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Credit Risk

Credit risk is defined as the risk of loss in portfolio value owing to the downgrade or default of an institution or security issuer.

NZDMO is exposed to credit loss when the issuer of a debt instrument defaults on interest or principal payments, or when a counterparty in a transaction such as a swap agreement defaults on an obligation. Credit-related loss in the value of the portfolio also occurs when the market value of a debt instrument falls owing to an increase in credit risk.

Financial instruments that subject NZDMO to credit risk include bank balances, advances, investments, interest rate swaps, currency swaps and foreign exchange forward contracts.

NZDMO manages credit risk through the credit screening of counterparties, use of credit exposure limits and counterparty collateral obligations. Credit exposures are maintained only with highly rated institutions for which the probability of default is low. To diversify credit exposure, NZDMO limits its exposure to any one institution. The creditworthiness of counterparties is continuously monitored. Credit risk is further controlled by incorporating credit support annexes into master swap agreements with swap and foreign exchange counterparties.

NZDMO lending to government entities, and to entities to which NZDMO is exposed as a matter of government policy, is not managed under the credit policy.

Credit Risk Management
2009
$m		 Credit Risk Management 2010
$m
22,831 Total NZDMO financial assets 23,097
  Less:  
15,297 Crown-related balances 13,928
7,534 Total Credit Exposure for Financial Assets 9,169

Concentration of Credit Exposure as at 30 June 2010

Credit Exposure by Credit Rating
By Credit Rating AAA
$m		 AA
$m		 A
$m		 Other
$m		 Non-rated
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents 1,056 75 2 - - 1,133
Debtors and receivables - - - - - -
Advances to non-Crown - - - - 86 86
Marketable securities 1,995 1,993 - - - 3,988
External deposits - 424 43 - - 467
Derivatives in gain - 841 431 - 24 1,296
IMF financial assets - - - - 2,199 2,199
Total Credit Exposure by Credit Rating 3,051 3,333 476 - 2,309 9,169
Credit Exposure by Industry
By Industry Sovereign
Issuers
$m		 Supra-
National
$m		 NZ Banking
Sector
$m		 Foreign Banking
Sector
$m		 Other
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents 1,120 - 11 2 - 1,133
Debtors and receivables - - - - - -
Advances to non-Crown - - - - 86 86
Marketable securities 779 422 1,118 763 906 3,988
External deposits - - 424 43 - 467
Derivatives in gain - - 626 532 138 1,296
IMF financial assets - 2,199 - - - 2,199
Total Credit Exposure by Industry 1,899 2,621 2,179 1,340 1,130 9,169
Credit Exposure by Geographical Area
By Geographical Area United States
of America
$m		 Europe
$m		 Japan
$m		 Australia
$m		 New
Zealand
$m		 Supra-
National
$m		 Other
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents 1,056 - 64 2 11 - - 1,133
Debtors and receivables - - - - - - - -
Advances to non-Crown - - - - 86 - - 86
Marketable securities 120 1,354 337 434 1,216 422 105 3,988
External deposits - - - 43 424 - - 467
Derivatives in gain 248 354 - 44 650 - - 1,296
IMF financial assets - - - - - 2,199 - 2,199
Total Credit Exposure by Geographical Area 1,424 1,708 401 523 2,387 2,621 105 9,169

Concentration of Credit Exposure as at 30 June 2009

Credit Exposure by Credit Rating
By Credit Rating AAA
$m		 AA
$m		 A
$m		 Other
$m		 Non-rated
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents 1,043 60 2 - - 1,105
Debtors and receivables - 396 - - -  396
Advances to non-Crown 16 - - - 49 65
Marketable securities 2,461 963 - - - 3,424
External deposits - 442 - - - 442
Derivatives in gain 83 1,202 353 - 10 1,648
IMF financial assets - - - - 454 454
Total Credit Exposure by Credit Rating 3,603 3,063 355 - 513 7,534
Credit Exposure by Industry
By Industry Sovereign
Issuers
$m		 Supra-
National
$m		 NZ Banking
Sector
$m		 Foreign Banking
Sector
$m		 Other
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents 1,045 - 58 2 - 1,105
Debtors and receivables - - 396 - - 396
Advances to non-Crown 16 - - - 49 65
Marketable securities 1,320 498 520 630 456 3,424
External deposits - - 442 - - 442
Derivatives in gain -   1,153 401 94 1,648
IMF financial assets - 454 - - - 454
Total Credit Exposure by Industry 2,381 952 2,569 1,033 599 7,534
Credit Exposure by Geographical Area
By Geographical Area United States
of America
$m		 Europe
$m		 Japan
$m		 Australia
$m		 New
Zealand
$m		 Supra-
National
$m		 Other
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents 1,042 - 3 2 58 - - 1,105
Debtors and receivables - - - - 396 - - 396
Advances to non-Crown - - - - 65 - - 65
Marketable securities 127 1,371 231 609 520 498 68 3,424
External deposits - - - - 442 - - 442
Derivatives in gain 247 225 - 12 1,163 - 1 1,648
IMF financial assets - - - - - 454 - 454
Total Credit Exposure by Geographical Area 1,416 1,596 234 623 2,644 952 69 7,534
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