Expected credit losses (ECL)
Kommuninvest calculates expected credit losses in accordance
with . Decisions on the methods used in these calcula-
tions are made by the Company’s Credit Risk Committee,
which meets quarterly. The daily follow-up and implementa-
tion of the Credit Risk Committee’s decisions is performed by
the Finance Department and the Risk and Control Depart-
ment. Changes in credit risk are monitored daily.
Credit risk exposure
Kommuninvest is exposed to credit risks through its lending port-
folio, through off-balance sheet items and through investments.
Kommuninvest’s lending portfolio comprises lending to
municipalities and regions (members of the Society), as well as
companies and other entities. Any lending to parties other than
members (municipalities/regions) directly requires a guarantee
from one or more members. Off-balance sheet items consist of
contracted new lending yet to be disbursed. Investments com-
prise cash and cash equivalents or holdings in sovereigns or
state-related counterparties, including federal states, local
govern ment authorities and credit institutions similar to
Kommun invest.
Calculation of ECL
When calculating expected credit losses (), the exposure at
default () is multiplied by the proportion determining the
loss given default (). This is then multiplied by the probabil-
ity of default ().
= * *
is updated on a daily basis. The three factors, as well
asphase allocation, are monitored on an ongoing basis. On
aquarterly basis, an assessment is made of the trend for the
period, and of any need for adjusting the model.
Expected maturity in the ECL calculation
shall be calculated for different periods, which vary
depending on the development of the counterparties’ credit-
worthiness. When a contract is initiated, it is in Phase .
isthen calculated on the basis of default possibly occurring
within the ensuing months. In the event that an exposure be
classied in Phase due to a heightened credit risk, the calcula-
tion is based instead on all cash ows throughout the remain-
ing maturity. In the event of default, the exposure is transferred
to Phase . Indicators are used to continuously monitor the
development of credit risk in the Company’s lending. All credit
exposures are currently in Phase .
For the investments, Kommuninvest uses the regulatory
exemption for low credit risk. This is supported by the invest-
ment portfolio’s credit risk prole and favourable credit qual-
ity. Kommuninvest denes low credit risk as a credit rating
from Moody’s of at least Baa and from S&P Global Ratings
ofat least –.
Kommuninvest currently only has exposures with very good
credit quality, which, in addition to cash and cash equivalents
at payment banks, comprise sovereign or government relations.
In connection with negative changes in credit ratings, qualita-
tive assessments are often made to determine whether credit
risk has increased signicantly. Assuming that no signicant
increase is deemed to have occurred and the credit rating meets
the Company’s requirement of low credit risk, the asset remains
in Phase .
Definition of default
Any lending to parties other than members directly requires
aguarantee for the entire credit amount from one or more
members. Kommuninvest’s denition of default is in line with
the guidelines developed by the European Banking Authority
() and entail a counterparty having defaulted when at least
one of the following situations has occurred:
• Kommuninvest considers it unlikely that the counterparty
will be able to meet its commitments in full.
• Any of the counterparty’s commitments to Kommuninvest
have been due for payment for more than 90 days.
Before an exposure is considered to be in default, Kommunin-
vest is to perform an expert assessment. Based on the ’s
guidelines, this shall ascertain whether a “technical default”
situation has arisen. If the exposure is directly to a member
(municipality or region), the in-depth analysis is motivated
primarily by the local government authorities’ constitutionally
protected role in society, including the right to levy taxes,
meaning in practice that a local government authority cannot
be declared bankrupt.
Determination of impaired credit quality
Kommuninvest applies a set of indicators to continuously mon-
itor the development of credit risk in the lending portfolio. The
function of the indicators is to demonstrate whether there is
achange in the probability of default necessitating a transfer
between credit risk phases based on limits. Kommuninvest uses
both quantitative and qualitative indicators in its ongoing mon-
itoring of the lending portfolio. The quantitative indicators
consist of ratings from rating agencies and data from credit
information providers (risk score, risk forecast and payment
orders) and Kommuninvest’s internal risk value model for
assessing lending counterparties. Limits have been established
for the quantitative indicators, and violations are followed up.
A limit is also applied, meaning that an asset will be transferred
to Phase if payment is delayed by more than days. The
qualitative indicators consist of restructuring of loan terms.
Before an individual counterparty is transferred to phase ,
aspecial assessment is to be made to elucidate the underlying
causes and the counterparty’s overall repayment capacity. The
credit quality of the nancial assets is determined by the Credit
Risk Committee.
Kommuninvest has never suffered any actual credit loss, nor
has it modied payment ows or renegotiated any existing
agreements. In light of the above, the Company has no specic
principles for write-offs.
Probability of default (PD)
The Company uses S&P Global Ratings’ database for histori-
cal probability of bankruptcy and applies an internal theoreti-
cal model to obtain forward-looking data.
In the calculation of expected credit losses in investments,
is allocated based on the issuer’s rating.
In calculating in the lending portfolio, is allocated
on the basis of an interpolation between for the Swedish
central government and for a level worse than the lowest
rating for a local government exposure in the portfolio. This is
because not all local government authorities have credit rat-
ings. For the interpolation of the lending counterparty’s rating,
Kommuninvest’s internal risk value model is used. For the lend-
ing portfolio, Kommuninvest determines at the counter-
party level and not at the transaction level. This is motivated by
the fact that the conditions for all lending are identical. with no
hierarchical order of credit having been assigned to counter-
parties. In other words, a deteriorated credit quality will affect
all of the counterparty’s transactions.
Factors affecting the calculation of :
• The weightings for macroeconomic factors are based on the
empirical correlations between macro factors and Z-factors.
Z-factors are used to adjust historical probability to become
forward-looking.
Note 3, continued
FINANCIAL STATEMENTS
61Kommuninvest i Sverige AB, reg. no. 556281–4409Annual Report 2023