Annual Report
2015
Content
1 Management report
2 1. Business and conditions 7 2. Financial report 11 3. Risk report
26 4. Internal control and risk management system with regard to the accounting process
32 5. Forecast report
39 Financial statements
40 Balance sheet as of 31 December 2015 42 Income statement for the period
from 1 January to 31 December 2015 44 Report of the Réviseur d’Entreprises agréé 46 Assurance from the legal representatives 47 Notes
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1. Business and conditions
1.1 Macro-economic environment
1While global economic growth did not gain any momentum in 2015, growth rates pertaining to the industrialised nations which are of vital importance for the Group rose again. The Interna-tional Monetary Fund (IMF) assumes in its January 2016 update that the growth rates for indus-trialised economies (“advanced economies”) for 2015 have only slightly increased to 1.9% (after 1.8% in 2014).
In the relevant countries, private and public investments recovered slightly in 2015, resulting in minor growth rates being seen again. However, decreasing unemployment rates led to positive development of private consumption. In the euro zone, real gross domestic product (GDP) is likely to have risen by 1.5% in 2015, which clearly is an improvement over the previous year‘s level of only just under 1%. The development of individual euro zone countries still varies, but at a lower degree compared with the previous year. The German economy developed as described in our last forecast, resulting in GDP growth of 1.7% in 2015. Fortunately, the euro zone as a whole was able to almost entirely close the growth gap to the German economy. With an economic real growth rate of 1.1% in 2015, France was able to overcome the economic stag-nation of previous years. Simultaneously, a real growth rate of 0.7% was recorded for the Italian economy – the first increase since 2011. In Spain, the positive development continued, leading to a strong GDP growth rate of 3.2% in 2015. In Great Britain, the recovery of recent years was confirmed once more in 2015, albeit at a slightly slower pace. Economic momentum in Sweden further improved during the year under review. The development of the economy in some central and eastern European markets, such as Poland and the Czech Republic, was also positive again.
In 2015, interest rate levels in the markets relevant for the DEPFA Group were generally to be found at all-time lows. In the euro zone, the ECB left its leading interest rates at a record low of 0.05%, and lowered the negative deposit rate for banks from -0.2% in 2014 to -0.3%. Inflation in the euro zone was also close to zero in 2015, after an already very low level in the previous year. The currency markets reflected the central bank decisions for a looser monetary policy in the
euro zone and the expectations of a future tightening of monetary policy in the United States and Great Britain. The euro lost significantly in value in against the US dollar, particularly as the yield advantage of US dollar investments increased again due to the anticipated ECB bond purchase programme and the increase of key interest rates in the US. Although the EUR/USD exchange rate remained volatile during the rest of the year, the euro‘s year-end closing rate stood slightly above the closing rate for the first quarter 2015, translating into a total loss of almost 12% for the entire year compared with the US dollar. Against the British pound sterling, the euro weakened steadily throughout the year.
1.1 Macro-economic environment 1.2 Sector-specific conditions
1.2 Sector-specific conditions
2Overall situation of the banking sector Despite the extensive provision of liquidity, the international banking sector still faces a difficult operative environment.
In the euro zone, the banks in countries affected by the euro crisis particularly suffer under the burden of non-performing loans. The negative rating pressure on the banking sector decreased slightly, although it is not limited to countries affected by the crisis, but challenges the European banking sector as a whole. Profitability in the sector was distinctly limited by persistent and comparably low demand for credit funding, together with the further decline of interest rate levels. The gradual implementation of plans to involve subordinated bond inves-tors in bank resolutions negatively affected the capital costs of banks. In general, increasingly stricter regulation continues to have a negative impact on the profitability of the sector.
Public sector finance The situation in all segments of municipal financing is now back to normal conditions. The financing provided by retail banks and development banks for municipal financing was sufficient to fund the majority of relevant municipal investment projects in the relevant coun-tries.
Countries which were subject to a critical stance on the part of financing banks and investors in the previous year, such as Spain and Ireland, received increasing financing contributions from private banks and investors. In Spain, liquidity provided by the government resulted in high pressure on margins.
The German market provided sufficient demand for public investment finance. Nevertheless, financing arrangements with extremely long-term loans remained popular and were granted at very low margins, primarily by public-sector and development banks. The traditional public investment finance market was thus highly challenging for other providers. Competition picked up again on the French market, which was reflected in deteriorating margins during the year.
Refinancing markets As in previous years, the trend of decreasing interest rates continued in the first quarter of 2015. It was only halted after the introduction of the two quantitative easing measures “Public Sector Purchase Program” (PSPP) and “Covered Bond Purchase Program 3” (CBPP3) by the ECB in March 2015. However, the market gave no indications of any sustained move towards higher interest rates. As a result, capital markets continued to be characterised by high stakes of liquidity, looking for investment opportunities, and persistently low yields. From an investor‘s perspective, the situation deteriorated considerably compared with previous years. Apart from the decrease of overall interest rate levels, credit spreads on covered issues further decreased, fuelled by the ECB‘s CBPP3 programme. Uncovered issues were burdened additionally by the pending and unclear transposition of the Bank Recovery and Resolution Directive (BRRD) into national law, which establishes the seniority of covered issues and deposits protected by deposit guarantee schemes. Depending on the transposition into national law at the level of individual jurisdictions the uncovered issues may lose their eligi-bility for repo transactions at the respective national central bank.
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During the course of 2015, an unusually high number of geopolitical risks and changes occurred. The interest rate and monetary policies of the larger central banks, such as the US Federal Reserve (Fed) and the ECB, were largely responsible for determining the market senti-ment. The Fed‘s announcements of potential interest rate increases for the first time in nine years led to uncertainty and reticence amongst investors. However, the ECB‘s quantitative easing (QE) measures and a further interest rate cut in December 2015 pushed investors into longer maturities and higher-risk investments.
1.3 Group and company-specific conditions
1.3.1 Business model and strategyIn accordance with a requirement of the European Commission, the DEPFA Group does not conduct any new business. The business activities of the subgroup are essentially limited to administration of the existing assets and liabilities, the volume of which is reduced mainly by way of maturities. The DEPFA has a functioning bank platform with DEPFA as well as two banks for issuing covered bonds, namely the Irish DEPFA ACS Bank plc (DEPFA ACS) and DEPFA PBI.
In August 2013, HRE Holding commenced the process for selling 100% of the share capital of its subsidiary DEPFA; this was completed with effect from 10 December 2014 with the final transfer of the DEPFA Group to FMS Wertmanagement.
1.3.2 Company-specific conditions
General In accordance with the requirements of the European Commission regarding the aid package of the Sonderfonds für Finanzmarktstabilisierung (SoFFin) for the HRE Group, DEPFA PBI will not conclude any new business until further notice.
The business activities of the subgroup are essentially limited to administration of the existing assets and liabilities, the volume of which is reduced mainly by way of maturities.
On 13 May 2014, the Federal Republic of Germany, in its capacity as the owner of HRE, stopped the sales process of DEPFA. Instead, at the recommendation of the Bundesanstalt für Finanz-marktstabilisierung (FMSA), the representatives of the federal government decided that the DEPFA Group would be transferred to FMS Wertmanagement for the purposes of state resolu-tion. The share purchase agreement between FMS Wertmanagement and HRE Holding was signed on 4 August 2014. The completion of the sale of the DEPFA Group to FMS Wertmanage-ment was announced with effect from 19 December 2014.
In the financial year 2015, the Bank continued to focus primarily on assuring liquidity at all times and also on reducing the portfolio without a negative impact on earnings. Refinancing of DEPFA PBI now mainly consists of covered bonds and the unsecured refinancing which is necessary to comply with the requirements applicable for the creditworthiness of the cover funds and which is obtained mainly from the parent company (DEPFA). However, the high quality of the assets continues to permit tender operations with the central bank and also secu-rity lending transactions.
1.2 Sector-specific conditions
1.3 Group and company-specific conditions
Rating
Senior unsecured ratings and covered bond ratings for DEPFA PBI
31.12.2015 31.12.2014 Standard &
Poor’s Standard & Poor’s
Long-term rating A–- A–
Outlook Stable Stable
Short-term rating A–2 A–2 Covered bonds (Lettre de gage) ./.2) A+1)
1) Negative outlook
2) Rating was withdrawn on 14 August 2015
The rating agencies are able to change or withdraw ratings at any time. The prevailing criteria and explanations of the rating agencies should be used for measuring and utilising the ratings, and the conditions for use must be complied with. Ratings should not be used as a substitute for own analysis. They do not constitute a recommendation for purchasing, selling or holding secu-rities of DEPFA PBI.
The development of the ratings continue to be significantly dependent on external factors, which for instance are linked with changes to the legal background conditions and resultant changes to methods implemented by the rating agencies.
In June 2015, Standard & Poor’s (S&P) downgraded the rating of the covered bonds issued by DEPFA PBI from A+ (negative outlook) to A- (stable outlook) as a result of revised rating criteria. On 14 August 2015, the covered bond rating of DEPFA PBI was withdrawn by S&P following an application of DEPFA.
Legal changes In the course of several meetings and circular resolutions, the Board of Direc-tors of DEPFA PBI deliberated in the financial year 2015 the transactions which are reportable in accordance with the articles of incorporation and rules of procedure of the Bank, and took relevant decisions in this respect. Major issues in this respect included not only the adoption of the annual financial statements for 2014, but also the prospects of the Bank and further possi-bilities of reducing the portfolio.
The general meeting of 12 May 2015 extended (as scheduled) by one year the mandates of the members of the Board of Directors which expire with the general meeting which is responsible for taking decisions in relation to the annual financial statements for 2014.
With effect from 17 November 2015, the Board of Directors mandate of Mr. John Cox was with-drawn by the extraordinary general meeting which was held on that date. He was then released from his duties as managing director by the Board of Directors of DEPFA PBI with effect from 20 November 2015.
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Senior management has at all times fully and promptly notified the local regulatory authority CSSF, BCL as well as the external auditors and trustees of the developments in the Group and in the Bank.
1.3 Group and company-specific conditions Financial report
2.1 Development in earnings
2.1 Development in earnings
The development of the individual items of the income statement for the reporting period from 1 January to 31 December 2015 is shown in the following table:
Profit and loss account in tabular form
01.01. - 31.12.2014
in T€ 01.01. - 31.12.2015
Net interest income –1,527 1,559 Net commission income –306 –218 Net income from financial operations 7,103 –59,273
Staff expenses –2,159 –1,773 Other administrative expenses –6,170 –4,958
General administrative expenses –8,329 –6,732 Depreciation on property, plant and equipment –11 – Other operating income/expenses –9,279 309 Net depreciation and impairments / income from the
reversal of impairments in relation to securities held as financial assets, investments and shares in
affiliated companies –10,133 51,364 Operating result before loan loss provision –22,482 –12,991
Taxes –918 –1,009
Result –23,400 –14,000
Ratios
Cost-income ratio –207.2% –11.7% Return on equity before tax –20.3% –16.0% Return on equity after tax –21.1% –17.3%
The interest income and also the interest expense declined further in the financial year 2015 in line with the declining holdings in core business. The decline in interest income was much more significant than the decline in interest expense, not least as a result of the reversal of deriva-tives in connection with asset sales carried out in relation to the large exposure regulation. This is opposed by income components in other income positions which provide partial compensa-tion, for instance income from the reversal of provisions for contingent losses. In addicompensa-tion, released liquidity could only be re-invested subject to less favourable terms.
Compared with the previous year, net commission income has been relatively constant, and mainly comprises account management fees and guarantee commissions.
Administrative expenses increased in total by € 1.6 million compared with the prior year. Personnel expenses have increased by € 0.4 million compared with the prior year, due to the creation of severance and vacation provisions. The main reason behind the € 1.2 million increase in the other administrative expenses compared with the previous year is to be seen in the costs due to affiliated companies, which increased by € 0.8 million compared with the previous year.
Net result from financial transactions is shown as € 7.1 million in the period under review, and comprises income from the reversal of provisions for contingent losses relating to
off-balance-8
sheet transactions of € 3.7 million, the foreign currency valuation result of € 3.7 million, as well as costs of € -0.3 million from repurchasing own bonds.
The other operating income mainly comprises costs of € 10.0 million for the reversal of deriva-tives which are connected with the disposal of security investments and which formed an economic entity with the security investments.
Under the item “Depreciation and impairments on securities which constitute financial assets, equity participations and shares in affiliated companies”, the realised losses of the assets which are sold are shown with a total of € 10.1 million. The sales proceeds of € 11.2 million are opposed by sales losses of € 21.3 million.
Overall, taking account of the provisions for contingent losses relating to the negative market values of the remaining derivatives and the costs relating to the reversal of derivatives which were associated with security investments, the asset sales of the past financial year resulted in a loss of € 16.5 million.
2.2 Development in net assets
The balance sheet total of DEPFA PBI amounted to € 2,425.8 million as of 31 December 2015 (31 December 2014: € 3,002.3 million); this is equivalent to a decline of € 576.5 million (19.2%). Loans and advances including securities amounted to € 2,145.9 million. This is equivalent to a decline of only € 357.8 million (14.3%) compared with 31 December 2014 (€ 2,503.7 million). The development in the loans and advances is due to a correspondingly high volume of
repay-ment and sales, simultaneously opposed by replacerepay-ment investrepay-ments. The individual figures are shown in the following table.
Development in net assets
Change Purchase repayment Maturity / FX-rate
in € million
Cash deposited with the central bank – – – – Government bonds –55.0 – –55.0 – Loans and advances to credit institutions –109.1 17.5 –135.7 9.1 Loans and advances to customers 0.3 – –2.5 2.8 Bonds –194.0 323.2 –607.9 90.7
Total –357.8 340.7 –801.1 102.6
The disposals include security sales of € 347.2 million, which are opposed by replacement investments of € 323.2 million. These sales were carried out as part of the large exposure management process.
Derivative financial instruments are used only for hedging against interest and currency risks attributable to market changes.
All securities are allocated to the asset portfolio, where they are measured in accordance with the modified lower-of-cost-or-market principle in accordance with Article 56 of the Act of
2.1 Development in earnings 2.2 Development in net assets
2.3 Development of the financial position
17 June 1992 regarding the Annual Financial Statements and Consolidated Financial State-ments of Credit Institutions subject to the Law of Luxembourg (in its currently valid version). It was not necessary for any individual allowances to be recognised as a result of impairments which were of a probably permanent nature. Nor have any collective allowances been recog-nised.
2.3 Development of the financial position
The capital structure of DEPFA PBI as of 31 December 2015 continues to be sound; all current obligations can be fulfilled. The liabilities have a balanced maturity structure.
Refinancing funds amount to € 2,084.0 million. This is equivalent to a decline of € 621.2 million (23.0%) compared with 31 December 2014 (€ 2,705.2 million).
The following table provides a detailed overview: Development of the financial position
Change Borrowings Maturity FX-rate
in € million
Liabilities due to the central bank – – – – Liabilities due to other banks –320.8 27.5 –348.3 – Liabilities due to customers –310.0 – –310.0 – Securitised liabilities 9.6 – –64.0 73.6
Total –621.2 27.5 –722.3 73.6
No public bearer covered bonds or registered covered bonds were issued in the financial year 2015. There were also no issues of subordinate instruments.
Issued bearer covered bonds of nominal amounts of CHF 50.0 million and € 15.0 million became due upon final maturity in the year under review. In addition, own bonds with a nominal value of CHF 3.0 million were repurchased and redeemed. The Bank also exercised the termi-nation option for zero registered covered bonds for a nominal amount of € 310.0 million.
Equity amounts to € 123.2 million as of the reporting date, compared with € 106.1 million as of 31 December 2014. The increase is attributable to the capital increase of € 30.0 million which has been carried out and also the payment of € 10.5 million into the reserves as well as the loss of € 23.4 million under commercial law.
Regulatory ratios For regulatory purposes, DEPFA PBI has sound equity backing as of 31 December 2015 even after the implementation of the Capital Requirements Regulation and Directive – CRR and CRD IV – as well as the technical regulatory standard of the European Banking Authority (EBA) regarding the look-through approach for transactions with underlying assets (RTS) and also following the action for remedying the large exposure problem carried out in the first half of the current financial year. Liable equity amounted to € 163.8 million as of the reference date (31 December 2014: € 150.9 million). The increase in liable equity is mainly attributable to the capital increase of € 30.0 million which was carried out in the course of the first half of the financial year, the capital injection of € 10.5 million which was made at the end of the year as well as the opposite negative result of € 22.4 million in accordance with the
Interna-10
tional Financial Reporting Standard (IFRS) and the phase-out effects of subordinate capital instruments. The equity ratio (minimum 8%) amounted 32.3% as of the reference date; the core capital ratio amounted to 26.9% (31 December 2014: 27.0% / 22.9%). The change between the two reference dates is due to the decline in liable equity and also the increase in risk-bearing assets.
Liquidity DEPFA PBI has always complied with the liquidity parameters defined by the regula-tory authorities. The ratio relates the liquid assets to the liabilities which are due. Liquidity was considered to be sufficient if eligible assets covered at least 30% of the due liabilities. The liquidity ratio was abolished with effect from 1 October 2015.
2.3 Development of the financial position Risk report
3.1 Organisation, responsibilities and tasks of risk management
3.1 Organisation, responsibilities and tasks of risk
management
As part of its business and risk strategy, the DEPFA Group has set up a group-wide risk management and steering system which defines basic principles, methods and processes. The central guidelines in the field of uniform risk identification, measurement and limiting, moni-toring and management are drawn up by the DEPFA Group.
Organisation and committees The Board of Directors of DEPFA PBI is responsible for the following major tasks of the risk management system:
- Defining, updating and communicating business and risk strategies as the basis of the busi-ness activities and risk tolerance within the framework of the guidelines defined throughout the Group (please refer to the sections concerning risk strategy and the individual risk types). Defining and further developing the guiding principles of a clear and coherent structure and procedure organisation within the DEPFA Group in particular for risk management for ensuring that all major risks are managed and monitored. This also includes the guidelines regarding appointments to key functions and the form of internal control mechanisms. - Adopting key modules of risk reporting.
- Adopting credit competences as a decision-making framework along the credit processes. - Taking decisions regarding (portfolio) management measures outside the competences
which have been transferred.
The Management Board of DEPFA consists of executive directors and non-executive directors. It has overall responsible for the group-wide risk management system, and is responsible for taking decisions relating to strategies and the main issues of risk management and risk organi-sation of the DEPFA Group. The risk management system covers all business activities of the Group. On the basis of a risk strategy which is reviewed annually, all major risks are verifiably and systematically identified, analysed, evaluated, managed, documented, monitored and communicated.
Risk management of the DEPFA Group is organised centrally and, apart from the Management Board and senior management of the group banks, comprises several committees. The following committees are detailed based on their significance for DEPFA PBI:
The DEPFA Board Risk Committee (DEPFA BRC) consists of a minimum of four non-executive directors; it meets on a quarterly basis, and advises the Management Board of DEPFA regarding risk appetite, strategy and profile, and monitors the effectiveness of the risk management organisation in relation to the risk profile of the DEPFA Group. It also advises the Management Board of DEPFA regarding the effectiveness of management of the economic capital and own funds for covering the risks of the DEPFA Group, and monitors the effective-ness of the compliance processes with regard to compliance with statutory and regulatory regulations.
The DEPFA Group Management Risk Committee (DEPFA Group MRC) comprises the three executive directors of DEPFA, the Chief Executive Officer (CEO), the Chief Risk Officer (CRO) and the Chief Operating Officer (COO), and the division managers of Risk Control, Risk Analytics, Credit Portfolio Management and Finance. In general, the committee meets once every month and draws up recommendations for the Management Board and the DEPFA BRC
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regarding the risk strategy and limit structure; it adopts guidelines, methods of risk measure-ment, the related parameters as well as methods of risk monitoring for all types of risk including risk provisioning and the stress test. The DEPFA Group MRC is responsible throughout the Group for the development of uniform standards for risk management and controlling, and also monitors the development in risk-bearing capacity, the economic capital, the risk covering potential and the credit portfolio as well as compliance with limits in the monthly DEPFA Risk Report. Since November 2015, a representative of DEPFA PBI Risk Management & Control (RMC) has also been invited to attend the meetings, but does not have a voting right in the DEPFA Group MRC.
The DEPFA Group Asset & Liability Committee (DEPFA Group ALCO) consists of the CEO, the CRO and the Chief Legal Officer/COO (CLO/COO) as well as the heads of Treasury, Risk Control and Finance (all of DEPFA). Further participants – without voting rights – are a Treasury representative of the New York branch and a Treasury representative of DEPFA PBI. It meets at least every six weeks. Its tasks comprise liquidity management, management of the balance sheet structure, calculation of transfer prices, as well as the management of market risks and the regulatory capital ratios and draws up decision-making drafts for liquidity and refi-nancing strategies for the management of the group companies – and thus also for the Board of Directors of DEPFA PBI.
DEPFA PBI has set up locally a “jour fixe” Treasury RMC, a forum which meets every week at the work level for discussing issues covering all divisions.
The DEPFA Group Credit Committee (DEPFA Group CC) was abolished in 2015; instead, credit decisions are now taken jointly by the head of Credit Portfolio Management and the CRO, whereby the latter bears the ultimate responsibility, within the framework of the credit competences specified by the Management Board.
DEPFA PBI has set up a Credit Committee for local management of lending operations in line with the overall group specifications; this meets on an ad-hoc basis, and consists of manage-ment as well as the local heads of RMC.
In addition to the above-mentioned committees, the following organisation entities – which are relevant from the perspective of DEPFA PBI – of the CRO are an integral component of the risk management system of the DEPFA Group in which DEPFA PBI is integrated:
- Risk Analytics, which is responsible throughout the Group for monitoring operational risks and liquidity risks;
- Risk Control, which is responsible throughout the Group for monitoring the market risks and risk-bearing capacity; As part of the process of restructuring the risk management func-tion in the period under review, these two funcfunc-tions emerged from the organisafunc-tion entity Risk Management & Control.
- Credit Portfolio Management (replacing Credit Risk Management), which is respon-sible for portfolio management and analysing selective new business.
The entity responsible for risk management and reporting in DEPFA PBI is part of Risk Control and is responsible locally to the managing director responsible for the Back Office, who is at the same time also the CRO of DEPFA PBI.
3.1 Organisation, responsibilities and tasks of risk management
Risk strategy and regulations The risk strategy is based on the business strategy, the risk inventory and the results of the group-wide financial planning process. It is applicable for the operating segments and legal entities of the DEPFA Group and also constitutes the framework for the group-wide risk manual.
For DEPFA PBI, as a group subsidiary of the DEPFA Group, the business and risk strategy is derived from the business strategy 2015 - 2018 which was adopted in April 2015 and which was also extended to cover DEPFA PBI by the Board of Directors in September 2015, and is also derived from the risk strategy of the DEPFA Group which was adopted in April 2015 and which was also extended to cover DEPFA PBI by the Board of Directors in September 2015. This enables various objectives to be derived for local business and risk management, including the following:
- Further reduction of the portfolio and total assets by way of gradual maturities of holdings, where appropriate by way of selective security sales; this reduction is carried out in a manner designed to maintain value and to avoid placing strain on capital. However, in line with management of the large exposure limits, portfolio reallocations necessary as a result of regulatory requirements resulted in losses.
- There are still no plans for new issues of covered bonds and expanding holdings in cover funds. However, if necessary for legal considerations, selective securities will be added to the cover funds or replaced with other securities as part of cover fund management.
- Assuring refinancing and optimum costs of refinancing over the life of the portfolio.
The risk strategy is specified in operational terms in the DEPFA Group via risk-specific guide-lines for all major risk types (default risk, market risk, liquidity risk and operational risk). These guidelines provide a detailed description of risk measurement, monitoring and management, the limitation process, and the escalation procedure in the event of a limit violation; they are regularly – that is at least once a year – reviewed and updated where necessary.
In addition to the above-mentioned regulations, further local DEPFA PBI specific regulations are applicable for the market and liquidity risk.
Risk reporting In line with overall group specifications and local regulations, the RMC is also responsible for the following in DEPFA PBI:
- Daily risk measurement and monitoring of the market, credit, counterparty and liquidity risks – the former essentially on the basis of a value-at-risk (VaR) approach. For risk purposes, liquidity reporting (consisting of the “liquidity report” and “liquidity coverage ratio forecast report”), “FX gap report” and a “market risk and performance report” are drawn up and sent to the Treasury department and senior management. Responsibility for monitoring the credit and counterparty risks has been outsourced to Credit Portfolio Management.
- The Board of Directors of DEPFA PBI also receives liquidity reporting every week; in addition, it also receives all four above-mentioned reports at the end of the month, including a summary of the main information from the point of view of RMC.
- The BCL receives weekly reports concerning the cover funds, the liquidity risk and the foreign currency financing risk of DEPFA PBI.
- Calculation of the risk-relevant regulatory ratios and compliance with the related reporting requirements. At present, this relates primarily to the liquidity cover requirements (liquidity coverage ratio, net stable funding ratio).
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In addition to this reporting, special reports which consider specific and acute risk aspects are prepared on an ad-hoc basis for management and the Board of Directors.
Certain services rendered for RMC (for instance analyses within the framework of the credit processes, provision of market data for valuation purposes, instruments for managing opera-tional risks) have been outsourced to DEPFA as the service provider within the framework of two service level agreements (SLAs).
Risk quantification and risk management – general The value-at-risk (VaR) approach is used for quantifying the main risk types (apart from the liquidity risk) also particularly with regard to calculating the economic capital and the corresponding backing with risk covering potential within the framework of the risk-bearing capacity analysis. The liquidity risk is meas-ured on the basis of the liquidity position. The individual calculation methods are described in detail in the risk report in the chapters “Result of the risk-bearing capacity analysis” and “Liquidity risk”.
Further risk types which are considered to be major as part of the regular internal risk inventory, such as regulatory risks as well as intangible risks which are considered to be minor risks, are not quantified by means of risk models; instead, they are managed and limited by way of regular detailed reports, clear specifications, e.g. the regulations concerning compliance and corpo-rate governance.
DEPFA PBI manages its risks at the portfolio and individual transaction level by means of the following:
1. Monitoring the risk-bearing capacity on the basis of the comparison of economic capital and the risk covering potential of DEPFA PBI, with due consideration also being given to stress test results. Risk quantification under the “internal capital adequacy assessment process” (ICAAP) and the corresponding stress testing have been outsourced to Risk Capital /ICAAP of DEPFA.
2. Monitoring of the risk-weighted assets (RWA) at the portfolio level by means of stress tests which are intended to ensure that the core capital ratio according to Basel III does not fall below 9%.
3. Operational risk management via
- a limit system for counterparty and issuer risks on the basis of a group-wide uniform risk measuring method.
- Monitoring the risk of losses by way of appropriate impairment triggers in accordance with IAS 39.
4. Daily monitoring of market risk. 5. Daily monitoring of liquidity risk. 6. Ongoing monitoring of operational risk.
Economic capital and monitoring the risk-bearing capacity – general The DEPFA Group has established a ICAAP-based risk-bearing capacity analysis. The review of internal capital adequacy is based on the concept of economic capital.
Economic capital is defined as “the quantity of capital required by a bank in order to cover the largest contingent unexpected total loss with a defined probability (the confidence level) over a
3.1 Organisation, responsibilities and tasks of risk management
time horizon of one year”. The concept was further developed uniformly throughout the Group in the period under review.
A going-concern approach has already been developed in 2012 as the primary management parameter for demonstrating the risk-bearing capacity of the former parent company HRE and its subsidiaries; this has been completely integrated in the ICAAP. Unlike the gone-concern approach which exists in parallel, this management parameter does not focus on the theore-tical event of the Group being liquidated; instead, it focuses explicitly on the going-concern assumption and also assumes that the regulatory minimum capital ratios are met. In addition to protecting regulatory minimum capitalisation, the going-concern approach also comprises an extensive early warning system which generates corresponding early warning signals a long time before the minimum ratios are attained.
In addition to the above-mentioned going-concern approach, the main approach continues to be the gone-concern approach in the DEPFA Group. In line with the other subsidiaries of the DEPFA Group, DEPFA PBI continues to use the previous gone-concern approach as the basis for reporting; this approach is detailed in the following.
The method for calculating the economic capital takes account of regulatory requirements (Basel III Pillar 2) and also the business activities of the Bank. The requirements of Basel III, Pillar 2 are applicable for DEPFA PBI, as specified in accordance with the relevant regulatory requirements in Luxembourg (see for instance the CSSF circulars 07/301, 06/273, 08/338, 09/403, 12/552, 13/563 and 14/597). These require adequate internal capitalisation.
The economic capital of each risk type is established using a quantitative approach, and is aggregated with due consideration being given to specific correlations to the total bank risk. In line with the common market standard, the capital amounts of the individual risk types are calculated for a period of one year and a confidence level derived from the target rating (of 99.95% in this case). The use of a confidence level of 99.95% (unchanged) implies that the Bank aims at least to achieve a rating which is equivalent to a very good rating of external agen-cies (A- at S&P, A/A2 at Fitch and Moody’s).
The individual specific methods of calculating the economic capital for the individual risk types as well as current ratios are described in greater detail in the relevant sections; the latter are summarised in the section “Result of the risk-bearing capacity analysis”. No economic capital is calculated for the liquidity risk. This risk type is the subject of specific precautions of struc-ture and procedure organisation.
In order to evaluate the adequacy of the capital backing of the Bank, the amount of economic capital is compared with the financial resources available to the Bank within one year, the so-called risk covering potential. The definition of the available risk covering potential for one year comprises customary components such as the shareholders’ equity in accordance with IFRS, components similar to shareholders’ equity (subordinate capital and hybrid capital with a holding period of at least one year). The purpose of these components is to compensate for possible losses and to maintain a corresponding risk cushion. The risk covering potential must always be greater than the economic capital.
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The results of the capital adequacy process and the stress tests are regularly presented to senior management (e.g. the Board of Directors of DEPFA PBI), which then defines any management measures which may be necessary.
3.2 Risk measurement, control and management of major risk
types in DEPFA PBI
Major risk types DEPFA PBI distinguishes the following major risk types for its business activities: - Default risk - Market risk - Liquidity risk - Operational risk - Business risk
The following are major risk types which are not quantified but which are limited by means of suitable reports, guidelines and guidelines:
- Strategic risks - Reputational risks - Regulatory risks
3.2.1 Default risk
Definition The default risk in general is defined as the risk of an unexpected default or decline in the fair value of a receivable or a derivative, resulting from a deterioration in the hedging situ-ation or deteriorsitu-ation in the creditworthiness of a country or a counterparty.
The default risk comprises the credit risk, counterparty risk, issuer risk, country risk, concen-tration risk and fulfilment risk which are defined as follows:
- Credit risk is defined as the risk which affects loans and traditional credit products as such. A major factor determining the credit risk is the probability of default in relation to the ability of the borrower to fulfil his financial obligations, and also the loss-given default, in relation to the value of securities. Declines in the fair value as a result of rating changes are taken into consideration for calculating the credit risk.
- Counterparty risk is defined as the risk of a potential unexpected default or decline in the fair value of a claim or a derivative. This is due to a deterioration in the creditworthiness of a coun-terparty or a deterioration of the hedging situation. The councoun-terparty risk includes the replacement risk and the repayment risk.
- Issuer risk is defined as the risk in relation to bonds and other securities. In particular, it refers to the ability of the issuer to meet his financial obligations and also relates to the value of securities in the event of the default of an issuer. Declines in the fair value as a result of rating changes are taken into consideration for calculating the issuer risk.
- Country risk arises from changes in the values of international exposures due to country-specific political and economic conditions. It essentially comprises the risk that arises in connection with business activities in certain countries. The country risk includes the conver-sion risk, transfer risk and sovereign default risk.
3.1 Organisation, responsibilities and tasks of risk management 3.2 Risk measurement, control and
management of major risk types in DEPFA PBI
- Concentration risk is defined as the risk of cluster formation in relation to a risk factor or coun-terparties, or a strongly correlated group of risk factors or counterparties.
- Fulfilment risk is defined as the risk that the bank makes a payment or delivers an asset which has been sold to a counterparty but does not receive a payment or the purchased asset. Credit portfolio according to regions and sectors The credit and issuer risks are almost exclusively attributable to public sector borrowers and banks in OECD member states (Organi-sation for Economic Cooperation and Development). The utili(Organi-sation of all credit lines is avail-able online, based on market values, for each individual counterparty, and also on an aggre-gate basis.
The breakdown of the credit portfolio as of 31 December 2015 is shown in the following:
Region Countries
Asia South Korea
North America USA, Canada Northern Europe Denmark Eastern Europe Poland,
Slovakia, Slovenia
Southern Europe Spain, Italy Western Europe France,
Great Britain,
Ireland, Luxembourg, Central Europe Austria,
Germany , Switzerland Asia 1% North America 37% Northern Europe 2% Eastern Europe 7% Southern Europe 2% Western Europe 12% Central Europe 39%
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Credit institutions 22% Public lenders 78%
Breakdown of the credit portfolio by borrower
Origin and management of counterparty risks DEPFA PBI is exposed to counterparty risks resulting from contingent losses of value of interest-related and FX-related derivatives and futures transactions which DEPFA PBI has concluded mainly for hedging positions as part of asset/liability management. A value-at-risk approach based on a mark-to-market method and also based on potential future replacement costs is used for measuring the counterparty risk throughout the Group. The Group is exposed to external counterparty risks in derivative, security and money trading transactions with business partners in relation to financial institu-tions, central banks and supranational organisations with above-average ratings on the basis of the assessment of external rating agencies and also on the basis of internal rating proce-dures which are used. In order to reduce the derivative-related counterparty risk, the Bank uses framework agreements with its business partners which enable contracts covered by the framework agreement to be pooled into a net receivable if the counterparty fails to meet its obli-gations (close-out netting). In order to reduce risk further, collateral agreements are taken out in certain cases which may result in the cancellation of transactions if the counterparty fails to comply with a request to provide collateral.
Management of country risks Responsibility for monitoring the country risks has been outsourced to Credit Portfolio Management of DEPFA. Depending on the available risk covering potential and the results of the internal rating procedure of the DEPFA Group, limits which restrict the business activities are assigned to
- each individual country and
- groups of countries in certain rating corridors.
All country ratings and country limits are reviewed at least once every year by Credit Portfolio Management. The internal risk assessments are also regularly compared with the assess-ments of the main rating agencies.
3.2 Risk measurement, control and management of major risk types in DEPFA PBI
Default risk quantification via economic capital and risk assets under Basel III
Credit portfolio model In order to calculate the economic default risk capital at the portfolio level, DEPFA PBI uses a credit portfolio model on a stand-alone basis which follows the approach of a so-called asset value model. The fundamental idea of this approach is that the repeated simulation of correlated rating migrations of borrower defaults as well as a calculation of resultant value changes via a corresponding revaluation of the portfolio mean that proba-bility statements can be made with regard to contingent losses from lending business. The loss distribution calculated in this way can then be used to calculate the economic default risk capital as a VaR value. This defines the maximum unexpected loss calculated for a confidence level of 99.95% which will result within one year due to rating migrations and defaults in lending business. In addition to the loss distribution of the credit portfolio, a significant result is the risk-commensurate allocation of the default risk capital measured in this way to the individual borrower units using the so-called expected shortfall principle. This ensures fair causation-based allocation to the borrowers, and thus constitutes a major module in the risk-oriented management of the credit portfolio.
In previous years, adjustments were carried out to the correlation parameters within the credit portfolio model with the aim of ensuring that the credit portfolio model is based in an optimum manner on the business model of the DEPFA Group, whilst ensuring simultaneous compliance with the conservative regulatory requirements regarding the modelling of diversification effects (transition from a single-factor to a multi-factor correlation model).
Stress tests The stress tests for economic capital in the default risk are discussed in greater detail in the chapter “Result of risk-bearing capacity analysis”.
Economic default risk capital The economic capital for credit risks – calculated from the credit portfolio model – amounts to € 50.1 million as of 31 December 2015 (31 December 2014: € 62.6 million) for a confidence level of 99.95% and a time horizon of one year disregarding diversification effects in relation to other risk types. There are two opposite reasons for this significant decline compared with 2014 (€ -12.5 million). Economic capital has increased as a result of rating downgrades affecting in particular Austrian mortgage banks. However, final maturities particularly of Spanish exposures last year as well as sharply lower durations and rating improvements for some countries (Italy, Slovakia) have more than compensated for these effects.
3.2.2 Market risk
Definition Market risk is defined as the risk of a loss of value resulting from the fluctuation of the market prices of financial instruments. Transactions of DEPFA PBI are mainly exposed to the following risk types:
- Interest rate risk - Foreign currency risk - Basis risks
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Market risk management, monitoring and measurement In line with Group regulations, DEPFA PBI manages and monitors the market risk by means of a three-pillar approach:
- Management of the position in Treasury,
- Risk management and monitoring of compliance with limits by RMC,
- Escalation processes across all decision-taking bodies right through to management and Board of Directors.
The market risk is monitored by a combination of VaR limits and sensitivities.
RMC uses a variance-covariance approach to calculate the market risk VaR at the overall and sub-portfolio level on a daily basis. All transactions are included, whereby the credit spread VaR from positions which are included in the IFRS category Loans & Receivables is not taken into consideration for the market risk VaR.
The following parameters have been used as the basis of calculating the market risk VaR: - The correlations and volatilities used for the VaR measurement are based on historical
figures for the previous 250 trading days, which are included in the calculation on an equally weighted basis.
- For the daily operational risk management, the VaR relates to a holding period of ten days and a one-tailed 99% confidence interval.
When the individual market risk components, such as interest rate, currency, basic and credit spread VaR, are aggregated to form an overall VaR, which constitutes the basis for limit moni-toring, the actual correlations between the individual market risk components are taken into consideration.
Most interest rate and currency risks are hedged at DEPFA PBI at the point at which the trades are concluded. Credit spread risks are due to the assets of the cover fund and are thus an inherent factor in the business model of DEPFA PBI.
Since the end of October 2015, the process of preparing the daily “Market risk and performance report” has been based on the IT application “R-Script”; this means that the operational risk of a lack of IT support associated with end user computing (EUC) applications is reduced.
Development of the market risk VaR On 31 December 2015, the VaR for interest rate risks amounted to € 0.1 million (31 December 2014: € 0.1 million), the corresponding figures for currency risks were € 0.1 million (31 December 2014: € 0.2 million) and for basis risks € 0.3 million (31 December 2014: € 0.1 million). The increase in the basis risks is mainly attributable to the conclusion of basic currency swaps for managing mismatches in foreign currency financing. The VaR limit for all market risks of the Treasury portfolio amounts to € 0.7 million (31 December 2014: € 0.7 million). There were no limit violations in the period under review. Results of the stress tests to be carried out every six months in accordance with the CSSF circular 08/338 of 19 February 2008: As of 31 December 2015, the potential change in the present value for interest risks for DEPFA PBI was € -1.6 million in conjunction with a 200 basis point increase in yields and € -0.2 million in conjunction with a 200 basis point decline in yields (31 December 2014: € -3.2 million and € 0.1 million respectively).
3.2 Risk measurement, control and management of major risk types in DEPFA PBI
Market risk quantification via economic capital
Method The purpose of calculating the economic capital for market risks is to identify contin-gent financial losses resulting from changes in the prices of items in the investment book and, where appropriate, the trading book. In this process, the contingent non-systematic losses are derived from an analysis of historical time series of specific factors of influence (risk factors), e.g. interest rates, exchange rates and credit spreads over the previous seven years. The rela-tively long period of seven years ensures that economic phases which are not favourable for the Bank are also taken into account in the model. The annual loss distribution of the portfolio market value is then determined by means of a simulation procedure and using the linear sensi-tivities of the financial instruments; this can then be used to determine the economic capital in relation to a confidence level of 99.95%.
Economic market risk capital The economic capital for market risks for a one-year observation period, disregarding diversification effects to other risk types, thus amounts to € 3.2 million as of 31 December 2015 (31 December 2014: € 3.8 million).
3.2.3 Liquidity risk
Definition Liquidity risk is defined as the risk of not being able to meet the extent and dead-lines of existing or future payment obligations in full or on time.
Liquidity risk management, monitoring and measurement Management of the risk is the responsibility of the Treasury function of DEPFA PBI which is independent of the RMC. In view of the regulatory liquidity cover requirements for credit institutions with effect from 1 October 2015, the DEPFA PBI Board of Directors adopted new tolerance figures in relation to the liquidity risk in September 2015; these have been implemented by a newly developed liquidity reporting function. It consists of the following components:
- Liquidity report (“Treasury basic scenario”)
- Liquidity coverage ratio forecast report (“Risk stress scenario”) - Daily liquidity report (for the BCL in its required format).
The liquidity report of DEPFA PBI is drawn up daily and contains the daily liquidity situation as well as projections on the basis of contractual cash flows and assumptions made in relation to future events which will influence the probable liquidity development. In the corresponding basic scenario, the liquidity position is measured and detailed under constant market and refi-nancing conditions. The liquidity preview covers two years. The liquidity position of DEPFA PBI measured under stress conditions is detailed every day in the liquidity coverage ratio forecast report. The internal liquidity coverage ratios established on the basis of the dele-gated regulation (EU) 2015/61 must, at all reference dates within a three months observation period, be higher than the regulatory minimum applicable for this duration segment – with corresponding liquidity cushions in two versions.
This internal liquidity reporting is used as the basis for active and forward-looking liquidity policy and planning.
For managing the liquidity position and limiting the inherent risks in both scenarios, DEPFA PBI has set up a system of limits and triggers with an early warning function (including an
escala-22
tion procedure); this system is updated at least once every year and adopted by the Board of Directors of the Bank.
This is also correspondingly applicable for the trigger system which was established for moni-toring and managing mismatches in foreign currency financing; for this purpose, RMC draws up an FX gap report every day (in accordance with regulatory requirements, for instance in CSSF circular 12/537).
Since the end of October 2015, the process of preparing daily liquidity reporting and the FX gap report has been based on the IT application “R-Script”; this means that the operational risk of a lack of IT support associated with end user computing (EUC) applications is reduced.
In 2014, reporting of the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) was set up in accordance with the requirements of the regulation (EU) No. 575/2013 and the directive 2013/36/EU (CRR/CRD IV). In accordance with the requirements set out in the CSSF circular of 6 March 2015, this LCR reporting was extended to include estimates for liquid assets as well as for the balance of liquidity inflows and outflows and the resultant LCR value; the three input parameters are determined in accordance with the requirements of the delegated regulation (EU) 2015/61.
DEPFA PBI has obtained short-term liquidity mainly by covered and uncovered borrowings via DEPFA.
Development of the liquidity position and forecast liquidity requirement under stress conditions The LCR figure established in the course of the liquidity risk measurement as of 31 December 2015 amounted to 116% as of the reporting date and 99% for a time horizon of three months – i.e. as of 31 March 2016.
It is not standard practise in the sector for liquidity risks in the narrower sense of the term to be capitalised. Liquidity risks in the broader sense are recognised in the economic capital for the business risk due to an increase in refinancing costs.
3.2.4 Operational risk
Definition The DEPFA Group defines operational risk as “the risk of losses caused by processes which are not satisfactory or which have not even been implemented, human error, technology failure or external events”. The definition includes legal risks, but excludes strategic and reputation risks.
Organisation of operational risk management In the Risk Control function, the entity Operational Risk is responsible for uniform Group-wide processes, instruments and methods for recording, assessing, monitoring and reporting operational risks within the DEPFA Group. Operational risks are monitored by means of a network of controls, procedures, reports and responsibilities. Within the Group, each individual unit and each management level takes on responsibility for its own operational risks, and provides appropriate resources and processes for limiting such risks. The focus is rather placed on the proactive early recognition, reduction and management of risks and not only on measurement and monitoring of risks as well as reac-tion to risks.
3.2 Risk measurement, control and management of major risk types in DEPFA PBI
The “Operational risk self-assessments” (ORSA) which are carried out throughout the Group every year are a key instrument for the proactive early recognition of operational risks; these are initiated centrally by the Operational Risk department, and are used for identifying and evaluating the risks and the related controls. Financial instruments which are included in the range of products of the DEPFA Group and which have not been traded (for at least one year) in DEPFA PBI are subject to a “local product approval process” (LPAP) which is managed by RMC.
Operational risk events continue to be recorded locally in the operational risk event database in accordance with specifications which are uniform throughout the Group. DEPFA PBI recorded 11 events in the financial year; no event resulted in any claim.
Quantification of operational risks via economic capital The calculation of economic capital for operational risks includes the result of the calculation using the standard approach in accordance with Basel III; budgeted income is also included in the calculation base. For the purpose of the capital adequacy method, the capital requirement specified by the regulator is scaled to reflect the higher level of confidence (from 99.9% to 99.95%). In September 2015, a minimum figure for capital backing was implemented in order to avoid a situation in which oper-ational risks might be underestimated.
The economic capital for operational risks amounted to € 2.2 million as of 31 December 2015 (31 December 2014: € 2.2 million).
3.2.5 Business risk
Definition In the DEPFA Group, the business risk is defined as reductions in profit due to changes in the external business environment which have an influence on the economic condi-tions of the Bank. These include costs which have become relevant as a result of regulatory and reputation risks, income which is not generated for new business as well as higher financing costs.
Business risk quantification via economic capital The economic capital is calculated on the basis of the following two components:
1. No income for new business
Because this risk covering potential does not contain any forecast profits for regulatory purposes, the inclusion of this component in the business risk has become redundant. 2. Higher financing costs
Higher financing costs may result from the following two reasons: - Higher financing requirement
- Increase in the unsecured refinancing rate
As part of the liquidity risk measurement process, the increased financing requirement which would occur in conjunction with certain market events is simulated every month in the stress scenario “Further decline”. An increase in the Bank’s own rating to the historical maximum of credit spreads observed on the market is simulated for the uncovered refinancing rate. It is conservatively assumed that both events will occur simultaneously.
As of the end of 2015, any increase in the refinancing requirement was established on the basis of the liquidity stress scenarios implemented at the end of September 2015 (see chapter 3.2.3
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Liquidity risk). This is calculated on the basis of the shortage of liquid assets compared with the regulatory minimum figure applicable for this period; all figures within a one-year observation period are included (“LCR forecast”). In the background specified under 1., the first-mentioned component is € 0.0 million as of 31 December 2015. As a result of the liquidity situation set out in the liquidity coverage ratio forecast report and the refinancing rate described above, a figure of € 0.9 million resulted as of 31 December 2015 for the second component – and thus for the economic capital for business risks overall.
3.3 Result of the risk-bearing capacity analysis
3.3.1 Economic capital according to risk typesEconomic capital according to risk types
31.12.2015 31.12.2014 Change in € million Credit risk 50.1 62.6 –12.5 Market risk 3.2 3.8 –0.6 Operational risk 2.2 2.2 – Business risk 0.9 – 0.9
Total before diversification effects 56.4 68.6 –12.2
Total after diversification effects 56.1 68.4 –12.3
Risk cover funds 164.4 142.8 21.6
Capital cushion 108.3 74.4 33.9
Disregarding diversification effects between the individual risk types, the economic capital of DEPFA PBI amounted to € 56.4 million as of 31 December 2015 (31 December 2014: € 68.6 million); if these effects are taken into consideration, the economic capital of DEPFA PBI declines to € 56.1 million (31 December 2014: € 68.4 million). Changes in results were already explained in greater detail in the section regarding the individual risk types.
The risk cover funds are shown as € 164.4 million, and have increased compared with the previous year (31 December 2014: € 142.8 million) mainly as a result of the capital increase which was carried out (€ +30.0 million) and the capital contribution (€ +10.5 million). Opposite effects are attributable to the negative IFRS result (€ -22.4 million) and the anticipated loss of the following year (€ -7.2 million). The lower AFS reserve has also had a positive impact on the risk cover funds (€ +13.4 million).
According to the ICAAP model of DEPFA (the former gone-concern approach) which deter-mines the economic risk-bearing capacity of the Company, there is an economic capital cushion as of 31 December 2015 of around € 108.3 million for a one-year observation period (31 December 2014: € 74.4 million). The most significant risk type on the basis of the ICAAP (meas-ured in terms of the economic capital and without explicitly taking account of the liquidity risk) is the credit risk which accounts for 88.8% of undiversified economic capital.
3.2 Risk measurement, control and management of major risk types in DEPFA PBI
3.3 Result of the risk-bearing capacity analysis
3.3.2 Stress tests
Stress tests in relation to the economic capital are used in order to obtain a better under-standing of the sensitivity of the results compared with the risk parameters which underly the model. DEPFA PBI carries out stress tests as an instrument for appropriate economic capital management for the following individual categories, each in relation to an isolated risk type: - Downgrading of the main individual counterparties, measured in terms of economic capital, - Downgrading of the main counterparty groups (broken down according to region and sector),
measured in terms of economic capital,
- Stress tests of the creditworthiness of all counterparties (downgrading by one notch), - Simulated insolvency of the ten largest “non-investment-grade” counterparties,
- Stress tests with regard to the collateral (assumption of 10 percentage points increase in loss-given default values (LGDs) / minimum LGDs assumed to be 40%),
- Interest risk stress test in accordance with CSSF circular 08/338, - Operational risk realised as a loss,
- For the business risk, the loss is attributable to the refinancing scenario involving the collapse of the European Union (EU).
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4. Internal control and risk management
system with regard to the accounting
process
4.1 Conception
The internal control and risk management system with regard to the accounting process comprises the principles, procedures and measures designed to assure the effectiveness and efficiency of accounting and also to assure compliance with the relevant legal regulations. The aim of the risk management system with regard to the accounting process is to identify and evaluate risks which may oppose the objective of ensuring that the financial statements comply with the relevant rules, to limit risks which have been identified and to check the impact of such risks on the financial statements and also the way in which these risks are presented. The internal control system in relation to the accounting process is an integral part of the risk management system.
The objective is to implement controls in order to provide adequate certainty that, despite the risks which have been identified, financial statements which are prepared are consistent with the relevant regulations. However, an internal control and risk management system with regard to the accounting process cannot provide absolute assurance regarding success in attaining the associated objectives. As is the case with all discretionary decisions, decisions relating to the establishment of appropriate systems may also be errored as a result of faults, errors, changes in ambient variables or deliberate violations and criminal actions. These problems mean that it is not possible with absolute assurance to identify or prevent misstatements in the financial statements.
At DEPFA, the internal control and risk management system with regard to the accounting process is reflected in the structure and procedure organisation. In terms of structure organisa-tion, the internal control and risk management system with regard to the accounting process mainly comprises the Management Board, the Supervisory Board which is responsible for monitoring the Management Board, the Audit Committee which is established by the Supervi-sory Board and the Group Finance Committee (GFC). The structural organisation of DEPFA has had no separate CFO function since September 2015. The CEO is now responsible for the Finance function.
The Management Board, in its capacity as the legal representative of DEPFA, is required to prepare consolidated financial statements and a Group management report. In conjunction with the obligation to introduce a Group-wide internal control and risk management system, the Management Board of DEPFA also bears responsibility for monitoring an adequate and effec-tive internal control and risk management system with regard to the accounting process. The Management Board takes decisions in this respect with regard to all strategies at the sugges-tion of Finance.
The Supervisory Board is responsible for monitoring the Management Board. For this purpose, the Supervisory Board may specify that its approval is required for management measures. In addition, the Supervisory Board also has audit obligations and reporting obligations. In order to support its activity, the Supervisory Board of DEPFA has set up an Audit Committee.
The Audit department supports the Management Board and the Supervisory Board in its control function by way of independent audits.
The CEO is responsible for Treasury, Human Resources, Corporate Governance, Finance and Regional Management. The CRO is responsible for Risk Control, Risk Analytics, Credit
Port-folio Management and Planning & Controlling. The COO, who is simultaneously the CLO, is responsible for Internal Audit, Compliance, Corporate Services / Sourcing, Legal, IT & IT Secu-rity, Operations, Regulatory Affairs & Reporting as well as Tax.
In the Finance function, the consolidated financial statements are prepared in accordance with IFRS, and the accounting-relevant capital market information is provided.
The companies of DEPFA prepare their financial statements in accordance with the respective local legal requirements.
For Group accounting purposes, the financial statements are harmonised in relation to uniform accounting policies in accordance with IFRS. Each company included in the consolidated financial statements reports its balance sheet, income statement and notes via the consolida-tion software to a central department in Group Accounting. In Group Accounting, the data of the foreign currency companies are translated into Euros by means of the consolidation soft-ware. In addition, this is where the data are checked for plausibility, analysed and consolidated. The Management Board has set up a GFC at the Group level for making recommendations to
the Management Board. This includes responsibility for defining and monitoring the guidelines and procedures for accounting and reporting for all entities of DEPFA and the consolidated financial statements as well as for all segments of DEPFA. In order to ensure close communica-tion with other departments, the CEO or the heads of the Finance funccommunica-tion also serve on other committees, for instance the Risk Committee with its sub-committees or the ALCO.
In terms of procedure organisation, the internal control and risk management system with regard to the accounting process is based on an intended far-reaching standardisation of processes and software. For core activities and processes, there is a Guideline function and a code of conduct. In addition, the four-eyes principle is mandatory for major transactions. Data and EDP systems are protected against unauthorised access. In addition, certain rele-vant information is made available only to employees who actually require such information for their work. Where necessary, results are agreed on an enterprise- and Group-wide basis. The Management Board has also established further processes in order to identify operational
risks, to assess the impact of such risks on operations and also to establish and monitor appro-priate controls. This is a multi-stage procedure in which – based on an “operational risk self-assessment” (ORSA) – identification of possible risks, a corresponding assessment and anal-ysis of the impact on operations is carried out – business impact analanal-ysis (BIA) which then leads to an ongoing key control process in which any variances are recorded in an operational risk event system.
4.2 Implementation
DEPFA has implemented the concept of the internal control and risk management system in relation to the accounting process in various measures for identifying, measuring and limiting the risks. The structure organisation measures relate to the committees of DEPFA and the breakdown of responsibilities.
management system with regard to the accounting process 4.1 Conception
