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The Bank manages risks and capital by pursuing the strategies, policies and instructions that it adopted as fundamental documents in this area both for the Bank and the Sparkasse Group. These documents define the organisational set-up as well as the procedures for measuring, identifying, monitoring and managing risks. It is estimated that with the implementation of the strategies and policies, the Bank and the Group have in 2012 established a solid and reliable management system, comprising a clear organisational set-up, efficient procedures for identifying, measuring, assessing, managing and monitoring risks and an adequate internal control system in view of the characteristics, volume and complexity of the activities performed by the Bank.

The organisational structure of Banka Sparkasse is based on a distribution of tasks and competences among all employees, including all management levels, which limits and prevents the possibility of any conflicts of interests and ensures a transparent and documented decision-making process. The Bank finds that the organisational structure of its subsidiaries within the Group is clearly defined, transparent and reliable, enabling a comprehensive overview of the risk management process within the Group.

The strategies and policies of risk assumption and management for the Bank and the Group are suitable, effective and comprehensive. Banka Sparkasse d.d. ensures that the significant risks assumed in the framework of its operations are identified early on, properly handled, monitored in the course of its daily activities and presented to the appropriate management levels in a timely fashion. Effective risk management reduces the likelihood of incurring unexpected losses and consequently prevents the risk of damage to the Bank's reputation as a result of such losses.

The Bank's bodies for management and supervision in the area of risk management are responsible for approving, reviewing and updating the Bank's risk assumption and management strategies and policies and for ensuring all the necessary conditions for comprehensive and proportional consideration of all risks assumed by the Bank. With respect to risk management, the Bank's top management is responsible for the preparation and implementation of risk assumption and management strategies and policies, for informing the Bank's management or supervisory bodies about important business risks assumed and for establishing and maintaining the management system.

Risks: identifying, assuming, managing and monitoring

Risk identification procedures include comprehensive and timely detection of risks that the Bank takes in its operations and a root cause analysis. Identified risks are duly recorded.

Within the framework of the Basel II Capital Accord, Banka Sparkasse has in place suitable, effective and comprehensive strategies and policies for risk assumption and management.The Bank laid down a comprehensive definition of risk assumption and risk management in its overall strategy and policy. Major individual risks the Bank is exposed to such as credit, operational, interest rate, liquidity and currency risks are laid down in detail in corresponding strategies and policies that for the most part mirror the structure of the overall strategy or policy.

In its overall strategy for risk assumption and risk management, Banka Sparkasse defined – both for the Bank and the Group – objectives and general principles or directions for risk assumption and management, an approach to managing individual risks, an approach to the internal capital adequacy assessment process (ICAAP), an outline of plans regarding important business activities and a description of any planned changes in the Bank's business strategy. In the overall policy for risk assumption and risk management, the Bank laid down the methodology for assessing its risk-bearing capacity, organisational rules for implementing the risk management process, including its description, rules for assessing the Bank's risk profile, including methodologies for identifying, measuring and assessing risks, rules for the system of internal controls and rules for the internal capital adequacy assessment process.

Risk management procedures include all measures and rules for the implementation of measures for the assumption, reduction, dispersion, transfer and avoidance of risks that the Bank has identified, measured and assessed.

The risk management procedures, designed to achieve the desired risk profile, include rules on the responsibility, method and frequency requirements with respect to monitoring risks that the Bank has assumed in the course of its operations.

Regulatory capital

Banka Sparkasse laid down the capital management procedures in the corresponding strategy and policy for both the Bank and the banking group. The strategy defines the objectives and general principles or directions on capital management, the approach to capital management and the approach to the internal capital adequacy assessment process (ICAAP) and includes an outline of plans regarding important business activities and a description of any planned changes in the Bank's business strategy. The policy defines the methodology for assessing the Bank's risk-assumption capacity, organisational rules for the capital management process, including its description, rules for assessing the Bank's risk profile, including methodologies, rules for the system of internal controls and rules for the internal capital adequacy assessment process.

According to banking legislation, risk management capital is divided into regulatory and internal capital. Banka Sparkasse defines regulatory capital as internal capital, i.e. capital available for the assumption of risks. For the Sparkasse Group, the capital available for the assumption of risks is defined as in the Bank, namely as regulatory capital of the Sparkasse Group.

In the framework of the Asset-Liability Committee, the Bank regularly – monthly and also on an as-needed basis – monitors the regulatory and economic capital, capital requirements for individual risks and capital adequacy at the Bank and Group levels.