Landeskreditbank Baden-WÃ¼rttemberg - L-Bank

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our income statement. Losses reflecting negative market values of those portfolio hedges are being accounted for in the balance sheet under the item “Contingency Reserves” together with all other reserves built by us. Risk Control The measurement, monitoring and control of risks are all integral functions of our global bank control system. Our board of management formulates our risk policy and establishes the appropriate procedural framework for its implementation. Our risk management system was designed to ensure that we can estimate our risk exposure at any time and implement alternative risk management options as required. The system consists of five subprocesses: risk identification, risk evaluation, risk management, risk monitoring and risk communication. Risks are identified — that is, analyzed, structured and allocated — by our risk controlling team in cooperation with the individual divisions in which the risks arise. Our risk categories, which correspond to those set forth in the German accounting standards, include counterparty default risk, market risk, liquidity risk and operational risk. The data resulting from our risk identification process are used as the basis for the quantitative and qualitative evaluation of risks. For market risks and counterparty default risks, we calculate the value at risk. For other risks, we use estimates as the basis for evaluation. The results of the evaluation process are continually documented, monitored by our risk controlling team and reported in near real-time. At the same time, our operating units evaluate the market risk for management purposes. Risk management is the responsibility of our operating units, our board of management and our lending committee, in each case acting within approved limits and up to certain assigned competence levels. Counterparty default risk Counterparty default risks embody the greatest proportion of specific risks to which we as a whole are exposed. They comprise credit risk, settlement risk, country risk and investment portfolio risk. We evaluate counterparty default risks using rating methods tailored to the peculiarities of each market segment. In the case of commercial transactions and loans connected with liquid investments and management of our own books of account, counterparty default risks are limited by applying counterparty and country limits, which are proposed by our lending analysis division and approved by our board of management. Individual country limits are allocated and supervised according to a set of guidelines established each year by our board of management. Market risk Our market risks consist primarily of interest rate risks and, to a lesser extent, of currency risks. In addition, certain of our subsidiaries, such as property development companies, are also exposed to price risks in the form of real estate risks. These companies may incur potential losses as a result of adverse developments affecting building costs or property prices and rents. To control these risks, our board of management specifies value-atrisk and stop-loss limits. Each day the risk controlling team uses the historical simulation method to calculate the value at risk represented by interest rate and currency risks. Back testing is used to check the reliability of the calculation method applied. To estimate potential losses in the event of extreme market fluctuations, we also carry out stress tests and simulate extreme and worst-case scenarios. To further limit our interest rate risk, our board of management regularly defines a budgeted risk structure, which represents the target interest rate risk profile. The permissible variance of the actual risk structure to the budgeted risk structure is defined by setting a limit per range of maturities. To quantify real-estate risks, we use worst-case projections to calculate the potential reduced return on invested capital at the time of sale. The shortfall in earnings is estimated by reference to historical and projected trends in real-estate prices. Our risk controlling team monitors interest rate and currency risks. The value-at-risk and stop-loss figures calculated each day are compared with the specified limits. The team also monitors adherence to the budgeted risk structure and 21
authorized limits. A daily risk and performance report is submitted to our board member responsible for controlling risks and the board member responsible for the trading divisions. Liquidity risk Our liquidity management, which is the responsibility of our treasury division, is based on a computergenerated liquidity projection, which takes into account all foreseeable, scheduled payment flows over the next twelve calendar months. The reporting system assesses, monitors and reports on the liquidity risk. Our liquidity factor is calculated monthly, in line with the reporting requirements of Principle II (governing liquidity) of the German <strong>Bank</strong>ing Act (see “—Regulation and Supervision of L-<strong>Bank</strong> in the Federal Republic of Germany— Liquidity Requirements”). Operational risk Operational risk covers the potential for losses as a result of risks associated with operational systems or processes. It includes operating risks arising as a result of human or technical error, as well as legal risks arising from contractual agreements or the underlying legislative framework. In accordance with our system for analyzing and evaluating operational risks, all product-related processes in the individual divisions are analyzed once a year and evaluated with the help of experts. Any risks identified are assigned to one of five risk categories. These are measured according to the financial impact that potential exposure may have on our net worth and the frequency with which such risks may arise over a twelve-month period. The value at risk is calculated by analyzing the loss rate separately from the extent of the losses. 22
Page 1 and 2: INTERNATIONAL PROSPECTUS SUPPLEMENT
Page 3 and 4: ISSUER Landeskreditbank Baden-Würt
Page 5 and 6: TABLE OF CONTENTS Use of Proceeds .
Page 7 and 8: EXCHANGE RATE INFORMATION The follo
Page 9 and 10: Maturity, Repurchase Maturity. The
Page 11 and 12: the rules of such stock exchange pe
Page 13 and 14: THE CLEARING SYSTEMS DTC DTC is a l
Page 15 and 16: Cross-market transfers between pers
Page 17 and 18: For the purposes of this provision,
Page 19 and 20: These activities by the managers or
Page 21 and 22: You should rely only on the informa
Page 23 and 24: PROSPECTUS SUMMARY The following su
Page 25 and 26: APPLICATION OF PROCEEDS As may be m
Page 27 and 28: (4) Loans to customers (i.e., non-c
Page 29 and 30: transferred to independent subsidia
Page 31 and 32: Our housing-related activities are
Page 33 and 34: (1) Holdings in companies for strat
Page 35 and 36: Loan Portfolio Risks We maintain a
Page 37 and 38: securities portfolio. In accordance
Page 39: The following table shows our borro
Page 43 and 44: MANAGEMENT INFORMATION Introduction
Page 45 and 46: credit institutions increased by 10
Page 47 and 48: To control the risks of unhedged po
Page 49 and 50: RECENT DEVELOPMENTS Development of
Page 51 and 52: MANAGEMENT Board of Management Our
Page 53 and 54: Wirtsch.-Ing. Bernd Bechtold Presid
Page 55 and 56: REGULATION AND SUPERVISION OF L-BAN
Page 57 and 58: non-banking corporations if the use
Page 59 and 60: Covering Market Risk Positions Mark
Page 61 and 62: ank, and the aggregate nominal valu
Page 63 and 64: may at any time change the reserve
Page 65: The Entschädigungseinrichtung GmbH
Page 68 and 69: ECONOMY General Germany The economy
Page 70 and 71: Industrial Structure General Positi
Page 72 and 73: The following table shows the amoun
Page 74 and 75: The Euro-zone follows a mutual mone
Page 76 and 77: Revenue Equalization While the Germ
Page 78 and 79: For more detailed information regar
Page 80 and 81: Outstanding Principal Maturity Amou
Page 82 and 83: DESCRIPTION OF THE DEBT SECURITIES
Page 84 and 85: (iv) a waiver by the holders of the
Page 86 and 87: CURRENCY CONVERSION RATES The follo
Page 88 and 89: TAXATION UNITED STATES FEDERAL INCO
Page 90 and 91:
number of complete years to maturit
Page 92 and 93:
will equal such U.S. Holder’s ini
Page 94 and 95:
using the constant yield method des
Page 96 and 97:
We have included the federal income
Page 98 and 99:
Capital gains resulting from the di
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SUMMARY OF CERTAIN DIFFERENCES BETW
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The credit risk of the loan and sec
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Under U.S. GAAP, repurchased debt s
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LIMITATIONS ON ACTIONS AGAINST THE
Page 108 and 109:
GLOSSARY This glossary describes ce
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Administrative loans, which are loa
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Depreciation and accumulated amorti
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Landeskreditbank Baden-Württemberg
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Balance sheet as at December 31, 20
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Statement of income for the period
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Notes to the annual financial state
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Authorities of Landeskreditbank Bad
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Proposal of the Board of Management
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FINANCIAL STATEMENTS OF L-BANK AS O
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Landeskreditbank Baden - Württembe
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Directorships held by members of th
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State government deputy representat
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Independent Auditors’ opinion We
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Directorships held by members of th
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Authorities of Landeskreditbank Bad
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Proposal of the Board of Management
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Debt of L-Bank at December 31, 2004
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Debt Securities
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Landeskreditbank Baden-WÃ¼rttemberg - L-Bank

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