Pillar 3 Disclosures - KBI Global Investors Kleinwort Benson Pillar... · BHF Kleinwort Benson 7 2. Scope In line with CRR guidelines the Pillar 3 disclosures are presented at a BHF

Pillar 3 Disclosures as at 31 December 2014

BHF Kleinwort Benson

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Contents

1. Introduction ................................................................................................................................................................ 5

Background ................................................................................................................................................................ 5

Overview of the regulatory framework ................................................................................................................. 5

Objective .................................................................................................................................................................... 5

Developments since last disclosure ....................................................................................................................... 6

Key Metrics ................................................................................................................................................................. 6

2. Scope .......................................................................................................................................................................... 7

BHF Kleinwort Benson Group SA (“BHF KB”) .................................................................................................... 8

BHF (“BHF”) ............................................................................................................................................................ 9

Kleinwort Benson Bank Limited (“KBBL”) .......................................................................................................... 9

Kleinwort Benson Channel Islands Holdings Limited and subsidiaries (“KBCIHL”) ................................... 9

Kleinwort Benson Investors Dublin Limited (“KBI”) .......................................................................................... 9

Differences in the basis of consolidation for accounting and prudential purposes .................................... 9

Pillar 3 process and approval policy ...................................................................................................................11

Basis and frequency of disclosures ......................................................................................................................12

Future Developments .............................................................................................................................................12

Location and verification ......................................................................................................................................12

3. Governance and Risk Management ..................................................................................................................13

BHF Kleinwort Benson Group SA ...........................................................................................................................13

BHF Bank ....................................................................................................................................................................13

Kleinwort Benson .....................................................................................................................................................19

Kleinwort Benson Wealth Management (“KBWM”) ....................................................................................19

KBI ..........................................................................................................................................................................26

4. Assessment of Group’s Risk Mitigation Policies and Assumptions ..................................................................29

Risk appetite .............................................................................................................................................................29

Risk Identification .....................................................................................................................................................29

Use of Credit Risk Mitigation Techniques ............................................................................................................31

BHF Kleinwort Benson Group (Management companies) ........................................................................31

BHF Bank ..............................................................................................................................................................31


KBI ..........................................................................................................................................................................32

5. Capital resources ....................................................................................................................................................33

Total Available Capital ..........................................................................................................................................33


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Indicators of global systematic importance ......................................................................................................33

Description of Capital Instruments .......................................................................................................................33

Common Equity Tier 1 (CET 1) Capital ...........................................................................................................33

Tier 2 (T2) Capital ................................................................................................................................................34

Capital Management ............................................................................................................................................34

6. Capital requirements ..............................................................................................................................................35

Internal Assessment of Capital Adequacy.........................................................................................................35

Capital Buffers ..........................................................................................................................................................35

7. Credit risk ...................................................................................................................................................................37

Credit Risk Exposures ...............................................................................................................................................37

Credit Limits for Exposures ......................................................................................................................................37

BHF Kleinwort Benson Group (Management companies) ........................................................................37

BHF Bank ..............................................................................................................................................................38


KBI ..........................................................................................................................................................................39

Netting Arrangements ............................................................................................................................................39

BHF Bank ..............................................................................................................................................................40


Geographical Analysis of Exposures ....................................................................................................................40

Maturity Analysis of Exposures ...............................................................................................................................40

Credit Risk Mitigation (“CRM”) ..............................................................................................................................41

Equity exposures not included in the trading book ..........................................................................................42

BHF Bank ..............................................................................................................................................................43

BHF KB Group (Management companies) & Kleinwort Benson Wealth Management (“KBWM”) ...45

Impairment of Financial Assets and Past Due Items .........................................................................................45

Neither past due or impaired ..........................................................................................................................47

Past due but not impaired financial instruments .........................................................................................47

Impaired loans ....................................................................................................................................................47

Use of External Credit Assessment Institutions (“ECAI”) ....................................................................................49

8. Counterparty Credit Risk ........................................................................................................................................51

Settlement Risk .........................................................................................................................................................51

Derivatives & Financial Contracts ........................................................................................................................51

Counterparty Credit Limits .....................................................................................................................................51

Wrong-Way risk ........................................................................................................................................................51

Counterparty Credit Risk Mitigation ....................................................................................................................52

Potential Collateral Obligations ...........................................................................................................................53

9. Exposure to Securitisation Positions ......................................................................................................................54

10. Market Risk ................................................................................................................................................................59


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Market Risk - BHF Bank ............................................................................................................................................59

Market Risk – Kleinwort Benson Wealth Management (“KBWM”) .................................................................61

Market Risk – Capital Requirements ....................................................................................................................61

Equity Market Risk (Trading Book) ........................................................................................................................62

Currency (“FX”) Risk ................................................................................................................................................62

Currency (“FX”) Risk – BHF Bank ......................................................................................................................62

Currency (“FX”) Risk – KBBL, KBCIHL, KBI & BHF KB Group management companies ..........................62

Interest Rate (Non-Trading Book) .........................................................................................................................63

Assumptions used in the calculation of the interest rate gap ..................................................................64

Debt instruments (Trading Book) ..........................................................................................................................64

VaR Model Based PRR ............................................................................................................................................65

SVar Model Based PRR ...........................................................................................................................................65

11. Operational Risk .......................................................................................................................................................67

BHF KB Group management companies ...........................................................................................................67

BHF Bank ....................................................................................................................................................................67

Kleinwort Benson Wealth Management (“KBWM”) ..........................................................................................67

KBI ...............................................................................................................................................................................68

BHF KB Group operational risk requirements ......................................................................................................69

12. Unencumbered Assets ...........................................................................................................................................70

13. Leverage ...................................................................................................................................................................72

14. Remuneration ..........................................................................................................................................................73

Governance .............................................................................................................................................................73

Scope ........................................................................................................................................................................73

Link between pay and performance ..................................................................................................................74

Determination of variable remuneration ......................................................................................................74

Cap on variable remuneration .......................................................................................................................74

Deferral of variable remuneration ..................................................................................................................74

Code staff remuneration .......................................................................................................................................75

15. Appendix – List of Acronyms .................................................................................................................................76

Terms ..........................................................................................................................................................................76

Entity names .............................................................................................................................................................77


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1. Introduction

Background

BHF Kleinwort Benson Group (“BHF KB”) is regulated as an institution in the UK by the Prudential Regulation

Authority (“PRA”). The PRA regulate BHF KB as a UK Consolidation Group and currently acts as the lead

regulator. The Financial Conduct Authority (“FCA”) regulates the UK financial services activities of the

Group via Kleinwort Benson Bank Limited (“KBBL”).

All disclosures within this report have been prepared from existing internal policies and documentation

reflecting BHF KB’s practices as at 31st December 2014, the Group’s last financial year end.

Overview of the regulatory framework

The PRA requires BHF KB to maintain sufficient financial resources, including own funds and liquidity

resources of an amount and quality to ensure there is no significant risk that its l iabilities cannot be met as

they fall due.

The Basel lll regulatory framework, which was implemented in Europe through the Capital Requirements

Directive IV (“CRD IV”), came into effect on 1 January 2014. The requirements of CRD IV build upon the

pre-existing regulations which divide the framework into three ‘pillars’ that leislate how a firm should

approach this responsibility:

Pillar 1 sets out quantitative minimum capital requirements to mitigate a firms’s credit, counterparty,

market and operational risk

Pillar 2 requires firms to carry out an ‘Individual Capital Adequacy Assessment Process’ (“ICAAP”), a

more qualitative internal review to assess its own risk profile and whether additional capital should be

held against those risks not adequately covered in Pillar 1. The firm’s view of the additional capital

requirement is also assessed by the GFSC during its ‘Supervisory Review and Evaluation Process’ (“SREP”)

and is used to determine the overall capital resources required by the bank

Pillar 3 rules are designed to promote market discipline by enhancing the level of disclosures made by

firms to their stakeholders, allowing them to assess a firm’s key risk exposures and the adequacy of the

Board’s risk management processes to mitigate these risks

All three pillars require that a firm has in place strategies, processes and systems to identify and manage

the major sources of risk relevant to the firm, given the nature and scale of its business, and to assess and

maintain financial resources that it considers adequate to cover the risks to which it is or might be

exposed.

The Pillar 3 disclosure requirements are set out in articles 429 to 455 of the Capital Requirements

Regulation (“CRR”).

Objective

This document comprises BHF KB’s Pillar 3 disclosures on capital and risk management as at

31 December 2014. It has two principal purposes:

To meet the regulatory disclosure requirements noted above

To provide stakeholders with further useful information on the capital and risk profile of the Group


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Developments since last disclosure

BHF KB has now fully transformed itself from an industrial holding company into a focused financial

services group by materially disposing of all legacy (non-financial) businesses. In addition to this, on

26th March 2014 BHF KB acquired BHF (“BHF”), which substantially increased BHF KB’s assets.

During the year RHJI International SA (“RHJI”) renamed itself as BHF Kleinwort Benson SA which was part of

simplifying the legal structure of The Group. This is explained on pages 2 - 9 of the BHF Kleinwort Benson

Group Annual report 2014. The Annual Report 2014 is located on BHF Kleinwort Benson’s website and can

be accessed via the following link:

http://www.bhfkleinwortbenson.com/investor-information/financial-information/financial-reports-

presentations/annual-reports?year=2014

Key Metrics

The Group’s performance in 2014 was in line with expectations following the acquisition of BHF and

changes to BHF KB’s structure. The key ratios and metrics that demonstrate The Group’s capital and

financial position are as follows:

Table 1

Common Equity

Tier 1 Capital

Common Equity

Tier 1 Ratio

€734.8m 17.0%

Tier 1 Capital Tier 1 Ratio

€734.8m 17.0%

Total Regulatory Capital Total Capital Ratio

€888.2m 20.5%

Total RWA's Total RWA Density

€,4333.6m 46.2%

Credit Risk RWA Credit Risk RWA Density

€,3363.3m 50.1%

Leverage Ratio

(As Per CRR)

7.2%

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2. Scope In line with CRR guidelines the Pillar 3 disclosures are presented at a BHF KB consolidated level. The basis

of consolidation is the same as for Capital Adequacy (Own Funds) reporting to the PRA.

While the BHF KB Annual Report 2014 is published in EUR, the capital adequacy reporting to the PRA is in

GBP. Therefore BHF KB will publish the Pillar 3 disclosures in both GBP & EUR currencies for consistency and

reconciliation purposes.

CRD4 regulation states that significant subsidiaries must also report limited Pillar 3 disclosures. The main

significant subsidiaries of the Group are BHF, Kleinwort Benson Channel Islands Holding Limited (“KBCIHL”)

and Kleinwort Benson Bank Limited (“KBBL”). These subsidiaries also disclose their own Pillar 3 disclosures

report.

The diagram below shows details of The Group structure as at 31st December 2014:

Table 2


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Kleinwort Benson Group Limited (“KBG”) is currently in the process of being collapsed into the parent

company BHF Kleinwort Benson Group SA to create a cost-efficient single-tier holding structure. This is part

of the Group’s legal reorganisation strategy, which is explained on page nine of BHF KB Group’s annual

report 2014. For this reason, further sections below will incorporate these two holding companies into a

single company where possible and refer to them as BHF KB Group (Management companies).

BHF KB Group (Management companies) has disposed of its legacy portfolio relating to investments in

industrial holdings, which historically would have been deducted as “Qualifying Holdings”. There is a small

transitional amount remaining which will also be liquidated into cash once it is strategically appropriate.

These items are shown at amortised cost for accounting purposes and not consolidated which is

consistent to their treatment for prudential purposes. These items are risk weighted as part of Equity Credit

Risk.

BHF KB Group (Management companies) continues to hold small holdings (€18m) in Financial Investments

which are not significant and equity accounted, which historically would have been deducted as

“Material Holdings”. These items are not consolidated for accounting purposes, which is consistent to

how they are treated for prudential purposes. These items are risk weighted as part of Equity Credit Risk.

During the year the Group acquired some new equity investments as part of the takeover of BHF. BHF

holds a small number of investments, which are predominantly in Funds and they are treated in the same

manner for both accounting and prudential reporting. These investments are not consolidated and risk

weighted as part of The Groups credit risk calculations. This is explained further in section 7.8 of this Pillar 3

document.

As at 31st December 2014 the Group’s basis for prudential consolidation is the same as the accounting

consolidation for the financial statements.

The entities within the business that fit one of the following descriptions have been included in the

Group’s prudential consolidation:

An institution (i.e. a bank, building society or investment firm)

A financial institution

An asset management company

A financial holding company

An ancillary services undertaking

The entities considered to be financial companies and within scope of consolidation include BHF, KBBL,

KBCIHL and Kleinwort Benson Investors Dublin Ltd (“KBI”). In addition investments in subsidiary

undertakings or participations that are financial companies are also consolidated for both accounting

and prudential purposes.

The Group does not have any transitional provisions or deductions in relation to ‘Material’ or ‘Qualifying

holdings’. No entities have been partially consolidated and after the changes in the legal structure as

explained on page 9 of the Annual Report 2014 there are no deductions in relation to ‘Minority Interests’.

BHF Kleinwort Benson Group SA (“BHF KB”)

The Group’s ultimate parent company BHF Kleinwort Benson Group SA is a financial holding company

incorporated under the laws of Belgium, having its registered office in Brussels, Belgium.

BHF KB combines the two traditional brands of BHF and Kleinwort Benson to create a client-centric

merchant bank with principle activities in private banking, asset management and financial markets &

corporates. BHF KB provides contemporary wealth management and corporate banking in Europe for

sophisticated private and corporate clients and family offices.


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As noted above, it is assumed that KBG is part of BHF KB for the purposes of the Pillar 3 disclosures.

BHF (“BHF”)

BHF is the modern private bank for discerning middle-market entrepreneurs and their families. The bank

has a clear strategic focus on wealth management and corporate advisory services. BHF's business

activities are focused on Private Banking and Asset Management along with Financial Markets &

Corporates. The close cooperation between Private Banking and a Corporate Finance unit that is clearly

geared to the needs of entrepreneurs in the 'Mittelstand' segment is one of the bank's hallmarks.

Headquartered in Frankfurt am Main, BHF has 12 locations in Germany and international offices in

Abu Dhabi, Geneva, Luxembourg and Zurich.

Kleinwort Benson Bank Limited (“KBBL”)

KBBL focuses on providing private banking and wealth management services. The target clients are high

net worth individuals, family offices and entrepreneurs primarily in the UK and selected international

markets. KBBL offers bespoke structuring of complex wealth solutions for high net worth clients as well as

in-house funds for the affluent sector whilst seeking to maintain a strong capital base and a liquid

balance sheet with little reliance on wholesale funding.

Kleinwort Benson Channel Islands Holdings Limited and subsidiaries (“KBCIHL”)

Kleinwort Benson’s offshore operations are focused on Guernsey and Jersey. Kleinwort Benson plays a

pivotal role in these key financial centres and was one of the first major banks to establish itself in the

Channel Islands, over 50 years ago. Jersey and Guernsey are on the G20’s White List and are classed as

having substantially implemented the internationally agreed tax standard along with the UK, US, France

and Germany.

In addition to providing private banking services, including Fiduciary, to wealth management clients,

KBCIHL delivers a business-to-business proposition to Trust Companies, assisting them in managing their

clients' assets, deposits and electronic banking, custody and investment services.

The Fiduciary, Fund Administration and Custodian Trustee divisions provide services to investment funds

and institutional clients including the administration of Funds, Employment Benefit Trusts, Special Purpose

Vehicles and the provision of Custodian Trustee services.

Kleinwort Benson Investors Dublin Limited (“KBI”)

KBI is an established institutional asset manager that has been managing assets for institutional investors

since 1980. It currently manages specialist strategies for public and corporate pension schemes, sub-

advisory investors and foundations/endowments. KBI offers investment services on both a segregated

and unitised basis, with the majority of its Assets under Management (“AuM”) relating to its international

clients. KBI’s primary goal is to enhance performance and meet clients’ investment expectations through

specialisation and innovation. KBI focus on two key strategies: global equities and environmental equities.

KBI has a global client base in Europe, North America, the UK, Ireland and Asia.

Differences in the basis of consolidation for accounting and prudential purposes

The Group’s basis for prudential consolidation is the same as the accounting consolidation in the

financial statements. In terms of presentation, some of the items are presented with different categories

for accounting and prudential reporting and the table below shows how these are reallocated.


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Table 3

BHF Kleinwort Benson Group SA

Consolidated Balance Sheet

Financial statements versus regulatory view

As at 31st December 2014Carrying

values as

reported in

published

financial

statements

Reallocations

between IFRS

and

regulatory

categories

Carrying

values under

scope of

regulatory

consolidation

Assets €m €m €m

Cash and balances at central banks 208.8 0.0 208.8

Items in the course of collection from other banks 0.0 76.6 76.6

Trading portfolio assets 0.0 0.0 0.0

Financial assets designated at fair value 0.0 0.0 0.0

Derivative financial instruments 664.9 0.0 664.9

Investments (Fair value through profit and loss) 1,387.1 0.0 1,387.1

Investments (Amortised Cost) 58.0 0.0 58.0

Investments (Available for sale) 2,729.6 0.0 2,729.6

Non current assets classified as held for disposal 0.5 0.0 0.5

Loans and advances to banks 1,483.5 -378.0 1,105.5

Loans and advances to customers 2,530.9 0.0 2,530.9

Reverse repurchase agreements and other similar secured lending 0.0 301.4 301.4

Prepayments, accrued income and other assets 129.3 -9.6 119.7

Investments in equity accounted investees 18.5 0.0 18.5

Property, plant and equipment 65.5 0.0 65.5

Goodwill and intangible assets 57.2 0.0 57.2

Current tax assets 8.8 0.0 8.8

Deferred tax assets 33.5 0.0 33.5

Retirement benefit assets 0.0 9.6 9.6

Total Assets 9,375.9 0.0 9,375.9

Liabilities

Deposits from banks 1,216.0 -395.6 820.5

Items in the course of collection due to other banks 0.0 1.2 1.2

Customer accounts 6,124.6 0.0 6,124.6

Repurchase agreements and other similar secured borrowing 0.0 394.4 394.4

Trading portfolio liabilities 0.0 0.0 0.0

Financial liabilities designated at fair value 1.3 -1.3 0.0

Derivative financial instruments 735.9 0.0 735.9

Subordinated liabilities 243.1 0.0 243.1

Accruals, deferred income and other liabilities 124.0 1.3 125.3

Liabilities included in disposal groups as held for sale 0.0 0.0 0.0

Provisions 107.7 -57.2 50.6

Current tax liabilities 18.7 0.0 18.7

Deferred tax liabilities 6.9 0.0 6.9

Retirement benefit liabilities 0.0 57.2 57.2

Total Liabilities 8,578.3 0.0 8,578.3

Equity

Share capital 735.7 0.0 735.7

Share premium 32.2 0.0 32.2

Reserves -7.1 0.0 -7.1

Retained earnings 36.8 0.0 36.8

Total Equity 797.6 0.0 797.6

Total Equity & Liabilities 9,375.9 0.0 9,375.9


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The table below shows how assets and liabilities as per the financial statements are presented or

disclosed for capital adequacy calculations in this Pillar 3 document.

Table 4

Pillar 3 process and approval policy

The Pillar 3 disclosures are completed annually as part of the overall Group regulatory reporting process.

Each business unit approves their components and validates the accuracy of the financial figures used in

the overall consolidation. All individual business unit and consolidated disclosures are checked and

validated against the relevant regulatory returns where possible to ensure the disclosures are consistent.

Sections of the Pillar 3 document are checked by Finance, Risk, Treasury, Legal, Compliance and

Corporate Governance representatives across each business unit. The component elements of the

disclosures have been reviewed and approved by local Executive Management of each subsidiary. The

consolidated Pillar 3 document is formally approved by the BHF KB Audit Committee before being

published.

The BHF KB Board believes these disclosures appropriately display the risk profile of The Group.


Regulatory classifications of IFRS accounts

IFRS Classification Credit Risk

Counterparty

Credit Risk Market Risk 3

Assets £m £m £m

Cash and balances at central banks o o

Items in the course of collection from other banks o o

Trading portfolio assets o o

Financial assets designated at fair value o

Derivative financial instruments o o

Available for sale investments o o

Loans and advances to banks o o

Loans and advances to customers o o

Reverse repurchase agreements and other similar secured lending o o

Investments in equity accounted investees o o

Other Assets 1 o o

Liabilities

Deposits from banks o o o

Items in the course of collection due to other banks o o o

Customer accounts o o o

Repurchse agreements and other similar secured borrowing o o

Trading portfolio liabilities o o

Financial liabilities designated at fair value o o

Derivative financial instruments o o

Subordinated liabilities o o o

Other Liabilities 2o o o

1

2

3

Other Assets consist of Prepayments, Accrued Income, Other Assets, Property Plant and Equipment, Goodwill &

Intangibles, current tax assets, deferred tax assets & retirement benefit assets

Other Liabilities consist of Accruals, deferred income, other liabilities, Liabilities in disposal groups as held for

sale, provisions, current tax liabilities, deferred tax liabilities & retirement benefit liabilities

For market risk the table above indicates specific balance sheet items that are subject to market risk

fluctuations. It does not represent FX market risk which would impact the whole balance sheet.


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Basis and frequency of disclosures

The disclosures in this document have been completed in accordance with Articles 429 to 455 of the

CRR. Unless stated otherwise, all figures are as at the financial year-end, 31st December 2014. These

disclosures will be issued on an annual basis and prepared in conjunction with the Financial Statements.

Future Developments

The BCBS introduced a series of rules that form the basis of Basel III & CRD4 which became effective on

1st January 2014. Although CRD4 has been reflected in these Pillar 3 disclosures, some elements are being

phased in and will become effective over the course of the next few years. The impacts of the new rules

are summarised below:

Capital requirements and capital ratios will be gradually phased in as follows:

o Minimum Common Equity Tier 1 (“CET1”) requirement of 7% by 2019: This includes a 2.5%

Capital Conservation Buffer (“CCB”) which will be phased in from 01st January 2016 with

increments 0.625% per annum.

o Minimum Total Capital requirement of 10.5% by 2019 which also includes the CCB of 2.5%

being phased in from 01st January 2016 for CET1 ratio requirements.

o The Bank of England also has the option to introduce a Counter-Cyclical Capital Buffer

(“CCCB”)

New leverage ratio of 3% will be introduced for all UK regulated banks from January 2018 subject to

review in 2017.

New liquidity ratios:

o Intraday liquidity risk reporting will commence in 01st July 2015 and will be required on a

quarterly basis.

o Additional Liquidity Monitoring Metrics (ALMM) reporting will commence 01st July 2015.

The BCBS also published revised Pillar 3 disclosure requirements in January 2015 and these are planned to

take effect by year-end 2016.

Location and verification

The Pillar 3 disclosures for the consolidated group and its subsidiaries are located on the BHF Kleinwort

Benson website and can be accessed via the following link

http://www.bhfkleinwortbenson.com/investor-information/financial-information/financial-reports-presentations/other-

reports?year=2014

The disclosures are not subject to external audit and do not form part of BHF Kleinwort Benson Groups

financial statements.

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3. Governance and Risk Management


The Group is a focused financial services business with principal activities in private banking and wealth

management, asset management and financial markets & corporates. These complementary businesses

are offered by various businesses:

Private banking and wealth management are offered by KBBL in the UK, KBCIHL in the Channel

Islands and by German-based BHF;

Asset management services are offered by KBI and BHF’s subsidiary Frankfurt Trust;

Financial markets and corporate banking services are mostly provided through BHF.

Through the combined businesses, the Group faces and accepts risks in order to generate returns for its

shareholders. The Group has set strategic objectives and its medium-term performance targets against

following qualitative risk appetite principles:

Maintenance of a strong capital position with sufficient regulatory capital surpluses which are at

the high-end of European peers, set in the context of the prevailing global economic environment,

market conditions, regulatory environment and reflecting the potential impact from several

appropriate stress tests.

Maintenance of a strong liquidity position ensuring that liabilities can be met, even under adverse

business and market conditions. The Company’s approach to liquidity is based on the

maintenance of highly liquid low-risk treasury portfolios and stable funding with limited reliance on

wholesale funding.

Conduct of business in accordance with the highest ethical standards aimed at maintaining an

excellent reputation with clients, employees, regulators and other stakeholders.

The above qualitative principles are translated into risk appetite statements with appropriate risk

tolerance levels and quantitative risk limits defined in comprehensive risk frameworks for each of the

Company’s businesses developed under the responsibility of their respective Board of Directors.

Please refer to the BHF KB’s Strategy and Business Review together with Corporate Governance sections

of the BHF KB’s Annual Report 2014 for further information on The Groups governance.

BHF Bank

BHF’s risk management, measurement and control processes ensure that significant risks are identified at

an early stage, fully evaluated and outlined adequately. The risk management objectives together with

the strategies and processes to manage risks are demonstrated in the diagram below:


14

Table 5

BHF guarantees the viability and effectiveness of its risk management system through the clear,

functional organisation of its risk management process. As part of this approach, the individual bodies

are assigned clear tasks at strategic level:

The Supervisory Board plays a supervisory role in respect of all measures related to risk mitigation and

management at BHF. It approves the capital allocation proposed by the Board of Managing Directors of

BHF.

The Board of Managing Directors is responsible for proper organisation of the business and its continuous

development. This responsibility comprises (in cooperation with the Risk Committee and the Asset-Liability

Committee) the main activities of overall bank management on the basis of risk reports, overriding limit

concepts and risk-bearing capacity. This includes a clear definition of the strategies, the transaction

types, as well as the acceptable and unacceptable risks.

The members of the Board of Managing Directors in charge of finance and credit risk management bear

the responsibility for the risk management and control processes in relation to the risks entered into by

BHF.

The Risk Committee establishes the risk profile of BHF for the individual risk types within the framework of

the strategies determined by the Board of Managing Directors, for example, by volume and structure

control (achieved among other things by setting limits in the context of monitoring and limiting

concentration risks), by the establishment of risk management parameters and methods and by

determining measures to ensure ongoing compliance with internal and external guidelines.

The Asset Liability Committee (ALCO) of BHF assumes all responsibilities that exist in relation to the liquidity

management of the Bank and the Group. The ALCO ensures the liquidity position of BHF is efficiently

managed, that appropriate processes and guidelines exist for monitoring and limiting risks, and that

sufficient resources are available for evaluating and controlling the risks.

At BHF, the Head of Corporate finance carries out the risk controlling function pursuant to MaRisk AT 4.4.1,

which is responsible for the independent monitoring and communication of risks. It operates independent

of the market units and reports solely to the member of the Board of Managing Directors responsible for

finance. Its tasks, supported by the Risk Control department, include in particular:

- supporting the management in all risk-policy matters, especially in the development and

implementation of the risk strategy and in the design of a system for limiting risks,


15

- implementing the risk inventory and creation of the overall risk profile,

- supporting management in the establishment and development of risk management and

control processes,

- establishing and developing a system of risk indicators and an early risk detection process,

- ongoing monitoring of the risk situation of the institution and the risk-bearing capacity as well

as compliance with established risk limits,

- preparing regular risk reports for management,

- assuming responsibility for the processes involved in the immediate forwarding to the

management, the responsible party and, where appropriate, the internal audit department

of information that is material in terms of risk.

As part of their risk control function, the Head of Corporate Finance has access to all information

necessary to perform his/her duties and is involved in all important risk-policy decisions.

The risk management and control processes ensure that material risks are identified at an early stage,

comprehensively recorded and mapped in an appropriate manner. The risk management and control

processes are adjusted promptly to take account of changing conditions. Interactions between the

various types of risk are taken into account where relevant and material.

Corporate Finance and Credit Risk Management submit a risk report to the Risk Committee, the Board of

Managing Directors and the Risk and Audit Committee of the Supervisory Board takes place at regular

intervals, but at least quarterly. This reporting also forms the basis for the presentation of risk data to the

supervisory authorities and rating agencies.

This comprehensive risk reporting, which includes appropriate stress tests and scenario analyses, ensures

that regular monitoring of all significant risks, especially in the lending and trading business, and taking

into account risk/return considerations, takes place both at the individual transaction level and at

portfolio level, and that appropriate control measures can be implemented at an early stage, if

necessary.

The comprehensive approach to risk management at BHF also guarantees timely and recipient-based

forwarding of all relevant information through appropriate measures. Defined communication channels

and corresponding information events ensure there is a regular exchange of information between those

involved in the various corporate divisions with respect to strategies, objectives and risks, in order to

prevent an accumulation of individual risks or the combination of risks that would lead to a risk that

threatens the existence of the company.

Ad hoc reporting includes the immediate forwarding to the responsible party of information that is

material in terms of risk (e.g. claims, relevant defects, specific suspicions of irregularities). In addition, the

involvement of Group Operational Risk Control is required in the event of claims or operational risks; it

informs the Board member responsible for risk controlling and the internal audit department to ensure

that appropriate measures or audit procedures can be initiated at an early stage.

The Management Information System (MIS) of BHF serves as the central strategic control, information and

early warning system. This enables the simultaneous description of profitability, its underlying value drivers

and the risks on the basis of both regulatory and economic risk measures. As part of the MIS reporting,

management and other decision-makers are provided with all information relevant to controlling on a

monthly basis, taking into account risk/return considerations. The control of BHF is subject to various

conditions. The most important conditions are the core and total capital ratio in accordance with CRR

and compliance with economic risk limits

The Board of Managing Directors of BHF has a business strategy and a consistent overall risk strategy,

including complementary sub-risk strategies adopted as frameworks for the BHF Group’s risk policy

orientation.


16

The overall risk strategy defines, amongst other things, the individual risk types classified as material and

establishes the framework for dealing with these risks in the context of the risk-bearing capacity concept.

Specifically, the following points are defined and substantiated:

- the types of risk that are material for the Bank,

- the risk-bearing capacity concept,

- the transactions that can be executed,

- the regulations on activities in new products or in new markets,

- the procedures for risk assessment,

- the risk monitoring and communication in the context of risk reporting,

- the tasks of the internal audit department,

- the general conditions for the outsourcing of business activities,

- the requirements for organisational guidelines and for documentation and

- the information on the personnel and technical resources in the BHF Group.

The overall risk strategy is complemented by the individual sub-risk strategies for credit risk, market risk,

liquidity risk, operational risk, investment risk, business risk and reputational risk.

In its sub-risk strategy for credit risk, the Bank has laid down the conditions for entering into, monitoring,

controlling and reporting with respect to this type of risk. Under this strategy, the prerequisites for the

execution of credit transactions in BHF include, amongst others, the understanding of the transaction and

an individual assessment of the customer’s creditworthiness, including the establishment of risk-

appropriate conditions. The credit risk strategy also includes provisions for the identification and limitation

of risk concentrations.

The market risk strategy describes the fungible products and the related business objectives associated

with entering into market risks. In addition, the principles of market risk management, limit setting and

monitoring, including the principles of quantification of market risks, are defined.

In accordance with its liquidity risk strategy BHF pursues conservative liquidity management in order to

ensure that sufficient liquidity is always maintained within the BHF Group. The liquidity risk strategy

describes in detail the methods used to manage and measure liquidity risk, the main committees and the

contents of the regular reports.

In its sub-risk strategy for operational risks, the Bank defines the principles for the management and

limitation of operational risks. These include the definition of clear roles and responsibilities within the

framework of risk management. One principle of the sub-risk strategy is the emphasis on maintaining the

good reputation of the BHF Group in all business activities.

Risk management for investment risks (-> investment risk strategy) takes place at different levels. All

affiliated companies that are included in the consolidated financial statements are included in the

management information system (MIS) reports in order to ensure ongoing monitoring of business

developments. Moreover, the Corporate Development & Investment department regularly collects and

prepares information on investments. A monthly review of the recoverability of the carrying amounts of

investments is conducted on this basis.

The management of business risk (-> business risk strategy) is based on a qualitative approach through

regular reporting of results to the Board of Managing Directors and other stakeholders.

The information on value drivers, in particular income and expense margins, in the management

information system supports the identification, assessment and control of business risks.


17

Besides monitoring and reporting, the Bank states in its sub-risk strategy for investment risks that

investments may be made for strategic reasons, for the provision of internal services or as compulsory

investments. The acquisition and disposal of investments may only be made with the approval of the

Board of Managing Directors. If the amount of the investment exceeds EUR 5 million, the Supervisory

Board also has to approve the acquisition or disposal.

The objective of BHF’s Group-wide risk management and early warning system is to ensure that losses

from the risks entered into at no time exceed the risk-bearing capacity in a liquidation approach. To this

end, the sum of the risk capital requirements for the risk types included in the risk-bearing capacity

(counterparty risk (credit risk), market risk, investment risk, operational risk and business risk) is compared

with the risk capital allocated to the individual business areas and portfolios. In parallel, the risk-bearing

capacity is also determined quarterly from a going-concern perspective as part of the risk reporting at

the overall bank level. A traffic light system is used in both control areas, which depicts limit utilisation at

an early stage.

Table 6

The adequacy of the methods used to assess the risk-bearing capacity is reviewed annually by the Risk

Controlling Department and the assumptions underlying them are justified in a clear manner.

The risk coverage is determined on a quarterly basis on the dates of the risk report. The allocated risk

capital as a percentage of the risk cover represents the potential amount of risks that can be entered

into in business activities. The calculation of risk coverage is oriented toward the balance sheet and profit

and loss and is based on the total IFRS equity of the BHF Group and the long-term, subordinated liabilities,

taking into account various deductions that are shown in the table below. In this way, the Bank takes into

account the fact that these deductible items will very likely not be available in the event of liquidation.

BHF has introduced a traffic light system with defined escalation measures in order to monitor and ensure

the risk-bearing capacity. One criterion within the traffic light concept considers the ratio of economic

capital to the IFRS capital. At the reporting date this ratio was 75%.

The risk assessment for counterparty risks and market risk is carried out on the basis of value-at-risk (VaR)

concepts and stress tests. For the other types of risk included in the risk-bearing capacity concept, the risk

utilisation is determined using indicator-based measurement methods.

BHF uses the depiction of risk-adjusted profitability ratios in the Management Information System to ensure

that the risk inherent in the business activities is taken into account in its control and monitoring processes.

BHF Bank

Risk bearing capacity and utilisation

2014 2013 Variance

€m €m €m

Available risk capital to cover assets 617.5 601.3 16.2

Free risk capital to not be quantified or allocated to risks (inc capital buffer) -177.5 -161.3 -16.2

Risk capital available for allocation (inc capital buffer) 440.0 440.0 0.0

Capital buffer -2.6 0.0 -2.6

Risk capital available for allocation (excl capital buffer) 437.4 440.0 -2.6

Risk capital utilised (Amount) 365.7 352.0 13.7

Risk capital utilised (%) 83.6% 80.0% 3.6%

Risk capital to cover for default risk 35.7 34.5 1.2

For individual impairment 20.5 21.4 -0.9

For collective impairment 15.2 13.1 2.1

Accruals for provisions 12.2 12.8 -0.6


18

The Bank allocates risk capital to the individual sub-segments, portfolios and risk types and carries out its

controlling using risk-adjusted profitability indicators; the objectives of this approach are to limit risks to a

total amount that is consistent with the business strategy, to limit risk concentrations in a targeted way

and to maintain sufficient capital even in worst-case assumptions, transparency with regard to the level

of risks entered into by the individual sub-segments, the effective use of risk capital through the individual

sub-segments and the linking of risk management and overall bank management.

Table 7

The risk-bearing capacity is calculated quarterly and shown in the risk reports. The responsibility for this lies

with the Risk Control department of the Corporate Finance department.

BHF applies risk-reducing diversification effects (resulting from the correlation between the risk types) to

aggregate the individual risk contributions. The calculation of correlations is based on the Bank’s internal

time series and has an overall conservative orientation, as the correlations are determined based on

maximum values with respect to different timeframes. The final correlation values are determined using

the statistical bootstrapping method as the 95% percentile of the bootstrapping distribution.

In the event limits are exceeded, the Bank has processes in place to ensure an immediate reduction of

the limit utilisation. The possible measures include risk-reducing transactions, the redistribution of risk

capital set aside for the specific risk type within the sub-segments or portfolios and the distribution of a

capital buffer. Risk controlling is responsible for the monitoring of compliance with the limits that have

been set and informs the Board of Managing Directors if the limits are exceeded.

The Bank uses an emergency plan in the event of extremely unfavourable markets and heavy daily

losses, which may lead to limits being exceeded due to the utilisation of market risk limits. In this context,

the Bank uses an escalation process based on a traffic light concept, which should ensure an adequate

response in such a scenario and guarantee that risks can be reduced within one month. This applies in

particular to market risks arising from products that can be completely removed only by selling the

products. No escalation was required in the reporting year.

AT 4.1 item 9 MaRisk, in the version dated 14 December 2012, requires institutions to have a process of

planning for future capital requirements. The planning horizon should include a reasonably long, multi-

year period. According to the accompanying letter from BaFin dated 17 December 2012 on the MaRisk

BHF Bank

Risk bearing capacity and utilisation

Tota

l

Priva

te

Ba

nk

ing

Ass

et

Ma

na

ge

me

nt

Co

rpo

rate

s

Fin

an

cia

l

Ma

rke

ts

Inte

rna

l

ac

co

un

ts

Pe

nsi

on

s

Oth

ers

€m €m €m €m €m €m €m €m

Credit Risk 183.5 5.5 0.0 148.6 24.2 1.0 4.2 0.0

Market Risk 133.9 1.9 0.0 1.0 100.0 2.0 30.2 -1.2

Counterparty Risk 70.2 10.5 5.0 25.0 1.0 30.6 0.0 -1.9

Business Risk 49.1 13.4 4.0 5.0 7.9 18.8 0.0 0.0

Operational Risk 37.0 14.5 5.0 6.8 9.0 1.8 0.0 0.0

Diversification and Capital deductions -36.3 -3.0 -0.8 -13.4 -5.7 -0.8 -0.8 0.0

437.4 42.8 13.2 173.0 136.4 53.4 33.6 -3.1

Capital buffer 2.6

BHF Bank available risk capital 440.0

Risk capital utilised (Amount) 365.7 35.0 12.7 153.9 96.1 49.9 29.3

Risk capital utilised (%) 83.6% 81.8% 96.2% 89.0% 70.5% 93.4% 87.2% 0.0%

Risk capital utilised (%) Previous year 80.0% 88.4% 91.4% 84.4% 67.3% 90.4% 77.0% 0.0%

Risk capital available for allocation (excl

capital buffer)


19

amendment, both internal and regulatory capital requirements must be determined. To do so, based on

its business plan BHF calculated the future development of its equity at the Group level and the

regulatory capital for the period 2015-2018, including taking into account a stress effect to identify

possible future capital requirements at an early stage and to take countermeasures.

Kleinwort Benson

Kleinwort Benson is the combination of KBBL, KBCIHL and KBI.

KBBL and KBCIHL are the Private Banking entities of Kleinwort Benson and form Kleinwort Benson Wealth

Management (“KBWM”). KBI is the Asset Management arm of Kleinwort Benson.

KBBL, KBCIHL and KBI are wholly owned subsidiaries of KBG as shown in the organisational chart in table 2

of this Pillar 3 disclosure report.

Kleinwort Benson Wealth Management (“KBWM”)

KBWM has a vision statement to provide a compelling relationship driven proposition to clients through a

focused high quality offering and state-of-the-art execution. KBWM reviews its business strategy annually

and it is presented to the KBBL and KBCIHL Boards for approval.

To achieve the strategy KBWM maintains a Risk Appetite and Framework (“The Risk Framework”) which is

approved by the KBBL and KBCIHL Management Committee and Strategic Risk Committee before being

approved by the Boards of KBBL, KBCIHL and KBCIL.

The Risk Framework sets out a comprehensive framework of high level limits to control key risks facing the

business but aligned to achieving the overall business strategy.

KBWM has a Treasury and Financial Risks Management Policy (T&FRMP) document which is an

overarching risk management framework. This document complements the Risk Framework setting out

strategies, policies and how to manage the risks within the business and stay within the risk appetite. This

document consists of the following key components:

The Board’s articulation of Kleinwort Benson Wealth Management‘s strategy and direction together

with the associated risk appetite. This is complemented by targets and risk limits set by executive

committees.

Clear roles, responsibilities, reporting lines, committees and mandates exist to achieve the strategy.

A comprehensive set of risk policies, processes and control procedures in place to provide bedrock

for an effective control environment.

Comprehensive and timely management reporting of risk exposures for decision making or

mitigating potential risk on the horizon.


20

The following diagram illustrates how the KBWM Strategic review flows into the T&FRMP and the

underlying policies and procedures.

Table 8

Updated Risk Appetite

Business Strategy

Updated Risk Limits

Treasury Strategy

Treasury and Financial Risks

Management Policy

Market Risk

Interest Rate

Risk in

Banking Book

Liquidity Risk Operational

Risk

Credit and

Counterparty

Risk

Strategic Review

External Factors / Clients Needs/ Core Values / Internal Objectives/ Current Risk Appetite

Policies / Procedures / Limits


21

The following diagram sets out the high level Board and Committee structure. It excludes details of

boards for subsidiary companies wholly owned by KBBL and KBCIHL.

Table 9

Strategic Risk Committee

The Strategic Risk Committee has responsibility for recommending The Risk Framework and overall Risk

Appetite to the boards of KBWM and their subsidiaries and considers how the external environment may

impact the current and future strategy of the businesses. The Committee consists of at least three

members, the majority of whom are independent non-executive directors and meets at least three times

per annum.

Nomination and Remuneration Committee

The Nomination and Remuneration Committee reviews the structure, size, function and composition of

the Kleinwort Benson Boards, having regard to gender representations, and makes recommendations to

the appropriate Kleinwort Benson Boards in relation to any changes deemed necessary, including the

identification and nomination of candidates for the approval of the appropriate Kleinwort Benson

Boards.

The Nomination and Remuneration Committee agrees with the Kleinwort Benson Boards and, as

appropriate, subsidiary company boards a general remuneration policy for the executive directors and

officers of Kleinwort Benson and/or subsidiary company and a group policy for other members of staff,

ensuring that they meet any legal and regulatory requirements.

In line with local regulations and guidance, KBI also has its own Remuneration Committee.

Audit Committee

The Audit Committee advises the board on meeting its external financial reporting obligations and

provides advice and guidance on all matters relating to internal and external audit, together with the

internal control systems of KBWM.

Kleinwort Benson

Nomination and

Remuneration

Committee

Kleinwort Benson

Strategic Risk

Committee

Kleinwort Benson

Audit Committee

Kleinwort Benson

Investors Dublin

Limited

Kleinwort Benson

Group Limited

Offshore

Management

Committee

EXCO

Client

Sub-Group

Management

Committee

Kleinwort Benson

Channel Islands

Holdings Limited

Kleinwort Benson

Bank Limited

BHF-BANK A.G.


22

Management Committee

The Management Committee of KBWM has been given delegated authority for strategy and operational

management. The Committees primary responsibilities are to:

Define, recommend to the boards and promote Kleinwort Benson’s strategy, business plans and

annual budget

Set targets and goals across the business areas; and

Monitor performance against the strategic objectives and targets.

Alongside the Management Committee, the Offshore Management Committee independently

considers any group-wide policy, committee terms of reference or other material proposal regarding the

business strategy, management, operations and performance of the non-UK businesses and considers

whether or how it should be implemented having taken account of the legal and regulatory

requirements relating to the business carried out by KBCIHL and its subsidiaries.

The Management Committee has established the following sub-committees:

Table 10

Risk ManagementChange Management

CEO

Taskforce

Project

Board

CEO

Taskforce

Project

Board

Risk and

Compliance

Committee

Asset and

Liability

Management

Committee

Credit

Committee

New Products

and

Instruments

Committee

Management

Committee

Change Board

Cash

Management

Committee

Reputational

Risk

Committee

Policy

Committee


23

The responsibilities of each of these committees are detailed in the table below:

Table 11

The KBWM Boards are firmly committed to sound and prudent risk management practices, given the

importance of such practices to achieving The Group’s strategic objectives. In line with its ordinary

activities, KBWM is exposed to a number of risks. KBWM has embedded a robust risk process into its risk

management practise. The firm has a five step approach to risk management as detailed in the following

diagram:

Committee Specific Responsibilities

Asset and Liability

Management

Committee

Monitoring liquidity and capital and determining the investment

policy for the treasury assets in the context of KBBL’s strategy and

market conditions

Cash Management

Committee

The design of and monitoring performance against the risk

framework around the product, “Kleinwort Benson Cash

Management Service.”

Change Board Monitoring progress with change projects and setting priorities.

Approving counterparty limits and investment grade rated credit

applications.

Considering the allowable non-property collateral

New Products and

Instruments Committee

Reviewing existing and proposed products, services and

instruments.

Monitoring compliance, risk and control issues across the business

and determining market risk limits.

Monitoring the adequacy of the performance of outsourcers

providing Credit, IT and Operational services

Reputational Risk

Committee

Determines the reputational risk appetite in relation to client or

business opportunities

Policy Committee

Responsible for the policy framework across the group, including

the review, recommendation and, in certain circumstances,

approval of policies

Credit Committee

Risk and Compliance

Committee


24

Table 12

Risk Identification

This is the identification of all risks which could have a material impact on the operation of the business

and/or the achievement of the business’s strategy and objectives.

KBWM control functions undertake assessments in specialist areas, incorporating external drivers, e.g. new

legislation, to assist in risk identification. The internal audit, external audit, compliance and risk monitoring

processes, the business change process and the due diligence process also highlight new risks.

Regular internal business meetings also assist in risk identification, and new risks may be identified through

analysis of root causes of other (related) risks. Risk identification includes risks that are both internal and

which are caused by factors external to the firm.

Risk Assessment

The objective of risk assessment is to develop an understanding of each risk, including cause, potential

likelihood of occurrence and the impact on the business. The firm uses an impact v likelihood matrix to

quantify and prioritise the risk on the basis of financial, operational, reputational, and other loss

categories.

Risk Management

The risk management or risk mitigation process requires Kleinwort Benson to identify a range of options

around managing individual risks. Once agreed, this is then followed by mitigation planning and

implementation.

Risk Identif ication

Risk Assurance

Risk Management

Risk Reporting

Risk Monitoring

Risk

Culture


25

Overall risk management strategy options include, but are not limited to:

Table 13

Risk reporting and Management Information

KBWM identifies and captures a wide range of information concerning events and activities, both internal

and external, that is relevant to achieving the strategic business aims of KBWM.

Providing the appropriate level of information to the relevant business and function heads, at the right

time enables KBWM to be better informed of the risks faced, as well as providing effective monitoring of

the key risks within KBWM.

Information is gathered centrally through a variety of business as usual mechanisms including, as new risks

on risk registers, as incidents occur, through local self-assessments, internal audit, external audit, post-

incident assessments and general risk reviews.

MitigationImplementation of new or revised policies and processes to ensure the risk is mitigated to

an appropriate level.

SharingRisk is reduced or spread across the organisation or external parties sharing risk, through

such sources as subcontracting, outsourcing or entering into partnerships or joint ventures

Avoidance By performing or not performing an action which prevents an initial risk materialising

Can be achieved through external assurance (ie insurance) or parental guarantees, use of

credit derivatives, selling positions or portfolios and use of collateral

In some cases the firm recognises that the risk exists and accepts it to accomplish business

objectives.

Acceptance In some cases the firm recognises that the risk exists and accepts it to accomplish business

objectives.

Risk Management Strategy Options

Transfer


26

The following table provides an overview of the key management information provided to the Boards

and various committees which enable KBWM to manage it’s financial and risk exposures and mitigate or

take correcting actions for potential risks that may be on the horizon.

Table 14

KBI

The governance structure within KBI provides a clear overview of the basic principles of KBI’s risk

governance, the roles and responsibilities of each of the KBI Board and the various KBI Board sub-

committees, e.g. the Executive Committee and KBID Audit Committee and its decision making policies.

From a solvency risk perspective KBI’s capital is managed within this governance framework taking into

account the relevant regulatory requirements with which the KBI Board and subsidiary boards must

comply. There are regular checks and reviews of its adequacy to mitigate against such risk.

KBBL & KBCIHL

Boards

Strategic Risk

Committee

Asset & Liabilitee

Committee

Risk and

Compliance

Committee Credit Committee

Minimum three

meetings

per annum

Minimum three

meetings

per annum

Monthly Meetings Minimum nine

meetings

per annum

Quarterly meetings

Financial update Chief Risk Officer’s

report

Treasury portfolio

status and market

conditions

Compliance

breaches

Credit approvals

Strategic update Market conditions

and trends report

Balance sheets Regulatory findings

/ interactions

Loan book and

analysis

Capital status Liquidity report Margins Complaints Client ‘Watch List’

Liquidity status Lending report Capital position Major risk events Provisions and

losses against loans

Risk Appetite

(annually or on

change)

Risk Appetite

(annually or on

change)

Liquidity position Key risks per

business area

Regulatory issues

(where necessary)

Exceptions to Risk

Appetite

Exceptions to Risk

Appetite

Counterparty

exposure

Major initiatives Audit findings

(where necessary)

Strategic Risk

Committee report

Market Risks

exposure

Key risk indicators

for top enterprise

risks (quarterly)

Audit Committee

report

Compliance

Assurance status

and progress

against findings

Nomination and

Remuneration

Committee report

Internal Audit

status and progress

against findings

TCF/Conduct risk

metrics/report


27

The chart below gives an overview of the KBI governance structure including sub-committees:

Table 15

The KBI Board

The KBI Board has adopted Principles of Corporate Governance, which provide an effective corporate

governance framework for KBI. The KBI Board meets at least on a quarterly basis and more frequently if

required. It is responsible for:

Setting the strategic goals of the company and for the overall oversight and supervision of the

affairs of the company;

Defining and documenting the risk strategy and the capital planning of the company;

Supporting the internal development of risk awareness within the organisation;

Delegating and overseeing the implementation of the ICAAP to the Executive Committee;

Approving the risk and capital policies as set out by the Executive Committee;

Delegating and overseeing the risk management function; and

Approving on a regular basis the risk and capital management processes of the company through

regular reporting by the Executive Committee.

The KBI Board maintains the following committees to assist in discharging its oversight responsibilities:

Remuneration Committee

Audit Committee

Executive Committee

Remuneration Committee

The Remuneration Committee advises and supports the Board in developing and managing a coherent,

fair and responsible remuneration policy aligned to the business strategy and the interests of relevant

stakeholders, and will oversee its implementation in a manner that does not encourage excessive risk-

taking.

Risk Committee IT Steering

Committee

Pricing

Committee

Audit

Committee

KBI Board of

Directors

Executive

Committee

Remuneration

Committee

Business

Continuity

Management

Committee


28

Audit Committee

The Audit Committee assists the Board of Directors and does this by supervising on behalf of the Board,

the integrity, efficiency and effectiveness of risk management and the internal control measures in place,

paying special attention to correct financial reporting. The Audit Committee also oversees the

company’s processes to secure compliance with laws and regulations.

Executive Committee

The Executive Committee implements the strategies, policies and decisions of the Board and manages

the company and its subsidiaries from a day-to-day perspective. It is responsible for managing the

business and affairs of the company and for the leadership and operational management of the

company.

The Executive Committee maintains the following sub-committees to assist it in discharging its oversight

responsibilities:

Risk Committee

IT Steering Committee

Pricing Committee

Business Continuity Management Committee


29

4. Assessment of Group’s Risk Mitigation Policies and

Assumptions

Risk appetite

The Group and its subsidiaries have a comprehensive and conservative medium-term plan which sets out

a three year strategy to manage the business in the face of the changing economic environment.

BHF KB sets its qualitative risk appetite principles that are then translated into a risk appetite statement for

each of the business units as explained in section three of this Pillar 3 document.

BHF has clearly defined its risk appetite as part if its business and risk strategy. The framework for this

appetite is set by BHF’s low-risk business model as such. The outcome of this process is as follows:

With respect to pillar 1 requests, BHF’s significantly high tier 1 and total capital ratios underline its

degree of risk-awareness.

With respect to ICAAP (pillar 2), the risk appetite is given by a set of buffers (i. e. only a part of the

adjusted own funds is allocated as risk capital) and consistent risk limits.

KBWM adopts a Risk Appetite and Framework (“The Risk Framework”) which is explained in section three

of this Pillar 3 document that is approved by the Boards. This is a comprehensive document which outlines

the nature and quantum of risk KBWM is prepared to tolerate in the process of achieving its strategic and

operational objectives whilst remaining within relevant and regulatory constraints.

KBI defines its Risk Appetite as the process to quantify as fully as possible the amount of risk the company

is willing to bear in order to achieve its strategic, profitability and growth objectives while remaining within

the bounds of regulatory constraints. To define this, KBI has a Risk Appetite Frontier which sets the

tolerance range of acceptable versus unacceptable risks.

Risk Identification

BHF KB is a focused financial services business and through its combined businesses faces and accepts

risks in order to generate returns. The main risks that The Group face is outlined in the principle risks and

uncertainty section (pages 31 – 35) of BHF KB’s Annual Report 2014.

The risks which impact The Group by business unit are shown in the table below:


30

Table 16

Key Risks Description

BHF KB

Group

(Mgt

Co's)

BHF

BANK KBWM KBI

Counterparty

and Credit

Risk

Credit risk is defined as the risk of loss due to a debtor's non-

payment of a loan or other line of credit (in terms of either the

principal amount or interest or both).

Counterparty credit risk is where the business can suffer significant

loss of assets placed with a counterparty or the non completion of

a trade, both arising from the failure of a counterparty

Market RiskThe risk that the value of an investment will increase or decrease

due to movement in market factors

Operational

Risk

The risk to the business from inadequate or failed internal processes,

people and systems or from external events. This will include IT

systems risk (risk to the business from poor/inadequate/overly

complex IT systems or failure of IT systems)

Liquidity Risk

The risk of not being able to meet liabilities as they fall due. The

ability of the firm to transact in the market may fall away if there is

a liquidity crisis.

Concentration

Risk

The risk that arises when lending toward a single borrower or a

group of connected counterparties is large enough to impact the

group in the event of the failure of the borrower or counterparties.

Business /

Strategy Risk

The risk of failure to achieve the business objective of increasing

revenues/fees and deposits for the business and lack of

responsiveness to new challenge.

Residual RiskThis may arise when the firms Credit Risk Mitigation techniques are

not effective in reducing the risk

Securitisation

Risk

The risk that assets which are owned by The Group which have

been securitised by a pool of other assets are impacted by any

adverse changes in this pool

Interest Rate

Risk in the

Banking Book

The risk of mismatches in the asset and liabilities for fixed and

floating interest rates.

Risk of

Excessive

Leverage

The risk that the firms has taken on too much leverage

Pension

Obligation Risk

Pension deficit risk arises as a result of changes in life expectancy

and other parameters for pension and dependants benefits as well

as invalidity benefits in so far as they are covered by The Group

Subsidiary /

Group Risk

Group Risk is the risk that the financial position of the company

may be adversely affected by its relationships (financial or non-

financial) with other entities in the same group or by risks which

may affect the financial position of the whole group.

Regulation,

Financial

Crime Risk &

Reputational

Risk

The risk to the business arising from breaching rules or regulations or

losses due to internal/external fraud

Insurance Risk

The risk associated with insurance policies taken out or and

contracts undertaken/written and the potential obligations

against them


31

The table above demonstrates that BHF KB Group management companies incur most of its risk from its

main subsidiaries which are BHF Bank, KBWM & KBI. Each of these business units have their own risk

governance, appetite and frameworks as explained in these Pillar 3 disclosures.

Liquidity risk, though very important for BHF, cannot be covered by risk capital, but has to be limited by a

target survival period. BHF considers any impacts of liquidity within its stress testing.

Reputational risk is also an important risk for BHF but more of an indirect risk, mostly covered by the other

risk types mentioned above. The remainder of this risk leads to a deduction from the risk capital which is

available for allocation to different business areas.

The process through which KBWM indentifies its top risks is explained in section three and table 12 of these

Pillar 3 disclosures.

KBI operates a Risk Appetite Frontier in which a Risk Register is maintained to identify the risks that the

business faces. By its nature, this is an ongoing process that involves all units and it is updated on a

continuous basis. It covers risks across all business processes from execution risk, including fraud and front

running, to client take-on risks, including investing mandates fully and in line with client restrictions and

objectives.

Use of Credit Risk Mitigation Techniques

The Group adopts a range of measures to reduce inherent risk in its credit risk including a thorough

analysis and assessment of each counterparty with reference to the ability to service and repay the

requested facility or debt. In almost all customer lending cases, risk is further mitigated by the taking of

collateral to cover the funds advanced.

BHF Kleinwort Benson Group (Management companies)

BHF KB Group management companies are subject to Credit Risk predominantly on its investments. The

value of these items is €30.2m as at 31st December 2014 and most of this is prudently risk weighted at 250%.

There is also some cash which is held for day-to-day operational purposes and this is held with highly

rated counterparties.

BHF KB Group Management companies do not have any formal credit risk mitigation in place.

BHF Bank

BHF takes into account the credit risk mitigation in KSA guarantees, financial securities and real estate

collateral.

The bulk of the guarantees used for credit risk mitigation are made for the state export credit insurance.

The guarantor here is primarily the Federal Republic of Germany. Through the collection of guarantees in

the context of investments without funding, usually by financial institutions, counterparty risks are hedged.

Before a guarantee is accepted, the creditworthiness of the guarantor is assessed according to the

credit analysis of a borrower. Guarantees are taken into account in consideration of maturity, currency

and credit rating (external).

The calculation of risk-weighted exposure amount of guarantees is carried out in accordance with Article

235 of the CRR depending on the risk weight (credit) to the guarantor and the borrower. Here, the same

rating rules apply as for all other borrowers. Currency and maturity mismatches between demand and

guarantee are also accounted for by reductions where necessary.

The recognition of financial collateral (cash deposits at BHF and securities) is based on the

comprehensive method in accordance with Article 223 of the CRR.


32

For the volatility adjustments to securities collateral, BHF uses regulatory prescribed haircuts. For currency

and maturity mismatches between security and demand additional discounts will be considered.

The Bank also has credit risk associated with domestically established and situated residential and

commercial properties where there is a charge against these properties. The valuation of the property is

carried out by an independent credit approval process by certified real estate appraisers under the

mortgage lending value regulation. The equity value is reviewed annually as part of the loan application.

BHF regularly checks the concentration risk for pledged securities collateral and guarantees and

publishes the results in the risk report. The concentration is determined and monitored as the total of

pledged securities per issuer or the concentration by guarantor.


KBWM receives collateral from customers against lending to reduce the risk in the event that the client is

unable to service or repay the debt. The types of collateral which KBWM accept as security include:

Cash Deposits;

Portfolios of Stocks and Shares;

Charges over UK & Channel Island Residential Property;

Charges over UK Commercial Property;

Guarantees;

Mortgages / Assignments of Life Insurance Investment Bonds

Property backed transactions are usually subject to a professional and independent appraisal to

determine valuation and suitability as lending collateral.

Residential property values are reviewed according to published Land Registry indexation figures on a

regular basis and, where deemed appropriate, by formal re-valuation.

In respect of commercial premises it is KBWM’s practice to revalue properties held as collateral on a

regular basis, at the Credit Committee’s discretion.

All other forms of security which are subject to fluctuation in value are re-assessed with a suitable

frequency ranging from daily to monthly (as a minimum).

Standard facility and security documents used have been prepared by external lawyers and are subject

to periodic review to ensure that they remain robust and enforceable. Non-standard loans are subject to

bespoke and independently commissioned documentation on a case by case basis.

KBWM also takes accepts collateral as part of reverse repo transactions with certain banking

counterparties. This is further explained in section seven of this Pillar 3 document.

KBI

KBI is not involved in any customer lending and therefore the Credit Risk that KBI is subject to is

predominantly the cash which it holds on it balance sheet. This is relatively small in the context of the

wider Group with balances of €20.6m as at 31st December 2014.

KBI mitigates its risk by holding a proportion of this cash within The Group by placing these as short term

deposits with KBWM. The remainder of the cash in line with the Risk Framework is kept short term and with

the approved external counterparties.

KBI has been disaggregated from changes to revised Risk Framework (and we have recently requested

revised counterparty limits in June 2015). It should be checked whether the reference to Risk Framework is

still appropriate or was still appropriate at end 2014.


33

5. Capital resources

Total Available Capital

As at 31st December 2014, The Group complied with all of the externally applicable capital requirements.

Details of the components of regulatory capital as at 31st December 2014 are summarised in the table

below:

Table 17

The disclosure above has been prepared based on the format set out in Annex IV of EU Commission

implementing regulation – EU 1423/2013. The Group does not have any transitional provisions and

therefore the figures are on a fully loaded basis.

Indicators of global systematic importance

The Financial Stability Board produces a list of Global Systemically Important Financial Institutions (“G-

SIFI”) on an annual basis. These institutions are identified as representing a high risk to the global economy

due to their size. G-SIFI banks will be required to hold additional capital buffers and be subject to

additional disclosures.

BHF KB has not been identified as G-SIFI as at 31st December 2014.

Description of Capital Instruments

Common Equity Tier 1 (CET 1) Capital

The CET1 Capital is made up of fully paid up share capital, share premium accounts, retained earnings

and other small reserves (predominantly revaluation reserve).


Own Funds

As at 31st December 2014

€m

Capital instruments and the related share premium accounts 767.9

Retained earnings 36.8

Accumulated other comprehensive income (and other reserves) (7.2)

Common Equity Tier 1 (CET 1) capital before regulatory adjustments (As per

Financial Statements) 797.6

Regulatory adjustments and deductions

Additional Value Adjustments (Prudential filters) (4.4)

Goodwill and intangible assets (net of related tax liability) (50.9)

Deferred tax assets that rely on future profitability not including temporary

differences (net of related tax liability) (2.2)

Defined-benefit pension fund assets (net of related tax liability) (5.3)

Total Regulatory Adjustments (62.8)

Fully Loaded Common Equity Tier 1 734.8

Additional Tier 1 (AT1) Capital 0.0

Fully Loaded Tier 1 Capital 734.8

Tier 2 (T2) Capital

Qualyfying T2 own funds instruments (including minority interests) issued by

subsidiaries and held by third parties 153.4

Fully Loaded Total Regulatory Capital 888.2


34

Tier 2 (T2) Capital

The T2 Capital as at 31st December 2014 is made up of subordinated notes issued by BHF as follows:

Table 18

Capital Management

The Group’s approach to capital management takes into account the regulatory, economic and

commercial environment it operates in. This involves regular monitoring of capital adequacy against

business plans and forecasts.

The Group maintains a strong capital base to support the development of its businesses and to ensure it

meets the regulatory requirements at all times.


Tier 2 (T2) Capital Instruments


Nominal

Value IFRS Value

Regulatory

Value

Dated subordinated liabilities Maturity Date €m €m €m

4.460% Fixed Rate Subordinated Notes 05/01/2015 3.0 4.6 0.0




























Total Dated Subordinated Liabilities

(Tier (T2) Capital) 203.5 243.1 153.4


35

6. Capital requirements An assessment of The Group’s capital adequacy is undertaken by the Board to ensure that the Group

has adequate and robust management strategies for dealing with the risks its businesses are exposed to.

This assessment is captured in The Group’s ICAAP and monitored as part of the monthly/daily capital risk

reporting processes. It is the Group’s policy to ensure that it and its entities have sufficient capital to meet

their regulatory requirements for all identified risks.

Internal Assessment of Capital Adequacy

The Group assesses the adequacy of its capital through its Internal Capital Adequacy Assessment Process

(“ICAAP”). Under the ICAAP, the Group considers whether the amount of capital held is sufficient to

meet its requirements.

Pillar 1 rules define a quantitative capital amount based on the specific positions at reporting date.

However, the Group in assessing the adequacy of available capital also undertakes a risk analysis to

consider whether there are any other risks that can best be mitigated by holding additional capital. This

includes risks that are either not considered under Pillar 1 or are risks that are considered under Pillar 1 but

where the generic Pillar 1 framework does not capture the risks adequately for the Group’s specific

business model and portfolio. This additional capital is considered under Pillar 2A.

In addition, the Group undertakes stress testing to identify whether additional capital should be held to

help ensure that the firm can continue to maintain an adequate level of capital under a number of

specific stress scenarios. The output from this analysis is the capital that should be held over and above

the Pillar 1 and Pillar 2A requirement and is referred to as Pillar 2B.

The Pillar 2A and Pillar 2B calculations are reviewed by the PRA and set as part of the firms Individual

Capital Guidance (“ICG”). The PRA will set this requirement following their assessment of the Group’s own

calculations, controls, governance, risk management & risk mitigating processes.

Once the guidance has been set the Group will monitor its capital adequacy against this guidance as

part of its risk and control framework.

Capital Buffers

By 2019, BHF KB has to achieve a CET1 ratio regulatory requirement of 7% plus a Pillar 2A add-on of 3.5%.

The 7% is made up of a CRR minimum CET1 ratio of 4.5% plus CCB of 2.5%, which will be phased in from

1st January 2016. As at 31st December 2014 the Group had a CET1 ratio requirement of 4.5% that will

increase by 0.625% per annum from 2016 through to 2019. In addition to this, from 2015 The Group will

need to meet its Pillar 2A add-on with 56% of CET1 capital.

Based on the current PRA guidelines the Group’s capital buffers are projected to be as follows:

Table 19


Capital Buffers

2014 - 2019 A B C = A + B D E = C/D

Reporting Period

Minimum

CET1 Ratio

Capital

Conservation

Buffer (CCB)

Total CET1 Ratio

requirement

excl Pillar 2A

Total Capital

Requirement

Ratio

% requirement

to be met with

CET1 capital

From 1st January 2014 4.500% 0.000% 4.500% 8.000% 56.250%

From 1st January 2015 4.500% 0.000% 4.500% 8.000% 56.250%

From 1st January 2016 4.500% 0.625% 5.125% 8.625% 59.420%

From 1st January 2017 4.500% 1.250% 5.750% 9.250% 62.162%

From 1st January 2018 4.500% 1.875% 6.375% 9.875% 64.557%

From 1st January 2019 4.500% 2.500% 7.000% 10.500% 66.667%


36

The Bank of England may require UK Banks to also hold Counter-Cyclical Capital Buffers (“CCCB”) and/or

Sectoral Capital Requirements (“SCR”). In addition to this CRD4 could require firms to hold a Systemic Risk

Buffer (“SRB”), however, BHF KB is not required to hold any of these buffers as at 31st December 2014.

The table below details the Group’s capital requirements and adequacy as at 31st December 2014:

Table 20


Capital Adequacy

As at 31st December 2014€m

Common Equity Tier 1 (CET 1) 797.6

Regulatory adjustments and deductions (62.8)

Fully Loaded CET 1 & Tier 1 Capital 734.8

Qualifying Tier 2 own funds instruments 153.4

Fully Loaded Total Regulatory Capital 888.2

RWA

Capital

Required

Credit & Counterparty Credit Risk - Standardised Approach (SA) €m €m

Central governments or central banks 1.8 0.1

Regional governments or local authorities 0.0 0.0

Public sector entities 8.4 0.7

Multilateral Development Banks 0.0 0.0

International Organisations 0.0 0.0

Institutions 665.1 53.2

Corporates 1,887.1 151.0

Retail 68.0 5.4

Secured by mortgages on immovable property 191.7 15.3

Exposures in default 19.2 1.5

Items associated with particular high risk 94.2 7.5

Covered bonds 43.7 3.5

Claims on institutions and corporates with a short-term credit assessment 34.1 2.7

Collective investments undertakings (CIU) 29.7 2.4

Equity 86.1 6.9

Other items 207.1 16.6

Securitisation positions SA 27.0 2.2

Total Credit & Counterparty Credit Risk 3,363.3 269.1

Settlement / Delivery Risk 1.9 0.2

Total Settlement / Delivery Risk 1.9 0.2

Market Risk - Standardised Approach (SA)

Traded debt instruments PRR 5.4 0.4

Foreign Exchange PRR 19.5 1.6

Market Risk - Internal Models (IM)

VaR model based PRR 53.7 4.3

SVaR model based PRR 125.7 10.1

Total Market Risk 204.4 16.4

Credit Valuation Adjustment (CVA)

Standardised method 32.8 2.6

Total CVA Risk 32.8 2.6

Operational Risk

Basic Indicator Approach (BIA) 731.1 58.5

Total Operational Risk 731.1 58.5

Total Capital Requirements 4,333.5 346.7

CET1 Capital Ratio 17.0%

Surplus of CET1 capital 539.8

T1 Capital Ratio 17.0%

Surplus of T1 capital 474.8

Total Capital Ratio 20.5%

Surplus of T1 capital 541.5

Capital

resources


37

7. Credit risk

Credit Risk Exposures

Credit risk is defined as the risk of loss due to a debtor's non-payment of a loan or other line of credit

(either the principal or interest or both). In the Group, credit risk predominantly arises within the banking

entities of BHF Bank, KBCIHL and KBBL as a result of direct lending to customers and the investment of

customer deposits into third party institutional assets. There is also a minimal degree of settlement risk.

The Group follows the standardised approach in the calculation of Pillar 1 credit risk requirements as set

out in Articles 111 to 141 of the CRR. This involves classification of exposures into defined categories and

applying standardised risk weightings.

The table below shows the Risk Weighted Assets (“RWA”) by exposure class for each business unit.

Table 21

Credit Limits for Exposures

The Banking entities within The Group assign credit limits against counterparties to ensure that exposures

do not exceed the Risk Appetite and stay within regulatory guidelines for both the entity itself and the

wider Group. These limits are monitored carefully and a variety of methods are used to agree credit limits

for counterparties.

BHF Kleinwort Benson Group (Management companies)

The largest credit limits at a Group level are set against banking counterparties and sovereigns. Each

business in the Group sets its own limits against these counterparties and where these are common

counterparties across the Group a limit is set at Group level to ensure that the combined exposure to

connected clients/counterparties do not exceed regulatory limits.


Credit & Counterparty Credit Risk Analysis

Risk Weighted Assets by Business unit


Credit & Counterparty Credit Risk - Standardised Approach (SA) €m €m €m €m

Central governments or central banks 1.8 0.0 0.0 1.8

Regional governments or local authorities 0.0 0.0 0.0 0.0

Public sector entities 4.4 4.0 0.0 8.4

Multilateral Development Banks 0.0 0.0 0.0 0.0

International Organisations 0.0 0.0 0.0 0.0

Institutions 482.5 180.1 2.6 665.1

Corporates 1,648.5 231.8 6.9 1,887.1

Retail 0.0 68.0 0.0 68.0

Secured by mortgages on immovable property 12.0 179.7 0.0 191.7

Exposures in default 7.5 11.7 0.0 19.2

Items associated with particular high risk 94.2 0.0 0.0 94.2

Covered bonds 43.7 0.0 0.0 43.7

Claims on institutions and corporates with a short-term credit assessment 34.1 0.0 0.0 34.1

Collective investments undertakings (CIU) 29.7 0.0 0.0 29.7

Equity 13.7 3.2 69.2 86.1

Other items 162.1 43.2 1.6 207.1

Securitisation positions SA 27.0 0.0 0.0 27.0

Total Credit & Counterparty Credit Risk 2,561.1 721.8 80.2 3,363.3

*1 Kleinwort Benson refers to the combination of KBBL, KBCIHL and KBI

BHF Bank

Kleinwort

Benson*1

BHF KB

Group (Mgt

co's)

BHF

Kleinwort

Benson

Group


38

BHF Bank

Lending business, which is an integral part of BHF’s product range, inevitably involves credit risks. The

Board of Managing Directors determines the credit risk strategy and thus sets out the central framework

for the assumption of credit risks and lending business in BHF.

By defining appropriate credit policy targets, the credit risk strategy sets the parameters for the

operations of the individual divisions as well as for the central credit risk management and finance units

as regards managing credit risks at client level and throughout the entire bank. The credit portfolio

strategy additionally restricts default risks at client, country, sector and portfolio level. In every area of

credit business, lending and pricing takes due account of the risk and return, i.e. the individual

creditworthiness of the client (rating), the collateral and the transaction structure, the overall business

relationship with the respective client and risk concentrations, if applicable. Transactions or business

relationships that could damage BHF’s reputation are strictly avoided.

BHF will only grant loans on the basis of standardised written loan applications and within the framework

of risk-based decision-making authorities delegated by the Board of Managing Directors. Credit decisions

are taken jointly by the front office and credit risk management areas. If a credit decision is taken by a

committee, credit risk management will always have the right to put in a final veto.

The strategic management of credit risk is performed at Group level by the risk committee. In line with The

Group’s business strategy and the credit risk strategy stipulated by the Board of Managing Directors, this

committee determines the credit policy targets. The main tasks of this committee include managing the

volume and structure of lending business as well as monitoring and limiting concentration risks.

Credit risk management is responsible for measuring and managing credit risks. Its tasks include, in

particular, the monitoring of credit risk exposures and commitments, credit - worthiness analyses, credit-

rating decisions and the approval of loans within the framework of credit-granting authorities. The credit

risk management department furthermore defines limits, draws up diversification strategies, further

develops the collateral standards and policies and is responsible for decision-making regarding lending

policy. It also monitors compliance with the regulatory requirements relating to lending business. On an

organizational level, a clear separation was made between the front office, and the back office, which

includes the credit risk managers and analysts in the central credit risk management unit. This separation

is adhered to throughout the bank, including the Board of Managing Directors.

Credit is granted and collateral monitored in accordance with the credit risk strategy, the credit policy

guidelines determined therein and further credit guidelines. The delegation of lending authority is based,

in particular, on the experience of the credit risk manager involved, the client segment, the rating, the

amount and the term of the loan as well as the type of transaction. The responsibility for making

provisions for risk lies with a provisions committee comprising staff from credit risk management and

finance.

BHF uses separate internal rating procedures for loans and advances granted to banks, corporate and

private clients. Each rating model includes quantitative and qualitative elements as well as assessments

as regards the borrower’s future development. Specific industry risks and external ratings are also taken

into account, as are current market indicators. The model parameters are calibrated using internal

historical default data as well as external information. The security provided is assessed by the collateral

department taking account of the recovery rates estimated by experts. In operational terms, credit risk

management is carried out on the basis of country, borrower, product and, if required, term-related risk

limits, as well as daily limit and position monitoring.

As part of the credit portfolio management, target-oriented strategies, measures and transactions are

used to optimize the risk/return profile of the credit portfolio and increase returns as well as limit migration

and concentration risks. An early-warning system has been installed to recognize the initial signs of a


39

critical situation arising among corporate clients and to identify potential migration risks. Furthermore,

monitoring concentration limits serves to limit and reduce concentration risks in lending business.

Concentrations are assessed at counterparty, country, sub-portfolio and sector level. Adherence to

internal limits and the large exposures limit is monitored intraday by a bank-wide monitoring system with

almost real-time processing of all the major credit relationships.


KBWM’s maximum exposure limits to governments, multilateral development banks and institutions are

stipulated in the KBWM Risk Appetite and Framework. This Framework describes and quantifies the

appetite with limits set for credit exposure, country and concentration risk.

Country risk exposure is limited to institutions domiciled principally in Western European democracies, USA,

Canada, Australia, New Zealand, Japan, and Hong Kong. (With specific additional countries that are

outside of the Risk Framework being individually approved by the Strategic Risk Committee).

The Group adopts a conservative approach to credit risk and will generally only undertake government,

multinational development bank or institutional exposures with a minimum Issuer Rating of Moody’s A3 (or

equivalent) as dictated in the Risk Appetite. The only exception to this are the Added Yield Portfolio,

where the minimum Issuer Rating is Moody’s B3, and also any high yield, illiquid investments which may

not be rated (and which each require approval from both the Strategic Risk Committee and the relevant

Boards).

Positions not in full conformance with the Risk Framework are required to be approved by the Credit

Committee on an exceptional basis and are subject to Board ratification.

The counterparties used by KBWM for the booking of foreign exchange and interest rate swaps are

subject to approval in accordance with the Risk Framework.

KBWM offers a range of private banking services to its clients that include mortgages, terms loans and

revolving credit lines all of which result in credit risk exposures. KBWM has adopted a Collateral Cover

Quality Matrix (CCQM) framework which assigns an internal rating and risk weighting to loans based on

the quality of the collateral provided. This acts as an internal grading system with the lowest risk loans

classified as Class A and the highest risk unsecured loans being classified as Class C1c.

The CCQM framework plays a part in agreeing an overall limit for a customer and assists in analysing and

monitoring their credit risk.

KBI

KBI sets out its credit limits as part of its Risk Appetite Frontier in which acceptable tolerance of risk is

defined. KBI does not have significant exposure to credit risk as its receivables are mainly short-term

trading items. Most of KBI’s credit risk arises when placing its cash reserves and deposits with external

counterparties.

KBI sets a low acceptable limit of risk tolerance at 2% of debtors on its receivables and a maximum

deposit with external counterparties of €4m (£3m).

Netting Arrangements

Counterparty credit risk can be further mitigated by holding netting arrangements so that receivables

can be offset against payables. These arrangements are predominantly against banking counterparties

which the Group have similar counteracting contracts to be able to net.


40

BHF Bank

To reduce the counterparty risk in the context of commercial transactions netting agreements are used in

BHF on derivatives and repurchase agreements. Standard framework agreements are used. The

conclusion of new contracts for the BHF is carried out by the legal department. The legal enforceability of

netting agreement in the different jurisdictions will be reviewed on the regular collection of legal opinions

As part of the collateralization of the derivatives business exclusively cash collateral and securities are

currently being taken in. Netting agreements on money receivables are not used in BHF.


KBWM has Global Master Repurchase Agreements (GMRA) in place with counterparties which allow the

netting of collateral on reverse repo exposures. This is all off balance sheet exposure netting.

KBWM does not have any on balance sheet netting arrangements or any other legally enforceable

on/off- balance sheet netting arrangements that would enable any credit mitigation.

Geographical Analysis of Exposures

The following table provides a geographic analysis of the Group’s Gross Exposures (before credit risk

mitigation and provisioning) by regulatory asset class as at 31st December 2014:

Table 22

Maturity Analysis of Exposures

The table below provides a residual maturity breakdown of the Group’s Gross Exposures (before credit risk

mitigation and provisioning) by regulatory asset class as at 31st December 2014:



Gross Exposure (Before Provisions and CRM) by Geographical location of the counterparty


United

Kingdom Germany Europe *1

North

America

Channel

Islands *2

Rest of the

World Total

Credit & Counterparty Credit Risk -

Standardised Approach (SA)€m €m €m €m €m €m €m

Central governments or central banks 465.9 160.1 187.6 91.5 0.0 40.4 945.5

Regional governments or local authorities 0.0 1,149.7 0.0 20.5 0.0 0.0 1,170.2

Public sector entities 0.0 297.5 17.3 3.4 0.0 0.0 318.2

Multilateral Development Banks 0.0 0.0 65.3 37.9 0.0 2.3 105.5

International Organisations 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Institutions 398.9 648.4 582.6 184.7 0.5 434.2 2,249.3

Corporates 181.2 2,043.9 807.7 39.6 117.2 1,170.7 4,360.2

Retail 84.4 0.0 19.6 1.8 5.3 5.7 116.7

Secured by mortgages on immovable

property 359.2 27.8 5.5 9.2 75.2 31.3 508.2

Exposures in default 4.6 17.0 0.8 0.9 5.5 44.2 73.0

Items associated with particular high risk 0.0 42.7 10.0 0.0 0.0 0.0 52.7

Covered bonds 24.2 185.0 227.6 0.0 0.0 0.0 436.7

Claims on institutions and corporates with

a short-term credit assessment 0.0 43.9 0.0 0.0 0.0 0.0 43.9

Collective investments undertakings (CIU) 0.0 248.8 10.2 0.0 0.0 0.0 259.0

Equity 3.2 9.6 25.0 0.0 0.0 2.2 39.9

Other items 17.5 109.6 30.7 0.0 17.3 0.0 175.0

Securitisation positions SA 0.0 0.0 27.0 0.0 0.0 0.0 27.0

Total Credit & Counterparty Credit Risk 1,539.1 4,983.8 2,016.8 389.5 221.0 1,730.9 10,881.1

*1 EEA Countries

*2 The UK Crown Dependencies


41

Table 23

Credit Risk Mitigation (“CRM”)

The tables below shows the collateral used for CRM by The Group as of 31st December 2014:

Table 24



Gross Exposure (Before Provisions and CRM) by residual maturity


On Demand

Less than 3

Months

Over 3

months less

than 1 year

Over 1 year

less than 3

years

Over 3 years

less than 5

years Over 5 years Total


Standardised Approach (SA) €m €m €m €m €m €m €m

Central governments or central banks 177.2 99.1 0.0 111.9 517.3 40.0 945.5

Regional governments or local authorities 0.0 22.0 5.0 161.7 490.0 491.5 1,170.2

Public sector entities 0.0 5.1 40.0 61.2 116.4 95.4 318.2

Multilateral Development Banks 0.0 7.9 15.1 12.9 69.6 0.0 105.5


Institutions 93.2 526.1 374.9 483.4 439.3 332.5 2,249.3

Corporates 1,116.7 891.9 657.6 715.8 549.9 428.3 4,360.2

Retail 17.2 1.7 57.0 19.1 15.9 5.8 116.7


property 0.0 26.6 88.9 300.2 83.2 9.2 508.2

Exposures in default 13.4 13.5 1.0 14.4 30.1 0.7 73.0


Covered bonds 0.0 29.8 89.0 68.4 125.0 124.6 436.7


a short-term credit assessment 40.4 3.2 0.2 0.0 0.0 0.0 43.9


Equity 0.0 0.0 0.0 0.0 0.0 39.9 39.9

Other items 112.4 0.0 0.0 0.0 0.0 62.6 175.0


Total Credit & Counterparty Credit Risk 1,570.5 1,626.9 1,355.7 1,949.1 2,436.7 1,942.1 10,881.1



Pre & post CRM and yearly averages


Year end 2014 Av'ge Year end 2014 Av'ge Year end 2014 Av'ge Year end 2014 Av'ge


Standardised Approach (SA) €m €m €m €m €m €m €m €m

Central governments or central banks 945.5 625.5 1,307.0 915.4 1.8 1.7 0.1 0.1

Regional governments or local authorities 1,170.2 1,196.1 1,170.2 1,196.1 0.0 0.1 0.0 0.0

Public sector entities 318.2 328.8 341.6 437.3 8.4 12.4 0.7 1.0

Multilateral Development Banks 105.5 172.7 239.0 272.6 0.0 1.6 0.0 0.1

International Organisations 0.0 14.9 0.0 14.9 0.0 0.0 0.0 0.0

Institutions 2,249.3 2,771.8 2,051.8 2,564.4 665.1 776.1 53.2 62.1

Corporates 4,360.2 4,159.2 2,032.0 1,999.2 1,887.1 1,850.7 151.0 148.1

Retail 116.7 119.4 73.7 72.2 68.0 66.9 5.4 5.4

Secured by mortgages on immovable property 508.2 483.2 508.2 482.6 191.7 200.5 15.3 16.0

Exposures in default 73.0 82.4 16.5 17.1 19.2 21.2 1.5 1.7

Items associated with particular high risk 52.7 50.3 52.7 50.3 94.2 92.5 7.5 7.4

Covered bonds 436.7 576.0 436.7 576.0 43.7 57.6 3.5 4.6

Claims on institutions and corporates with a

short-term credit assessment 43.9 48.7 22.7 24.1 34.1 36.2 2.7 2.9

Collective investments undertakings (CIU) 259.0 263.9 259.0 263.9 29.7 38.6 2.4 3.1

Equity 37.7 64.1 37.7 64.1 83.9 122.9 6.7 9.8

Other items 177.2 199.8 177.2 199.7 209.1 198.8 16.7 15.9

Securitisation positions SA 27.0 27.0 27.0 27.0 27.0 27.0 2.2 2.2

Total Credit & Counterparty Credit Risk 10,881.1 11,183.9 8,753.1 9,176.9 3,363.2 3,504.8 269.1 280.4

Gross Exposure Pre-

CRM & Provisions

Net Exposure Post-

CRM & ProvisionsRWA Capital Requirements


42

Table 25

Equity exposures not included in the trading book

The Group has a number of non-trading equity exposures which are held for various investment purposes.

Some of these are where the Group has participated in an Alternative Investment Fund (“AIF”),

Collective Investment Undertaking (“CIU”) or entered into a small investment of a listed company for

operational purposes. These equity positions are categorised as credit risk for capital requirements

calculations.

The table below shows the entities in which these investments are held across the Group and the capital

requirements for them:



Credit Risk Mitigation


Cash

collateral

(Funded)

Other

eligible

collateral

security

(Unfunded)

Inbound

guarantees

(Unfunded)

Total Credit

Risk

Mitigation

(CRM)

€m €m €m €m

Central governments or central banks 0.0 0.0 416.8 416.8

Regional governments or local authorities 0.0 0.0 0.0 0.0

Public sector entities 0.0 0.0 45.7 45.7

Multilateral Development Banks 0.0 0.0 145.6 145.6

International Organisations 0.0 0.0 0.0 0.0

Institutions 51.4 239.1 160.4 450.8

Corporates 27.8 527.2 (733.7) (178.7)

Retail 39.0 0.0 0.0 39.0

Secured by mortgages on immovable property 0.0 0.0 0.0 0.0

Exposures in default 0.0 0.0 (34.9) (34.9)

Items associated with particular high risk 0.0 0.0 0.0 0.0

Covered bonds 0.0 0.0 0.0 0.0

Claims on institutions and corporates with a short-

term credit assessment 0.0 0.0 0.0 0.0

Collective investments undertakings (CIU) 0.0 0.0 0.0 0.0

Equity 0.0 0.0 0.0 0.0

Other items 0.0 0.0 0.0 0.0

Securitisation positions SA 0.0 0.0 0.0 0.0

Total 118.1 766.3 (0.0) 884.4


43

Table 26

BHF Bank

Shareholder risk in the case of equity investments is described as equity risk. This risk defines the risk of loss

arising from the equity provided. It has been defined as a significant risk for the bank.

BHF’s equity investments portfolio mainly comprises strategic holdings used for implementing the business

model and for providing internal services.

The following table shows the carrying value of BHF’s equity instruments reported in the balance sheet as

at 31st December 2014 and their fair value pursuant to IFRS for the investment groups depending on the

objectives being pursued and the strategy:

Table 27

Managing and monitoring risks

At BHF, the ongoing monitoring and steering of the equity investments portfolio is performed in the

corporate development & investments department and the finance and credit risk management

divisions. All these units cooperate closely, exchange information and reconcile results on an ongoing

basis. As a rule, every equity investment is allocated to either Private Banking & Asset Management or to

Financial Markets & Corporates, which are then in charge of the equity investment allocated to them.

As part of the mandate management performed by the corporate development & investments

department, the business activities of the affiliated companies and equity investments are monitored

continuously. As a rule, members of BHF’s Board of Managing Directors will also be members of these

companies’ supervisory boards.

The economic performance of the affiliated companies included in BHF’s consolidated financial

statements is monitored by the finance department on a monthly basis as part of the bank-wide

Management Information System (MIS), using the value drivers specific to the respective business. This


Gross Exposure (Before Provisions and CRM) to Equities not included in the trading book


Gross Exposure

pre-CRM &

Provisions RWA

Capital

Requirements

Investment €m €m €m

BHF Bank 46.4 81.3 6.5

KBBL 1.3 3.2 0.3

BHF KB Group (Management companies) 29.0 69.2 5.5

Total Credit Risk for Equities 76.6 153.6 12.3

BHF Bank



Carrying values as

reported in

published financial

statements Fair Value

Investment €m €m

Funds 36.7 36.6

Other strategic holdings 0.6 0.6

Other investments 9.1 8.6

Total Credit Risk for Equities 46.4 45.8


44

task also comprises the comparison of budget/actual figures as well as the analysis and evaluation of key

performance trends. These companies are included in the bank’s planning process.

Annual financial statements and key performance figures are processed for the most important

companies which support BHF’s business model.

Risks are assessed in the corporate development & investments department in close liaison with the

finance department. The assessment is based on a categorisation of the equity investments by risk class

in combination with their reported financial statement values and/or book values. The categorisation is

made in particular on the basis of the business objective and the business activities of the company in

question. The risk capital for equity risk is calculated by multiplying the risk class (expert estimate) by the

exposure. If less than 50 % of the company’s capital is held, the exposure corresponds to the equity

investment’s book value plus any potential obligation to provide additional capital. If more than 50 % of

the respective company’s capital is held, the exposure corresponds to the total assets less the debt

capital provided by BHF. The risks arising from indirect equity investments are covered via the shareholder

risk from direct equity investments.

The most important equity investments are reviewed on a look-through basis and the equity risk is based

on their own equity investments. The degree of risk arising from equity investments is limited at divisional

and Group level and is monitored on a monthly basis.

The risk committee and the Board of Managing Directors are informed about the equity investments and

changes in the equity investments portfolio at least on a quarterly basis.

Valuation in accordance with the Commercial Code

The investments in the banking book of BHF comprise exclusively unlisted equity instruments that are

included in the IFRS consolidated financial statements as available for sale instruments (AFS).

Investments in the AFS portfolio are measured at fair value if one has been determined. Investments

whose fair value cannot be reliably measured are accounted for at cost.

Regulatory evaluation

The following comments refer exclusively to investments that are not consolidated but are recognised as

risk-weighted assets. Under the CRSA approach these investments are generally reported in the asset

class "equity investments" and in special cases in the new asset class "positions associated with

particularly high risks".

Income from investment instruments

In the reporting year 3 companies were sold or wound up. This resulted in income of €17.5m (£13.6m).

Revaluation gains of €1.1m (£0.9m) are included in the investments held in accordance with IFRS.


45

BHF KB Group (Management companies) & Kleinwort Benson Wealth Management (“KBWM”)

Strategic objectives

The BHF KB Group management (Previously RHJ International SA) historically held a portfolio of

investments which are now regarded as “legacy” holdings. These were acquired prior to the Groups

strategic change in 2010 to transform itself into a focused financial services group.

Since 2010 the BHF KB Group management companies have divested most of its legacy industrial

holdings and acquired financial services companies including Kleinwort Benson & BHF-BANK, which are

wholly-owned and fully consolidated as well as certain non-controlling investments in financial services

companies.

Accounting techniques and valuations used

The only remaining non-controlling investment in financial services is a 27.8% holding in Quirin Bank which

is valued at €17.9m (£13.9m) as at 31st December 2014. This investment is equity accounted while all the

other investments are shown at fair value through profit and loss.

The table below shows the carrying and fair value of BHF KB Group (Management companies) & KBBL’s

equity investments as at 31st December 2014:

Table 28

Impairment of Financial Assets and Past Due Items

The Group is subject to credit risk impairments and loans becoming past due.

A loan is considered past due where contractual interest or principle payments which are due are not

received on their contractual dates. If a loan is more than 90 days in arrears then an assessment of

default would need to be considered as part of CRR Article 178.

The Group considers evidence of impairment for financial assets measured at amortised cost (loans and

receivables and held to maturity investment securities) at both a specific asset and collective level. All

individually significant assets are assessed for specific impairment. Those found not to be specifically

impaired are then collectively assessed for any impairment that has been incurred but not yet identified.

Assets that are not individually significant are collectively assessed for impairment by grouping together

assets with similar risk characteristics.

In assessing collective impairment, The Group uses historical trends of the probability of default, the timing

of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether

current economic and credit conditions are such that the actual losses are likely to be greater or less

than suggested by historical trends.

BHF Kleinwort Benson Group (Management Companies & KBBL)



Carrying values as

reported in

published financial

statements Fair Value

Investment €m €m

Funds 5.9 5.9

Other strategic holdings 24.4 24.4

Other investments 0.0 0.0

Total Credit Risk for Equities 30.2 30.2


46

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the

difference between its carrying amount and the present value of the estimated future cash flows at the

asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance

account against loans and receivables or held to maturity investment securities. Interest on the impaired

asset continues to be recognised. When an event occurring after the impairment was recognised causes

the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or

loss.

The table below shows The Group’s Credit Risk assets and how impairments are applied to get to a net

exposure:

Table 29



Gross and Net Exposures - Application of Credit Risk Mitigation & Impairments


Gross

Exposure

Individual

Impairment

Collective

Impairment

Credit Risk

Mitigation

Credit

Substitution

Off Balance

Sheet

Conversion

Factor

Exposure

after

Impairment

and CRM

€m €m €m €m €m €m €m

Central governments or central banks 945.5 0.0 0.0 0.0 416.8 (55.3) 1,307.0

Regional governments or local authorities 1,170.2 0.0 0.0 0.0 0.0 0.0 1,170.2

Public sector entities 318.2 0.0 0.0 0.0 45.7 (22.4) 341.6

Multilateral Development Banks 105.5 0.0 0.0 0.0 145.6 (12.1) 239.0


Institutions 2,249.3 0.0 0.0 (290.4) 160.4 (67.4) 2,051.8

Corporates 4,360.2 0.0 0.0 (554.9) (733.7) (1,039.6) 2,032.0

Retail 116.7 0.0 0.0 (39.0) 0.0 (4.1) 73.7

Secured by mortgages on immovable property 508.2 0.0 0.0 0.0 0.0 (0.0) 508.2

Exposures in default 73.0 (20.7) 0.0 (0.0) (34.9) (0.8) 16.5


Covered bonds 436.7 0.0 0.0 0.0 0.0 0.0 436.7


short-term credit assessment 43.9 0.0 0.0 0.0 0.0 (21.1) 22.7


Equity 37.7 0.0 0.0 0.0 0.0 0.0 37.7

Other items 177.2 0.0 0.0 0.0 0.0 0.0 177.2


Totals 10,881.1 (20.7) 0.0 (884.4) (0.0) (1,222.9) 8,753.1


47

The table below shoes The Group’s past due and impairments split by exposure category:

Table 30

Neither past due or impaired

These are instruments where contractual interest or principal payments are within agreed terms.

Past due but not impaired financial instruments

These are instruments where contractual interest or principal payments are past due but the Group

believes that specific impairment is not appropriate on the basis of the level of security/capital available

and/or the stage of collection of amounts owed to The Group.

Impaired loans

These are instruments for which the Group determines that it is probable that it will be unable to collect

all principal and interest due according to the contractual terms of the financial instrument agreement(s).

The Group recognises a provision against these amounts which represents its best estimate of amounts

that may not be recovered.



Gross Exposure (Before Provisions and CRM) to customers and banks - Past due and impairments


Neither past

due or

impaired

Past due but

not impaired Individual Collective Total Loans


Standardised Approach (SA) €m €m €m €m €m

Central governments or central banks 945.5 0.0 0.0 0.0 945.5

Regional governments or local authorities 1,170.2 0.0 0.0 0.0 1,170.2

Public sector entities 318.2 0.0 0.0 0.0 318.2

Multilateral Development Banks 105.5 0.0 0.0 0.0 105.5

International Organisations 0.0 0.0 0.0 0.0 0.0

Institutions 2,249.3 0.0 0.0 0.0 2,249.3

Corporates 4,353.5 6.7 0.0 0.0 4,360.2

Retail 116.7 0.0 0.0 0.0 116.7

Secured by mortgages on immovable property 508.2 0.0 0.0 0.0 508.2

Exposures in default 6.8 10.4 55.7 0.0 73.0

Items associated with particular high risk 52.7 0.0 0.0 0.0 52.7

Covered bonds 436.7 0.0 0.0 0.0 436.7


short-term credit assessment 43.9 0.0 0.0 0.0 43.9

Collective investments undertakings (CIU) 259.0 0.0 0.0 0.0 259.0

Equity 39.9 0.0 0.0 0.0 39.9

Other items 175.0 0.0 0.0 0.0 175.0

Securitisation positions SA 27.0 0.0 0.0 0.0 27.0

Totals 10,808.2 17.1 55.7 0.0 10,881.1

Impaired loans


48

The table below shoes the Group’s past due and impaired assets by geographical location:

Table 31

The table below shows show’s the movement of the impairments during 2014.

Table 32



Gross Exposure (Before Provisions and CRM) to customers and banks - Arrears by geographical location


United

Kingdom Germany Europe *1

North

America

Channel

Islands *2

Rest of the

World Total

€m €m €m €m €m €m €m

Neither past due or impaired loans 1,534.6 4,963.7 2,016.0 388.6 215.4 1,689.9 10,808.2

Past due but not impaired loans 3.0 5.5 0.8 0.9 5.5 1.4 17.1

Individually impaired loans 1.4 14.6 0.0 0.0 0.0 39.6 55.7

Collectively impaired loans 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Credit & Counterparty Credit Risk 1,539.1 4,983.8 2,016.8 389.5 221.0 1,730.9 10,881.1

*1 EEA Countries

*2 The UK Crown Dependencies



Credit risk - Movements for impairments and provisions against loans losses


Specific

Collective /

General Total

€m €m €m

As at 31st December 2013 (1.0) 0.0 (1.0)

Acquisitions*1 (21.5) (14.1) (35.6)

Charges against profits (0.1) 0.0 (0.1)

Recoveries 5.0 1.0 6.0

Amounts written off (3.3) (2.1) (5.5)

Other small movements 0.3 0.0 0.3

As at 31st December 2014 (20.8) (15.2) (36.0)

*1 During the year the group acquired BHF Bank and these balances were taken on as

part of this acquisition


49

The following table analyses impairments against investments in subsidiaries as of 31st December 2014.

Table 33

Use of External Credit Assessment Institutions (“ECAI”)

The Group uses nominated ECAI’s as part of the standardised approach for credit risk to determine risk

weightings applied to rated counterparties.

The Group currently uses Moody’s, Standard & Poor’s & Fitch rating agencies to determine the external

rating of specific counterparties. The Group previously used only Moody’s as a nominated ECAI but have

now adopted these agencies as part of the acquisition of BHF Bank.

In addition to the above, BHF uses credit assessments of Export Credit Agency "AGA Länderklassifizierung"

within the meaning of Article 137 CRR predominantly for its securitisation position.

The Group uses ECAI risk assessments as part of the determination of risk weightings for the following asset

classes:

Central governments or central banks

Regional governments or local authorities

Public sector entities

Multinational development banks

International organisations

Institutions

Claims on institutions and corporates with a short-term credit assessment

Corporates

Covered bonds

The table below shows the external ratings of the nominated ECAI’s which The Group uses and their

association with CRR Part Three, Title II, Chapter 2 and how this is then used for risk weighting of relevant

exposure classes.



Impairments and movement of Equity Investments


Specific

Collective /

General Total

€m €m €m

Equity investments as at 31st December 2013 53.6 0.0 53.6

Acquisitions 46.4 0.0 46.4 *1

Charges against profits (2.9) 0.0 (2.9)

Disposals (18.8) 0.0 (18.8)

Amounts written off 0.0 0.0 0.0

Exchange rate movements 0.0 0.0 0.0

Other small movements (1.6) 0.0 (1.6)

Equity investments as at 31st December 2014 76.6 0.0 76.6

*1 During the year the group acquired BHF Bank and these positions were taken on as part of this


50

Table 34

The Group uses various system tools to upload Issue and Issuer ratings to the specific counterparties and

assets on the balance sheet. The Group would apply the Issuer rating for exposures which are not debt

securities and issue ratings for exposures which are.

The Group would use the most prudent rating available to ensure that the highest risk weighting possible

is assigned to an exposure in the event that 2 or more ECAI credit assessments are available for the same

exposure. The Group follows the rules set out in Articles 138 to 141 to map ECAI credit assessments to

exposures.

The table below shows The Group’s Gross Exposures (Before credit risk mitigation and provisioning) as at

31st December 2014 and where ECAI credit assessments have been used for risk weighting purposes:

Table 35

Credit & Counterparty Risk Table

Credit

Step Moody's

Standard &

Poor's Fitch Rated Unrated Unrated > 3 Mths < 3 Mths

Central

governments

or central

banks

Public sector

entities

1 Aaa AAA AAA 20% 100% 20% 20% 20% 0% 20%

1 Aa1 AA+ AA+ 20% 100% 20% 20% 20% 0% 20%

1 Aa2 AA AA 20% 100% 20% 20% 20% 0% 20%

1 Aa3 AA- AA- 20% 100% 20% 20% 20% 0% 20%

2 A1 A+ A+ 50% 100% 50% 50% 20% 20% 50%

2 A2 A A 50% 100% 50% 50% 20% 20% 50%

2 A3 A- A- 50% 100% 50% 50% 20% 20% 50%

3 Baa1 BBB+ BBB+ 100% 100% 100% 50% 20% 50% 100%

3 Baa2 BBB BBB 100% 100% 100% 50% 20% 50% 100%

3 Baa3 BBB- BBB- 100% 100% 100% 50% 20% 50% 100%

4 Ba1 BB+ BB+ 100% 100% 100% 100% 50% 100% 100%

4 Ba2 BB BB 100% 100% 100% 100% 50% 100% 100%

4 Ba3 BB- BB- 100% 100% 100% 100% 50% 100% 100%

5 B1 B+ B+ 150% 100% 100% 100% 50% 100% 100%

5 B2 B B 150% 100% 100% 100% 50% 100% 100%

5 B3 B- B- 150% 100% 100% 100% 50% 100% 100%

6 Caa1 CCC+ CCC 150% 100% 150% 150% 150% 150% 150%

6 Caa2 CCC CCC 150% 100% 150% 150% 150% 150% 150%

6 Caa3 CCC- CCC 150% 100% 150% 150% 150% 150% 150%

Institutions (Including Banks)Corporates



Gross Exposure (Before Provisions and CRM) by credit exposure class


Credit

Quality

Step 1

Credit

Quality

Step 2

Credit

Quality

Step 3

Credit

Quality

Step 4

Credit

Quality

Step 5

Credit

Quality

Step 6

Std'ised

Regulatory

Treatment

Applied

Total

(Pre CRM

&

Provisions)

Credit Risk

Mitigation

(CRM) Provisons

Off

Balance

Sheet

Conversio

n Factor

Net

Exposure

after CRM


Standardised Approach (SA) €m €m €m €m €m €m €m €m €m €m €m €m

Central governments or central banks 826.6 0.0 0.4 0.0 40.0 0.0 78.4 945.5 416.8 0.0 (55.3) 1,307.0

Regional governments or local authorities 20.5 0.0 0.0 0.0 0.0 0.0 1,149.7 1,170.2 0.0 0.0 0.0 1,170.2

Public sector entities 316.5 0.0 0.0 0.0 0.0 0.0 1.7 318.2 45.7 0.0 (22.4) 341.6

Multilateral Development Banks 101.8 0.0 0.0 0.0 0.0 0.0 3.7 105.5 145.6 0.0 (12.1) 239.0

International Organisations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Institutions 744.8 478.7 249.4 136.9 0.0 0.0 639.4 2,249.3 (130.1) 0.0 (67.4) 2,051.8

Corporates 57.0 205.2 139.7 19.9 3.6 0.0 3,934.8 4,360.2 (1,288.6) 0.0 (1,039.6) 2,032.0

Retail 0.0 0.0 0.0 0.0 0.0 0.0 116.7 116.7 (39.0) 0.0 (4.1) 73.7


property 0.0 0.0 0.0 0.0 0.0 0.0 508.2 508.2 0.0 0.0 (0.0) 508.2

Exposures in default 0.0 0.0 0.0 0.0 0.0 0.0 73.0 73.0 (34.9) (20.7) (0.8) 16.5

Items associated with particular high risk 0.0 0.0 0.0 0.0 0.0 0.0 52.7 52.7 0.0 0.0 0.0 52.7

Covered bonds 436.7 0.0 0.0 0.0 0.0 0.0 0.0 436.7 0.0 0.0 0.0 436.7


a short-term credit assessment 0.0 0.0 0.0 0.0 43.9 0.0 0.0 43.9 0.0 0.0 (21.1) 22.7

Collective investments undertakings (CIU) 0.0 0.0 0.0 0.0 0.0 0.0 259.0 259.0 0.0 0.0 0.0 259.0

Equity 0.0 0.0 0.0 0.0 0.0 0.0 39.9 39.9 0.0 0.0 0.0 39.9

Other items 0.0 0.0 0.0 0.0 0.0 0.0 175.0 175.0 0.0 0.0 0.0 175.0

Securitisation positions SA 0.0 0.0 0.0 0.0 0.0 0.0 27.0 27.0 0.0 0.0 0.0 27.0

Total Credit & Counterparty Credit Risk 2,504.1 683.9 389.6 156.8 87.5 0.0 7,059.2 10,881.1 (884.4) (20.7) (1,222.9) 8,753.1

Exposure where ECAI ratings have been applied


51

8. Counterparty Credit Risk Counterparty credit risk is the risk of financial loss if a customer or counterparty fails to meet a payment

obligation under a contract.

The Group incurs counterparty credit risk within its banking entities where derivative contracts are taken

out with other counterparties for the purpose of hedging or trading. The Group monitors its counterparty

credit risk exposures against limits that have been set which is covered in section 7.2 of this Pillar 3

disclosure.

Settlement Risk

Settlement Risk is defined as the risk that a settlement in a transfer system does not take place as

expected. Generally, this happens because one party defaults on its clearing obligations to one or more

counterparties. This could be caused by an operational issue, a shortage of stock, liquidity issues or

insolvency.

The Group continues to take a prudent approach to the calculation and assignment of settlement risk.

Trading for underlying clients is performed on an agency basis and, given the nature of the client base, is

generally with stock or cash already held in custody. Further to the formal assessments provided for each

approved counterparty broker, additional monitoring and control is performed for the assessment and

assignment of settlement risk.

Settlement Risk within The Group is principally in relation to Treasury activities.

Derivatives & Financial Contracts

Counterparty risk arises when the bank enters into an off-balance sheet “Over-the-Counter” (“OTC”)

derivative contracts with another counterparty that matures in a future period. There is a risk that the

counterparty may not be able to honour this contract. The Group uses approved market counterparties

for transacting foreign exchange and interest rate swaps in order to manage risk in treasury book

positions. These transactions, including associated client initiated deals, gives rise to a counterparty risk

and creates an exposure to the bank.

In the event that a counterparty does not honour a contract, The Group may suffer a loss and incur a

cost to replace this contract with another counterparty. These exposures give rise to a Pillar 1 capital

charge. The Group adopts the Mark-to-Market Method to calculate its counterparty credit risk in

accordance with CRR Article 274.

Counterparty Credit Limits

The Group may suffer losses if a counterparty does not honour a contract therefore all counterparties are

given limits to control the level of exposure The Group has against them.

Counterparty limits in relation to Derivatives and Financial Contracts are set as part of an overall limit for a

counterparty which covers all exposures including credit risk. This is covered in Section 7.2 of this Pillar 3

document.

Wrong-Way risk

Wrong-way risk is defined as the risk that occurs when an exposure to one counterparty is closely

correlated with the credit quality of another counterparty. This risk could happen if The Group took out a

credit derivative with a counterparty to hedge an exposure and also has a different exposure with the

same counterparty which the credit derivative was taken out with.


52

The Group does not have any credit derivative transactions and closely monitors all its counterparties

which it engages with to ensure that risks such as this are minimised where possible. The Board do not

consider this as a material risk due to the nature of the business and transactions which BHF KB engages

in.

Counterparty Credit Risk Mitigation

The Group secures collateral and applies netting against counterparty credit risk on derivative contracts.

This is explained in more detail in section 4.3 & 7.2 of this Pillar 3 document.

The Group does not have any credit derivative hedges/transactions or contracts where exposures with

protection are linked to them.

The table below shows The Groups exposure to counterparty credit risk as at 31st December 2014 showing

any netting, credit risk mitigation and net exposure. This is in accordance with Part three, Title II, and

Chapter 6 of the CRR:

Table 36

The exposures above are incorporated into the overall credit risk tables shown in Section 7 of this Pillar 3

document. These exposures will be included within the “institutions” exposure class.

The Group’s financial contracts are with well rated counterparties and are usually short term in nature.

Most of the contracts are Interest Rate Swaps which are used for hedging the interest rate risk in the

banking book. The large size in the nominal values of the contracts when compared to the exposure

value is partly due to the fact these swaps are offsetting each other and partly due to the counterparties

attracting low credit conversion factors, resulting in negligible Pillar 1 capital requirements. The net

exposure to counterparty credit risk represents 2% of The Groups overall credit risk requirement.


Counterparty Credit Risk by financial contract and reporting approach


Gross

Nominal

Value of

Contracts

Gross

Positive

Fair Value

of

Contracts

Potential

Future

Credit

Exposure

Netting

Benefits

Net

Current

Credit

Exposure

Collateral

Held Provisions

Net

Exposure

Mark to Market method €m €m €m €m €m €m €m €m

Financial Contract Type

Interest Rate Contracts 15,988.2 639.0 83.2 (528.1) 194.1 (101.8) 0.0 92.3

Foreign Currency Contracts 2,172.8 23.0 26.5 0.0 49.5 (1.0) 0.0 48.5

Equities Contracts 1,156.6 20.1 69.5 0.0 89.6 (51.8) 0.0 37.8

Precious Metals & Commodities Contracts 17.3 0.0 1.7 0.0 1.7 (0.8) 0.0 1.0

Securities Financing Transactions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Credit Derivatives 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Any other contracts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Mark to Market Method 19,335.0 682.1 181.0 (528.1) 334.9 (155.4) 0.0 179.5

Potential

Future

Credit

Exposure

Gross

Positive

Fair Value

of

Contracts

Potential

Future

Credit

Exposure

Netting

Benefits

Net

Current

Credit

Exposure

Collateral

Held Provisions

EAD post-

CRM

Internal Method £m £m £m £m £m £m £m £m

Financial Contract Type

Interest Rate Contracts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Foreign Currency Contracts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Equities Contracts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Precious Metals & Commodities Contracts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Securities Financing Transactions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Credit Derivatives 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Any other contracts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Internal Method 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0


53

Potential Collateral Obligations

BHF has a long term credit rating of BBB- awarded by Fitch and is the only entity within The Group which

carries an ECAI rating. BHF has a limited number of financial contracts with counterparties which

stipulate that in the event that this rating was to be downgraded that there will be an increased

collateral requirement.

This is the case together with 4 guarantees that have been given in the context of revolving credit

facilities. The amount of potential obligation can only be estimated, since the contractual agreements

do not clearly differentiate between actual additional collateral obligations and a simple necessity of

acceptance in case of a rating downgrade.

Together with OTC derivatives, there are no further obligations agreed upon.


54

9. Exposure to Securitisation Positions Securitisation is the process of pooling various types of contractual debt such as mortgages, credit card

loans or other assets which generate receivables and selling their related cash flows to a third party

investor as a securitised position.

In connection with securitisations, an institution may act as an originator, sponsor or investor as defined by

the regulations. For regulatory purposes there are thus different consequences and treatments

depending on the role of the institution. The only entity within The Group which holds such a position is

BHF.

BHF is currently active in the market solely as an investor. In the role of investor, it buys securitised assets

from other financial institutions. All receivables acquired in this context are due from domestic

companies. A credit insurance policy is taken out for the securitisation position which can be counted as

a risk-mitigating guarantee for each receivable.

When new securitisation positions are acquired, specific internal requirements must be observed in order

to meet the special requirements for securitisation positions with respect to due diligence and the

deductible in accordance with Articles 405 and 406 of the CRR. The internal processes to monitor the risk

profile of securitisation positions is based both on the provisions of the CRR and the principles of MaRisk.

Both before investing in a securitisation and with existing positions, it is ensured that all material relevant

data and documents are collected, analysed and evaluated continuously and promptly. In general, the

competent market area is responsible for obtaining the required data.

As a CRSA institution, BHF determines the capital requirements for securitisation positions in accordance

with the CRR’s rules for CRSA securitisation positions. As no external rating exists for the existing

securitisation position, the Bank uses the look-through approach in accordance with Article 253 of the

CRR. The risk weighting of the securitisation position is determined by the average risk weighting of the

securitised receivables.

The Bank’s securitisation transaction is maintained in the banking book and The Group does not have

any trading book positions. No impairments were necessary in 2014.

The table below shows the approaches to calculating RWA for The Group on securitisation positions:

Table 37

The table below shows the securitisations in the year including any gains or losses and whether these

were Traditional or Synthetic:


Securitisations by approach

As at 31st December 2014Exposure

value RWAs

Capital

Requirement

€m €m €m

Approach

Standardised 27.0 27.0 2.2

Ratings based 0.0 0.0 0.0

Internal Ratings Based (IRB) 0.0 0.0 0.0

Supervisory method 0.0 0.0 0.0

Totals 27.0 27.0 2.2

Non-Trading Book


55

Table 38

The only securitisation The Group has been taken up in the year was in BHF Bank which was not part of

the Group in 2013.

The table below shows the securitisation positions during the year where the Group acted as Investor,

Originator or Sponsor:

Table 39


Securitisation during the year


Traditional Synthetic

Total

Movement

Gains /

Losses on

sale

€m €m €m €m €m €m

Originator

Mortgages 0.0 0.0 0.0 0.0 0.0 0.0

Loans to Corporates or SMEs 0.0 27.0 0.0 27.0 0.0 27.0

Consumer loans 0.0 0.0 0.0 0.0 0.0 0.0

Trade receivables 0.0 0.0 0.0 0.0 0.0 0.0

Securitisations / Re-securitisations 0.0 0.0 0.0 0.0 0.0 0.0

Other assets 0.0 0.0 0.0 0.0 0.0 0.0

Totals 0.0 27.0 0.0 27.0 0.0 27.0

Non-Trading Book

As at 31st

December

2013

Movement in the year

As at 31st

December

2014


Securitisation during the year


As

originator As sponsor As investor

Total

Movement

Gains /

Losses on

sale

€m €m €m €m €m €m €m

Originator

Mortgages 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Loans to Corporates or SMEs 0.0 0.0 0.0 27.0 27.0 0.0 27.0

Consumer loans 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Trade receivables 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Securitisations / Re-securitisations 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Totals 0.0 0.0 0.0 27.0 27.0 0.0 27.0

Non-Trading Book

As at 31st

December

2013

Movement in the year

As at 31st

December

2014


56

There were no assets awaiting securitisation as at 31st December 2014:

Table 40

The table below demonstrates that no securitisation positions were past due or impaired as at 31st

December 2014:

Table 41


Assets awaiting securitisation


Non-Trading

Book

Trading

Book

€m €m

Originator

Mortgages 0.0 0.0

Loans to Corporates or SMEs 0.0 0.0

Consumer loans 0.0 0.0

Trade receivables 0.0 0.0

Securitisations / Re-securitisations 0.0 0.0

Other assets 0.0 0.0

Total IRB 0.0 0.0


Securitisation amounts and impairments


Traditional Synthetic

Total Non-

Trading

Book

of which

past due

Impairments

Recognised

€m €m €m €m €m

Originator

Mortgages 0.0 0.0 0.0 0.0 0.0

Loans to Corporates or SMEs 27.0 0.0 27.0 0.0 0.0

Consumer loans 0.0 0.0 0.0 0.0 0.0

Trade receivables 0.0 0.0 0.0 0.0 0.0

Securitisations / Re-securitisations 0.0 0.0 0.0 0.0 0.0

Other assets 0.0 0.0 0.0 0.0 0.0

Totals 27.0 0.0 27.0 0.0 0.0

Non-Trading Book


57

The table below shows balance of securitisation positions as at 31st December 2014 by Originator, Sponsor

and Investor:

Table 42

The only securitisation position that the Group had as at 31st December 2014 was not deducted from

capital resources nor was it risk weighted at 1,250% as seen below:

Table 43


Securitisation exposure value by exposure class


As


Total Non-

Trading

Book

€m €m €m €m

Originator

Mortgages 0.0 0.0 0.0 0.0

Loans to Corporates or SMEs 0.0 0.0 27.0 27.0

Consumer loans 0.0 0.0 0.0 0.0

Trade receivables 0.0 0.0 0.0 0.0

Securitisations / Re-securitisations 0.0 0.0 0.0 0.0

Other assets 0.0 0.0 0.0 0.0

Totals 0.0 0.0 27.0 27.0

Non-Trading Book


Securitisation exposure by risk weighting


As


Total Non-

Trading

Book

As


Total

Trading

Book

€m €m €m €m €m €m €m €m

Originator

Less than or equal to 10% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

> 10% <= 20% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

> 20% <= 50% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

> 50% <= 100% 0.0 0.0 27.0 27.0 0.0 0.0 2.2 2.2

> 100% <= 650% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

> 650% <= 1250% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Deduction from capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total IRB 0.0 0.0 27.0 27.0 0.0 0.0 2.2 2.2

Exposure Value Capital Requirement

Non-Trading Book


58

The table below shows the Geographical split of securitisation positions as at 31st December 2014:

Table 44


Securitisation exposure value by geography


United

Kingdom Germany Europe

North

America

Channel

Islands

Rest of the

World

Total

Trading

Book

€m €m €m €m €m €m €m

Originator

Mortgages 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Loans to Corporates or SMEs 0.0 27.0 0.0 0.0 0.0 0.0 27.0

Consumer loans 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Trade receivables 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Securitisations / Re-securitisations 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Totals 0.0 27.0 0.0 0.0 0.0 0.0 27.0

Non-Trading Book


59

10. Market Risk Market risk is defined as the risk that the value of a financial asset or liability will increase or decrease due

to changes in market factors. The most significant proportion of market risk within The Group is within BHF

Bank, KBCIHL & KBBL. KBI and the BHF KB Group management companies do not hold any market risk

positions apart from FX risk which arises as part of the balance sheet composition which is very small.

The standard market risk factors which The Group is exposed to are as follows:

Table 45

These market risk factors contribute in fluctuations of the market value in The Groups assets, liabilities and

currency positions which can result in a loss. Most of The Groups assets and liabilities are predominantly

interest bearing and therefore The Group is also exposed to interest rate fluctuations which can result in a

loss to the firm.

Each entity within The Group manages their market risk as part of their individual risk framework.

Market Risk - BHF Bank

BHF uses an Internal Market Risk Model for risk management as well as for quantification of own funds

requirements according to article 366 of the CRR. The process for measurement and supervision of

market risk is identical for all the portfolios in the trading and banking book. This leads to maximum

transparency from the single portfolio level up to BHF Bank as a whole.

The internal risk management is based on a Value-at-Risk (VaR) approach with a confidence level of 99%

and a holding period of 1 day for the trading book with the exception of some strategic positions which

are held for up to 1 month.

VaR calculations are based on volatilities that are updated daily and calculated from the time series

stored in BHF’s in-house market database. The VaR number for the linear part of general market risk is

given by a variance-covariance-model and for the non-linear part (e.g. out of options) by Monte Carlo

simulations. In addition to this, a stressed VaR (SVaR) calculation is also required.

The final own funds requirement using the internal VaR approach is then defined by the sum of the own

funds requirements of both Standard-VaR and Stressed-VaR according to article 364 of the CRR.

Daily stress scenarios are a vital supplement of VaR calculations. The scenarios are not only composed of

shifts of the basic risk-factors (e.g fx-rates, stock prices, interest rate curves and credit spreads) but also of

the implied volatility, and are always performed in the way of a full valuation of each single position. The

results for the scenarios are limited by the allocation of capital; the usage of limits is monitored daily. The

design of these scenarios is subject to at least an annual review. In addition to these standard scenarios,

BHF performs stress tests that use data from different historical financial crises (e.g. euro-crisis, subprime-

crisis 2007/2008, 1987 crash etc) as well as portfolio-specific stress tests. These non-standard stress tests are

done on a monthly basis.


Market Risk - Main risks

Risk Type Description

Equity risk The risk that stock prices will change

Interest rate risk The risk that interest rates will change

Currency risk The risk that foreign exchange rates will change

Commodity risk The risk that commodity (i.e grains, metals, etc) will change


60

In order to validate the quality of the risk model, VaR values are compared to the real revaluation results

(back-testing). Article 366 of the CRR stipulates that back-testing on hypothetical changes in the

portfolio's value is based on a comparison between the portfolio's end-of-day value and, assuming

unchanged positions, its value at the end of the subsequent day. Back-testing on actual changes in the

portfolio's value is based on a comparison between the portfolio's end-of-day value and its actual value

at the end of the subsequent day excluding fees, commissions, and net interest income. The back-testing

results (i.e. the comparison of VaR-overshootings to the statistically expected number of overshootings), is

used to validate the risk model internally and externally.

The table below shows the supervisory back-testing history over 2014 as required by CRR Article 366:

Table 46

The table below shows the high, low, mean and end-of-period calculation for the period ending

31st December 2014:

Table 47

BHF has neither a model for incremental default & migration risk nor for the specific risk of the correlation

trading portfolio.

The scope of permissions given to BHF to use an Internal Market Risk Model covers all of the following

market risk components:

general risk of equity instruments;

specific risk of equity instruments;

general risk of debt instruments;


Market Risk - VaR & SVaR Back-Testing


high low mean

end-of-

period

€m €m €m €m

VaR 1.8 0.5 1.1 1.6

SVaR model based PRR 3.7 1.3 2.6 3.1


61

foreign-exchange risk;

commodities risk;

including Vega and non-linear risks.

BHF also is subject to market risk on its trading positions in debt instruments which are not covered as part

of The Group’s credit risk calculations.

BHF has defined that the decision over the inclusion of financial instruments in the trading or in the

banking book is done according to their purpose at the time of purchase. This means, the assignment

takes place at a moment when the profit and loss impact of a deal is still unforeseeable.

The short-term criteria is defined by positions intended to benefit from actual or expected short-term

price differences between buying and selling prices at the moment of purchase or sale. The average

holding period of debt instruments held for trading purposes at BHF is six months.

The transfer of positions from the trading book to the banking book and vice versa is limited to the case

of a change in the intent to hold a specific position due to a change in business strategy. Indicators for

such a change may be caused by checks of the trading intent itself, the ability to trade or the holding

period of a position.

These criteria are checked at least annually. If there is a reason to transfer positions, the decision is made

independent from the trading desk and documented within a predefined process.

A prudent and careful valuation (Article 105 of the CRR) of fair value positions is done daily, based on

market data and with respect to adequate valuation adjustments.

Market Risk – Kleinwort Benson Wealth Management (“KBWM”)

Overall responsibility for overseeing and controlling market risk positions in KBWM lies with the Head of

Financial Risk, Management Committee, the Strategic Risk Committee and the relevant Boards.

Operational duties for the management and control of market risk at the KBWM level are undertaken by

the Treasury department and monitored and controlled by the Risk Management Department.

Risk Management is also responsible for risk reporting, governance in accordance with the Risk

Framework and escalating any limit breaches to senior management.

Market Risk – Capital Requirements

The table below shows The Group’s market risk capital requirements as at 31st December 2014:

Table 48


Market Risk


RWA

Capital

Requirements

€m €m

Market Risk - Standardised Approach (SA)

Traded debt instruments PRR 5.4 0.4

Foreign Exchange PRR 19.5 1.6

Market Risk - Internal Models (IM)

VaR model based PRR 53.7 4.3

SVaR model based PRR 125.7 10.1

Total Market Risk 204.4 16.4


62

Equity Market Risk (Trading Book)

The Group does not currently hold any equity positions for trading purposes. All The Group’s equity

positions are non-trading and the capital requirements are included within credit risk covered in section 7

of this Pillar 3 document.

Currency (“FX”) Risk

FX risk arises primarily from the Group’s banking entities providing FX services to clients. When granting

loans, booking deposits or executing bonds or other financial instruments denominated in a foreign

currency, the Group may incur FX risk if those positions are not hedged or closed.

Currency (“FX”) Risk – BHF Bank

BHF Bank manages its FX risk as part of its VaR, SVar and stressed risk as explained earlier in this section.

Currency (“FX”) Risk – KBBL, KBCIHL, KBI & BHF KB Group management companies

FX positions within KBBL & KBCIHL are managed by the Treasury department who invest or refinance those

positions in the required currency. The Treasury function may also enter into FX swaps or FX forward

contracts to manage currency mismatches in assets and liabilities.

KBBL / KBCIHL’s FX exposure arising from providing FX services to clients are managed in line with the

internal limits. A report detailing FX risk positions is sent out on a daily basis to senior management by the

Risk Management Department.

This includes foreign currency exposures arising due to the risk management and hedging strategies

adopted by KBBL & KBCIHL’s Treasury department and interest rate risk arising from interest rate contracts

which are in the process of being closed.

KBI has a relatively small balance sheet compared to The Group and most of the assets & liabilities are

EUR denominated. From time to time if these cash balances were to be significant then KBI would enter

into a currency hedge.

BHF KB Group management companies carry very minimal FX risk. BHF KB Group’s executive

management monitors the evolution of the exchange rate between EUR & GBP which is the 2 main

currencies of The Group and may enter into currency hedges from time to time.

KBBL, KBCIHL, KBI and the BHF KB Group management companies use the standardised approach for FX

market risk and the table below shows the positions as at 31st December 2014:


63

Table 49

Interest Rate (Non-Trading Book)

Interest rate risk arises in the banking book of The Group, particularly from fixed interest bonds held as

marketable investments. The Group also is exposed to interest rate risk in the banking book as a result of

interest bearing customer deposits and loans.

KBWM hedge such risks on a portfolio basis, rather than a matched basis where possible. KBWM manage

the net interest rate risk through the use of interest rate swaps and futures within prescribed limits across

products. Derivative positions may be closed or offset by opposite positions to manage risk. Fair value

gains or losses on derivatives are netted against those on bond positions.

BHF manage interest rate risk in the banking book in a similar way, usually on a macro basis. The main

sources of interest rate risk are fixed rate bonds and fixed rate promissory loans that are hedged by

interest rate swaps. In order to avoid accounting mismatches most of those positions are designated in

fair value hedges according to IAS 39.

The table below shows The Groups interest rate gap stressed for an upward and downward shift in

interest rates after applying any interest rate derivatives:


Market Risk

As at 31st December 2014Long

Positions

Short

Positions

(Net) Long

Positions

(Net) Short

Positions

Capital

Requirements

Foreign Exchange PRR €m €m €m €m €m

Euro 1,011.0 1,009.8 1.2 0.0 0.1

Australian Dollar 23.2 23.0 0.1 0.0 0.0

Canadian Dollar 7.3 7.1 0.2 0.0 0.0

Danish Krone 1.6 1.7 0.0 0.0 0.0

Egyptian Pound 0.9 0.9 0.0 0.0 0.0

Pound Sterling*1 0.0 0.0 0.0 0.0 0.0

Yen 18.9 11.2 7.7 0.0 0.6

Mexican Peso 1.2 1.2 0.0 0.0 0.0

Zloty 0.0 0.0 0.0 0.0 0.0

Russian Ruble 0.0 0.0 0.0 0.0 0.0

Swedish Krona 2.6 2.3 0.3 0.0 0.0

Swiss Franc 81.2 81.1 0.1 0.0 0.0

Turkish Lira 0.0 0.0 0.0 0.0 0.0

US Dollar 1,021.7 1,012.1 9.7 0.0 0.8

Norwegian Krone 7.2 7.1 0.1 0.0 0.0

Hong Kong Dollar 16.2 16.2 0.0 0.0 0.0

New Taiwan Dollar 0.1 0.1 0.0 0.0 0.0

New Zealand Dollar 3.1 3.1 0.0 0.0 0.0

Singapore Dollar 76.2 76.1 0.1 0.0 0.0

Won 0.0 0.0 0.0 0.0 0.0

Other 8.1 8.1 0.0 0.0 0.0

Total Foreign Exchange Instruments 2,280.6 2,261.1 19.5 0.0 1.6

*1 GBP is the reporting currency for BHF Kleinwort Benson Group SA


64

Table 50

The Group has a total potential negative impact on net present value of -€37m against interest rate risk in

the banking book for a negative 200bps shift in interest rates, of which €12m relates to BHF Bank. This risk is

covered in The Groups ICAAP process and Pillar 2A capital is held against this risk.

Assumptions used in the calculation of the interest rate gap

The Group uses the PRA’s FSA017 approach to show the impact of a 200bps change to interest rates

against its banking book. The Group includes only assets and liabilities which are on the balance sheet as

at 31st December 2014 and places them into re-pricing buckets based on their next re-pricing date.

Interest rate derivative contracts are also included to give a net gap per bucket as well as cumulatively

before being discounted to show present values. Finally a 100bps & 200bps shift in interest rates is applied

to calculate the total impact.

The FSA017 calculation is based on sensitivities against current assets and liabilities and does not include

future pension obligations and liabilities. BHF Bank performs a separate supervisory calculation for a

200bps shock to interest rates when including potential future pension liabilities which leads to a NPV

impact of -€33m rather than -€12m without future pension liabilities.

Debt instruments (Trading Book)

BHF Bank is the only entity in The Group which has market risk positions for traded debt instruments. As

explained in section 10.1.1 BHF Bank distinguishes between debt instruments which are held for Trading

Purposes and those which are held in the Banking Book.

The inclusion in the trading book as stated in Article 104 of the CRR is bound to the trading intent as

defined in Article 4, paragraph 85 of the CRR. In consequence, the inclusion is driven by the intent to

generate a short-term trading profit or the partial or complete closing of market risk positions via hedging

instruments. Additionally, a trading intent is assumed in case of market-making or in case of client-driven

activities.

In contrast to that, commission deals are not a part of the trading book as they are mainly a service for

the client. On the other hand, BHF keeps client deals within the trading book, if settlement is subject to

complete execution and if such a deal leads to an open position.

BHF Bank uses the standardised approach for these positions risks in calculating its own funds

requirements.

The table below shows positions which have been categorised in the trading book and used in the

traded debt instruments market risk calculations as at 31st December 2014:


Interest Rate Risk in the Banking Book


< 3 Months

> 3 Months

< 6 Months

> 6 Months

< 1 Year

> 1 Year

< 2 Years

> 2 Years

< 3 Years

> 3 Years

< 4 Years

> 4 Years

< 5 Years

> 5 Years

< 10 Years

> 10 Years

Total

€m €m €m €m €m €m €m €m €m €m

NPV Interest Rate

Sensitivity impacts

+ 200 bps 3.3 (16.6) 3.1 (11.8) (19.6) 53.0 (5.2) 13.7 10.0 29.7

+ 100 bps 1.7 (8.4) 1.5 (6.0) (9.9) 27.1 (2.7) 7.1 5.3 15.7

- 100 bps (1.7) 8.5 (1.6) 6.1 10.3 (28.3) 2.8 (7.6) (6.1) (17.5)

- 200 bps (3.4) 17.1 (3.2) 12.4 21.0 (57.9) 5.8 (15.8) (13.0) (37.0)

Cumulative impacts


65

Table 51

VaR Model Based PRR

BHF Bank is the only entity in The Group which uses the VaR method to calculate its Market Risk on some

instruments.

In order to fulfill the regulatory own funds requirements for market risks, an Internal Model according to

article 365 of the CRR with a confidence level of 99 % and a holding period of 10 days is used

(=Standard-VaR).

Article 364 (1a) of the CRR requires the own funds requirement of Standard-VaR to be calculated as the

higher of the previous day’s Standard-VaR and the Average Standard-VaR of the preceding sixty

business days multiplied by a bank specific multiplication factor. The multiplication factor currently being

used is 3.2 times.

The table below shows the market risk calculations for using VaR as at 31st December 2014:

Table 52

SVar Model Based PRR

BHF Bank is the only entity in The Group which uses the SVaR method to calculate its Market Risk on some

instruments.

In addition to the internal VaR calculation, the calculation of a Stressed VaR (SVaR) is also necessary. For

SVaR the input data is calibrated to historical data from a continuous 12-month period of significant

financial stress relevant to the institution's portfolio by using an adequate covariance-matrix.

Article 364 (1b) of the CRR requires the own funds requirement calculation of SVaR to be the higher of

the previous day’s SVaR and the average SVaR of the preceding sixty business days multiplied by a bank

specific multiplication factor. The multiplication factor currently being used is 3.2 times.


Market Risk


Long Positions

Short

Positions

Net

Positions

Risk Capital

Charge

Capital

Requirements

Risk Weighted

Asset

€m €m €m % €m

Traded debt instruments PRR

Specific risk items

Category 1 debt securities 0.0 0.0 0.0 0.00% 0.0 0.0

Category 2 debt securities 6 months or under 160.8 0.0 160.8 0.25% 0.4 5.0

Category 2 debt securities > 6 months < 24 years 2.0 0.0 2.0 1.00% 0.0 0.3

Category 2 debt securities > 24 months 0.4 1.1 (0.7) 1.60% 0.0 0.1



Total Traded Debt Instruments 163.2 1.1 162.1 0.4 5.4


Market Risk - VaR based last 60 day positions


End-of-Period

VaR

multiplication

factor

Capital

Requirements

Risk

Weighted

Asset

€m €m €m

VaR Model Based PRR

Higher of Actual VaR & Mean Average 60 Day VaR 1.3 320% 4.3 53.7

Total VaR Model Based Instruments 1.3 3.2 4.3 53.7


66

The table below shows the market risk calculations for using SVaR as at 31st December 2014:

Table 53


Market Risk - SVaR based last 60 day positions


End-of-Period

VaR

multiplication

factor

Capital

Requirements

Risk

Weighted

Asset

€m €m €m

SVaR Model Based PRR

Higher of Actual SVaR & Mean Average 60 Day SVaR 3.1 320% 10.1 125.7

Total SVaR Model Based Instruments 3.1 3.2 10.1 125.7


67

11. Operational Risk Operational risk is defined as “The risk of failing to achieve business objectives as a result of inadequate or

failed internal processes, people and systems or from external events”. Operational risk is predominantly

within the operating entities across The Group with Pillar 1 assessment undertaken on the Basic Indicator

Approach (“BIA”) for each business unit as well as on a consolidated level.

The significant operating entities within The Group are BHF Bank, KBBL, KBCIHL, KBI, BHF KB Group

management companies and their subsidiaries. Operational risk is managed separately in each of these

business units apart from KBBL & KBCIHL who do this on a combined level.

BHF KB Group management companies

While The Group does not explicitly seek to take operational risk, it accepts it is inherent within the

business. All operational risk events with actual or potential exposure greater than the agreed limits are

reported to the Board of the relevant business unit in which the exposure arises, with escalation to the

Board of the holding company as appropriate.

The Group’s respective boards recognise that The Group will be exposed to higher frequency, low

impact events and in exceptional circumstances, low frequency high impact events, and will therefore

reserve a portion of its capital to absorb these unexpected losses. This is covered in The Group ICAAP

process.

BHF Bank

BHF‑Bank identifies and assesses operational risk through an annual Risk Control Self-Assessment (“RCSA”)

which is carried out involving a series of selected questionnaires that form part of a systematic review for

each business line and subsidiary.

Operational risks are categorised on expert evaluations of probability of occurrence and potential level

of losses in a risk metric database. All potential and actual operational loss events are reported to the Risk

Controlling department. BHF maintains a loss events database and monitors Key Risk Indicators on a

regular basis. Information about legal cases and complaints as well as provisions due to those cases is

collected and analyzed systematically.

In case of new products, markets or processes, BHF have set up a predefined process in order to identify

inherent risks and to keep operational risks as low as possible.

The RCSA, risk measurement, risk monitoring and risk events databases form part of the process to assess

the overall Group Pillar 2 operational risk requirement as part of The Group ICAAP.

There is an Operational Risk Policy which BHF follow that sets out the key elements which seek to mitigate

their exposure to operational risk and defines the principles for operational risk governing. Operational

risks are a fixed part of regular risk reporting, at least within the documents discussed in the quarterly

meetings of the BHF risk-committee.


KBWM applies a consistent approach to Operational Risk management. There is one Operational Risk

Policy which both entities follow that sets out the key elements which seek to mitigate their exposure to

operational risk. KBWM governs operational risk with three policies – The Risk Appetite, Risk Event Policy

and Risk & Control Self Assessment Policy.


68

The Risk Appetite sets out the key elements within operational risk including the governance structure that

supports the identification, management, measurement and reporting of operational risk.

The Risk Event Policy is designed to identify, report and managed operational risk in a timely manner,

which is critical to minimising any financial or reputational impact to KBBL, KBCIHL or their clients.

The Risk and Control Self Assessment (“RCSA”) policy sets out the process and methodology used to

identify all the key risks within each business area along with their impact and likelihood scores, control

design and performance effectiveness. Issues and actions are identified from the RCSA process then

logged so they can be tracked through to completion by the operational risk team.

The Reputational Risk Policy further helps to control operational risk and feeds into the above process.

Operational risk reporting is submitted to the Risk and Compliance Committee, BHF Kleinwort Benson

Group Strategic Risk Committee, the BHF Kleinwort Benson Group Audit Committee and senior

management as and when required. These reports are used to formally report operational risk issues and

themes arising from risk events and the RCSAs completed.

This overall process is used to assess the overall Group Pillar 2 operational risk requirement as part of The

Group ICAAP.

KBI

KBI’s Operational Risk Framework ensures that KBI operates within a well controlled environment and that

all of its operational risks are properly managed and monitored. The management of operational risks in

KBI is an end-to-end approach and is characterised as follows:

Risk Identification (Risk Register)

Risk Assessment (Risk Control Assessments, Policies and Recommended Practices)

Risk Response

Monitoring Risk (Key Risk Indicators, Operational Errors Database)

Reporting and Consolidation

KBI Risk committee is responsible for approval of the overall Operational Risk Framework and monitoring

of its implementation.

Risks are identified via the Risk Register and this details all the risk which KBI is exposed, mitigations, risk

grading, action plans and potential risk response.

The Risk Control Assessment process involves periodic assessments which determine the effectiveness of

existing controls and help to facilitate any new and/or enhanced controls.

Risk monitoring is performed with an Operational Errors Database which reveals vulnerabilities and

weaknesses of the control environment. There is a risk register which logs all operational risk events.


69

BHF KB Group operational risk requirements

The table below shows the Operational Risk capital requirement and RWA as at 31st December 2014 by

business unit.

Table 54


Operational Risk by Entity

As at 31st December 2014Average

Regulatory

Income

Capital

Requirement RWA

€m €m €m

Entity

BHF-Bank AG 247.0 37.0 463.0

Kleinwort Benson Channel Islands Holdings Limited 81.4 12.2 152.7

Kleinwort Benson Bank Limited 44.3 6.6 83.1

Kleinwort Benson Dublin Ltd 18.0 2.7 33.7

Management subsidiaries and intercompany eliminations (1.1) (0.2) (2.0)

Totals 389.6 58.4 730.5


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12. Unencumbered Assets Asset encumbrance is when a firm pledges its assets to receive a form of secured funding or

collateralised obligation. These are typically items such as repurchase agreements, securitisations,

covered bonds or derivatives. The Group is required to disclose in its Pillar 3 disclosures information with

regard to its encumbered and unencumbered assets as set out in Article 443 of the CRR.

The EBA issued guidelines on 27th June 2014 in which it set out four templates for firms to disclose that are

outlined below:

Table 55


Asset Encumbrance


Template A - Assets

Carrying amount of

encumbered

assets

Fair value of

encumbered

assets

Carrying amount of

unencumbered

assets

Fair value of

unencumbered

assets

€m €m €m €m

010 Assets of the reporting institution 794.7 8,581.5

030 Equity instruments 87.3 58.4

040 Debt securities 581.5 538.7 3,517.7 3,517.9

120 Other assets 798.8

Template B - Collateral Received

Fair value of

encumbered

collateral

received or own

debt securities

issued

Fair value of

collateral

received or own

debt securities

issued available

for encumbrance

€m €m

130 Collateral received by the reporting institution 155.3 170.0

150 Equity instruments 0.1

160 Debt securities 155.2 170.0

230 Other collateral received

240 Own debt securities issued other than own covered bonds or ABSs

Template C - Encumbered assets/collateral received and associated liabilities

Matching liabilities,

contingent

liabilities or

securities lent

Assets, collateral

received and own

debt securities

issued other than

covered bonds

and ABSs

encumbered

€m €m

010 Carrying amount of selected financial liabilities 658.3 822.8

120 Other sources of encumbrance 0.2 127.2


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Template D – Information on importance of encumbrance

The BHF KB Group is predominantly made up of Banks who are deposit taking institutions where most of

these deposits are from retail customers. These retail customers are usually clients who have had a long

standing relationship with BHF or Kleinwort Benson and The Group manage their investments of which

part of this is held on deposit to form their portfolios.

As at 31st December 2014 the Group had invested roughly 31% of its own equity and customer deposits

into customer loans and 55% into cash or cash equivalents/marketable assets. The Group had €795m of

its assets encumbered and compared to a balance sheet size of €9,376m this represents only 8%. Roughly

46% of the €795m encumbrance was in relation to derivatives so less than 5% of The Group’s assets were

actually encumbered to receive secured funding.

Due to the nature of the funding which The Group receives and the large proportion of cash or cash

equivalents the Group has very little reliance on encumbrance.


72

13. Leverage All firms including banks rely on a mixture of equity and debt to finance their operations which

demonstrates the amount of leverage they have. One of the underlying causes of the financial crisis was

that many banks had built up excessive on-and-off-balance sheet leverage while still maintaining healthy

capital ratios.

The Basel Committee published its requirements on leverage ratio disclosure in January 2014 with

requirements for public disclosure from 01st January 2015. The PRA set our Supervisory Statement SS3/13

requiring major UK Banks to disclose its leverage ratio and a formal requirement of maintaining a ratio

above 3%. The leverage ratio requirements are being implemented into the CRR and should be effective

in 2015. The PRA have not yet set a leverage ratio requirement for the BHF KB Group.

The disclosures below have been prepared in accordance with Part Seven of the CRR. The Group have

calculated its Tier 1 capital on a fully loaded basis i.e without applying any transitional provisions.

Table 56

The Group leverage ratio is very healthy and considerable greater than the 3% as required by major UK

Banks. There will need to be a 42% reduction in the firms Tier 1 Capital or a 240% increase in the firms

leverage exposure for leverage ratio to reach 3%.

The Group looks to maintain a healthy leverage ratio monitors this on a regular basis and there are not

plans for this ratio to substantially change.


Leverage Ratio


€m

Leverage Exposure

Assets

Derivatives 914.9

Loans, advances, debt securities and other assets 8,461.2

Total IFRS Assets (A) 9,376.2

Off Balance Sheet Exposures

Securities financing transactions 11.9

Potential future exposures to derivatives 335.5

Weighted off balance sheet commitments 1,232.8

Total off balance sheet exposures (B) 1,580.2

Regulatory Adjustments to exposures

Regulatory deductions (64.0)

Cash collateral (118.1)

Other financial netting for derivatives (554.8)

Total Regulatory Adjustments (C) (736.9)

Total Leverage Exposure (A + B + C) 10,219.5

Fully Loaded Tier 1 Capital 734.8

Fully loaded leverage ratio 7.2%


73

14. Remuneration

Governance

In line with best practice, BHF KB Group has a Nomination and Remuneration Committee (“RemCo”) who

assist and advise the Group Board on:

the size and composition of, and appointment to, the BHF KB Group Board;

the size and composition of, and appointment to, the Committees of the BHF KB Group Board;

the appointment and evaluation of members of Senior Management and Executive Management;

and

remuneration policy.

RemCo periodically assesses the remuneration policy for directors and how it is being implemented. Any

proposed modification to the remuneration of directors is subject to approval by the Board and is

subsequently submitted to the Annual Shareholders’ Meeting for approval.

In line with best practice, RemCo periodically reviews the remuneration policy for Executive

Management and its implementation, retains the services of internationally recognised remuneration

consultants, and applies a benchmarking approach against international financial institutions with a

similar strategic remit and executive management composition with which the Company competes for

talent. Any proposed modification to the remuneration of Executive Management is subject to approval

by the Board.

The objective of BHF KB’s remuneration policy is to provide a framework for remuneration in such a form

and amount as to continue to attract, motivate and retain top talent to (i) determine, implement and

execute the business strategy and (ii) drive strong long-term business performance. Consistent with this

objective, the Company applies a total remuneration approach, which includes a significant element of

deferred variable remuneration. Total remuneration is sub-divided into two principal components: fixed

remuneration (comprising base remuneration and benefits) and variable remuneration. The individual

mix varies and depends, in particular, on the employee’s role, seniority, business and location.

The key principles of the Company’s remuneration policy are:

(a) linking rewards to sustainable performance: rewards are determined by business performance,

with appropriate account taken of risk factors associated with the Company’s business; and

(b) alignment with shareholders’ interests: Part of the employees’ variable remuneration may take

the form of equity or equity-based instruments, thereby aligning the interests of the employees with those

of the Company’s shareholders.

Full details of the BHF KB Group remuneration policies can be found pages 46 – 55 of the BHF KB Group

annual report 2014.

Scope

The PRA set out its remuneration code in its Handbook under the title Senior Management Arrangements,

Systems and Controls (SYSC) and in particular SYSC 19A which relates to Banks. The PRA highlights that

employees which impact The Group’s risk profile are defined as Remuneration Code Staff. Remuneration

Code Staff comprises categories of staff including senior management, risk takers, staff engaged in

control functions and employee’s receiving total remuneration that takes them into the remuneration

bracket as senior management and risk takers, whose professional activities have a material impact on

the firm’s risk profile.


74

For the purposes of this year’s Pillar 3 process, Remuneration Code staff is defined as the Executive

Management of BHF KB Group as they are deemed to be the only staff whose professional activities

have a material impact on the firm’s risk profile.

Link between pay and performance

Variable remuneration rewards Executive Management for the Company’s performance and business

development, with individual awards reflecting each member’s individual contribution under these

criteria.

Determination of variable remuneration

The following criteria (“Award Criteria”) are applied by the Board, acting upon recommendation of

RemCo, to determine the award and amount of any variable remuneration:

(a) overall annual financial performance of the Company – relevant for the assessment is the

evolution of the Company’s year-end financial statements, including the evolution of profitability, holding

costs and key metrics relevant for financial services businesses (e.g. capital and liquidity);

(b) achievement of the Company’s objectives – relevant for the assessment is the development of

the Group’s financial services activities. This takes into account the occurrence of operational events

(e.g. integration, synergies or development of new client services/business activities) and transactional

events (e.g. M&A and corporate reorganisations); and

(c) individual recipient’s contribution to the Company’s development – relevant for the assessment is,

in particular, the individual’s contribution to the design and implementation of the Group’s strategy and

relevant events in this respect.

Having regard to the key remuneration principles and assessing the fulfilment by Executive Management

of the Award Criteria outlined above, the RemCo makes recommendations to the Board to support it in

its determination of an overall bonus pool and the amount of variable remuneration, if any, which should

be awarded to individual members of Executive Management.

Cap on variable remuneration

The EU Directive 2013/36 also referred to as the EU Capital Requirements Directive IV (“CRD IV”) sets out in

Article 94 rules that relate to variable elements of remuneration. The UK Remuneration Code in SYSC 19A

sets out the standards that banks and certain investment firms have to meet when setting pay and bonus

awards for their staff and reflects the requirements of CRD IV, which came into effect on 1 January 2014.

Due to the size, internal organisation, nature, scope and complexity of its activities, the Group has not

applied the relevant provisions of the UK Remuneration Code on proportionality grounds. Independently,

with a view to achieving a higher degree of legal certainty in a context of complex regulatory matters,

as well as formalising a harmonized Group-wide practice, BHF KB’s annual shareholders’ meeting of

16 June 2015 confirmed the practice of capping variable remuneration at 200% of base remuneration,

from the year ending 31 December 2015.

The pool eligible for award to Executive Management as variable remuneration for the year ended

31 December 2014 was capped at 300% of Executive Management’s base remuneration, and at 200%

for the year ending 31 December 2015.

Deferral of variable remuneration

In accordance with the requirements of the Law of 6 April 2010 on Corporate Governance, the

Company operates a deferred bonus plan pursuant to which:


75

(a) up to 50% of Executive Management’s variable remuneration is earned by and paid out to the

individual recipient upon determination of the variable remuneration using the Award Criteria (the “Non-

Deferred Variable Remuneration”);

(b) the remaining 50% or more of Executive Management’s variable remuneration (the “Deferred

Variable Remuneration”) is deferred as follows:

(i) half of the Deferred Variable Remuneration can be earned two years after the beginning of the

year for which the Deferred Variable Remuneration is granted (in the case of equity-based awards, this

also remains subject to applicable vesting periods, i.e. three years from grant date), if the relevant

predetermined and objectively measurable entitlement criteria (the “Entitlement Criteria”) are met; and

(ii) the other half of the Deferred Variable Remuneration can be earned three years after the

beginning of the year for which the Deferred Variable Remuneration is granted (in the case of equity-

based awards, this also remains subject to applicable vesting periods, i.e. three years from grant date), if

the Entitlement Criteria are met.

Entitlement Criteria are established by the Board at the beginning of the year for which the variable

remuneration is granted, based on recommendations provided by the RemCo.

Code staff remuneration

The table below provides quantitative information on remuneration for executive staff members classified

as Code Staff per the scope paragraph above.

Table 57

The Group has four code staff at the end of 2014 and 2013.

More detailed information regarding the remuneration, benefits, termination and certain other terms for

the Executive Management is provided in the Remuneration Report within the BHF KB Group annual

report 2014.


Remuneration of staff which impact the Groups risk profile

Total remuneration by type


2014 2013

€m €m

Fixed pay 3.2 3.2

Cash variable remuneration 2.3 1.5

Equity based (RSU) variable remuneration 1.2 0.3

Benefits 0.4 0.4

Totals 7.1 5.4

The Group had four code staff as at 31 December 2014


76

15. Appendix – List of Acronyms

Terms

CRR – Capital Requirements Regulation

CRD – Capital Requirements Directive

BCBS – Basel Committee on Banking Supervision

FSA – Financial Services Authority

FCA – Financial Conduct Authority

PRA – Prudential Regulation Authority

BIPRU – Prudential Sourcebook for Banks, Building Societies and Investment Firms

GENPRU – General Prudential Sourcebook for Banks, Building Societies and Investment Firms

CRM – Credit Risk Mitigation

ICAAP – Individual Capital Adequacy Assessment Process

FINREP – Financial Reporting

COREP – Common Reporting

LCR – Liquidity Coverage Ratio

NSFR – Net Stable Funding Ratio

EMIR – European Markets Infrastructure Regulations

IFRS – International Financial Reporting Standards

ECAI – External Credit Assessment Institutions

CRO – Chief Risk Officer

ALCO – Asset and Liability Committee

RemCo – Remuneration Committee

ESIS – Employee Share Incentive Scheme

RCSA – Risk and Control Self Assessments

GMRA – Global Master Repurchase Agreement


77

Entity names

RHJI – RHJ International S.A

BHF – BHF

KBBL – Kleinwort Benson Bank Limited

KBI – Kleinwort Benson Investors Dublin Limited

KBCIL – Kleinwort Benson (Channel Islands) Ltd

KBIoM – Kleinwort Benson Bank (Isle of Man) Ltd

KBCIHL – Kleinwort Benson Channel Islands Holdings Limited and subsidiaries

KBG – Kleinwort Benson Group

KBWM – Kleinwort Benson Wealth Management (aggregation of KBBL and KBCIH)

About BHF Kleinwort Benson Group SA

BHF Kleinwort Benson (Euronext: BHFKB) is a limited liability company incorporated under the laws

of Belgium, having its registered office at Avenue Louise 326, 1050 Brussels, Belgium. BHF Kleinwort Benson

is a merchant bank with principal activities in private banking, asset management and financial markets

& corporates.

For further information visit: www.BHFKleinwortBenson.com

http://www.bhfkleinwortbenson.com/

Documents

Pillar 3 Disclosures - KBI Global Investors Kleinwort Benson Pillar... · BHF Kleinwort Benson 7 2. Scope In line with CRR guidelines the Pillar 3 disclosures are presented at a BHF