Landeskreditbank Baden-Württemberg - L-Bank

non-banking corporations if the use of a lower value is advisable in its reasonable commercial
judgment to safeguard against the special risks inherent in the banking business), provided that such
reserves may not exceed 4% of the book value of such receivables and securities;
(8) capital paid in consideration of profit participation rights (Genussrechte) which meets certain
conditions set forth in the German Banking Act, including subordination to all creditors and
participation in the bank’s losses;
(9) long-term subordinated debt (with a term of at least five years) meeting certain conditions set forth in
the German Banking Act, including subordination to all non-subordinated creditors;
(10) certain revaluation reserves (banks may allocate amounts equaling a certain percentage of the
difference between the book value and the actual value of certain assets to revaluation reserves; these
revaluation reserves may, in an amount up to 1.4% of the risk-weighted assets and certain off-balance
sheet items, be counted as Liable Capital, if the Core Capital of the bank amounts to at least 4.4% of
such risk-weighted assets and off-balance sheet items); and
(11) reserves pursuant to Section 6b of the German Income Tax Act (Einkommensteuergesetz).
The German Banking Act also requires that balance sheet losses and certain intangible assets (including
goodwill), certain investments in banks or financial services institutions and certain other items be deducted in
computing Liable Capital.
Core Capital is the portion of Liable Capital set forth in items (1) through (6) above, less balance sheet
losses, certain intangible assets (including goodwill) and certain other items. Supplementary Capital is the
portion of Liable Capital referred to in items (7) through (11), less certain deductions. In our case, Core Capital
consists of (i) paid-in subscribed capital, (ii) retained profit and reserves (including capital surplus) and (iii) the
fund for general bank risks pursuant to Section 340g of the German Commercial Code.
In our case Supplementary Capital consists of (i) long-term subordinated debt, (ii) profit participation
capital and (iii) reserves for general bank risks pursuant to Section 340f of the German Commercial Code. The
German Banking Act provides that the aggregate amount of Supplementary Capital must not exceed the Core
Capital. In addition, the sum of long-term subordinated debt must not exceed 50% of the Core Capital. Core
Capital reflects the same concept as Tier I Capital and Supplementary Capital reflects a similar concept as Tier II
Capital (as such terms are used in the United States capital adequacy rules).
Risk Weighted Assets and Off-Balance Sheet Items
To compute risk-weighted assets (the first part of the denominator of the Solvency Ratio), the assets of a
bank are assigned to six broad categories (0%, 10%, 20%, 50%, 70% and 100%) of relative credit risk depending
on the debtor or on the type of instrument or collateral securing the asset. The valuation basis of each asset, being
its book value subject to certain accounting adjustments, is multiplied by the percentage weight applicable to its
risk category to arrive at the risk-weighted value.
The valuation basis for computing risk-weighted off-balance sheet items (the second part of the denominator
of the Solvency Ratio) depends on the type of the off-balance sheet item. The valuation basis (1) for swap
transactions and any credit support obligation assumed in connection therewith is the principal amount or — in
absence of such principal amount — the current market value of the underlying asset, and (2) for forward or
futures contracts and rights under option agreements and any credit support obligation assumed in connection
therewith, the current market value of the right of the bank to obtain delivery or of the obligation of the
counterparty to accept delivery of the underlying asset assuming actual performance of the contract. For all other
off-balance sheet items, the valuation basis is their book value subject to certain accounting adjustments.
To compute risk-weighted off-balance sheet items (the second part of the denominator of the Solvency
Ratio), different rules apply depending on the type of off-balance sheet items. The valuation basis of off-balance
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