Danske Bank A/S : Internal Capital Adequacy Assessment - Q2 2022

Contents		Page
1. Introduction ...............................................................................................................................................................................................................................................	3
2. Process for deter mining the solvency need ....................................................................................................................................................................	4
2.1	Basis for capital management ..................................................................................................................................................................................	4
2.2	Risk identification ................................................................................................................................................................................................................	4
2.3 Dans ke Bank's internal assessment of its solvency need ..................................................................................................................	5
3. Stress test method and assumptions .................................................................................................................................................................................	9
4. Additional information ......................................................................................................................................................................................................................	9

Danske Bank / Internal Capital Adequacy Assessment 2/10

1. Introduction

The objective of this Internal Capital Adequacy Assessment report is to address the disclosure requirements stipulated in the Danish Executive Order of 3 December 2020 on Calculation of Risk Exposures, Own Funds and Solvency Need (schedule 2) and in the Danish Financial Business Act. The report concerns the Danske Bank Group, Danske Bank A/S, the Realkredit Danmark Group (sub-group) and Realkredit Danmark A/S.

This report is a supplement to the Danske Bank Group's annual Risk Management report, which contains further details. This document includes

• a description of the process and method for determining the solvency need
• a calculation of the solvency need
• a description of the stress test method and assumptions

The Danske Bank Group monitors its risks through the coordinated efforts of credit and risk departments at both Danske Bank A/S and Realkredit Danmark A/S. Realkredit Danmark A/S is a subsidiary of Danske Bank A/S and is included in the report on the Danske Bank Group in accordance with the Danish Executive Order on Calculation of Risk Exposures, Own Funds and Solvency Need. The present report, including the description of the process and method used for determining the solvency need, covers the companies mentioned above and is published on the websites of the individual companies.

Conclusion

At the end of June 2022, the Danske Bank Group's solvency need amounted to DKK 98.0 billion, or 11.4% of its total risk exposure amount (REA). With total capital of DKK 183.9 billion and a total capital ratio of 21.3%, the Danske Bank Group had DKK 36.9 billion in excess of the sum of its solvency need and the combined buffer requirement.

Danske Bank / Internal Capital Adequacy Assessment 3/10

2. Process for determining the solvency need

2.1 Basis for capital management

The primary objectives of the Group's capital management practices are to support the Group's business strategy and to ensure a sufficient level of capital to withstand even severe downturns without breaching regulatory requirements.

Credit institutions assume risks as part of conducting business, and sometimes financial losses occur. The first response to losses is the individual institution's earnings. In a given year, if earnings are not sufficient to cover losses, they are covered by excess capital, that is, the part of the institution's capital that exceeds its solvency need.

The Group's capital management ensures that the Group has sufficient capital to cover the risks associated with its activities. The Group uses advanced approaches for all significant risk types in combination with adjustments based on expert assessments, if necessary.

The Group develops its capital management framework on an ongoing basis, taking international guidelines and best- practice recommendations into consideration. The Group monitors national and international measures that may influence its capital position and capital management framework.

The Group's capital management is based on the Internal Capital Adequacy Assessment Process (ICAAP). As its primary capital management tool, the Group's ICAAP, including the ICAAPs of its subsidiaries, helps provide a clear picture of capital and risks throughout the Group.

The regulatory framework for the Group's capital management is rooted in the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD), which can be divided into three pillars:

• Pillar I contains a set of mathematical formulas for the calculation of risk exposure amounts for credit risk, market risk and operational risk. The minimum capital requirement is 8% of the total REA.
• Pillar II contains the framework for the contents of the ICAAP, including the identification of a credit institution's risks, the calculation of its solvency need and stress testing. It also includes the Supervisory Review and Evaluation Process (SREP), which is a dialogue between an institution and the relevant financial supervisory authority on the institution's
  ICAAP.
• Pillar III deals with market discipline and sets forth disclosure requirements for risk and capital management .

While Pillar I entails the calculation of risks and the capital requirement on the basis of uniform rules for all credit institutions, the ICAAP under Pillar II takes into account the individual characteristics of a given institution and covers all relevant risk types, including risks not addressed under Pillar I.

As part of the ICAAP, management identifies the risks to which the Group is exposed for the purpose of assessing its risk profile. When the risks have been identified, the Group determines the means by which they will be mitigated. These are usually business procedures, contingency plans and other measures. Finally, the Group determines what risks will be covered by capital. In the ICAAP, the Group determines its solvency need on the basis of internal models and other means, and it conducts stress tests to ensure that it always has sufficient capital to support its chosen business strategy.

2.2 Risk identification

The Group is involved in a number of business activities. These activities can be divided roughly into five segments: banking, market, asset management, insurance, and group-wide activities. The latter category covers management activities that are not specific to any of the first four business activities but broadly support them all. Each of these activities entails various risks, and they fall into the nine main categories of the Group's enterprise risk management framework. These risks can be mapped to the risk types listed in the Danish Executive Order on Calculation of Risk Exposures, Own Funds and Solvency Need.

Danske Bank / Internal Capital Adequacy Assessment 4/10

Risk identification by Danish FSA risk type

Danske Bank Group risk categories

Financial risks

Non-financial risks

Danish FSA	Credit	Market	Liquidity,
funding and
risk types	risk	risk
capital risk

			Financial		Regulatory
	Operational	Technology	control and	Financial
Model risk	compliance
risk	and data risk	strategic	crime risk
	risk
			risk

Earnings			
Credit growth	
Credit risk	
Concentration risk			
Market risk			
Interest risk outside			
the banking book
Liquidity risk			
Operational risk			
Gearing			
Other risk*			
Control environment			



 

 

					
					
					

* Includes strategy risk, reputational risk, external risk, group risk and settlement risk .

The Danske Bank Group's Risk Management 2021 report, published at the same time as the Group's Annual Report 2021, provides detailed information about the individual risk types. The report is available at www.danskebank.com/reports.

2.3 Danske Bank's internal assessment of its solvency need

The ICAAP under Pillar II entails the Group's calculation of its solvency need. The process is adjusted to address the conditions at the individual credit institution, and it covers all material risks.

An important part of the process of determining the solvency need is to evaluate whether the calculation takes into account all material risks to which the Group is exposed. The Group uses add-ons to the solvency need if the result of the model calculations does not appear to be sufficiently conservative - for example if the Group believes that there is a need for a more conservative approach than what is indicated by the Pillar I approach. The Group has established a process that quantifies the add-ons on the basis of input from internal experts. The capital add-ons are additive although they may overlap one another, and the process thus represents a conservative and careful assessment of the Group's solvency need.

The Group does not set aside capital for liquidity risk but rather mitigates such risk by means of stress test analyses, contingency plans and other measures. The Group recognises that a strong capital position is necessary for mai ntaining a strong liquidity position.

The Group assesses its solvency need on the basis of internal models and ensures that proper risk management systems are used. The ICAAP also includes capital planning to ensure that the Group always has sufficient ca pital to support its chosen business strategy. Stress testing is an important tool used for capital planning purposes.

The Group complies with approved risk limits and risk monitoring through a defined cycle of reporting on changes in risk objectives to the Board of Directors and the Executive Leadership Team. An expanded ICAAP report is submitted to the Board of Directors and the Executive Leadership Team for approval once a year.As part of the ICAAP, the Board of Directors evaluates an annual report that describes the Group's risk profile. At quarterly board meetings, the Board of Directors reviews and approves the Group's solvency need.

As stipulated in Danish legislation, a credit institution must disclose its solvency need and solvency need ratio. For the Group, this requirement applies to Danske Bank A/S and Realkredit Danmark A/S.

The solvency need is the total capital of the size, type and composition needed to cover the risks to which an institution is exposed.

Danske Bank / Internal Capital Adequacy Assessment 5/10