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The Treasury Function in the ALM Framework ISLTC Treasurer s Meeting Luxembourg, 22 March 2007

March 2007. 2. AGENDA . NIB BackgroundGovernanceALM FrameworkBalance Sheet Structure Risk Measures The Treasury Department OrganisationOperations Q/A. March 2007. 3. MISSION AND STRATEGY. NIB promotes sustainable growth of its Member Countries by providing long-term complementary fin

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The Treasury Function in the ALM Framework ISLTC Treasurer s Meeting Luxembourg, 22 March 2007

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    1. The Treasury Function in the ALM Framework ISLTC Treasurers Meeting Luxembourg, 22 March 2007

    2. March 2007 2 AGENDA NIB Background Governance ALM Framework Balance Sheet Structure Risk Measures The Treasury Department Organisation Operations Q/A

    3. March 2007 3 MISSION AND STRATEGY NIB promotes sustainable growth of its Member Countries by providing long-term complementary financing, based on sound banking principles, to projects that strengthen competitiveness and enhance the environment. NIB puts particular emphasis on projects involving: investments in infrastructure; investments improving the environment; large investments by the corporate sector; and small and medium-sized enterprises, targeted in cooperation ith financial intermediaries.

    4. March 2007 4 MEMBER COUNTRIES

    5. March 2007 5 KEY FIGURES

    6. March 2007 6 ORGANISATION

    7. March 2007 7 STEADY GROWTH IN THE LENDING PORTFOLIO

    8. March 2007 8 GOVERNANCE

    9. March 2007 9 GOVERNANCE - FINANCE COMMITTEE FC advises the President on policies affecting the Treasury Department and Risk Management. It helps monitor the departments activities and oversees preparation of reports for the Board of Directors. FC reviews credit risk classification and limits for counterparties in capital market transactions instruments to be approved for Treasury operation new funding transactions performance and risk of the Bank's EUR fixed income and liquidity portfolios GAP, FX, Refinance and other risk reports The Finance Committee is chaired by the President and has currently eight members appointed by the President. The appointment is confirmed by the Board of Directors.

    10. March 2007 10 GOVERNANCE - RISK LIMITS

    11. March 2007 11 ALM FRAMEWORK - BALANCE SHEET STRUCTURE

    12. March 2007 12 ALM FRAMEWORK - RISK MEASURES REFINANCING RISK Refinancing risk occurs when long-term assets are financed with short-term liabilities. Reinvestment risk occurs when short-term assets are financed with long-term liabilities. The Bank manages the refinancing and reinvestment risk within conservative limits with a view to best accommodate the demand from its customers on one hand and the demand from investors in its bond issues on the other hand. The Board of Directors sets limits for acceptable refinancing and reinvestment risk. The limits are scaled to the Banks equity. Limits are defined as Impact on NII due to a 10 bp adverse shift in margin on funding/investments to LIBOR (Max 1% of NIB equity) Annual gap between maturing asset and liabilites (Max 2 billion EUR)

    13. March 2007 13 ALM FRAMEWORK - RISK MEASURES REFINANCE RISK

    14. March 2007 14 ALM FRAMEWORK - RISK MEASURES FOREIGN EXCHANGE RISK The Bank is required by the statutes to hedge itself against FX Risk. Defined as translation risk of balance sheet positions Exposure to future net interest income not part of limit system Limits are set by the Board.

    15. March 2007 15 ALM FRAMEWORK - RISK MEASURES INTEREST RATE RISK NIB normally only assumes limited interest rate risk on the funded part of the balance sheet. Long or short postions occurs due to residual risks due to different repricing dates on funding, lending and liquidity Active position taking both internally and through external management Monitored, Managed and reported by traditional GAP analysis Limits are set by the Board, globally and by currency Limits are set in relation to the Banks equity and measured as gross impact on NII due to 1% points change in interest rate change by currency. gross total: 40 000 000/2% of equity gross total 1 year: 10 000 000/25% of total

    16. March 2007 16 ALM FRAMEWORK - INTEREST RATE RISK

    17. March 2007 17 ALM FRAMEWORK - RISK MEASURES INTEREST RATE RISK

    18. March 2007 18 TREASURY DEPARTMENT OPERATIONAL TARGETS Treasury Department has three main operational targets: Financing the Bank at the lowest possible cost of funds Maximising return on assets under management Liquidity Fixed Income Portfolios Managing FX, interest rate and refinancing risks on the balance sheet Each operating unit is provided a benchmark/target and delegated authority to execute transactions. Delegated structure supported by daily reporting routines to Treasurer, Monthly Finance Committee Meetings and regular reporting to Board of Directors

    19. 28 april 2004 Styrelsemde 3/04 TREASURY DEPARTMENT ORGANISATION

    20. March 2007 20 TREASURY DEPARTMENT FUNDING

    21. March 2007 21 TREASURY DEPARTMENT FUNDING - FX AND INTEREST RATE RISK HEDGING

    22. March 2007 22 TREASURY DEPARTMENT LIQUIDITY Functioning as warehouse until lending disbursements Target to cover 12 months net liquidity needs inclusive of new lending disbursements This enables the Bank to avoid accessing capital markets for borrowing during times of unfavourable market conditions. Cash Management and Portfolio Management separated Portfolio Management measured against Money Market performance Investment universe: Average rating Aa1Aa2 by Moodys, minimum A Senior debt Sovereigns, Supranationals, Agencies, Covered bonds, Financials and ABS (MBS and Credit CardAaa-tranches)

    23. March 2007 23 TREASURY DEPARTMENT LIQUIDITY

    24. March 2007 24 Try to follow how much extra return has been earned from this change into new instruments on a relative basis, i.e. compared to investing in Money Market deposits the difference is about 20-25 basis points per annum since 2001 on an absolute basis this means a cumulative extra NII of about 25 million since 2001. For 2005 alone this "added" income is about 7 million. Try to follow how much extra return has been earned from this change into new instruments on a relative basis, i.e. compared to investing in Money Market deposits the difference is about 20-25 basis points per annum since 2001 on an absolute basis this means a cumulative extra NII of about 25 million since 2001. For 2005 alone this "added" income is about 7 million.

    25. March 2007 25 TREASURY DEPARTMENT FIXED INCOME Fixed Income Portfolio is held for the purposes of providing additional liquid reserves and maintaining a stable long-term income to the Bank. The return on this portfolio is an important contributor to NIBs total profits. The portfolio is composed of fixed and floating rate securities, but also includes derivative instruments. The investment strategy is based on a long-term goal of generating a return similar to investments in government bonds in the Euro-area with an average modified duration of around 4.5 years.

    26. March 2007 26 TREASURY DEPARTMENT FIXED INCOME Securities in the held to maturity qualifies to be held on amortized cost basis, reducing P&L volatility. Risk profile can only be adjusted in connection with reinvestments or new investments in the portfolio. To limit the impact on returns of heavily concentrated redemptions, which may coincide with low levels of interest rates, a policy is designed to smoothen the redemption profile of the portfolio. The mark-to-market portfolio has been set up to introduce the concept of active portfolio management and to compare returns on a mark-to-market against market benchmarks.

    27. March 2007 27 MODIFIED DURATION AND 10-YEAR YIELD Indeed interest rates have started slowly to exhibit rising trends. From a low in mid-summer of about 3 percent, the 10 year yield in euro has risen some 50-60 bp. As a reaction to these trends a process took place after summer to reduce duration on the mark-to-market portfolio from a level in mid 2005 of 4-4,5 to about 2,5 years at present. This will not prevent negative effects from rising interest rates, but will of course somewhat reduce and mitigate them.Indeed interest rates have started slowly to exhibit rising trends. From a low in mid-summer of about 3 percent, the 10 year yield in euro has risen some 50-60 bp. As a reaction to these trends a process took place after summer to reduce duration on the mark-to-market portfolio from a level in mid 2005 of 4-4,5 to about 2,5 years at present. This will not prevent negative effects from rising interest rates, but will of course somewhat reduce and mitigate them.

    28. March 2007 28 FIXED INCOME Annualised return since 2003 compared to long term objective and risk-free rate Key message to take a way from this slide is that returns on the FI portfolios are in line with the defined objective. Risk free rate comment. Key message to take a way from this slide is that returns on the FI portfolios are in line with the defined objective. Risk free rate comment.

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