Aareal Bank : Regulatory Disclosure Report 2020 of Aareal Bank Group

Regulatory Disclosure

Report­ for the

2020 financial year

of Aareal Bank Group

Regulatory Disclosure Report for the 2020 financial year

1. Preface
2. Summary

7 Risk Management

7 Information about Corporate Governance Regulations

9 Scope of Application of the Regulatory Framework

1. Comparison of the scopes of consolidation

1. Utilisation of the "waiver" regulation

1. Differences between accounting and regulatory
   scopes of consolidation and mapping­ of financial statements categories with regulatory risk categories

1. Main sources of differences between regulatory risk exposure amounts and carrying values in financial statements

1. Regulatory Capital
2. Main features of capital instruments

17 Disclosure of own funds

1. Reconciliation from equity, as disclosed in the Statement of Financial Position, to regulatory capital
2. Regulatory capital requirements

24 Countercyclical Buffer

26 Credit Risks and General Information on Credit Risk Mitigation

1. Credit risk strategy
2. Loss allowance

1. General quantitative information on credit risks

1. Quantitative information on the credit quality of exposures

1. Exposures subject to a general payment moratorium

1. General information on credit risk mitigations

1. Qualitative information on the use of the Credit Risk Standard Approach
2. Quantitative information on the use of the Credit Risk Standard Approach

59 Qualitative information on the use of the IRB Approach

63 Quantitative information on the use of the IRB Approach

71 Counterparty Credit Risk

1. Qualitative disclosures on counterparty credit risk
2. Quantitative disclosures on counterparty credit risk

77 Liquidity Risks

1. Liquidity risk strategy
2. Liquidity controlling and management

1. Liquidity Coverage Ratio

1. Operational Risks
2. Strategy for the treatment of operational risks

1. Instruments used to control operational risks
2. Regulatory assessment

1. Investment Risks
2. Investment risk strategy
3. Regulatory assessment

86 Market Risks

1. Market risk strategy
2. Regulatory capital requirements for market risk in the standardised approach

1. Interest rate risk in the banking book
2. Encumbered and

Unencumbered Assets

1. Remuneration

1. Leverage Ratio

1. Imprint

Regulatory Disclosure Report for the 2020 financial year

Preface

3

Preface

In addition to the details contained in the Aareal Bank Group Annual Report, this Regulatory Disclosure Report explains the business policy standards and facts that are relevant for assessing our situation from a regulatory perspective. Besides providing a qualified description of the manner in which our risks are identified, evaluated, weighted and reviewed, the Regulatory Disclosure Report also contains detailed quantitative statements about the sizes of the individual areas.

The Regulatory Disclosure Report implements the requirements in accordance with part 8 of Regulation (EU) 575/2013 (Capital Requirements Regulation - "CRR"). The existing disclosure requirements are specified by the guidelines of the European Banking Authority (EBA) on disclosure requirements under part 8 of the CRR (EBA/GL/2016/11).

Aareal Bank Group is classified as a significant institution within the scope of the Single Supervisory

Mechanism (SSM) and is therefore subject to direct supervision by the European Central Bank (ECB).

Aareal Bank Group is - in principle - not covered by the EBA guidelines and is therefore not formally required to meet the disclosure requirements formulated therein, as it is not classified by the ECB as a Global Systemically Important Institution (G-SII) on the basis of Delegated Regulation (EU) 1222/2014 or as an Other Systemically Important Institution (O-SII) on the basis of Article 131 (3) CRD IV. Nor is

it obliged to meet the EBA guidelines. Nonetheless, Aareal Bank Group meets the EBA guidelines in full, on a voluntary basis.

The Regulatory Disclosure Report is prepared in accordance with Bank-internal provisions and procedures stipulated in writing in order to fulfil disclosure requirements.

In line with the requirements of Article 431 (3) of the CRR, Aareal Bank Group has created formal procedures through disclosure guidelines, which ensure that the disclosure requirements are met. The disclosure guidelines of Aareal Bank Group contain rules on

• the scope and content of the disclosure requirements,
• the principles of disclosure, in particular on appropriateness, structure of the report, locations,
  reporting­ date and frequency,
• determining the materiality, confidential information and trade secrets,
• responsibilities and organisational units involved,
• the structure of the disclosure process,
• the data sources and relevant IT systems and
• the review of the disclosure procedure.

The specific structure and implementation of the disclosure requirements is described in detail in the supplementary documents.

Aareal Bank Group has implemented comprehensive control mechanisms as part of its disclosure pro- cess, which are used to review the disclosed data for completeness, accuracy and appropriateness. These control activities associated with the disclosure process are an integral component of Aareal Bank Group's Internal Control System (ICS). Besides the ongoing control in the course of the creation process, the control activities include an annual, central review of the following aspects:

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Preface | Summary

Regulatory Disclosure Report for the 2020 financial year

• appropriateness of the details,
• content-relateddesign of the disclosures,
• frequency of the disclosures,
• new regulatory requirements and adjustments.

The Regulatory Disclosure Report and the disclosure guidelines are approved by the Management Board of Aareal Bank AG.

In addition, compliance with the disclosure requirements is regularly reviewed by Internal Audit of

Aareal Bank Group.

Overall, the Regulatory Disclosure Report is subject to control mechanisms comparable to those used in the management report for financial reporting.

In accordance with the legal requirements, the Regulatory Disclosure Report does not require a qualified audit opinion and is therefore not audited.

The Regulatory Disclosure Report is published pursuant to Article 434 (1) of the CRR on the Aareal Bank AG website, under the menu item "Investor Relations". Furthermore, selected details from various disclosure tables which are considered relevant for the Bank are published there in a summarised form. Aareal Bank AG publishes the Regulatory Disclosure Report on a quarterly basis. The scope is oriented on the guidelines EBA/GL/2016/11 in conjunction with the revised guidelines EBA/GL/2014/14.

Summary

Aareal Bank AG, whose registered office is in Wiesbaden, Germany, is the parent institution of the Group.

Aareal Bank complies with the requirements of parts 2 and 3 of the CRR at a Group level, due to the fact that Aareal Bank Group has elected to use the waiver option provided by section 2a (1) sentence 1 of the German Banking Act (Kreditwesengesetz - "KWG") (in conjunction with Article 7 (3) of the CRR), whereby reports for financial holding companies or banking groups may be prepared on a consolidated basis.

The details we have published in this Regulatory Disclosure Report are based on both the Credit Risk Standard Approach (CRSA) and the Advanced IRB Approach (Advanced Internal Ratings-Based Approach - AIRBA). We only mention the disclosure requirements explicitly relevant for us.

As at the reporting date, Aareal Bank holds no securitisation exposures in its portfolio, so that the

­disclosure requirements pursuant to Article 449 of the CRR shall not apply. In addition, the transitional provisions, pursuant to Article 473a of the CRR, to mitigate the impact of the introduction of IFRS 9 on regulatory capital requirements will not be applied. Accordingly, the obligation to provide additional disclosures (as specified in detail in EBA guidelines EBA/GL/2018/01) is waived.

Minor differences may occur regarding the figures stated, due to rounding.

The Regulatory Disclosure Report includes the requirements of the CRR, provided the necessary information is not already disclosed elsewhere.

Regulatory Disclosure Report for the 2020 financial year

Summary

5

The following outline provides an overview as to where the information on the disclosure requirements pursuant to part 8 of the CRR is published.

Furthermore, if facts are already described in the Annual Report, reference is made specifically to the ­information included in the corresponding source references.

CRR article

431

1. (1)

1. (1)

435 (1)

1. (1)

1. (1)

435 (2)

436

437

438

Contents

Scope of application of disclosure obligations

Institution risk management approach (EU OVA)

General qualitative information about credit risk (EU CRA)

Qualitative disclosure requirements related to counterparty credit risk (EU CCRA)

Qualitative disclosure requirements related to market risk (EU MRA)

Disclosure of Liquidity Coverage

­Ratio and liquidity risk management

Corporate governance regulations

Scope of application

Own funds

Regulatory capital requirements

Chapter in the Regulatory Disclosure Report

"Preface"

"Risk management"

"Credit risk and general information on credit risk mitigation"

"Counterparty credit risk"

"Market risks"

"Liquidity risks"

"Information about corporate governance regulations"

"Scope of application of the regulatory framework"

"Regulatory capital"

"Regulatory capital requirements"

Reference to other publications of Aareal Bank

Aareal Bank Group Annual Report:

- Risk Report: "Aareal Bank Group Risk Management"

Aareal Bank Group Annual Report:

• Risk Report "Lending business"
• Risk Report "Loan loss risks"

Aareal Bank Group Annual Report:

• Risk Report "Trading activities"
• Risk Report "Credit risk mitigation for trading activities"

Aareal Bank Group Annual Report:

- Risk Report: "Market risks"

Aareal Bank Group Annual Report:

• Risk Report: "Liquidity risks"
• Report on the Economic Position: "Treasury portfolio"

Aareal Bank Group Annual Report:

• Risk Report "Risk Management - Scope of application and areas of responsibility"
• "Report of the Supervisory Board of Aareal Bank, Wiesbaden"

Website: www.aareal-bank.com/en/about-us/corporate-governance/www.aareal-bank.com/en/about-us/company-profile/the-management-board/www.aareal-bank.com/en/about-us/company-profile/supervisory-board/

Aareal Bank Group Annual Report:

• Group Management Report: "Fundamental information about the Group"

Aareal Bank Group Annual Report:

• Notes to the Consolidated Financial Statements: "(78) Regulatory capital and capital management"

Website:

• Main features of capital instruments: www.aareal-bank.com/en/investors-portal/finance-information/regulatory-disclosures/archive/2020/
• Full terms and conditions of capital instruments: www.aareal-bank.com/en/investors-portal/finance-information/terms-and-conditions-of-issue-pursuant-to-article-437-1-c-of-the-crr/archive/2020/

Aareal Bank Group Annual Report:

• Consolidated Financial Statements "(78) Regulatory capital and capital management"

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