setters as well as to continue to grow our business.
Capital requirements Common Equity Tier 1 ratio:
Capital adequacy rules express the regulatory
requirement for how much capital a bank must hold in 25.0
relation to the risk the bank faces %
2015: 24.1%

Highlights 2016

Common Equity Tier 1 capital:
Thanks to stable earnings generation, Swedbank’s already
strong capitalisation further improved throughout the year. 98.7
SEK bn
Swedbank’s Common Equity Tier 1 (CET1) capital ratio was
25.0% as of year-end, which makes the Group well-positioned 2015: SEK 93.9bn

to meet both current and future capital requirements. In

December 2016, Swedbank issued a new Additional Tier 1

capital instruments to further optimise its capital structure. Risk Exposure Amount:
Internal and external stress tests also show that Swedbank
remains resilient to crises, not least the Internal Capital 394.1
SEK bn
Adequacy Assessment Process (ICAAP), which incorporates
adverse scenarios more severe than any recent Swedish 2015: SEK 389.1bn

recessions.

Common Equity Tier 1 capital requirement:

21.9
%

2015: 19.9%

Leverage ratio:

5.4
%

2015: 5.0%

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Capital requirements In December 2016, Swedbank issued USD 500m in Additional
Tier 1 capital to further optimise its capital structure. The
Capital adequacy rules express the regulatory requirement for
issuance was in the form of debt instruments that convert to
how much capital a bank must hold in relation to the risk the
ordinary shares if the bank’s regulatory capital falls below a
bank faces. When assessing its capital needs, Swedbank takes
certain level. The issuance strengthened Swedbank’s Tier 1
into consideration its current and future risk profile, internal
capital ratio by 1.13 percentage points.
risk measurement, and assessment of the risk capital needed.
In addition to capital requirements for credit, market and Key figures
operational risk (i.e. Pillar 1), all other risks, such as interest
At year-end 2016, CET1 capital ratio (i.e. the CET1 capital in
rate risk in the banking book, concentration risks, pension
relation to the risk exposure amount), was 25.0% (31
risks, earnings volatility risk, and strategic risk must be taken
December 2015: 24.1%).
into account when assessing the total capital need (i.e. as part
of the Pillar 2 assessment). In recent years, Pillar 2 capital CET1 capital increased by SEK 4.8bn, to SEK 98.7bn. The
charges have increased in importance as a supervisory tool. In change is mainly attributable to earnings, net of proposed
particular, the Swedish Financial Supervisory Authority (SFSA) dividend. The accounting for employee benefits (IAS 19)
has introduced both a systemic risk buffer and a risk-weight creates volatility in the estimated pension liabilities and
floor for Swedish mortgages within the Pillar 2 framework. In decreased the CET1 capital by approximately SEK 1.5bn
2016 the SFSA also imposed a temporary additional Pillar 2 during 2016. The changes in CET1 capital are shown in Figure
capital charge related to revised requirements on banks’ 2-2 below.
internal models requiring the banks to anticipate a larger
proportion of economic downturns in their estimates of The risk exposure amount (REA) increased during the year by
probability of default, as described below. The capital charge SEK 5.0bn, to SEK 394.1bn (31 December 2015 SEK 389.1bn).
will be imposed until the SFSA has approved the banks’
Credit risk REA increased by SEK 9.4bn during the year. In
updates to their models in response to the revised
terms of exposure, there was an increase mainly in corporate
requirements.
and private mortgage exposures in Swedish Banking and LC&I.
Under the EU Capital Requirements Regulation (EU Regulation Negative rating migrations increased REA by a total of SEK
No 575/2013, CRR), a bank’s total capital must be equivalent 0.2bn. REA decreased by SEK 7.9bn due to improved LGD-
to at least the sum of the capital requirements for credit, levels resulting from higher property values for private
market and operational risks, including capital buffers and residential properties and from improved processes for
potential Pillar 2 add-ons. Banks using the internal ratings- handling collateral values. Changes in exchange rates
based (IRB) approach shall, at all times, also hold own funds increased REA for credit risks by SEK 3.6bn due to
equal to or exceeding 80% of the total minimum amount of depreciation of the Swedish krona.
own funds that the bank would be required to hold under
The REA for credit value adjustment (CVA) decreased REA by
Basel 1 rules (“Basel 1 floor”). Swedbank fulfills these
SEK 2.1bn, mainly driven by decreased exposures. The REA for
requirements; see Appendix A, table A1.
market risk decreased by SEK 1.4bn. Operational risk
Other laws and regulations also apply; for example, the decreased REA by SEK 0.9bn compared to the preceding year-
Swedish Banking and Finance Business Act require a minimum end, mainly due to Swedbank’s revenue being lower in the
initial capital of EUR 5m. Furthermore, the CRR includes rules rolling three-year period. See Figure 2-3 for changes in REA.
regarding large exposures, i.e. the limitation of exposures to
Swedbank’s leverage ratio was 5.4% on 31 December 2016
individual customers or groups of customers in relation to
(5.0%). Tier 1 capital increased by SEK 8.4bn, to SEK 113.0bn.
total capital.
The change is mainly attributable to earnings, net of proposed
In brief, the total capital is the sum of CET1 capital, Additional dividend, and to issuance of Additional Tier 1 capital in
Tier 1 (AT1) capital, and Tier 2 (T2) capital. CET1 capital December 2016. The issuance of Additional Tier 1 capital
mainly comprises shareholder equity after various impacted the leverage ratio only indirectly, it was not aimed
adjustments, while Additional Tier 1 capital and Tier 2 capital directly at the leverage ratio. The exposures included in the
are mainly made up of subordinated debt. A reconciliation of calculation of the leverage ratio decreased by SEK 4.1bn
shareholders’ equity (according to International Financial during the year. See Table 2-7 for a full reconciliation of the
Reporting Standards, IFRS) and the regulatory total capital is leverage ratio.
presented below in Figure 2-1.

SWEDBANK Risk Management and Capital Adequacy Report – Pillar 3 - 2016