Report of the Directors 3. Loss in the event of a default (LGD). Evaluation of how much the Group could lose of an outstanding claim in case of default, considering collateral provided etc. Evaluations are based upon internal and external historical experience and the specific details of each relevant transaction. These components are combined and used in a portfolio model, taking into account industry and geographic diversification as well as large-name concentrations when the credit risks are aggregated. Key risk drivers, such as probability of default and loss in the event of a default, are the same as estimated in the Basel II programme; also the portfolio model itself has been revised during the year to more closely follow the framework used in that programme. Market risk Market risk is the risk of loss or reduction of future net in come following changes in interest rates, foreign exchange and equity prices, including price risk in connection with the sale of assets or closing of positions. The Group Asset and Liability Committee allocates the market risk mandate set by the Board to each division which, in turn, allocates the limits obtained among its business units. SEB makes a clear separation between market risks in the trading book and the banking book. Market risks in the trading book arise from the Group’s role as a market maker for trading in the international foreign exchange, money and capital markets following transactions with customers and other professional market participants. The risks are managed at the different trading locations within a comprehensive set of limits in VaR, stoploss and delta-1 terms, with a supplementary limit structure for non-linear risks. The risks are consolidated each day on a Groupwide basis by Risk Control for reporting to the Executive Management. Risk Control is present in the trading room and monitors limit compliance and market prices at closing, as well as valuation standards and the introduction of new products. Market risks in the banking book arise because of mismatches in currencies, interest rate terms and periods in the balance sheet. Group Treasury has the overall responsibility for managing these risks, which are consolidated centrally through the internal funds transfer pricing system. Small market risk mandates are granted to subsidiaries where cost-efficient, in which case Group Treasury is represented on the local Asset and Liability Committee for coordination and information sharing. The centralised operations create a cost-efficient matching of liquidity and interest rate risk in all non-trading related business. The Group uses an internally developed Value at Risk (VaR) model to measure its overall market risk. This statistical method expresses the maximum potential loss that can arise with a certain degree of probability during a certain period of time. For day-today risk management, SEB has chosen a probability level of 99 per cent and a ten-day time horizon. Since 2001 SEB holds a supervisory approval to use its internal VaR model for calculating capital requirements for the majority of the Bank’s trading book market risks. The following tables summarise ten-day VaR for SEB during the year. The levels were considerably higher during the second half of 2007 than during the first, as a consequence of the turmoil on the financial markets. Average trading VaR during the year was SEK 92m, compared with 96m during the year 2006. Even though market volatility has increased, equity trading VaR decreased during the fourth quarter as a result of reduced positions. The increase in interest rate trading VaR over the last few months of the year reflects both higher market volatility and increased positions. Value at Risk, Trading book 31 Dec Average Average SEKm Min Max 2007 2007 2006 Interest risk 28 233 119 64 63 Currency risk 4 83 30 21 30 Equity risk 17 243 70 75 48 Diversification –66 –68 –45 Total 36 281 153 92 96 Banking book VaR has during the year been affected by the higher market volatility, but SEB has also reduced the interest rate risk in its German portfolios. Value at Risk, Banking book 31 Dec Average Average SEKm Min Max 2007 2007 2006 Interest risk 138 402 199 251 411 Currency risk 0 69 51 25 31 Equity risk 11 151 30 47 7 Diversification –83 –63 –36 Total 120 416 197 260 413 The following graph displays daily trading results during the year. SEB uses these data to backtest the accuracy of the risk model, verifying that actual loss has not exceeded the VaR level during significantly more than one per cent of the trading days. Distribution of daily trading result No of days 20 18 16 14 12 10 8 6 4 2 0 –40 –30 –20 –10 0 10 20 30 40 Profit and loss, SEKm SEB ANNUAL REPORT 2007 37
