Executive Order on Calculation of Risk Exposures, Own Funds and Solvency Need 1

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1 Executive Order on Calculation of Risk Exposures, Own Funds and Solvency Need 1 The following shall be laid down pursuant to section 124(7), section 128(3), section 128a, section 142(1), section 143(1), nos. 2, 3, 5, 7 and 8 and section 373(4) of the Financial Business Act, cf. Consolidating Act no. 948 of 2 July 2013 as amended by Act no. 268 of 25 March 2014 as well as Article 89(3) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms: 1.-(1) This Executive Order shall apply to: Scope of application and definitions 1) Banks. 2) Mortgage-credit institutions. 3) Investment firms. 4) Branches in Denmark of banks, mortgage-credit institutions or investment firms, licensed in a country outside the European Union with which the Union has not entered into an agreement for the financial area. 5) Financial holding companies, cf. section 5(1) no. 10 of the Financial Business Act, which are subject to the requirements of section 170(1), (2), (4) and (5) of the Financial Business Act. 6) Groups in which one of the undertakings mentioned under no. 1-3 or 5 is the ultimate parent institution in Denmark. 7) Subgroups in which, pursuant to section 173(3) and (5) of the Financial Business Act, consolidated calculation shall be performed. (2) The institutions and companies mentioned in subsection (1) shall hereafter be referred to as "undertakings". 2.-(1) The "working capital of an undertaking" shall mean the sum of deposits, issued bonds etc., subordinated debt and equity. (2) "Fixed costs" for investment firms as mentioned in subsection (3) shall mean the following items on the income statement in annex 4 of the Executive Order on Financial Reports for Credit Institutions and Investment Firms, etc.: 1) Staff and administrative expenses (item 8). 2) Amortisation and depreciation as well as impairment losses on intangible and tangible assets (item 9). 3) Other operating costs (item 10). 1 This Executive Order contains provisions to implement parts of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, Official Journal 2013, no. L 176, page 338.

2 (3) Subsection (2) shall only apply for investment firms 1) which are licensed for the activities mentioned in annex 4, schedule A, nos. 3 and 6-9 of the Financial Business Act and which do not meet the provisions of Article 96(1)a and b of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, or 2) which are only licensed for the activities mentioned in annex 4, schedule A, nos. 1 and 5 of the Financial Business Act, and which do not hold money or securities belonging to their customers and which for that reason may not at any time place themselves in debt with their customers. Adequate own funds and solvency need 3.-(1) The board of directors and board of management of the undertaking shall stipulate the adequate own funds and individual solvency need (the solvency need) of the undertaking, cf. section 124(1) and (2) and section 125(1) and (4) of the Financial Business Act. In the calculation, the undertaking shall take account of the circumstances described in annex 1. (2) The solvency need shall be calculated as the percentage that the adequate own funds comprises of the total risk exposure. Disclosure obligations 4.-(1) Banks and mortgage-credit institutions shall publish the information stated in annex 2, cf. however, subsection (2). (2) Banks and mortgage-credit institutions which are part of a group with other banks and mortgage-credit institutions subject to the duty to publish the information in annex 2, may publish the information of the undertakings as one joint publication. In this case, the descriptions in annex 2, point 1 may be described in total for all the banks and mortgagecredit institutions in the group, provided that said descriptions cover all the banks and mortgage-credit institutions in the group which are subject to the duty to publish information. The joint publication shall be published by each individual bank and mortgage-credit institution. 5. Banks and mortgage-credit institutions may, without prejudicing their legitimate interests, at their own responsibility delay public disclosure of the information in annex 2, points 1-6, provided that such omission would not be likely to mislead the public and provided that the undertaking is able to ensure the confidentiality of that information. The undertaking shall publish the information as soon as possible without prejudicing the legitimate interests of the undertaking. 6.-(1) Banks and mortgage-credit institutions shall publish the information in annex 2, point 1, at least once a year. Banks which, at the end of the most recent financial year, had working capital of DKK 12 bn. or more, banks which issue shares which are admitted to trading on a regulated market, as well as mortgage-credit institutions shall publish the information in annex 2, points 2-6 every quarter. Other banks shall publish the information in annex 2, points 2-6 every six months.

3 (2) If there are significant changes in the information which banks or mortgage-credit institutions are to publish pursuant to section 4, the undertaking shall publish these changes immediately hereafter. (3) The information in annex 2, points 1-6 shall be published in Danish or English. 7.-(1) Investment firms as mentioned in subsection (2) shall publish the information stated in Article 435(1)a-d, Article 436(1)a-c, Article 437(1) and Article 438(1)a of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. (2) Subsection (1) shall apply for investment firms which are only licensed for the activities mentioned in annex 4, schedule A, nos. 1 and 5 of the Financial Business Act, and which do not hold money or securities belonging to their customers and which for that reason may not at any time place themselves in debt with their customers. Total risk exposure 8.-(1) In groups where the ultimate parent institution in Denmark carries out consolidation pursuant to section 170(1), (2) and (4) of the Financial Business Act, the requirements for the total risk exposure pursuant to Article 92(3) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms shall apply for the financial holding company and the group. In groups where the ultimate financial holding company in Denmark carries out consolidation pursuant to section 170(5) of the Financial Business Act, the requirements for the total risk exposure pursuant to Article 92(3) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms shall apply for the financial holding company. (2) In groups where the ultimate parent institution in Denmark carries out consolidation pursuant to section 170(1), (2) and (4) of the Financial Business Act, and the Internal Ratings Based Approach is applied to calculate the total risk exposure for credit risk and operational risk, the transitional provision in Article 500 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, shall apply for the financial holding company and the group. In groups where the ultimate financial holding company in Denmark carries out consolidation pursuant to section 170(5) of the Financial Business Act, the transitional provision in Article 500 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms shall apply for the financial holding company. 9.-(1) Undertakings permitted to use the Internal Ratings Based Approach for the calculation of risk weighted exposure amounts or the own funds requirements except for operational risk shall, no less than once a year or at the request of the Danish FSA, submit to the Danish FSA the results of the calculations of their Internal Ratings Based Approach for their exposures or positions that are included in the benchmark portfolios, cf. subsection (3).

4 (2) The benchmark calculations shall be submitted together with an account of the approaches applied. (3) The benchmark calculations shall be submitted in accordance with the model in the implementing technical standards drafted by the EBA pursuant to Article 78 of Directive 2013/36/EU Of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms. Own funds and transitional provisions 10. In groups where the ultimate parent institution in Denmark carries out consolidation pursuant to section 170(1), (2) and (4) of the Financial Business Act, the requirements for the own funds in part 2, and the requirements for transitional provisions in part 10, chapters 1 and 2, of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, shall apply for the financial holding company and the group. In groups where the ultimate financial holding company in Denmark carries out consolidation pursuant to section 170(5) of the Financial Business Act, the requirements for the own funds in part 2 and the requirements for transitional provisions in part 10, chapters 1 and 2 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms shall apply for the financial holding company. 11.-(1) In the calculation of the own funds at individual, sub-consolidated or consolidated level for banks, mortgage-credit institutions, investment firms I and for financial holding companies which are part of a group in which consolidation is carried out pursuant to Article 11(1) and (2) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, there shall be a deduction of the part of the sum of the capital requirement and, provided that the individual solvency need as a minimum corresponds to the capital requirement, the percentage mentioned in subsection (2) of the difference between the individual solvency need and the capital requirement of a subsidiary insurance company or an associated insurance company which corresponds to the directly or indirectly owned part of the insurance company's share and guarantee capital. If the insurance company does not have its registered office in Denmark, the capital requirement under the regulations of the home country shall be used. However, the capital requirement shall be no less than it would have been if the insurance company had had its registered office in Denmark. The deduction under the 1st clause shall be reduced by an amount corresponding to the difference between nos. 1 and 2, although the deduction cannot be less than zero: 1) The proportion of the capital base of a subsidiary insurance company or an associated insurance company, which corresponds to the proportion of the share capital owned. 2) The value in the balance sheet of the ownership interest in question with an addition of the value of the subordinate loan capital, including subordinate loan capital from other group undertakings to the subsidiary insurance company or the associated insurance company, when subordinate loan capital is included in the capital base of the subsidiary insurance company or the associated insurance company pursuant to section 36(1), no.

5 1 of the Executive Order on calculation of capital base for insurance companies and calculation of the capital base for certain investment firms. (2) The percentage for the application of subsection (1) shall be set at 33.33% for 2014, at 66.67%for 2015 and at 100% for (3) Subsection (1) shall only apply if the bank, mortgage-credit institution or investment firm I has received authorisation from the Danish FSA pursuant to Article 49(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. (4) The deduction pursuant to subsection (1) shall be made from the Common Equity Tier 1 capital by the percentage stipulated in section 4(2), nos. 1-4 of the Executive Order on transitional provisions according to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, and the remainder shall be deducted as one half from the Tier 1 capital and the other half from the Tier 2 capital. If one half of the deductions pursuant to subsection (1) reduced by the percentage stipulated in section 4(2), nos. 1-4 of the Executive Order on transitional provisions according to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, is larger than the Tier 2 capital, the excess shall be deducted from the Tier 1 capital. 12.-(1) Before banks, mortgage-credit institutions or financial holding companies subject to the Companies Act establish agreements on Additional Tier 1 capital or Tier 2 capital instruments containing terms on conversion, the general meeting shall decide to establish the agreement on the Additional Tier 1 capital or the Tier 2 capital instruments, or through provisions in the Articles of association authorise the board of directors to establish the agreement on the Additional Tier 1 capital or the Tier 2 capital instruments and at the same time authorise the board of directors to perform the associated capital increase for the conversion. The latter authorisation shall be made prior to establishment of the agreement on Additional Tier 1 capital or Tier 2 capital instruments in order to factor in the Additional Tier 1 capital or Tier 2 capital instruments. Terms for conversion may only be utilised provided the issuer is an undertaking covered by the 1st clause. (2) With regard to the decision by the general meeting to establish agreements on Additional Tier 1 capital or Tier 2 capital instruments which contain terms for conversion in banks, mortgage-credit institutions or financial holding companies subject to the Companies Act, section 167(1) and (2), and section 168 of the Companies Act shall apply. Section 167(3), of the Companies Act shall apply correspondingly as the resolution by the general meeting deals with conversion at the initiative of the issuer, or if the general meeting decides to establish an agreement to issue Additional Tier 1 capital or Tier 2 capital instruments. (3) Authorisation by the general meeting of the board of directors to establish agreements on Additional Tier 1 capital or Tier 2 capital instruments pursuant to subsection (1) which contain terms on conversion, as well as the associated capital increase to be utilised for the conversion, shall be granted for one or several periods of up to five years at a time. This time limit shall only apply for establishment of the agreement on the Additional Tier 1 capital or the

6 Tier 2 capital instruments, and not for any subsequent capital increase as a result of the conversion. (4) The Articles of association shall state the following regarding the authorisation pursuant to subsection (1): 1) The date of cessation of the period mentioned in subsection (3). 2) The maximum amount by which the board of directors may increase the capital. 3) Provisions on the aspects mentioned in section 158, nos. 5, 6, and 9-11 of the Companies Act. (5) For banks, mortgage-credit institutions and financial holding companies subject to the Companies Act with authorisation pursuant to subsection (1), the board of directors may make decisions on issuing Additional Tier 1 capital or Tier 2 capital instruments. In this respect section 169(2) of the Companies Act shall apply for the decision by the board of directors. The board of directors shall take a position on the legal status of the recipient if the conditions mentioned in section 169(3) of the Companies Act are carried out before conversion takes place at the initiative of the issuer. Section 169(4) and (5) and sections 170 and 171 of the Companies Act shall apply for the decision by the board of directors pursuant to the 1st clause. (6) For banks, mortgage-credit institutions and financial holding companies subject to the Companies Act, sections of the Companies Act on registration etc., shall apply for the decision by the general meeting pursuant to subsection (1). (7) Authorisation of the general meeting pursuant to subsection (1) shall lapse if the issuer is no longer an undertaking covered by subsection (1), 1st clause. (8) If an undertaking is no longer covered by subsection (1), 1st clause, Additional Tier 1 capital or Tier 2 capital, like other borrowed capital, may not continue to be included as a part of the share capital of the company. 13.-(1) In relation to qualifying holdings pursuant to Article 89(3), second paragraph of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, undertakings covered by the provision shall apply the method in Article 89(3)a of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. Reporting 14.-(1) In groups where the ultimate parent institution in Denmark carries out consolidation pursuant to section 170(1), (2) and (4) of the Financial Business Act, the reporting requirements in Article 99 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms shall apply and therefore these shall report the capital adequacy statement via the COREP forms. In groups where the ultimate financial holding company in Denmark carries out consolidation pursuant to section 170(5) of the Financial Business Act, the reporting requirements in Article 99 of Regulation (EU) No 575/2013 of the European Parliament and of

7 the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms shall apply and therefore these shall report the capital adequacy statement via the COREP forms. (2) With regard to investment firms which only hold a licence for the activities mentioned in annex 4, schedule A, nos. 1 and 5 of the Financial Business Act, and which do not hold money or securities belonging to their customers and therefore cannot place themselves in debt with their customers, the reporting requirements in Article 99 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms shall apply, and therefore these shall report the capital adequacy statement via the COREP forms however the undertaking shall report no later than 20 business days after the end of the first half of the year and 30 business days after the end of the year. (3) The capital adequacy statement shall be approved by the board of management of the undertaking. (4) Reporting shall be on a machine-readable, durable medium. (5) Group reports, cf. subsection (1), shall only be made at the highest group level, cf. however, subsection (6). (6) The Danish FSA may demand reports of subgroup statements for subgroups if consolidation is not carried out pursuant to Article 11(1) and (2) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. (7) Banks and mortgage-credit institutions shall submit the documentation mentioned in annex 1, points 30 and 31 on paper or some other durable medium to the Danish FSA by no later than 45 business days after the end of the year, unless some other date is agreed with the Danish FSA. Banks which, at the end of the most recent financial year, had working capital of less than DKK 250 mill. shall, however, be exempt from this duty to report. (8) The solvency need shall be reported to the Danish FSA. (9) Undertakings covered by section 1(1), nos. 1-3 shall report their individual solvency need, cf. section 124(2) and section 125(4) of the Financial Business Act, to the Danish FSA no later than 20 business days after the end of the quarter. Penalties 15.-(1) Any person violating the provisions laid down in section 3(1), section 4(1), section 6(1) and (2), section 7(1), sections 8-10, and section 14(1) and (2) shall be liable to a fine. (2) Companies etc. (legal persons) may subject to criminal liability according to the provisions in chapter 5 of the Criminal Code. Entry into force etc. 16.-(1) This Executive Order shall enter into force on 31 March 2014.

8 (2) Statutory Order no of 16 December 2011 on capital adequacy shall be repealed. The Danish Financial Supervisory Authority, 27 March 2014 Ulrik Nødgaard / Sean Hove Adequate own funds and solvency need for credit institutions etc. Annex 1 Contents Point Background 1-6 General conditions on calculation of adequate own funds and solvency need 7-32 Internal processes in the undertaking, especially with regard to the board of directors and the board of management 7-14 Approach by the undertaking to calculation of adequate own funds and solvency need Reassessment and monitoring Reporting Documentation 30-32

9 Methods Matters to be included in the assessment of the adequate own funds and the solvency need Introduction on matters to be included in the assessment Earnings Growth in lending Credit risks Concentration risks Market risks Interest-rate risks outside the trading portfolio Liquidity risks 83 Operational risks 84 Gearing 85 Other risks

10 86-91 Control environment Background 1) The regulations on adequate own funds and individual solvency need are in section 124(1) and (2), and section 125(1) and (4) of the Financial Business Act and in Article 500 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. The Danish FSA may, cf. section 124(3), section 125(8), and section 350(1) of the Financial Business Act stipulate a higher individual solvency requirement than stated in Article 92(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. 2) Section 171(1), section 172(1), section 173(3), and section 174(1) of the Financial Business Act as well as Article 11(1) and (2) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms state that the provisions also apply on a consolidated basis. 3) The solvency need is measured in relation to the total risk exposure, and therefore it is a percentage, cf. section 124(2) and section 125(7) of the Financial Business Act. However, the calculation of the solvency need can include both percentage amounts and actual DKK amounts. Management shall therefore ensure that the adequate own funds also remains in percentage terms within the requirement pursuant to section 124(2) and section 125(4) of the Financial Business Act. 4) An adequate own funds is the capital required to cover the solvency need, cf. section 124(2) and section 125(4) of the Financial Business Act. The adequate own funds is calculated as the amount suitable to cover the risks of the undertaking, cf. section 124(1) and section 125(1) of the Financial Business Act. 5) The undertaking shall note that the adequate own funds is the numerator of the fraction when the solvency need is to be calculated and that the solvency need can change over time solely as a consequence of changes in the total risk exposure. 6) Investment firms may not grant loans and investment firms which do not have a licence to carry out business for own account, cf. annex 4, schedule A, no 3 of the Financial Business Act, may only place the funds of the firm in accordance with section 157 of the Financial Business Act. With regard to these firms, operational risk in particular will be important when the firm is to calculate the adequate own funds. The adequate own funds of investment firms may not be less than (i) the minimum capital requirement, cf. section 125(2) of the Financial Business Act or Article 93(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, or (ii) the requirement that, as a minimum, the own funds is to amount to one quarter of the fixed

11 costs for the previous year, cf. section 125(3) of the Financial Business Act or Article 97(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. For investment firms I as well as investment firms which are licensed for the activities mentioned in annex 4, schedule A, nos. 2 and 4 of the Financial Business Act, the adequate own funds may also not be less than the requirement in Article 92(1)c of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms that the own funds shall, as a minimum, amount to 8% of the total risk exposure. Investment firms subject to Article 95(1) and Article 96(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms may, in their calculation of the total risk exposure, ignore operational risks, cf. Article 95(2)a and Article 96(2)a of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. General conditions on calculation of adequate own funds and solvency need Internal processes in the undertaking, especially with regard to the board of directors and the board of management 7) The board of directors and board of management are obliged to ensure that the undertaking has an adequate own funds and internal procedures for risk measurement and risk management for continuous evaluations and maintenance of a own funds of a size, type and distribution adequate to cover the risks of the undertaking. This applies for all undertakings, even if the undertaking is part of a group. However, there is nothing to prevent that the same principles are applied in the calculation of the adequate own funds for all the undertakings in a group, if it can be documented that it is relevant to apply these principles for all the undertakings in the group. 8) The board of directors and the board of management shall ensure that there is a similar calculation on a consolidated basis. 9) The board of directors and the board of management are responsible for ensuring that the undertaking sets the adequate own funds that is to form the basis for the solvency need of the undertaking. 10) The deliberations of the board of directors and the board of management on calculation of the adequate own funds shall result in an individual solvency need, cf. section 124(2) and section 125(4) of the Financial Business Act. 11) The board of directors shall, as a minimum, approve the overall methods applied by the undertaking in the calculation of the adequate own funds and the solvency need and they shall ensure that the methods for calculation of the adequate own funds and the solvency need

12 applied by the undertaking are updated and appropriate in relation to the risk profile of the undertaking. 12) The board of directors and the board of management shall ensure that decisions on setting the adequate own funds are an integrated part of the overall management of the undertaking. In this context they shall ensure that capital planning and the general principles and procedures for this are communicated in the undertaking in a relevant manner so that the management of the entities who can make decisions that can affect the size of the adequate own funds are aware of them. The board of directors shall also ensure that there are adequate resources to perform the calculation of the adequate own funds in accordance with the provisions of the Financial Business Act, section 3 of this Executive Order as well as this annex. 13) The board of directors and the board of management shall ensure that the undertaking has effective procedures to identify, manage, monitor and report the risks the undertaking is or can be exposed to, as well as appropriate control mechanisms, including good administrative and accounting practices and complete internal control procedures. These are all matters which are also included in the general provision in section 71 of the Financial Business Act. Calculation of the adequate capital shall therefore be regarded in context with the general regulations on risk management etc. in section 71 of the Financial Business Act and in the Executive Order on Management and Control of Banks etc. 14) Except for investment firms, the undertaking shall have a special plan approved by the board of directors to procure capital, and a time horizon for this. The plan shall include general principles for capital planning and who is responsible for this process. The plan shall also explain how the undertaking expects to be able to comply with the capital requirement in the future. Moreover, the plan shall contain an overall contingency plan for deviations in the expectations set, and describe what is to happen in the event of unexpected incidents. For example, the contingency plan may contain plans to procure new capital, limit areas of activity or application of risk-mitigation methods. Approach by the undertaking to calculation of adequate own funds and solvency need 15) An adequate own funds shall not only be regarded on the background for the risks to which the undertaking is sensitive. There shall also be an assessment of the capital the undertaking has available, notwithstanding whether this is equity or borrowed capital (Additional Tier 1 capital and subordinate loan capital). With regard to borrowed capital, the assessment shall also include consideration of the maturity of this borrowing. 16) Considerations regarding an adequate own funds shall be forward-looking. This means that changes in the strategy, business plans, societal aspects and other aspects of the undertaking which can affect the assumptions and methods previously included in the considerations shall induce new considerations about the adequate own funds. This also includes that in the calculation of the adequate own funds the undertaking places priority on future expectations and places less weight on historical experience.

13 17) In the assessment of the adequate own funds, account shall be taken of the nature and size of the business of the undertaking, as well as the complexity of this business. The same shall apply for the scope of the process forming the basis of the assessment. 18) In the assessment of the adequate own funds of the undertaking, account shall only be taken of the individual risk profile of the undertaking and the societal conditions in which the undertaking operates. The size of the undertaking's risks compared with other undertakings is not, in itself, decisive. Therefore, an undertaking cannot neglect to cover significant risks with capital because other undertakings have similar risks. 19) In the calculation of an adequate own funds, the undertaking shall not only examine the current risks but also the future risks as well as possibilities to procure capital. Reassessment and monitoring 20) The calculation of adequate own funds shall be reassessed as often as necessary to ensure that all risks are adequately covered and that the adequate own funds reflects the current risk profile. All changes in the undertaking's strategy, business areas, financial or business conditions or other aspects which have significant influence on the assumptions or methods forming the basis of the calculation of the adequate own funds shall lead to adjustments to the adequate own funds. If the undertaking is imposed with or accepts new risks, these shall be identified and included in its calculation of the adequate own funds. 21) Reassessment of the adequate own funds and the solvency need shall always take place at least once a year. Undertakings shall regularly monitor developments in the adequate own funds, the total risk exposure as well as the individual solvency need appropriately so that they meet the capital requirements pursuant to the Financial Business Act and Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. 22) The calculation of the adequate own funds shall be subject to an impartial assessment. The entity performing this assessment shall not participate in the ongoing business operations of the undertaking. The result of the assessment shall be reported to the board of directors. In undertakings which do not have authorisation to apply the IRB approach for credit risk or internal models for market risk, the control carried out by the board of directors may be regarded as sufficient to meet the requirement for an impartial assessment. Reporting 23) The board of directors shall be briefed about the undertaking's calculation of the adequate own funds and the solvency need to the same extent as the board of directors is briefed about compliance with the solvency requirement. 24) The group of persons covered by section 75(3) of the Financial Business Act have a duty to notify the Danish FSA immediately if the solvency ratio of the undertaking falls below the solvency need. Therefore this duty to notify is no different than the duty to notify if the solvency ratio falls below the 8% requirement or a higher solvency requirement set by the Danish FSA.

14 25) The adequate own funds and the solvency need shall be calculated regularly by the individual undertaking, but only reported to the Danish FSA at regular intervals, cf. section 3 and section 14(8) and (9). Changes in the solvency need decided by an undertaking shall not generally be reported to the Danish FSA. 26) If the circumstances which give rise to the change in the solvency need are of such character that a report is to be made pursuant to section 75(1) of the Financial Business Act, said circumstances shall, of course, be reported. The undertaking shall also report the increased solvency need. 27) The requirement to notify immediately, cf. section 75(3) of the Financial Business Act, therefore only applies if the solvency ratio falls under the solvency need or the solvency requirement calculated by the undertaking. 28) If the interest-rate risk outside the trading portfolio of the undertaking exceeds the limit in point 78, notification shall always be submitted to the Danish FSA pursuant to section 75(1) of the Financial Business Act. 29) There is no requirement that the undertaking publish the calculated solvency need, except for undertakings covered by section 1(1), nos. 1 and 2. However publishing the solvency need is not prohibited. Documentation 30) The calculation of the adequate own funds and the solvency need shall be documented in writing. The documentation shall include a description of the methods, assumptions and procedures applied in the calculation of the adequate own funds and the solvency need. The scope of the documentation will usually grow with the size of the undertaking and the complexity of its business areas. 31) The precise form of the documentation shall be set by the undertaking. The following shall, however, be documented: a) That the calculations of the adequate own funds and the solvency need have been approved by the board of directors, cf. point 7. b) The board of directors' plan to procure capital and contingency plans, cf. point 14. c) What stress tests have been applied by the undertaking, cf. point 40. d) A description of the internal process for calculating the adequate own funds and the solvency need, cf. points e) A description of the method applied by the undertaking to calculate the adequate own funds and the solvency need, including any changes or intended changes in all or parts of the methods to calculate the adequate own funds and the solvency need, cf. points f) A description of the matters included in the calculation, cf. points

15 g) Practice and procedures for reassessment of the calculation of the adequate own funds and the solvency need, cf. points h) Who performs the impartial assessment, cf. point 22. i) How internal reporting is performed. 32) The format of the documentation shall be such that, on request, it can be submitted to the Danish FSA on paper or some other durable medium. Methods 33) The adequate own funds shall be calculated on the basis of the risk profile of the undertaking. The solvency need shall therefore be set in accordance with the risk profile of the undertaking and the societal conditions in which the undertaking operates. However, the undertaking may take other matters into consideration, such as a desire to achieve a specific rating. In such case the undertaking shall document how these matters affect calculation of the adequate own funds. These matters cannot result in the undertaking having a lower solvency need than that dictated by a calculation based on the risk profile of the undertaking. 34) To a great extent there is a free choice of method for the calculation of the adequate own funds. The undertaking may base this on more advanced or less advanced methods. There are no requirements that the calculation is to be made using advanced financial methods. However, there is an expectation that the methods will be relatively more advanced in larger undertakings than in smaller undertakings. This is particularly relevant for undertakings intending to apply internal methods in calculation of the total risk exposure. 35) Furthermore, it is important that the board of directors and the board of management consider the extent to which risks and potential risks are to be covered by capital. It is more appropriate to cover some risks by better procedures and better controls. 36) The methods can be based on the minimum requirement of 8%, where the board of directors and the board of management decide which risks are covered by this before deciding possible adjustments. 37) Other methods on financial capital which, for example, are based on mathematical/statistical treatment of experiences with losses, start with the capital necessary to be able to cope with unexpected losses within a time horizon of typically one year. Notwithstanding the statutory minimum requirement of 8%, the point of departure for models based on financial capital is to calculate the capital required to ensure that, with a high degree of probability, depositors etc. will not incur losses. Necessary validation of the model shall be performed. The undertaking may take as its basis the validation requirements applicable for the IRB method for credit risk, or internal models for market risk (Value-at-Risk models). 38) Undertakings not wishing to develop an actual financial capital model may also apply simpler models based on the same concepts. This may be on the basis of the (negative) accounting results arising from a stress-test of the undertaking's financial statements. A stress

16 test is an attempt to stress the undertaking on the basis of a number of assumptions. The choice of stress level influences the probability that depositors etc. will not incur losses. The stress-test measures how the individual undertaking would react in improbable, but not entirely inconceivable, circumstances. It is up to the individual undertaking to define this on the basis of the risks of the undertaking. Examples of incidents which may be included are large increases in provisions and impairment losses, large changes in interest rates, large changes in share prices, large changes in property prices and large changes in exchange rates. 39) In addition to the stress-test, it will be necessary to make adjustments for matters not covered by the stress-test. 40) Irrespective of the method applied, the undertaking shall regularly perform stress-tests which are relevant for the undertaking and which stress the individual assumptions. In the assessment of the matters to be included in such a stress-test, the undertaking shall decide what changes in the assumptions are to be included in the stress-test. In determining this, the undertaking shall consider improbable, but not entirely inconceivable, circumstances. The undertaking may also consider the special circumstances in the areas of operation of the undertaking, including in particular the current position in the economic cycle. Matters such as new legislation which affects the business area and competitiveness of the undertaking may also be included in these considerations. The objective of the stress-tests is to determine which changes in the assumptions the undertaking can survive. If the undertaking has developed its model such that the stress-test is an integrated part of the model, which takes into account the matters mentioned above, the undertaking need not take other initiatives. 41) Irrespective of which model is applied, the board of directors and the board of management shall assess whether the method gives a reasonable result. Matters to be included in assessment of the adequate own funds and solvency need Introduction on matters to be included in the assessment 42) All significant risks to which the undertaking is exposed shall be included in the assessment of the adequate own funds. The undertaking itself shall therefore carry out an assessment of the significant risks to which it is exposed. 43) Some risks can be difficult to quantify. For such risks, the undertaking may decide to mitigate the risks using measures covered by section 71 of the Financial Business Act. However, an undertaking may not neglect to include significant risks in the calculation of the adequate own funds just because it is necessary to make estimates of the influence of the risks on the adequate own funds. Therefore, in some areas it will be necessary for the board of directors and the board of management to estimate the amount/percentage to be allocated for risks which cannot be specifically quantified. 44) The calculation of the adequate own funds may be based on the individual business areas. The business areas can therefore be assessed individually with regard to scope (and thus the significance of the area) as well as an assessment of how risky the individual business area is.

17 Furthermore, management and organisation of the individual business areas could be significant for the assessment. 45) There shall be an assessment of whether the complexity and size of the undertaking in itself necessitates consideration of adjustment of the adequate own funds, among other things taking into account the resources of the undertaking. These considerations should include whether the undertaking could cover these risks in some other way, e.g. by strengthening or adding to the control environment or by a supplement for any increased concentration risk. 46) The undertaking shall also note that other requirements in legislation may have an impact on the assessment by the board of directors and the board of management of the adequate own funds. For example Article 395 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, on the size of exposures in relation to the adequate own funds (eligible capital). Here, the board of directors and the board of management shall assess the effect of the largest exposure on the adequate own funds (eligible capital). If the undertaking has holdings in other undertakings, cf. section 146 of the Financial Business Act, such a holding shall also be included in the considerations. If the undertaking has real property as well as holdings in property companies, cf. section 147 of the Financial Business Act, such exposures shall also be included in the considerations, if the undertaking wishes to maintain the exposure. 47) The extent to which other legal requirements will be decisive for the assessment by the board of directors and the board of management of the adequate own funds will depend on a specific assessment of whether it is an investment which the undertaking wishes to retain and whether the institution is able to dispose of the investment. For example, a bank's exposure to another credit institution will normally not affect the adequate own funds as there will be no problem in moving the exposure. Earnings 48) The ability of the undertaking to earn profits will naturally be included in the assessment by the undertaking of the adequate own funds. Expected earnings shall be calculated prudently. If the undertaking has high earnings, all else being equal it will be easier for the undertaking to absorb future losses. If the undertaking has low earnings it shall be considered whether this requires an increase in the adequate own funds. 49) The stability of earnings will also affect how the undertaking assesses the adequate own funds. If the undertaking's earnings fluctuate significantly from year to year, it shall be considered whether this requires an increase in the adequate own funds. Utilisation of simple sensitivity analyses (stress-tests) can help quantify the level and stability of earnings. 50) The revenue-generating ability of the undertaking shall also be assessed in relation to the dividend policy of the undertaking as well as its possibilities to procure capital. In this context it should be considered that, in a situation where the undertaking needs additional capital because of losses, it is likely that it will be more difficult to raise capital than previously. Growth in lending

18 51) Expected future growth shall be included in assessment of the adequate own funds. The undertaking shall therefore also assess whether consolidation has grown correspondingly. If this is not the case, the calculation of the adequate own funds should take account of the expected growth in excess of the "normal consolidation", including the possibilities to procure capital. 52) The increase in the total risk exposure in itself generates a capital need. Furthermore it will be a matter of course to assess whether there is an increased risk of later losses as a result of the scope of the growth. Growth can also require capital as a result of the direct resources (e.g. new employees etc.) necessary to generate the growth. When this is assessed, however, account may be taken of the increased earnings realised by the expected growth. 53) Historically, strong growth in lending has been shown to be an indication that undertakings have eased their credit-quality requirements. Therefore it is a matter of course for the undertaking to increase its adequate own funds if the institution has had, and still expects, high growth in lending. Moreover, the growth in lending in itself will lead to a higher capital need. Therefore the undertaking shall consider growth expectations and possibly make an addition to its adequate own funds, depending on the size of the expected growth. Credit risks 54) The credit risks of the undertaking shall be included in the considerations of the adequate own funds. 55) In banks and mortgage-credit institutions, the credit area will often be the most significant area. An overall assessment of the quality of the assets will be crucial in the assessment of this area. 56) The focus of the undertaking in assessing the credit rating shall be on the exposures which exhibit signs of weakness. This applies in particular for risky lending, credits and guarantees subject to risk on which no impairment charges or provisions have been made in the financial statements, or where only partial impairment charges or provisions have been made. If the quality of the lending, credits and guarantees is impaired or is deemed to be moving towards impairment, this shall be taken into account in calculating the adequate own funds. 57) If the undertaking has internal rating and scoring systems or similar, these could be utilised. Other financial ratios could also be applied in assessing the creditworthiness of assets with credit risk. If the undertaking has a relatively large portfolio with small expected losses, the undertaking may consider making a small deduction in the adequate own funds for this part of the portfolio. On the other hand, the undertaking may consider increasing the adequate own funds for the weak exposures on which no impairment charges have been made. Correspondingly it will be a matter of course to consider whether additional capital is to be provided for the exposures on which impairment charges or provisions have been made but for which further negative developments can mean that further impairment charges and provisions must be made. 58) If the undertaking applies an internal method to rate customers to which the institution has extended loans, in the calculation of the risks linked to these customers there may be an

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