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Confirmed by the Board of Directors on December 17, 2009

FINANCIAL POLICIES PART I

Financial Policies Part I

Table of Contents PART I


1. GENERAL OPERATING PRINCIPLES OF THE BANK ......................................................... 5 1.1. Constituent documents ........................................................................................................ 5 1.2. Mission and strategy............................................................................................................ 5 1.2.1. Mission ................................................................................................................................ 5 1.2.2. Strategy................................................................................................................................ 5 1.3. Governance of the Bank ...................................................................................................... 6 1.3.1. General principles enhancing good governance.................................................................. 6 1.4. Decision-making bodies ...................................................................................................... 6 1.4.1. Board of Governors ............................................................................................................. 6 1.4.2. Board of Directors ............................................................................................................... 7 1.4.3. President .............................................................................................................................. 7 1.4.4. Organisation of the Banks operations ................................................................................ 8 1.5. Supervisory body................................................................................................................. 9 1.5.1. Control Committee .............................................................................................................. 9 FINANCIAL STRUCTURE ...................................................................................................... 10 2.1. Overview of the financial structure ................................................................................... 10 2.1.1. Assets and liabilities .......................................................................................................... 10 2.1.2. Profit and loss .................................................................................................................... 10 2.1.3. Authorised capital and equity............................................................................................ 10 2.1.4. Credit risk funds and reserves ........................................................................................... 11 2.2. Lending .............................................................................................................................. 11 GENERAL POLICIES ............................................................................................................... 13 3.1. Policy on the Banks own credit rating ............................................................................. 13 3.2. The Banks mandate .......................................................................................................... 13 3.3. Portfolio policy .................................................................................................................. 13 3.4. Procurement policy............................................................................................................ 14 3.5. Policy on fighting corruption ............................................................................................ 14 3.5.1. Integrity Due Diligence ..................................................................................................... 14 3.6. Accounting and auditing policy ........................................................................................ 15 3.7. Disclosure policy ............................................................................................................... 15 3.7.1. General Principles for Good Governance and Best Practices ........................................... 15 3.7.2. Target audiences ................................................................................................................ 16 ENVIRONMENTAL POLICY .................................................................................................. 17 CREDIT POLICY....................................................................................................................... 18 5.1. Lending counterparties ...................................................................................................... 18 5.2. Credit analysis ................................................................................................................... 18 5.3. Limits on credit exposure .................................................................................................. 19 5.3.1. General exposure limits ..................................................................................................... 19 5.3.2. Counterparty-specific exposure limits .............................................................................. 19 5.4. Credit enhancement policy ................................................................................................ 20 5.5. Key Clauses in Loan Documentation ................................................................................ 20 5.6. Maturities........................................................................................................................... 21 5.7. Pricing policy .................................................................................................................... 21 5.8. Credit risk monitoring ....................................................................................................... 21 5.9. Provision policy................................................................................................................. 21 POLICIES ON FUNDING, LIQUIDITY AND PORTFOLIO MANAGEMENT .................... 23 6.1. Funding .............................................................................................................................. 23 6.2. Treasury Portfolios - Overview and Objectives ................................................................ 23 2 (33) December 2009

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Financial Policies Part I 6.3. Liquidity management ....................................................................................................... 24 6.4. Portfolio management ....................................................................................................... 24 7. RISK MANAGEMENT ............................................................................................................. 26 7.1. Key risk management principles and responsibilities ....................................................... 26 7.2. Credit risk .......................................................................................................................... 27 7.2.1. Credit risk rating................................................................................................................ 27 7.2.2. Measurement of credit risk exposure ................................................................................ 28 7.3. Market risk ........................................................................................................................ 29 7.3.1. Market risk measurement and limits ................................................................................. 29 7.4. Liquidity risk ..................................................................................................................... 30 7.5. Economic capital ............................................................................................................... 30 7.6. Operational risk ................................................................................................................. 31 7.7. Information and communication technology (ICT) strategy and security ........................ 31 7.8. Administrative risk and legal risk ..................................................................................... 32 7.9. Compliance risk ................................................................................................................. 33

Appendices: 1. Maximum Limits on Portfolio Level 2. 3. 4. 5. 6. 7. 8. 9. Maximum Limits for Credit Risk Exposure per Counterparty NIBs Country Risk Limit Policy Limits for Counterparties in Treasury Operations Authorised Instruments in Treasury Operations Limits for Market and Liquidity Risks Limits for Interest Rate Risk in the EUR Fixed Income Portfolio Limits for Exchange Rate Risk Obligor Master Scale

10. Security Master Scale (LGD) 11. Transaction Master Scale 12. Calculation of Add-on to the Credit Risk Exposure in certain Treasury Transactions

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Financial Policies Part I INTRODUCTION The aim of the Financial Policies document (the document) is to summarise the Nordic Investment Banks (the Banks) current financial policies, risk management as well as instructions and guidelines for the application of the policies. This document has originally been approved by the Board of Directors in August 1995.The document has subsequently been updated in 1998, 2002, 2006 and 2007. Throughout the document, reference is made to source documents that together with this document form the policy and procedural framework for the operations of the Bank. The Financial Policies have been drawn up according to a two-tier structure: Part I, which may be released externally, and Part II, which is intended for internal use in the Bank. Part I contains a description of the general operating principles of the Bank, with an overview of the Banks strategy and mission, governance and organisation. It also describes the Banks financial structure. The financial policies are presented in the chapters: General policies, Environmental policy, Credit policy as well as Policies on Funding, Liquidity and Portfolio Management. Part I concludes with the main principles for the Banks risk management with an overview of the main types of risks that the Bank faces in its operations. Part II is divided into two sections. Section A focuses on the Banks organisation. Each department is described. The focus in this part is on the business processes as affected by the financial policies, determined in Part I. Those departments within the Banks organisation with responsibilities that are not directly related to the business processes are described more briefly. Section B includes more detailed and specific instructions and guidelines that are considered necessary for the application of the policies defined in Part I. Part II of the document mainly serves as internal guidance for the Banks business operations and administration in relation to the business functions. The contents of Part II do not require approval by the Board of Directors, however, the Board of Directors will from time to time be informed about the contents and amendments to Part II of the document. Updating of the document: The responsibility for keeping the document updated lies within Risk Management. Amendments of the document that need to be made shall always be communicated to Risk Management. Approved amendments shall include an indication of which part of the document is affected. The date of approval of an amendment shall be noted in connection with the text. Definitions: Counterparty (or all counterparties) = All counterparties in relation to the Banks business operations, lending and/or treasury. Counterparty in the above definitions refers to single counterparties or counterparty groups i.e. legal and/or financially consolidated groups or counterparties which otherwise are risk wise dependent. Loans outstanding = Annual Financial Report - Balance sheet 31 December, Loans outstanding. Lending exposure = Loans outstanding + Loans agreed but not disbursed Exposure = Lending exposure + Treasury exposure (as defined in Part I, Chapter 7.2. Credit Risk).

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Financial Policies Part I

1. GENERAL OPERATING PRINCIPLES OF THE BANK


1.1. Constituent documents
The Bank is governed by its constituent documents, namely the Agreement and the Statutes as amended from time to time. The current Agreement and Statutes were agreed upon in February 2004, to reflect the enlarged membership of the Bank as to include Estonia, Latvia and Lithuania alongside the founding members, the Nordic countries. The Agreement and the Statutes became effective on 1 January 2005 after ratification in each of the eight member countries. The Preamble of the Agreement establishes that the Bank is the member countries common international financial institution having the same status as other legal persons conducting similar operations within and outside the member countries. Article 1 stipulates that the Bank has the status of an international legal person with full legal capacity. In addition a Headquarters Agreement has been concluded between the Government of Finland and the Bank on 8 July 19991. The Headquarters Agreement regulates in more detail issues related to the status of the Bank and its staff and to the Banks relations with its host country. The constituent documents further define the immunities and privileges of the Bank, as an international organisation, and of its personnel.
References: Agreement between Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden concerning the Nordic Investment Bank, 11 February 2004 Statutes of the Nordic Investment Bank Headquarters Agreement between the Government of Finland and the Nordic Investment Bank, 8 July 1999

1.2. Mission and strategy


The foundation for the Banks Mission and Strategy is laid down in the Banks constituent documents (Agreement Article 1, Statutes Section 1). The Banks Mission and Strategy has been revised and approved by the Board of Directors in August 2006. 1.2.1. Mission The Bank 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. 1.2.2. Strategy The Bank promotes competitiveness and supports the environment by providing financing in the form of loans and guarantees for activities in which the Bank can add value and complement other financing sources. Moreover, the Bank continues to assess the environmental aspects of all its financing. The Bank remains flexible in terms of supporting different areas of the economy but puts particular emphasis on projects involving: investments in infrastructure;

The Headquarters Agreement has been replaced by the Host Country Agreement between the Government of Finland and the Nordic Investment Bank dated 20 October 2010.

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Financial Policies Part I investments improving the environment; large investments by corporations; and small and medium-sized enterprises, targeted in cooperation with financial intermediaries. While maintaining focus on activities in the member countries, the Bank aims at continued expansion of activities in the neighbouring areas and in other countries where a mutual interest is identified. The Bank carries out this strategy by proactively applying the Banks relative strengths: the Banks status as an international financial institution, which facilitates the financing of cross-border activities and strengthens the possibilities to manage risks; the highest possible credit rating, which emanates from high asset quality, a strong balance sheet and ownership, and enables a stable supply of long-term financing; the Banks experience in complex financing structures in cooperation with other international financial institutions and public and private sector lenders; and the Banks professional and highly motivated staff.
Reference: Mission and Strategy of the Nordic Investment Bank, 24 August 2006

1.3. Governance of the Bank


The Statutes set out the structure for the governance of the Bank. As an international organisation, the Bank is as such not subject to national legislation or to supervision by any national authorities. Without prejudice to the immunities and privileges of NIB, the Bank is, however expected to respect the laws of its host country and those of its other member countries, as well as of all other countries in which it carries out activities. 1.3.1. General principles enhancing good governance Taking into account expectations and limitations implied by the status and legal framework of the Bank as an international financial institution, the Bank aims at following best practices of good governance. The Bank defines openness, transparency, predictability, accountability, objectivity, responsibility and disclosure with due regard to the safeguarding of clients interests, as the general principles enhancing and further developing good governance.

1.4. Decision-making bodies


1.4.1. Board of Governors The Board of Governors is composed of eight Governors, designated by each member country respectively from among the ministers in its government. The Board of Governors appoints a Chairman for one year according to a rotation scheme adopted by them. According to the Agreement and Section 14 of the Statutes, the Board of Governors is the Banks supreme decision-making body vested with exclusive powers to: amend the Statutes; decide upon increases or decreases of the authorised capital; decide upon questions of interpretation and application of the provisions of the Agreement and Statutes; approve the annual report of the Board of Directors and the audited financial statements of the Bank; appoint two members of the Control Committee and decide upon procedures for the withdrawal of membership and the liquidation of the Bank.

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Financial Policies Part I 1.4.2. Board of Directors

According to Section 15 of the Statutes, the non-resident Board of Directors consists of eight Directors and Alternates. One Director and one Alternate are appointed by each member country. A Director and his or her Alternate are appointed for a maximum term of four years at a time. Except for the exclusive powers vested in the Board of Governors, all the powers are vested in the Board of Directors. The Board of Directors performs inter alia the following tasks: adopting policy decisions concerning the operations of the Bank; appointing the President and deciding on his/her remuneration; approving the loans and guarantees proposed by the President; authorising the President under annual general authorisations to carry out borrowings and associated treasury activities approving the principles for financial and cash management and setting limits for the Banks risk management and risk control deciding upon the annual financial plan and the financial statements submitting proposals to the Board of Governors on matters which are within the exclusive powers of the Board of Governors deciding upon other administrative matters outside the scope of the daily operations.

The Board of Directors can delegate its powers to the President to the extent it considers appropriate. Each Director has one vote and seven Directors or Alternates, entitled to vote, constitute a quorum. A proposal supported by at least five Directors or Alternates shall become the decision of the Board of Directors. The work of the Board of Directors is governed by its Rules of Procedure. The Board of Directors meets approximately eight times a year. Furthermore, decisions can be made according to a written procedure. There are currently no committees established within the Board of Directors. The Chairman and Deputy Chairman work closely with the President in between the board meetings. The Board Directors are bound by a code of conduct with the general purpose of further enhancing best practices in relation to the governance of the Bank. 1.4.3. President The President is appointed by the Board of Directors for a term of maximum five years at a time. The President shall not be a member of the Board of Directors, but may be present at the board meetings. The President is considered the legal representative of the Bank and is responsible for the conduct of current operations of the Bank. The President shall follow the instructions and guidelines established by the Board of Directors. The President is responsible for the management of the Bank and for the implementation and proposals for further development of the Banks policies. The President is responsible for managing the risk profile of the Bank as a whole within the framework set by the Board of Directors. The President has been delegated decision-making powers concerning lending operations and exercises these through the Credit Committee. The Board of Directors has also authorised the President to carry out borrowings and associated treasury activities. In addition the Board has delegated certain decision- making powers to the President in administrative matters regarding e.g. the employment of staff and the Legal framework for the staff. The President of the Bank is bound by a code of conduct. 7 (33) December 2009

Financial Policies Part I The Bank has established four separate bodies for the operations and administration of the Bank; the Management Committee, the Credit Committee the Finance Committee and the ICT Council, to assist the President in his work. The Management Committee consists of the President and presently six senior officers whose appointment to the Committee is confirmed by the Board of Directors. The Management Committee is the forum for addressing policy and management issues; it has the overall responsibility for risk management. The Management Committee meets once or twice a month and in addition as needed. The meetings are chaired by the President, who reaches decisions after consulting with the members of the Committee. The Credit Committee includes the President and presently six senior officers appointed to the Committee by the Board of Directors. The Credit Committee is chaired by the President or in the Presidents absence by one of its members. The Credit Committee meets regularly, once a week. The Credit Committee is responsible for the preparation of and the decision-making on matters related to the lending operations of the Bank. The President exercises his delegated decision-making powers concerning lending operations through the Credit Committee. The work of the Credit Committee is governed by its Rules of Procedure. The Finance Committee is an advisory body to the President concerning treasury and risk management operations. The Committee monitors the market risk, borrowing activities and treasury portfolio management of the Bank. The Committee is chaired by the President and consists of presently of additionally four members appointed by the President. The Committee meets normally once a month. The ICT Council advises the President in ICT matters. The President however, makes his decisions in ICT matters in the Management Committee. The ICT Council consists of the Head of ICT and of other staff members appointed by the President. The chairman of the ICT Council shall be a member of the Management Committee. 1.4.4. Organisation of the Banks operations The Banks operations are organised into two business functions, Lending and Treasury. In addition, the operations are backed by various support functions. Lending is responsible for the management of all lending activities within the Bank. Treasury is responsible for funding the Banks operations and managing the Banks liquidity. The support functions assist and advise the President and the business functions. These are: Accounting and Financial Planning Administration and Planning Communications Compliance Credit and Analysis Financial Administration Internal Audit ICT Legal Risk Management

References: Statutes of the Nordic Investment Bank Rules of Procedures for the Board of Governors, 27 April 2005

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Financial Policies Part I


Rules of Procedures for the Board of Directors, 21 April 2005 Code of Conduct for the Board of Directors and the President, 19 May 2005 Delegation of decision making in lending matters to the President 8 March 2007 Internal Committees, 17 November 2007 Rules of Procedure for the Credit Committee, 4 June 2009 NIBs ICT Governance Model, 27 April 2007

1.5. Supervisory body


1.5.1. Control Committee According to Section 17 of the Statutes, the Control Committee is the Banks supervisory body The Control Committee consists of ten members. Five members are appointed by the Nordic Council one from each of the Nordic countries and the Parliaments of Estonia, Latvia and Lithuania appoint one member respectively. Two members are appointed by the Board of Governors to serve as Chairman and Deputy Chairman. The members are appointed for a term of up to two years at a time. The Control Committee is responsible for the audit of the Bank and supervises that the operations of the Bank are conducted in accordance with the Statutes. The Control Committee appoints two professional external auditors for the purpose of assisting the Committee in carrying out the work and responsibilities of the Committee. Decisions of the Control Committee are taken unanimously concerning the financial statements and concerning the annual auditors report. Apart from the financial statements and the annual auditors report, all decisions of the Committee shall require the assent of the majority of its members. The work of the Control Committee is governed by its Rules of Procedure. The members of the Committee are bound by a code of conduct.
References: Statutes of the Nordic Investment Bank Code of Conduct for the Control Committee, 4 November 2005 Rules of Procedure for the Control Committee, 4 November 2005

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Financial Policies Part I

2. FINANCIAL STRUCTURE
2.1. Overview of the financial structure
The capital of the Bank is denominated, and its accounts are kept, in euro as specified in Section 12 of the Statutes of the Bank. 2.1.1. Assets and liabilities Loans outstanding constitute the main portion of the Banks assets. The Banks assets are financed primarily by medium- and long-term borrowing in the capital markets and, to a smaller extent, in the inter-bank market. The proceeds from the borrowing transactions are converted into the currencies requested by the Banks lending counterparties by using the derivatives markets. Derivatives are also used to convert funds from fixed interest borrowing to floating interest lending. The Bank maintains a high level of liquidity with the aim to ensure that the Bank can fund its operations even if, due to unforeseen circumstances, market conditions for borrowing were to be temporarily unfavourable. The Bank maintains a portfolio of EUR denominated fixed income debt securities, which is funded through paid-in capital and accumulated reserves. The size of the portfolio approximately equals the Banks equity. It consists of high-quality marketable securities, of which a major part is held to maturity. 2.1.2. Profit and loss The Banks main source of income is net interest income, derived from the Banks main business of lending, from the management of the EUR fixed income portfolio and from other liquid assets. The Banks administrative expenses are managed through prudent planning procedures. Credit loss provisions are accounted for according to the provision policy (ref. 5.9 Provision policy). The Banks surplus is allocated into statutory and other reserves and for dividends paid to the member countries. 2.1.3. Authorised capital and equity According to Section 3 of the Statutes, the total authorised capital of the Bank amounts to approximately EUR 4,142 million2. The authorised capital consists of a paid-in and a callable portion. The member countries have subscribed to the entire amount of the authorised capital in proportion to the member countries gross national income. The member countries shall pay in a portion corresponding to approximately 6.8 per cent 3 of the total authorised and subscribed capital of the Bank (Section 4 of the Statutes). Subscribed capital not paid in is subject to call by the Board of Directors to the extent that the Board deems it necessary for the fulfilment of the Banks debt obligations. The Statutes do not require that calls be made pro rata, but it is anticipated that in the unlikely situation, a call would be made in the first instance in that manner. To date no calls have been made.

2 3

Increased to EUR 6,142 million in February 2011 Following the capital increase in February 2011

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Financial Policies Part I In addition to the paid-in and callable capital, the Bank has various reserves. The Bank aims at having an equity level that at all times is sufficient in relation to the financial risks that the Bank takes and large enough to demonstrate steadfast member country support of the Bank. Capital sufficiency is determined by the demands of sound risk management practice, by the judgement of the Board of Directors and by the judgement of key outside experts, such as the credit rating agencies. Upon proposal by the Board of Directors, the Board of Governors can decide to increase the Banks authorised capital. To become effective, such a decision requires the approval of the parliament in each of the member countries. The Banks capital has been increased five times since 1976 by separate capital subscriptions with an increase in the paid-in part of the subscribed capital, through cash payments and transfers from the Statutory reserve. 2.1.4. Credit risk funds and reserves The Bank allocates a portion of the annual surplus to a General Credit Risk Fund. The General Credit Risk Fund is available to cover losses arising from the Banks lending portfolio as well as other risks the Bank assumes in its business activities. Sections 8 and 11 of the Banks Statutes require that the Bank maintain two reserve funds, the Special Credit Risk Fund for PIL and the Statutory Reserve Fund. According to Section 8 of the Statutes separate allocations of the Banks surplus shall be made to a Special Credit Risk Fund for the PIL facility. The Board of Directors has decided that this fund shall be kept at a level that corresponds to a credit risk quality of Aaa/Aa. After allocations to the General Credit Risk Fund and the Special Credit Risk Fund for PIL, the surplus of the Bank shall, according to Section 11 of the Statutes, be transferred to the Statutory Reserve Fund until the fund equals 10 per cent of the authorised capital of the Bank. This level has been achieved. As part of the terms and conditions of membership in the Bank, the republics of Estonia, Latvia and Lithuania have agreed to pay into the Banks reserves in the same proportion as their share of the subscribed capital.
References: Statutes of the Nordic Investment Bank Payment Agreement between the Republic of Estonia and the Nordic Investment Bank, 10 June 2004 Payment Agreement between the Republic of Latvia and the Nordic Investment Bank, 29 December 2004 Payment Agreement between the Republic of Lithuania and the Nordic Investment Bank, 8 December 2004.

2.2. Lending
The Bank may according to Section 7 of the Statutes grant loans and issue guarantees up to a total amount equivalent to 250 per cent of the sum of the authorised capital and accumulated reserves (i.e. the Statutory Reserve Fund and the General Credit Risk Fund). Lending under this rule is called Ordinary Lending. In addition to the Ordinary Lending the Bank has two special loan facilities according to Section 7 of the Statutes, namely; Project Investment Loans (PIL) and Environmental Investment Loans (MIL). Project Investment Loans (PIL) provide long-term financing to creditworthy projects in emerging markets and the transition economies. The purpose of this loan facility is to promote the internationalisation of business and industry, and the projects financed under the facility should be of mutual interest to the member countries and the country receiving such finance. 11 (33) December 2009

Financial Policies Part I The authorisation for the PIL facility is EUR 4,000 million. According to Section 8 of the Statutes, the member countries guarantee 90 per cent of losses on each loan up to a total of EUR 1,800 million based on an agreement between the Bank and each individual member country. The Bank assumes 100 per cent of any losses incurred on individual PIL loans, up to the amount available in the Special Credit Risk Fund for PIL (first loss principle). Only thereafter would the Bank be able to call on the member countries guarantees that support the PIL facility. The Directive for Project Investment Loans approved by the Board of Directors contain more detailed criteria for lending under PIL. Environmental Investment Loans (MIL) are granted for financing public and private sector environmental projects, of mutual interest, in the neighbouring regions of the member countries. The neighbouring regions of the member countries are defined to include Poland, the Kaliningrad enclave and Northwest Russia consisting of the St. Petersburg, Leningrad, Novgorod, Pskov and Vologda regions as well as the Barents region and the Republic of Karelia. The neighbouring regions also include Belarus and Ukraine to the extent covered by the drainage area of the Baltic Sea or by projects which cause emissions having a direct impact on the member countries. According to Section 9 of the Statutes, the authorisation for the MIL facility is EUR 300 million. The MIL facility is 100 per cent guaranteed by the member countries, based on an agreement between the Bank and each individual member country. The Directive for Environmental Investment Loans approved by the Board of Directors contain more detailed criteria for lending under MIL.
References: Statutes of the Nordic Investment Bank Directive for the Project Investment Loan Facility, 21 April 2005 Directive for the Environmental Investment Loan Facility, 21 April 2005

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Financial Policies Part I

3. GENERAL POLICIES
3.1. Policy on the Banks own credit rating
The Bank is not subject to the international banking supervision regulations established by the Bank for International Settlements. However, the Banks policy is to aim at meeting the minimum capital standards as proposed in the Basel II Capital Accord and to hold a level of capital required for maintaining a AAA/Aaa rating. The Bank strives to maintain the best possible credit rating from the leading international rating agencies, and has chosen to work with two agencies; Moodys Investor Service and Standard & Poors. Maintaining the best credit rating is critical to the Bank, as it largely determines the Banks cost of funds. A favourable cost of funds enables the Bank to offer loans at a competitive price. The Bank has been assigned a long-term credit rating of Aaa by Moodys Investor Service and AAA by Standard & Poors ever since it was first rated in 1982. Its short-term ratings have been A1+ and P1 respectively since they were first assigned. The ratings are based on the Banks strong capital base, the support of its member countries, the quality of its loan portfolio, its record of profitability and abundant liquidity as well as its effective risk management.

3.2. The Banks mandate


The Banks mandate is defined in the Mission and Strategy statement. According to Section 1 of the Statutes of the Bank, the Bank shall make loans and issue guarantees for investment projects of mutual interest to member countries and the host country of the lending counterparty. For each proposed loan, an investment project or part of an investment project shall be identified as the main purpose of the loan. In its lending operations under the Ordinary Lending and PIL facilities, the Bank is normally involved in, infrastructure projects, industrial projects and environmental projects, however, specific focus areas are outlined in the Banks Business Plan. Lending under the MIL facility is intended for environmental projects in the neighbouring area. The fulfilment of the Banks mandate; the enhancement of competitiveness and the environment, shall be a prerequisite for all lending. A system for evaluating the fulfilment of the mandate has for this reason been established.
Reference: Mandate Rating Framework 19 March 2009

3.3. Portfolio policy


The Banks portfolio policy aims at ensuring an adequate diversification of risk, and restricting large concentrations of risks. The policy recognises two sources of credit risk. The primary source is the individual counterparty credit risk. The secondary source is the potential default correlation of groups of counterparties (sectors). Limits are set with respect to these two layers. The limits are established both in terms of credit exposure and in terms of required allocated economic capital (7.5 Economic Capital). The limits are scaled to the Banks equity, the size of the total credit exposure and the Banks economic capital requirement.
Reference: Appendix 1: Maximum Limits on Portfolio Level

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Financial Policies Part I

3.4. Procurement policy


The Bank attaches great importance to ensuring that the projects it finances are both technically and economically sound and that they are implemented rationally and efficiently. The Bank emphasises the need to ensure fair competition in tendering procedures regarding both public and private sector investments. There are no stipulations within the legal framework of the Bank restricting the procurement of goods and services from any country. The responsibility for all aspects of the procurement process in the lending activities lies with the promoters of the projects. The Banks involvement is confined solely to satisfying itself that the conditions attached to its financing of an investment are met and that the proceeds of any loan extended by the Bank are used for the project for which the loan was granted. Projects that the Bank co-finances in cooperation with the major international financial institutions are usually subject to the procurement rules of those institutions. The Bank has also implemented rules for the procurement of goods and services for the Banks own use. The rules emphasise competitive bidding, objectivity and transparency in the procurement process. More stringent procedures apply for the procurement comprising larger amounts.
References: General Guidelines for Procurement, February 1999 Procurement Instruction, December 2009

3.5. Policy on fighting corruption


The Bank places particular emphasis on fighting corruption both in its external and internal activities. Fighting corruption also includes efforts to combat money laundering and the financing of international terrorism. The joint actions by the IFIs to combat fraud and corruption are set forth in a Uniform Framework for Preventing and Combating Fraud and Corruption (IFI-Framework) which NIB has also endorsed. The IFI -Framework calls for harmonised definitions of fraudulent and corrupt practices which are included in the Bank's policies and implemented in, or referred to, the Bank's loan and other documents. To enhance the Banks efforts in fighting corruption, it has established a Committee on Fighting Corruption. The purpose and tasks of the Committee are set out in Rules of Procedure for the Committee on Fighting Corruption. 3.5.1. Integrity Due Diligence The IFI-Framework also sets out recommendations on the general principles to guide in analysing integrity issues in lending and investment decisions: adequate "know your customer" procedures; close scrutiny of parties convicted of or under investigation for serious crimes and sanctioned by regulatory body or appearing on sanctions list; close scrutiny of politically exposed persons; ongoing monitoring of integrity risks through portfolio management. With reference to the IFI Framework and other market standards and practices and as part of its efforts to promote sustainability and compliance, the Bank has decided to embark on a consistent process to assess integrity matters in relation to its lending in formalising an Integrity Due Diligence Process (IDD-Process). 14 (33) December 2009

Financial Policies Part I Furthermore financial planning and cost control procedures are in place to prevent misuse of the Banks own financial resources.
References: Resolution on Fighting Corruption, 26 April 2007 Rules of Procedure for the Committee on Fighting Corruption, 26 April 2007 Declaration on IFI Uniform Framework for Preventing Fraud and Corruption 7 October 2008 Integrity Due Diligence for Lending, 15 April 2009

3.6. Accounting and auditing policy


The Bank aims at financial reporting in line with that of other international financial institutions. Due to the Banks activities in the global capital markets compliance with internationally agreed accounting standards is of vital importance. Since 1994 the Banks financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The international accounting standards are subject to continuous revision and change in order to meet the requirements of the business community. The Bank endeavours to implement the changes and revisions in the standards in order to comply with best practice in the banking sector, taking into consideration the Banks scope of business and status as an international financial institution. The Banks main accounting policies and principles are presented in the most recently published annual financial statements. According to Section 12 of the Statutes, the Banks accounts shall be kept in euro and the Banks financial year corresponds to the calendar year. The Bank publishes annual financial statements as of 31 December and un-audited interim financial statements as of 30 April and 31 August each year. A principal tool for disseminating financial information externally is the Banks website (http://www.nib.int). The Banks internal auditing activities are conducted in accordance with international standards issued by the Institute of Internal Auditors. The Internal Audit Department reports to the President, the Board of Directors and the Control Committee, which according to Section 17 of the Statutes is responsible for the audit of the Bank. The Committee presents annually an Auditors Report to the Board of Governors. The Control Committee appoints independent external auditors to assist in carrying out the audit. The authorisation of the external auditors is renewed annually.
References: Statutes of the Nordic Investment Bank Annual Report (latest available)

3.7.
3.7.1.

Disclosure policy
General Principles for Good Governance and Best Practices

As an IFI with sovereign states as members, NIB promotes openness and transparency in its operations. General principles enhancing and further developing good governance and best practices at the Bank, and thereby also guiding the Disclosure Policy, are defined by the Bank as: Openness The Bank strives to make information concerning its strategies, policies and activities available to the public in the absence of a compelling reason for confidentiality in line with the legal provisions of the Bank and the guiding principles of this policy.

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Financial Policies Part I Transparency By being transparent in its activities, NIB supports stability on the international markets and in the member countries economies. Transparency also increases the general publics trust in NIB. Accountability NIB shall be publicly accountable, as NIB is entrusted with public monies and is thus responsible for the proper management of the monies and other resources put at its disposal. Objectivity The information provided by the Bank shall not be biased. NIB is committed, as further set out in this policy, not to omit or otherwise withhold information solely because it may at times reflect negatively on the Bank. In relation to information on financial activities, NIB applies principles of non-discrimination and simultaneous disclosure through appropriate regulatory channels. Responsibility towards the member countries NIB has an obligation to provide information and respond to the questions and concerns of its member countries. The opinions of the Banks member countries are taken into account in policy and other decision-making, so as to ensure the Banks compliance with its mandate and accountability towards the member countries. Interaction with third parties and the general public While the Bank maintains an ongoing information exchange with its member countries and clients, NIB further aims to release information to the general public and specific interest groups, whenever possible and as early as feasible. The Bank is also willing to enter into constructive dialogues with identifiable third parties regarding NIBs strategies, policies, practices and activities. Safeguarding client interests While NIB is committed to openness and transparency in its dealings, NIB is, at the same time, a bank and as such it has to take careful account not only of the demands that bank confidentiality places on the Bank generally, but also of the individual clients confidentiality needs in carrying out a specific project. NIBs information dissemination activities are therefore based on procedures that have been adopted to guarantee that the clients justified need for confidential treatment of information is respected. 3.7.2. Target audiences NIB has a need to communicate actively with the general public in matters related to its overall mandate as well as with particular audiences in matters related to specific priorities of the Bank. In addition to the general public, these audiences are representatives of the member countries, government decision-makers, clients and potential clients, investors, counterparties, employees, press and media, non-governmental organisations and other strategic target groups.
Reference: NIBs Disclosure Policy14 June, 2007

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4. ENVIRONMENTAL POLICY
In accordance with the Banks mission statement, the Bank 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. The Bank recognises that taking environmental and social aspects into account is part of good business and leads to sustainable development. The Bank believes that this approach enhances the clients competitive advantage and that economic growth and a healthy environment go hand in hand. The Bank recognises that sustainability ranks high among the priorities of its activities. By following its Environmental Policy, the Bank improves the predictability, transparency and accountability of its actions. The Bank prioritises and actively seeks projects with direct or indirect environmental benefits. The Bank prioritises environmental investments reducing cross-border pollution in the member countries and in their neighbouring regions. Furthermore, research and development aimed at sustainable development is regarded as important. The Bank defines the term environment to include both ecological (such as physical and biological) aspects and related social aspects (such as worker protection and community issues). The Bank performs an economic and environmental review of all projects considered for financing. These reviews are important factors when the Bank decides whether or not to finance a project. The Bank assesses the environmental aspects of the loan application and aims to ensure that all the projects it finances are environmentally sound and are operated in compliance with applicable laws and regulations as well as in a manner consistent with the requirements of these applied standards. The Bank sees as important that natural resources are managed efficiently and sustainably in its projects. Managing the economic, environmental and social aspects in a manner consistent with applicable laws and regulations is the responsibility of the clients. Clients regular engagement with local communities about matters that directly affect them also plays an important role in both avoiding as well as reducing harm to both people and the environment. Adverse impacts are to be avoided, or if avoidance is not possible, the impacts should be appropriately reduced, mitigated or compensated for. Projects with positive impacts and opportunities should be identified and promoted. A proposed project can be rejected due to noncompliance with the Banks environmental policy and guidelines. The Bank also commits itself to act as a good corporate citizen and will pursue improvements on a permanent basis in its operations and in applying best practices in environmental management in its internal operations. The Bank seeks business partners who share its vision and commitment to sustainable development. The Bank furthermore works together with other IFIs and organisations in order to promote sound, coordinated and effective approaches to environmental issues. Through this environmental policy, the Bank puts into practice its commitment to sustainable development in the context of its mission and mandate. It is up to the Bank and its clients to translate this commitment into successful outcomes.
Reference: Environmental Policy and Guidelines, 11 October 2007

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5. CREDIT POLICY
The Banks credit policy forms the basis for all its lending operations. The credit policy aims at maintaining the Banks high quality loan portfolio and ensuring proper risk diversification as well as the enhancement of the Banks mission and strategy. The Bank operates according to sound banking principles with a focus on reducing the risk of credit losses. The purpose of the credit policy is to establish rules and guidelines applicable to all credit decisions on individual loans. The credit policy sets the basic criteria for acceptable risks and identifies risk areas which require special attention. The Banks credit policy is the basis for the credit approval process. Each loan shall comply with the credit policy. For loans that do not fully comply with the credit policy, deviations can be permitted on a case-by-case basis subject to an evaluation of the proposed credit policy deviation. A loan outside the credit policy is deemed to represent higher credit risk.

5.1. Lending counterparties


The main types of counterparties in lending operations for the Bank are: sovereigns (loans to governments or government guaranteed loans), public entities, municipalities, corporations and financial institutions (banks). In the Banks lending to these types of counterparties the main principles of fulfilling the Banks mandate and achieving its strategic goals applies. Specific policies for different counterparty types are only applied if deemed necessary. In project finance transactions a single-purpose entity is often established to act as the lending counterparty. Such entity is often fully separated from the activities of the sponsors in the project. Hence project finance in this context means: the financing of such an entity where repayment is based on the cash flow of the entity, with security interest in the assets of the entity, and with no or limited recourse to the sponsors. Guidelines for the application of the credit policies for certain types of lending counterparties are supplied separately.

5.2.

Credit analysis

In order to identify and mitigate the risks involved in lending, and to assess the fulfilment of the Banks mandate, all credit proposals shall be subject to an objective analysis and an independent risk classification. The purpose of the analysis shall be to cover all aspects of risk the Bank will bear when granting a loan or issuing guarantees; thus an analysis of the project, the lending counterparties repayment capacity and guarantors capacity for support, the mandate fulfilment as well as the structure and terms of the loan shall be conducted as relevant. The analysis shall identify the key credit risk issues as well as proper risk mitigating factors. The analysis shall also always contain an assessment of the investment projects environmental impact. The analysis of a transaction shall conclude with an assessment of the probability that the loan extended will be repaid. This conclusion is represented by the assigned counterparty risk rating. Furthermore, the credit enhancement shall be independently assessed and a security rating assigned. The counterparty rating combined with the security rating represents the final transaction risk rating. (ref. 7.2.1 Credit risk rating) In addition to the standard analysis undertaken for all loans, in the case of project and structured finance a more detailed analysis including a due diligence process will be carried out. This will

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Financial Policies Part I encompass, amongst other things a technical and legal due diligence, a sensitivity analysis of project cash flows and an evaluation of the quality of the security package. The Bank will use the services of expert advisers to perform due diligence for project finance transactions as deemed necessary.

5.3. Limits on credit exposure


In Section 7 of the Banks Statutes the overall limits on lending exposure for Ordinary Lending and for the special lending facilities are defined. Specific limit policies on portfolio and individual counterparty levels apply for all lending operations if not otherwise stated. 5.3.1. General exposure limits The Bank strives to diversify its loan portfolio in order to reduce risk concentration. In the Banks Ordinary Lending, special emphasis is put on customer and sector diversification. Lending under the PIL facility is diversified across countries and sectors. The following main principles apply: Exposure in relation to project costs: The maximum amount granted as loan or guarantee for a single project generally should not exceed 50 per cent of the total cost of the project. Exposure to sectors: The total required economic capital (ref. 7.5 Economic capital) of all loans and treasury transactions related to a single sector shall not exceed the defined limit of the Banks total required economic capital. At the same time the total credit exposure representing a single sector may not exceed the defined limit of the Banks total credit exposure. Exposure by country: There is no specific limit on the aggregate amount of lending exposure on a particular member country. Lending exposure on non-member countries is subject to country limits. The Banks Country risk limit policy sets the maximum country limits based on the risk classification, the amount of the approved PIL facility and the Banks equity. These country risk limits are revised on an annual basis. 5.3.2. Counterparty-specific exposure limits In order to be able to manage the exposure risk on a counterparty the Bank has a system for determining maximum exposure limits. This system is based on the risk classification (both obligor rating and transaction risk class) of the lending counterparty and the transaction, the total lending exposure on the counterparty in relation to its equity as well as on the total lending exposure on the counterparty in relation to the Banks equity. Furthermore, large exposures and the aggregate exposure limit of the Banks largest lending counterparties are established with separate limits and definitions according to the Banks equity and the requirement of economic capital. Project and structured finance transactions are expected to achieve a high debt-to-equity ratio because of the ring-fencing of cash flows and of the quality of the security offered. Therefore, the limits of maximum lending exposure in relation to the counterpartys equity will not apply to project and structured finance transactions. However, the Bank has established specific guidelines providing guidance on key financial ratios to be achieved for different types of transactions depending on their risk profile.
References: Appendix 1: Maximum Limits on Portfolio Level Appendix 2: Maximum Limits for Credit Risk Exposure per Counterparty Appendix 3: NIBs Country Risk Limit policy

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5.4. Credit enhancement policy


Under its Statutes (Section 7), the Bank is required to obtain adequate security for loans granted, unless sufficient security is considered to exist under the circumstances. There are no specific requirements regarding the types of security that the Bank may accept. The Bank may grant unsecured loans to counterparties that are sufficiently creditworthy. In such lending the Bank requires various undertakings by the counterparty as part of the loan documentation (i.e. negative pledge and other financial and non-financial covenants). Collateral that is easy to liquidate is preferred over non-liquid assets. In addition, security interests over assets that are vital to the lending counterpartys business and cash flow generation are preferred and the Bank will generally require that loans be extended at least pari passu with other IFIs and/or commercial banks. The Bank will require higher degrees of credit enhancement for project and structured finance transactions and for transactions considered bearing higher risks. The valuation of all collateral and security shall be assessed neutrally and prudently. The Bank has developed a Security Rating Tool supporting the evaluation of the security rating class for the collateral provided (ref. 7.2.1 Credit risk rating). The credit risk is reduced by the Banks status as an IFI and preferred creditor, which means that the Bank through its Agreement and Framework Agreements with non-member countries is granted similar privileges and immunities as other IFIs and in particular that the Bank will not be required to participate in the rescheduling of national debt.

5.5. Key Clauses in Loan Documentation


The Bank has developed a set of key clauses for its loan documentation. The purpose of these clauses is to ensure that the Bank will receive early warnings if the credit quality of the Borrower (or, as the case may be, a Guarantor) deteriorates or if an event occurs that could have an adverse effect on the Borrowers (or, as the case may be, a Guarantors) ability to repay the loan. The key clauses are also designed to give the Bank the possibility to take action if a trigger event occurs. A trigger event is typically either a breach of an undertaking in the loan documentation or a change in a circumstance on which the Bank has relied as a risk mitigant. The loan documentation contains Events of Default which specify the circumstances that constitute an Event of Default. If an Event of Default occurs, the Bank has the right to suspend any further disbursements and accelerate the loan, i.e. declare the whole loan amount due and payable. The loan documentation may also contain Mandatory Prepayment Clauses. Such clauses define the trigger events that entitle the Bank to demand payment in advance of scheduled maturity. A trigger event is typically a change in a circumstance on which the Bank has relied as a risk mitigant, for example a change in ownership/control or external rating. In addition to a Negative Pledge which is one of the key undertakings, the loan documentation may contain undertakings by the Borrower to comply with agreed financial ratios (Financial Covenants). The circumstances triggering mandatory prepayment as well as the Financial Covenants are usually specified by the Credit Committee and the credit decision is recorded in the respective Committee Minutes. The loan documentation shall be in compliance with the credit decision.

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5.6. Maturities
The Bank extends loans with long maturities. The maturity depends i.a. on the projects schedule and cash flow generation, possible other constraints and other sources of funds available to finance the project. As a general rule, all loans are limited to the economic life of the asset or the relevant underlying contracts supporting the financing.

5.7. Pricing policy


Section 1 of the Statutes requires that the Bank grant loans and guarantees on sound banking principles. Hence, there can be no subsidy element in the terms offered by the Bank. Loans and guarantees are priced to cover the Banks cost of funds, administration costs and the cost of the risk involved in a loan. In addition, a reasonable return on the capital employed should be achieved. The Bank uses a Risk Based Pricing Tool for the pricing of its loans. The tool enables calculation of the minimum earnings required on a loan in order to cover all the costs of lending, including the cost of risk (the Risk Adjusted Price).

5.8. Credit risk monitoring


The Bank pays specific attention to the monitoring of its lending exposure. The monitoring covers the lending counterparties repayment ability, the value of the credit enhancement, the factors that affect the risk classification as well as the lending counterpartys compliance with all term and conditions of the transaction. Project and structured finance transactions are subject to more detailed monitoring. Further all loans deemed to represent high credit risk and all watch-listed loans are subject to more detailed and specific monitoring and reporting requirements.

5.9. Provision policy


A loan is classified as impaired when it is considered likely that the counterparty in a lending transaction is unable to meet its contractual obligations and the estimated value of any collateral provided is deemed insufficient, and thus the Bank is at risk for a credit loss. An allowance for the impairment is calculated and recognised in the Banks financial statements in accordance with the IFRS requirements (ref. 3.6 Accounting and auditing policy). The Management Committee decides on the impairment allowance based on a proposal from Lending. Loans with payments overdue are classified as non-performing according to the following principles: Ordinary Lending Loans are classified as non-performing when contractual payments are more than 90 days overdue. Lending under the special loan facilities (PIL and MIL) Loans to a government or guaranteed by a government are classified as non-performing when contractual payments are more than 180 days overdue. Loans not granted to a government or guaranteed by a government are classified as nonperforming when contractual payments are more than 90 days overdue. 21 (33) December 2009

Financial Policies Part I When one loan is classified as non-performing, all loans extended to the same counterparty are deemed to be non-performing.
References: Statutes of the Nordic Investment Bank Directive for the Project Investment Loan Facility, 21 April 2005 Directive for the Environmental Investment Loan Facility, 21 April 2005

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6. POLICIES ON FUNDING, LIQUIDITY AND PORTFOLIO MANAGEMENT


According to Section 6 of the Statutes, the Bank may raise funds in the capital markets of its member countries as well as in the international capital markets to finance its lending operations. The Statutes (Section 10) require that the Bank protects itself against foreign exchange risk. The Banks Liquidity Policy, which has been approved by the Board of Directors, sets the framework and objectives for the Banks liquidity. The target of the Banks liquidity management is to secure sufficient liquidity by retaining access to funding and by possessing liquid assets. The treasury operations are conducted based on risk limits approved by the Board of Directors, as well as on limits and guidelines established by the President within the framework set by the Board. References:
Statutes of the Nordic Investment Bank Nordic Investment Bank, Liquidity Policy 23 February 2009 Appendix 4,5,6,7 &,8 Limits for the Treasury Operations

6.1. Funding
The Banks primary source of funding is the issuance of bonds in the main financial markets of Europe, Asia and America. The objective is to raise funds at a favourable cost to enable lending on competitive terms to the Banks customers. The Bank seeks to take advantage of favourable market conditions, adapting its borrowing operations to investor preferences in terms of currency, maturity, liquidity and structures. Within this strategy, the objective is to raise funds at the lowest possible cost while taking into consideration the risks involved in the structure and complexity of the individual transactions. Furthermore, potential mismatches between the terms of the funding and lending transactions are taken into consideration. To this extent, the proceeds from the issues are converted in the derivatives markets to best manage the foreign exchange, interest rate and refinancing risks on the balance sheet.
The Board of Directors authorises the Bank to raise funds in the capital markets. This mandate is reviewed once a year based on the Bank's estimated funding requirements.

6.2. Treasury Portfolios - Overview and Objectives


Objective: Stable earnings Objective: Meet obligations Objective: Additional earnings

Own Capital Portfolio

Liquidity Portfolio

Spread Portfolio

Rate Portfolio External Managers Portfolio of Reclassified Financial Assets

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6.3. Liquidity management


The Bank has defined two main objectives for its liquidity: to ensure that expected and unexpected payment obligations can be met at all times to contribute to the profitability of the Bank. Available liquidity should be large enough to cover expected obligations, on a rolling basis, for the coming 12 months, but not be larger than expected obligations for the next 18 months. A contingency plan is in place for exceptional circumstances. The liquidity is managed by the Treasury Department in different portfolios with distinct objectives. The objective of the Liquidity Portfolio is to warehouse liquidity in financial assets that can be sold to meet the Bank's obligations. The liquidity portfolio primarily comprises placements in the money market, commercial papers and short-term government bonds. A part of the liquidity can be invested with the objective to achieve additional earnings through an active investment strategy. This strategy is carried out through the Spread Portfolio, Rate Portfolio and External Managers. The Spread Portfolio is primarily invested in bonds and notes issued by financial institutions with an internal risk rating in the internal risk classes 1-7, covered bonds and asset swaps. The aim is that the spread portfolio should primarily be exposed to credit spread risk. Liquidity management also comprises the management of the Banks balance sheet risk. This includes the mitigation of currency risk, interest rate risk and maturity risk in the balance sheet through active hedging and position-taking strategies, using derivatives within prescribed risk guidelines. Furthermore, liquidity management involves setting the cost of funds for lending transactions based on the internal transfer prices applicable from time to time. Finally, the execution of loans disbursements is part of the liquidity management.

6.4. Portfolio management


Portfolio management deals with the management of the Banks investment portfolios. The objective is to contribute with stable earnings. The Own Capital Portfolio, consisting of the paid-in capital and accumulated reserves has the objective to provide a long-term, stable return. The portfolio is invested in medium- and longterm marketable fixed income and euro-denominated securities of high quality, typically government bonds, agency bonds and, to a limited extent, covered bonds. The own capital portfolio is held to maturity, and the portfolio is hence not subject to daily mark-to-market fluctuations. The own capital management is conducted based on risk limits approved by the Board of Directors, as well as on limits and guidelines established by the President within the framework set by the Board. The Rate Portfolio comprises high quality securities (internal risk class 1-4) and derivatives, such as interest rate futures, repos, swaps and assets swaps. The Rate portfolio is primarily exposed to interest rate risk.

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Financial Policies Part I The Bank has mandated external managers to carry out interest rate trading up to a maximum of USD 200 million on an unfunded basis. According to performance, the mandates can be increased or terminated at the discretion of the Bank. The Portfolio of Reclassified Financial Assets comprises asset-backed securities reclassified in line with the amendments in the international accounting standards made in late 2008. The objective of the portfolio is to secure earnings and avoid volatility in the valuations. This portfolio will be wound down over time as the securities mature and there will be no reinvestments.

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7. RISK MANAGEMENT
7.1. Key risk management principles and responsibilities
The Bank assumes a conservative approach to risk-taking. The main riskscredit risk, market risk, liquidity risk and operational riskare managed carefully with risk management closely integrated into the Banks business processes. The business functions, Lending and Treasury, are accountable for the risks assumed in their respective operations. Independent support functions bear responsibility for evaluating, measuring and monitoring the risks assumed. The Banks risk management systems and procedures are reviewed and refined on an ongoing basis in order to comply, in substance, with what the Bank identifies as the relevant market standards, recommendations and best practices. The Bank has chosen Basel IIs Advanced Internal Ratings Approach as a benchmark, although the Bank is not subject to regulations based on the Basel II Capital Accord. The Board of Directors defines the overall risk profile of the Bank and the general framework for risk management by approving its financial policies and guidelines, including maximum limits for exposure to various types of risk. Credit approval is primarily the responsibility of the Board of Directors, with some delegation of approval authority to the President. The Board of Directors also approves the authorisations for the Banks borrowings on an annual basis. Based on regular reporting by the Banks management, the Board of Directors oversees that the Banks activities are in line with the overall risk profile. The President is responsible for managing the risk profile of the Bank as a whole within the framework set by the Board of Directors and for ensuring that the Banks aggregate risk is consistent with its financial resources. The Management Committee, Credit Committee and Finance Committee assist the President in carrying out the risk management duties. The Management Committee has the overall responsibility for risk management. The risk management duties of the Credit Committee are focused on credit risk in the Banks lending operations. The Finance Committee deals with market risk and liquidity risk, as well as credit risk related to the Banks treasury operations. Lending and Treasury are responsible for the day-to-day management of all risks that arise in their operations. Lending is responsible for making assessments of the risks versus return of all loans and Treasury bears responsibility for the assessment of the risk versus return in the Banks treasury operations. Lending reviews on a regular basis the creditworthiness of all lending counterparties. Credit & Analysis is responsible for providing an independent assessment of the creditworthiness of counterparties in the Banks lending operations. Credit oversees that credit proposals are in compliance with established limits and policies. Furthermore, the Credit function monitors the regular reviews of the creditworthiness of all lending counterparties and may also initiate a review if deemed needed. Credit & Analysis reports to the President. Legal Department provides legal services in relation to the Bank's lending, funding and treasury operations as well as to the institutional and administrative processes of the Bank. Risk Management supports Treasury in identifying, measuring, monitoring and reporting the Banks market and liquidity risk exposure. Risk Management also assesses and monitors the creditworthiness of the Banks counterparties in treasury operations. It is further responsible for 26 (33) December 2009

Financial Policies Part I measuring, monitoring and reporting the Banks aggregate risk exposure in terms of economic capital, including an analysis of credit risk concentrations and migrations in credit quality on a portfolio level. The function is also responsible for the development of the Banks risk management tools and techniques. Risk Management reports to the President. Internal Audit is an independent function commissioned by the Board of Directors. The main responsibility of Internal Audit is to evaluate the controls, risk management and governance processes in the Bank. The Head of Internal Audit reports to the Board of Directors and to the Control Committee and keeps the President regularly informed.

7.2. Credit risk


Credit risk is the Banks main financial risk. Credit risk is the risk that the Banks counterparties fail to fulfil their contractual obligations and that collateral provided does not cover the Banks claims. Following from the Banks mandate and financial structure, most of the credit risk arises in the lending operations (ref. 2. Financial structure). In the Banks treasury activities, credit risk derives from the financial assets and derivative instruments used for investing the Banks liquidity and own capital as well as from the management of exchange rate and interest rate risks and other market risks related to structured funding transactions. The Banks credit risk management is based on an internal credit risk rating system, a limit system based on the credit risk ratings and on a model for the calculation of economic capital for the management of portfolio-level credit risk. 7.2.1. Credit risk rating The Bank assesses the creditworthiness of all counterparties that create credit risk exposure. Based on the assessment, an internal credit risk rating is assigned to each counterparty and a risk class to each transaction. The ratings and risk classes are used to distinguish the risk factors linked to counterparties and transactions and they form the basis for setting exposure limits, for the risk-based pricing of loans as well as for monitoring and reporting the Banks credit quality. The Banks rating system is based on estimating the probability of default of a counterparty and the loss given default on a transaction. Probability of Default (PD) indicates the statistical probability that a counterparty will default on its obligations. The PD for the various types of counterparties is derived from a combination of in-house expert-based judgement, scenario analyses, peer group comparisons and the output from the Banks quantitative and qualitative rating models (the Obligor Rating Tool for estimating the PD for corporations and the country rating tool for sovereign counterparties). For financial market counterparties the external ratings are used as an additional reference. Based on the PD assigned, the counterparties are segmented into rating classes. The Bank applies a rating scale comprising 20 rating classes for performing loans and two classes for loans in default. Each of the classes 1 to 20 is defined in terms of default probability. Class 1 indicates the highest credit quality (i.e. the lowest probability of default within one year) and class 20 indicates the lowest credit quality (i.e. the highest probability of default). The first default class indicates impairment and the second a non-performing status. The rating classes are mapped to the ratings of the major international rating agencies. As such, the rating classes 110 correspond to the investment grade ratings of the international rating agencies. Loss Given Default (LGD) is an estimate of the non-recoverable portion of a loan or financial placement in case the counterparty defaults. The severity of the loss is expressed as a percentage of the amount outstanding when the default occurs.

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Financial Policies Part I The severity of loss depends on a number of factors, such as the type of counterparty and the availability of collateral or other credit enhancement. From historical information it can be estimated how much is likely to be lost, on average, for various types of transactions. Due to the small number of defaulted loans, the Bank does not have sufficient historical data of its own to use as a basis for calculating average LGD rates. The Bank uses external sources, where available, for obtaining market references on LGD rates that are applicable to the Banks unsecured loans. For estimating the LGD of secured loans the Bank uses an in-house built tool, the Security Rating Tool. The estimated LGD is produced based on a combination of quantitative and qualitative input factors, including type of counterparty and collateral, estimated collateral value at liquidation and third party guarantees. By combining the two parameters PD and LGD the Expected Loss (EL) on each transaction is derived. Expected Loss quantifies the loss that the Bank expects to incur on each obligation based on the combined effect of the probability that a counterparty defaults and the estimate of the unrecoverable portion of the Banks claim in case of default. Based on the expected loss, the transactions are segmented into risk classes ranging from 1 to 20, such that risk class 1 refers to the lowest expected loss and class 20 to the highest expected loss. In addition, a default class is applied, indicating impairment or non-performing status. For the credit risk rating of project finance transactions the Bank applies the internally developed Project Finance Rating Tool. This is a cash flow-based simulation tool which incorporates both qualitative and quantitative factors. All rating tools are validated periodically to ensure their applicability to current credit conditions and to reflect the increase in the availability of historical data as well as recent methodology development.
References: Obligor Rating Tool, Methodology Development, Mercer Oliver Wyman, 20 January 2005 Security Rating Tool, Development Methodology, Mercer Oliver Wyman, 20 January 2005 Project Finance Tool, User Guide, Mercer Oliver Wyman, 20 January 2005 Appendix 9: Obligor Master Scale Appendix 10: Security Master Scale Appendix 11: Transaction Master Scale

7.2.2.

Measurement of credit risk exposure

For loans and capital market investments, credit exposure is measured in terms of gross nominal amounts, without recognising the availability of collateral or other credit enhancement. Exposure to each counterparty is measured on a consolidated group level, i.e. individual counterparties that are linked to one another by ownership or other group affiliation, are considered as one counterparty. The credit risk exposure of swaps is measured as the current market value plus an allowance for a potential increase in exposure over the transactions lifetime (often referred to as potential exposure). The add-on for potential exposure reflects the fact that significant fluctuations in the swaps value may occur over time. As a rule, NIB enters into the International Swaps and Derivatives Association (ISDA) contract with swap counterparties. This allows the netting of the obligations arising under all of the derivative contracts covered by the ISDA agreement in case of insolvency and, thus, results in one single net claim on, or payable to, the counterparty. Netting is applied for the measurement of the Banks credit exposure only in cases when it is deemed to be legally valid and enforceable in the relevant jurisdiction and against a counterparty.

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Financial Policies Part I The Bank enters into credit support agreements with its major swap counterparties. This provides risk mitigation, as the swap transactions are regularly marked-to-market and the party being the net obligor is required to post collateral. Only the value of an obligation above a certain threshold level is normally collateralised. The Bank strives to use unilateral credit support agreements, whereby the Bank is excluded from posting collateral. When credit support agreements are in place, the Bank does not apply add-ons in the exposure calculation. Credit support agreements are used to reduce the Banks credit exposure only in cases when such agreements are deemed to be legally valid and enforceable in the relevant jurisdiction and against a counterparty
Reference: Appendix 12: Calculation of add-on to the credit risk exposure in certain treasury transactions.

7.3. Market risk


Market risk is i.a. the risk that losses incur as a result of fluctuations in exchange rates and interest rates. The Banks exposure to exchange rate risk occurs when translating assets and liabilities denominated in foreign currencies into the functional currency, the euro. The Bank funds its operations by borrowing in the international capital markets and often provides loans in currencies other than those borrowed, which un-hedged would create currency mismatches in assets and liabilities. Furthermore, the funds borrowed often have other interest rate structures than applied in the loans made to the Banks customers. Exposure to exchange rate risk and interest rate risk created in the normal course of business is minimised by the use of derivative instruments. The residual risk must be kept within the limits approved by the Board of Directors. Such limits are kept very narrow to accommodate the Statutes, which stipulate that the Bank shall, to the extent practicable, protect itself against the risk of exchange rate losses. 7.3.1. Market risk measurement and limits Exchange rate risk is the impact of unanticipated changes in foreign exchange rates on the Banks assets and liabilities and on the net interest income. The Bank measures and manages foreign exchange risk in terms of the net nominal value of all assets and liabilities per currency on a daily basis (translation risk). The Board of Directors approves the limits for acceptable currency positions, i.e. the difference between assets and liabilities in a specific currency. Interest rate risk is the impact that fluctuations in market interest rates can have on the value of the Banks interest-bearing assets and liabilities and on the net interest income. The Banks sensitivity to interest rate fluctuations is measured on a daily basis using GAP analysis, which measures interest rate risk as the sensitivity of the Banks interest income to a 1% change in interest rates. A gross and net total limit is defined for the acceptable interest rate risk, with separate sub-limits for each individual currency. The limits, which are set in relation to the Banks equity and adjusted annually, are approved by the Board of Directors. Risk emanating from differences in the maturity profile of assets and liabilities is managed by monitoring against limits established for refinancing and reinvestment risk. Refinancing risk arises when long-term assets are financed with short-term liabilities. Reinvestment risk occurs when short-term assets are financed with long-term liabilities. Refinancing and reinvestment risk are measured by means of a sensitivity analysis. The analysis captures the impact on the Banks net interest income over time of a 0.1% change in the margin on an asset or liability. The limits for refinancing and reinvestment risk are set in relation to the Banks equity. They are reviewed annually and approved by the Board of Directors. The Bank calculates Value-at-Risk (VaR) for the Own Capital Portfolio, the Rate Portfolio and for the whole balance sheet. VaR estimates the potential future loss (in terms of market value)

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Financial Policies Part I that will not be exceeded in a defined period of time and with a defined confidence level. For measuring Value-at-Risk, the Bank applies both a parametric method and the Monte Carlo method. Under the Monte Carlo method, simulations are made to estimate the sensitivity of the portfolio and the individual transactions to changes in the yield curve and exchange rates. The model is based on a 95% confidence level and a holding period of 1 day. The Bank manages its Own Capital Portfolio by means of modified duration. Modified duration measures how much the price of a security or portfolio of securities will change for a given change in interest rates. Generally, the shorter the duration, the less interest rate-sensitive the security is. The Board of Directors approves the limit for maximum duration. The Bank is exposed to credit spread risk relating to the bonds held in its marked-to-market portfolios. Credit spread risk arises from changes in the value of debt instruments due to a perceived change in the credit quality of the issuers or underlying assets. The Bank manages the exposure to credit spread movements by calculating the sensitivity of the bonds in the markedto-market portfolios to a 0.01% change in credit spreads. The Board of Directors approves the limit for the maximum acceptable credit spread exposure.
References: Appendix 6: Limits for Market and Liquidity Risks Appendix 7: Limits for Interest Rate Risk in the EUR Fixed Income Portfolio Appendix 8: Limits for Foreign Exchange Risk

7.4. Liquidity risk


Liquidity risk is defined as the risk of losing earnings and capital due to an inability to meet obligations in a timely manner when they become due. Liquidity risk is categorised into two risk types: Funding liquidity risk occurs when the Bank cannot fulfil its obligations because of an inability to obtain new funding. Market liquidity risk occurs when the Bank is unable to sell or realise specific assets without significant losses in price. To manage liquidity risk, the Bank monitors its obligations and commitments by estimating the cash flows emanating from all assets and liabilities up to different maturities and by setting limits to the available liquidity in relation to the estimated liquidity requirements. The liquidity risk limits are approved by the Board of Directors.
References: Nordic Investment Bank, Liquidity Policy 23 February 2009

7.5. Economic capital


Economic capital is the amount of capital that the Bank needs in order to be able to absorb severe unexpected losses, with a defined level of certainty. As an IFI, the Bank is not subject to regulatory capital requirements. However, the Bank uses standards proposed by the Basel II Capital Accord as a benchmark for its economic capital framework. The Bank's policy is to hold a level of capital required to maintain the AAA/Aaa rating. The overall purpose of the Bank's economic capital framework is to incorporate risk awareness throughout the business decision process. The economic capital model provides an aggregated view of the Bank's risk position at a certain point in time, it allows capital to be allocated for the purpose of the risk-based pricing of loans and it is used for measuring the Bank's risk-adjusted performance. 30 (33) December 2009

Financial Policies Part I The Bank estimates its economic capital requirement for each of the main risks: credit risk, market risk and operational risk. When allocating economic capital for credit risk, the model uses the PD and LGD values arrived at in the internal rating process. The model recognises correlations between assets in various sectors and geographical regions, which enable it to take into account the positive impact of diversification and the negative impact of concentrations in the Banks portfolios. When estimating the total economic capital requirement, the model recognises correlations between the different types of risk (credit risk, market risk and operational risk). The Board of Directors is regularly provided with reports on the development in economic capital and risk trends that are observable in the Bank as a whole and in the lending and treasury portfolios separately.

7.6. Operational risk


Operational risk can be broadly defined as any risk which is neither credit risk, market risk, strategic risk nor compliance risk. The Bank defines operational risk more precisely as the risk of direct or indirect losses or damaged reputation due to failure attributable to technology, employees, processes, procedures or physical arrangements, including external events and legal risks. The Banks status as an international organisation with immunities and privileges granted to the Bank and its personnel, and the fact that the Bank is not bound by or under the supervision of any national laws as such, results in a specific need to address potential risks by adopting an extensive set of guidelines, regulations, rules and instructions governing the activities of the Bank and its staff. The Banks operational risk management focuses on proactive measures in order to ensure business continuity, accuracy of information used internally and reported externally, the expertise and integrity of the Banks personnel and its adherence to established rules and procedures as well as on security arrangements to protect the physical infrastructure of the Bank. The Bank attempts to mitigate operational risks by following strict rules for the assignment of duties and responsibilities among and within the business and support functions and by following a system of internal control and supervision. The main principle for organising work flows is to segregate business-generating functions from recording and monitoring functions. An important factor in operational risk mitigation is also the continuous development and upgrading of strategic information and communication systems.
Reference: Operational risk management policy 11 December 2008

7.7. Information and communication technology (ICT)4 strategy and security


The Bank considers ICT as one of its key focus areas in enabling the Bank to achieve operational excellence, reduce operational risk and reach a high level of cost efficiency aligned with the Banks business strategy. The Bank aims at a process-oriented, cross-departmental mindset with streamlined and automated business processes.

Information technology (IT) renamed Information and Communications Technology (ICT) as of May 2007. In any previously approved texts the abbreviation IT should be interpreted as ICT.

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Financial Policies Part I The key ICT implications are strategy and ICT functionality alignment, organisation-wide risk management, operational risk reduction, competence development, the effectiveness of ICT capability and focus on core business. A proactively planned, disciplinary and defined ICT governance model is also an area of key importance. The ICT Council is the forum for overall ICT planning and prioritisation. The ICT Council has the authority to make investment decisions and other related decisions within the scope of the established financial plan. The Bank aims at a high-quality ICT architecture that ensures performance stability and flexibility and which is adapted to the transaction volumes of the Bank. The Banks preferred strategy is to use standard packaged-based software applications with proven functionality and an established user base. Solutions based on purchased external services can also be considered as a good alternative in many cases. As the Banks operations are largely based on information processing, much emphasis is also put on information technology security. In terms of ICT security, the Banks ambition is to maintain a level comparable to good international standards within the financial sector. The overall purpose of the Banks ICT security policy is to ensure an uninterrupted, secure and undisturbed use of information and communication systems. The basic principles of ICT security are thus confidentiality, integrity, availability, authentication and non-repudiation. ICT security covers all parts of the ICT environment, including hardware, software, networks, databases and ICT services as well as ICT administration, ICT management, ICT operations and other ICT-related work processes. The Bank also emphasises disaster recovery of its core ICT systems should exceptional circumstances arise. ICT security is the responsibility of the Banks President. ICT security policies are prepared by the ICT Security Committee and approved by the President in the Management Committee and submitted as information to the Board of Directors. The compliance with the policies, instructions and other rules regarding ICT security is the responsibility of the line management and, ultimately, of every employee of the Bank.
Reference: NIBs IT Security Policy, 23 October 2001 NIBs Model for IT governance, 26 April 2007

7.8. Administrative risk and legal risk


The Bank has established an extensive Legal framework for its personnel. The Code of Conduct, as part of the Legal framework, defines the fundamental ethical principles to be observed by the Banks personnel. These include e.g. the requirement regarding the employees integrity and loyalty, guidelines for handling conflicts of interest, prohibitions on insider trading, restrictions on financial interest and rules regarding bank secrecy. Furthermore, the Bank has a number of internal instructions, issued by the President. General instructions refer to matters concerning the Banks total staff or at least two or more departments. Such instructions are i.a. instructions regarding ICT security, the authorisation of business transactions and the safekeeping of documents. In addition, internal instructions for a department may be issued to cover, e.g., certain procedures and routines. It is the responsibility of the management to ensure that all employees are familiar with the internal instructions and adhere to them. The Compliance Office controls compliance on a regular basis and reports any breaches. The Banks legal risks relate to inadequate or inefficient documentation, legal capacity, enforceability and the applicability of national law and dispute resolution mechanism in the jurisdictions under which it operates. These risks are mitigated through e.g established 32 (33) December 2009

Financial Policies Part I procedures, key clauses and the legal review of all contractual documents of the Bank irrespective of whether they relate to the operational or the administrative activities of the Bank. In its documentation of lending operations, the Bank uses key clauses developed over the years. For the documentation of treasury transactions, the Bank relies on standardised documentation commonly accepted in the market. Concerning borrowing, the Bank uses its own standard documentation developed based upon the Banks Statutes and practise that has evolved over time. The Legal Department is responsible for the Banks contractual documentation i.a. to verify the legal capacity of the Banks counterparties, ensure the enforceability of the contract including realisation of collaterals and to advise on the choice of governing law and forms of dispute resolution, before any contracts are entered into by the Bank.
References: Set of Staff Regulations and Rules Code of Conduct, 1 July 2009 Department Instructions Authority to sign for NIB, 29 October 2008 Attest instruction, 17 November 2004 NIB Information Policy, 6 March 2008 NIBs IT Security Policy, 23 October 2001 Instruction concerning the Document and Security Register, 28 January 2002 Storage and Destruction of Documents, 23 August 2004 Instruction concerning the Administration of the Banks Common Vault, 21 January 2009 Procurement Instruction, 16 April 2004 (under review)

7.9. Compliance risk


Compliance can be defined as the adherence to laws, regulations, rules, related self-regulatory organisation standards and codes of conduct in matters concerning observing proper standards of market conduct, managing conflicts of interest and specifically dealing with matters such as prevention of money laundering and terrorist financing, and investigations of alleged corrupt and fraudulent behaviour. Compliance risk is the risk of legal or regulatory sanctions, material financial loss, or loss to reputation, a bank may suffer as a result of its failure to comply with compliance laws, rules and standards. Compliance laws, rules and standards have various sources, including primary legislation, rules and standards issued by legislators and supervisors, market conventions, codes of practice promoted by industry associations, and internal codes of conduct applicable to the staff members and other bodies of the Bank. Compliance laws typically include specific areas such as the prevention of money laundering and terrorist financing and tax laws. The fact that the Bank is not bound by or under the supervision of any national laws as such, results in a specific need to address potential risks by adopting an extensive set of guidelines, regulations, rules and instructions governing the activities of the Bank and its staff. The Compliance function assists the Bank in identifying, assessing, monitoring and reporting on, compliance risk in matters relating to the institution, its operations and to personal conduct. By this the Compliance function contributes in an independent manner to the overall risk management of the Bank in protecting the integrity and reputation of the Bank and the staff and in strengthening the Banks accountability and transparency.
Reference: Compliance Policy, 17 December, 2009

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