Risk and capital management DNB Group 2017 Disclosure according to Pillar 3 DNB GROUP 2017 — RISK AND CAPITAL MANAGEMENT 2 This report contains information about risk management, risk measurement and capital adequacy in accordance with the disclosure requirements in section IX: “Publication of financial information” of the capital adequacy regulations. In addition, the report contains information in accordance with the new reporting requirements issued by EBA «Final report on the Guidelines on Disclosure Requirements under Part Eight of Regulation 575 2013 (EBA-GL-2016-11)». The capital adequacy regulations consist of three pillars. Pillar 2 sets out requirements for the Internal Capital CREDIT RISK MARKET RISK OPERATIONAL RISK Adequacy Assessment Process, ICAAP, and the bank's Pillar 1 includes the quantitative minimum requirements responsibility for assessing risks other than those Standardised approach Basic indicator approach for banks’ capital and descriptions of measurement described under Pillar 1. Standardised approach methods for risk-weighted assets and eligible capital. The capital adequacy regulations allow different methods for Pillar 3 contains disclosure requirements and shall calculating the capital requirement. enable the market to assess financial institutions’ capital and risk management. The Board of Directors of DNB Foundation IRB approach Standardised approach The illustration shows the methods used to calculate ASA approves the guidelines and procedures for the capital requirements for the various risk categories. Pillar 3 reporting, and also reviews the report prior to DNB reports credit risk according to the advanced IRB publication. The Pillar 3 report is not subject to audit. approach, where internal risk models for PD, LGD and Tables can be found in the appendix to the report. Internal models approach Advanced measurement Advanced IRB approach EAD are used. Some credit portfolios are temporarily approaches or permanently exempt from IRB reporting, and are Information on DNBs remuneration policies is found in reported according to the standardised approach. Market DNBs Annual report which is found here: https://www. risk is measured using the standardised approach. ir.dnb.no/press-and-reports/financial-reports-and- Operational risk is generally reported using the presentations � Reporting methods used in DNB. standardised approach, while some subsidiaries use the basic indicator approach. → DNB GROUP 2017 — RISK AND CAPITAL MANAGEMENT 3 FUNDAMENTALS OF THE NORWEGIAN ECONOMY Fundamentals of the Norwegian economy Norway has 5.3 million inhabitants, and a GDP per on composite statistics of life expectancy, education and buffer between oil revenues and spending through capita which is significantly higher than in the EU. income indices, for 12 of the last 14 years. the government budget. The Oil Fund only invests For the last 15 years the Norwegian economy has outside Norway. At the end of 2017, the value of the experienced higher growth and less volatility in House prices in Norway have increased considerably fund equalled roughly 259 per cent of GDP. The fiscal GDP than the other Nordic countries and the euro over the last 20 years. They were lifted by high income rule regulates the use of petroleum revenues and is countries. Norway’s strong economy has given the growth, low and stable unemployment and, in recent intended to ensure that the level of revenues being country considerable fiscal leverage, and flexibility years, low interest rates. In addition, housebuilding phased into the economy can be sustained over time. to deal with lower economic activity. Due to higher activity relative to population growth was limited at economic growth in Norway than in the EU member times during this period. There was a turnaround in High cost inflation over time in combination with states after the financial crisis, the key policy rate 2017 and house prices fell, partly because they had risen low oil prices, led to significant cuts in petroleum has remained higher than in most other countries steeply in 2016. 82 per cent of the population lives in a investment in 2015 and 2016, and to a turnaround in the Nordic region and the EU. A national currency dwelling owned by the household itself, so the letting in the Norwegian economy. Both growth and with a floating exchange rate and credible fiscal and market is quite limited. capacity utilisation were lower than normal in 2016. monetary policies have dampened the effects of Unemployment rose, but primarily in petroleum- cyclical fluctuations. Since the first petroleum discoveries in the late related occupations and regions, especially in 1960s, the importance of oil to the economy has southern and western Norway. Lower interest rates, In addition to oil and gas, fish and aluminium are increased substantially. In 2017, oil and gas extraction an expansive fiscal policy and weakening of the important Norwegian export products. Good access accounted for 15.6 per cent of GDP and 39.9 per cent of Norwegian krone helped limit the downturn. The to low-priced electricity generated by hydropower has Norway’s export revenues. Demand stemming from parties in wage negotiations adapted wage growth to been an important prerequisite for the development of investment activity on the Norwegian Continental the new conditions. In 2017, the decline in oil-sector Norwegian metal production. Shelf also affects mainland enterprises. Income from investments slowed down, economic growth picked up petroleum activities accounted for 15.9 per cent of the and unemployment declined. At the beginning of 2018, Norwegian government bonds have the highest credit government’s total revenues in 2017. The income is it looks like economic growth in Norway will be higher rating available, and Norway has been ranked highest transferred to the Government Pension Fund Global, than what's considered normal growth. on the UN’s Human Development Index, which is based popularly called the Oil Fund. This fund serves as a → DNB GROUP 2017 — RISK AND CAPITAL MANAGEMENT 4 THE CRO´S SUMMARY DNB. The standard clearly describes responsibility and Efforts regarding non-financial risks, especially to increase its innovative power and implementation THE CRO’S SUMMARY ownership throughout the value chain, and specifies operational risk and compliance risk, were strengthen ability, but it is vital that this does not increase risk or requirements for risk assessments, documentation and during the year. As an aid for managing operational undermine quality. Group Risk Management plays an DNB implemented a new strategy, new values and verifiability. risk, DNB has acquired an integrated risk management important role in this connection, as does the strong a new purpose in 2017. Changes of technology, tool for "governance, risk and compliance". The first risk culture in the first line of defence. regulations and behavioural patterns mean that we The prevention of money laundering and terror module in this tool was a new loss and event database need to be more innovative. Four factors are critical financing and helping ensure that Norway abides by which was implemented in 2017. In my opinion, the DNB Group’s risk and capital for DNB’s success in creating the best customer international sanction rules are also part of DNB’s management report gives a good and accurate experiences and achieving financial targets: increase corporate social responsibility. This involves setting There is a high risk attached to data fraud in the description of the risk situation and of the way risk is innovative power, increase the use of customer up systems and the organisation to accommodate form of digital attacks, digital vandalism and risk of measured, managed and reported in DNB. insights, internal skills enhancement and incorporating these efforts as well as basic skills enhancement confidential information going astray. The digital corporate social responsibility in all of our processes. programmes for all employees. threat situation all around the world is increasingly serious. Measures have been established in order to To help achieve the goals of the new strategy, the DNB has built up over NOK 100 billion in common strengthen the information security in DNB to meet Board of Directors approved a new group structure equity Tier 1 capital since 2007. The DNB Group’s the increasing threat situation. in December 2017. Among the changes was the common equity Tier 1 capital ratio increased by establishment of IT as a separate support area. The another 0.4 percentage points in 2017 and came to DNB continues to work on automating and digitalising new structure is designed to facilitate more business- 16.4 per cent at the end of the year. The Norwegian products and services to meet customers’ needs and oriented IT development and ensure good control of authorities have stipulated a leverage ratio expectations. In 2017, DNB implemented a solution the Group's IT risk. Compliance has been separated requirement of 6 per cent for DNB. DNB meets this for digital pre-qualification letters for residential from Group Risk Management and established as a requirement with a good margin and is one of the mortgages. Group Risk Management has expertise on separate support area. Head of Compliance is now world’s best capitalised banks. Our strong capital level both model development and the credit process and is member of Group management and reports to the CEO. means that we are well-positioned for the changes of involved in the work of digitalising loan processes. As the regulatory framework on capital adequacy, Basel the second line of defence and owner of several central The new strategy is reflected in Group Risk III, which were published by the Basel Committee in processes in DNB, Group Risk Management will help Management's prioritisation. Group Risk Management December 2017. ensure that digitalisation does not increase the risk of plays an important role in ensuring that the bank loss, and that DNB offers the best possible products observes its corporate social responsibility, among Measured by economic capital, DNB’s risk exposure and services to its customers.