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Annual Report 2010 - Muenchener Hypothekenbank eG

The limitation of liquidity risks takes place using the structured liquidity forecast and the stress scenarios based on the Bank’s uncovered refinancing needs. in order to keep refinancing risks at a minimum, Münchenerhyp strives to refinance loans with concordant amounts and matu- rity dates and continuously checks if its relevant refinancing sources (primarily those within the Cooperative financial Net- work) remain available. in order to limit market liquidity risks in its lending business with public-sector borrowers and banks, Münchenerhyp primarily acquires securities that are accept- able as collateral by the European Central Bank, and which can be used for open market business at any time. investments in less liquid bonds, like Mortgage Backed Securities (MBS), are no longer being made. We currently hold 7 securities valued at € 125 million as of december 31, 2010 (previous year € 191 mil- lion) consisting solely of Commercial Mortgage Backed Securi- ties (CMBS) and Residential Mortgage Backed Securities (RMBS), secured by property in germany, france and Spain. All of the MBS have two or three ratings issued by the major rating agen- cies – and for over half of the MBS the second best rating is still AAA. The lowest rating in the group is an A. As of decem- ber 31, 2010 the weighted anticipated time-to-maturity of the MBS in our portfolio was 1.2 years. operationaL risks operational risks refer to possible losses caused by personal misconduct, weaknesses in procedural or project manage- ment, technical failure or negative outside influences. Per- sonal misconduct also includes unlawful actions, improper sales practices, unauthorised actions and transaction errors. We minimise our operational risks by qualifying our employees, by using transparent procedures, automating standard proce- dures, and by having fixed working instructions, comprehen- sive functional testing, as well as appropriate emergency plans and preventive measures. insurable risks are covered by insur- ance to the normal extent required by banks. The professional concepts and models used to calculate abili- ties to bear risks are being continuously further developed in accordance with legal supervisory requirements. Münchener hypothekenbank calculates its ability to bear risks based on present value and period-oriented approaches. The going Concern scenario is the most important method used for control purposes. This scenario is used to determine if the bank still would have an adequate equity capital ratio exceed- ing the legally required minimums of 4 percent core capital and total capital of 8 percent after the occurrence of risks contained in all of the risk categories. The only cover potential that may be used to cover risks in this scenario is the available regulatory equity capital. The scenario deducts market risks, borrower risks, operational risks, spread and migration risks, participation risks, as well as model risks containing other non-explicitly defined risks. All of these risks are taken into consideration conservatively and without diversification effects and using a 100 percent corre- lation level. Münchenerhyp was continuously able to bear risks throughout the 2010 fiscal year. use of finance instruments for heDGinG purposes We engage in hedging activities – interest rate and currency derivatives – in order to further reduce our risks and to hedge our business activities. We do not employ credit derivatives. in the past, we have only occasionally insured individual loans or portfolios against borrower risk. At the level of individual trans- actions, we use asset swaps as micro-hedges. Structured fun- damental transactions such as callable securities were hedged accordingly with structured asset swaps. (interest)-currency swaps were used to hedge exchange rate risks. At the portfo- lio level, the main hedging instruments we used were interest swaps and swaptions. Bermudan options on interest swaps (swaptions) and interest options (caps and floors) were used as macro-hedges for embedded legal termination rights or arrangements to limit interest rates. 44 | 45 münchener hypothekenbank eg | annUaL report 2010 management report