Note 15 - Capital adequacy

New capital adequacy rules were introduced in Norway as from 1 January 2007 (Basel II - the EU's new directive on capital adequacy). SpareBank1 SMN applied to and received permission from Finanstilsynet (Financial Supervisory Authority of Norway) to use internal rating methods (Internal Rating Based Approach - Foundation) to calculate charges for credit risk from 1 January 2007 onwards. This will make the statutory minimum capital adequacy requirement more risk-sensitive, so that it better reflects the risk in the underlying portfolios. Using IRB demands high standards of the Bank’s organisation, competence, risk models and risk management systems. Under interim regulations issued by Finanstilsynet, IRB banks are not yet seeing the full effect of the reduced capital requirements. As from 2009, a 20% reduction of the risk-weighted basis of calculation was allowed.

The Norwegian State Finance Fund has in a period to 30 September 2009 offered tier 1 capital to solid Norwegian banks to help them meet tighter capital adequacy requirements and improve their lending capacity. SpareBank 1 SMN applied for, and was granted, a capital infusion which was disbursed from the State Finance Fund in the form of hybrid equity worth NOK 1.25 billion as of 30 September 2009. In March 2010, with Finanstilsynet’s approval, this was partially redeemed in an amount of NOK 450 million, and the remainder is repaid in April 2010.

Subordinated debt and hybrid capital

Subordinated debt ranks behind all other liabilities. Dated subordinated loans cannot constitute more than 50 per cent of tier 1 capital for capital adequacy purposes, while perpetual subordinated loans cannot constitute more than 100 per cent of tier 1 capital. Subordinated loans are classified as a liability in the balance sheet and are measured at amortised cost in the same way as other long-term loans.

Hybrid capital denotes bonds with a nominal interest rate, but the bank is not obliged to pay interest in a period where dividends are not paid, and neither is the investor subsequently entitled to interest that has not been paid, i.e. interest does not accumulate. Hybrid capital is approved as an element of tier 1 capital up to limit of 15 per cent of aggregate tier 1 capital.  Finanstilsynet (Norway’s FSA) can require hybrid capital to be written down in proportion with equity capital should the bank’s tier 1 capital adequacy fall below 5 per cent or total capital adequacy falls below 6 per cent. Written-down amounts on hybrid capital must be written up before dividends can be paid to shareholders or before equity capital is written up. Hybrid capital is shown as other long-term debt at amortised cost.

For detailed information regarding subordinated debt and hybrid capital, see note 35 in the Bank’s annual report.

Parent bank   Group
31.12.09 31.12.10 31.12.11   31.12.11 31.12.10 31.12.09
1,736 2,373 2,373 Equity capital certificates 2,373 2,373 1,736
-2 0 0  - Own holding of ECCs 0 0 -2
0 182 183 Premium fund 183 182 0
889 1,159 1,457 Dividend equalisation fund 1,457 1,159 889
2,142 2,345 2,611 Savings bank's reserve 2,611 2,345 2,142
201 285 190 Recommended dividends 190 285 201
27 192 40 Provision for gifts 40 192 27
110 45 70 Unrealised gains reserve 85 66 124
  -   -   - Other equity and minority interest 1,409 1,244 1,052
5,075 6,581 6,924 Total book equity 8,348 7,846 6,183
-447 -447 -447 Deferred taxes, goodwill and other intangible assets -692 -466 -482
  -   -   - Part of reserve for unrealised gains, associated companies 64 65 0
-201 -477 -230 Deduction for allocated dividends and gifts -230 -477 -201
-373 -348 -387 50 % deduction for subordinated capital in other financial institutions   - - -
-182 -208 -137 50 % deduction for expected losses on IRB, net of write-downs -147 -216 -189
  -   -   - 50 % capital adequacy reserve -656 -571 -373
  -   -   - Share of non-performing, non-amortizsed estimate deviations   - - -
462 936 956 Hybrid capital, core capital 1,170 1,106 542
1,130 0 0 State Finance Fund, core capital 0 0 1,250
5,465 6,037 6,680 Total core capital 7,856 7,283 6,730
             
      Supplementary capital in excess of core capital      
0 0 0 Hybrid capital, supplementary capital 0 0 0
120   -   - State Finance Fund, supplementary capital   - - -
450 466 326 Perpetual subordinated capital 328 466 450
1,716 1,358 1,409 Non-perpetual subordinated capital 1,674 1,680 2,112
-373 -348 -387 50 % deduction for subordinated capital in other financial institutions   - - -
-182 -208 -137 50 % deduction for expected losses on IRB, net of write-downs -147 -216 -189
  -   -   - 50 % capital adequacy reserve -656 -571 -373
1,731 1,268 1,211 Total supplementary capital 1,199 1,360 2,001
7,196 7,305 7,891 Net subordinated capital 9,055 8,643 8,730
             
      Minimum requirements subordinated capital, Basel II      
1,295 1,386 1,456 Involvement with spesialised enerprises 1,456 1,386 1,295
998 1,115 1,313 Other corporations exposure 1,313 1,120 1,000
55 66 40 SME exposure 42 68 57
311 311 324 Retail morgage exposure 513 451 429
51 33 31 Other retail exposure 33 34 56
644 496 653 Equity investments   - -   476,00
3,356 3,406 3,818 Total credit risk IRB 3,358 3,058 3,314
  - 165 182 Debt risk 182 165 -
50 46 49 Equity risk 16 15 15
  -   -   - Currency risk   - - -
256 275 293 Operational risk 400 331 296
348 537 653 Exposures calculated using the standardised approach 2,184 1,864 1,594
-62 -59 -65 Deductions -111 -98 -67
  -   -   - Transitional arrangements   - - -
3,947 4,371 4,930 Minimum requirements subordinated capital 6,027 5,335 5,152
      Capital adequacy      
11,08 % 11,05 % 10,84 % Core capital ratio 10,43 % 10,93 % 10,45 %
14,59 % 13,37 % 12,81 % Capital adequacy ratio 12,02 % 12,97 % 13,56 %
© SpareBank 1 SMN