Landeskreditbank Baden-Württemberg - L-Bank

Covering Market Risk Positions
Market risk positions are foreign exchange positions, commodity positions and positions allocated to the
Trading Book. The sum of the amounts of market risk positions and, under certain circumstances, separately
computed option positions, may not exceed, at the close of each business day, the difference between the bank’s
Own Funds and an amount equal to 8% of the risk-weighted assets and off-balance sheet items. Additionally, an
overall ratio of the bank’s eligible capital (numerator) to the sum of (1) risk-weighted assets and off-balance
sheet items plus (2) market risk positions and certain option positions, both multiplied by 12.5 (denominator),
must be computed and must also be equal to at least 8%. The eligible capital is composed of the Liable Capital
not used to cover other risks under Principle I and that portion of the Tier III Capital that is used to cover market
risk positions and options. (The bank must also report to the BaFin for information purposes the ratio of Tier III
Capital that remains unused but constitutes part of Own Funds to the above-mentioned denominator of the
overall ratio). As a result, the amount of market risk positions must be covered by Liable Capital or Tier III
Capital, whereas under the Solvency Ratio requirement, risk weighted assets and off-balance sheet items must be
covered by Liable Capital. Therefore, (1) Tier III capital may only be used to cover market risk positions but not
counterparty risk related to assets or off-balance sheet items, and (2) Liable Capital not used to cover
counterparty risk related to assets and off-balance sheet items may be used to cover market risk positions.
Principle I does not permit Own Funds that have already been used to cover a risk to cover other risks under
Principle I.
The risk-weighted values of such market risk positions and certain option positions must be computed in
accordance with rules set forth in Principle I or, in the case of market risk positions, in accordance with the
bank’s internal risk computation models which have been approved by the BaFin.
During the period covered by this prospectus we have always met the risk-weighted capital adequacy rules
of the German Banking Act.
Liquidity Requirements
The German Banking Act and the regulations issued by the BaFin and its predecessors also contain liquidity
requirements. According to Principle II, banks must compute a liquidity factor at the end of every calendar
month. The liquidity factor is the quotient of liquid assets to payment obligations during four time bands: (1) one
day to one month; (2) more than one month to three months; (3) more than three months to six months; and (4)
more than six months to twelve months. The liquidity factor for the one-month time band must not be less than 1.
The excess of liquid assets over payment obligations in one of the other time bands may be counted as liquid
assets for the succeeding time band. The ratios between the respective liquid assets over the payment obligations
in the other three time bands are calculated for monitoring purposes only. The liquidity factor and the monitoring
ratios must be submitted at the end of each calendar month to the Bundesbank, which passes the reports on to the
BaFin.
At December 31, 2004 and at the end of every calendar month during the period covered by this prospectus,
we met the liquidity requirements of the German Banking Act.
Limitation on Large Credits
Own Funds and the distinction between Trading Book and Investment Book are also relevant for the
limitations on large credits. The term “credit” is defined to include all items on the asset side of the balance sheet,
derivative transactions and related guaranties and equivalent off-balance sheet positions. The term includes
equity investments. Large credits are credits to a single borrower or a connected group of borrowers that equal or
exceed 10% of the Liable Capital or Own Funds depending on whether the credit is allocated to the Investment
Book or to the combined Investment Book and Trading Book. There is no separate Trading Book lending limit.
The term “borrower” includes certain affiliates of the borrower. The limitations on large credits are applied on a
risk-weighted basis in a manner similar to the application of the risk-weighted capital adequacy rules discussed
above.
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