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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, FX options and FX 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 monitored daily. Credit risk is further controlled by incorporating credit support annexes into master swap agreements with swap and FX 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
2010
$m		 Credit Risk Management 2011
$m
23,097 Total NZDMO Financial Assets 29,926
 

Less:

  
13,928 Crown-related balances 20,114
9,169 Total Credit Exposure for Financial Assets 9,812

Concentration of Credit Exposure as at 30 June 2011

Concentration of credit exposure by credit rating as at 30 June 2011
By Credit Rating AAA
$m		 AA
$m		 A
$m		 Other
$m		 Non-rated
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents 1,356 104 1 - - 1,461
Debtors and receivables - 504 32 - - 536
Advances to non-Crown - - - - 151 151
Marketable securities 1,294 1,835 - - - 3,129
External deposits - 115 - - - 115
Derivatives in gain - 1,633 588 - 31 2,252
IMF financial assets - - - - 2,168 2,168
Total Credit Exposure by Credit Rating 2,650 4,191 621 - 2,350 9,812
Concentration of credit exposure by industry as at 30 June 2011
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 1,356 - 88 17 - 1,461
Debtors and receivables - - 493 43 - 536
Advances to non-Crown - - - - 151 151
Marketable securities 481 489 1,188 686 285 3,129
External deposits - - 115 - - 115
Derivatives in gain - - 1,427 692 133 2,252
IMF financial assets - 2,168 - - - 2,168
Total Credit Exposure by Industry 1,837 2,657 3,311 1,438 569 9,812
Concentration of credit exposure by geographical area as at 30 June 2011
By Geographical Area United States of America
$m		 Europe
$m		 Japan
$m		 Australia
$m		 NZ
$m		 Supra- National
$m		 Other
$m		 Credit Exposure
$m
Foreign cash and cash equivalents 1,356 - - 1 89 - 15 1,461
Debtors and receivables - 11 - 32 493 - - 536
Advances to non-Crown - - - - 151 - - 151
Marketable securities 56 743 202 451 1,188 489 - 3,129
External deposits - - - - 115 - - 115
Derivatives in gain 280 436 - 78 1,458 - - 2,252
IMF financial assets - - - - - 2,168 - 2,168
Total Credit Exposure by Geographical Area 1,692 1,190 202 562 3,494 2,657 15 9,812

Concentration of Credit Exposure as at 30 June 2010

Concentration of credit exposure by credit rating as at 30 June 2010
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
Concentration of credit exposure by industry as at 30 June 2010
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
Concentration of credit exposure by geographical area as at 30 June 2010
By Geographical Area United States of America
$m		 Europe
$m		 Japan
$m		 Australia
$m		 NZ
$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
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