Credit risk

Credit risk is the risk of a counterparty or debtor failing to fulfil its contractual obligations to the creditor, and the risk that pledged collateral does not cover claims. The term counterparty risk is often used in place of credit risk when referring to exposure to financial instruments, and results from the potential failure of a counterparty to fulfil his/her obligations in a financial transaction.

The Group’s credit exposure primarily comprises credit risks in the credit portfolio (meaning the risk of the Group incurring a loss due to a borrower’s failure to meet his/her payment obligations) and counterparty risk (the risk that a counterparty to a financial instrument will not meet his/her obligations).

There are also risks related to the concentration of the credit portfolio. Concentration risks refer to the exposure to individual counterparties/customers, industries and regions.

Counterparty risk

Counterparty risk in the banking operations arises in connection with managing liquidity risks by investing in assets to meet the demand for liquidity reserves, and with investing in financial assets that are not related to the liquidity reserve. Counterparty risk in the insurance operations primarily arise in connection with investment assets and cash and cash equivalents.

Counterparty risk also arises in derivative transactions and currency swaps which the Group conducts to manage market risks, and refers to the risk that the counterparty will be unable to fulfil his/her contractual obligations or will choose not to fulfil his/her obligations in the future pursuant to the same or similar conditions.

To reduce counterparty risk, the Group follows the established policies of each Group company which regulate, for example, type of investment and limits applicable to each individual counterparty. The liquidity reserve comprises extremely high quality assets.

Since a large share of the Group’s liabilities are in SEK and significant assets are denominated in SEK, NOK, EUR and DKK, counterparty risks arise when the Group hedges its currency exposures. The Group manages counterparty risk by conducting currency swaps with several different financial counterparties. Currency hedges are subject to ISDA agreements and the collateral to CSA agreements.

Credit risks in the credit portfolio

The Group is exposed to credit risks in thebanking operations’ credit portfolio. Credit risks associated with the credit portfolio comprise borrowers who, for various reasons, cannot meet their payment obligations.

Credit lending is characterised by ambitious objectives and goals in terms of ethics, quality and control. Credit risks are identified and assessed prior to the granting of credit and reflect the borrower’s solvency and the value of the collateral. The borrower’s anticipated repayment ability and the collateral are crucial credit assessment components in every credit lending decision.

The Group follows a policy, adopted by the Board, that specifies the framework for the banking operation’s credit strategy, credit risk management, credit risk reporting and credit rules to be applied in credit assessment. The Group strives for broad risk diversification and a relatively small portion of individual loans outstanding.

In general, the Group aims to have a balanced credit portfolio, with pricing based on risk exposure. The pricing of products varies to some extent depending on geographic factors.