Annual Report 2010 - Muenchener Hypothekenbank eG

The Bank has created a general adjustment to value reserve as a precautionary measure to cover latent lending risks. This general adjustment to value is calculated per the terms con- tained in a federal Ministry of finance notice dated January 10, 1994. The key default rate is calculated using 60 percent of the aver- age volume of defaults that took place over the last five years compared to the average volume of loans-at-risk made over this period. The general adjustment to value is the result of multiplying the default rate by the volume of loans-at-risk on the date of record. individual adjustments to value created remained comparatively low for our private property lending business due to the great stability of the residential property market. We continued to pay special attention on our portfolio of commercial property loans in the uSA. following a careful examination of this port- folio we decided to make provisions for risk for certain individ- ual loans. in the past our uSA business generally focused on loans secured by top tier mortgages and with moderate mort- gage lending value ratios, whereby the sustainable mortgage lending value was employed. in the interim, this area of busi- ness has been defined as being discontinued pursuant to the terms of Art. 69 of the german Solvency Regulation. This means that Münchenerhyp will no longer enter into any new business deals in the uSA. Accordingly, the existing portfolio of loans will continuously shrink. We will continue to monitor the further development with undiminished intensity and dil- igence and take appropriate measures as they become nec- essary until all of our business has been wound down. Business relationships with financial institutions are primarily based on master agreements that permit settlement of claims and liabilities (netting) vis-à-vis the other institution. in general, we also enter into collateral agreements. Borrower failure risks also include migration risk, which is defined as the risk of a loss occurring due to drop in ratings, which is normally accompanied by an implied increase in yield. market price risks Market price risks consist of the risk of possible declines in the value of positions or portfolios arising from changes in market parameters including interest rates or exchange rates. These risks are quantified as potential losses of present value using a present value model that differentiates between changes in interest rates, as well as risks arising from options and currency rates. 40 | 41 münchener hypothekenbank eg | annUaL report 2010 management report The individual and general adjustments to value developed as follows in 2010: total lenDinG Business in million euros opening balance adjustment Dissolution usage changes related to exchange rate shifts and other factors closing balance individual adjust- ment to value 63.6 41.1 6.7 10.6 2.6 90.0 general adjust- ment to value 17.4 0.0 3.3 0.0 0.0 14.1