NEDBANK CAPITAl - Nedbank Group Limited

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InvestmentsRmPublicly listed Privately held Total2009 2008 2009 2008 2009 2008Fair value disclosed in balance sheet(excluding associates and joint ventures) 485 525 2 491 2 087 2 976 2 612Fair value disclosed in balance sheet(including associates and joint ventures) 485 525 3 416 3 254 3 901 3 779Operational riskNedbank Group has approval from SARB to use the Standardised Approach for operational risk for Basel II regulatory capital.Nedbank Group has applied to SARB in January 2010 for the use of AMA. The AMA Operational Risk Management Framework wasapproved by the board’s Group Risk and Capital Management Committee in April 2009. The AMA methodologies are already rolledout and running in parallel in the businesses, and Nedbank Group will change to using AMA for economic capital purposes for 2010.Major concentration risks and off-balance-sheet risksCredit concentration risk is addressed on page 152. Property concentration risk was discussed on page 133, in particular the ‘deepdive’ into the Property Finance Division in 2008, and is incorporated in the quantification of credit economic capital.The one other potential major concentration risk in Nedbank Group is liquidity risk. The management of this, includingdiversification of the funding base, contingency planning of sources of funding, related governance, etc is covered on page 169.Concentration risk is also a key feature of Nedbank Group’s Group Market Risk Framework. However, undue concentration risk is notconsidered to prevail in the group’s trading, interest rate risk in the banking book, forex and equity risk portfolios (evident in the lowpercentage contributions to group economic capital, see page 183), nor in assets and liabilities, subject to mark-to-market fair-valueaccounting.As regard off-balance-sheet risks, there are only three ‘plain vanilla’ securitisation transactions, which have funding diversificationrather than risk transfer objectives, as well as no ‘exotic’ credit derivative instruments or any risky off-balance-sheet special-purposevehicles.Economic capitalEconomic capital is a sophisticated, consistent measurement and comparison of risk across business units, risk types and individualproducts or transactions. This enables a focus on both downside risk (risk protection) and upside potential (earnings growth).Nedbank Group assesses the internal requirements for capital using its proprietary economic capital methodology, which modelsand assigns economic capital within nine quantifiable risk categories.The total average economic capital required by the group, as determined by the quantitative risk models and after incorporatingthe group’s estimated portfolio effects, is supplemented by a capital buffer of 10% to cater for any residual cyclicality and stressedscenarios. The total requirement is then compared with available financial resources.GROUP REPORTSGOVERNANCEOPERATIONAL REVIEWSOVERVIEW165NEDBANK GROUP ANNUAL REPORT 2009
isk and BALANCE SHEET management reportNedbank Group’s economic capital model and target capital adequacy (used for ICAAP)Credit risksBasel II AIRB credit methodology integrated with sophisticated credit portfolio modelling(incorporating credit concentration risk and intra-risk diversification, counterparty credit risk and securitisation risk)+Transfer risk(closely related to credit risk but arises due to sovereign default and so separately modelled and quantified)Similar to AIRB credit methodology but dependent on probability and the extent of a transfer event (ie sovereign default)+Market risksTrading (position) riskIRRBB riskEquity (investment) and property risksForex translation risksVaR scaled to one year usingVaR limits (board-approved).Simulated modelling of NII;economic value of equity (EVE)also done.300% and 400% risk weightings in linewith Basel II equity risk; PD/LGDApproach for Property Finance.Multiple of exposure, based on randvolatility measures.+Operational riskBasel II Standardised Approach used+Business riskEaR methodology used+Other assets(100% risk-weighted)=Minimum economic capital requirement(after inter-risk diversification benefits)+Capital buffer(10% buffer for procyclicality, stressed scenarios, etc)=Total economic capital requirementMeasurement period/time horizon: one year (same as Basel II)Confidence interval (solvency standard): 99,93% (A) (ie more conservative than Basel II)vsAvailable financial resourcesComprisesTier A = core Tier 1 regulatory capital and qualifying reservesTier B = perpetual preference shares and hybrid debt capital166NEDBANK GROUP ANNUAL REPORT 2009
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NEDBANK CAPITAl - Nedbank Group Limited

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