COMMERZBANK AKTIENGESELLSCHAFT

decrease in the value of the collateral provided. As a consequence of the financial market crisis and
the economic slump, the market values of many properties have been subject to considerable
fluctuations for some time now and have fallen sharply in some cases, which has had a
correspondingly negative impact on Eurohypo’s business activities. Factors that can have a sustained
influence on the real estate market include the relationship between the supply of commercial
properties and the demand for them, construction delays and defects, legacy issues and ground
contamination, the availability of tenants, investment behavior and general cyclical fluctuations on the
property market. The Bank has concluded a control and profit transfer agreement with Eurohypo in
which it has undertaken, among other commitments, to offset any losses incurred by Eurohypo. The
risk of volatile real estate prices could therefore have a material adverse effect on the Group’s
business, results of operations and financial condition.
Risks arising from Structured Credit Products
Since the second half of 2007, the international financial markets have been suffering from the major
impact of the subprime crisis, which originated in the U.S. market for subprime mortgage loans (i.e.,
generally variable-rate mortgages issued to borrowers with inadequate credit histories), and the aftereffects
of this crisis. The originating banks regularly used what were in some cases complex financial
instruments (structured credit products) to transfer, either directly or using special investment vehicles
(“SIVs”), the risks arising from these loans to the international capital markets. For some time, the
financial instruments were considered by investors to be attractive capital investments, not least
because of the good ratings they were awarded by the ratings agencies.
After the financial market crisis had initially spread to a number of banks that specialized in credit
products with subprime exposure, and investment banks, hedge funds and also bond and credit
insurers (especially monoline insurers) found themselves in difficulty or even became insolvent in
some instances, the crisis took a major turn for the worse in autumn 2008 and led to among other
things significant restructuring especially of U.S. banks, often in conjunction with governmental
supportive measures. Like the U.S. banks also European banks were highly affected by the intensified
impacts of the financial crisis and fell into financial and in some cases existential distress which they
could often only overcome with governmental stabilizing measures.
Refinancing of banks still (also in the interbank market) suffers because of a lack of confidence not
least due to the complexity of a lot of structured financial products with and without subprime exposure
to which there is insufficient transparency as to the dimension of risks. Even government bonds and
bonds from top-rated issuers occasionally reacted with changes in market value, significant in some
cases.
The crisis on the financial markets also led to a considerable increase in the volatility of financial
instruments’ market values. This had an impact on trading profits and net investment income, which
were hit hard by valuation losses in the Group’s ABS 2 portfolio. Heightened volatility also makes risk
management more difficult, as it makes the results of the model calculations and stress tests used for
this purpose less reliable. In addition, greater volatility makes it more expensive to hedge risks.
The financial market crisis has therefore weighed heavily on the Group’s business, results of
operations and financial condition, and it should be assumed that the crisis will continue to give rise to
material adverse consequences for the Group in future.
To a large extent, demand for the Group’s products and services depends on general economic
trends. In the Private Customers segment, declining corporate valuations prompt customers to switch
to lower-risk investment options, which generally only generate relatively low sales commissions. In
2 ABS or Asset-backed securities are securities or certificates of indebtedness representing claims against a special purpose
vehicle set up solely for the purpose of an ABS transaction. The claims are backed by a portfolio of claims, which are
transferred to the special purpose vehicle and are for the benefit of the holders of the asset-backed securities as collateral for
the liabilities.
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