COMMERZBANK AKTIENGESELLSCHAFT

the Mittelstandsbank, Central and Eastern Europe and Corporates & Markets segments, the economic
downswing is having a direct impact on the demand for credit from companies. Because a weak
economic environment also makes corporate insolvencies and therefore credit defaults more likely,
higher provisions for possible loan losses are required. In addition, because of lower company
valuations, the deteriorating outlook for corporate earnings results in less interest in mergers and
acquisitions and capital market transactions such as initial public offerings, capital increases or
takeovers, and the proceeds from advisory and placement business decline accordingly. Should the
financial market crisis continue, there could be more insolvencies at banks, insurance companies or
other corporations, prompting further deterioration in the overall economic environment. This could
exacerbate the risks described. Thus, the economic downturn has had a material adverse effect on the
Group’s business, results of operations and financial condition, and additional pressure is expected.
Because the markets for securities related to U.S. residential mortgages have been increasingly
illiquid since July 2007, certain categories of securities held by the Group, including securities that
were awarded very good ratings by the rating agencies, have lost a large part of their value over this
period.
The Group is subject to the risk of impairments and losses in respect of both financial instruments with
subprime exposure and other structured financial instruments, and this risk will remain until market
sentiment and the liquidity of these products experience a material and sustained improvement. The
Group’s holdings of structured financial instruments with and without subprime exposure, in particular
structured credit products as well as conduits 3 , which primarily comprise liquidity facilities/backup lines
in favor of the conduits administered by the Group. Most of the securitized asset portfolios underlying
the conduits stem from customers, with a smaller portion from the securitization of the Bank’s own
loan receivables within the scope of active credit risk management. These asset portfolios are highly
diversified and do not include any of the subprime RMBS 4 instruments affected by the crisis.
The Group continues to hold substantial positions in financial instruments with subprime exposure as
well as other structured instruments. In the Group’s opinion, the markets for these securities will be
subject to liquidity bottlenecks for the foreseeable future. At present, it is not possible to forecast how
long these bottlenecks will persist and whether they might even become more severe. It is, therefore,
certainly possible that the Group will incur further significant charges upon the disposal of financial
instruments with subprime exposure and other structured instruments, or in the event of defaults on
these instruments, liquidity bottlenecks in the relevant markets or other developments relevant from a
valuation perspective.
Should the Group no longer be in a position to use valuation models to calculate the fair value of
financial instruments with subprime exposure and other structured instruments, future write-downs
and/or losses could prove to be even greater than in the past. A decline in the fair value of an asset or
an increase in the fair value of a liability gives rise to a corresponding charge in the income statement.
Depending on the extent of the change in value, the level of this charge could be significant and entail
a substantial loss. Calculating the fair value of financial instruments with subprime exposure or other
structured instruments on the basis of actual market or indicative prices could result in far lower fair
values in future if market prices reach substantially lower levels than those of model prices. Prices
could reach a very low level if portfolios of structured products were sold at a very large discount to
market values. If amendments were made to – or if there were changes in the interpretation of – the
relevant accounting standards, the regulatory framework or the rating agencies’ criteria, such changes
could compel the Group to alter its existing valuation models in respect of structured financial
instruments with and without subprime exposure, which would result in concomitant changes to the
respective fair values.
3
Conduits are special-purpose vehicles whose only corporate purpose is to issue securities to purchase receivables as part of
an asset securitization.
4
RMBS or residential mortgage-backed securities are asset-backed securities where the receivables securitized are real estate
loans secured by mortgages on residential property.
44