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Liquidity Policy

Treasury / 23/02/2009

Nordic Investment Bank

LIQUIDITY POLICY

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Liquidity Policy

Treasury / 23/02/2009

Table of Contents

INTRODUCTION ...............................................................................................................................3 1. THE BANK'S LIQUIDITY .............................................................................................................4 2. TREASURY PORTFOLIOS ...........................................................................................................5 2.1 Own Capital Portfolio ................................................................................................................5 2.2 Liquidity Portfolio......................................................................................................................6 2.2.1 Spread Portfolio ..................................................................................................................6 2.3 Active Portfolio Management....................................................................................................6 2.4 Reclassified Financial Assets.....................................................................................................7 3. RISK MANAGEMENT SET-UP ....................................................................................................7 4. ROLES AND RESPONSIBILITIES ...............................................................................................7 4.1 Board of Directors......................................................................................................................8 4.2 The President (The Finance Committee) ...................................................................................8 4.3 Head of Treasury........................................................................................................................8 4.4 Risk Management & Controlling...............................................................................................9 5. REPORTING ...................................................................................................................................9

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Liquidity Policy

Treasury / 23/02/2009

INTRODUCTION

This document sets out the Nordic Investment Bank's (the Bank) policy towards liquidity and sets the framework and objectives for the Bank's Treasury Operations. In the preparation of the Liquidity Policy, and in defining the liquidity risk limits, the Bank has taken note of the recommendations given by the Basel Committee on Banking Supervision in their paper Sound Practices for Managing Liquidity in Banking Organisations from February 2000. This document is structured as follows: section 1 define the Bank's liquidity; section 2 outlines the Treasury Portfolios; section 3 describes the risk management set-up; section 4 describes roles and responsibilities; and section 5 the reporting framework.

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1. THE BANK'S LIQUIDITY

The Bank defines liquidity as all its financial assets held in the Bank's treasury operations. In the balance sheet, the financial assets are booked as cash and cash equivalents, placements with credit institutions and investment securities. The liquidity is managed by the Treasury Department in different portfolios with distinct objectives. Figure 1 shows the portfolio set-up. The portfolio set-up consists of an Own Capital Portfolio, a Liquidity Portfolio with a sub-portfolio called the Spread Portfolio, an Active Management Portfolio and a portfolio called Reclassified Financial Assets. All the portfolios are described under section 2. Figure 1: Treasury Portfolios

Treasury Portfolios

Overview and Objectives Objective: Stable earnings Objective: Meet obligations Objective: Additional earnings

Own Capital Portfolio

Liquidity Portfolio

Spread Portfolio

Active Portfolio Management

Reclassified Financial Assets

The Bank has defined two main objectives for its liquidity to: ­ ­ ensure that the Bank can meet expected and unexpected payment obligations at all times; contribute to the profitability of the Bank.

Meeting these objectives is done by means of: ­ ­ ­ ­ ­ ­ having an organisational structure for liquidity management with defined roles and responsibilities; funding executed subject to the Bank's liquidity requirement; ensuring that assets are liquid enough to be liquidated without significant losses; limiting risk-taking by setting appropriate portfolio and risk limits; maximising returns on treasury portfolios within the approved risk limits; having a contingency plan ready should a liquidity problem arise.

The target is to secure sufficient liquidity by retaining access to funding and by possessing liquid assets.

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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 appears when the Bank cannot fulfil its obligations because of an inability to obtain new funding. ­ Market liquidity risk appears 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 Bank seeks to maintain the highest possible credit rating, which enables access to the capital markets at the lowest possible cost. The Bank's primary source of funding is the issuance of global benchmark bonds and medium-term notes (MTNs) on the main capital markets of Europe, Asia and the Americas. In addition, the Bank can borrow short-term liquidity with a maturity of up to 12 months through money market operations or through Commercial Paper (CP) programmes. Available liquidity (the Liquidity Portfolio and the Spread Portfolio, see below), 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.

2. TREASURY PORTFOLIOS

The Treasury Portfolios are described by objective, size and instruments employed.

2.1 Own Capital Portfolio

The Own Capital Portfolio is funded by the Bank's own capital, and consists of the paid-in capital and the accumulated reserves. The objective of the Own Capital Portfolio is to retain the value of the capital and to provide a long-term stable return. The portfolio is composed of medium- and long-term marketable fixed income securities of high quality. All the securities are denominated in euro and the Bank's Internal Rating (IR) 1 of the issuers is limited to maximum 2 for government bonds and maximum 4 for covered bonds. All securities are subject to counterparty risk limits. The bulk of the securities are issued by governments, public agencies and supranational institutions. Covered bonds and bonds issued by local governments can also be included in the portfolio to a limited extent. The portfolio is subject to a modified duration limit expressed in years, which limits the maturity of the investments. The instruments in the portfolio shall be held to maturity, and the portfolio is hence

1

The Bank's Internal Rating (IR) is assigned to counterparties upon a credit risk assessment of probability of default and loss-given-default. The Bank's Internal Rating is scaled from 1-20, where 1 is the best possible rating and 20 is the worst possible rating.

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not subject to daily mark-to-market fluctuations. All investments are subject to available credit risk limits. The performance of the investments is compared to a benchmark managed by JP Morgan, which consists of European government bonds with a modified duration of 4.5 years.

2.2 Liquidity Portfolio

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 is funded through debt issuance. The Bank classifies assets as liquidity if the Bank is able to sell the assets at market prices or realise the asset on a specific date to meet obligations. The following assets can be used as liquidity: cash deposited on the Bank's correspondent bank accounts; money market deposits with a duration of less than one year and placed in central banks and financial institutions with a maximum IR of 7; commercial papers with a duration under one year issued by central banks, supranationals, public agencies, local governments and financial institutions with a maximum IR of 7; government T-bills and short-term bonds with a maximum duration of three years and with an issuer maximum IR of 2.

2.2.1 Spread Portfolio

Part of liquidity can be invested in a Spread Portfolio, to which up to 75% of the available liquidity can be allocated. The objective of the Spread Portfolio is to increase earnings within the applied liquidity and risk limits. In the Spread Portfolio the following instruments can be used: bonds and notes issued by financial institutions with a government guarantee and a IR of 2; covered bonds with a maximum IR of 4; bonds and notes issued by financial institutions with a maximum IR of 7. The size of the portfolio is restricted by the risk limits. These restrain the effects of spread widening and hence also the duration of the investments. All the above investments are subject to available counterparty risk limits.

2.3 Active Portfolio Management

The target of the Active Portfolio Management is to contribute to the earnings of the Bank through short-term investment strategies. The strategies are carried out both internally and externally. The objective of using external managers is to enhance returns and diversify the global risk of the Bank. Investments in this portfolio are limited to securities with a maximum IR of 4 and to using liquid interest rate derivative instruments. All these investments are subject to available counterparty lines. The risk and the size of the portfolio are restricted by the overall market risk limits. The Bank's

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Finance Committee 2 allocates separate limits to the Active Management Portfolio. All instruments are held for trading and valued on a daily basis.

2.4 Reclassified Financial Assets

In October 2008, the Bank decided to reclassify specific financial assets in line with the International Accounting Standard IAS 39 and the IFRS 7 Amendment "Reclassification of Financial Assets". The reclassified securities consist of asset-backed securities (ABS) with a maximum IR of 4. The objective of the portfolio is to secure earnings while avoiding volatility in the valuations. The securities in the portfolio are subject to overall risk limits. The portfolio will be unwound over time as the securities mature and there will be no reinvestments.

3. RISK MANAGEMENT SET-UP

Risk Management is responsible for the daily calculation, monitoring and follow-up on compliance with the risk limits. The objective is to control and report whether risk is kept at an acceptable level. Through the Financial Policies and Guidelines the Board of Directors approves risk limits applying to the Bank's treasury operations 3 . The risk limits are applied in three areas: 1) counterparty risk; 2) market risk; and 3) liquidity risk. Counterparty risk limits apply to the credit exposures in the treasury operations arising from all instruments used in relation to the Bank's counterparties. Market risk limits apply to all interest rate risk, foreign exchange rate risk, credit spread risk, and refinance and reinvestment risk. A duration limit applies to the Own Capital Portfolio and serves to restrict the duration of the investments. Liquidity risk limits address the positive liquidity requirement for the first 12 months and funding deficits in longer maturities. For the daily management of the Bank's treasury operations to be responsive to changing market conditions, the Bank has additional risk mitigations approved by the Finance Committee. The risk mitigations depend on the actual risk environment in the financial market, but they typically include country, sector and instrument mitigation, liquidity monitoring and funding diversification as well as stress testing.

4. ROLES AND RESPONSIBILITIES

This section outlines the roles and responsibilities within the liquidity policy with respect to duties, decision-making, information and reporting.

2

The Finance Committee is an advisory body to the President, described in Part I of NIB's Financial Policies. The current limits approved by the Board of Directors are published in appendices of Part I of the Financial Policies

3

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4.1 Board of Directors

The Board of Directors approves the Liquidity Policy as well as Financial Policies, which identify lines of authority and responsibility for managing NIB's treasury operations. For risk measures, the Board of Directors approves assigned risk limits, which are part of the Bank's Financial Policies. The Board of Directors monitors the performance of the Bank's liquidity and risk limits utilisation by receiving reports that are timely and sufficiently detailed to allow the assessment of risks facing the Bank. The Board of Directors also reviews the concentration in the Bank's funding and the composition of holdings.

4.2 The President (The Finance Committee)

The President is responsible for setting guidelines and risk limits for the treasury operations in the Finance Committee within the framework decided by the Board and for further delegation to the Head of Treasury. Treasury and Risk Management are responsible for reporting to the President, and for bringing to the President's attention issues concerning liquidity and risks that require new decisions. The Finance Committee sets limits which ensure an adequate risk level and liquidity within the limits approved by the Board of Directors. The Finance Committee also ensures that there are adequate internal controls in place to protect the integrity of the established risk management process. The utilisation of limits and the breach of limits are reported to the Finance Committee. All new as well as existing financial instruments used in the treasury operations are subject to approval by the Finance Committee. 4 The Finance Committee approves the Bank's internal transfer prices between the Treasury and Lending Departments on the basis of a proposal from Treasury. Treasury bases the transfer price proposal on an assessment of the current and expected future funding costs. The Finance Committee acts during times of liquidity problems as the organiser and decision-maker and executes the contingency plan following a recommendation from Treasury and Risk Management.

4.3 Head of Treasury

The responsibility for organising and managing the Bank's liquidity and funding is placed with the Head of Treasury. The Head of Treasury is responsible for the daily execution of the treasury operations and for ensuring that these are in accordance with the approved guidelines and risk limits. He/she is also responsible for the reporting on the Bank's funding and liquidity management. The Head of Treasury is responsible for taking the initiative to bring liquidity management and other risk issues of importance to the attention of the President and the Finance Committee for

4

For a complete list of authorised instruments see the Financial Policies, Part I, Appendix 5 - Authorised Instruments for the Treasury Operation.

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decision-making. If limits are breached, the Head of Treasury shall promptly schedule a plan for bringing the positions back within the approved limits. The Head of Treasury brings to the attention of the President and Finance Committee the emergence of liquidity problems and recommends action.

4.4 Risk Management & Controlling

The Bank shall have adequate and separate internal controls to ensure the sufficiency and integrity of its risk management process. The internal controls are an integrated part of the Bank's risk management system and are described in the Bank's Financial Policies. The system of internal controls consists of daily reports produced by Treasury and Risk Management. Risk Management is responsible for the daily checks and follow-up on the quality of the reporting and on limits compliance and utilisation. The Bank seeks to promote effective and efficient control combined with reliable financial and risk reporting in compliance with policies and limits. With respect to financial policies and procedures, attention is paid to appropriate approval processes, limits, reviews and other mechanisms designed to provide assurance that the Bank's risk management objectives are achieved. Periodic reviews of limits and the operations within them are to be conducted by Risk Management to determine whether the organisation complies with the risk policies and procedures. Positions that exceed established limits receive prompt attention and are reported to the Head of Treasury and the Head of Risk Management. Risk Management is responsible for analysing the likely impact of a range of predetermined stress scenarios.

5. REPORTING

Compliance with respect to all limits is monitored on a daily basis. Risk and position reports are produced and must be published daily by Treasury and Risk Management. Follow-up on limit compliance is based on the published reports. The Board of Directors and the Finance Committee are updated on all prevailing limits. Any breach of limits is reported. The Board of Directors is continuously updated through sufficiently detailed reporting on the treasury operations. A review of the Liquidity Policy is conducted annually and reported to the Board of Directors. The Finance Committee coordinates the information for public disclosure in a contingency situation and the Board of Directors is informed thereof. The Liquidity Policy is part of the Financial Policies and is available to the public on the Bank's website: www.nib.int.

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