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Risk Analysis and Control

SEB banka Group (further in the text also just: the Group) is exposed to the following main risks: credit risk, operational risk, market risk, liquidity risk, reputational risk, business risk, strategic risk.

The risk management at SEB banka is an integrated part of the risk management of SEB Group - risk management policies, risk analysis methods and instruments are aligned and limits of substantial risks are approved and controlled on the Group level.

Operational control of risk levels and limits is ensured with a structured risk limits system, which comprises all the main risk types.

The risk control function on the Group's level is separated from business structures. Risk reports are regularly communicated to the Board of Directors and the Council Risk Committee, as well as the European Central Bank within the Joint Monitoring Mechanism.

Credit risks

Credit risk is a risk that partners might not pay to the Group in full amount and in due time. The credit risk assessment, decision taking and supervision in the Group is carried out in accordance with the Lending Policy, Credit risk control Policy, Lending Instructions, Credit risk assessment Instructions and other related instructions of SEB banka.

The Group controls the credit risk on a regular basis, by assessing the risk level of every partner and individual portfolios, setting limits for every lender, groups of affiliated lenders, and individual segments.

SEB banka has received permission from Finance and Capital Markets Commission and Swedish Financial Inspection to use Internal Ratings-Based Approach for calculating credit risk capital requirement starting from 2008.

To assess the credit risk of corporate customers, SEB banka uses the SEB Group Risk Scale, according to which partners are classified in one of 16 risk classes, where Class 1 is the lowest risk level, and Class 16 means non-fulfilment of liabilities.

To assess small risk transactions, scoring models developed within Basel II project in cooperation with SEB Baltic banks are used; they make it possible to assess every individual transaction and manage portfolios of relevant transactions.

The Group's credit risk is decreased by securing increased-risk transactions with relevant pledges and guarantees. The credit risk is supervised continuously and assessed per every month, quarter and year.

Credit risk concentration is analysed by evaluating the concentration of individual risk transactions, sectors, collaterals and currencies. Credit risk concentration is measured using the SEB Group developed models.

Operational risk

Operational risk is a loss risk due to external (natural disasters, external crimes etc) or internal (IT system crash, fraud, violation of internal or external regulations, insufficient internal control) factors.

The identification, assessment and management of the operational risks in the Group are carried out in accordance with the Operational Risk Policy and other related instructions of SEB banka.

For new products, risks are identified and managed in accordance with the New Products Approval Instruction of SEB banka. In early 2009 the Group introduced a system to ensure a standardised process of approval of new products/processes. This process involves all control and support functions together with representatives of appropriate business divisions who carry out the assessment of proposals according to their own area of activity. The purpose of the system is to ensure approval of all processes/products according to the set common standards in SEB Group.

To identify, analyse and control operational risks, SEB banka use the SEB Group's advanced operational risk management system, which ensures incident registration, management and resolution.

To control the operational risk on a regular basis the main risk indicators are used, monthly comparing the limits set with actual values, as well as self-assessment of operational risk, made for every substantial operations field and service type at least annually, is employed, also by drawing up the necessary action plans to minimise the potential losses in high-risk areas. To overcome emergency cases and resume normal operation, a plan for uninterrupted operation of the Bank has been developed and is being updated at least annually.

The Group's substantial operational risks are covered with relevant insurance.

Market risk

Market risk is a risk of loss or future income reduction due to changes in interest rates, currency exchange rates or securities prices (including price risk when selling assets or closing positions). The market risk management in the Group is carried out in accordance with the Market Risk Policy and related instructions of SEB banka. Trading and investment activities are carried out in accordance with the Securities Trading Policy.

The Group uses the Value at Risk (VaR) methodology to assess market risks per positions and the possible maximum loss that might incur due to market fluctuations. The VaR assessment is made every day, and its reliability level is 99%. This assumption means the daily loss due to the market risk might exceed the VaR result on one day in hundred on averages. To limit the possible loss due to the market risk, the Group has set a certain VaR limits, on the compliance with which a report is submitted to the Resources Committee monthly.

The interest rate risk, which is influenced by repayment timeframes for assets and liabilities connected with interest income and expenses or rate revision dates, is controlled by the Group by using Delta 1% assessments and the limits set for them. Delta 1% reflects how changes in interest rates by 100 base points will affect the Group's profit/loss. Delta 1% approach is based on the use of interest-rate-sensitive balance and non-balance item amounts and re-pricing structures in calculations. The limits set by the SEB Group Assets-Liabilities Committee are controlled monthly.

The Group controls the currency risk by setting the limits of open positions and monitoring their fill daily. To assess the influence of interest rate, price and currency risk increase on the quality of Group's assets, stress tests are regularly carried out; in the result of the tests, the risk restriction limits are set and a detailed action plan for the reduction of possible loss are developed.

Liquidity risk

Liquidity risk is a risk of loss or considerably increased costs if the Group is unable to settle its payment liabilities in due time. The liquidity risk in the Group is carried out in accordance with the Liquidity Management Policy of SEB banka.

To control the liquidity risk, the Group employs the SEB Group Liquidity Model and the limits set by the Assets-Liabilities Committee. An integral part of liquidity risk control is regular stress tests based on scenarios approved by the Board.

In order to manage extraordinary liquidity situations and to revolve normal business activity a special Liquidity continuity plan has been worked out, being revised and tested not less than once a year.

Capital adequacy

The risk level in the Group is closely related to capital level and capital adequacy. The capital adequacy reflects the capital funds of the Group necessary to secure against credit, activity and market risks related to assets and off-balance sheet items. Also the capital necessary for covering the business risk is evaluated and updated on a regular basis. The capital adequacy of the Group and its dynamics is reported monthly to the Assets-Liabilities Committee in order to adopt in due time and implement the decisions necessary to maintain the capital at the level that ensures realization of the business plan with a certain safety margin. Determination of capital reserve in the Group is based on stress test results.

To control that capital resources are used efficiently, business capital has been made available to the Group. The return on the capital made available is assessed against all new loans issued by the Large Corporate Customers Department, as well as monthly on the Group's level, division’s level and basic business unit level.

Starting from 2008 Group assess capital adequacy based on Basel II rules, using Internal Credit Risk Ratings-Based Approach, as well as Advanced Measurement Approach to cover operational risk. Starting from 2014 Group implemented capital adequacy assessment based on Basel III rules (the Regulation (EU) No 575/2013 of the European Parliament and of the Council).

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