Risk Weighted Assets

 

The requirements of the Basel II framework are set out in the Capital Requirements Directive (CRD). The CRD is legally enforced by Dutch law by the Financial Supervision Act (Wet Financieel Toezicht). The CRD is based on the Basel II framework, which contains three pillars:  

• Pillar 1 defines the regulatory minimum capital requirements by providing rules and regulations for measurement of credit risk, market risk and operational risk. These capital requirements need to be covered by regulatory own funds. NIBC received approval from the Dutch Central Bank to use as of 1 January 2008, the AIRB approach for calculating solvency requirements regarding credit risk for its most important exposure classes, namely corporate and retail, and the Internal Model Approach (IMA) regarding market risk in the Trading book. Solvency requirements for the remaining portfolios and for operational risk are calculated using the Standardised approach.
• Pillar 2 covers the Supervisory Review Process. This consists of the Internal Capital Adequacy Assessment Process (ICAAP), the bank’s own assessment of its capital adequacy in relation to all its risks and the Supervisory Review and Evaluation Process (SREP), the response of the Supervisor on the institution’s ICAAP. The economic capital framework, which is explained in the section that follows, falls under Pillar 2.
• Pillar 3 focuses on disclosure requirements, covering all relevant pieces of information for a market participant to assess the risk profile and capital adequacy of the credit institution. The risk disclosures are connected to Pillar 1 of the Basel II framework, as information is provided regarding the underlying exposures, risk weighted assets and regulatory capital.

 

Capital calculations for all risk types under Pillar 1 are based on risk weighted assets (RWA). RWA is a risk-adjusted measurement of a bank’s exposures, weighted according to the risk they contain. Some assets, such as corporate loans, are assigned a higher risk weight than others, such as cash or government bonds. The calculation method of RWA is stipulated in the CRD.

 

In general terms, for portfolios on the AIRB approach, the main drivers for RWA calculation are the PD, the LGD and the EAD. More information on these parameters, which NIBC calculates internally, can be found in the sections on Corporate Loans and Residential Mortgages. RWA for portfolios on the Standardised approach are generally calculated by multiplying the exposure of the asset by a risk weight prescribed in the CRD (Annex VI, part 1).

 

The RWA calculation for market risk encompasses the interest rate risk from the Trading book and the currency risk of NIBC. The RWA of the Trading book is calculated under the IMA approach using VaR figures, and the RWA for the currency risk depends on the year-end position, following the standardised approach.

 

For operational risk, the main driver of RWA calculation is the gross income of each individual business line, as this serves as a proxy for the scale of business operations and as such, the likely scale of operational risk exposure within each of these business lines.

 

Table 28 presents a breakdown of RWA among the exposure classes and risk types included in Pillar 1. Specifically for credit risk, the table also provides a breakdown of NIBC’s portfolios among the Pillar 1 exposure classes.

 

 

Table 28 RWA per Pillar 1 exposure class and risk type
in EUR millions		2009		2008		Portfolios in Annual Report
Sovereign		0		1		Debt investments in sovereign entities and cash at central banks
Institutions		798		770		Debt investments in financial institutions, enhanced investments and cash and derivative transactions with financial institutions
Corporate		6,363		5,659		Corporate Loan portfolio, including guarantees and corporate derivatives, and Investment Management Loan portfolio
Retail		871		924		Dutch and German Residential Mortgage portfolio, excluding securitised portfolios
Equities		1,846		2,184		Equity investments, credit fixed income funds and off-balance exposures
Securitisations		773		617		Securitisations portfolio and retained notes of own securitisations
Other		92		96		Non-credit related exposures
Total credit Risk		10,744		10,251
Total market risk		98		145		Trading book
Total operational risk		957		704
Floor calculation		-		364
Total NIBC		11,799		11,464

 

The RWA consumption of NIBC between 2009 and 2008 increased by 3% and this is due to a variety of factors. Within credit risk, whereas RWA for the sovereign exposure stood at zero, those for institutions increased by 4%. The increase is related to the increase in the size of NIBC’s Debt Investments portfolio.

 

The RWA for the corporate exposure class increased by 12%, mainly as a result of downward rating migrations in the Corporate Loan portfolio, as well as an increase in the size of this portfolio.

 

RWA for the retail exposure class slightly decreased by 6%, due to the limited decrease in the size of both the Dutch and the German Residential Mortgage portfolios.

 

The decrease of 15% in the RWA of the equity exposure class is due to the ending of certain transactions.

 

The RWA consumption for the securitisations exposure class increased by 25%. Even though the size of the Securitisations portfolio decreased, the increase in RWA results from the rating composition of the Securitisations portfolio. In 2009 all rating agencies adjusted their methodologies for the different securitisations asset classes. Consequently, a vast majority of all securitised products suffered from downgrades.

 

RWA for market risk in 2009 decreased by 32% compared to 2008. The reason for this is the lower risk profile of the Trading book at the end of 2009 and therefore it does not indicate a structural decline in RWA.