COREALCREDIT BANK AG

problems, i.e. the risk that the government of a state may take measures that restrict the crossborder
transfer of capital and/or the procurement of currency; Country risk also includes the risk of
the default or deterioration in credit standing of a country; (iii) Collateral risk is the risk of a
deterioration in the value of collateral for reasons attributable to the property that is being financed,
and/or changes in the relevant market; (iv) Settlement risk is the risk that, following delivery or
payment by the Issuer, the counterparty fails to make the agreed counter-performance; and (v)
Issuer risk is the risk of partial or total loss of receivables from investment securities such as profitshare
rights or other bonds due to the default of the Issuer.
On the part of COREALCREDIT, a credit risk exists to an especially high degree, however, in
connection with the granting of credits, since, if this risk is realized, not only is the compensation
for the activity lost, but also and above all the loans which have been made available to the
customer. The Issuer believes that adequate provision has been made for all of
COREALCREDIT's recognized potentially or acutely endangered credit commitments. It cannot be
excluded, however, that COREALCREDIT will have to make further provision for possible loan
losses or realize further loan losses, possibly as a consequence of the persistently weak economic
situation, the continuing deterioration in the financial situation of borrowers from COREALCREDIT,
the increase in corporate and private insolvencies (particularly in Germany), the decline in the
value of collateral, the impossibility in some cases of realizing collateral values or a change in the
provisioning and risk-management requirements. This may materially adversely affect
COREALCREDIT's net assets, financial position and earnings performance.
Market Risk
Market risk is related to the risk of a loss due to the volatility of market prices of financial
instruments. It includes among others the risk of potential loss arising by changes in market
conditions, i.e. interest rate risk, credit spread risk and exchange-rate risk, or parameters which
influence prices (volatilities, correlations).
Volatility in interest rates, for instance, may negatively affect the Issuer's net interest income and
have other adverse consequences. As with any bank, changes in market interest rates could affect
the interest rates the Issuer charges on its interest-earning assets differently than the interest rates
it pays on its interestbearing liabilities. This difference could result in an increase in interest
expense relative to interest income, which would reduce the Issuer's net interest income, the
largest source of its revenues. An increase in interest rates may reduce the demand for loans and
the Issuer's ability to originate loans. A decrease in the general level of interest rates may affect
the Issuer through, among other things, increased prepayments on its loan portfolio and increased
competition for deposits. Likewise, a decrease in interest rates may affect the Issuer's ability to
securitise parts of its balance sheet positions or otherwise issue debt securities. Interest rates are
highly sensitive to many factors beyond the Issuer's control, including monetary policies and
domestic and international economic and political conditions.
Liquidity Risk and Market Liquidity Risk
The Issuer is exposed to liquidity risk, i.e. the risk that the Issuer is unable to meet its current and
future payment commitments, or is unable to meet them on time (solvency or funding risk). In
addition, the risk exists for the Issuer that inadequate market liquidity will prevent the Issuer from
selling trading positions at short notice or hedging them, or that it can only dispose of them at a
lower price (market-liquidity risk).
Liquidity risk can arise in various forms. It may happen that on a given day the Issuer is unable to
meet its payment commitments and then has to procure liquidity at short notice in the market on
expensive conditions.
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