Taking risks in order to generate earnings is the core function of the Deutsche Postbank Group’s business activities. One of the Deutsche Postbank Group’s core competencies is to assume normal banking risks within a strictly defined framework, whilst at the same time maximising the potential return arising from them. In the process, each of the relevant risks is thoroughly identified, continuously measured and monitored as well as regularly reported. To this end, the Deutsche Postbank Group has established a risk management organisation as the basis for risk- and earnings-based overall bank management.

In accordance with the requirements of MaRisk (Minimum Requirements for Risk Management), the risk strategy is consistent with the business strategy and takes into account all significant areas of business and types of risk. In addition to an overarching, group-wide risk strategy, Postbank’s Management Board has resolved specific risk strategies for market, credit, liquidity and operational risk.

The nature and extent of the risks taken, as well as the strategy for managing such risks, depends on the individual business units, whose actions are prescribed by the business strategy. The Deutsche Postbank Group is active in the Retail Banking, Corporate Banking, Transaction Banking and Financial Markets areas.

Operational responsibility for risk management is spread across several units in the Deutsche Postbank Group, primarily the Financial Markets board department, Domestic/Foreign Credit Management and the credit functions of the private customer business and, at a decentralised level, the subsidiaries BHW Bausparkasse AG, BHW Bank AG, Deutsche Postbank International S.A. and PB Capital Corp, as well as the London branch.

Risk Controlling, part of the Finance board department, is the independent, group-wide risk monitoring unit. Risk Controlling is authorised to make decisions regarding the methods and models applied in risk identification, measurement and limitation. In co-operation with the risk control units at the BHW Bausparkasse AG, BHW Bank AG, Deutsche Postbank International S.A. and PB Capital Corp. subsidiaries and the London branch, the department is responsible for operational risk control and reporting at group level.

The Internal Audit unit is a key element of the Deutsche Postbank Group’s business and process-independent monitoring system. In terms of the Bank’s organisational structure, it is assigned to the Chairman of the Management Board and reports independently to the Group Management Board. The Postbank Group Management Board is responsible for risk strategy, the appropriate organisation of risk management, monitoring the risk content of all transactions and risk control. In conjunction with the Risk Committees, the Group Management Board has defined the underlying strategies for activities on the financial markets and the other business sectors of the group.

Definition of risk types

The Deutsche Postbank Group distinguishes between the following risk types:

Presentation of risk position

The importance of risk control has further increased against the background of continuously volatile capital markets due to the crisis on the financial markets, low interest rates as against previous years and continued intense competition in the markets for deposits and loans, with consequent pressure on interest margins. An additional factor is the insolvency trend in the economy as a whole. In financial year 2007, the Deutsche Postbank Group further sophisticated the structures, instruments and processes for risk management and controlling for the relevant risk types and has state-of-the-art tools for overall bank management. BHW, which was acquired in 2006, has now also been fully integrated in the risk control processes. As a result, the Deutsche Postbank Group is in a position to meet the challenges it faces in the market, and to manage and limit all types of risk across all business units in a way that minimises risk whilst maximising earnings. The methods and procedures employed meet the current statutory and regulatory requirements.

The risks arising from the structured credit portfolio of Deutsche Postbank Group are systematically and intensively analysed and closely monitored within the scope of an internal project structure. Where impairment testing resulted in impairments likely to be permanent, the appropriate impairment losses were recognised.

With respect to other risk not related to structured loans, Postbank maintained the relatively low risk profile of its credit business during 2007, having comparatively low risk costs. Amongst other things, the increasing credit risks in the retail segment in Germany were countered by a restrictive scoring-based lending policy as well as by more efficient and faster workout processes for loans in default. The additions to the allowance for losses on loans and advances mainly result from the planned expansion of the retail business in financial year 2007. In return, the allowance recognised in previous periods could be reversed due to the positive economic environment. The net addition was therefore significantly reduced. The Deutsche Postbank Group will continue to pursue its risk-sensitive business policy in the future.

With regard to the allocation of risk capital, the Postbank Group has been, and continues to be able to allow the business units sufficient scope to achieve business growth in line with its strategy. Should the turbulences triggered by the US real estate market intensify notably and spill over into the real economy, an additional financial burden cannot be excluded. No risks that could impair the Deutsche Postbank Group’s development or even jeopardise its continued existence have been identified amongst the above-mentioned risk types.

Derivative financial instruments

The Deutsche Postbank Group uses derivatives for hedging purposes as part of its asset/liability management policy. Derivatives are also used for trading. Foreign currency derivatives are mainly used in the form of currency forwards, currency swaps, cross-currency swaps and currency options. Interest rate derivatives mainly consist of interest rate swaps, forward rate agreements, interest futures and interest options; in isolated cases, forward transactions in fixed-interest securities were conducted. Equity derivative contracts are signed in particular in the form of stock options and equity/index futures. Only a few credit derivatives (credit default swaps) were entered into. Credit derivatives (credit default swaps) are basically the result of derivatives separated from synthetic CDOs. The notional amounts represent the gross volume of all sales and purchases. The notional amount is a reference value for determining reciprocally agreed settlement payments; it does not represent recognisable receivables or liabilities. The fair values of the individual contracts were calculated using recognised valuation models and do not reflect any netting agreements. The derivatives portfolio is classified by economic purpose as follows:

Derivatives – classification by counterparties

The following table presents the positive and negative fair values of derivatives by counterparty.

Fair values of financial instruments carried at amortised cost or at the hedged fair value

Fair values of financial instruments which are carried at amortised cost or at the hedged fair value are compared with the carrying amounts in the following table.