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					Financial Report 2007
                                            Contents.




Managing Directors and Directors of the KfW Group.                                                                         4

Report of the Board of Supervisory Directors.                                                                              5

Board of Supervisory Directors.                                                                                            7

Letter from the Board of Managing Directors.                                                                               8

Management report of the KfW Group.
Economic report.                                                                                                         18

Risk report.                                                                                                             32

Forecast report.                                                                                                         57

Consolidated financial statements.
Income statement.                                                                                                        64

Balance sheet.                                                                                                           66

Statement of changes in equity.                                                                                          67

Cash flow statement.                                                                                                      70

Notes.                                                                                                                   72

Auditor’s report reprint.                                                                                               148
The figures in the tables were calculated accurately and added up. Figures may not add to totals shown because of independent
rounding.
  Managing DireCtors anD DireCtors
         of the KfW group.




                                   BoarD of Managing DireCtors.

Dr Günther Bräunig (seat is dormant during his appointment as Chairman of the Management Board of IKB)
       Dr Peter Fleischer       Dr Peter Klaus (until 30 April 2007)     Dr Norbert Kloppenburg
                  Wolfgang Kroh (Speaker from 7 April 2008)          Detlef Leinberger
                        Ingrid Matthäus-Maier (Spokeswoman until 7 April 2008)


                                                DireCtors.

   Dr Stefan Breuer                   Rainer Hartje                      Joachim Rastert
   Dr Frank Czichowski                Klaus Klüber                       Ludolf Rischmüller
   Helmut Gauges                      Doris Köhn                         Wolfgang Roßmeißl
   Werner Genter                      Werner Möller                      Dr Jürgen Schneider
   Dr Dieter Glüder                   Dr Hanns-Peter Neuhoff             Dr Bernd Schreiber
   (seat is dormant during his        Klaus Neumann                      Dietrich Suhlrie
   appointment to the Board of        Werner Oerter                      Klaus Weirich
   Managing Directors of IKB)         Uwe Ohls                           Bruno Wenn
   Dr Volker Groß                     Christiane Orlowski                Dr Christian Zacherl


                         BoarD of Managing DireCtors of KfW ipeX-BanK.

         Michael Ebert    Heinrich Heims (Speaker) Dr Peter Klaus (Speaker until 30 April 2007)
                                   Christian Murach Markus Scheer

The business areas of project and corporate finance in Germany and international project and export
finance were regrouped to form KfW IPEX-Bank. Since the beginning of the year 2008 it has been a legally
independent subsidiary of the KfW Group and subject to the German Banking Act (KWG) and banking
supervisory regulations.



                   BoarD of ManageMent of Deg – DeutsChe investitions-
                              unD entWiCKlungsgesellsChaft MBh.
        Johannes-Jürgen Bernsen          Dr Michael Bornmann          Dr Winfried Polte (Chairman)

DEG was founded in 1962 and has been a 100 % subsidiary of the KfW Group since 2001. DEG is one of
the largest European development finance institutions for long-term project and corporate financing. For over
40 years DEG has been financing investments by private companies in developing and transition countries.




                                                     4
report of the BoarD of supervisory DireCtors.




                                           Michael Glos
                                           Federal Minister of Economics and Technology




      The Board of Supervisory Directors has continu-         bilitation, the planned “Special Fund Energy
      ally supervised the conduct of KfW’s business and       Efficiency for SMEs” and financing for the pur-
      the administration of its assets. For this purpose,     chase of low-emission heavy commercial vehi-
      in particular to take decisions on the provision        cles. In reporting on the activities of KfW Ent-
      of financing and the issuing of guarantees ac-          wicklungsbank the Board of Managing Directors
      cording to the conditions set forth in the Law          focused especially on the new initiatives for
      concerning KfW and the By-Laws, several regular         climate change and environmental protection
      and – owing to the subprime crisis in the US            (IKLU) and on financial sector development (“Mo-
      property market and its impacts on the financial        bilising capital for the poor”). The Board of
      market in Germany and particularly on IKB Deut-         Supervisory Directors was also informed about
      sche Industriebank AG – several extraordinary           securities management and the progress made
      meetings of the Board of Supervisory Directors          in the spin-off of KfW IPEX-Bank GmbH as at
      and its committees were held during the finan-          1 January 2008 as well as the transfer of promo-
      cial year.                                              tional reserves of the ERP Special Fund to KfW as
          At those meetings the Board of Managing             at 1 July 2007. A key topic that was also the
      Directors provided the Board of Supervisory             centre of intense discussion at several extraordi-
      Directors with information about the business           nary meetings of the Board of Supervisory Direc-
      activities and current developments in KfW’s            tors was the risk protection provided for IKB
      individual fields of activity, about the Group’s net    Deutsche Industriebank AG that became neces-
      assets, profit or loss and risk situation as well as    sary as a result of the US property crisis and in
      about special activities such as the risk protec-       which KfW is participating together with the
      tion afforded to IKB Deutsche Industriebank AG.         German banking industry. The Board of Manag-
          In its reports on the activities of KfW Mittel-     ing Directors always informed the Board of
      standsbank and KfW Förderbank, the Board of             Supervisory Directors without delay of develop-
      Managing Directors placed special emphasis on           ments concerning the risk protection and
      KfW’s “Small SMEs” initiative and KfW’s target          involved it in decision-making as stipulated in
      topic of climate and environmental protection,          the Law concerning KfW and in the By-Laws. In
      mentioning in particular the programmes to              the course of these decisions the Board of Super-
      finance energy-efficient construction and reha-         visory Directors commissioned the Board of Man-




                                                             5
aging Directors to move ahead quickly with the              Spiller and Erwin Teufel left the Board of Super-
process of selling IKB Deutsche Industriebank AG.           visory Directors. The Board of Supervisory Direc-
The Board of Supervisory Directors stressed the             tors would like to thank these former members
importance of having the German banking                     for their work on the Board. New members are
industry and the other shareholders of IKB                  Dr Siegfried Jaschinski, Waltraud Lehn, Dr Helmut
participate in the risk protection measures. Two            Linssen and Alexander Rychter.
essential prerequisites formed the basis for every             PricewaterhouseCoopers Aktiengesellschaft
decision: KfW‘s promotional capacity remains                Wirtschaftsprüfungsgesellschaft, Frankfurt am
assured and the ERP Special Fund is exempt from             Main, who were appointed auditors by the
the charges resulting from the IKB crisis. The              supervisory authority, the Federal Ministry of
Board of Supervisory Directors also discussed the           Finance (BMF), in consultation with the Federal
formation of an executive and an audit commit-              Audit Office following the proposal by the Board
tee, which was passed in February 2008 in the               of Supervisory Directors, have examined and
form of an amendment of the By-Laws.                        unconditionally confirmed the annual financial
    The Loan Approval Committee concerned                   statements and the management report of KfW
itself primarily with the loan commitments that             as well as the consolidated financial statements
have to be presented under the Law and By-Laws              and the group management report of the KfW
as well as with the risk report of the KfW Group.           Group, all of which were prepared by the Board
An extraordinary meeting was convened imme-                 of Managing Directors. The financial statements
diately (early August) after the crisis arose at IKB        and the management report were prepared in
to discuss risk protection measures for IKB.                accordance with the provisions of the German
    The Legal and Administrative Committee                  Commercial Code (HGB) and the consolidated
mainly discussed staff issues and the audit of the          financial statements and the group management
annual financial statements including the ap-               report were prepared in accordance with Inter-
pointment of the auditors and made correspond-              national Financial Reporting Standards (IFRS) as
ing recommendations to the Board of Supervi-                applicable within the European Union.
sory Directors. It also considered amending the                The Board of Supervisory Directors accepted
By-Laws to establish an executive and an audit              the result of the audits. At its meeting on 7 April
committee and made a corresponding recom-                   2008 the Board of Supervisory Directors ap-
mendation to the Board of Supervisory Directors.            proved the financial statements and the con-
    The Advisory Council for Promotional Meas-              solidated financial statements, both of which
ures in the New Federal States discussed the                were prepared by the Board of Managing Direc-
business activities of KfW during 2006 and fo-              tors, as stipulated in Article 9 (2) of the Law Con-
cused specifically on the new federal states. It also       cerning KfW following a recommendation by the
concerned itself with the activities of the busi-           Audit Committee.
ness start-up centre (Unternehmensgründerbüro)
in Leipzig and the Microfinance Fund Germany.               Frankfurt am Main, 7 April 2008
    As was agreed, in my capacity as Federal
Minister of Economics and Technology I have                 THE BOARD OF SUPERVISORY DIRECTORS
assumed the position of chairman of the Board
of Supervisory Directors for 2008.
    In the period under review Rüdiger Dorn,
Dr Thomas R Fischer, Stefan Ortseifen, Jörg-Otto            Chairman




                                                        6
                              BoarD of supervisory DireCtors.



                                               Duties of the BoarD of supervisory DireCtors.
The Board of Supervisory Directors supervises the conduct of KfW’s business and the administration of its assets. It approves larger loans
and the annual financial statements. The Board of Supervisory Directors consists of 37 members. Its Chairman is the Federal Minister of
Economics and Technology and the Deputy Chairman is the Federal Minister of Finance.

Michael Glos                             Dr Thomas R Fischer                        Claus Matecki                            Christine Scheel
Federal Minister of Economics and        Former Chairman of the Board of            Member of the Federal Executive Board    Member of the German Bundestag
Technology                               Managing Directors of WestLB               of the Confederation of German           Member appointed by the German
Chairman                                 Representative of the Mortgage Banks       Trade Unions (DGB)                       Bundestag
(from 1 January 2008)                    (until 2 August 2007)                      Representative of the Trade Unions
Deputy Chairman                                                                                                              Hanns-Eberhard Schleyer
(until 31 December 2007)                 Sigmar Gabriel                             Dr Michael Meister                       Secretary-General of the
                                         Federal Minister of the Environment,       Member of the German Bundestag           Zentralverband des
Peer Steinbrück                          Nature Conservation and Nuclear            Member appointed by the German           Deutschen Handwerks
Federal Minister of Finance              Safety                                     Bundestag                                Representative of the Skilled Crafts
Deputy Chairman
(from 1 January 2008)                    Heinrich Haasis                            Franz-Josef Möllenberg                   Horst Seehofer
Chairman                                 President of the Deutscher                 Chairman of the Gewerkschaft             Federal Minister of Food, Agriculture
(until 31 December 2007)                 Sparkassen- und Giroverband                Nahrung-Genuss-Gaststätten               and Consumer Protection
                                         Representative of the Savings Banks        Representative of the Trade Unions
Dr Günter Baumann                                                                                                            Michael Sommer
Member of the Board of Managing          Peter Jacoby                               Hartmut Möllring                         Chairman of the Deutscher
Directors of the Association of          Minister of Finance of the State of        Minister of Finance of the               Gewerkschaftsbund
German Chambers of Industry and          Saarland                                   State of Lower Saxony                    Representative of the Trade Unions
Commerce (DIHK)                          Member appointed by the German             Member appointed by the German
Representative of Industry               Bundesrat                                  Bundesrat                                Gerd Sonnleitner
                                                                                                                             President of the Deutscher
Anton F Börner                           Dr Siegfried Jaschinski                    Klaus-Peter Müller                       Bauernverband e. V.
President of the Federation of           Chairman of the Board of Managing          President of the Association of          Representative of Agriculture
German Wholesale and Foreign             Directors of Landesbank Baden-             German Banks
Trade (BGA)                              Württemberg                                Representative of the Commercial         Jörg-Otto Spiller
Representative of Trade                  Representative of the Mortgage Banks       Banks                                    Member of the German Bundestag
                                         (from 5 December 2007)                                                              Member appointed by the German
Dr Uwe Brandl                                                                       Stefan Ortseifen                         Bundestag
President of the Bayerischer             Bartholomäus Kalb                          Former Spokesman of the Board of         (until 31 December 2007)
Gemeindetag                              Member of the German Bundestag             Managing Directors of IKB
Representative of the Municipalities     Member appointed by the German             Deutsche Industriebank AG                Dr Frank-Walter Steinmeier
                                         Bundestag                                  Representative of the Industrial Loan    Federal Minister of Foreign Affairs
Frank Bsirske                                                                       Banks
Chairman of ver.di – Vereinigte          Roland Koch                                (until 30 July 2007)                     Ludwig Stiegler
Dienstleistungsgewerkschaft              Minister President of the State of Hesse                                            Member of the German Bundestag
Representative of the Trade Unions       Member appointed by the German             Matthias Platzeck                        Member appointed by the German
                                         Bundesrat                                  Minister President of the State of       Bundestag
Prof Dr Ingolf Deubel                                                               Brandenburg
Minister of Finance of the State of      Jürgen Koppelin                            Member appointed by the German           Erwin Teufel
Rhineland-Palatinate                     Member of the German Bundestag             Bundesrat                                Minister President (retired) of the
Member appointed by the German           Member appointed by the German                                                      State of Baden-Württemberg
Bundesrat                                Bundestag                                  Dr Christopher Pleister                  Member appointed by the German
                                                                                    President of the Bundesverband           Bundesrat
Rüdiger Dorn                             Oskar Lafontaine                           der Deutschen Volks- und                 (until 31 December 2007)
Attorney and notary public               Member of the German Bundestag             Raiffeisenbanken e. V. (BVR)
Law offices of Dorn, Metzler,            Member appointed by the German             Representative of the Cooperative        Jürgen R Thumann
Jäger & Partners                         Bundestag                                  Banks                                    President of the Bundesverband
Representative of the Housing Industry                                                                                       der Deutschen Industrie e. V. (BDI)
(until 31 December 2007)                 Waltraud Lehn                              Alexander Rychter                        Representative of Industry
                                         Member of the German Bundestag             Managing Director of the Bundes-
Prof Dr Kurt Faltlhauser                 Member appointed by the German             verband Freier Immobilien- und           Wolfgang Tiefensee
Minister of Finance (retired) of the     Bundestag                                  Wohnungsunternehmen e. V. (BFW)          Federal Minister of Transport,
Free State of Bavaria                    (from 1 January 2008)                      Representative of the Housing Industry   Building and Urban Development
Member appointed by the German                                                      (from 1 January 2008)
Bundesrat                                Dr Helmut Linssen                                                                   Heidemarie Wieczorek-Zeul
                                         Minister of Finance of the State of                                                 Federal Minister of Economic
                                         North Rhine-Westphalia                                                              Cooperation and Development
                                         Member appointed by the German
                                         Bundesrat
                                         (from 1 January 2008)




                                                                                      7
letter froM the BoarD of Managing DireCtors.




      2007 was a highly unusual year for the KfW                connection with subprime investments in the
      Group – in more ways than one. Apart from sig-            USA. The process of selling KfW‘s shares in IKB is
      nificantly expanding our promotional business             under way.
      we have also managed several large-scale                      In 2007 we were also in the final phase of the
      projects.                                                 spin-off of KfW IPEX-Bank. This was quite a ma-
          In March we bought a stake in EADS. The Ger-          jor project that we finished on time by 1 January
      man Federal Government had asked us to buy this           2008 as required by the European Commission in
      holding as part of a consortium of private and            the so-called EU understanding II. Although KfW
      public banks in order to maintain the balance of          IPEX-Bank is not a promotional bank it remains
      power at EADS between Germany and France.                 committed to KfW’s official mandate and con-
          As at 1 July the reorganisation of the ERP            tinues to be one of the key pillars of KfW. For
      Special Fund (ERP SV), which had been initiated           decades it has been a reliable partner for the
      by the German Government as agreed in the                 German economy, which depends heavily on
      coalition agreement signed in November 2005,              exports, and a guarantor of long-term financing.
      was completed. During the course of the transfer          The profits it generates in its commercial business
      EUR 2 billion flowed into the federal budget; the         will continue to support KfW‘s promotional
      annual promotional volume of the ERP Special              activities, e. g. in the SME sector or in climate
      Fund that is available to small- and medium-              protection.
      sized enterprises will, however, remain intact.               In view of these challenges it is even more
          On 28 and 29 July KfW, together with the              noteworthy that our promotional activities were
      banking industry, acted quickly and determined-           so successful in 2007. In terms of our promo-
      ly – also in the interest of stabilising the German       tional performance 2007 was the best year in
      financial market – to provide risk protection to          KfW’s almost 60-year history!
      IKB, which encountered existential problems in


                       DevelopMent of KfW’s finanCing aCtivities.
      In 2007 KfW’s total volume of financing                   makers and associations to develop the necessary
      increased by over 13 % to EUR 87.1 billion. That          promotional programmes. In 2007 we set two
      is over EUR 10 billion more than in the previous          particular priorities for our promotional business
      year. At EUR 68.1 billion the greatest share of           – small SMEs and climate protection – that are
      commitments was for lending operations. Even              especially important for the economy and
      though the securitisation market is generally             society. Of course the increase in our financing
      under heavy pressure as a consequence of the              volume in 2007 reflects not only our attractive
      crisis in the financial markets, securitisations          products but also the economic upswing in Ger-
      reached a volume of EUR 19 billion.                       many and Europe. The companies have invested
          This result tells us that we have chosen the          heavily. In 2008 we expect less economic dyna-
      right strategy. We identified issues of future            mism and a more moderate increase in corporate
      relevance early on and joined hands with policy-          investment.




                                                            8
                                  KfW MittelstanDsBanK.
KfW Mittelstandsbank committed EUR 23.2 bil-          again rose strongly in 2007.In July we added a
lion last year for the promotion of small- and        50 % exemption from liability to this programme.
medium-sized enterprises. Our support thus            This ‘risk partnership’ was very well accepted by
remains at a high level. Our promotional activi-      the market. Since we share the default risk with
ties targeted small SMEs in particular, and in this   the banks on-lending the funds, they are more
context we also launched our “Small SMEs” ini-        willing to join in the financing for investments
tiative. Enhancing the support for small busi-        by SMEs. In the year 2007 KfW again contributed
nesses continues to be a matter of urgency since      substantially to strengthening Germany’s equity
although the financing conditions for SMEs have       capital market. Although our equity finance busi-
improved these past few years, micro enterprises      ness accounts for only a small portion of our
are still unable to fully benefit from them, if at    total commitments, the very fact that KfW par-
all. We therefore reduced the interest rates in our   ticipates in about half of all SME equity finance
StartGeld (start-up funds) and Mikrodarlehen          activities underlines the important role we play
(microloan) programmes by one-third at the            in this field. Our promotion is particularly impor-
beginning of 2007. This enabled us to increase        tant for the structure and quality of the products
our commitments for very small business under         offered in the market because we are active pri-
these programmes by 40 % over the previous            marily in the early stage. Private investment in
year. Demand for the Unternehmerkredit, or            this stage is far too low because it involves risk.
entrepreneurial loan, our flagship in SME finance,



                                       KfW förDerBanK.
KfW Förderbank also made a major contribution         Growth”, which we developed jointly with the
to the success of the Group as a whole. In 2007       Federal Government. The ‘hard core’ of this ini-
a financing volume of EUR 43.5 billion was            tiative is the programme component “energy-ef-
achieved. This marks a rise over the previous year    ficient construction and rehabilitation”. The pro-
of 22 %. The KfW Group commits a considerable         motional initiative was already a great success in
portion of its lending volume to investments in       its starting year, 2006. The commitment volume
environmental and climate protection. There is        was again very high in 2007. Many private
now not a single business area within KfW that        households in Germany were able to save energy
disregards climate protection objectives. Some        by renewing their energy systems. The invest-
20 %, or approx. EUR 16.6 billion, of total com-      ments that were initiated in the years 2006 and
mitments are since flowing into environmental         2007 alone will sustainably reduce CO2 emissions
financing operations. This makes KfW Germany’s        by over 1.6 million tonnes per annum. Another
number one environmental bank and an impor-           effect was that, according to preliminary esti-
tant cornerstone of the “Integrated Energy and        mates, these investments created or safeguarded
Climate Programme” of the German Government.          nearly 440,000 jobs for one year in 2007 alone.
A central part of this programme is our promo-        This result proves that the promotional initiative
tional initiative entitled “Housing, Environment,     is also an excellent economic programme – not




                                                      9
Letter from the Board of Managing Directors.




                 least for SMEs and for the skilled crafts. These         are strongly committed to financing renewable
                 examples illustrate the close relationship between       energies and are one of the main sources of
                 KfW Förderbank and KfW Mittelstandsbank, as              financing worldwide. At the same time we place
                 many of the activities of KfW Förderbank benefit         high demands on the sustainability of our own
                 the SME sector both directly and indirectly. En-         actions. For instance, as from 2006 we have made
                 vironmental and climate protection are topics of         the entire Group CO2 neutral. It is not only in
                 intense debate in the area of transport as well.         climate protection, however, that we set stand-
                 This is why we are supporting the purchase of            ards. We are working on firmly incorporating
                 low-emission heavy commercial vehicles via               sustainability thinking in all of our core pro-
                 low-interest loans whose rates are reduced even          cesses.
                 further by the Federal Ministry of Transport,               Education finance remained at a similarly high
                 Building and Urban Development (BMVBS). Dur-             level as in 2006. Since the start of the KfW Stu-
                 ing the first three months after this measure took       dent Loan programme in April 2006, for instance,
                 effect, already around 25,000 low-emission heavy         we have granted some 37,000 loans.
                 commercial vehicle purchases were financed. We



                                            KfW entWiCKlungsBanK anD Deg.
                 In 2007 KfW Entwicklungsbank again increased             en the financial sector in developing countries,
                 its commitment volume in developing and tran-            the poor performance of which is often an ob-
                 sition countries over the previous year to help to       stacle to economic growth in these countries. As
                 sustainably reduce poverty in these countries and        a leading global micro finance provider, KfW is
                 to boost their economies. This steady growth in          familiar with these problems. Poor people cannot
                 our promotional business is only possible because        find a way out of poverty on their own unless
                 we add funds of our own to those provided by             they have the opportunity to access credit at fair
                 the federal budget for Development Cooperation.          conditions. Our subsidiary DEG complements the
                 More than half of all commitments now origi-             product range of KfW Entwicklungsbank with
                 nate from KfW funds. This enables KfW Entwick-           financing and advisory services that are tailored
                 lungsbank to combine the instruments available           to the needs of private companies. In 2007 it
                 to it as a credit institution with its development-      again substantially increased its financing
                 policy competence and to assist the German               volume for private-sector investment in develop-
                 Government in augmenting its Official Develop-           ing and transition countries and passed the
                 ment Aid quota.                                          EUR 1 billion mark for new commitments. At
                     One example of this is our “Mobilising capital       EUR 1.2 billion, the volume of new business of
                 for the poor” initiative. Its purpose is to strength-    DEG was around 30 % higher than in 2006.




                                                                     10
                                         KfW ipeX-BanK.
KfW IPEX-Bank obtained legal independence at           strategy and will continue to be an integral part
the beginning of 2008. We are pleased that the         of the Group. KfW IPEX-Bank successfully contin-
spin-off of international project and export fi-       ued its business during the final phase before
nance went so smoothly in the given time frame.        gaining independence. At year-end EUR 16.1 bil-
Not only did KfW IPEX-Bank start on time, but it       lion in new business stood in the books, around
did so under the best conditions. It was approved      EUR 1.1 billion more than in 2006. KfW IPEX-Bank
as an advanced IRB bank, which means that its          will maintain its position as one of the top ad-
control and management systems meet the high-          dresses in international project and export finance
est and strictest regulatory requirements. Two         in the future as well and will continue to be a
renowned rating agencies assigned it a rating of       reliable partner of German industry. This aim is
AA minus, clearly confirming the business model.       bolstered by its successful business strategy and
Yet in the midst of these changes KfW IPEX-Bank        by its employees’ expertise and long experience.
remains closely intertwined with the overall group



                                              funDing.
In terms of funding, 2007 was a successful year.       markets. Altogether we raised EUR 64.6 billion in
The turbulence in the international capital mar-       funds. This figure is higher than in past years due
kets had little impact on our funding. On the          to extraordinarily strong demand for our promo-
contrary: our good standing as a reputable and         tional loans. We are expecting a funding volume
reliable issuer manifested itself in a positive way.   of about EUR 70 billion for 2008 since we will
We issued bonds in 25 different currencies in          now also refinance promotional loans and other
over 550 transactions in the international capital     loans out of the ERP Special Fund.


           risK proteCtion for iKB DeutsChe inDustrieBanK ag,
                              DüsselDorf.
In July 2007 KfW held 37.8 % of IKB’s shares.          proved unanimously by KfW‘s Board of Supervi-
KfW initially assumed a stake in IKB of approx.        sory Directors. At that time, other credit institu-
1 % in 1985 at the request of the German Gov-          tions had no serious interest in buying and
ernment because Stiftung Industrieforschung            maintaining IKB as a financing institution for
was unable to exercise its subscription rights         SMEs. In the course of its merger with DtA in the
during a capital increase. In 2001 the Board of        year 2003, KfW increased its stake by another
Managing Directors of IKB at the time asked KfW        3.6 % – which had been in DtA’s portfolio – to a
to purchase the 33.2 % share package being of-         total of 37.8 %.
fered by Allianz and Münchner Rück in order to            At the end of July 2007 IKB was faced with an
fend off a pending divestiture of IKB. KfW’s stake     existential crisis. The trouble was caused by dis-
was thus increased to maintain IKB‘s role as a key     astrous developments in the US subprime mort-
provider of SME finance. The purchase was ap-          gage market, which had a massive impact on IKB




                                                       11
Letter from the Board of Managing Directors.




                 and other banks through investments in this              January, KfW is now conducting in-depth talks
                 field. In order to avoid a sudden moratorium of          with a total of 49 parties on the closing of the
                 IKB, which at the time was one of Germany‘s best         conduit.
                 rated banks, and to prevent the crisis from                 During the months of October and November
                 spreading shock waves into the German financial          2007 the dire situation in the US subprime mort-
                 sector, KfW and the three German banking                 gage market deteriorated even further, leading
                 associations (deposit insurance fund of the Bun-         to downgrades on an unprecedented scale. As a
                 desverband deutscher Banken [BdB], the Bundes-           consequence of these events, additional risks of
                 verband der Deutschen Volks- und Raiffeisen-             EUR 350 million from the Havenrock structure
                 banken [BVR] and the Deutscher Sparkassen- und           had to be hedged for IKB (EUR 150 million
                 Giroverband [DSGV]) decided at the end of July           provided by KfW) and the estimated loss for
                 2007 to take concerted action and offer IKB risk         the conduit Rhineland had to be corrected up-
                 protection. The risk protection measures rest on         wards considerably. Overall, this led to a rise in
                 three pillars:                                           the risk provisions in KfW’s balance sheet from
                 K assumption by KfW of the rights and obliga-            EUR 2.5 billion to EUR 4.95 billion by the end of
                    tions under the liquidity lines granted by IKB        November.
                    to the Rhineland conduit,                                In mid-January 2008 KfW opened a structured
                 K sub-participation in risks entered into by IKB         and nondiscriminatory bidding process to sell its
                    in the special purpose entities Havenrock I &         IKB shares.
                    II, and                                                  As part of the restatement of its 2006/2007
                 K default guarantees for IKB to cover balance            financial statements, in early 2008 IKB also re-
                    sheet risks arising from structured securities.       valuated the structured products reported in its
                 At the time of the decision on 28 and 29 July            balance sheet. As market developments remained
                 2007 the losses from the total risk protection           highly negative, further valuation losses became
                 were expected to reach EUR 3.5 billion, with KfW         apparent within IKB. These losses exceeded the
                 assuming 70 % and the banking associations               risk protection that had been offered to cover
                 30 %. While the banking associations limited             the balance sheet risks and would have caused
                 their contribution to a maximum of EUR 1 bil-            the equity ratio to fall below the minimum re-
                 lion, KfW entered into the obligations of the            quired by supervisory law. To fend off another
                 liquidity lines of IKB, which was a prerequisite for     pending moratorium of IKB as well as the associ-
                 the risk protection for IKB, thus necessarily as-        ated risks for the financial sector and the German
                 suming the risk for the overall sum of the liquid-       economy, in mid-February 2008 the German
                 ity line. This measure, however, did not include         Government commissioned KfW to implement
                 the possibility of actively managing the Rhine-          capital measures to ensure IKB had an adequate
                 land conduit securities attributable to the liquidity    equity base. The additional loss risks incurred
                 lines. This will not be possible until the securities    through these measures of approx. EUR 1.5 bil-
                 are released from the conduit. With all short-           lion will be borne mostly by the German Govern-
                 term refinancings of the conduit Rhineland hav-          ment (EUR 1.2 billion). The Bundesverband deut-
                 ing been repaid on schedule and in full in the           scher Banken agreed to provide another EUR 300
                 form of asset-backed Commercial Paper in                 million in support. Since KfW had carried the




                                                                     12
biggest burden by far under the first two pack-      backed securities accelerated further. In consist-
ages of risk protection measures, it was unable      ent application of our conservative valuation
to assume further charges for the new support        approach we have taken into account the market
measures as this would have jeopardised its pro-     developments of the current year, which are
motional capacity and put the substance of the       treated as adjusting events, in the risk provisions
ERP Special Fund at risk. In March 2008 the US       we made for the liquidity lines for the Rhineland
Financial Guaranty Insurance Company (FGIC)          conduit in the 2007 annual statements and
filed a USD 1.875 billion lawsuit in New York        increased our risk provisions by another EUR 1.8
against IKB, the impact of which could not yet       billion. As a result we made write-downs on the
be fully assessed at the time of writing.            revaluation of around 90 % on the Rhineland
    In the first quarter of 2008 the deterioration   conduit. To cover most of the charges arising in
of the US real estate market fundamentals con-       connection with the risk protection for IKB, KfW
tinued unabated. Default rates of subprime bor-      applied EUR 5.3 billion from its fund for general
rowers rose again significantly the decline in the   banking risks, which serves as risk provision for
prices of homes started to accelerate. In this en-   the Group.
vironment the drop in the prices of mortgage-



                        results froM finanCial year 2007.
The 2007 business result was affected by the         by incorporating adjusting information from the
enormous charge resulting from the risk protec-      first quarter 2008 in the 2007 balance sheet.
tion measures applied to IKB, which had run into         The results of operative business such as inter-
existential difficulties. Risks taken over by KfW    est and commission income and the risk position
by participating in the liquidity lines of IKB for   in the bank’s core business remained stable. Risk
the Rhineland conduit in July 2007 accounted         provisioning without including the extraordinary
for a significant portion of these measures. The     effects of the risk protection for IKB continued
continuing negative developments in the securi-      at a low level even as the lending volume
ties held by the conduit in the first quarter of     expanded.
2008 led to much higher impairment require-              In KfW’s individual financial statements,
ments for these liquidity lines than had been        which are prepared in accordance with the Ger-
expected in December. This trend is fully recog-     man Commercial Code, the bank incurred a net
nised in the 2007 financial year. The overall        loss of EUR 1.4 billion for the year. Most of the
charge from the IKB crisis for KfW now amounts       risk protection provided for IKB was covered by
to EUR 7.2 billion, of which EUR 6.8 billion from    our fund for general banking risks which, as part
the various risk protection instruments and          of our risk provisioning, serves to maintain our
EUR 0.4 billion in write-offs on KfW‘s sharehold-    promotional capacity in stress situations. In the
ing in IKB. The credit lines (liquidity lines) for   first quarter of 2008, however, the deterioration
Rhineland Funding are now 90 % written off. We       of the US real estate market continued unabated.
are pursuing a conservative measurement ap-          This loss, however, could no longer be covered by
proach and providing for early transparency of       our fund. The net loss for the year will be recog-
the charges KfW has incurred from rescuing IKB       nised as loss carried forward in KfW‘s balance




                                                     13
Letter from the Board of Managing Directors.




                 sheet and offset against net income generated in       effect on results – this is not possible under IFRS.
                 coming years. The consolidated financial state-        Accordingly, under IFRS the risk protection for
                 ments were prepared according to the interna-          IKB had a full negative impact on profit, so the
                 tional accounting standards IFRS for the first         Group reported a net loss of approx. EUR 6.2 bil-
                 time. Contrary to German Commercial Code               lion for 2007. This burden was then partly com-
                 accounting standards, under which the burden           pensated through the fund for general banking
                 resulting from the risk protection can be com-         risks and recognised directly in equity, so the
                 pensated in large part by dissolving the fund for      Group reported a balance sheet loss directly in
                 general banking risks – with the corresponding         equity of EUR 1.4 billion.



                                                              outlooK.
                 In 2007 we significantly broadened our support         for which we use our own funds to make terms
                 again and achieved very good results. Owing to         and conditions more favourable we will stay the
                 the turmoil on the financial markets and the           course of improving efficiency in programme
                 possible impacts on the real economy, the future       implementation and design, for example by
                 development is difficult to forecast, especially       aligning the terms and conditions more closely
                 for securitisation. In order to protect IKB against    with those prevailing in the capital market.
                 risks and thus to stabilise the financial markets      In these endeavours we will focus not only on
                 in Germany, KfW has taken on an extraordinar-          expanding but also on enhancing the quality of
                 ily heavy burden. Nevertheless, we will fulfil our     our promotional programmes. We will maintain
                 promotional mandate with dedication in the             the promotional priorities of “small SMEs” and
                 future, too. The promotional capacities of the         “environmental and climate protection” which
                 ERP Special Fund are secure. In the programmes         we established in recent years.


                                                   KfW initiative “sMall sMes”.

                 Providing promotional support to small SMEs has        an investment loan, micro businesses are still
                 been and still is a key focus of our activities.       much more apt to hear ‘no‘ from their bank than
                 There have already been numerous positive              large companies. This makes it all the more
                 changes for the SME sector. The financing condi-       important for us to ease the extension of promo-
                 tions have generally seen good improvement. Of         tional loans for credit institutions. This year we
                 course the good economic situation in the past         intend to vigorously continue the promotional
                 two years played a role in this. Yet, the situation    and advisory programmes which we already
                 remains difficult for small and micro enterprises.     introduced last year.
                 Although it has become easier for them to obtain




                                                                   14
                               support for CliMate proteCtion.

We will continue our commitment to climate and         tested technologies of wind power and photo-
environmental protection in the future as well.        voltaics, we are developing measures for tapping
For instance, we plan to carry on with the “Hous-      additional renewable energies. After all, climate
ing, Environment, Growth” initiative. There is         change does not stop at national borders. This is
great potential for saving energy in the com-          why protecting resources and the climate is both
mercial sector as well. Unfortunately, not enough      a national and a global task. We will therefore
small- and medium-sized enterprises have realised      continue participating in the EU’s energy effi-
that ecology and economy do not have to be             ciency facility for new member states. In addi-
opposites. With targeted advice and investment         tion, KfW Entwicklungsbank will launch a climate
companies can realise their energy-saving poten-       and environmental protection initiative together
tial, significantly reduce their costs and strength-   with the Federal Ministry for Economic Coopera-
en their competitive position. Our new “Special        tion and Development (BMZ). Over the next
Fund Energy Efficiency for SMEs” answers to this       four years we plan to finance investments in
need. A very important area is the promotion of        industrialising countries that have particularly
renewable energies. In addition to the tried and       fast impacts.



In 2008 KfW will again focus all its efforts and abilities on its promotional business.




         Dr Peter Fleischer              Dr Norbert Kloppenburg                Wolfgang Kroh
                                                                         (Speaker from 7 April 2008)




              Detlef Leinberger                             Ingrid Matthäus-Maier
                                                       (Spokeswoman until 7 April 2008)




                                                       15
KfW Bankengruppe.




 Board of Managing Directors of the KfW Group:
 Dr Günther Bräunig (dormant seat since 1 August 2007), Ingrid Matthäus-Maier (Spokeswoman until 7 April 2008),
 Wolfgang Kroh (Speaker from 7 April 2008), Detlef Leinberger, Dr Peter Fleischer, Dr Norbert Kloppenburg
            ManageMent report of the KfW group.
Economic report.




                                                           eConoMiC report.

                                                      overvieW of the KfW group.

                   KfW’s consolidated financial statements for the            The KfW Group consists of KfW and six consoli-
                   past financial year were prepared in accordance            dated subsidiaries. In addition, five special funds
                   with International Financial Reporting Standards           responsible for strategic asset management have
                   (IFRS) for the first time. The comparative figures         been included in the consolidated financial state-
                   for the previous year were also prepared on the            ments in accordance with the requirements of
                   basis of IFRS.                                             SIC 12. The development of the Group’s business is
                                                                              largely dependent on the performance of KfW.



                    Composition of the KfW Group
                    Balance sheet total (EUR in millions) before consolidation

                                                                                                        2007              2006
                                                                                               EUR in millions   EUR in millions
                    KfW                                                                               353,153          332,905
                    Subsidiaries
                    DEG – Deutsche Investitions- und                                                    3,254             2,739
                    Entwicklungsgesellschaft mbH (DEG), Cologne
                    KfW International Finance Inc. (KfW Finance), Delaware, USA                         2,782             3,007
                    KfW Beteiligungsholding GmbH, Bonn                                                  1,107             1,437
                    tbg Technologie-Beteiligungs-Gesellschaft mbH (tbg), Bonn                             600               644
                    KfW IPEX-Beteiligungsholding GmbH, Frankfurt                                          219                33
                    Finanzierungs- und Beratungsgesellschaft mbH (FuB), Berlin                             48                48
                    Special purpose entities required to be consolidated
                    Five special funds                                                                  7,417             6,554
                    Investments accounted for using the equity method
                    Movesta Lease and Finance GmbH, Düsseldorf (50 %)                                     193               259
                    IKB Deutsche Industriebank AG, Düsseldorf (37.8 %)                                      –            53,262
                    Assets held for sale (IFRS 5)
                    IKB Deutsche Industriebank AG, Düsseldorf                                          63,538                 –




                                                    general eConoMiC environMent.

                   The global economy continued to grow rapidly               contrast, growth slowed in the Eurozone and the
                   in 2007. According to the data available to date,          United States. The rate of growth in Germany
                   worldwide GDP increased by just under 5 % in               was somewhat slower than in the previous year.
                   real terms. Thus, the high level of growth of the          However, the 2.5 % increase in price-adjusted
                   previous year remained nearly constant. Led by             GDP was still well above the long-term average
                   China and India, emerging and developing coun-             for the reunited Germany. On average, small- and
                   tries recorded extremely strong growth, which              medium-sized enterprises rated the business
                   was slightly higher than in the previous year. In          climate during 2007 as the most positive since




                                                                         18
reunification, although confidence tailed off as       off-balance sheet special purpose entities which
the year progressed. The major growth drivers for      had refinanced long-term mortgage securities by
the economy as a whole – in addition to the            issuing short-term commercial paper. When this
strong stimulus from exports – were government         financing channel became no longer viable
expenditures and, most importantly, gross fixed        because of the lack of demand for such com-
capital formation. On the other hand, growth in        mercial paper, the banks that had granted
housing construction was slower than in the pre-       liquidity facilities to these conduits were also
vious year, when a number of one-off factors           drawn into the crisis.
generated increased construction activity in this         In the first quarter of 2008 the deterioration
market segment. For example, the announcement          of the US real estate market fundamentals con-
of an increase in VAT due at the start of 2007 led     tinued unabated. Default rates of subprime bor-
to efforts to award housing construction con-          rowers are still rising strongly, the number of
tracts earlier than planned in 2006. Purchases of      foreclosures is climbing to levels last seen in the
consumer goods in private households were              early 1980s, and the decline in the prices of
stimulated for the same reason, resulting in           homes is starting to accelerate. The drying up of
weaker and even moderately dwindling private           liquidity, in particular, is turning out to be prob-
consumption in 2007.                                   lematic. As most banks and mortgage lenders
    In contrast to the generally healthy situation     have withdrawn from the business segment the
in the real economy, the environment for the           borrowers attributed to the subprime segment
financial markets deteriorated significantly dur-      are practically no longer able to obtain new loans
ing the course of 2007. This was caused by the         even if they have adequate solvency. The Federal
mounting problems in the subprime segment of           Reserve‘s interest rate cuts and the rescue meas-
the US mortgage market. As a result of falling         ures introduced by the US government have not
demand in the US property market and interest          yet shown any effect on the real estate market.
rate adjustments to mortgages, a growing                  In this environment the drop in the prices of
number of US private households ran into pay-          mortgage-backed securities in the first quarter
ment difficulties, which led to a significant rise     accelerated further, and default risks continued
in default rates, especially in relation to variable   to increase. In the meantime, the rating agencies
subprime loans. The number of bankruptcies             have also made massive adjustments to their
among subprime mortgage lenders consequent-            models, which has led to further dramatic and
ly rose during the first quarter of 2007. In the       hitherto unparalleled downgrades, particularly
summer, the problems in the US subprime seg-           for subprime ABS and subprime ABS CDOs.
ment spread to become a crisis of confidence              Prior to the emergence of this crisis of confi-
affecting the international banking system, fol-       dence, capital market interest rates in the United
lowing the downgrading of mortgage-backed              States and the Eurozone had risen on balance
securities (MBS), collateral debt obligations (CDO)    until around the middle of 2007. In the second
and MBS/CDO securities by the ratings agencies         half of the year, the turbulence in the financial
and reports of liquidity difficulties at some hedge    markets and a downward revision of expecta-
funds. As a result of uncertainties about the          tions for the US economy resulted in greater
distribution of risks, risk premiums in money          demand for fixed-interest government bonds and
markets rose substantially and securitisation          a corresponding decline in capital market inter-
markets effectively dried up. The biggest problem      est rates, which fell more significantly in the
for the financial system, however, proved to be        United States than in the Eurozone. In response




                                                       19
Economic report.




                   to the increased risk to the economy and the loss       year. Nevertheless, as a result of the lack of con-
                   of confidence among participants in the money           fidence, interest rates on the money markets
                   markets, the US Federal Reserve’s base rate was         after August were considerably higher than
                   cut by a total of 100 basis points in the last four     would have been justified by the level of base
                   months of 2007 while the ECB made no further            rates.
                   increases in its base rate in the second half of the



                                                   DevelopMent of the KfW group.

                   In 2007, the Group increased its promotional            November 2007 to include coverage of the re-
                   business volume by 13 % to EUR 87.1 billion,            maining risks from the “Havenrock structure”.
                   particularly as a result of strong growth in its        KfW is thus making a significant contribution to
                   domestic promotional loan business. The assets,         the stabilisation of the financial markets and of
                   financial position and earnings position of the         Germany as a financial centre. Charges from the
                   Group were primarily influenced by the one-time         risk protection amounted to EUR 6.8 billion at
                   effects of the reorganisation of the ERP pro-           year-end.
                   motion programme and the risk protection pro-               These charges include the current market de-
                   vided to IKB Deutsche Industriebank AG (IKB),           velopments of the first quarter 2008 which are
                   Düsseldorf.                                             treated as an adjusting event after the balance
                       When the Act for the Reorganisation of ERP          sheet date. In consistent application of its con-
                   Economic Promotion (Gesetz zur Neuordnung               servative valuation approach, KfW has taken
                   der ERP-Wirtschaftsförderung) came into effect,         these developments into account and, accord-
                   the ERP Special Fund contributed equity capital         ingly, revalued the portfolio at the end of
                   amounting to EUR 4.65 billion and subordinated          March.
                   loans of EUR 3.25 billion to KfW as at 1 July 2007.         IKB was protected from both on-balance
                       Income generated from the newly contrib-            sheet and off-balance sheet risks through a va-
                   uted equity capital may only be used for the            riety of measures:
                   purposes of the ERP economic promotion and –            K KfW assumed the rights and obligations under
                   together with promotional subsidies provided               IKB’s liquidity lines for the purpose of refi-
                   by the ERP Special Fund – covers the expenses              nancing the Rhineland Funding Capital Corpo-
                   incurred by KfW in implementing the ERP eco-               ration (RFCC), New York/USA, conduit, which
                   nomic promotion. Income from the pre-existing              required KfW to provide for potential loan
                   share of the ERP Special Fund in KfW’s equity              losses in the form of individual impairments.
                   will continue to be used to preserve the sub-           K KfW assumed risks in the amount of
                   stance of the ERP Special Fund.                            USD 1.5 billion through credit derivatives in
                       IKB, which had encountered existential prob-           connection with the reverse hedge provided
                   lems due to the US subprime crisis and in which            to other liquidity providers for RFCC (Haven-
                   KfW held a 37.8 % interest as at the balance               rock structure). These instruments gave rise to
                   sheet date, has been receiving financial backing           write-downs on revaluation.
                   in the form of risk protection from KfW togeth-         K KfW assumed IKB’s risks from its structured
                   er with three associations of the German banking           securities portfolios by way of financial guar-
                   industry (associations) since the end of July 2007.        antees and credit derivatives. This risk protec-
                   This risk protection was increased at the end of           tion measure is capped at EUR 1.0 billion.




                                                                      20
Since KfW’s Board of Supervisory Directors                                          general crisis of confidence in the financial mar-
resolved as at 30 November 2007 to move for-                                        kets. High risk premiums even for highly-rated
ward with a prompt sale of IKB, KfW’s equity                                        issuers and the drying-up of the securitisation
investment in IKB is no longer reported as an                                       markets led to severe market disruptions.
associate but rather according to accounting                                            Due to the Group’s conservative investment
rules for assets held for sale. Accordingly, KfW                                    policy, the fluctuations in value recorded were
wrote down its IKB shares to market value based                                     comparatively modest given the Group’s large
on the share price as at 31 December 2007,                                          securities portfolio of approximately EUR 44 bil-
taking into consideration the costs expected in                                     lion. The valuation losses of securities held by the
connection with a sale of the interest in IKB. This                                 Group, largely considered temporary, totalled just
write-down resulted in an additional expense of                                     under EUR 0.6 billion. Of this amount, EUR 0.2
EUR 0.4 billion at year-end.                                                        billion was reported under revaluation reserves
    In order to fund a significant portion of the                                   directly in equity. The share of the expenses
charges arising from the IKB crisis, which amount                                   recorded in the income statement and in equity
to EUR 7.2 billion in total, KfW applied EUR 5.3                                    from ABS securities held directly by KfW with
billion from its fund for general banking risks.                                    generally high creditworthiness amounted to
Under IFRS, this fund is a component of equity,                                     EUR 0.2 billion.
so this application did not impact the income                                           The following key figures provide an introduc-
statement.                                                                          tory overview of the developments in the 2007
    In the second half of 2007, the problems in                                     financial year:
the US subprime segment spread to become a



     KfW Group key financial figures

                                                                                                               2007              2006
     Balance sheet key figures                                                                        EUR in billions   EUR in billions
     Total assets                                                                                                354               334
     Volume of lending                                                                                           341               327
     Contingent liabilities                                                                                        6                 7
     Irrevocable loan commitments                                                                                 39                45
     Assets held in trust                                                                                         19                19
     Business volume                                                                                             417               406
     Equity                                                                                                       15                17
     Income statement key figures                                                                     EUR in millions   EUR in millions
     Operating result before valuation                                                                         1,357             1,381
     Operating result after valuation1)                                                                       – 6,182            1,542
     Consolidated profit/loss                                                                                 – 6,168            1,564
     Economic income statement key figures                                                            EUR in millions   EUR in millions
     Comprehensive income                                                                                     – 6,417             1,511
     Comprehensive economic income                                                                            – 1,312            1,113
     Key capital figures                                                                                          %                 %
     Equity ratio                                                                                                 4.2               5.0
1)   Including the participation of the associations in the risk protection provided to IKB.




                                                                                   21
Economic report.




                   The consolidated total assets of the KfW Group            EUR 3.9 billion to EUR 45.7 billion. Growth was
                   rose by EUR 19.6 billion (5.9 %) to EUR 354.0             mainly funded by increased issuing activities. The
                   billion in financial year 2007. Loans and advan-          volume of certificated liabilities, at EUR 260.3
                   ces (EUR 285.8 billion), in particular, developed         billion, was EUR 20.2 billion higher than in the
                   positively with an increase in volume of EUR 27.7         previous year.
                   billion. Financial assets also rose significantly by




                   Operating result before valuation, consolidated profit/loss, comprehensive income and
                   comprehensive economic income
                   EUR in millions

                     2,000                                                                   K Operating result before valuation
                                                                                             K Consolidated profit/loss
                                                                                             K Comprehensive income
                        0            –6,168 –6,417 –1,312
                                                                                             K Comprehensive economic income
                             1,357                          1,381 1,564 1,511 1,113


                    –2,000



                    –4,000



                    –6,000
                                         2007                        2006




                   The operating result before valuation was                 uses to provision for risks – and other IFRS ef-
                   EUR 1,357 million, which was slightly lower than          fects not deemed economically reasonable, the
                   the previous year’s figure of EUR 1,381 million.          Group recorded negative comprehensive eco-
                       The charges arising in connection with the            nomic income of EUR – 1,312 million in 2007
                   risk protection for IKB and the write-down of             after a strong business performance in 2006.
                   KfW’s equity interest in IKB led to a consolidated           This decline was mainly due to the charges
                   loss for 2007 of EUR 6,168 million. In the previ-         resulting from the IKB crisis that were not
                   ous year, the Group recorded a EUR 1,564 million          covered by the fund and the largely temporary
                   profit.                                                   expenses resulting from fair value accounting for
                       From an economic perspective, additional              securities portfolios, amounting to EUR 0.6 bil-
                   expenses resulted from valuation losses on secu-          lion. On the other hand, the encouraging per-
                   rities carried directly in equity that are taken into     formance of the promotion of equity participa-
                   account for the comprehensive income.                     tions, in particular, had a positive impact. Risk
                       Excluding charges in connection with the IKB          provisions for the remaining lending business
                   crisis that were covered by the application of the        remained low.
                   fund for general banking risks – which the Group




                                                                        22
                                         DevelopMent of assets.

The Group’s core business is lending to banks and       was attributable to its lending business.
customers. 79 % of the Group’s assets in 2007


                                                    Assets 2007

                                                                                                2007     2006
                                                    K Net loans and advances to banks            53 %      49 %
                                                    K Net loans and advances to customers        26 %      27 %
                                                    K Securities and investments                 13 %      13 %
                                                    K Other receivables to banks/customers        6%        8%
                                                    K Derivatives                                 2%        2%
                                                    K Other assets                                0%        1%




The volume of lending rose by EUR 13.5 billion,         have been even higher if not for the weakness of
or 4 %, to EUR 340.9 billion. The increase would        the US dollar.



 Volume of lending
 EUR in millions

                                                                     2007              2006            Change
                                                            EUR in millions   EUR in millions   EUR in millions
 Loans and advances                                                 285,805         258,136             27,669
 Risk provisions for lending business                               – 7,671          – 1,964            – 5,707
 Net loans and advances                                           278,134           256,172             21,962
 Contingent liabilities from financial guarantees                     5,850            6,731             – 881
 Irrevocable loan commitments                                        38,462           45,162            – 6,700
 Loans and advances held in trust                                    18,440           19,371             – 931
 Total                                                            340,887           327,436             13,450




                                                       23
Economic report.




                   The growth in loans and advances of EUR 27.7               vances held in trust, which mainly comprise loans
                   billion to EUR 285.8 billion was largely driven by         promoting developing countries and financed by
                   the domestic promotional loan business with its            budget funds of the Federal Republic of Ger-
                   entrepreneur loan (Unternehmerkredit) pro-                 many, declined by 5 % year on year and amount-
                   gramme and the “Housing, Environment, Growth”              ed to EUR 18.4 billion.
                   initiative. Liquidity lines granted as part of the             Other receivables to banks and customers,
                   risk protection provided to IKB also increased             which consists mostly of short-term funds, de-
                   loans and advances. Risk provisions relating to            clined by EUR 6.2 billion from the previous year’s
                   IKB were primarily responsible for the increase in         figure of EUR 26.4 billion.
                   risk provisions for lending business by EUR 5.7                Bonds and other fixed-income securities
                   billion to EUR 7.7 billion. Net loans and advan-           increased by EUR 5 billion to EUR 42.3 billion,
                   ces in total represented 82 % of the volume of             while the volume of money market securities
                   lending, or EUR 278.1 billion.                             declined by EUR 1.1 billion to EUR 0.4 billion. In
                       Contingent liabilities from the Group’s finan-         addition, the volume of securities held in special
                   cial guarantee business declined year on year to           funds for strategic investment purposes increased
                   EUR 5.9 billion, accounting for 2 % of the volume          to EUR 7.4 billion as at 31 December 2007. The
                   of lending. Irrevocable loan commitments                   total amount of securities and investments of
                   declined by EUR 6.7 billion to EUR 38.5 billion            EUR 45.7 billion increased by 9 % compared to
                   due to the high level of loans in 2007. Within             the previous year.
                   assets held in trust, the volume of loans and ad-



                    Securities and investments
                    EUR in millions

                                                                                        2007              2006            Change
                                                                               EUR in millions   EUR in millions   EUR in millions
                    Bonds and other fixed-income securities                            42,787            38,933             3,853
                    Shares and other non-fixed income securities                        1,526             1,529                –3
                    Equity investments                                                  1,205               731               474
                    Shares in affiliated entitites not included in the
                    consolidated financial statements                                      18                12                 6
                    Investments accounted for using the equity method                       5               597             – 592
                    Shares in held for sale affiliated entities                           204                 0               204
                    Total                                                              45,745            41,802             3,943




                                                                         24
As at 31 December 2007 securities and invest-           Value adjustments from macro hedging for the
ments included ABS with a carrying amount of            portfolios of underlying balance sheet assets
EUR 6.4 billion held directly by KfW.                   declined by EUR 1.5 billion.
   The volume of derivatives with positive                 There were only minor changes to the other
fair values increased by EUR 1.6 billion to             balance sheet items.
EUR 8.7 billion.



                               DevelopMent of finanCial position.

Funds raised in the form of certificated liabilities,   total, continued to account for the majority of
which represented 74 % of the balance sheet             the Group‘s sources of funding.



                                                    Funding structure 2007

                                                                                                   2007     2006
                                                    K Certificated liabilities                      74 %      72 %
                                                    K Liabilities to banks/customers                14 %      18 %
                                                    K Derivatives                                    6%        4%
                                                    K Equity                                         4%        5%
                                                    K Subordinated liabilities                       1%        0%
                                                    K Other liabilities                              1%        1%




Borrowings rose by EUR 13.8 billion, or 5 %, to         of funding for the expansion of the volume of
EUR 313.5 billion and were the primary source           business.



  Borrowings
  EUR in millions

                                                                      2007                2006            Change
                                                             EUR in millions     EUR in millions   EUR in millions
  Short-term funds                                                   23,550              16,285             7,264
  Bonds and other fixed-income securities                           241,437             230,015            11,422
  Other borrowings                                                   44,739              52,916            – 8,177
  Subordinated liabilities                                            3,747                 500             3,247
  Total                                                             313,473             299,716            13,756




                                                        25
Economic report.




                   Funds raised in the form of issues of medium-          sions for guarantees assumed as part of the risk
                   and long-term bonds and other fixed-income             protection provided to IKB.
                   securities of KfW represented the Group’s prin-           As part of the reorganisation of the ERP eco-
                   cipal source of funding. In 2007, such funds           nomic promotion programme, the ERP Special
                   amounted to EUR 241.4 billion, representing an         Fund granted EUR 3.25 billion in subordinated
                   increase of EUR 11.4 billion and accounting for        loans to KfW. The total volume of subordinated
                   77 % of borrowings. Short-term issues of com-          liabilities thus amounted to EUR 3.75 billion.
                   mercial paper rose by EUR 8.8 billion, to EUR 18.9        There were only minor changes to the other
                   billion. The total amount of short-term funds          balance sheet items.
                   raised amounted to EUR 23.6 billion. Other bor-           The changes in equity were in particular in-
                   rowings by KfW, in addition to promissory note         fluenced by the Act for the Reorganisation of
                   loans by banks and customers, which declined by        ERP Economic Promotion (Gesetz zur Neuord-
                   EUR 3.5 billion to EUR 25.4 billion compared with      nung der ERP-Wirtschaftsförderung). The net
                   the previous year, consisted mainly of liabilities     reduction of the Group’s fund for general bank-
                   to the federal budget.                                 ing risks and the balance sheet loss had an off-
                       The volume of derivatives with negative fair       setting effect. In total, equity was EUR 1.8 billion
                   values rose by EUR 7.2 billion to EUR 21.2 billion     below the previous year’s level, at EUR 14.9 bil-
                   as at year-end.                                        lion. The equity ratio based on reported equity
                       Provisions increased by EUR 0.5 billion to         amounted to 4.2 % compared with 5.0 % in the
                   EUR 1.5 billion – in particular, due to risk provi-    previous year.



                    Equity
                    EUR in millions

                                                                                    2007              2006            Change
                                                                           EUR in millions   EUR in millions   EUR in millions
                    Paid-in subscribed capital                                      3,300             3,300                 0
                    Capital reserve                                                 6,254             1,604             4,650
                      including promotional reserves from the ERP
                      Special Fund                                                  4,650                 0             4,650
                    Reserve from the ERP Special Fund                                804                757                47
                    Retained earnings                                               5,862             5,584               278
                    Fund for general banking risks                                   200              5,300           – 5,100
                    Revaluation reserves                                             – 92               157             –249
                    Balance sheet loss                                            –1,393                  0            –1,393
                    Total                                                         14,936            16,702            –1,767




                   The capital reserve increased by EUR 4.65 billion      EUR 5.3 billion was applied from the fund for
                   to EUR 6.25 billion due to the transfer of promo-      general banking risks in 2007 in order to cover
                   tional reserves of the ERP Special Fund as part of     the charges arising in connection with the IKB
                   the reorganisation of ERP economic promotion.          crisis. The fund for general banking risks totaled




                                                                     26
EUR 0.2 billion as at 31 December 2007 after an               The reserve from the ERP Special Fund and
addition of the same amount from current profit.              retained earnings increased by a total of
   Valuation losses recognised directly in equity             EUR 0.3 billion. An amount corresponding to
relating to available-for-sale financial assets re-           KfW’s unconsolidated net loss of EUR 1.4 billion
sulting primarily from the negative conditions                for 2007 was reported as a balance sheet loss.
affecting international financial markets were
responsible for a decline in revaluation reserves
of EUR 0.2 billion.



                                DevelopMent of earnings position.

The earnings position is comparable with the previous year’s figures only to a limited extent because of
the impact of the IKB crisis.



 Earnings position
 EUR in millions

                                                                            2007              2006            Change
                                                                   EUR in millions   EUR in millions   EUR in millions
 Net interest income                                                        1,755             1,754                 1
 Net commission income                                                        209               200                 9
 Administrative expense                                                       607               573                34
 Operating result before valuation                                          1,357             1,381              – 24
 Risk provisions for lending business                                     – 6,409              – 12           – 6,397
 Net gains/losses from hedge accounting and other
 financial instruments at fair value through profit or loss                –1,880               155            –2,035
 Net gains/losses from securities and investments                            –421                19             – 440
 Operating result after valuation                                         – 7,353             1,542           – 8,895
 Net other operating income                                                 1,189                32             1,157
 Profit/loss from operating activities                                    – 6,164             1,574           – 7,738
 Taxes on income                                                                4                10                –6
 Consolidated profit/loss                                                 – 6,168             1,564           – 7,732
 Net gains/losses recognised in equity                                      – 249              – 53             – 196
 Comprehensive income                                                     – 6,417             1,511           – 7,928
 Adjustment for temporary net gains/losses from
 economically unjustified changes in derivatives value
 and hedge accounting                                                           5             – 131               136
 Additions to the fund for general banking risks                            – 200             – 267                67
 Application of the fund for general banking risks to
 charges related to the IKB crisis                                          5,300                 –             5,300
 Comprehensive economic income                                            – 1,312             1,113           – 2,425




                                                              27
Economic report.




                   The operating result before valuation was             effect. The provision for immediate credit risks
                   EUR 1,357 million, which was slightly lower than      was reduced.
                   the previous year’s figure of EUR 1,381 million.          The provisions for losses on loans and advan-
                       The Group’s main source of income is net in-      ces and the fund for general banking risks cover
                   terest income. Net interest income amounted to        all immediate and latent risks and reflect the
                   EUR 1,755 million and was virtually unchanged         consistent implementation of our conservative
                   from the previous year’s level. Expenses from         risk policy.
                   measures to reduce interest rates for the in-             The income statement was impacted by
                   creased promotional loan business were compen-        expenses of EUR 6.3 billion for the provisions for
                   sated by income from the investment of higher         losses on loans and advances made in connection
                   non-interest-bearing liabilities from the equity      with KfW’s assumption of the rights and obliga-
                   contribution by the ERP Special Fund.                 tions under the liquidity lines granted to the
                       Net commission income increased slightly by       special purpose entities of Rhineland Funding
                   4.8 % to EUR 209 million (previous year: EUR 200      Capital Corporation, New York/USA, and for the
                   million). In particular, income from the PROMISE      provision made for the guarantee to hedge the
                   and PROVIDE securitisation platforms and from         balance sheet risks as part of the risk protection
                   credit derivatives contributed to this increase.      afforded to IKB.
                       Administrative expense amounted to EUR 607            In addition to the extraordinary effect of
                   million, representing a EUR 34 million, or 5.9 %,     EUR 1.7 billion charge from the valuation of credit
                   increase above the comparable figure for the          derivatives from the risk protection provided to
                   previous year. Personnel expense rose slightly by     IKB, net gains/losses from hedge accounting and
                   EUR 14 million to EUR 349 million due to salary       other financial instruments at fair value through
                   increases because of collective pay agreements        profit or loss in 2007 also reflected the fluctua-
                   and improved performance while employee               tions on the financial markets which occurred
                   headcount increased by 4 %. A EUR 20 million          following the US subprime mortgage crisis.
                   increase in non-personnel expenses to EUR 258             Net gains from micro and macro fair value
                   million related in particular to other administra-    hedge accounting amounted to EUR 73 million.
                   tive expenses, among other factors, from in-          The successful application of hedge accounting
                   creased expense for the administration of exter-      eliminates one-sided and high volatilities not
                   nally held special funds and for services provided    deemed economically reasonable from deriva-
                   by third parties.                                     tives used solely for hedging purposes from the
                       Excluding the extraordinary effect of the risk    group income statement.
                   protection provided to IKB, expenses for risk pro-        Financial instruments at fair value through
                   visioning in the past financial year remained low     profit or loss in the form of debt instruments
                   at EUR 129 million, while the volume of lending       issued, including the associated hedging deri-
                   grew significantly, keeping in line with the trend    vatives, generated expenses of EUR 45 million.
                   of the previous year. The recognition of portfolio    Triggered by the crisis in the financial markets,
                   valuation allowances, particularly to account for     improved funding spreads applied in fair value
                   existing concentration risks in the financial sec-    accounting for borrowings caused a temporary
                   tor in KfW’s business model, had a negative           expense for KfW.




                                                                    28
The contribution to earnings from hedges not         less the expected costs of sale. This write-down
qualifying for hedge accounting under IFRS           led to a further charge of EUR 77 million.
amounted to a charge of EUR 29 million, com-             Disposals and valuations of securities and
pared with a gain of EUR 87 million in the previ-    equity investments not accounted for at fair
ous year.                                            value through profit or loss led to net expenses
   Equity finance business recorded at fair value    totalling EUR 67 million.
through profit or loss performed well again, fol-        EUR 216 million in valuation losses recognised
lowing the positive results in the previous year     directly in equity relating to financial assets was
(EUR 130 million), and contributed EUR 193 mil-      charged to revaluation reserves. Of this amount,
lion to earnings. In addition to equity invest-      EUR 56 million was attributable to ABS products.
ments, this item includes valuation gains and            Net other operating income primarily reflects
losses on ancillary agreements in equity finance     the one-off income from the participation of
business (risk commissions/profit participa-         associations of the German banking industry in
tions).                                              the risk protection afforded to IKB.
   Securities recorded at fair value through prof-       Overall, a consolidated loss of EUR 6,168 mil-
it or loss, including fair value accounting for      lion was recorded, compared with a consolidated
gains and losses on special funds, gave rise to an   profit of EUR 1,564 million in the previous year.
expense of EUR 328 million. In addition to the           Comprehensive income includes changes in
profit and loss components realised, this item       revaluation reserves in addition to the consoli-
primarily includes valuation gains and losses,       dated profit/loss reported in the income state-
largely considered temporary, arising from the       ment. At a loss of EUR 6,417 million, comprehen-
negative conditions in the financial markets. Di-    sive income was significantly below that for the
rectly held ABS instruments recorded at fair         previous year, due in particular to the impact
value through profit or loss led to EUR 137 mil-     of the IKB crisis. The item included the higher
lion in expenses.                                    short-term changes in value for financial assets
   Net losses from securities and investments of     recognised directly in equity, a charge of
EUR 421 million (previous year: net gains of         EUR 216 million, and the derecognition of the
EUR 19 million) primarily reflected the write-       pro-rata revaluation reserve recognised directly
down of the value of KfW’s equity interest in        in equity due to IKB’s status as an associate.
IKB, amounting to EUR 356 million. During the            The comprehensive economic income is based
reporting year, the interest in IKB was recorded     on the comprehensive income determined in
using the equity method until, as at 30 November     accordance with IFRS and supplements the
2007, the Board of Supervisory Directors of KfW      Group’s income statement. KfW uses comprehen-
resolved to move forward with a prompt sale of       sive economic income for two reasons:
IKB. The resulting expenses amounted to EUR 279       K The companies within the Group are not trad-
million. Since 1 December 2007, IKB is no longer        ing institutions. Derivative financial instru-
accounted for as an associate but instead as a          ments are entered into for hedging purposes.
held-for-sale asset in accordance with IFRS 5. As       Under IFRS, the requirements for recognition
a result, KfW’s equity interest in IKB was written      and valuation of derivatives and hedges nev-
down to market value based on the share price           ertheless give rise to effects which are reflect-




                                                     29
Economic report.




                      ed in the income statement. In the opinion              nomic effectiveness but not qualifying for
                      of KfW, these effects do not adequately reflect         hedge accounting in accordance with IFRS
                      that its hedges are economically effective for          were eliminated. These hedges do not give rise
                      hedging purposes.                                       to any net gain or loss over the entire period
                   K As a result of its statutory responsibility as a         to maturity.
                      promotional bank with a long-term business           The following adjustment was made with respect
                      perspective, KfW pursues a risk policy of build-     to the accounting treatment of the Group’s re-
                      ing sufficient reserves to meet potential risks      quired risk provisioning:
                      in a fund for general banking risks. This risk        K Additions to and reductions of the fund for
                      policy adequately reflects the sustainable and          general banking risks are reported in the
                      long-term nature of the promotional approach            economic income statement.
                      and takes into account particular stress             In the economic income statement, various tem-
                      phases in the market. In the opinion of KfW,         porary effects from the accounting treatment of
                      it is not possible to adequately reflect the         hedges in accordance with IFRS in 2007 were
                      effects of this policy in providing for potential    largely offset after a gain of EUR 131 million was
                      risks under IFRS since they cannot be reported       adjusted in the previous year.
                      in the income statement.                                 Excluding the application of EUR 5,300 mil-
                   The following adjustments were made in respect          lion from the fund for general banking risks
                   of the accounting treatment of hedges:                  to charges resulting from the IKB crisis and
                   K Temporary gains and losses from micro and             the addition of EUR 200 million to the fund
                      macro hedge accounting were eliminated. All          from current profit, the negative comprehensive
                      of the Group’s hedges are economically effec-        economic income of EUR –1,312 million was
                      tive and do not give rise to any net gain or         EUR 2,425 million below the previous year’s
                      loss over the entire period to maturity.             figure.
                   K Temporary gains and losses from the fair                  This decline was mainly due to charges result-
                      value accounting for debt instruments issued         ing from the IKB crisis that were not covered by
                      using the fair value option in order to avoid        the fund for general banking risks and valuation
                      an accounting mismatch were eliminated               losses in the income statement and in equity
                      together with the associated hedging deriva-         from securities, triggered primarily by the general
                      tives. These economically effective hedges do        crisis of confidence in the financial markets.
                      not give rise to any net gain or loss over the
                      entire period to maturity.
                   K Temporary gains and losses from the fair
                      value accounting of hedges with high eco-




                                                                      30
       Material events after the BalanCe sheet Date (as at 12 MarCh 2008).

Since 1 January 2008, KfW IPEX-Bank, the wholly-      vertible bond for EUR 54.3 million issued by IKB.
owned subsidiary of KfW, has conducted its busi-      The bond was converted on 28 February 2008.
ness as the legally independent KfW IPEX-Bank         With the conversion, the Group increased its
GmbH. This step implements the understanding          interest in IKB by 5.6 percentage points.
on the restructuring of the promotional banking          In order to provide additional risk protection
system reached with the EU Commission in              for IKB, the Federal Government mandated that
2002.                                                 KfW, in accordance with § 2 (4) of the Law Con-
    As part of the risk protection granted to IKB,    cerning KfW (KfW Law), implement capital meas-
KfW will, upon contractual implementation of          ures up to an amount of EUR 2.3 billion for the
the restructuring of the RFCC conduit, gain con-      benefit of IKB. The Board of Supervisory Directors
trol over assets attributable thereto under the       confirmed this in its meeting as at 13 February
liquidity lines funded by KfW. These assets will      2008. In connection with a planned cash capital
be transferred to two new special purpose enti-       increase of IKB of up to EUR 1.487 billion, KfW
ties operated by KfW. The special purpose entities    will ensure that IKB receives at least EUR 1.25
will be refinanced exclusively by KfW. The two        billion. Additionally, KfW has increased IKB’s
special purpose entities will be consolidated in      mandatory core capital by EUR 600 million thus
financial year 2008 upon the transfer of control      far since 19 February 2008. Currently recognis-
over the assets.                                      able risks arising from this transaction are to be
    In January 2008, as part of the risk protection   borne by the German Federal Government and
granted to IKB, KfW acquired a one-year con-          other parties involved.




                                                      31
Risk report.




                                                                        risK report.

                                        BasiC prinCiples anD oBjeCtives of risK ManageMent.

               Measuring and controlling the risks incurred in                        The KfW Group’s business areas operate in a dy-
               the context of its promotional objectives is of                        namic environment. Product innovation there-
               major importance for the KfW Group1). Only with                        fore requires continuing development of risk
               well-planned risk management is KfW able to                            measurement methods and systems. At the same
               use its resources optimally to realise its promo-                      time, changing banking supervisory and eco-
               tional objectives. Systematic risk management is                       nomic parameters place higher demands on the
               a precondition for maintaining the Group’s risk-                       quality of risk management procedures and
               bearing capacity and for sustainably achieving                         methods. KfW is meeting these challenges
               promotional objectives in the future. The KfW                          through targeted development of its risk man-
               Group operates in various market segments. This                        agement and controlling. Having established and
               results in a heterogeneous loan portfolio with                         validated both the required risk measurement
               returns and risks that need to be managed                              and controlling procedures and the organisa-
               group-wide. Group risk/return management takes                         tional bases for these procedures in accordance
               into account the special characteristics of a pro-                     with supervisory requirements in the preceding
               motional bank. The main purpose of KfW’s risk                          years, KfW’s focus in this reporting year was on
               management approach is to maintain its risk-                           further development and validation of methods.
               bearing capacity. The KfW Group works to ensure                        In addition KfW analysed its credit and market
               that the economic capital tied up by credit, mar-                      risks under stress conditions in 2007.
               ket and operational risks is at all times covered                          In order to establish risk management and
               by the Group’s available financial resources in                        controlling competence within the organisation
               order to ensure the desired solvency level. Bank-                      of the bank, KfW offers training courses which
               ing supervisory requirements, such as the mini-                        include a modular programme on risk topics. This
               mum requirements for risk management                                   training program enables employees and man-
               (MaRisk), constitute important secondary re-                           agement staff from the entire Group to acquire
               quirements for KfW’s risk management structures                        orientation knowledge or to deepen their expert
               and procedures.                                                        know-how.




               1)   The Group considers both KfW and its subsidiaries in its risk management.




                                                                                 32
                  organisation of risK ManageMent anD Monitoring.
      risK ManageMent BoDies anD funCtional aspeCts of risK ManageMent.
KfW’s Board of Managing Directors determines         funding situation, assessment of currency risks
the bank’s risk principles and guidelines as part    and interest rate risks and discussion of the
of its overall responsibility. KfW’s supervisory     interest hedging strategy to be pursued in fund-
bodies – the Board of Supervisory Directors and      ing. The Credit Risk Sub-Committee (SCK) deals
the Federal Ministries of Finance and of Econom-     with credit risk methods and credit portfolio
ics and Technology, which take turns in providing    management, for example by taking decisions on
the chairman and deputy chairman of the Board        the development of rating methods and on the
of Supervisory Directors – are regularly informed    design of systems for limit management and col-
of the Group’s risk situation.                       lateral assessment and by preparing decisions on
    Risk management within the KfW Group is          global limits and portfolio guidelines for the
exercised by closely intertwined decision-making     RMC. Several working groups have been estab-
bodies. They are headed by the Risk Management       lished under the Sub-Committees.
Committee (RMC), which is responsible for the            The Working Group Country Rating is the
entire Group’s risk profile. The RMC includes all    central forum for assessing country risks. It is
members of the Board of Managing Directors           composed of economists from the regional
along with representatives of KfW’s business         departments of KfW Entwicklungsbank and
areas, some central staff departments and sub-       representatives of KfW IPEX-Bank, DEG and
sidiaries of the KfW Group. The RMC adopts           KfW’s Transaction Management Department. It
major changes to existing risk principles, drafts    is chaired by the ratings officer in charge in the
new risk principles, and deals with risk strategy,   Risk Management Department. The working
adjustments to global limits and similar topics      group meets quarterly or more often as required.
relating to risk management. The RMC also re-        The role of the Working Group Country Rating is
ceives information on matters such as the devel-     to identify, analyse and assess political and eco-
opment of lending business, liquidity and limit      nomic risks (and rewards) in the global economy
utilisation and the changes to the risk principles   and particularly in the countries in which the
adopted in the Sub-Committees (SCs). The RMC         KfW Group is doing or planning to do business.
is headed by the KfW board member in charge          Proposals for risk ratings assigned to developing,
of risk controlling. Sub-Committees for credit       transition and emerging countries are made
risks, market price risks and, going forward, for    by the departmental regional economists while
operational risks do preparatory work for the        proposals for the rating of industrial countries
RMC. Heads of business areas and divisions are       are submitted by the Risk Management Depart-
represented on the Sub-Committees in order to        ment. Countries are ultimately assigned to risk
ensure that SC decisions are taken indepen-          categories on the basis of discussions conducted
dently. SC meetings are prepared at the working      within the Working Group Country Rating. If no
level to ensure their efficiency.                    consensus is reached, a vote of the Risk Manage-
    The Market Price Risk Sub-Committee (SCM)        ment Department is decisive. The Risk Manage-
deals with decision papers on subjects relating to   ment Department then presents the results of
market risk, liquidity and asset management.         the meetings directly to the Board of Managing
These papers include reports on the liquidity and    Directors and justifies the decisions taken.




                                                     33
Risk report.




               The Working Group Trading Activities is the cen-                  departments. The collateral and transaction man-
               tral platform for exchanging opinions on matters                  agement departments are in charge of the final
               relating to counterparty default risks arising                    provision, valuation, ongoing administration, re-
               from trading activities. This working group was                   lease and realisation of collateral. For cost/ben-
               established chiefly for two reasons: first, to ad-                efit reasons, KfW does not recognise any collat-
               dress the more stringent requirements of the                      eral in on-lending operations in which the
               regulation on capital adequacy of institutions,                   on-lending bank is released from its liability.
               groups of institutions and financial holding                      Accepted collateral is revaluated in regular inter-
               groups (Verordnung über angemessene Eigenka-                      vals, at least annually, in the course of loan
               pitalausstattung von Instituten, Institutsgruppen                 management. Collateral is re-examined on a
               und Finanzholdinggruppen) or Solvency Regula-                     case-by-case basis in the intensive loan manage-
               tion (Solvabilitätsverordnung) on risk manage-                    ment and problem-loan processing stages and as
               ment procedures; and, second, to control and                      soon as the bank detects any substantial dete-
               document the risks associated with the use of                     rioration in its value.
               credit risk mitigation techniques. The main task                      The Working Group Rating Systems is a cen-
               of the Working Group Trading Activities is to                     tral, group-wide body which ensures sufficient
               prepare the implementation of group-wide                          understanding of all essential aspects of the rat-
               standards and decisions, particularly for keeping                 ing systems within the KfW Group. The term rat-
               procedures and disclosures compliant with regu-                   ing system refers to all methods, procedures, and
               latory requirements and for generating and man-                   data collection and processing systems that are
               aging standards for framework agreements. In                      applied to evaluate counterparty risks, to map
               addition the working group provides proposals                     the derived risk assignments to (creditworthiness)
               for dealing with questions of how to apply                        categories or retail pools, or to assign default and
               credit risk mitigation techniques at KfW, identi-                 loss rate estimates to specific types of assets.
               fies gaps in the provisions and suggests possible                 The Working Group Rating Systems prepares
               alternatives and solutions.                                       management decisions or takes decisions within
                   The Working Group Collateral is the group-                    its defined range of competency. These decisions
               wide platform in the area of collateral manage-                   include evaluating and accepting reports on
               ment for lending business. It is composed of                      validation and further development as well as
               representatives from various business areas and                   deriving, planning and coordinating recommen-
               departments. The central functions of the Work-                   dations for measures to enhance rating systems.
               ing Group Collateral include assessment of new                    The Working Group Rating Systems includes rep-
               valuation procedures and relevant decisions, revi-                resentatives of all users of the rating systems,
               sion of existing valuation procedures, definition                 risk management and controlling, and KfW’s
               of generally acceptable1) types of collateral, fur-               Internal Auditing Department.
               ther development of acceptability policy, and                         The Working Group Portfolio Management is
               provision of standard texts for collateral agree-                 headed by the risk management unit and is a
               ments.                                                            communication platform as well as a body for
                   In most cases, the collateral agreement and                   preparing group-wide portfolio management
               the first steps towards the provision of the col-                 decisions. Its main objective is to initiate and
               lateral are the responsibility of the various credit              coordinate measures designed to improve the risk

               1)   Collateral is examined for acceptability at the KfW Group against the criteria set out in the German Solvency Regulation.




                                                                            34
structure. The working group discusses approach-                              against balance sheet, legal, business policy and
es to identifying, analysing and measuring cred-                              risk policy criteria, adopts specific measures and
it (portfolio) risks. It then evaluates alternative                           recommends them to the Credit Risk Sub-Com-
risk transfer instruments across all business areas                           mittee.


     Risk management bodies


                                                Board of Supervisory Directors



                                                 Board of Managing Directors*
                                                  All members of the Board of Managing
                                                   Directors are represented in the RMC

                                            Risk Management Committee – RMC
                                                                                                      Group business area
                                   Prepare decisions                                                 representatives are in
                                                                                                           the RMC

                    Sub-Committees – SC                                                                                                   IF
                                                                                                                Group business areas
                                                                                                                                       Incl. tbg
                                                                          Group business area
          SCM                 SCK**                 SCO***
                                                                         representatives are in                                            FE
                                                                         the Sub-Committees
                                                                                                                                       Incl. DEG
                                                                                                                       (KGF)

     Market price          Credit risk/             OpRisk/




                                                                                                                                                    Internal Auditing
     risk/Funding           Portfolio               MaRisk                                                                                 EP
                                                                                                                                       Incl. IPEX

                                                                                                                                          BD




                                              Risk Management and Controlling

                                                                                                   Risk Methods, Instruments
            Risk Management                               Risk Controlling
                                                                                                        and Procedures

      Priority: Risk/                            Priority: Measurement and                        Priority: Methods and
      return optimisation                        reporting of risks                               procedures
      – Risk policy                              – Risk quantification                            – Integrity of methodology
      – Limit management                         – Risk-adjusted                                    and data
      – Second vote                                performance measurement                        – Rating systems
      – Capital allocation                                                                        – Portfolio models
      – Portfolio management                                                                      – Risk manual
                                                                                                  – Supervisory law


 *   The Working Group Country Rating reports to the Board of Managing              IF   – Investment financing in Germany and Europe
     Directors.                                                                     EP   – Export and project finance
 ** The Working Groups Collateral, Portfolio Management, Trading                    FE   – Promotion of developing countries
     Activities and Rating Systems contribute of the SCK.                           BD   – Shareholdings, treasury and services
 *** The SCO is currently being established.




                                                                            35
Risk report.




               The subsidiaries of the KfW Group and the              Group and are accessible to all employees. Risk
               organisational units exercise their own control        principles (i. e. normative rules for loan and risk
               functions within the group-wide risk manage-           management procedures) and portfolio guide-
               ment system. In these cases, too, group-wide           lines (e. g. prohibitions and collateral require-
               projects and working groups ensure a coordi-           ments) make up the core of the risk manual. The
               nated approach, for example in the rollout of          risk principles and portfolio guidelines serve as
               rating instruments to subsidiaries or the man-         the framework for the operating activities of all
               agement and valuation of collateral.                   business areas. The risk manual ensures that uni-
                  Responsibility for developing and assuring the      form procedures are applied throughout the
               quality of the risk management and controlling         group to identify, measure, control and monitor
               procedures lies outside the credit departments,        risks. In addition, group-wide regulations are
               entirely with the Risk Management and Control-         supplemented in individual business areas by
               ling Department. A comprehensive risk manual           specific rules which the Risk Management and
               has been prepared for this purpose and is con-         Controlling Department monitors as part of a
               tinually updated. The rules and regulations laid       decentralised compliance review.
               out in the risk manual are binding for the entire



                                                        risK ManageMent.

               The primary task of the Risk Management De-            concentrated risks. Stress tests are conducted to
               partment is to optimise risks and returns. For this    maintain the ability to respond even when cycli-
               purpose, it formulates and regularly reviews the       cal conditions deteriorate substantially. The
               Group’s risk strategy. The risk strategy builds on     active use of credit derivatives also contributes
               the existing risk situation and establishes a          to improving the risk profile and expanding the
               framework for the assumption and management            range of business options. In order to optimally
               of risks within the Group. A variety of instru-        use available capital while preserving the Group’s
               ments are used to implement the risk strategy.         risk-bearing capacity, the Risk Management De-
               Management measures applied to individual              partment proposes, at the Group planning level,
               counterparties and portfolios (e. g. second vote       the allocation of capital to the various business
               for loan approvals, a limit management system          areas (capital budgets). This capital is then made
               and portfolio guidelines) ensure risk-bearing ca-      available to the individual business areas as
               pacity and prevent an undesirable expansion of         equity for both ongoing and new operations.




                                                                 36
                       risK Controlling/MethoDs anD proCeDures.

The Risk Controlling Department and the Meth-        development. The Risk Controlling and Methods
ods and Procedures Department perform further        and Procedures Departments are responsible for
central functions alongside the Risk Management      the operative procedures for Group business area
Department. The Risk Controlling Department is       planning to determine the key performance in-
in charge of measuring and reporting all risks of    dicators of the bank and the methods and ap-
the KfW Group. A comprehensive risk report, is-      plications used in measuring these indicators.
sued quarterly to the Risk Management Commit-        Risk controlling monitors and reports in regular
tee and supervisory bodies of KfW in accordance      intervals on the achievement of the targets de-
with regulatory requirements (MaRisk), is the        fined in Group business area planning for the use
basis of risk reporting for the Group. The Meth-     of capital and value creation, and promotion in
ods and Procedures Department ensures that           the individual business areas (performance re-
consistent risk analysis methods are applied         porting, comparison of targets and results). The
throughout the Group. These two departments          use of economic capital budgeted in the plan-
are responsible for the correctness and complete-    ning process is also monitored so that it is pos-
ness of all key risk variables used in the manage-   sible to intervene whenever necessary (e. g.
ment of the bank (methodological and data sov-       capital reallocation). Finally, performance report-
ereignty). The instruments and methods applied       ing serves as a performance evaluation in the
are regularly validated and subject to continued     individual business areas.



                                       internal auDiting.

As an instrument of the Board of Managing            for measuring and assessing market price risks
Directors, the Internal Auditing Department is       and operational risks.
not bound by directives and works independ-              The Internal Auditing Department monitored
ently of Group procedures. It generally audits all   important projects, particularly the IT develop-
of KfW’s processes and activities to identify the    ment projects, while retaining its independence.
risks involved. The Internal Auditing Department     As in previous years, in 2007 the Internal Audit-
reports directly to the Board of Managing Direc-     ing Department monitored the further devel-
tors.                                                opment of risk measurement procedures by
    The procedure for risk-oriented planning of      participating in meetings (guest status) of deci-
internal audits was further developed in 2007.       sion-making bodies.
The economic capital requirements of the opera-          The Internal Auditing Department also per-
tions to be audited are taken into account when      formed the coordination and management tasks
determining the audit cycles for the individual      of a group auditing department. It incorporates
audit areas.                                         the internal auditing departments of the sub-
    In addition to the promotional business, au-     sidiaries in the group-wide audit reporting. In
diting activities focused on the risk management     addition, it coordinates and manages the estab-
procedures and methods in 2007. The risk man-        lishment and development of instruments, meth-
agement audits focused on the internal rating        ods, procedures and standards applied in the
systems as well as on the methods and processes      auditing work within the Group.




                                                     37
Risk report.




                                                 the KfW group’s risK ManageMent approaCh.

               Risk management within the KfW Group chiefly                                model and the risk measure credit value-at-risk
               serves to preserve the Group’s risk-bearing ca-                             at a prescribed confidence level. The difference
               pacity. In conducting its business, the Group only                          between credit value-at-risk and expected loss is
               takes risks for which capital is available. An anal-                        referred to as the economic capital require-
               ysis of the risk-bearing capacity must measure                              ment.
               risks and match them against risk-covering po-                                  KfW’s approach to market price risks is similar,
               tential. Potential financial losses are measured                            as the value-at-risk is computed using statistical
               with the aid of two central risk-measuring tools:                           models. For market price risks, the value-at-risk
               expected loss and economic capital, which is a                              also represents the economic capital require-
               measure to cover unexpected loss.                                           ment.
                   Expected loss refers to losses that are expect-                             The forecast period for both risk categories is
               ed to arise on a statistical average over a number                          one year. The confidence level used for calculat-
               of years. Expected losses along with other para-                            ing the economic capital requirement is 99.99 %,
               meters are important when credit is priced. Ex-                             which corresponds to triple-A standard. The
               pected losses are defined as the product of:                                capital requirement for credit and market price
               K the probability of a borrower’s default (prob-                            risks is aggregated, taking diversification effects
                  ability of default),                                                     into account. The capital requirement for opera-
               K the expected amount of the loan outstanding                               tional risks is calculated using the regulatory
                  at the time of the potential default (exposure                           standard approach according to Basel II.
                  at default) and                                                              In addition, the KfW Group applies a risk
               K the magnitude of likely loss on the exposure                              buffer, which is also determined in accordance
                  (loss given default).                                                    with very conservative standards, in the calcula-
               The probability of default is estimated for each                            tion of its overall capital requirements. The risk
               borrower with the aid of rating methods. The                                buffer covers potential additional economic
               result of the rating measures is an estimate                                capital requirements for the loan portfolio that
               of the probability that a counterparty will be                              might result from stress tests conducted for an
               unable to fulfil its obligations within the next 12                         assumed severe recession scenario. It can also
               months. In particular, collateral and guarantees                            be used to cover additional economic capital
               have to be evaluated to estimate the magnitude                              requirements for interest rate risks while the sol-
               of the likely loss. Expected losses are not backed                          vency level defined by the group management is
               by capital as they are offset in a means calcula-                           maintained. The overall risk capital requirement1)
               tion by the risk margins (insurance principle).                             (economic capital or ECAP) is matched against
                   In cases where the losses for an individual                             the risk covering potential (available financial
               year exceed the expected loss, such losses must                             resources, or AFR). The AFR essentially result from
               be covered by the bank’s own resources (risk-                               KfW’s recognised equity. Parts of the equity
               covering potential). The loss potential to be                               (reserves) that are attributed to DEG or the ERP
               backed by capital (unexpected loss) is quantified                           Special Fund are included in AFR only to the
               by the Risk Controlling Department with the aid                             extent that DEG or ERP Special Fund operations
               of statistical models. For credit risks, the loss                           themselves require economic capital. Subordi-
               potential is computed using a credit portfolio                              nated liabilities are not considered.

               1)   KfW does not cover liquidity risk with risk capital as it is not a loss risk to be covered on the liabilities side but a payment risk to be
                    covered on the assets side.




                                                                                     38
     Risk-bearing capacity
     EUR in millions
                                                                        17,500

                                                                        15,000

                                                                        12,500

                                                                        10,000

                                                                         7,500

                                                                         5,000

                                                                         2,500

                                                                              0
                                                                                             31 Dec. 2007             31 Dec. 2006
                                                                                              (Basis IFRS)           (Basis German
                                                                                                                  Commercial Code)
     K Risk buffer                                                                                  5,000                    4,000
     K Operational risk                                                                               354                      317
     K Market price risk1)                                                                          2,419                    2,291
     K Credit risk                                                                                  5,777                    7,336
     K Available financial resources                                                                9,917                   16,178
1)   Taking into account the volatility of the present value of equity-funded assets




Despite the burdens resulting from the risk pro-                                   Both KfW’s Board of Supervisory Directors and
tection for IKB, which resulted in a significant                                   the Risk Management Committee are informed
decline in available financial resources, the eco-                                 on a quarterly basis about all major risks and the
nomic capital required for credit, market price                                    overall risk situation of the KfW Group in con-
and operational risks was always matched by an                                     nection with (MaRisk) risk reporting. Events of
adequate risk covering potential throughout                                        major importance to the bank’s risk situation are
2007. Taking into account the above-mentioned                                      promptly communicated to the decision-makers.
burdens, EUR 1.4 billion (or 27 %) of the risk                                         Based on the primary goal of ensuring risk-
buffer is covered. This permits an increase of the                                 bearing capacity, promotion and growth are the
economic capital required for risks by up to 15 %.                                 further objectives of (RAROC-based) group busi-
KfW addresses liquidity and other risks by moni-                                   ness area planning. For the KfW Group, growth
toring appropriate key figures and by regularly                                    means generating returns on a sustainable basis
controlling the processes of the banking opera-                                    so as to be able to continue its promotional ac-
tions.                                                                             tivities in the future. The main elements of group




                                                                                  39
Risk report.




               business area planning are group-wide strategic                         KfW’s management approach is based on state-
               planning and its quantification in the planning                         of-the-art models used in banking practice. How-
               of risks and earnings. Central top-down guide-                          ever, each model represents a simplification of a
               lines set by the Board of Managing Directors for                        complex reality and builds on the assumption
               key management variables, taking into account                           that risk parameters observed in the past can be
               KfW‘s system of objectives, form the basis for                          considered representative of the future. Not all
               planning in individual business areas. On this ba-                      possible influential factors and their complex
               sis the business areas formulate planning sce-                          interactions can be identified and modelled for
               narios that are presented and discussed in a                            the risk development of a portfolio. This is one
               planning dialogue. The Board of Managing Direc-                         reason why KfW carries out stress tests both in
               tors subsequently decides on the strategy of each                       the credit risk models and in the market risk
               business area and on the overall group strategy.                        models. The Group works continually to refine its
               Strategy implementation and central manage-                             risk models.
               ment variables are monitored throughout the
               year.



                                                                        types of risKs.
                                                             Counterparty Default risK.
               The KfW Group assumes counterparty risks1) in                           promotional loans channelled through on-lend-
               the context of its promotional mandate. In its                          ing banks, and equity finance. In addition, KfW
               domestic promotional lending business the main                          assumes risks in the context of export and project
               risks are in the areas of start-up finance and                          finance as well as, increasingly, promotional loans
               financing of small- and medium-sized enterprises,                       extended under Financial Cooperation.




               1)   Counterparty default risk is defined as the risk of financial loss that can occur if the borrower or counterparty fails to meet
                    contractual payment obligations. Counterparty default risk also includes country risk, which is composed of transfer, conversion and
                    political risks.




                                                                                 40
 Debtor       State debtors        Banks                    Enterprises         Other
  level
              Country rating       Bank rating              Corporate rating    Retail
                                                            SME rating          Start-up rating
  Rating                                                                        Private equity




                                                                                                            backtesting processes
procedure                                                                       recipient/provider




                                                                                                               Validation and
                                                                                rating
                                                                                Cash flow rating


                                           Loan amount outstanding
                                              (exposure at default)
Borrower
  level                                Loss ratio in an event of default
                                                 (loss given default)

Portfolio
                                             Loan portfolio model
  level
Reporting     Risk reporting       Limit and portfolio      Performance         Group business            Validation
  level                            management               accounting          area planning              reports




    Default risks of lending operations are rated by          rating procedures are calibrated to a one-year
    estimating probabilities of default and loss given        default probability. The ratings for new custom-
    default. The KfW Group applies internal risk              ers are conducted in the credit departments with
    rating procedures in which country risks and              follow-up ratings for existing clients conducted
    individual corporate or project-related risks are         in the transaction management departments and
    assessed separately. It uses computer-based rat-          always controlled and checked by a second loan
    ing procedures adapted to the largely homoge-             officer. This procedure also ensures compliance
    neous customer segments and types of financing.           with section 18 of the German Banking Act
    KfW uses specific rating procedures for banks,            (Kreditwesengesetz/KWG) (supervision of ongo-
    corporations, small- and medium-sized enter-              ing disclosure).
    prises, private equity providers, private equity              Depicting the default probability on a master
    recipients, start-up businesses and countries.            scale which is uniform for the entire KfW Group
    These procedures are based on scorecards and              ensures the consistency of the individual rating
    follow a uniform and consistent model architec-           procedures. The master scale consists of 20 dif-
    ture. For project financings, KfW applies a cash–         ferent classes that can be summarised into four
    flow based rating method. Under this method,              groups: investment grade, non-investment grade,
    the projection of cash flow generated by the              watch list and default. Each master scale class is
    financed object determines the credit risk. The           based on an average default probability which




                                                             41
Risk report.




               undergoes a validation procedure that takes into                       determined value is an important element in
               account the different rating procedures. Specific                      estimating loss given default within the KfW
               organisation regulations, which mainly specify                         Group. Depending on data availability, the vari-
               the responsibilities, competencies and control                         ous valuation procedures for individual types of
               mechanisms associated with a particular rating,                        collateral are based on internal and external his-
               apply to each rating procedure. The external                           torical loss data and expert estimates. The valu-
               ratings are mapped to the KfW master scale to                          ation parameters undergo a periodic validation
               ensure comparability of internal ratings of the                        procedure. For individual collateral this guaran-
               KfW Group with ratings of external rating agen-                        tees a reliable valuation of the collateral position.
               cies. It is important, however, to ensure that the                     At the level of the collateral portfolio, KfW is
               proper external rating type is used when making                        currently developing a concept that permits con-
               comparisons. The separate report of the debtor’s                       centration risks to be measured, valuated and
               probability of default, the transfer risk, the ex-                     managed.
               pected loss severity in the event of default, and                         The KfW Group has various portfolio guide-
               the term applied by the external rating must be                        lines to limit risks from new business. They form
               taken into account, along with other factors.                          the basis for the second vote on lending transac-
               Periodic validation and further development of                         tions and serve as an orientation guide for loan
               the rating procedures ensure that KfW is able to                       approvals. They are also designed to ensure ad-
               rapidly respond to changes in overall conditions.                      equate quality and risk structure of KfW’s port-
               The aim is to continuously improve the selectiv-                       folio2). These guidelines distinguish between
               ity for all rating procedures. Rating instruments                      types of counterparties and product variants and
               and procedures largely meet the minimum re-                            define conditions under which business transac-
               quirements of the prevailing regulatory standards                      tions generally may be conducted. A risk princi-
               (MaRisk/Basel II).                                                     ple for loan collateral regulates uniform manage-
                   Exposure and valuation of collateral are heav-                     ment, valuation and recognition of collateral
               ily weighted in determining loss severity. In con-                     across the Group. The risk of default on invest-
               nection with the valuation of acceptable collat-                       ments in securities and in derivatives is also lim-
               eral, the expected net revenue from collateral                         ited by the conservative selection of counterpar-
               realisation in case of loss is estimated over the                      ties and by collateral agreements.
               entire loan term. This estimate takes into account                        Existing higher-risk exposures are divided into
               discounts based on the probability of default in                       a “watch list” and a list for non-performing
               case of personal collateral1) and the magnitude                        loans. The watch list serves to identify potential
               of loss incurred by the collateral provider.                           problem loans early and, if necessary, to make
               For other collateral the discounts are chiefly                         preparations for handling these loans. For this
               attributable to fluctuations in market prices and                      purpose, KfW closely monitors the economic and
               devaluation resulting from depreciation. The                           financial environment of the respective bor-




               1)   Due to KfW’s business model, personal collateral (especially guarantees provided by the Federal Republic) is common.
               2)   These guidelines take into account the specific features of KfW’s promotional lending business.




                                                                                 42
rower. It regularly reviews and documents the            implemented or takes over the problem loan
economic situation and the collateral provided           completely from the credit department. This
and formulates proposals for remedial action.            process ensures that specialists are involved at an
Depending on the status of a problem loan, the           early stage to ensure professional management
Special Assets Group advises on measures to be           of problem loans.



                                           risK provisioning.

The KfW Group takes appropriate measures                 into account the scope and value of the collat-
to address all identifiable default risks in its lend-   eral. A simplified impairment prodedure is per-
ing business by making risk provisions for loans.        formed for small and standardised loans on the
These risks also include political risks of financ-      basis of homogeneous sub-portfolios.
ing transactions abroad. For loans with immedi-              Risk provisions for latent risks (portfolio im-
ate risk of default (i. e. non-performing loans)         pairment) are derived from the valuation of loan
KfW sets up individual impairments or provisions         receivables in the context of annual rating pro-
for undisbursed portions. Immediate risks of             cedures and collateral valuations. The basis for
default arise when the series of payments due            this is the expected loss model described above.
under a financial instrument is adversely af-            For the purposes of IFRS the components expo-
fected by one or more events. These events are           sure at default (EAD) and loss given default (LGD)
identified on the basis of criteria that meet both       were adjusted as follows: instead of the esti-
Basel II and IFRS requirements. Criteria include         mated exposure at default, the recognised (gross)
the identification of considerable financial dif-        exposure of the financial instrument is used for
ficulties on the part of the debtor, payment             the calculation of the risk provisions. As a result,
arrears, concessions made to the debtor owing            KfW recognises risk provisions only for losses
to its financial situation (for example, in the          already incurred as at the reporting date and not
context of restructuring measures), conspicuous          for losses expected in the future (“losses incurred
measures undertaken by the debtor to increase            but not yet reported”). Moreover, the loss given
its liquidity, and a substantial deterioration in        default has been adjusted by eliminating all
the value of collateral taken. These criteria are        imputed and internal costs. Risk provisions for
further specified in KfW’s risk manual. Individual       irrevocable loan commitments are set up using
impairments are determined by means of an                the same method of calculation.
impairment tool. The calculation of individual               Portfolio impairment also includes provisions
impairments is also based on an individual               for risks from portfolio concentration in the
assessment of the borrower’s ability to make             financial sector that result from the business
payments in the future. The calculation also takes       model of extending promotional loans through




                                                         43
Risk report.




                              the banking sector (on-lending business). The                                     sure also takes into account contingent liabilities
                              KfW Group is, as a result, dependent on the                                       and irrevocable loan commitments. These expo-
                              financial development of the banking industry                                     sures are reduced by the risk provisions made.
                              with its specific risks. KfW forms separate risk                                  Payment arrears were reported only in Loans and
                              provisions to take account of this.                                               advances to banks and customers. Individual
                                 According to IFRS 7.36, the maximum expo-                                      impairments were also reported under Securities
                              sure to credit risk for the KfW Group arising from                                and investments as well as under Contingent
                              financial instruments is theoretically the total                                  liabilities and Irrevocable loan commitments.
                              loss of the respective risk exposures. This expo-




       Maximum exposure
       EUR in millions

                                                                Loans and                 Loans and              Value adjust-   Derivatives used    Securities and        Contingent
                                                               advances to               advances to              ments from           for hedge       investments           liabilities,
                                                                    banks                 customers                 macro fair       accounting;                      irrevocable loan
                                                                                                                  value hedge               Other                        commitments
                                                                                                                   accounting         derivatives
                                                           2007         2006         2007         2006          2007     2006     2007     2006      2007     2006     2007       2006
       Carrying amount as equivalent for
       maximum risk of default           205,253 190,772                           93,082       91,753              0     219     8,736    7,173    45,745   41,802   44,516     52,092
       Risk provisions                                       485          455        7,186        1,509             0       0         0        0       80       13       530          65
         Neither past due nor impaired                  204,490 190,263            88,301       87,394              0     219     8,736    7,173    45,631   41,775   43,919     52,036
         With conditions renegotiated
         (in the reporting year)*                                7            0            4            0           0        0        0        0        3        4          0          0
      * Includes financial instruments that would be overdue or impaired without renegotiation of conditions.




                                                                                                        44
 Financial instruments past due and not individually impaired
 EUR in millions

                                        Loans and advances to banks         Loans and advances to customers
                                                2007              2006              2007                2006
 Less than 90 days past due                      576                195               971               1,030
 90 days and more past due                        41                109             1,721                 844




 Individually impaired financial instruments
 EUR in millions

                                   Loans and              Loans and       Securities and         Contingent
                                  advances to            advances to        investments            liabilities,
                                       banks              customers                         irrevocable loan
                                                                                               commitments
                               2007     2006           2007    2006       2007    2006      2007        2006
 Exposure                       145       205      2,088       2,484       115       27       597           56
 Individual impairments           71       95      6,858       1,322        80       13       446           21




In the 2007 financial year EUR 2.9 billion (net           latent risks of default (economic and political
after deduction of risk provisions; previous year:        risks). As at 31 December 2007, risk provisions for
EUR 2.8 billion) was classified as individually           performing business totalled EUR 826 million
impaired out of EUR 397 billion (previous year:           (previous year: EUR 591 million). These provisions
EUR 384 billion) in financial instruments out-            include EUR 357 million (previous year: EUR 301
standing. Potential losses are conservatively             million) for concentration risks in the financial
estimated, and individual impairments have been           sector. On average, though, more than 75 % of
formed in the sum of EUR 7.4 billion (previous            the loans in the KfW Group’s portfolio for per-
year: EUR 1.4 billion). This strong increase is due       forming loans are collateralised.
to the risk protection provided to IKB.                       In 2007 the KfW Group did not take posses-
   In addition to provisions for immediate risks          sion of any asset previously held as collateral.
of default, the KfW Group makes provisions for




                                                         45
Risk report.




                                                          stress tests.

               To prepare for a significant increase in default      ments during one year (severe recession scenar-
               risks that can be neither foreseen nor ruled out,     io). As at 31 August 2007 the economic capital
               the KfW Group conducts stress tests to determine      rose under stress tests by 52 % for a mild reces-
               whether higher economic capital is required for       sion scenario and by 82 % for a severe recession
               specific scenarios. A scenario covers potential       scenario. 27 % of the additional economic capital
               deteriorations that may occur (scenario 1) short-     requirement can be covered by the available
               term and cyclically (mild recession scenario) or      capital buffer.
               (scenario 2) annually in view of critical develop-



                                                    portfolio struCture.

               The contribution of individual commitments to         centration risks. On the basis of the limit man-
               the KfW Group’s loan portfolio risk is assessed       agement system, the KfW Group defines global
               with the aid of an internal portfolio model. Con-     limits which prevent losses that would put the
               centrations of individual borrowers or groups of      continuation of the bank at risk. These limits are
               borrowers give rise to the risk of major losses       accordingly derived from KfW’s risk-bearing
               that could jeopardise a bank’s existence. On the      capacity. The global limits provide a framework
               basis of the economic capital concept, the Risk       for managing counterparty risks. KfW reduces
               Controlling Department measures the risk con-         concentration risks under its risk management
               centrations by individual borrower, industry and      and active portfolio management in a targeted
               country. Concentrations are measured primarily        manner. To achieve this KfW uses credit deriva-
               by the extent to which they require economic          tives (single name credit default swaps) and
               capital. This ensures that not only high risk vol-    other instruments to hedge against individual
               umes but also unfavourable probabilities of           counterparty risks. The use of single name credit
               default and inconvenient risk correlations are        default swaps permitted KfW to release econom-
               taken into account. The results form the basis for    ic capital of EUR 122.7 million in 2007 (previous
               managing the loan portfolio and are included in       year: EUR 113.8 million).
               the limit management system to contain con-




                                                                46
                                               regions.

As at 31 December 2007 the Eurozone accounted            Eurozone the German share rose slightly, owing
for 71 % of the KfW Group’s loan portfolio               to a particularly strong increase in domestic
in terms of economic capital, the same relative          lending business.
percentage as in the previous year. Within the


                                                      Economic capital by region
                                                                                          2007     2006
                                                      K Germany                            54 %     50 %
                                                      K Eurozone countries
                                                        (without Germany)                  17 %     21 %
                                                      K EU countries without
                                                        Eurozone countries                  7%       9%
                                                      K Europe outside the EU               9%       7%
                                                      K Asia (incl. Australia
                                                        and New Zealand)                    5%       4%
                                                      K Latin America                       4%       5%
                                                      K North America                       2%       2%
                                                      K Africa                              2%       2%




                                               seCtors.

The high share of the financial industry in the          taken into account more closely. The relative in-
overall economic capital for credit risks is due to      crease in economic capital requirements for the
the KfW Group‘s promotional mandate. By far              manufacturing industry and land-based trans-
the greatest portion of the Group’s domestic             port was mainly due to rating adjustments. The
promotional lending business consists of loans           heavy concentration in the finance sector is also
that are on-lent through banks. For the finance          reflected in terms of individual counterparties.
industry the relative economic capital decreased         The ten largest borrower units of the KfW Group
from 53 % to 51 % against the previous year. This        require a total of 24 % (previous year: 18 %) of
result was largely due to improved average col-          the total economic capital for credit risks. This
lateralisation ratios and the remodelling of risks       percentage includes a disproportionately high
from money-market trading, where the short-              share of banks.
term nature of money market exposures was




                                                        47
Risk report.




                                                                      Economic capital by sector
                                                                                                            2007    2006
                                                                      K Financial industry                  51 %      53 %
                                                                      K Private equity investment firms      8%        8%
                                                                      K Manufacturing industry               8%        7%
                                                                      K Shipping                             5%        5%
                                                                      K Basic industries                     4%        4%
                                                                      K Aviation                             3%        5%
                                                                      K Land-based transport                 4%        2%
                                                                      K Rest                                17 %      16 %




                                                          CreDit quality.

               As credit quality itself enters into the calculation      investment grade counterparties. Operations
               of the economic capital, it is appropriate, particu-      declined over the year, and the changes outlined
               larly in analysing the credit quality structure,          above led to lower risk being recorded. Only 2 %
               to examine the distribution of net exposures by           (previous year: 1 %) of the net exposure is cate-
               credit quality category. Measured by net expo-            gorised as a default/probable loss and 3 % (previ-
               sure, 79 % (previous year: 86 %) of our portfolio         ous year: 2 %) is assigned to the watch list port-
               is composed of investment-grade debt. This drop           folio (increased risk of default). The Group’s loan
               is primarily due to the above-mentioned effects           portfolio continues to have a very good credit
               from money-market trading operations which                quality structure.
               the KfW Group conducted exclusively with



                                                                      Credit quality by net exposure
                                                                                                            2007     2006
                                                                      K Investment grade (M1–M8)             79 %     86 %
                                                                      K Non-investment grade (M9–M15)        16 %      11 %
                                                                      K Watch list (M16–M18)                  3%       2%
                                                                      K Default (M19–M20)                     2%       1%




                                                                  48
              risK proteCtion for iKB DeutsChe inDustrieBanK ag, DüsselDorf.

To support IKB Deutsche Industriebank AG, Düs-       As at 31 December 2007 the risk protection
seldorf, which encountered existential problems      amounted to EUR 9.3 billion. Based on the nom-
in the wake of the US subprime crisis, KfW and       inal volume of the positions as at 30 July 2007,
the three German banking associations (associa-      EUR 269 million has since been repaid and
tions) assumed risks of IKB at the end of July       EUR 521 million has been saved owing to
2007. For this purpose risk protection measures      exchange rate effects that were hedged at year-
were agreed upon that rest on three pillars:         end. The amount contributed to the risk protec-
K KfW assuming the rights and obligations            tion by the banking associations is limited to
   under the liquidity lines granted by IKB to the   EUR 1.2 billion. The following table shows the
   special purpose entities of the financing con-    volume covered by the risk protection and the
   duit Rhineland Funding.                           loss estimate as at the balance sheet date. Hedge
K Reverse hedging of 25 % of the first losses        positions in US dollars were converted at the
   from risk sub-participations entered into by      closing rate of 1.4721 USD/EUR.
   IKB in the special purpose entities Havenrock
   I & II.
K Hedging of default risks from a specified port-
   folio of structured securities on IKB’s balance
   sheet up to a maximum amount of EUR 1 bil-
   lion.



     IKB risk protection: Volume of protection and estimated loss
     EUR in billions

                                                            Total as at                     Estimated loss
                                                          31 Dec. 2007
                                                      EUR in billions     EUR in billions               %
     Rhineland
     K CDO                                                        6.51)              5.8             89.2
     K Customer receivables                                         0.6                –                –
     Havenrock                                                      1.2              1.2            100.0
     IKB balance sheet assets                                     1.02)              1.0            100.0
     Total                                                         9.3               8.0             86.0
1) without commitments
2) including risk cap




                                                     49
Risk report.




               After deduction of the risk sub-participation of                        conduit is not impaired and was sold to a third
               EUR 1.2 billion provided by the banking associa-                        party bank in early 2008, such that no specific
               tions (15 %), the estimated loss of EUR 8.0 billion                     risk provisions were recorded.
               led to a charge of EUR 6.8 billion for KfW (85 %).                          In order to account for the effects of IKB risk
               As at 31 December 2007, there was no need to                            protection on the Group’s risk-bearing capacity,
               write off or use risk provisions owing to realised                      the risk provisions for lending business stated in
               losses.                                                                 the balance sheet and the negative market val-
                  Within the Rhineland conduit, individual spe-                        ues of the credit derivatives used for the risk as-
               cial purpose entities have acquired debt owed to                        sumption were deducted in full (EUR 6.8 billion)
               IKB from SME customers. With a total amount of                          from the available financial resources.
               EUR 563 million, this portion of the Rhineland



                                                                      MarKet priCe risK.

               Market price risks result primarily from potential                      KfW and its subsidiaries are not required by the
               losses that may arise from changes in:                                  German Commercial Code to keep a trading book;
               K interest structure (interest rate risks)                              consequently, their market price risks are limited
               K exchange rates (currency risks) and                                   to the banking book.
               K other market prices (e. g. share prices or raw
                  materials prices).



                                                                    interest rate risKs.

               The main market risk component in the KfW                               determined with the aid of this standard soft-
               Group is interest rate risk. The Group assumes                          ware. On this basis, KfW regularly performs val-
               limited interest rate risks in order to seize op-                       ue-at-risk calculations to assess its interest risk
               portunities for returns. This enables KfW to make                       position. The applied simulation-based method
               use of diversification possibilities with credit risks                  is based on a two-factor Cox-Ingersoll-Ross
               in the context of overall risk. Additionally, inter-                    model1), which is used to estimate the distribu-
               est rate risks arise from the special architecture                      tion of risk positions in the Group given possible
               of the domestic lending business with its off-                          changes in market interest rates and based on an
               schedule repayment options. KfW takes this into                         assumed holding period of three months. A so-
               account in its risk management by including the                         called Monte Carlo simulation is run to deter-
               estimated volume of future off-schedule repay-                          mine 100,000 risk distributions. Out of the simu-
               ments in its funding strategy.                                          lated losses, the tenth largest loss is defined as
                   In the identification of interest rate risks in its                 economic capital requirement and thus an esti-
               banking book, KfW uses standard software that                           mate of a loss that will, with a likelihood of
               is connected to all data relevant for risk assess-                      99.99 %, not be exceeded over a one-year period.
               ment. The current balances of interest rate ma-                         Periodic stress tests supplement this calculation
               turities (euro, US dollar and British pound) are                        to estimate possible losses under extreme, stand-



               1)   Each of the factors consists of a money-market interest rate and a capital-market interest rate. The parameters required for the
                    model are estimated from past data.




                                                                                  50
ardised market conditions. Apart from a parallel                narios such as a twist in the yield curve and an
shift in the yield curve, these tests include sce-              extension of the holding period.



                                                        CurrenCy risKs.

Foreign currency loans are generally funded in                  the IKB risk protection. The revaluation of the
the same currency or secured by appropriate for-                IKB risk protection at the end of March 2008
eign currency hedging instruments. This also ap-                requires a further increase in USD holdings by
plies to individual impairments for which the                   USD 2.4 billion, which is to be effected prompt-
corresponding replacement assets are provided.                  ly in April.
In addition, KfW has decided to make portfolio                      Margins and commissions received over time
provisions in US dollars to hedge against contin-               in other currencies are always converted into
gent exchange rate risks from a potential default               euros without delay to avoid currency risks.
on existing debt denominated in US dollars. The                     Risks from open currency positions remaining
earnings components generated in US dollars in                  at the balance sheet closing date are measured
the year under review were accumulated for this                 by a variance/covariance approach in the form
purpose. In addition, KfW increased holdings of                 of a value-at-risk with the required parameters
US dollars by USD 4 billion in 2007 and USD 1.1                 (variances and correlations) estimated from past
billion in early 2008 as a currency hedge under                 data.1)



                                                 other MarKet priCe risKs.

In addition to shares traded on the stock ex-                   The models applied within the KfW Group to
change under asset allocation and the participa-                estimate market price risks are reviewed annu-
tion in IKB, KfW’s other market price risks include             ally during backtesting.
CO2 certificates kept by the KfW Group in its                       The Risk Management Committee manages
books. Risks arise from CO2 certificates because                the market risks on the basis of the evaluation
KfW has decided to act as an intermediary be-                   and analysis of the interest and currency posi-
tween sellers and buyers of CO2 certificates. KfW               tion, the remaining market risks and the stress
also keeps certificates in its own books for these              tests for interest rate risks. The objective of this
purposes.                                                       is the long-term management of a reasonable
    The risks from the remaining market price                   market risk position for the bank and the invest-
risks are measured under variance/covariance ap-                ment of own funds. The strategy pursued in light
proaches in the form of a value-at-risk (99.99 %                of this management is defined annually in the
percentile) with the parameters derived from                    context of the group business planning and
historic data. The assumed holding period in risk               monitored with the aid of a global limit system.
measurement is three months, as for all other                       The Board of Managing Directors has imposed
types of market risk, and the capitalisation pe-                general conditions in line with market standards
riod is one year.                                               for the transaction, handling and settlement of
                                                                trading activities in accordance with the mini-
                                                                mum requirements for risk management.

1)   The holding period in this case is three months.




                                                                51
Risk report.




               The market price risks within the KfW Group           capital as at 31 December 2007. This position is
               required a total of EUR 1,544 million in economic     composed of the following individual risks:



                Total economic capital for market price risk
                EUR in millions

                                                                                     31 Dec. 2007         31 Dec. 2006
                Interest rate risks                                                         1,120                1,175
                Currency risks                                                                 51                    0
                Other market price risks                                                      373                  226
                Market price risk                                                           1,544                1,401




               Minor changes were observed in the interest           lion as at the balance sheet closing date. In ad-
               rate risks, which required economic capital of        dition, the revaluation of the IKB risk protection
               EUR 1,120 million for the debt-financed book as       at the end of March resulted in an open cur-
               at the reporting date.                                rency position as at the balance sheet closing
                  As at 31 December 2007, there was an open          date in the equivalent of EUR 1.7 billion, which
               currency position in the balance sheet in the         is to be covered promptly in April 2008.
               equivalent of EUR 759 million, of which around            With respect to the remaining market risks,
               EUR 747 million was attributed to the USD posi-       the economic capital increased by EUR 147 mil-
               tion (31 December 2006: EUR 151 million). This        lion compared with the previous year. This in-
               open position results from the risk protection for    crease was mostly due to KfW’s new indirect
               IKB and was fully closed in early 2008. The eco-      investment in EADS through Dedalus GmbH &
               nomic capital for currency risks was EUR 51 mil-      Co. KGaA in 2007.



                                 volatility of present value of assets funDeD By equity.

               Assets financed by equity are not actively man-       resulting from the volatility of the present value
               aged in the context of interest risk management       of these assets, KfW calculates economic capital
               because they are a long-term investment. Inter-       (EUR 875 million as at 31 December 2007; previ-
               est rate risks nevertheless exist for these assets    ous year: EUR 890 million) using the two-factor
               as changes in interest rates impact the present       Cox-Ingersoll-Ross model presented above.
               value of equity-funded assets. To cover the risk



                                                         liquiDity risK.

               A variety of instruments and criteria are applied     lines include the definition of risk, objectives for
               to manage the liquidity position and funding          liquidity management, the various instruments
               requirements within the KfW Group. The proce-         used in internal liquidity management and key
               dures to be applied in liquidity management are       parameters applied to meet statutory and regula-
               defined by specific risk guidelines. These guide-     tory requirements.




                                                                52
The KfW Group’s risk definition breaks down           KfW also monitors its liquidity position for com-
liquidity risks into institutional and market         pliance of the KfW Law, which requires the pro-
liquidity risks. Institutional liquidity risks com-   portion of short-term to long-term obligations
prise the risk of being unable to meet existing       to be determined in order to ensure compliance
payment obligations at all, in due time and/or in     with the 10 % threshold. It also voluntarily deter-
the required amount. Market liquidity risks, in       mines the key parameters on a monthly basis
turn, comprise risks associated with the market       according to the requirements of the Liquidity
price losses of assets in the event of a necessary    Regulation. All key liquidity figures are regularly
sale and the risk of being incapable of raising       above the minimum requirements.
necessary funds in due time and/or in sufficient         To maintain liquidity KfW holds an adequate
volume or of obtaining them only at a dispropor-      stock of money-market instruments and liquid
tionately high funding rate.                          securities that are Category I securities eligible
    The primary objective of liquidity management     as collateral with the European Central Bank,
is to ensure that the KfW Group is at all times       both for overnight funding and for regular open-
capable of meeting its payment obligations.           market transactions. Liquid USD securities are
KfW’s subsidiaries are principally responsible for    also held as a liquid reserve for USD business. The
ensuring and managing their own liquidity and         required liquidity cushion is reviewed regularly
complying with the existing regulatory require-       and calculated in such a manner that KfW’s op-
ments. KfW, however, is available as a contrac-       erations can continue as planned even if a hypo-
tual partner for all commercial transactions of       thetical extraordinary market disruption occurs
its subsidiaries, particularly for their funding.     and affects its funding options. For purposes of
For this reason the liquidity requirements of         monitoring and communicating liquidity risks,
the subsidiaries are included both in KfW’s           the two key liquidity parameters and the mid-
funding schedule and in the liquidity mainte-         term liquidity planning are reported to the Risk
nance strategy.                                       Management Committee monthly and the long-
    The basis for managing the liquidity position     term planning at least annually. The committee
and determining the funding requirements with-        also decides on the measures to be taken when
in the KfW Group is a computer-based liquidity        a need for action is determined. Responsibility
management system that evaluates all known            for monitoring the liquidity situation and prompt
current and future payments. Additional expect-       reporting lies with the Treasury Department.
ed payment flows (e. g. disbursements under new          The table below shows the contractual pay-
lending transactions, off-schedule repayments         ment obligations (principal and interest) of the
and exercise of termination rights) are added to      KfW Group arising from financial instruments by
the known payment flows. On this basis KfW            maturity range.
performs liquidity management and planning in
daily, monthly and annual intervals. Additional
analyses can be performed promptly as required.




                                                      53
Risk report.




                    Contractual payment obligations from financial instruments by maturity range as at 31 December 20071)
                    EUR in millions

                                                                                       Up to 1              1 to 3       3 months to         1 to 5 years        5 years and                   Total
                                                                                        month              months             1 year                                   more
                    Liabilities to banks and customers                                   5,298               7,449               6,889              21,605              37,578              78,819
                    Certificated liabilities                                             7,389               7,603              37,709            143,437             133,499             329,637
                    Net liabilities under derivative financial
                    instruments                                                             645              1.357               2.091               3.743             – 8.760                – 924
                    Subordinated liabilities                                                   0                   0                666                 584              3.617                4,867
                    Liabilities under on-balance financial
                    instruments                                                        13,332              16,409              47,355            169,369             165,934             412,399
                    Contingent liabilities                                               6,054                     0                   0                   0                   0              6,054
                    Irrevocable loan commitments                                        38,462                     0                   0                   0                   0            38,462
                    Liabilities under off-balance financial
                    instruments                                                        44,516                      0                   0                   0                   0           44,516
                    Liabilities under financial instruments                            57,848              16,409              47,355            169,369             165,934             456,915
               1)   Payment obligations arising from derivatives are offset against the opposite payment claims under the contracts, and irrevocable loan commitments and contingent liabilities are
                    assigned flat to the first maturity range.




                    Contractual payment obligations from financial instruments by maturity range as at 31 December 20061)
                    EUR in millions

                                                                                       Up to 1              1 to 3       3 months to         1 to 5 years        5 years and                   Total
                                                                                        month              months             1 year                                   more
                    Liabilities to banks and customers                                   6,332               5,622               5,606              24,260              39,072              80,892
                    Certificated liabilities                                             5,554               11,675             37,799            133,578             126,348             314,954
                    Net liabilities under derivative financial
                    instruments                                                             558                 945                 376              1,593             – 9,564             – 6,092
                    Subordinated liabilities                                                   0                   0                 20                 520                    0                540
                    Liabilities under on-balance financial
                    instruments                                                        12,444              18,241              43,801            159,950             155,857             390,293
                    Contingent liabilities                                               6,930                     0                   0                   0                   0              6,930
                    Irrevocable loan commitments                                        45,162                     0                   0                   0                   0            45,162
                    Liabilities under off-balance financial
                    instruments                                                        52,092                      0                   0                   0                   0           52,092
                    Liabilities under financial instruments                            64,536              18,241              43,801            159,950             155,857             442,385
               1)   Payment obligations arising from derivatives are offset against the opposite payment claims under the contracts, and irrevocable loan commitments and contingent liabilities are
                    assigned flat to the first maturity range.




                                                                                                        54
Finally, in light of the current situation in the      original EUR 12 billion to EUR 20 billion in the
financial markets, KfW’s funding situation may         middle of the year. The main reason for this was
be summarised as follows: Despite the difficult        that KfW aimed to increase its funding flexibil-
market environment characterised by the finan-         ity overall in order to be able to optimally cover
cial market crisis, KfW’s funding situation con-       increasing funding needs resulting from its
tinues to be very positive and was not, at any         expanding promotional activities. For 2008, KfW
time, negatively affected. The general uncer-          expects its capital market funding needs to be
tainty prevailing in the market since the end of       approximately EUR 70 billion (previous year: EUR
July prompted many investors to seek out “safe         65 billion). Only a minor portion of this increase
havens”, which has benefited KfW particularly          will result from the replenishment of its liquidity
in terms of its short-term funding activities          reserves, which were used in the course of 2007
through the multicurrency commercial paper             to meet the liquidity obligations assumed from
programme. Both the issuing volume and the             IKB with respect to Rhineland Funding. Most of
funding costs achieved under this programme            the increase is due to the expanding promotional
have developed clearly to KfW‘s advantage. The         activities of KfW, including new ERP business.
programme volume was increased from its



                                  operational anD other risKs.

The KfW Group defines operational risk as the          Operational risks are quantified and capital
risk of direct or indirect loss resulting from inad-   requirements are determined using the regula-
equate or failed internal processes, people and        tory standard approach according to Basel II and
systems or from external events. This definition       the Solvency Regulation.
includes legal risks but does not include strategic       Loss data collection has been further opti-
risks.                                                 mised. The first bank-wide survey of OpRisk as-
    Control of operational risks is performed cen-     sessments was completed in 2007. Since then
trally by the Risk Management and Controlling          assessments have been conducted in regular in-
Department. Operational risks are managed by           tervals. Both OpRisk instruments are supported
the individual operational departments. Further-       by data processing systems specially tailored to
more, the central OpRisk Controlling is in charge      the needs of the KfW Group. The management
of operational continuity management, which            of measures was technically designed in 2007. A
supports the risk management.                          technical platform was developed for the
    In accordance with the definition laid out in      MaRisk-compliant monitoring of measures de-
the Solvency Regulation, operational risks at the      rived from the OpRisk assessments or the ascer-
KfW Group are integrated into its economic             tainment of losses. This platform supports risk
management as part of a holistic management            management and will be implemented in the
approach. Risk management is based on loss data        beginning of 2008. Comprehensive management
collection, OpRisk assessments and the identifi-       reporting of risk events was introduced in 2007.
cation and monitoring of measures.                     Quarterly reporting to the departments and the




                                                       55
Risk report/Forecast report.




                   Board of Managing Directors of KfW has been            The Group addresses legal risks by involving its
                   established. A project has been launched for the       in-house legal department early in the process
                   technical development of early warning indica-         and by cooperating closely with external legal
                   tors. A survey of initial risk indicators is sched-    advisers in Germany and abroad. Contracts may
                   uled to take place within the Group in the first       be entered into only on the basis of unambigu-
                   half of 2008.                                          ous and correctly-documented arrangements.
                       At the operative level, operational risks with-    Moreover, current operations are concluded
                   in the KfW Group are limited by an internal con-       using standard contracts (e.g. ISDA contracts).
                   trol system. The IT system is under permanent              A crisis management group has been estab-
                   development and business processes are con-            lished for operational continuity management.
                   stantly being analysed and optimised. For risks        Crisis, emergency and early warning procedures
                   that can arise from unforeseeable events, the          have also been defined. A technical solution has
                   bank has put appropriate contingency plans in          already been implemented for the early warning
                   place (for IT system disruptions) and has suffi-       procedures. Preparations are currently underway
                   cient insurance coverage (e. g. for fire and water     to optimise the technical support for the plan-
                   damage).                                               ning of crisis and emergency procedures.



                                                        suMMary anD outlooK.

                   The KfW Group will continue to attach great im-        The KfW Group plans to further expand the
                   portance to enhancing its set of risk measure-         active management of its loan portfolio. It plans
                   ment and management instruments. The main              to implement innovative portfolio management
                   focus for 2008 will be on further developing and       concepts, an infrastructure for the overarching
                   validating KfW’s rating methods and stress test        management of securities portfolios and the
                   instruments. Another major focus will be con-          integration of market and credit risks.
                   tinuously improving and speeding up the risk
                   management and controlling procedures. The
                   bank has launched, along with others, projects
                   that establish procedures for securing and im-
                   proving data quality and integrity of KfW’s risk
                   models more firmly with the IT systems.




                                                                     56
                                       foreCast report.
In comparison with 2007, the risks for the global      already being assumed. The business climate in
economy have increased considerably. Originat-         the SME sector will likely fall from its historical
ing in the distortions on the US mortgage mar-         high. In 2008 and 2009, the expected economic
ket, the crisis of confidence in the international     situation of SMEs will be classifiable as “satisfac-
financial markets has now spread to other mar-         tory” to “good.”
kets, with the result that economic growth, par-           The uncertainty hanging over the capital mar-
ticularly in industrialised countries, will be damp-   kets and the associated deterioration in condi-
ened in 2008 and 2009. Development in many             tions will be reflected in the KfW loan portfolio
emerging markets, however, should have a sta-          mainly through the impact on the financial serv-
bilising effect and help mitigate major global         ices industry. If downgrades occur on the ratings
economic slumps over the next two years. Over-         of counterparties in the financial sector portfolio
all, KfW forecasts that global economic growth         in 2008, KfW’s internal risk management model
will slow down in 2008 before levelling out            would call for an increase in the Group’s capital
in 2009.                                               requirements for the default risks resulting from
    A deciding factor affecting the global econo-      this segment of the KfW portfolio. KfW uses
my will be the future performance of the capital       stress tests to anticipate these risks. It matches
markets. The extent to which the markets regain        higher economic capital requirements quantified
their footing and win back the confidence of           under these scenarios against risk buffers that
counterparties and investors will be of interest.      are designed to ensure adequate available finan-
The real estate, securitisation and lending mar-       cial resources even in a severe recession. The bank
kets also remain under very close observation. If      continuously develops its risk management in-
the situation in these markets deteriorates, the       struments to avoid exhausting the risk buffers
impact on the real economy will be greater than        and to reduce risks once they are detected.
previously anticipated.                                    Over the next two years, KfW Mittelstands-
    In Germany, after two years of strong growth       bank and KfW Förderbank will pursue their on-
the economy is likely to slow down in 2008. This       going promotional programmes to support the
forecast is based on expectations that foreign         German economy. Besides promoting start-ups,
trade will contribute less to growth and that          SMEs and innovation, they will also focus on en-
capital spending growth will decline. Continuing       vironmental and climate protection issues, hous-
employment expansion and collectively negoti-          ing, infrastructure, and education. KfW Mittel-
ated wage increases, by contrast, are expected to      standsbank’s promotional activities support
spur aggregate demand. An economic downturn            start-ups as well as small- and medium-sized
might be ahead, however, if the crisis triggered       enterprises in the form of loans and mezzanine
by the US mortgage market deepens or private           and equity capital. In the 2008 financial year, we
spending fails to pick up in the first half. In par-   intend to expand our promotional programmes
ticular, it cannot be ruled out that strong in-        – in particular for founders of businesses and
creases in energy and food prices, by reducing         small enterprises.
real purchasing power and because of their spe-            One focal point for KfW Förderbank in the
cial relevance to “perceived” inflation, may bur-      2008 financial year will be promoting environ-
den consumers even more persistently than is           mental and climate protection. We also expect




                                                       57
Forecast report.




                   our programmes to spur growth, which will               forms for synthetic securitisations, the flexibility
                   benefit the SME sector, as well as show notice-         of which we want to continue to develop, remain
                   able environmental effects. Our support pro-            key components. The ABS portfolio focusing on
                   grammes will also be improved to promote                SMEs will also continue to play a key role, allow-
                   owner-occupied housing.                                 ing support for the outplacement of SME risks by
                       In addition, the lending programmes of both         investing in mezzanine tranches. In addition, we
                   KfW Mittelstandsbank und KfW Förderbank are             plan to pursue new lines of development in the
                   constantly being adjusted to meet demand and            market.
                   market requirements. The structural changes tak-           In 2008, KfW would like to help reopen the
                   ing place in the banking sector, in particular,         securitisation channel so that banks can outplace
                   mean that we have to adopt a forward-thinking           and maintain new business at favourable condi-
                   approach to developing our products and proc-           tions, especially for the SME sector.
                   esses. Our attention in 2008 will continue to be           With respect to the KfW Carbon Fund, the use
                   focused on the modernisation of our promo-              of emission certificates from projects abroad will
                   tional programmes so as to offer leaner, more           take on an increasingly important role in com-
                   efficient and better-quality products and proc-         panies’ CO2 strategies in the future. KfW is thus
                   esses. KfW expects to see its promotional activi-       steadily increasing its purchase of such certifi-
                   ties continue at a very high level, as planned. This    cates. The certificates are purchased in the inter-
                   also applies to ERP economic promotion. Given           est of companies wishing to use them to fulfil
                   the multitude of influential factors, only a rough      their obligations under the European emissions
                   estimate can be given for the promotional busi-         trading scheme. The fund will, therefore, con-
                   ness volume. Overall, we expect the commitment          tinue to provide services to those companies that
                   volume for our promotional loans to be around           do not themselves have access to foreign projects
                   EUR 45 billion.                                         or that do not wish to develop capacities of their
                       As a result of the US subprime crisis and the       own for such purposes. The purchase of these
                   subsequent loss of investor confidence, the se-         certificates will also help to promote climate
                   curitisation market has slumped since summer            protection projects around the globe. The sale of
                   2007. The current tense situation in the securiti-      certificates serves as an additional source of in-
                   sation market will continue well into the 2008          come for these projects, without which they
                   financial year. In order to avert any negative im-      would generally not be feasible. KfW intends to
                   pact on lending for our customer groups, it is          increase its purchase activities over the coming
                   important that the securitisation markets re-           years while keeping its focus on innovative areas.
                   cover quickly. With its financing instruments,          KfW actively supports the climate protection
                   KfW can make an important contribution to-              programme of the German Federal Government
                   wards stabilising the primary and secondary mar-        and takes into account the interest of the Ger-
                   kets, especially in the current climate. Our plat-      man and overall European economy in the in-




                                                                      58
creased use of the market instruments under the       KfW Entwicklungsbank expects to make loan
Kyoto Protocol. A reliable perspective beyond         commitments of almost EUR 3 billion in financial
2012 that will guarantee planning reliability and     year 2008. Through the provision of additional
confidence is decisive for the further develop-       budget funds by the Federal Government, we
ment of this new market. KfW and the European         anticipate a continuing period of growth over
Investment Bank (EIB), together with other Eu-        the coming years. We also wish to expand our
ropean development banks, have taken the ini-         financing programmes by offering special loan
tiative and agreed to set up a Post-2012 Carbon       facilities to promote financial systems as well as
Fund, which will become operational in spring         environmental and climate protection. These spe-
2008. This fund will make targeted purchases of       cial facilities will partly take the form of Finan-
emission certificates now that will be generated      cial Cooperation development loans (FZ-Entwick-
after 2012.                                           lungskredite), which represent a combination of
    On 1 January 2008, KfW IPEX-Bank GmbH,            government and KfW funding, and will partly be
Frankfurt, (IPEX) commenced operations as a le-       issued as FC promotional loans (FZ-Förderkredite),
gally independent subsidiary of KfW. Over the         for which KfW bears the entire risk.
next two years, IPEX plans to generate EUR 12             Over the next few years, KfW Entwicklungs-
billion per year in new commitments. IPEX will        bank intends to continue expanding its core
continue its present business strategy of diver-      competencies in climate and environmental pro-
sifying its product range and offer short-term        tection, financial sector development, and the
finance and guarantee instruments. The bank’s         promotion of the water sector, and to leverage
core business will remain focused on medium-          them to offer policy advice.
and long-term lending for international project           Deutsche Investitions- und Entwicklungsges-
and export finance as well as general corporate       ellschaft mbH, Cologne, (DEG) intends to con-
finance. IPEX will continue efforts to attract new    tinue increasing its support of private companies
customer groups outside its traditional clientele     in developing and transition countries as a way
of large and predominantly internationally ori-       of helping to improve the quality of life for the
ented companies from Germany and other Euro-          people in these countries. DEG has a new busi-
pean countries, focusing on larger SMEs. The          ness target of EUR 1 billion for 2008. This
bank sees its organisational realignment, product     continuing high level of financing reflects the
range expansion and profound experience and           consistently strong demand for long-term invest-
knowledge of countries and markets as a recipe        ment financing support and, in particular, for
for sustained business success. It is expanding its   venture capital. As favourable conditions cur-
network of foreign representative offices to          rently prevail in most of the markets relevant to
include Abu Dhabi, Johannesburg and Singapore.        DEG in developing and transition countries, the
The representative office in London will be con-      opportunities to develop the private sector in
verted into a branch office.                          these regions are still good.




                                                      59
Forecast report.




                   Following the privatisation transactions with the     KfW expects the international capital markets to
                   German Federal Government, KfW will continue          continue to suffer from the impact of the tur-
                   to hold stakes in Deutsche Telekom AG, Bonn,          bulence triggered by the situation in the US
                   (2007: 16.9 %) and Deutsche Post AG, Bonn,            mortgage market. The resulting risk aversion
                   (2007: 30.5 %) in financial year 2008. Further        of institutional investors and their “flight to
                   privatisation transactions will take place in line    quality” is expected to lead to greater demand
                   with prevailing market conditions and the stra-       for top-rated investments such as those offered
                   tegic objectives of the Federal Government.           by KfW.
                       Over the next two years, KfW expects to see           As of January 2008, KfW assumed the new
                   an increase in refinancing volumes. Approxi-          business activities of KfW International Finance,
                   mately EUR 70 billion has been budgeted for fi-       Delaware, USA. KfW International Finance will
                   nancial year 2008. The ongoing strength of the        gradually wind up its existing business and dis-
                   promotional business will be the main driver of       continue operations at the end of 2008 until
                   this increase. In addition, following the reor-       further notice.
                   ganisation of the ERP economic promotion in               For the years 2008 and 2009 KfW predicts
                   summer 2007, the refinancing needs of the pro-        stable, slightly declining operating results before
                   motional programmes falling under ERP eco-            valuations. Under fair value accounting under
                   nomic promotion are covered by KfW. In order to       IFRS, the risk protection for IKB will continue to
                   meet its funding requirements, KfW will rely on       impact future consolidated earnings. Upon im-
                   its successful blend of benchmark bonds, other        plementation of the restructuring of the Rhine-
                   public bonds and private placements. The EUR          land Funding Capital Corporation, New York/USA,
                   and USD benchmark programmes, which are be-           conduit KfW will acquire the power of disposal
                   coming increasingly important, will constitute        over the assets associated with the conduit and
                   the predominant source of funding for the bank.       transfer them to two new special purpose enti-
                   The British pound and the Japanese yen are also       ties (SPEs) managed by KfW. This step will result
                   likely to remain key currencies, with their mar-      in the consolidation of the two SPEs in 2008.
                   kets accordingly important. With a view to fur-           Based on the resolution by the Board of
                   ther diversification, KfW also aims to continue       Supervisory Directors of KfW of 30 November
                   expanding its range of issue currencies in emerg-     2007 to move forward with a prompt sale of IKB,
                   ing markets.                                          KfW expects the interest to be sold in 2008.




                                                                    60
To this end, a formal sales process started in       and experienced staff to meet the increased
January 2008.                                        demands placed on its business areas and proc-
    The spin-off of KfW IPEX-Bank will lead to       esses. KfW is committed to the upcoming gen-
shifts in staffing levels within the Group. In the   eration of professionals and intends to increase
business areas remaining with KfW, a moderate        the number of positions offered to apprentices
increase in headcount in 2008 and, possibly, 2009    and trainees in 2008. Overall, KfW will continue
is expected. KfW will continue its prudent human     to give due consideration to demographic shifts
resources policy based on its business needs,        in its recruitment policy.
focusing on the recruitment of highly qualified




                                                     61
            ConsoliDateD finanCial stateMents.
Contents.




             Consolidated financial statements.
             Income statement.                                                                              64
             Balance sheet.                                                                                 66
             Statement of changes in equity.                                                                67
             Cash flow statement.                                                                           70
             Notes.                                                                                         72
             Accounting policies.                                                                           72
              (1) Basis of presentation.                                                                    72
              (2) Assessment of the impact of applying IFRS/IFRIC in the future.                            73
              (3) Consolidated group.                                                                       73
              (4) Basis of consolidation.                                                                   74
              (5) Financial instruments – recognition and measurement.                                      74
              (6) Financial instruments – valuation techniques.                                             77
              (7) Hedging relationships.                                                                    78
              (8) Treatment of embedded derivatives.                                                        80
              (9) Credit derivatives.                                                                       80
             (10) Risk protection for IKB.                                                                   81
             (11) Foreign currency translation.                                                             82
             (12) Loans and advances to banks and customers.                                                82
             (13) Risk provisions for lending business.                                                     83
             (14) Securities and investments.                                                               84
             (15) Repurchase agreements.                                                                    85
             (16) Property, plant and equipment and Investment property.                                    85
             (17) Intangible assets.                                                                        86
             (18) Taxes on income.                                                                          86
             (19) Liabilities to banks and customers and Certificated liabilities.                          87
             (20) Provisions.                                                                               87
             (21) Subordinated liabilities.                                                                 89
             (22) Equity.                                                                                   89
             (23) Contingent liabilities and irrevocable loan commitments.                                  89
             (24) Trust activities.                                                                         90
             (25) Leasing transactions.                                                                     90
             Reconciliation and notes on first-time adoption of IFRS.                                        91
             Notes to the income statement.                                                                 95
             (26) Net interest income.                                                                      95
             (27) Risk provisions for lending business.                                                     97
             (28) Net commission income.                                                                    97
             (29) Net gains/losses from hedge accounting.                                                   98
             (30) Net gains/losses from other financial instruments at fair value through profit or loss.   100
             (31) Net gains/losses from securities and investments.                                         102
             (32) Administrative expense.                                                                   104
             (33) Net other operating income.                                                               104
             (34) Taxes on income.                                                                          105




                                                                     62
Segment reporting.                                                              107
(35) Segment reporting by business area.                                        107
(36) Segment reporting by region.                                               110
Notes to the balance sheet.                                                     111
(37) Cash reserves.                                                             111
(38) Loans and advances to banks.                                               111
(39) Loans and advances to customers.                                           112
(40) Risk provisions for lending business.                                      113
(41) Value adjustments from macro fair value hedge accounting.                  114
(42) Derivatives used for hedge accounting.                                     115
(43) Other derivatives.                                                         115
(44) Securities and investments.                                                116
(45) Property, plant and equipment.                                             117
(46) Intangible assets.                                                         119
(47) Other assets.                                                              120
(48) Liabilities to banks.                                                      121
(49) Liabilities to customers.                                                  122
(50) Certificated liabilities.                                                  122
(51) Value adjustments from macro fair value hedge accounting.                  123
(52) Derivatives used for hedge accounting.                                     123
(53) Other derivatives.                                                         124
(54) Provisions.                                                                124
(55) Other liabilities.                                                         127
(56) Subordinated liabilities.                                                  128
(57) Equity.                                                                    129
Notes on financial instruments.                                                 130
(58) Gains and losses from financial instruments by valuation category.         130
(59) Balance sheet for financial instruments by valuation category.             132
(60) Fair values of financial instruments.                                      135
(61) Additional disclosures on liabilities to banks.                            136
(62) Additional information on liabilities to customers.                        137
(63) Additional information on certificated liabilities.                        137
(64) Additional information on derivatives.                                     138
(65) Disclosures on repurchase agreements.                                      138
Other notes.                                                                    139
(66) Contingent liabilities and irrevocable loan commitments.                   139
(67) Trust activities and administered loans.                                   140
(68) Leasing transactions as lessee.                                            141
(69) Average number of employees during the financial year.                     142
(70) Compensation and loans to members of the Board of Managing Directors and
     Board of Supervisory Directors of KfW.                                     143
(71) Related party disclosures.                                                 144
(72) Auditor’s fees.                                                            144
(73) Disclosures on shareholdings.                                              145
Subsequent events (as at 2 April 2008).                                         147
Statement by the Board of Managing Directors.                                   147

Auditor’s report reprint.                                                       148




                                                           63
Income statement.




            Income statement
            EUR in millions

                                                                     Notes            2007              2006            Change
                                                                             EUR in millions   EUR in millions   EUR in millions
            Interest income                                           (26)           27,578            23,688             3,890
            Interest expense                                          (26)           25,823            21,934             3,889
            Net interest income                                                       1,755             1,754                 1
            Risk provisions for lending business                (10), (27)          – 6,409               –12           – 6,397
            Net interest income after risk provisions                               – 4,655             1,741           – 6,396
            Commission income                                         (28)              388               369                19
            Commission expense                                        (28)              178               169                 9
            Net commission income                                                      209               200                 10
            Net gains/losses from hedge accounting               (7), (29)               73               –17                91
            Net gains/losses from other financial instruments
            at fair value through profit or loss                (10), (30)           –1,953               172           – 2,125
            Net gains/losses from securities and investments    (14), (31)             –421                19             – 440
            Administrative expense                                    (32)              607               573                34
            Net other operating income                          (10), (33)            1,189                32             1,157
            Profit/loss from operating activities                                   – 6,164             1,574           – 7,738
            Taxes on income                                           (34)                4                10                –6
            Consolidated profit/loss                                                – 6,168             1,564           – 7,732




                                                                64
 Appropriation of consolidated profit/loss
 EUR in millions

                                                                        2007              2006            Change
                                                               EUR in millions   EUR in millions   EUR in millions
 Consolidated profit/loss                                             – 6,168             1,564           – 7,732
 Additions to reserves from the ERP Special Fund                         – 47              – 55                 8
 Additions to retained earnings                                         – 278           – 1,242               964
   Additions to reserves in accordance with the KfW Law                     0             – 822               822
   Additions to other retained earnings                                 – 278             – 420               142
 Additions to the fund for general banking risks                        – 200             – 267                67
 Reductions of the fund for general banking risks                       5,300                 0             5,300
 Balance sheet profit/loss                                            – 1,393                 0           – 1,393




KfW’s reserves from the ERP Special Fund are              EUR 200 million was added to the fund for gen-
increased on the basis of contractual agreements.         eral banking risks from consolidated profit/loss
KfW’s net loss for the period in the amount of            for the year. In the previous year, in addition to
EUR 1,393 million is recorded as a balance sheet          EUR 267 million from the profit for the year,
loss in the consolidated financial statements.            other retained earnings of EUR 433 million were
In the previous year, in accordance with § 10 (2)         reclassified to the fund. KfW applied EUR 5,300
and (3) of the KfW Law, EUR 487 million of KfW’s          million from the fund for general banking risks
net income had been allocated to the statutory            to cover some of the charges arising in connec-
reserve and EUR 335 million to the special                tion with the crisis situation at IKB.
reserve.




                                                          65
Balance sheet.




            Assets
            EUR in millions

                                                                           Note      31 Dec. 2007      31 Dec. 2006            Change
                                                                                    EUR in millions   EUR in millions   EUR in millions
            Cash reserves                                                   (37)                26                26                 0
            Loans and advances to banks                          (9), (12), (38)          205,738            191,228            14,510
            Loans and advances to customers                 (9), (10), (12), (39)          100,267            93,262             7,005
            Risk provisions for lending business                (10), (13), (40)            – 7,671           –1,964            – 5,707
            Value adjustments from macro fair value hedge
            accounting                                                 (7), (41)            –1,295               219            –1,514
            Derivatives used for hedge accounting                      (7), (42)             5,570             3,196             2,374
            Other derivatives                                      (8), (9), (43)            3,166             3,977             – 812
            Securities and investments                          (14), (15), (44)            45,745            41,802             3,943
            Property, plant and equipment                             (16), (45)               801               778                23
            Intangible assets                                         (17), (46)                69                59                11
            Other assets                                              (18), (47)             1,579             1,806             – 227
            Total                                                                         353,997           334,389            19,608




            Liabilities and equity
            EUR in millions

                                                                           Note      31 Dec. 2007      31 Dec. 2006            Change
                                                                                    EUR in millions   EUR in millions   EUR in millions
            Liabilities to banks                                 (9), (19), (48)            13,366            17,990           – 4,624
            Liabilities to customers                             (9), (19), (49)            37,121            41,958           – 4,837
            Certificated liabilities                                   (19),(50)           260,315          240,086             20,229
            Value adjustments from macro fair value hedge
            accounting                                                 (7), (51)             – 423             – 329              – 94
            Derivatives used for hedge accounting                      (7), (52)             4,091             5,009             – 919
            Other derivatives                                (8), (9), (10), (53)           17,114             9,013             8,100
            Provisions                                          (13), (20), (54)             1,545               996               549
            Other liabilities                                         (18), (55)             2,185             2,462             – 277
            Subordinated liabilities                                  (21), (56)             3,747               500             3,247
            Equity                                                    (22), (57)            14,936            16,702            -1,766
            Total                                                                         353,997           334,389            19,608




                                                                     66
Statement of changes in equity.




            Statement of changes in equity in financial year 2007
            EUR in millions

                                                           As at     Capital     Appropriation    Changes in           As at
                                                 1 January 2007    increases   of consolidated    revaluation   31 December
                                                                               profit/loss from      reserves          2007
                                                                                 financial year
                                                                                           2007
            Subscribed capital                            3,750           0                  0             –           3,750
            Outstanding contributions                      – 450          0                  0             –           – 450
            Capital reserve                               1,604       4,650                  0             –           6,254
             Promotional reserves from the ERP
             Special Fund                                     0       4,650                  0             –           4,650
            Reserve from the ERP Special Fund
                                                            757           0                 47             –            804
            Retained earnings                             5,584           0                278             –           5,862
             Statutory reserve under
             § 10 (2) KfW Law                             1,574           0                  0             –           1,574
             Special reserve under
             § 10 (3) KfW Law                             1,893           0                  0             –           1,893
             Special reserve less the special
             loss account from provisioning
             pursuant to § 17 (4) D-Mark Bal-
             ance Sheet Law                                  21           0                  0             –             21
             Other retained earnings                      2,095           0                278             –           2,374
            Fund for general banking risks                5,300           0            – 5,100             –            200
            Revaluation reserves                            157           –                  –         – 249            – 92
            Balance sheet profit/loss                         0           –             –1,393             –         –1,393
            Equity                                       16,702       4,650            – 6,168         – 249         14,936




                                                                     67
Statement of changes in equity.




            Statement of changes in revaluation reserves in financial year 2007
            EUR in millions

                                                      Bonds and        Shares and           Equity      Investments    Total
                                                     other fixed-      other non-     investments     accounted for
                                                  income securi-     fixed income                          using the
                                                              ties       securities                  equity method
            As at 1 January 2007                               86               38              0                33     157
            A. Changes recognised in the income
               statement
            Decrease due to disposals                           2                3              0                 0       5
            Increase due to disposals                          –1               –3              0                 0      –4
            Decrease due to impairments                         0               –1              0                 0      –1
            Total changes recognised in the
            income statement                                    1               –1              0                 0       0
            B. Changes recognised directly
               in equity
            Changes in revaluation reserves                 – 211               –3             –1              – 33    – 248
            Total changes recognised directly
            in equity                                       – 211              –3              –1              – 33    – 248
            Effect of exchange rate changes                    –1                0              0                 0      –1
            As at 31 December 2007                          –125                34             –1                 0     – 92




                                                                     68
Statement of changes in equity in financial year 2006
EUR in millions

                                                As at          Reclassifi-     Appropriation       Changes in              As at
                                      1 January 2006              cations    of consolidated       revaluation      31 December
                                                                             profit/loss from         reserves             2006
                                                                               financial year
                                                                                        2006
Subscribed capital                             3,750                     0                 0                   –           3,750
Outstanding contributions                       – 450                   0                  0                   –           – 450
Capital reserve                                1,604                     0                 0                   –           1,604
Reserve from the ERP Special Fund                703                    0                 55                   –            757
Retained earnings                              4,775                – 433              1,242                   –           5,584
 Statutory reserve under
 § 10 (2) KfW Law                              1,087                    0                487                   –           1,574
 Special reserve under
 § 10 (3) KfW Law                              1,559                    0                335                   –           1,893
 Special reserve less the special
 loss account from provisioning
 pursuant to § 17 (4) D-Mark
 Balance Sheet Law                                21                    0                  0                   –             21
 Other retained earnings                       2,108                – 433                420                   –           2,095
Fund for general banking risks                 4,600                   433               267                   –           5,300
Revaluation reserves                             210                     0                 –                 – 53           157
Equity                                        15,191                    0              1,564             – 53            16,702




Statement of changes in revaluation reserves in financial year 2006
EUR in millions

                                           Bonds and other         Shares and other           Investments                  Total
                                              fixed-income        non-fixed income     accounted for using
                                                  securities              securities    the equity method
As at 1 January 2006                                     68                      82                    60                   210
A. Changes recognised in the income
   statement
Decrease due to disposals                                 1                       3                     0                     5
Increase due to disposals                                –1                      –6                   – 27                  – 34
Decrease due to impairments                               0                      –3                     0                    –3
Total changes recognised in the
income statement                                          0                      –6                  – 27                   – 32
B. Changes recognised directly
   in equity
Changes in revaluation reserves                          18                     – 30                    0                   –12
Total changes recognised directly                        18                    – 30                     0                   –12
in equity
Effect of exchange rate changes                           0                      –8                     0                    –9
As at 31 December 2006                                   86                      38                    33                   157




                                                                  69
Cash flow statement.




            Cash flow statement
            EUR in millions

                                                                                                      2007       2006
            Consolidated profit/loss                                                                – 6,168      1,564
            Non-cash items included in consolidated net income for the period
            and reconciliation to cash flow from operating activities:
            Depreciation, amortisation and impairment (receivables, property, plant and equip-
            ment, securities and investments) and changes in risk provisions for lending business     7,095         82
            Changes in other provisions                                                                 138         60
            Profit/loss from the disposal of securities and investments and property,
            plant and equipment                                                                          –3         –2
            Other adjustments (net)                                                                     268     –1.713
            Subtotal                                                                                  1,330         –8
            Changes in assets and liabilities from operating activities after adjustment
            for non-cash items:
            Loans and advances to banks                                                             –14,515    –15,934
            Loans and advances to customers                                                          – 7,722     8,498
            Securities and investments (Securities)                                                  – 4,320   –10,196
            Other assets relating to operating activities                                            –1,870      7,347
            Liabilities to banks                                                                     – 4,623    – 2,798
            Liabilities to customers                                                                 – 4,837     7,564
            Certificated liabilities                                                                 20,229      4,266
            Other liabilities relating to operating activities                                        6,759      – 312
            Interest and dividends received                                                          27,578     23,688
            Interest paid                                                                           – 25,823   – 21,934
            Income tax paid                                                                               8         –8
            Cash flow from operating activities                                                     – 7,806        172
            Cash proceeds from the disposal of:
            Property, plant and equipment                                                                13          7
            Cash payments for investment in:
            Securities and investments (Equity investments)                                             – 36       – 82
            Property, plant and equipment                                                               – 89      –131
            Changes from other investing activities                                                       1          0
            Cash flow from investing activities                                                        –110      – 206
            Cash proceeds/(payments) from capital increases/(decreases)                               4,650          0
            Changes from other financing activities                                                   3,247          0
            Cash flow from financing activities                                                       7,897          0

            Cash and cash equivalents as at 31 December 2006                                             26         26
            Cash flow from operating activities                                                      – 7,806       172
            Cash flow from investing activities                                                        –110      – 206
            Cash flow from financing activities                                                       7,897          0
            Effects of exchange rate changes                                                             20         34
            Cash and cash equivalents as at 31 December 2007                                             26         26




                                                                             70
The IAS 7 item cash and cash equivalents report-     The cash flow statement prepared in accordance
ed in the cash flow statement is identical to the    with IAS 7 largely corresponds to the cash flow
balance sheet item cash reserves and thus com-       statement for 2006 prepared in accordance with
prises cash on hand and balances with central        the German Commercial Code (Handelsgesetz-
banks.                                               buch/HGB) (DRS 2-10). A separate reconciliation
   The cash flow statement shows the changes         was therefore deemed unnecessary.
in cash and cash equivalents in the financial year       Please refer to the comments on liquidity risk
through the cash flows from operating activities,    in the group management report for information
investing activities and financing activities.       on the KfW Group’s liquidity risk management.




                                                     71
Notes.




                                                      notes.

                                              aCCounting poliCies.
                                           (1) Basis of presentation.
         KfW is the promotional bank of the Federal           as well as information on capital and capital
         Republic of Germany and was founded in 1948          management as set out in IAS 1.124.
         as a public law institution based in Frankfurt am        IFRS 1 was applied to the first-time prepara-
         Main.                                                tion of IFRS consolidated financial statements.
            The KfW Group includes six subsidiaries           The effects of the transition from group account-
         and five special funds (securities funds/Wert-       ing in accordance with the German Commercial
         papier-Sondervermögen) that are consolidated.        Code to group accounting in accordance with
         One jointly controlled entity is accounted for at    IFRS are set out in a reconciliation.
         equity.                                                  The consolidated financial statements were
            The consolidated financial statements as at       prepared in accordance with standard KfW ac-
         31 December 2007 have been prepared, pursuant        counting policies and are based on the going
         to section 315a (1) of the German Commercial         concern principle. The accounting policies were
         Code (Handelsgesetzbuch/HGB), in accordance          applied in a consistent manner. All companies
         with the International Financial Reporting Stand-    accounted for at equity prepared their annual
         ards (IFRS), as applicable in the European Union     financial statements as at 31 December 2007.
         (EU), and with the interpretations set out by the        The reporting currency and the functional
         International Financial Reporting Interpretations    currency of all consolidated entities is the euro.
         Committee (IFRIC), as mandatory consolidated         Unless otherwise specified, all amounts are stat-
         accounts in accordance with Article 4 of Regula-     ed in millions of euros (EUR in millions).
         tion (EC) No. 1606/2002 (IAS Regulation) of the          As a general rule, assets are carried at (amor-
         European Parliament and Council of 19 July           tised) cost, with the exception of the following
         2002, as well as further regulations on the adop-    financial instruments:
         tion of certain international accounting stand-      K derivative financial instruments carried at fair
         ards. The standards and interpretations that            value through profit or loss;
         apply are those that had been published and          K designated financial instruments carried at
         endorsed by the EU at the point in time at which        fair value through profit or loss;
         these financial statements were prepared.            K available-for-sale financial assets carried at
            The supplementary provisions of the German           fair value recognised directly in equity.
         Commercial Code that also apply to IFRS con-         The consolidated financial statements include
         solidated financial statements have been taken       values which are determined on the basis of
         into account. The group management report pre-       judgements and/or estimates and assumptions
         pared in accordance with section 315 of the Ger-     which are determined to the best possible know-
         man Commercial Code includes the risk report         ledge and in accordance with the applicable
         with the risk-oriented information on financial      standard. The amounts actually realised can devi-
         instruments as set out in IFRS 7, material events    ate from these estimates. Estimates and assump-
         after the balance sheet date according to IAS 10     tions are required, in particular, for calculating




                                                         72
risk provisions, recognising and measuring provi-    as estimates and their underlying assumptions
sions (including pension liabilities), performing    were required, the assumptions made are ex-
the fair value accounting for financial instru-      plained in the notes to the relevant items.
ments based on valuation models, assessing and          KfW does not expect any deviations from its
measuring impairment of assets, and assessing        assumptions or any uncertainties with respect
the utilisation of deferred tax assets. The esti-    to estimates that could result in a material risk
mates and assumptions underlying these esti-         requiring a substantial adjustment to the related
mates are reviewed on an ongoing basis and are       assets and liabilities within the next financial
based, among other things, on historical experi-     year. With a view to the current uncertainties in
ence or expected future events that appear           the financial markets, however, this cannot be
likely given the particular circumstances. Insofar   completely ruled out.



         (2) assessMent of the iMpaCt of applying ifrs/ifriC in the future.

IFRS 8, “Segment Reporting”, which replaces the      IFRIC 11/IFRS 2, “Group and Treasury Share Trans-
previous regulations on segment reporting, must      actions”, which has already been endorsed by the
be applied with effect from 1 January 2009. KfW      EU, is not relevant to the KfW Group.
did not voluntarily adopt IFRS 8 early. This
change is not expected to have any material im-
pact on its financial position and performance.



                                    (3) ConsoliDateD group.

All significant subsidiaries, jointly controlled     at equity until the decision to move ahead with
entities and associates have been included in the    a prompt sale of the shares. As at the balance
consolidated financial statements.                   sheet date it was treated as an asset held for sale
   Affiliated entities are consolidated in accord-   in accordance with IFRS 5.
ance with IAS 27 if KfW can exercise control over       Special purpose entities (SPEs) are companies
the company directly or indirectly. The acquisi-     formed to accomplish a narrow, well-defined
tion date is the date of initial consolidation.      objective. In accordance with IAS 27/SIC 12, a
Affiliated entities are deconsolidated when con-     special purpose entity is consolidated when the
trol can no longer be exercised.                     substance of the relationship between the re-
   Associates and jointly controlled entities are    porting enterprise and the SPE indicates that the
included in accordance with IAS 28/IAS 31 inso-      SPE is controlled by that enterprise.
far as a significant influence or joint control is      The structure of the KfW Group is set out in
exerted. IKB was accounted for as an associate       the Notes under Disclosures on shareholdings.




                                                     73
Notes.




                                            (4) Basis of ConsoliDation.

         Consolidation involves revaluing the total assets       Any intragroup assets and liabilities are elimi-
         and liabilities of the subsidiaries at the acquisi-     nated, as are expenses and revenues from trans-
         tion date, irrespective of the percentage of eq-        actions between group companies. Intragroup
         uity instruments acquired, and incorporating            profits between consolidated companies are also
         them into the consolidated balance sheet. The           eliminated.
         resulting adjustments from hidden reserves and             Associates and jointly controlled entities are
         obligations are treated in accordance with the          accounted for using the equity method.
         applicable standards. If the revaluation procedure         KfW holds no minority interests.
         results in an excess of acquisition cost, this
         amount is capitalised as goodwill. There is no
         goodwill recognised at present.



                       (5) finanCial instruMents – reCognition anD MeasureMent.

         A financial instrument is any contract that gives       determinable payments that are not quoted in
         rise to a financial asset of one entity and a finan-    an active market. These are measured at amor-
         cial liability or equity instrument of another          tised cost using the effective interest method.
         entity. The following explanations provide an           For the KfW Group, this primarily relates to the
         overview of how the requirements of IAS 39 are          lending business reported under Loans and
         implemented.                                            advances to banks and Loans and advances to
             Initial recognition is as at the settlement date    customers. In its lending business the KfW Group
         for non-derivative financial instruments and as         uses the Basel definition for its selection of de-
         at the trade date for derivatives.                      fault criteria and applies a uniform definition of
             Upon initial recognition, financial instruments     default group-wide. Default criteria are, in par-
         must be assigned to one of the following catego-        ticular, payments overdue for more than 90 days
         ries. The subsequent valuation depends on this          (taking a marginality limit into account) and an-
         categorisation:                                         ticipated non-fulfilment of payment obligations
         K Loans and receivables,                                in the face of indicators such as filing for bank-
         K Held-to-maturity investments,                         ruptcy, material adverse change, distressed loan
         K Financial assets and liabilities at fair value        indication, cases of conversion and transfer, debt
            through profit or loss,                              to equity swaps, deferment/restructuring and
            – Financial assets and liabilities designated        disposal of loans or advances at significant loss.
               at fair value through profit or loss (fair            Held-to-maturity investments are non-
               value option),                                    derivative financial assets with fixed or determi-
            – Financial assets and liabilities held for          nable payments and fixed maturity that an
               trading,                                          entity has the intention and ability to hold to
         K Available-for-sale financial assets, or               maturity. This valuation category is not used
         K Other liabilities.                                    within the KfW Group.
         The category “loans and receivables” includes               For financial assets and liabilities, the fair
         non-derivative financial assets with fixed or           value option can be used irrevocably if




                                                            74
K the categorisation can resolve or substantial-        allocated to this category if they are not record-
   ly reduce an accounting mismatch resulting           ed under hedge accounting in accordance with
   from the valuation of financial assets or            IAS 39. They are reported under Other deriva-
   financial liabilities or the recognition of a loss   tives, while changes to the fair value are report-
   or a gain as a result of differing accounting        ed under Net gains/losses from other financial
   policies;                                            instruments at fair value through profit or loss.
K a group of financial assets and/or financial          Derivatives used for Hedge accounting are
   liabilities is managed in accordance with the        reported in the balance sheet under the item of
   documented risk management or investment             the same name, while changes to the fair value
   strategy and its performance is assessed on          are reported under Net gains/losses from hedge
   the basis of the fair value and the information      accounting. Interest income/expense from de-
   is passed on to key personnel; or                    rivatives is reported under Net interest income.
K a contract contains one or several embedded               All other financial assets fall under the cate-
   derivatives which significantly modify the cash      gory “available-for-sale financial assets”. The dif-
   flows required by the contract or an analysis        ference between the fair value and the (amor-
   is required to determine that the embedded           tised) cost is recognised directly in a separate
   derivative(s) may not be separated.                  equity item until the asset is sold or an impair-
Designated financial assets and liabilities are         ment loss has to be recognised in profit or loss.
measured at fair value through profit or loss. The      This is the case for debt instruments if there is
KfW Group uses the fair value option for hedging        objective evidence (“trigger”) of impairment with
relationships, structured products, securitisation      an impact on the expected future cash flows.
transactions, equity finance business, and for          Specific trigger events are defined depending on
financial instruments of consolidated perform-          the type of financial instrument. Events such as
ance-based special funds. These financial instru-       payments overdue for 30 days or more, a dete-
ments are reported under Securities and invest-         rioration in the internal rating to the non-per-
ments, Liabilities to banks and customers and           forming loans category, and a decline in the
Certificated liabilities. Changes to the fair value     market price can be considered objective evi-
are stated under Net gains/losses from other            dence of a possible impairment. Furthermore, an
financial instruments at fair value through profit      impairment has to be recognised in profit or loss
or loss, while interest income/expense is reported      in the case of a significant or prolonged decline
under Net interest income.                              in the acquisition cost of equity instruments. The
    Financial instruments that belong to the cat-       impairment of a debt instrument assigned to this
egory “financial assets and liabilities held for        category is reversed through profit or loss if there
trading” are measured at fair value through prof-       is no longer any objective evidence for an im-
it or loss. This category includes both derivatives     pairment. Impairments of equity instruments
and non-derivative financial instruments pur-           assigned to this category may only be reversed
chased with the intention of generating a short-        directly in equity. Equity instruments that cannot
term profit. The KfW Group does not enter into          be reliably measured at fair value are accounted
any transactions with the intention of generat-         for at cost. Impairments are recognised in profit
ing a short-term profit. Derivatives transactions       or loss, while reversals of impairment losses are
concluded purely for hedging purposes are               not considered. Within the KfW Group, the avail-




                                                        75
Notes.




         able-for-sale financial assets are reported under    covers borrowings that are reported under
         Securities and investments. Gains and losses from    Liabilities to banks and customers, Certificated
         disposals, impairments to be recognised in profit    liabilities and Subordinated liabilities.
         or loss and the reversal of impairments from debt       Financial assets are derecognised as at the
         instruments are reported under Net gains/losses      settlement date, with the exception of deriva-
         from securities and investments. Premiums and        tives. Derecognition is performed when the con-
         discounts are accounted for through profit or        tractual rights relating to the asset have expired,
         loss at amortised cost under Interest income         the power of disposal/control has been trans-
         using the effective interest method.                 ferred, or the substantial risks and rewards have
             All non-derivative financial liabilities for     been transferred to a third party unrelated to the
         which the fair value option is not applied are       KfW Group.
         categorised as other liabilities. These are meas-       Financial liabilities are derecognised if the
         ured at amortised cost using the effective inter-    obligations set out in the agreement have been
         est method. For the KfW Group, this category         fulfilled or cancelled or have expired.




                                                         76
                   (6) finanCial instruMents – valuation teChniques.

At the KfW Group, initial recognition of financial     3. No active market – equity instruments
instruments is at fair value.                             If in exceptional cases it is not possible to
    Subsequent valuation at amortised cost is             reliably determine the fair value of equity in-
based, within the KfW Group, on the fair value            struments that are not quoted in an active
upon initial recognition, taking into account             market using valuation models, they are meas-
any principal repayments and any impairments.             ured at cost. The fair value cannot be calcu-
The amortisation of premiums and discounts,               lated reliably if the range of reasonable fair
transaction costs and fees is performed in                value estimates for this instrument is signifi-
accordance with the effective interest method             cant and the probabilities of the various esti-
on the basis of the contractual cash flows. In            mates cannot be reasonably assessed.
its promotional business, only discounts are           Fair values are determined on the basis of the
amortised; this is carried out until the end of the    valuation category for recognition on the bal-
first fixed interest rate period (generally five or    ance sheet and for information on financial in-
ten years).                                            struments in the Notes. Fair values from active
    At the KfW Group, subsequent valuation at          markets are applied in particular to bonds and
fair value is based on the following hierarchy:        other fixed-income securities, as well as shares
1. Active market                                       and other non-fixed income securities. Valuation
   The best objective evidence of fair value is        techniques for non-derivative financial instru-
   given by published price quotations in an ac-       ments are applied in particular to the products
   tive market. A financial instrument is regarded     reported under Loans and advances to banks and
   as quoted in an active market if quoted prices      customers, Liabilities to banks and customers,
   are readily and regularly available and those       and Certificated liabilities. Valuation techniques
   prices represent actual and regularly occurring     are also applied to OTC derivatives. Equity invest-
   market transactions on an arm’s length basis.       ments and shares which cannot be reliably meas-
2. No active market – valuation techniques             ured at fair value are measured at cost.
   If the financial instrument is not quoted in an         The fair value for loans to banks and custom-
   active market, valuation techniques are used.       ers is calculated using the discounted cash flow
   The valuation techniques used include, in par-      (DCF) method based on the risk-free discounting
   ticular, the discounted cash flow (DCF) method      of the risk-adjusted cash flows with the swap
   and option pricing models, as well as a com-        curve. The expected loss calculated for the re-
   parison with the fair value of a financial in-      spective reporting date is used to correct the
   strument with almost identical characteristics      contractual cash flows. The fair value at initial
   (e. g. multiplier-based models). The valuation      recognition is equivalent to the cost upon acqui-
   techniques take account of all of the param-        sition. The customer fee includes operating ex-
   eters that the market participants would in-        penses, the margin, the equity and debt risk pre-
   clude in the pricing process, e. g. market rates,   mium, and any subsidies. The customer fee
   risk-free interest rates, credit spreads or swap    remains unchanged for subsequent valuation
   curves.                                             (constant spread).




                                                       77
Notes.




         The fair value of financial instruments due on        Separate options, as well as derivatives with em-
         demand, such as cash reserves or receivables and      bedded options, triggers, guaranteed interest
         liabilities due on demand, is the carrying            rates and/or complex coupon agreements, are
         amount.                                               measured using recognised models unless they
            In cases in which no prices from liquid mar-       are listed on a stock exchange. The same applies
         kets are available, recognised valuation models       for credit default swaps.
         and methods are applied. The discounted cash             The aforementioned models are calibrated, if
         flow method is used for securities, swaps, and        possible, on the basis of observable market data
         currency and money market transactions with no        for instruments that are similar in terms of the
         embedded options and no complex coupons.              type of transaction, maturity, and credit quality.



                                           (7) heDging relationships.

         Derivatives are used within the KfW Group for         value hedge accounting, and at the portfolio
         the hedging of interest rate and currency risks.      level in the form of macro fair value hedge
         Economic hedging relationships are recognised         accounting. The effectiveness of the hedging
         through hedge accounting or by using the fair         relationships is shown by applying the dollar-
         value option. However, as not all derivatives are     offset method.
         subject to hedge accounting or the fair value            In micro fair value hedge accounting, interest
         option, some economic hedging derivatives are         rate and currency risks from bonds allocated to
         reflected in the accounts, although their risk-       securities and investments (“available-for-sale
         mitigating impact is not reflected in the accounts    financial assets” category) and borrowings (“other
         because the hedged risk associated with the           liabilities” category) are hedged. The fair values
         underlying transactions is not recognised in          attributable to the hedged risks are reported as
         profit or loss.                                       an adjustment of the carrying amount of the
             Under hedge accounting, i. e. the accounting      hedged items with the corresponding gain or loss
         for hedging instruments (derivatives) and hedged      reported under Net gains/losses from hedge
         transactions in accordance with special rules,        accounting. The hedging instruments are recog-
         strict requirements apply to the accounting for       nised at fair value under Derivatives used for
         hedging relationships.                                hedge accounting. Changes in the value of these
             Within the KfW Group, hedge accounting is         instruments are also reported under Net gains/
         used solely in the form of fair value hedges to       losses from hedge accounting, leading to a sub-
         recognise hedging relationships between deriva-       stantial compensation of the earnings effects
         tives and the respective assets/liabilities. The      resulting from the valuation of the hedged items.
         hedging relationship is reported at the individu-     The fair value of the hedged risks from hedging
         al transaction level in the form of micro fair        relationships which no longer fulfil the strict




                                                          78
hedge accounting requirements is amortised over       portfolio of underlying transactions is deter-
the residual term of the original hedging rela-       mined each month in the context of a dynamic
tionship under Net gains/losses from hedge ac-        hedge designation and reversal process. The
counting.                                             resultant value adjustment items are amortised
    In macro fair value hedge accounting, interest    over the residual term of the maturity period in
rate risks from loan receivables (“loans and re-      Net gains/losses from hedge accounting. Dispos-
ceivables” category) and borrowings (“other           als from the hedged portfolios result in a partial
liabilities” category) are hedged. The fair values    reversal of the related value adjustments in Net
attributable to the hedged risks in the hedged        gains/losses from hedge accounting.
portfolios in the “loans and receivables” category        If the strict hedge accounting requirements
are reported under Value adjustments from macro       for the designation of hedging relationships
fair value hedge accounting on the assets side.       between derivatives and financial assets/liabili-
The fair values attributable to the hedged risks      ties are not fulfilled within the KfW Group, the
in the hedged portfolios in the “other liabilities”   fair value option is used for the non-derivative
category are reported under Value adjustments         financial instruments in certain circumstances, in
from macro fair value hedge accounting on the         particular for structured products.
liabilities side. Changes in the fair values of the       Further derivative financial instruments are
hedged risks from the hedged portfolios are           also used to hedge risks, but their resultant
reported under Net gains/losses from hedge            hedge effect is not reflected in the accounts.
accounting. The hedging instruments are reported          The fair values of all derivatives not subject to
at fair value under Derivatives used for hedge        hedge accounting are reported under Other
accounting. Changes in the value of these instru-     derivatives. Changes in the fair values are recog-
ments are also reported under Net gains/losses        nised in the income statement under Net gains/
from hedge accounting, with the consequence           losses from other financial instruments at fair
that they almost fully offset the earnings effects    value through profit or loss.
from the valuation of the hedged portfolios. The




                                                      79
Notes.




                                    (8) treatMent of eMBeDDeD Derivatives.

         Derivative financial instruments can be part of a       Supplementary agreements made in the KfW
         hybrid (combined) instrument as embedded                Group’s equity finance business are treated as
         derivatives. Under certain conditions, they are         separate embedded derivatives which are meas-
         reported separately from the host contract,             ured at fair value through profit or loss and
         similar to stand-alone derivatives. They must be        reported under Other derivatives. The loan re-
         reported separately if the economic characteris-        ceivables are reported under Loans and advances
         tics and risks of the embedded derivative are not       to customers. Changes in fair value are recorded
         closely related to the economic characteristics         in Net gains/losses from other financial instru-
         and risks of the host contract. The host contract       ments at fair value through profit or loss under
         will be accounted for depending on its categori-        the item Derivatives not qualifying for hedge
         sation.                                                 accounting.
             The KfW Group enters into contracts with em-           Unscheduled termination rights that are
         bedded derivatives requiring separation particu-        granted regularly in promotional loan transac-
         larly with respect to borrowings. As it makes use       tions are not recorded as embedded derivatives
         of the fair value option, KfW reports all these         requiring separation since the economic charac-
         hybrid (combined) financial instruments at fair         teristics and risks associated with the termination
         value.                                                  rights are closely related to the economic char-
                                                                 acteristics and risks of the loans.



                                                (9) CreDit Derivatives.

         The KfW Group enters into credit derivatives as         two standardised platforms PROMISE (pro-
         protection seller and protection buyer.                 gramme for the securitisation of SME loans) and
            As part of active portfolio management,              PROVIDE (programme for the securitisation
         single name CDSs (credit default swaps) are used        of housing loans). The KfW Group assumes the
         to hedge the risks of individual counterparties.        default risks of the reference portfolio via port-
         These are recognised at fair value under Other          folio CDSs, whereas the risks are simultaneously
         derivatives. The changes in value are reported in       passed on via portfolio CDSs/credit-linked notes.
         the income statement under Net gains/losses             These transactions are subject to the fair value
         from other financial instruments at fair value          option. The fair values are reported as receivables
         through profit or loss. The current risk premiums       or liabilities. Changes to the fair values are rec-
         are reported under Commission expense.                  ognised under Net gains/losses from other finan-
            As part of its promotional loan business, the        cial instruments at fair value through profit
         KfW Group gives commercial banks the opportu-           or loss. The current risk premiums are reported
         nity to place their credit risks in the capital mar-    under Net commission income.
         ket as part of a synthetic securitisation via the




                                                            80
                                   (10) risK proteCtion for iKB.

IKB is being protected against risks that arose in      value adjustments are presented under Net gains/
connection with the US subprime mortgage crisis.        losses from other financial instruments at fair
In addition to KfW, three German banking                value through profit or loss. The risks arising from
associations (banking pool) are also taking part        financial guarantees are covered by provisions.
in the support initiative.                              The claim against the banking association for
    As part of the support measures, KfW has            participation in losses provided for in the pool
assumed all of IKB’s rights and obligations under       agreement is recorded under Loans and advanc-
IKB’s liquidity lines to refinance the special pur-     es to customers and included in Net other oper-
pose entities of the “Rhineland Funding Capital         ating income.
Corporation, New York/USA” conduit. In addition,           The method and valuation applied to the
credit derivatives were used as a means of as-          issued financial instruments are in line with
suming IKB’s loss exposures arising from reverse        standard KfW accounting policies. The valuation
hedges of this conduit up to a maximum of               of loans and advances, guarantees and credit
USD 1.5 billion. Furthermore, credit derivatives        derivatives was based on an analysis of the
and financial guarantees were used to back IKB’s        underlying assets. The valuation techniques fol-
risks arising from specified securities portfolios up   lowed the hierarchy set out in IAS 39.48A. Mar-
to a maximum of EUR 1 billion. The banking pool         ket values were used to the extent available for
is participating in the risk protection on a pro-       the instruments covered by the risk protection.
rata basis up to a maximum of EUR 1.2 billion.          In all other cases valuation was carried out on
    The “Rhineland Funding Capital Corporation,         the basis of models that took into consideration
New York/USA” conduit was not consolidated by           directly or indirectly observed market prices for
the KfW Group during the reporting year. The            similar or substantially identical financial instru-
provision of liquidity lines does not trigger an        ments. Valuation was carried out using internal
obligation for KfW to consolidate the special           bank models only insofar as no prices or market
purpose entities since KfW does not “control” the       parameters were available for the instruments
SPEs within the meaning of SIC 12. By providing         covered by the risk protection or for substan-
the liquidity lines, KfW did not obtain power           tially identical financial instruments. In such
of disposal over the SPEs or their assets. KfW          cases the capital losses resulting from the pro-
served solely as provider of debt capital for the       tected financial instruments were calculated
conduit and did not possess any decision-making         using a cash-flow based, static loss estimate. The
powers over the assets of the SPEs or over the          financial instruments were differentiated by
SPEs themselves. The drawn liquidity lines are          asset category, rating and, in some cases, year of
reported under Loans and advances to customers.         issue. The values were verified through compari-
Commitments outstanding are presented under             son with quotations by arrangers and/or inde-
Irrevocable loan commitments in the Notes. In-          pendent estimates by specialists. In view of the
dividual impairments were set up for the default        current developments in the market for struc-
risks. The credit derivatives are accounted for at      tured products, however, there is relatively high
negative fair value under Other derivatives. The        estimation uncertainty in this regard.




                                                        81
Notes.




         Using this as a basis, KfW recorded individual         financial instruments on the liabilities side with
         impairments and provisions to account for the          the maximum risk assumed. The contribution to
         assumption of the liquidity lines. KfW is expect-      the risk protection by the banking associations
         ing full utilisation of the reverse hedging for the    will be capitalised in the full amount, taking the
         Rhineland Funding conduit and for the first-loss       expected potential loss resulting from the liquid-
         risks assumed by it and is accounting for the          ity lines into consideration.



                                      (11) foreign CurrenCy translation.

         The functional currency of KfW and its consoli-        rates. Income and expenses are translated strict-
         dated subsidiaries and special funds is the euro.      ly at the average monthly rate.
            Monetary assets and liabilities denominated             The results from currency translation are rec-
         in foreign currency are converted at the spot          ognised in profit or loss under Net gains/losses
         rate. Translation is made as at the balance sheet      from other financial instruments at fair value
         date using the European Central Bank reference         through profit or loss.



                            (12) loans anD aDvanCes to BanKs anD CustoMers.

         The KfW Group’s lending business carried at            ity by commercial banks is reported under Loans
         amortised cost is reported under Loans and             and advances to customers.
         advances to banks and customers. This item con-            Current interest and similar income are
         sists primarily of the promotional loan business,      recorded under Interest income. Premiums, dis-
         in which loans are typically granted to the final      counts, processing fees and other remuneration
         borrowers through accredited commercial banks.         are amortised using the effective interest meth-
         These assets are reported under Loans and              od under Interest income. Processing fees that
         advances to banks insofar as the commercial            do not need to be amortised using the effective
         banks underwrite part of the liability. Promo-         interest method are recognised under Commis-
         tional on-lending without underwriting of liabil-      sion income.




                                                           82
                         (13) risK provisions for lenDing Business.

The overall risk provisions for lending business       impairment losses may be reversed through the
include the provisions for losses on loans and         income statement.
advances, which are reported separately, as well           For performing loans not subject to individu-
as the provisions for contingent liabilities and       al impairment, the risk of losses due to defaults
irrevocable loan commitments.                          that have been incurred but not reported is
    The risks resulting from recognised lending        addressed by portfolio impairment. Economic
business are reflected by individual and portfolio     risk and transfer risk are taken into account for
impairments recognised in profit or loss.              the calculation. The key parameters are the out-
    Individual impairments reflect counterparty        standing loan volume (based on the carrying
risks identified in an impairment test of indi-        amount) as at the reporting date, the expected
vidual loans. The amount of the impairment             loss given default and one-year probabilities of
loss corresponds to the difference between the         default (given a LIP [loss identification period]
amortised cost of the loan and the discounted          factor of 1). The probabilities of default are
expected future cash flows from interest and re-       provided by credit risk control, as is the loss
demption payments and from collateral-based            given default, whereas the latter is adjusted for
cash flows. The recognition of interest income in      imputed cost. The underlying assumptions of
accordance with the original contractual terms         expected losses are backtested on a regular basis
is terminated as at the date on which the first        against the actual loss experience.
individual impairment is set up. For the subse-            For contingent liabilities and irrevocable loan
quent valuation, interest income is determined         commitments the individual risks are addressed
and reported based on the unwinding of the dis-        in the form of provisions, with a corresponding
counted expected cash flows using the original         effect on the income statement. For irrevocable
effective interest rate; the overall risk provisions   loan commitments, impairments not yet identi-
decrease by the same amount. Any reversals of          fied individually are addressed via portfolio mod-
individual impairment losses are accounted for         els by forming specific provisions.
through profit or loss.                                    Non-recoverable loans, for which no specific
    Smaller and standardised loans are grouped         provisions exist, are directly written off. Recover-
into homogenous subportfolios for portfolio            ies on loans already written off are recognised as
impairment on the basis of the identified risks.       income from risk provisions.
If less impairment than expected is necessary,




                                                       83
Notes.




                                         (14) seCurities anD investMents.

         Securities and investments include, in particular,      are made for illiquidity. For example, when dis-
         securities portfolios. These mainly serve to sup-       counted cash flow (DCF) models are used, a dis-
         port KfW’s liquidity status or are used to optimise     count rate adjusted for a fungibility factor is
         and stabilise the ability of the KfW Group to ful-      applied. In cases where the fair value of non-
         fill its promotional mandate in the long term.          listed equity investments cannot be reliably
              The Securities and investments item on the         measured, such assets are carried at cost allow-
         balance sheet comprises bonds and other fixed-          ing for impairment losses.
         income securities, shares and other non-fixed               Any changes in the value of financial assets
         income securities, equity investments, and shares       at fair value through profit or loss are reported
         in affiliated entities not included in the consoli-     under Net gains/losses from other financial
         dated financial statements which are held by            instruments at fair value through profit or loss.
         KfW, its subsidiaries and consolidated special          Realised gains and losses and impairments from
         funds.                                                  the “available-for-sale financial assets” and
              To ensure uniform accounting treatment for         “loans and receivables” categories are recognised
         equity investments with and without significant         under Net gains/losses from securities and in-
         influence, individual group business divisions          vestments. Unrealised gains from available-for-
         that provide equity financing as part of their          sale financial assets are recognised directly in
         promotional mandate are categorised as venture          equity as revaluation reserves. Current interest
         capital organisations for accounting purposes           payments and dividends are reported under
         when they meet the respective requirements.             Interest income.
         These equity investments, like all other equity             Associates and jointly controlled entities that
         investments, are reported under Securities and          are material for the KfW Group are also included
         investments.                                            under Securities and investments. Their inclusion
              Securities and investments are initially recog-    is based on the equity method insofar as there is
         nised at fair value and subsequently measured           significant influence or joint control. This item
         depending on their classification either as finan-      also includes assets held for sale in accordance
         cial assets at fair value through profit or loss or     with IFRS 5. The assets are reported either at
         as available-for-sale financial assets. Financial       carrying amount or at fair value, whichever is
         instruments with fixed or determinable payments         lower, less the disposal costs. Any value adjust-
         which are not quoted in an active market are            ments are reported under Net gains/losses from
         categorised as loans and receivables.                   securities and investments.
              When non-listed equity investments are
         measured at fair value, appropriate allowances




                                                            84
                                  (15) repurChase agreeMents.

The KfW Group enters into repurchase agree-            ers. Interest is recorded under Interest expense in
ments as standardised repos or reverse repos.          accordance with the respective conditions of the
These are combinations of simultaneous spot and        repurchase agreements.
forward transactions on securities with the same          The cash outflows generated by reverse repos
counterparty. The terms and modalities of col-         are recognised and measured as Loans and
lateralisation and for the use of collateral follow    advances to banks or Loans and advances to cus-
common market practice.                                tomers. The securities received (spot purchase)
   The securities sold under repo transactions         are not recognised or measured. Interest is
(spot sale) continue to be recognised and meas-        recorded in Interest income in accordance with
ured as securities. The cash inflow is recognised      the respective conditions of the reverse repur-
under Liabilities to banks or Liabilities to custom-   chase agreements.



            (16) property, plant anD equipMent anD investMent property.

The land and premises, the fixtures, furniture and     Administrative expense. Gains and losses from
office equipment reported by the KfW Group are         the sale of property, plant and equipment are
carried at cost less depreciation on a straight-       reported under Net other operating income.
line basis, and impairment is recognised under            The land and premises of the KfW Group are
Administrative expense. An impairment is recog-        primarily owner-occupied. There is a small vol-
nised if the carrying amount of the asset exceeds      ume of rental activity to third parties. These
the recoverable amount, which is the higher of         properties are reported as investment property
the fair value less the disposal cost or the value     under Property, plant and equipment and meas-
in use. Expected wear and tear is taken into           ured as such. Every five years an expert opinion
account when determining the useful life. The          determines the fair value of these properties by
KfW Group assumes an estimated useful life of          applying the discounted earnings method unless
40 to 50 years for premises, three years for IT        a significant change in the real estate market
systems and five years for other property, plant       becomes detectable beforehand.
and equipment. Purchases of low-value property,           Payments in advance and assets under con-
plant and equipment are completely written off         struction are reported under Other property,
in the year they are acquired and recorded under       plant and equipment.




                                                       85
Notes.




                                               (17) intangiBle assets.

         Under Intangible assets, the KfW Group reports         An impairment is recorded when the carrying
         purchased and internally generated software at         amount of an asset exceeds the recoverable
         cost less depreciation on a straight-line basis and    amount. A situation in which the asset is not
         its impairment under Administrative expense. The       expected to be used as originally planned leads
         useful life is determined based on expected wear       to an impairment recognition.
         and tear. The KfW Group assumes a useful life of          In-house software under development is
         three years.                                           reported under Other intangible assets.



                                               (18) taXes on inCoMe.

         KfW is a non-taxable entity. Taxes on income for       Deferred tax assets and liabilities arise as a result
         non-exempt subsidiaries are determined in              of differences between carrying values according
         accordance with taxation laws in the respective        to IFRS of an asset or a liability and the respec-
         country of residence. Current taxes on income as       tive tax bases if these are likely to result in tax-
         well as expenses and income from the change in         able or tax deductible amounts in the future
         deferred taxes are recognised in proft or loss as      (temporary differences). Deferred tax assets
         Taxes on income or directly in equity under            relating to loss carryforwards not yet used are
         Revaluation reserves depending on the underlying       recognised only if there is a sufficient degree of
         transaction. Current and deferred tax assets and       certainty that the respective taxable entity will
         liabilities are reported under the items Other         earn sufficient taxable income in subsequent pe-
         assets and Other liabilities. Deferred income tax      riods to use the loss carryforward. Deferred tax
         assets and liabilities are offset insofar as the       assets and liabilities are recognised and measured
         requirements are met.                                  either through profit or loss as Taxes on income
            Current taxes on income are calculated using        or directly in equity under Revaluation reserves,
         currently applicable tax rates.                        depending on the underlying transaction.




                                                           86
        (19) liaBilities to BanKs anD CustoMers anD CertifiCateD liaBilities

The item Liabilities to banks and customers pri-      es from other financial instruments at fair value
marily includes non-current borrowings carried        through profit or loss. Presentation of the differ-
at amortised cost and the KfW Group’s money-          ent types of borrowed funds is not based on their
market transactions. The item Certificated liabil-    categorisation or their designation as hedged
ities contains bonds, notes and money-market          items. Valuation of the items is based on their
instruments issued. For market-making purposes,       respective categorisation.
repurchased own issues are deducted from the             Current interest is recorded in Interest ex-
liabilities as at the repurchase date.                pense; premiums and discounts are amortised
    The fair value option is used for structured      using the effective interest method over the
liabilities. There are no changes in the fair value   expected life in Interest expense. Changes in the
due to changes in credit risk as KfW is classified    value of liabilities designated at fair value are
in the highest rating classes with stable outlook     recorded in profit or loss under Net gains/losses
by the leading international rating agencies. The     from other financial instruments at fair value
valuation effects from market-related changes         through profit or loss. Results from the repur-
in credit spreads generated by the development        chase of own issues categorised as Other liabili-
of demand for the different KfW refinancing           ties are recognised as at the repurchase date
instruments are recognised under Net gains/loss-      under Net other operating income.



                                          (20) provisions.

The item Provisions includes provisions for pen-      The pension commitments for defined-benefit
sions and similar commitments, credit risks as        plans are calculated by an independent qualified
well as other obligations of uncertain amount         expert in accordance with the projected unit
and timing involving a probable outflow of            credit method on the basis of group-wide uni-
funds.                                                form parameters such as age, length of service
   All employees of the KfW Group participate         and salary. The commitments are recognised at
in a company pension plan that pays retirement,       present value of the defined-benefit obligations
long-term disability and survivor benefits. The       as at the reporting date, taking into considera-
KfW Group has both defined-benefit pension            tion actuarial profits and losses to be amortised.
plans and defined-contribution pension plans. In      The discount factor is based on current market
both cases the benefits depend mainly on the          conditions for corporate bonds with a maturity
length of service and salary. Apart from employ-      matching that of the obligations. Additional
er-financed pension plans there are also plans in     demographic factors (including the Heubeck
place involving contributions by employees.           actuarial tables for 2005 G) and actuarial




                                                      87
Notes.




         assumptions (rate of salary increases, rate of          Under defined-contribution plans employers pay
         pension increases, rate of staff turnover, etc.) are    a set amount to an external service provider
         accounted for. No plan assets were defined for          (such as the Versorgungsverband bundes- und
         the pension obligations of the KfW Group, so the        landesgeförderter Unternehmen e.V., the German
         related special regulations do not apply.               pension association for entities benefiting from
            The KfW Group recognises net cumulative              federal and state support). Beyond this employers
         actuarial gains and losses that exceed 10 % of          have no legal or constructive obligation to pay
         the present value of the defined-benefit obliga-        additional amounts if the external service pro-
         tions (corridor approach). Amounts in excess of         vider does not fulfil its obligations as agreed.
         the 10 % mark are amortised on a straight-line          Contributions paid to the service provider are
         basis over the expected average remaining work-         reported under the item Administrative expense;
         ing life and accounted for through profit or loss       no provisions are necessary for defined-contribu-
         in the pension provisions under Administrative          tion plans.
         expense.                                                   Pension-like obligations include commitments
            All pension obligations resulting from de-           for deferred compensation, early retirement and
         fined-benefit plans are financed from the recog-        partial retirement. Actuarial reports are prepared
         nised pension provisions. There are no fund-fi-         and a provision is set up accordingly for these
         nanced pension obligations. Allocations to              types of commitments as well. There are no
         pension provisions distinguish between current          actuarial gains and losses, so that the recognised
         service cost, interest expense and other alloca-        provision matches the present value of the
         tions (including past service cost). The interest       obligations.
         expense for pension obligations is reported under          Other provisions are set up primarily for
         Other interest expense and other allocations are        obligations to employees and for audit and con-
         included in the item Administrative expense.            sultancy services at the estimated expenditure.




                                                            88
                                (21) suBorDinateD liaBilities.

This item includes subordinated liabilities to the   Deferred interest as well as value adjustments
European Recovery Program Special Fund (ERP-         from micro fair value hedge accounting are
SV) and the Federal Republic of Germany.             recognised under Other liabilities.
   They are classified as other liabilities and         Current interest expenses are recorded under
carried at amortised cost.                           Interest expense.


                                            (22) equity.

The equity structure is determined by the KfW        The KfW Group created a fund for general bank-
Law and IFRS.                                        ing risks. Additions to or reductions of the fund
   Pursuant to § 10 (2) and (3) of the KfW Law,      are shown under IFRS as appropriation of con-
KfW’s net income for the period determined in        solidated profit/loss.
accordance with the German Commercial Code              Under IFRS any remaining consolidated net
is transferred to reserves and is included in        income is allocated to Other retained earnings in
equity under IFRS. In accordance with IFRS, the      the same period.
KfW Group must report the contractually agreed          Revaluation reserves contain the valuation
“strengthening” of the reserve from the ERP          results from the category “available-for-sale
Special Fund under equity as “appropriation of       financial assets”.
consolidated profit/loss”.



          (23) Contingent liaBilities anD irrevoCaBle loan CoMMitMents.

KfW’s contingent liabilities result mainly from      Irrevocable loan commitments are firm commit-
guarantees (financial guarantee contracts). All      ments by the KfW Group to grant a loan under
contingent liabilities of the KfW Group are listed   contractually agreed terms. These are listed in
in the Notes at their nominal amounts less provi-    the Notes at their nominal amounts less provi-
sions.                                               sions.




                                                     89
Notes.




                                                 (24) trust aCtivities.

         Assets and liabilities held by the KfW Group in          budget both grants the funds and underwrites
         its own name but for third-party accounts are            these loans. The remuneration associated with
         not recognised. This particularly applies to loans       these transactions is recognised under Commis-
         granted under German Financial Cooperation               sion income.
         to support developing countries; the federal


                                             (25) leasing transaCtions.

         Leases are classified as operating leases or as          Finance leases are only entered into to a small
         finance leases depending on the risks and                extent. The leased assets are capitalised and
         rewards relating to ownership of an asset. This          depreciated over the useful life or lease term,
         classification determines their accounting treat-        whichever is shorter, in Administrative expense.
         ment.                                                    Liabilities arising from future leasing payments
             The KfW Group enters into both types of              are reported under Other liabilities.
         leases as a lessee only. Real estate leases are clas-
         sified as operating leases; the corresponding
         rental payments are included under Administra-
         tive expense.




                                                             90
               reConCiliation anD notes on first-tiMe aDoption of ifrs.

The transition of the accounting regime from the            An IFRS opening balance sheet (as at 1 January
German Commercial Code to IFRS leads to a                   2006) was prepared for the KfW Group in
number of alterations affecting in particular the           accordance with IFRS 1, leading to the following
recognition and valuation of financial instru-              effects in equity:
ments. As at the transition date, all balance sheet
items are measured as if they had always been
accounted for in accordance with IFRS.



 Reconciliation of equity from the German Commercial Code to IFRS as at 1 January 2006
 EUR in millions

                                                                                              EUR in millions
 Equity according to the German Commercial Code as at 1 January 2006                                   8,999
 Reclassification of the fund for general banking risks                                               + 4,600
 Reclassification of the special loss account from provisioning pursuant to § 17 (4) of the
 D-Mark Balance Sheet Law (D-Markbilanzgesetz)                                                           – 27
 Effects from the consolidation of special funds in the consolidated financial statements
 in accordance with IAS 27/SIC 12                                                                      + 324
 Effects from the transition of the recognition and measurement of financial instruments
 reported under retained earnings in accordance with IAS 32 and IAS 39                                + 1,262
     Recognition and measurement of risk provisions for lending business                               + 662
     Measurement of equity investments                                                                 + 186
     Micro and macro fair value hedge accounting (valuation of underlying transactions
     and underlying portfolios and designated derivatives)                                              + 19
     Other transition effects on financial instruments                                                 + 395
 Effects from the adoption of other IFRS standards reported under retained earnings                    – 177
     Investments accounted for using the equity method in accordance with IAS 28                         – 44
     Recognition and measurement of pension provisions in accordance with IAS 19                        – 210
     Recognition and measurement of other provisions in accordance with IAS 37                          + 34
     Recognition of internally generated intangible assets in accordance with IAS 36                    + 33
     Recognition of deferred taxes in accordance with IAS 12                                             + 10
 Effects from the transition reported under Revaluation reserves                                       + 210
     Recognition and measurement of securities and investments in accordance with                      + 150
     IAS 32 and IAS 39
     Investments accounted for using the equity method in accordance with IAS 28                        + 60
 Equity in accordance with IFRS as at 1 January 2006                                                  15,191




                                                           91
Notes.




         In accordance with IFRS 1, the reconciliation of               ments prepared under previous accounting
         the equity of the KfW Group to IFRS was also                   standards (as at 31 December 2006).
         carried out as at the end of the last period pre-                 The effects were as follows:
         sented in the Group’s last annual financial state-



          Reconciliation of equity from the German Commercial Code to IFRS as at 31 December 2006
          EUR in millions

                                                                                                       EUR in millions
          Equity according to the German Commercial Code as at 31 December 2006                                10,028
          Reclassification of the fund for general banking risks                                               + 5,300
          Reclassification of the special loss account from provisioning pursuant to § 17 (4) of the              – 27
          D-Mark Balance Sheet Law (D-Markbilanzgesetz)
          Effects from the inclusion of special funds in the consolidated group in accordance with              + 500
          IAS 27/SIC 12
          Effects from the transition of the recognition and measurement of financial instruments
          in accordance with IAS 32 and IAS 39                                                                  + 927
              Recognition and measurement of risk provisions for lending business                               + 262
              Measurement of equity investments                                                                 + 237
              Micro and macro fair value hedge accounting (valuation of underlying transactions
              and underlying portfolios and designated derivatives)                                                +2
              Other transition effects on financial instruments                                                 + 426
          Effects from the adoption of other IFRS standards                                                     – 183
              Investments accounted for using the equity method in accordance with IAS 28                        – 89
              Recognition and measurement of pension provisions in accordance with IAS 19                       – 191
              Recognition and measurement of other provisions in accordance with IAS 37                          + 29
              Recognition of internally generated intangible assets in accordance with IAS 36                    + 49
              Recognition of deferred taxes in accordance with IAS 12                                            + 19
          Effects from the transition reported under revaluation reserves                                       + 157
              Recognition and measurement of securities and investments in accordance with                      + 124
              IAS 32 and IAS 39
              Investments accounted for using the equity method in accordance with IAS 28                        + 33
          Equity in accordance with IFRS as at 31 December 2006                                                16,702




                                                                   92
In accordance with IFRS 1, the reconciliation of            statements prepared under previous accounting
the net income of the KfW Group to IFRS was                 standards (as at 31 December 2006).
also carried out as at the end of the last period              The effects were as follows:
presented in the Group’s last annual financial



 Reconciliation of consolidated profit from the German Commercial Code to IFRS
 for financial year 2006
 EUR in millions

                                                                                                 EUR in millions
 Consolidated profit according to the German Commercial Code in financial year 2006                         974
 Additions to the fund for general banking risks as part of appropriation of profit under IFRS            + 700
 Interest earned on the reserve from the ERP Special Fund as part of appropriation of                      + 55
 profit under IFRS
 Effects from the consolidation of special funds in the consolidated financial statements in              + 176
 accordance with IAS 27/SIC 12
 Effects from the transition of the recognition and measurement of financial instruments in
 accordance with IAS 32 and IAS 39                                                                        – 335
     Recognition and measurement of risk provisions for lending business                                  – 400
     Measurement of equity investments                                                                      + 51
     Micro and macro fair value hedge accounting (valuation of underlying transactions
     and underlying portfolios and designated derivatives)                                                  – 17
     Other transition effects on financial instruments                                                      + 31
 Effects from the adoption of other IFRS standards                                                           –6
     Investments accounted for using the equity method in accordance with IAS 28                            – 45
     Recognition and measurement of pension provisions in accordance with IAS 19                           + 19
     Recognition and measurement of other provisions in accordance with IAS 37                               –5
     Recognition of internally generated intangible assets in accordance with IAS 36                       + 16
     Recognition of deferred taxes in accordance with IAS 12                                                 +9
 Consolidated profit in accordance with IFRS in financial year 2006                                       1,564




In addition to differences in the accounting                statement. As the cash flow statement prepared
policies impacting both equity and the income               in accordance with IAS 7 is very similar to previ-
statement, there are a number of significant yet            ous cash flow statements prepared according to
purely presentational differences between the               the German Commercial Code (GAS 2-10), these
German Commercial Code and IFRS that affected               differences were not reconciled.
the consolidated balance sheet and income




                                                           93
Notes.




                                                   BalanCe sheet.

         Loans and advances to banks and customers in-         Trust activities are no longer recorded in the fi-
         clude impairment losses under the German Com-         nancial statements under IFRS. Instead, they are
         mercial Code. Under IFRS, separate risk provisions    explained in the Notes.
         for lending business are recognised on the face          Assets from holding arrangements (Platz-
         of the balance sheet.                                 haltergeschäfte) are included in Shares and
            The German Commercial Code requires premi-         other non-fixed income securities under the Ger-
         ums and discounts to be reported as separate          man Commercial Code; under IFRS they are re-
         balance sheet items, such as deferred income and      ported under Loans and advances to customers.
         prepaid expenses and deferred charges, and re-           Under the German Commercial Code, repur-
         ceivables and liabilities are recognised at their     chased own bonds are reported under Bonds and
         nominal amount. According to IFRS, premiums           other fixed-income securities. Under IFRS they
         and discounts are part of the carrying value          are offset with Certificated liabilities.
         and, as such, subject to valuation at amortised          Provisions for obligations involving a probable
         cost.                                                 outflow of funds that were recognised in accord-
            Accrued interest from derivatives is reported      ance with the German Commercial Code are
         under receivables and liabilities in accordance       reported under Other liabilities in accordance
         with the German Commercial Code; reconciling          with IFRS.
         items from the valuation of foreign currency             Contingent liabilities reported in accordance
         derivatives are included in Other assets/Other        with the German Commercial Code in the amount
         liabilities. Under IFRS, these are components         of the maximum liability under credit default
         of the fair value of derivatives and reported in      swaps are no longer reported as such under IFRS.
         a separate balance sheet item.                        Instead, they are recognised at fair value in the
                                                               balance sheet.



                                                inCoMe stateMent.

         Under the German Commercial Code, interest            Expenses for hedging credit risk positions in the
         income and expense from derivatives are allo-         form of risk sub-participations, financial and
         cated to Interest income or Interest expense in       other guarantees are offset with Interest income
         the income statement depending on the associ-         according to IFRS. Under the German Commercial
         ated hedged items; derivatives used for the man-      Code they are classified as Commission expense.
         agement of the banking book are shown net                Interest-like income from financial guarantee
         in Interest expense. Under IFRS, only the effects     business is reported in Interest income under
         of derivatives allocated to hedged items are          IFRS, whereas under the German Commercial
         offset.                                               Code it is reported in Commission income.




                                                          94
                                     notes to the inCoMe stateMent.
                                          (26) net interest inCoMe.


 Analysis of net interest income by class
 EUR in millions

                                                                     2007              2006            Change
                                                            EUR in millions   EUR in millions   EUR in millions
 Interest and similar income from loans and advances
 to banks and customers                                             13,068            12,100               968
 Similar income from financial guarantees                               43                40                 3
 Interest income from securities and investments                     1,969             1,247               722
 Interest income from derivatives                                   12,472            10,280             2,192
 Other interest income                                                  26                21                 5
 Interest income                                                   27,578            23,688              3,890
 Interest and similar expense for liabilities to
 banks/customers                                                     2,127             1,955               172
 Interest expense for certificated liabilities                      11,419            10,573               846
 Interest expense for subordinated liabilities                          93                20                73
 Interest expense for derivatives                                   11,948             9,110             2,838
 Other interest expense                                                236               276              – 40
 Interest expense                                                  25,823            21,934              3,889
 Total                                                               1,755             1,754                 1




Income from unwinding in the amount of                 Interest income from derivatives includes the net
EUR 43 million (previous year: EUR 60 million)         interest income from derivatives irrespective
is reported under Interest and similar income from     of whether they are designated for hedge ac-
loans and advances to banks and customers.             counting.




                                                       95
Notes.




          Analysis of interest income from securities and investments
          EUR in millions

                                                                             2007              2006            Change
                                                                    EUR in millions   EUR in millions   EUR in millions
          Interest income from bonds and other fixed-income
          securities                                                         1,881             1,201               680
          Income from shares and other non-fixed income
          securities                                                            54                31                23
          Income from equity investments                                        34                14                20
          Total                                                              1,969             1,247              722




                                   (27) risK provisions for lenDing Business.


          Analysis of risk provisions by transaction
          EUR in millions

                                                                             2007              2006            Change
                                                                    EUR in millions   EUR in millions   EUR in millions
          Impairment charges                                                 6,857               391             6,466
          Direct write-offs                                                    118               164              – 46
          Expense for risk provisions                                        6,975              555              6,420
          Income from the reversal of impairment losses                        469               503              – 35
          Income from recoveries of amounts previously
          written off                                                           97                39                58
          Income from risk provisions                                         566               542                 23
          Total                                                            – 6,409              – 12           – 6,397




         The impairment charges include the provisions             ration, New York/USA, conduit as well as the
         attributable to the assumption by KfW of the              provision for the guarantee to provide cover for
         liquidity lines provided for the special purpose          balance sheet risks as part of the risk protection
         entities of the Rhineland Funding Capital Corpo-          for IKB.




                                                              96
                                     (28) net CoMMission inCoMe.


 Analysis of net commission income by class
 EUR in millions

                                                                 2007              2006            Change
                                                        EUR in millions   EUR in millions   EUR in millions
 Commission income from lending business                           266               251                15
 Commission income from credit derivatives                           6                 0                 6
 Other commission income                                           114               116                –2
 Income from trust activities                                        2                 2                 0
 Commission income                                                388               369                 19
 Commission expense for lending business                           166               160                 6
 Commission expense for credit derivatives                           4                 3                 1
 Other commission expense                                            8                 6                 2
 Commission expense                                               178               169                  9
 Total                                                            209               200                 10




Commission income from lending business also       Other commission income includes fees for hand-
includes current premiums and fees from the        ling German Financial Cooperation with develop-
securitisation platforms PROMISE and PROVIDE.      ing and transitions countries in the amount of
                                                   EUR 84 million (previous year: EUR 83 million).



                        (29) net gains/losses froM heDge aCCounting.


 Analysis of net gains/losses from hedge accounting by type of hedging relationship
 EUR in millions

                                                                 2007              2006            Change
                                                        EUR in millions   EUR in millions   EUR in millions
 Micro fair value hedge accounting                                – 72              – 23              – 49
 Macro fair value hedge accounting                                 146                 6               140
 Total                                                              73              – 17                91




                                                   97
Notes.




                    Analysis of net results from micro fair value hedge accounting by hedged item
                    EUR in millions

                                                                              2007              2006              Change
                                                                     EUR in millions   EUR in millions     EUR in millions
                    Hedging of securities and investments                        –3                –1                  –1
                    Hedging of liabilities to banks/customers                    –3                –1                  –2
                    Hedging of certificated liabilities                         –15                10                – 25
                    Hedging of subordinated liabilities                          –3                 0                  –3
                    Subtotal: Effectiveness of hedges                          – 24                 8                – 32
                    Amortisation of value adjustments                          – 48               – 31                –18
                    Total                                                      – 72              – 23                – 49




         Gross analysis of valuation results from micro fair value hedge accounting:
         Comparison of hedged items and hedging instruments in financial year 2007
         EUR in millions

                                                                     Hedged items Hedging instruments               Effectiveness of
                                                                                                                              hedge
                                                                     EUR in millions        EUR in millions          EUR in millions
         Hedging of securities and investments                                 –107                      104                     –3
         Hedging of liabilities to banks/customers                               57                      – 60                    –3
         Hedging of certificated liabilities                                  – 280                      264                    –15
         Hedging of subordinated liabilities                                      9                      –12                     –3
         Total                                                                – 320                      296                    – 24




                                                                98
Gross analysis of valuation results from micro fair value hedge accounting:
Comparison of hedged items and hedging instruments in financial year 2006
EUR in millions

                                                                      Hedged item      Hedging instrument             Effectiveness
                                                                                                                          of hedge
                                                                     EUR in millions        EUR in millions          EUR in millions
Hedging of securities and investments                                         – 323                      322                     –1
Hedging of liabilities to banks/customers                                       150                      –151                    –1
Hedging of certificated liabilities                                           2,217                 – 2,207                      10
Total                                                                         2,043                – 2,036                        8




           Analysis of net results from macro fair value hedge accounting for hedged items and
           hedging instruments
           EUR in millions

                                                                              2007              2006              Change
                                                                     EUR in millions   EUR in millions     EUR in millions
           Valuation of the hedged risks in the portfolios of
           hedged items                                                     – 1,387           – 2,208                 821
           Valuation of hedging instruments                                   1,332             2,128               – 796
           Subtotal: Effectiveness of hedges                                   – 55              – 79                  25
           Subsequent valuation of hedging relationships                        201                85                 115
           Total                                                               146                  6                140




         The result from the subsequent valuation of            pro-rata reversal of value adjustments in the
         hedging relationships includes the amortisation        event of disposals from the underlying portfolios
         of the value adjustments from the dynamic              as well as the residual term effect of the hedging
         hedge designation and reversal process and the         derivatives.




                                                                99
Notes.




                           (30) net gains/losses froM other finanCial instruMents
                                         at fair value through profit or loss.


          Analysis of net gains/losses from other financial instruments at fair value through
          profit or loss by class
          EUR in millions

                                                                           2007              2006            Change
                                                                  EUR in millions   EUR in millions   EUR in millions
          Securities and investments                                       – 237                –6             – 231
          Assets                                                           – 237               –6              – 231
          Liabilities to banks/customers                                     284                44               240
          Certificated liabilities                                           567             1,244             – 678
          Liabilities                                                        851             1,289             – 438
          Financial derivatives not qualifying for hedge
          accounting                                                       – 590            –1,033               444
          Credit derivatives                                              –1,875                –2            –1,873
          Derivative financial instruments                               – 2,465           –1,035            –1,430
          Foreign currency translation                                      –102               –75              – 27
          Total                                                          –1,953               172            – 2,125




         The result from liabilities to banks/customers in-      In addition, the result from derivatives not qual-
         cludes the result of the credit-linked notes issued     ifying for hedge accounting includes changes in
         under the PROMISE and PROVIDE securitisation            the value of embedded derivatives from invest-
         platforms.                                              ment financing business which have to be sepa-
            The result from derivatives not qualifying           rated.
         for hedge accounting is attributable mainly to              The result from credit derivatives includes the
         derivatives in economic hedges which are recog-         cost of the risk protection for IKB in the form of
         nised by using the fair value option for classify-      credit derivatives.
         ing the hedged items. The hedged items include
         securities and investments and liabilities to banks
         and customers and, in particular, certificated
         liabilities.




                                                           100
 Analysis of net gains/losses from securities and investments at fair value through profit
 or loss by product type
 EUR in millions

                                                             2007              2006            Change
                                                    EUR in millions   EUR in millions   EUR in millions
 Bonds and other fixed-income securities                     – 397             –142              – 255
 Shares and other non-fixed income securities                    2                71              – 69
 Equity investments                                            157                65                93
 Total                                                       – 237               –6              – 231




 Analysis of net gains/losses from credit derivatives and credit-linked notes from the
 securitisation platforms PROMISE and PROVIDE at fair value through profit or loss
 EUR in millions

                                                             2007              2006            Change
                                                    EUR in millions   EUR in millions   EUR in millions
 Single Name CDSs                                               14                –2                16
 Portfolio CDSs                                             –1,662                 0            –1,662
 PROMISE / PROVIDE                                               0                 1                –1
  CDSs                                                       – 227                 0             – 228
  Issued credit-linked notes                                   227                 0               227
 Total                                                     –1,647                 –2           –1,646




The result from portfolio CDSs shows the costs of the risk protection for IKB in the form of credit
derivatives.




                                                  101
Notes.




          Gross analysis of results from economic hedged borrowing:
          Comparison of hedged items and hedging instruments
          EUR in millions

                                                                              2007              2006            Change
                                                                     EUR in millions   EUR in millions   EUR in millions
          Borrowings                                                            624             1,288             – 665
          Hedging instruments                                                 – 668            –1,250               582
          Total
          (Effectiveness of economic hedges)                                   – 45                38              – 83




                           (31) net gains/losses froM seCurities anD investMents.


          Analysis of net gains/losses from securities and investments by class
          EUR in millions

                                                                              2007              2006            Change
                                                                     EUR in millions   EUR in millions   EUR in millions
          Bonds and other fixed-income securities                               –19                 0               –20
          Shares and other non-fixed income securities                            0                 7                –7
          Equity investments                                                   – 48                –5              – 43
          Financial instruments                                                – 67                 2              – 69
          Investments accounted for using the equity method                   – 277                16             – 294
          Held-for-sale affiliated entities                                    – 77                 0               –77
          Total                                                               – 421                19             – 440




         The result from financial instruments include              from the disposal of financial assets that were
         gains and losses realised from the sale of and             recognised at cost.
         impairments of securities and investments clas-               The result from investments accounted for
         sified as available-for-sale financial assets or as        using the equity method includes the continued
         loans and receivables. Both the result from shares         recognition of IKB using the equity method; this
         and other non-fixed income securities and the              company was recognised as an associate until the
         result from equity investments include income              disposal resolution in late November 2007. Since




                                                              102
the announcement of this intention to sell, the     downs of the shares in IKB to the market value
investment in IKB has been recognised as an as-     based on the share price as at 31 December 2007
set held for sale (IFRS 5). The result from held-   less expected selling costs.
for-sale affiliated entities includes the write-



 Disclosures on impairment of securities and investments
 EUR in millions

                                                               2007              2006            Change
                                                      EUR in millions   EUR in millions   EUR in millions
 Securities and investments                                       80                14                67
   Bonds and other fixed-income securities                        18                 0                18
   Shares and other non-fixed income securities                    1                 1                 0
   Equity investments                                             61                13                49
 Total                                                            80                14                67




 Disclosures on the reversal of impairment losses from securities and investments
 EUR in millions

                                                               2007              2006            Change
                                                      EUR in millions   EUR in millions   EUR in millions
 Securities and investments                                        0                 1                –1
   Bonds and other fixed-income securities                         0                 1                –1
 Total                                                             0                 1                –1




                                                    103
Notes.




                                            (32) aDMinistrative eXpense.


          Analysis of administrative expense
          EUR in millions

                                                                               2007              2006            Change
                                                                      EUR in millions   EUR in millions   EUR in millions
          Wages and salaries                                                     276               265                11
          Social security contributions                                           41                40                 1
          Expense for pension provision and other employee
          benefits                                                                32                30                 2
          Personnel expense                                                     349               335                 14
          Other administrative expense                                           216               198                18
          Depreciation and impairment on property, plant and
          equipment                                                               42                40                 2
          Non-personnel expense                                                 258               238                 20
          Total                                                                  607              573                 34




         The non-personnel expense includes EUR 5 mil-               Other administrative expense include rental
         lion for depreciation and impairment relating to            expense arising from operating leases in
         finance leases (previous year: EUR 3 million).              the amount of EUR 11 million (previous year:
                                                                     EUR 9 million).



                                          (33) net other operating inCoMe.


           Analysis of net other operating income
           EUR in millions

                                                                               2007              2006            Change
                                                                      EUR in millions   EUR in millions   EUR in millions
           Other operating income                                              1,217                40             1,177
           Other operating expense                                                29                 8                21
           Total                                                               1,189                32             1,157




         The contribution of the German banking asso-                including investment property income of
         ciations to the risk protection for IKB is present-         EUR 3 million (previous year: EUR 4 million),
         ed in Other operating income.                               results from repurchasing own issues and income
            Additional items reflected in Other operating            from the reversal of other provisions.
         income and expense include rental income




                                                               104
                                       (34) taXes on inCoMe.


  Analysis of taxes on income by component
  EUR in millions

                                                                  2007              2006            Change
                                                         EUR in millions   EUR in millions   EUR in millions
  Current taxes on income                                            16                19                –3
  Deferred taxes                                                    –12                –9                –3
  Total                                                               4                10               –6




In the reporting year deferred tax assets resulted     EUR 52 million) and the effects of the new tax
in taxes on income of EUR 12 million (previous         rate due to the Company Tax Reform Act 2008
year: EUR 9 million).                                  (Unternehmensteuerreformgesetz 2008), in the
    This is attributable primarily to the effects of   amount of EUR 13 million.
non-deductible business expenses of EUR 182               Minor adjustments were made for actual
million (previous year: EUR 5 million), the effects    taxes on income attributable to other periods
of income tax differentials within the KfW Group       (previous year: EUR 3 million).
in the amount of EUR 178 million (previous year:




                                                       105
Notes.




          Tax reconciliation
          EUR in millions

                                                                                 2007              2006            Change
                                                                        EUR in millions   EUR in millions   EUR in millions
          Profit/loss from operating activities (before tax)                    – 6,164            1,574           – 7,738
          Group income tax rate (%)                                                  0                 0                 0
          Expected income tax expense for 2007                                       0                 0                 0
          Effects of tax rate differentials within the Group                      –178                52             – 230
          Effects of tax rate changes due to the Company Tax
          Reform Act 2008                                                           13                 0                13
          Effects of previous year taxes recorded in the reporting
          year                                                                      –1                –5                 4
          Effects of non-deductible taxes on income                                  0                 1                –1
          Effects of non-deductible business expenses                              182                 5               177
          Effects of tax-free income                                                –2               –19                17
          Trade tax add-ons                                                          1                 1                 0
          Permanent accounting differences                                           1                 3                –2
          Profit/loss distribution recorded under commercial law                     0               – 21               21
          Effects of changes in recognised deferred tax assets                      –7                –3                –4
          Other effects                                                             –5                –4                –1
          Reported taxes on income                                                   4                10               –6




         The reconciliation shows the relationship be-                 major effect of this status on profit/loss from
         tween the expected income tax expense for the                 operating activities.
         financial year based on the applicable tax rate                  The effects of tax rate differentials result from
         and reported taxes on income.                                 taxable group companies with different applica-
            The KfW Group’s applicable income tax rate                 ble tax rates. In the reporting year the tax rates
         of zero percent, on which the reconciliation is               ranged between 0 and 31 % (previous year up to
         based, takes into account the tax status of KfW               39 %).
         as a non-taxable public-law institution and the




                                                                 106
                                                      segMent reporting.
                                   (35) segMent reporting By Business area.
Primary segment information in accordance with                          The composition of the segments, and their prod-
IAS 14 follows the internal control structure of                        ucts and services, are shown in the following
the business areas of the KfW Group.                                    overview:


     Investment finance Germany/Europe
     K Equity financing (incl. tbg – Technologie-Beteiligungs-Gesellschaft mbH)
     K Corporate investments/industrial pollution control financing
     K Education and social finance
     K Infrastructure and home finance
     K Global loans
     K Advisory
     K Loan securitisation
     Export and project finance
     K Promotion of German and European export activities
     K Financing of direct and other corporate investments
     Promotion of developing and transition countries
     K Promotion of developing and transition countries on behalf of the German Federal Government (budget
        funds) with complementary funds raised by KfW in the market
     K DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH (private enterprise financing)
     Shareholdings, treasury and services
     K Holding arrangements for the Federal Republic of Germany
     K Shareholdings
     K Securities investments
     K Other services



The operating business areas are measured on the                          accounting by cost centres2). Administrative
basis of their profit or loss from operating                              expense includes depreciation on property,
activities. The individual line items are based on                        plant and equipment.
the following methods:                                                  K Risk provisions for lending business were de-
K The analysis of net interest income was based                           termined based on the concept of expected
  on the market interest rate method1). The item                          losses (standard risk costs) and allocated ac-
  also includes the imputed return on equity                              cordingly to each segment.
  with an analysis based on equity usage.                               K Other contributions to income include the net
K The allocation of administrative expense is                             gains/losses from hedge accounting, the net
  based on the results from activity-based                                gains/losses from the fair value accounting for




1)   Refinancing at matching maturities is assumed for the calculation of interest margins in this method.
2)   The costs incurred in the organisational units are allocated to the products by means of business processes.




                                                                       107
Notes.




                   other financial instruments, the net gains/                           The reconciliation/consolidation column includes
                   losses from securities and investments, and net                       all adjustments necessary for reconciliation of
                   other operating income. In addition, this item                        segment information to the aggregated informa-
                   also shows the valuation result recognised un-                        tion in the consolidated financial statements. In
                   der revaluation reserves directly in equity.                          addition, the impact on results attributable to
                 K Segment assets include all recognised balance                         the risk protection for IKB is also presented in
                   sheet assets less income tax assets plus assets                       the reconciliation/consolidation column for fi-
                   held in trust1).                                                      nancial year 2007.
                 K Contributions to income generated independ-
                   ently of the segments (such as income/loss
                   from interest rate management) are allocated
                   to the group centre.



         Segment reporting by business area for financial year 2007
         EUR in millions

                                               Investment       Export and        Promotion        Share- Group centre                    Recon-             KfW
                                                   finance          project      of develop-     holdings,                              ciliation/          Group
                                                 Germany/          finance           ing and treasury and                                consoli-
                                                    Europe                         transition     services                                 dation
                                                                                   countries
         Net interest income                          –109               468              119              177             1,099                 1          1,755
         Net commission income                           72               26               96                12                0                 4           209
         Administrative expense                      – 246             –114              –153              – 69             – 20               –5           – 607
         Risk provision for lending
         business                                     –125             –135               – 61              –6                 0          – 6,081         – 6,409
         Other contributions to
         income                                       –166               –14              149             –729              – 79            – 273          –1,112
         Profit/loss from operating
         activities                                  – 573              232               148            – 617            1,000           – 6,354         – 6,164
         Total assets                             228,934            43,710           22,726           63,964            10,806         –16,143           353,997




                 Other contributions to income include a figure                          include assets of EUR 5 million from investments
                 of EUR – 279 million in the Shareholdings, treas-                       accounted for using the equity method as at
                 ury and services business area and a figure of                          31 December 2007. Shares in IKB, which were
                 EUR 1 million in the Export and project finance                         still accounted for using the equity method as at
                 business area for the result attributable to                            31 December 2006, were allocated to shares in
                 investments accounted for using the equity                              held for sale affiliated entities as at 31 December
                 method. The assets of Export and project finance                        2007.




                 1)   Segment liabilities are not shown separately because, on the assumption that assets are fully refinanced, the analysis of segment
                      liabilities to a large extent reflects the analysis of segment assets.




                                                                                   108
Segment reporting by business area for financial year 2006
EUR in millions

                             Investment    Export and     Promotion        Share- Group centre     Recon-        KfW
                                 finance       project   of develop-     holdings,               ciliation/     Group
                               Germany/       finance        ing and treasury and                 consoli-
                                  Europe                   transition     services                  dation
                                                           countries
Net interest income                – 27           511          105           186          976            3      1,754
Net commission income                63            29           95            15            0          –3        200
Administrative expense            – 229         –115          –148          – 75           –7            0      – 573
Risk provision for lending
business                          –105          –155           – 55          –15            0         316        –12
Other contributions to
income                               70          – 35           45          – 62          132          55        206
Profit/loss from operating
activities                        – 227          236            43           50         1,101         370       1,574
Total assets                   204,285        43,232        22,055        71,804       12,406    –19,393      334,389




        The Shareholdings, treasury and services business     the former included a figure of EUR 593 million
        area includes a figure of EUR 12 million, and the     and the assets in the latter included assets of
        Export and project finance business area a figure     EUR 4 million, attributable in both cases to
        of EUR 4 million, for the result of investments       investments accounted for using the equity
        accounted for using the equity method under           method as at 31 December 2006.
        Other contributions to income. The assets in




                                                              109
Notes.




                                               (36) segMent reporting By region.

                 Net interest and commission income and seg-               The reconciliation/consolidation column contains
                 ment assets are allocated on the basis of the             all adjustment measures which are necessary for
                 clients’ geographical location. The imputed return        reconciling the segment information to the ag-
                 on equity included in net interest income and             gregated information for the KfW Group. The
                 income/loss from group interest risk management           earnings effects from the risk protection for IKB
                 are allocated to Germany. The remaining assets            Deutsche Industriebank AG, Düsseldorf, are pre-
                 that are not attributable are also allocated to           sented in the reconciliation/consolidation column
                 Germany.                                                  for financial year 2007.


         Segment reporting by region for financial year 2007
         EUR in millions

                                    Germany Eurozone       Rest of         North       Latin      Asia/    Africa     Recon-       Group
                                                (excl.     Europe         America   America/   Australia            ciliation/
                                            Germany)                                  Carib-                         consoli-
                                                                                       bean                            dation
         Net interest income           1,241       121       135              70         73          84       30            1      1,755
         Net commission income            75         8         22              2          9          48       41            4       209
         Segment income                1,315       129       157              71         83        132       72             5      1,964
         Total assets                249,707    43,178    30,091          11,558      6,286     22,664     6,656    –16,143      353,997




         Segment reporting by region for financial year 2006
         EUR in millions

                                    Germany Eurozone       Rest of         North       Latin      Asia/    Africa     Recon-       Group
                                                (excl.     Europe         America   America/   Australia            ciliation/
                                            Germany)                                  Carib-                         consoli-
                                                                                       bean                            dation
         Net interest income           1,267        82       146              57         79          90       30            3      1,754
         Net commission income            72         8         23              3         11          44       41          –3        200
         Segment income                1,339        90       169              61         90        134        71            0      1,953
         Total assets               237,273     39,363    30,086           9,105      6,223     25,229     6,503    – 19,393     334,389




                                                                    110
                                    notes to the BalanCe sheet.
                                          (37) Cash reserves.


 Analysis of cash reserves by class
 EUR in millions

                                                                  31 Dec. 2007      31 Dec. 2006            Change
                                                                 EUR in millions   EUR in millions   EUR in millions
 Balances with central banks                                                 26                26                 0




                                (38) loans anD aDvanCes to BanKs.


 Analysis of loans and advances to banks by class
 EUR in millions

                                                                  31 Dec. 2007      31 Dec. 2006            Change
                                                                 EUR in millions   EUR in millions   EUR in millions
 Money-market transactions                                               11,109            19,945           – 8,837
 Loans and advances                                                     187,391          165,330             22,061
 Promissory note loans                                                      424               445              – 20
 Other receivables                                                        6,814             5,508             1,306
 Total                                                                 205,738           191,228            14,510




The receivables from the PROMISE and PROVIDE securitisation platforms are included in Other
receivables.


  Analysis of loans and advances to banks by liability type
  EUR in millions

                                                                  31 Dec. 2007      31 Dec. 2006            Change
                                                                 EUR in millions   EUR in millions   EUR in millions
  Direct loans to banks                                                  64,161            51,569            12,592
  On-lent customer loans with full underwriting borne
  by the on-lending bank                                                120,304           110,231            10,073
  On-lent customer loans with partial underwriting borne
  by the on-lending bank                                                  2,734             3,395              – 661
  Direct and on-lent subordinated loans                                     192               135                57
  Total                                                                187,391           165,330             22,061




                                                           111
Notes.




                                      (39) loans anD aDvanCes to CustoMers.


          Analysis of loans and advances to customers by class
          EUR in millions

                                                                     31 Dec. 2007      31 Dec. 2006            Change
                                                                    EUR in millions   EUR in millions   EUR in millions
          Money-market instruments                                             121                 0               121
          Loans and advances                                                98,414            92,806             5,608
          Promissory note bonds                                                 36                36                 0
          Other receivables                                                  1,696               420             1,276
          Total                                                           100,267            93,262              7,005




         Receivables from PROMISE and PROVIDE securitisation platforms are included in Other receivables.



          Analysis of loans and advances to customers by liability type
          EUR in millions

                                                                     31 Dec. 2007      31 Dec. 2006            Change
                                                                    EUR in millions   EUR in millions   EUR in millions
          Direct loans to customers                                         90,295            84,568             5,727
          On-lent customer loans without underwriting borne
          by the on-lending bank                                               660               677              – 17
          Direct and on-lent subordinated loans                              7,459             7,560             – 102
          Total                                                            98,414            92,806              5,608




                                                              112
                            (40) risK provisions for lenDing Business.


 Analysis of risk provisions for lending business by class
 EUR in millions

                                                                   31 Dec. 2007           31 Dec. 2006              Change
                                                                  EUR in millions        EUR in millions     EUR in millions
 Loans and advances to banks                                                      485               455                  30
 Loans and advances to customers                                              7,186               1,509               5,677
 Provisions for losses on loans and advances                                  7,671               1,964               5,707
 Provisions for contingent liabilities and irrevocable
 loan commitments                                                                 530                65                 465
 Total                                                                        8,201               2,029               6,172




 Development of risk provisions for lending business in financial year 2007
 by risk assessment type
 EUR in millions

                                       Indi-     Risks as-            Country-           Provi-   Provisions          Total
                                    vidually    sessed on              specific       sions for
                                   assessed      portfolio                risks      losses on
                                        risks        basis                          loans and
                                                                                     advances
 As at 1 January 2007                 1,417              501                46          1,964               65        2,029
 Additions                            6,232              254                12          6,498              477        6,975
 Write-offs                           – 208                0                 0           – 208               0        – 208
 Reversals                            – 396              – 45              – 16          – 457             –11        – 468
 Unwinding                              – 43               0                 0            – 43               0         – 43
 Exchange rate changes                  – 74              –8                –3            – 84             –1          – 85
 Transfers                                 1               0                 0               1               0            1
 As at 31 December 2007               6,929              702                39          7,671              530        8,201




Country-specific risks include risks assessed on a portfolio basis.
In 2007, EUR 92 million (previous year: EUR 87 million) in interest income was not collected for
impaired loans.




                                                                113
Notes.




          Development of risk provisions for lending business in financial year 2006
          by risk assessment type
          EUR in millions

                                             Indi-     Risks as-    Country-          Provi-   Provisions           Total
                                          vidually    sessed on      specific      sions for
                                         assessed      portfolio        risks     losses on
                                              risks        basis                 loans and
                                                                                  advances
          As at 1 January 2006              1,744            537          75          2,356              90         2,446
          Additions                           495             56           11          563               20           583
          Write-offs                         – 384             0            0         – 384               0         – 384
          Reversals                          – 340           – 85        – 37         – 461             – 42        – 503
          Unwinding                           – 60             0            0          – 60               0          – 60
          Exchange rate changes               – 37            –8          –4           – 49              –3          – 52
          Transfers                            –1              1            0             0               0             0
          As at 31 December 2006            1,417            501          46          1,964              65         2,029




                  (41) value aDjustMents froM MaCro fair value heDge aCCounting.


          EUR in millions

                                                                     31 Dec. 2007      31 Dec. 2006               Change
                                                                    EUR in millions   EUR in millions      EUR in millions
          Value adjustments to assets designated for macro
          fair value hedge accounting                                      – 1,295               219              – 1,514




         The fair values attributable to the hedged risks in the hedged portfolios under the category “loans
         and receivables” are included in this item.




                                                              114
                         (42) Derivatives useD for heDge aCCounting.


 Analysis of derivatives with positive fair values designated for hedge accounting by type of
 hedging relationship
 EUR in millions

                                                     31 Dec. 2007      31 Dec. 2006            Change
                                                    EUR in millions   EUR in millions   EUR in millions
 Micro fair value hedge accounting                           4,229             2,378             1,851
 Macro fair value hedge accounting                           1,341               819               523
 Total                                                       5,570             3,196             2,374




 Analysis of derivatives with positive fair values designated for hedge accounting by class
 EUR in millions

                                                     31 Dec. 2007      31 Dec. 2006            Change
                                                    EUR in millions   EUR in millions   EUR in millions
 Interest-related derivatives                                3,994             2,618             1,376
 Currency-related derivatives                                1,576               578               998
 Total                                                       5,570             3,196             2,374




Only interest-related derivatives are designated for macro fair value hedge accounting.
Cross-currency swaps are reported under Currency-related derivatives.


                                     (43) other Derivatives.


 Analysis of other derivatives with positive fair values by class
 EUR in millions

                                                     31 Dec. 2007      31 Dec. 2006            Change
                                                    EUR in millions   EUR in millions   EUR in millions
 Interest-related derivatives                                2,042             1,801               240
 Currency-related derivatives                                1,065             2,100           – 1,034
 Credit derivatives                                             11                 0                10
 Other derivatives                                              48                76              – 29
 Total                                                       3,166             3,977             – 812




Cross-currency swaps are reported under Currency-related derivatives.




                                                  115
Notes.




                                              (44) seCurities anD investMents.


          Analysis of securities and investments by class
          EUR in millions

                                                                        31 Dec. 2007      31 Dec. 2006            Change
                                                                       EUR in millions   EUR in millions   EUR in millions
          Bonds and other fixed-income securities                              42,787            38,933             3,853
          Shares and other non-fixed income securities                          1,526             1,529                –3
          Equity investments                                                    1,205               731               474
          Shares in affiliated entities not included in the consoli-               18                12                 6
          dated financial statements
          Financial instruments, total                                        45,536            41,205              4,331
          Investments accounted for using the equity method                         5               597             – 592
          Held-for-sale affiliated entities                                       204                 0               204
          Total                                                               45,745            41,802              3,943




         The shares in IKB are shown at market value based on the share price as at 31 December 2007 less
         expected selling costs under Held-for-sale affiliated entities. These shares were accounted for using
         the equity method as at 31 December 2006.




                                                                 116
                              (45) property, plant anD equipMent.


 Analysis of property, plant and equipment by class
 EUR in millions

                                                      31 Dec. 2007      31 Dec. 2006            Change
                                                     EUR in millions   EUR in millions   EUR in millions
 Land and premises                                              577               581                –4
 Fixtures, furniture and equipment                               41                47                –6
 Other property, plant and equipment                            154               112                42
 Property, plant and equipment for own use                     773                741                32
 Investment property                                             29                37                –9
 Total                                                          801              778                 23




Fixtures, furniture and equipment includes leased assets from finance leases that are required to be
capitalised.
   Payments in advance and work in progress are presented under Other property, plant and
equipment.
   The fair value of the investment property is its carrying amount.




                                                  117
Notes.




         Development in property, plant and equipment in financial year 2007
         EUR in millions

                                                                    Cost     Accumulated        Net carrying
                                                                             depreciation/          amount
                                                                              impairment
                                                                                    losses
                                                          EUR in millions   EUR in millions   EUR in millions
         Carrying amount as at 1 January 2007                        979             – 201               778
         Additions/reversals of impairment losses                     67                 0                67
         Disposals                                                  – 38                26              – 13
         Depreciation                                                  –              – 29              – 29
         Impairment losses                                             –                –1                –1
         Carrying amount as at 31 December 2007                    1,007             – 206               801




         Development in property, plant and equipment in financial year 2006
         EUR in millions

                                                                    Cost     Accumulated        Net carrying
                                                                             depreciation/          amount
                                                                              impairment
                                                                                    losses
                                                          EUR in millions   EUR in millions   EUR in millions
         Carrying amount as at 1 January 2006                        881             – 170               711
         Additions/reversals of impairment losses                    107                 0               107
         Disposals                                                    –9                 2               –7
         Depreciation                                                  –              – 26              – 26
         Impairment losses                                             –                –7                –7
         Carrying amount as at 31 December 2006                     979              – 201              778




                                                    118
                                            (46) intangiBle assets.


 Analysis of intangible assets by class
 EUR in millions

                                                           31 Dec. 2007      31 Dec. 2006            Change
                                                          EUR in millions   EUR in millions   EUR in millions
 Software                                                             33                27                 6
   Acquired software                                                   8                 9                 0
   Internally generated software                                      25                18                 7
 Other intangible assets                                              36                32                 4
 Total                                                                69                59                11




Other intangible assets include, in particular, software under development.



 Development in intangible assets in financial year 2007
 EUR in millions

                                                                    Cost     Accumulated        Net carrying
                                                                             depreciation/          amount
                                                                              impairment
                                                                                    losses
                                                          EUR in millions   EUR in millions   EUR in millions
 Carrying amount as at 1 January 2007                                 98              – 39                59
 Additions/reversals of impairment losses                             22                 0                22
 Disposals                                                             0                 0                 0
 Depreciation                                                          –               – 11              – 11
 Carrying amount as at 31 December 2007                              119              – 50                69




                                                        119
Notes.




          Development in intangible assets in financial year 2006
          EUR in millions

                                                                           Cost     Accumulated        Net carrying
                                                                                    depreciation/          amount
                                                                                     impairment
                                                                                           losses
                                                                 EUR in millions   EUR in millions   EUR in millions
          Carrying amount as at 1 January 2006                               75              – 33                43
          Additions/reversals of impairment losses                           24                 0                24
          Disposals                                                          –1                 1                 0
          Depreciation                                                        –                –8                –8
          Carrying amount as at 31 December 2006                             98              – 39                59




                                                     (47) other assets.


          Analysis of other assets by class
          EUR in millions

                                                                  31 Dec. 2007      31 Dec. 2006            Change
                                                                 EUR in millions   EUR in millions   EUR in millions
          Other assets and receivables                                      226                42               185
          Prepaid expenses and deferred charges                           1,305             1,707             – 402
          Income tax assets                                                  48                57                –9
          Total                                                           1,579             1,806             – 227




          Analysis of income tax assets by type
          EUR in millions

                                                                  31 Dec. 2007      31 Dec. 2006            Change
                                                                 EUR in millions   EUR in millions   EUR in millions
          Current income tax assets                                          13                37              – 24
          Deferred income tax assets                                         35                21                14
          Total                                                              48                57               –9



         The income tax assets mainly result from deductible taxes (capital gains tax/solidarity surcharge).
            As the use of the existing tax loss carryforwards of KfW Beteiligungsholding GmbH is not
         sufficiently probable, no deferred taxes could be recognised.




                                                           120
 Analysis of deferred tax assets by balance sheet item
 EUR in millions

                                                           31 Dec. 2007      31 Dec. 2006            Change
                                                          EUR in millions   EUR in millions   EUR in millions
 Loans and advances to banks and customers                             4                 0                 4
 Other derivatives (assets)                                           14                 6                 7
 Securities and investments                                            7                13                –6
 Property, plant and equipment                                         2                 3                –1
 Provisions                                                            6                 5                 1
 Other balance sheet items                                             3                 3                 0
 Subtotal                                                             36                30                 6
 Offset against deferred tax liabilities                              –1                –9                 8
 Total                                                                35                21                14




                                           (48) liaBilities to BanKs.


 Analysis of liabilities to banks by class
 EUR in millions

                                                           31 Dec. 2007      31 Dec. 2006            Change
                                                          EUR in millions   EUR in millions   EUR in millions
 Money-market transactions                                           455             2,268           – 1,814
 Promissory note loans                                             8,941            11,561           – 2,620
 Other liabilities                                                 3,971             4,161             – 190
 Total                                                           13,366            17,990            – 4,624




Liabilities from the PROMISE and PROVIDE securitisation platforms are included in Other liabilities.




                                                        121
Notes.




                                         (49) liaBilities to CustoMers.


          Analysis of liabilities to customers by class
          EUR in millions

                                                                 31 Dec. 2007      31 Dec. 2006            Change
                                                                EUR in millions   EUR in millions   EUR in millions
          Money-market transactions                                      4,217             3,946               271
          Promissory note loans                                         16,487            17,361             – 874
          Other liabilities                                             16,418            20,652           – 4,234
          Total                                                        37,121            41,958            – 4,837




         Liabilities from the PROMISE and PROVIDE securitisation platforms are included in Other liabilities.
         Credit-linked notes issued in this connection are included under Promissory note loans.



                                          (50) CertifiCateD liaBilities.


          Analysis of certificated liabilities by class
          EUR in millions

                                                                 31 Dec. 2007      31 Dec. 2006            Change
                                                                EUR in millions   EUR in millions   EUR in millions
          Money-market issues                                           18,878            10,071             8,807
          Bonds and notes                                              241,437           230,015            11,422
          Total                                                       260,315           240,086            20,229




                                                          122
         (51) value aDjustMents froM MaCro fair value heDge aCCounting.


 EUR in millions

                                                              31 Dec. 2007      31 Dec. 2006            Change
                                                             EUR in millions   EUR in millions   EUR in millions
 Value adjustments to liabilities under macro fair value
 hedge accounting                                                     – 423             – 329              – 94




The fair values attributable to hedged risks in the hedged portfolios under Other liabilities are
included in this item.



                         (52) Derivatives useD for heDge aCCounting.


 Analysis of derivatives with negative fair values designated for hedge accounting by
 type of hedging relationship
 EUR in millions

                                                              31 Dec. 2007      31 Dec. 2006            Change
                                                             EUR in millions   EUR in millions   EUR in millions
 Micro fair value hedge accounting                                    2,410             2,379                31
 Macro fair value hedge accounting                                    1,680             2,630             – 950
 Total                                                                4,091             5,009             – 919




 Analysis of derivatives with negative fair values designated for hedge accounting by class
 EUR in millions

                                                              31 Dec. 2007      31 Dec. 2006            Change
                                                             EUR in millions   EUR in millions   EUR in millions
 Interest-related derivatives                                         3,340             4,272             – 932
 Currency-related derivatives                                           750               737                14
 Total                                                                4,091             5,009             – 919




Only interest-related derivatives are designated for macro fair value hedge accounting.
Cross-currency swaps are reported under Currency-related derivatives.




                                                           123
Notes.




                                                (53) other Derivatives.


          Analysis of other derivatives with negative fair values by class
          EUR in millions

                                                                   31 Dec. 2007      31 Dec. 2006            Change
                                                                  EUR in millions   EUR in millions   EUR in millions
          Interest-related derivatives                                     1,153             1,056                97
          Currency-related derivatives                                    14,240             7,950             6,290
          Equity/index-related derivatives                                    35                 0                35
          Credit derivatives                                               1,641                 4             1,637
          Other derivatives                                                   45                 3                41
          Total                                                          17,114              9,013             8,100




         Cross-currency swaps are presented under Currency-related derivatives.



                                                     (54) provisions.


          Analysis of provisions by class
          EUR in millions

                                                                   31 Dec. 2007      31 Dec. 2006            Change
                                                                  EUR in millions   EUR in millions   EUR in millions
          Provisions for pensions and similar commitments                    933               889                43

          Provisions for credit risks                                        530                65               465
          Other provisions                                                    82                42                40
          Total                                                            1,545              996               549




         The provisions for financial guarantees of EUR 400 million issued as part of the risk protection for
         IKB are shown at nominal value. They have not been discounted since it is expected that they will
         be utilised in the near future.




                                                            124
 Development in provisions for pensions and similar commitments in financial year 2007
 EUR in millions

                                               Pension          Early        Partial     Total
                                           obligations    retirement    retirement
 As at 1 January 2007                             875              3             11       889
 Pension benefits paid                            – 30            –1            –2        – 33
 Additions                                         74              1              1        76
  Service cost                                     27              1              1         29
  Interest cost                                    42              0              0         42
  Contributions by plan participants                  5            0              0          5
 Reversals                                            0            0              0          0
 As at 31 December 2007                           919              4             10       933




The calculation of the pension entitlements which were vested as at the valuation reference date
results in actuarial gains to be amortised of EUR 121 million.
   The value of the pension commitments calculated by the projected unit credit method was
EUR 769 million (previous year: EUR 854 million) as at 31 December 2007.



 Development in provisions for pensions and similar commitments in financial year 2006
 EUR in millions

                                               Pension          Early        Partial     Total
                                           obligations    retirement    retirement
 As at 1 January 2006                             852              5             10       867
 Pension benefits paid                            – 28            –1            –1        – 30
 Additions                                         51              0              2        53
  Service cost                                     25              0              2         27
  Interest cost                                    23              0              0         23
  Contributions by plan participants                  3            0              0          3
 Reversals                                            0           –1              0        –1
 As at 31 December 2006                           875              3             11       889




                                                125
Notes.




         The provisions for pensions and similar commitments are calculated on the basis of the 2005 G
         Heubeck actuarial tables and based on the following actuarial assumptions:


          Actuarial assumptions
          (in % per year)

                                                                          31 Dec. 2007           31 Dec. 2006
          Technical discount rate                                               5.50 %                 4.40 %
          Rate of salary increases                                              3.33 %                 3.31 %
          Rate of pension increases                                             2.30 %                 2.30 %
          Rate of staff turnover                                                 none                   none




          Development in other provisions in financial year 2007
          EUR in millions

                                         Obligations to               Other              Total            Tax
                                            employees             provisions                       provisions
          As at 1 January 2007                      24                   18                42             10
          Additions                                  7                   56                63              5
          Used amounts                              –5                  – 16              – 21            –6
          Reversal of unused amounts                 0                    0                –1             –4
          As at 31 December 2007                    25                   57                82              5




         The obligations to employees show other long-          reports have been prepared for these obliga-
         term employee benefits including provisions for        tions.
         service anniversaries. Corresponding actuarial



          Development in other provisions in financial year 2006
          EUR in millions

                                         Obligations to               Other              Total            Tax
                                            employees             provisions                       provisions
          As at 1 January 2006                      22                   20                42              5
          Additions                                  7                    4                11              6
          Used amounts                              –4                   –4                –8             –1
          Reversal of unused amounts                –2                   –2                –3              0
          As at 31 December 2006                    24                   18                42             10




                                                          126
                                     (55) other liaBilities.


 Analysis of other liabilities by class
 EUR in millions

                                                    31 Dec. 2007      31 Dec. 2006            Change
                                                   EUR in millions   EUR in millions   EUR in millions
 Other liabilities                                          2,123             2,380             – 256
 Deferred income                                               52                70              – 18
 Income tax liabilities                                        10                13                –3
 Total                                                      2,185             2,462             – 277




 Analysis of income tax liabilities by type
 EUR in millions

                                                    31 Dec. 2007      31 Dec. 2006            Change
                                                   EUR in millions   EUR in millions   EUR in millions
 Current income tax liabilities                                 6                11                –5
 Deferred income tax liabilities                                4                 2                 2
 Total                                                         10                13               –3




The income tax liabilities are largely the result of additions to current tax provisions within
the Group.




                                                 127
Notes.




          Analysis of deferred tax liabilities by balance sheet item
          EUR in millions

                                                                   31 Dec. 2007      31 Dec. 2006            Change
                                                                  EUR in millions   EUR in millions   EUR in millions
          Loans and advances to banks and customers                            0                 7                –7
          Other derivatives (liabilities)                                      2                 3                –1
          Provisions                                                           3                 0                 3
          Sub-total                                                            5                10               –5
          Offset against deferred tax assets                                  –1                –8                 7
          Total                                                                4                 2                 2




                                               (56) Subordinated liabilitieS.


          Analysis of subordinated liabilities by class
          EUR in millions

                                                                   31 Dec. 2007      31 Dec. 2006            Change
                                                                  EUR in millions   EUR in millions   EUR in millions
          Subordinated liabilities                                         3,747              500              3,247




         In relation to the acquisition of shares in Deut-       As part of the new legislation governing ERP
         sche Telekom AG, Bonn, and Deutsche Post AG,            economic promotion as at 1 July 2007, the ERP
         Bonn, for the continuing privatisation of these         Special Fund provided a subordinated loan to
         companies, the German Federal Government                KfW in the amount of EUR 3,247 million. The
         granted KfW a subordinated loan of EUR 500              loan consists of three tranches with different
         million. The loan, which has an agreed interest         fixed interest periods. The period during which
         rate of 3.9475 % per year, is due on 11 November        capital is tied up in all tranches ends as at
         2008, and was terminated in line with the notice        31 December 2017. Interest is charged on the
         period.                                                 tranches at an initial rate of 4.5 % per year.




                                                           128
                                                    (57) equity.


 Analysis of equity
 EUR in millions

                                                                  31 Dec. 2007      31 Dec. 2006            Change
                                                                 EUR in millions   EUR in millions   EUR in millions
 Subscribed capital                                                       3,750             3,750                 0
 less outstanding contributions                                             450               450                 0
 Paid-in subscribed capital                                               3,300             3,300                 0
 Capital reserve                                                          6,254             1,604             4,650
   Promotional reserves from the ERP
   Special Fund                                                           4,650                 0             4,650
 Reserve from the ERP Special Fund                                          804               757                47
 Retained earnings                                                        5,862             5,584               278
   Statutory reserve under § 10 (2) KfW Law                               1,574             1,574                 0
   Special reserve under § 10 (3) KfW Law                                 1,893             1,893                 0
   Special reserve less the special loss account from provi-
   sioning pursuant to § 17 (4) D-Mark Balance Sheet Law                     21                21                 0
   Other retained earnings                                                2,374             2,095               278
 Fund for general banking risks                                             200             5,300           – 5,100
 Revaluation reserves                                                      – 92               157             – 249
 Balance sheet profit/loss                                               –1,393                 0            –1,393
 Total                                                                  14,936            16,702            -1,767




As part of the new legislations governing                      they are backed by economic capital as deter-
ERP economic promotion as at 1 July 2007, the                  mined by internal steering. Adequate risk cover
ERP Special Fund provided equity to KfW in the                 was available at all times throughout financial
form of capital reserves (promotional reserves                 year 2007 to provide the economic capital
from the ERP Special Fund) in the amount of                    required for credit, market price and operational
EUR 4.65 billion.                                              risk.
   Equity forms the basis for ensuring the KfW                     For details, please refer to the risk report of
Group’s risk-bearing capacity. As a result, risk               the group management report.
positions are only entered into to the extent that




                                                               129
Notes.




                                                         notes on finanCial instruMents.
                                              (58) gains anD losses froM finanCial instruMents
                                                               By valuation Category.
                             The following tables show an analysis of the          by valuation category. The result from foreign
                             results from financial instruments included in        currency translation is not included
                             the various income statement items organised



         Presentation for financial year 2007
         EUR in millions

                                                  Net         Risk          Net       Net gains/    Net gains/       Net gains/    Net other      Total
                                             interest   provisions   commission      losses from          losses    losses from    operating
                                              income           for      income            hedge    from other         securities     income
                                                          lending                    accounting       financial             and
                                                         business                                 instruments      investments
                                                                                                 at fair value
                                                                                                       through
                                                                                                 profit or loss
                                              EUR in       EUR in        EUR in          EUR in          EUR in         EUR in       EUR in     EUR in
                                             millions     millions      millions        millions       millions        millions     millions   millions
         Loans and receivables                13,199       – 6,409           42         – 1,512               –            – 18        1,170     6,472
         Other liabilities                   – 11,359           –             0           – 161               –               –          –1    – 11,521
         Available-for-sale financial
         assets                                1,485            –             0           – 107               –            – 48           –      1,330
         Financial assets at fair value
         through profit or loss                  419            –           223               –           – 237               –           –        405
         Financial liabilities at fair
         value through profit or loss         – 2,473           –         – 166               –             624               –           –     – 2,016
         Derivatives used for hedge
         accounting                            – 484            –             –           1,853               –               –           –      1,369
         Other derivatives                     1,008            –             3               –         – 2,237               –           –     – 1,226
         Total                                 1,796      – 6,409          102               73         – 1,851            – 67       1,169     – 5,186




                                                                           130
Presentation for financial year 2006
EUR in millions

                                      Net         Risk          Net           Net gains/    Net gains/       Net gains/    Net other     Total
                                 interest   provisions   commission          losses from          losses    losses from    operating
                                  income           for      income                hedge    from other         securities     income
                                              lending                        accounting       financial             and
                                             business                                     instruments      investments
                                                                                         at fair value
                                                                                               through
                                                                                         profit or loss
                                  EUR in       EUR in        EUR in              EUR in          EUR in         EUR in       EUR in     EUR in
                                 millions     millions      millions            millions       millions        millions     millions   millions
Loans and receivables             12,167          – 12           46             – 2,877               –               0           0     9,323
Other liabilities                – 10,265           –             0               2,503               –               –          13    – 7,749
Available-for-sale financial
assets                               965            –             0               – 323               –               2           –       645
Financial assets at fair value
through profit or loss               270            –           204                   –              –6               –           –       468
Financial liabilities at fair
value through profit or loss      – 2,535           –         – 160                   –           1,289               –           –    – 1,407
Derivatives used for hedge
accounting                         – 680            –             –                 680               –               –           –          0
Other derivatives                  1,853            –            –2                   –         – 1,035               –           –       815
Total                              1,775         – 12            87                – 17            247                2          13     2,094




                                                                       131
Notes.




                                    (59) BalanCe sheet for finanCial instruMents By valuation Category .

                              The following tables show the assets and liabili-        different balance sheet items organised by valu-
                              ties from financial instruments included in the          ation category.


         Presentation of financial assets as at 31 December 2007
         EUR in millions and %

                                     Loans and      Loans and     Risk provi-         Value   Derivatives        Other      Securities    Assets (financial
                                    advances to    advances to      sions for adjustments        used for   derivatives           and        instruments)
                                         banks      customers        lending from macro            hedge                  investments
                                                                    business     fair value   accounting
                                                                                     hedge
                                                                               accounting
                                         EUR in         EUR in        EUR in        EUR in        EUR in        EUR in         EUR in      EUR in
                                        millions       millions      millions      millions      millions      millions       millions    millions    in %
         Loans and receivables         204,685        100,131         – 7,671       – 1,295            –             –          2,022    297,872     84.8
         Available-for-sale
         financial assets                     0              0             –             –             –             –         34,243     34,243       9.7
         Financial assets at
         fair value through
         profit or loss                   1,053           136              –             –             –             –          9,271     10,460       3.0
         Derivatives used for
         hedge accounting                     –              –             –             –         5,570             –              –      5,570       1.6
         Other derivatives                    –              –             –             –             –         3,166              –      3,166       0.9
         Total                         205,738        100,267        – 7,671       – 1,295         5,570         3,166        45,536     351,311     100.0




                                                                                 132
Presentation of financial liabilities as at 31 December 2007
EUR in millions and %

                        Liabilities        Liabilities Certificated          Value Derivatives                  Other          Other        Subor- Liabilities (financial
                         to banks                   to   liabilities adjustments      used for             derivatives     liabilities     dinated         instruments)
                                          customers                   from macro        hedge                                            liabilities
                                                                        fair value accounting
                                                                            hedge
                                                                       accounting
                           EUR in             EUR in          EUR in          EUR in           EUR in           EUR in        EUR in        EUR in        EUR in
                          millions           millions        millions        millions         millions         millions      millions      millions      millions    in %
Other financial
liabilities                12,141            26,604          226,906           – 423                 –               –           – 10        3,747      268,964     80.2
Financial liabilities
at fair value through
profit or loss              1,226            10,518           33,409               –                 –               –               –              0    45,152     13.5
Derivatives used for
hedge accounting                 –                 –               –               –              4,091              –               –              –     4,091      1.2
Other derivatives                –                 –               –               –                 –          17,114               –              –    17,114      5.1
Total                     13,366             37,121          260,315          – 423               4,091        17,114            – 10        3,747      335,320     100.0




Presentation of financial assets as at 31 December 2006
EUR in millions and %

                         Loans and           Loans and         Risk provi-             Value        Derivatives           Other        Securities       Assets (financial
                        advances to         advances to          sions for     adjustments             used for      derivatives             and           instruments)
                             banks           customers            lending       from macro               hedge                       investments
                                                                 business         fair value        accounting
                                                                                      hedge
                                                                                 accounting
                              EUR in              EUR in           EUR in            EUR in                EUR in          EUR in         EUR in         EUR in
                             millions            millions         millions          millions              millions        millions       millions       millions     in %
Loans and receivables       190,138              93,245            – 1,964               219                    –               –          1,040        282,679     85.4
Available-for-sale
financial assets                      0                 0               –                     –                 –               –         31,973        31,973       9.7
Financial assets at
fair value through
profit or loss                 1,089                    17              –                     –                 –               –          8,192         9,298       2.8
Derivatives used for
hedge accounting                      –                  –              –                     –             3,196               –              –         3,196       1.0
Other derivatives                     –                  –              –                     –                 –           3,977              –         3,977       1.2
Total                       191,228              93,262           – 1,964               219                3,196           3,977          41,205        331,123     100.0




                                                                                        133
Notes.




         Presentation of financial liabilities as at 31 December 2006
         EUR in millions and %

                                 Liabilities    Liabilities Certificated Value ad- Derivatives         Other        Other        Subor- Liabilities (financial
                                  to banks               to   liabilities justments      used for derivatives   liabilities     dinated         instruments)
                                               customers                 from macro        hedge                              liabilities
                                                                           fair value accounting
                                                                               hedge
                                                                          accounting
                                    EUR in        EUR in       EUR in       EUR in       EUR in       EUR in       EUR in       EUR in        EUR in
                                   millions      millions     millions     millions     millions     millions     millions     millions      millions    in %
         Other financial
         liabilities                16,821        31,793      200,425        – 329            –            –             3         500      249,213     79.3
         Financial liabilities
         at fair value through
         profit or loss              1,169        10,165       39,661            –            –            –             –            0      50,996     16.2
         Derivatives used for
         hedge accounting                 –            –            –            –        5,009            –             –            –       5,009       1.6
         Other derivatives                –            –            –            –            –        9,013             –            –       9,013       2.9
         Total                     17,990         41,958     240,086         – 329        5,009        9,013             3         500      314,231     100.0




                                                                                134
                                      (60) fair values of finanCial instruMents.

In the following tables, the fair values of finan-                               losses on loans and advances are deducted from
cial instruments are shown in comparison to                                      the carrying amounts of loans and advances to
their carrying amounts. Existing provisions for                                  banks and customers.


     Disclosures as at 31 December 2007
     EUR in millions

                                                                                      Fair value      Carrying amount                      Difference
                                                                                                          according to
                                                                                                         balance sheet
                                                                              EUR in millions           EUR in millions               EUR in millions
     Loans and advances to banks                                                        204,041                    205,253                      – 1,212
     Loans and advances to customers                                                     94,804                      93,081                       1,724
     Value adjustments from macro fair value                                                                                                      1,295
     hedge accounting                                                                           –                   – 1,295
     Derivatives used for hedge accounting                                                 5,570                      5,570                             0
     Other derivatives                                                                     3,166                      3,166                             0
     Securities and investments                                                          45,484                      45,536                         – 52
     Assets                                                                            353,065                    351,311                         1,754
     Liabilities to banks                                                                13,912                      13,366                         546
     Liabilities to customers                                                            37,328                      37,121                         206
     Certificated liabilities                                                          260,209                     260,315                        – 106
     Value adjustments from macro fair value
     hedge accounting                                                                           –                     – 423                         423
     Derivatives used for hedge accounting                                                 4,091                      4,091                             0
     Other derivatives                                                                   17,114                      17,114                             0
     Subordinated liabilities1)                                                            3,763                      3,736                           26
     Liabilities                                                                       336,415                    335,320                         1,095
1)   The carrying amount comprises pro-rata interest and value adjustments from micro fair value hedge accounting presented in the item Other liabilities.




Interest-related changes in value are taken into                                 it is necessary to take account of the (interest-
consideration for calculating the fair value of the                              related) changes in value resulting from the rec-
financial instruments. Accordingly, when the                                     ognition of loans and advances and borrowings
comparison is made with the carrying amount,                                     in macro fair value hedge accounting.




                                                                                135
Notes.




              Disclosures as at 31 December 2006
              EUR in millions

                                                                                              Fair value       Carrying amount                      Difference
                                                                                                                   according to
                                                                                                                  balance sheet
                                                                                       EUR in millions           EUR in millions               EUR in millions
              Loans and advances to banks                                                       191,148                     190,773                          376
              Loans and advances to customers                                                     94,475                      91,753                       2,723
              Value adjustments from macro fair value
              hedge accounting                                                                           –                        219                      – 219
              Derivatives used for hedge accounting                                                 3,196                      3,196                             0
              Other derivatives                                                                     3,977                      3,977                             0
              Securities and investments                                                          41,205                      41,205                             1
              Assets                                                                           334,003                     331,123                         2,880
              Liabilities to banks                                                                18,625                      17,990                         635
              Liabilities to customers                                                            42,113                      41,958                         154
              Certificated liabilities                                                          240,145                     240,086                            59
              Value adjustments from macro fair value
              hedge accounting                                                                           –                     – 329                         329
              Derivatives used for hedge accounting                                                 5,009                      5,009                             0
              Other derivatives                                                                     9,013                      9,013                             0
              Subordinated liabilities1)                                                              503                         503                            0
              Liabilities                                                                       315,408                    314,231                         1,177
         1)   The carrying amount comprises pro-rata interest and value adjustments from micro fair value hedge accounting presented in the item Other liabilities.




                                     (61) aDDitional DisClosures on liaBilities to BanKs .


              Disclosures on liabilities to banks designated at fair value through profit or loss
              (fair value option)
              EUR in millions

                                                                                              31 Dec. 2007             31 Dec. 2006                   Change
                                                                                             EUR in millions          EUR in millions          EUR in millions
              Carrying amount                                                                                260                    353                      – 93
              Repayment at maturity                                                                      1,377                    1,377                          0
              Difference                                                                                 1,117                    1,024                        93




         Of the difference between the repayment amount                                   attributable to borrowings for which the
         at maturity and the carrying amount, EUR 957                                     repayment amount builds up as a result of capi-
         million (previous year: EUR 908 million) is                                      talisation over time of interest due.




                                                                                   136
              (62) aDDitional inforMation on liaBilities to CustoMers.


 Disclosures on liabilities to customers designated at fair value through profit or loss
 (fair value option)
 EUR in millions

                                                     31 Dec. 2007      31 Dec. 2006            Change
                                                    EUR in millions   EUR in millions   EUR in millions
 Carrying amount                                            10,397            10,147               250
 Repayment at maturity                                      11,470            11,388                82
 Difference                                                  1,073             1,241             – 168




Of the difference between the repayment amount at maturity and the carrying amount, EUR 921
million (previous year: EUR 1,266 million) is attributable to borrowings for which the repayment
amount builds up as a result of the capitalisation over time of interest due.



               (63) aDDitional inforMation on CertifiCateD liaBilities.


 Disclosures on certificated liabilities designated at fair value through profit or loss
 (fair value option)
 EUR in millions

                                                     31 Dec. 2007      31 Dec. 2006            Change
                                                    EUR in millions   EUR in millions   EUR in millions
 Carrying amount                                            33,409            39,661           – 6,252
 Repayment at maturity                                      53,015            59,125            – 6,110
 Difference                                                19,606            19,464               142




Of the difference between the repayment amount at maturity and the carrying amount, EUR 19,269
million (previous year: EUR 19,167 million) is attributable to borrowings for which the repayment
amount builds up as a result of the capitalisation over time of interest due.




                                                  137
Notes.




                                             (64) aDDitional inforMation on Derivatives.


         Analysis of derivatives by counterparty
         EUR in millions

                                                                Nominal value                         Fair value                         Fair value
                                                                                                   31 Dec. 2007                       31 Dec. 2006
                                                 31 Dec. 2007    31 Dec. 2006       positive           negative          positive           negative
                                             EUR in millions EUR in millions EUR in millions EUR in millions EUR in millions EUR in millions
         OECD banks                                  427,549         385,757          6,967              18,913             5,984            10,904
         Non-OECD banks                                    0              20               0                  0                 1                 0
         Other counterparties                         75,150           79,363         1,721               2,212             1,112              3,116
         Public sector                                     0               4               0                  0                 0                 0
         Total                                       502,698         465,144          8,688              21,125            7,098             14,020




                 The analysis includes stand-alone financial and credit derivatives which are presented in the items
                 Derivatives used for hedge accounting and Other derivatives.



                                             (65) DisClosures on repurChase agreeMents.


                   Disclosures on repo transactions
                   EUR in millions

                                                                                 31 Dec. 2007         31 Dec. 2006              Change
                                                                                EUR in millions      EUR in millions     EUR in millions
                   Carrying amount of securities sold under repo
                   transactions that continue to be recognised in                          846                1,288                 – 441
                   securities and investments
                   Liabilities (countervalue)                                              838                1,256                 – 419
                      Liabilities to banks                                                 838                     894               – 56
                      Liabilities to customers                                                 0                   362              – 362




                 The KfW Group has received collateral under repo transactions, which can be resold or repledged
                 at any time in absence of default. The fair value of this collateral is EUR 17 million (previous year:
                 EUR 26 million).
                    The securities have been neither resold nor repledged.




                                                                          138
 Disclosures on reverse repo transactions
 EUR in millions

                                                             31 Dec. 2007       31 Dec. 2006             Change
                                                            EUR in millions    EUR in millions    EUR in millions
 Loans and advances to banks (countervalue)                          5,724              4,462              1,262




Securities purchased under reverse repos are not recognised.
   The KfW Group has not pledged any collateral under reverse repos which can be further resold or
repledged at any time in absence of default.



                                                    other notes.
           (66) Contingent liaBilities anD irrevoCaBle loan CoMMitMents.


 Analysis of contingent liabilities by class
 EUR in millions

                                                             31 Dec. 2007       31 Dec. 2006             Change
                                                            EUR in millions    EUR in millions    EUR in millions
 Contingent liabilities from financial guarantees                     5,850              6,731              – 881
 Performance guarantees                                                  48                 51                –3
 Other contingent liabilities                                           156                148                     8
 Total                                                               6,054              6,930               – 876




Other contingent liabilities include payment obligations attributable to investments which are not
fully paid up and do not have to be consolidated.


Notional amount of irrevocable loan commitments
EUR in millions

                                                            31 Dec. 2007       31 Dec. 2006             Change
                                                           EUR in millions    EUR in millions    EUR in millions
Irrevocable loan commitments                                       38,462            45,162             – 6,700




The irrevocable loan commitments are mainly attributable to domestic promotional lending business.




                                                          139
Notes.




                                     (67) trust aCtivities anD aDMinistereD loans.


          Analysis of trust activities by class (transactions in the bank’s own name but for
          third-party accounts)
          EUR in millions

                                                                31 Dec. 2007      31 Dec. 2006            Change
                                                               EUR in millions   EUR in millions   EUR in millions
          Loans and advances to banks                                   2,262             2,383             – 121
          Loans and advances to customers                              16,178            16,988             – 810
          Securities and investments                                       42                79              – 37
          Assets held in trust                                        18,482            19,450              – 968
          Liabilities to banks                                             49                59               – 10
          Liabilities to customers                                     18,433            19,391             – 958
          Liabilities held in trust                                   18,482            19,450              – 968




         EUR 15,956 million (previous year: EUR 16,262 million) of the assets held in trust are attributable to
         the promotion of developing and transition countries segment.



          Notional amount of administered loans granted (loans in the name and for the account
          of third parties)
          EUR in millions

                                                                31 Dec. 2007      31 Dec. 2006            Change
                                                               EUR in millions   EUR in millions   EUR in millions
          Administered loans                                            4,280             3,085             1,195




                                                        140
                                          (68) leasing transaCtions as lessee.


Disclosures on lessee agreements as at 31 December 2007
EUR in millions

                                                   Due within one      Due in between     Due in more than    Total
                                                             year    one and five years          five years
Finance leases
Future minimum leasing payments                                4                     5                   0       9
Present value of future minimum leasing                        4                     4                   0       8
payments
Operating leases
Future minimum leasing payments                               12                    13                   0      25




Disclosures on lessee agreements as at 31 December 2006
EUR in millions

                                                   Due within one      Due in between     Due in more than    Total
                                                             year    one and five years          five years
Finance leases
Future minimum leasing payments                                4                     3                   0       7
Present value of future minimum leasing                        4                     3                   0       7
payments
Operating leases
Future minimum leasing payments                               10                    20                   0      31




                                                               141
Notes.




                    (69) average nuMBer of eMployees During the finanCial year.


                                                                     2007           2006          Change
          Employees (female)                                         1,941          1,868              73
          Employees (male)                                           2,062          1,963              99
          Total                                                     4,003           3,831            172
           Staff not covered by collective agreements                2,653          2,506             147
           Staff covered by collective agreements                    1,350          1,325              25




         The average number of employees including temporary staff but without trainees is calculated based
         on the levels at the end of each quarter.




                                                        142
(70) CoMpensation anD loans to MeMBers of the BoarD of Managing DireCtors
                        anD BoarD of supervisory DireCtors of KfW.


 Compensation to members of the Board of Managing Directors and
 Board of Supervisory Directors
 EUR in thousands

                                                            2007               2006             Change
                                                 EUR in thousands   EUR in thousands   EUR in thousands
 Members of the Board of Managing Directors                2,935              2,589                346
 Members of the Board of Supervisory Directors               204                209                 –5
 Former members of the Board of Managing
 Directors and their surviving dependents                  3,639              3,336                303
 Total                                                     6,778              6,134                644




The fixed salary components were equally set at EUR 466 thousand per year for all members of the
Board of Managing Directors, plus EUR 127 thousand for non-cash benefits and other compensation.

The compensation to the members of the Board of Supervisory Directors is composed as follows:
K Compensation for the Chairman of the Board of Supervisory Directors: EUR 13 thousand per year
  (previous year: EUR 13 thousand)
K Compensation for the Deputy Chairman: EUR 10 thousand per year
  (previous year: EUR 10 thousand)
K Compensation for the members of the Board of Supervisory Directors: EUR 5 thousand per year
  (previous year: EUR 5 thousand)
K Compensation for membership on the Loan Approval Committee: EUR 0.6 thousand per year
  (previous year: EUR 0.6 thousand)
K Compensation for membership on the Legal and Administrative Committee: EUR 0.3 thousand
  per year (previous year: EUR 0.3 thousand)
Members who join during the year receive their compensation on a pro-rata basis.

Provisions in the amount of EUR 41,311 thousand had been set up at the end of the financial year
for pension obligations for former members of the Board of Managing Directors and their surviving
dependents (previous year: EUR 47,069 thousand).
   The total amount of loans granted to members of the Board of Managing Directors was
EUR 187 thousand as at year-end (previous year: EUR 15 thousand). The interest rates range between
2 % and 5 % per year.




                                                   143
Notes.




                                           (71) relateD party DisClosures.

         The KfW Group’s related parties, in accordance with IAS 24, include as legal persons the consolidated
         subsidiaries, the non-consolidated affiliated entities, jointly controlled entities and associates.
            Natural persons considered related parties in accordance with IAS 24 include the members of the
         Board of Managing Directors and the Directors of KfW (and their close family members), the members
         of the Board of Supervisory Directors of KfW, and the executive bodies of its consolidated subsidiaries.
            KfW is a public law institution in which the Federal Republic of Germany (Federal Government)
         holds an 80 % and the Federal States a 20 % stake. Any transactions with the Federal Government
         and the Federal States in the reporting year are covered by the rules and regulations set forth in the
         KfW Law.
            The business relationships between KfW and its affiliates and other related parties are primarily
         determined by the rules set out in the KfW Law. The conditions and prices are in line with standard
         market conditions and are concluded in accordance with KfW’s general conditions for its loan
         programmes open to the general public.



                                                       (72) auDitor’s fees.


          EUR in thousands

                                                                          2007               2006             Change
                                                               EUR in thousands   EUR in thousands   EUR in thousands
          Audit of the annual financial statements                        1,718             1,516                202
          Other audit-related and valuation services                     1,798              1,821                – 23
          Tax advisory services                                               5                 2                  3
          Other services                                                 2,651                632               2,019
          Total                                                          6,172              3,971              2,201




                                                              144
                                (73) DisClosures on shareholDings.


  Subsidiaries included in the consolidated financial statements

  Name/registered office                                          Capital share %     Equity according to IFRS
                                                                                     as at 31 December 2007:
                                                                                               EUR in millions
  DEG – Deutsche Investitions- und Entwicklungs-
  gesellschaft mbH, Cologne                                                   100                       1,546
  Finanzierungs- und Beratungsgesellschaft mbH, Berlin                        100                          30
  KfW Beteiligungsholding GmbH, Bonn                                          100                         560
  KfW IPEX-Beteiligungsholding GmbH, Frankfurt                                100                         219
  KfW International Finance Inc., Delaware / USA                              100                           0
  tbg – Technologie-Beteiligungs-Gesellschaft mbH, Bonn                       100                         509




  Investments included in the consolidated financial statements using the equity method

  Name/registered office                                          Capital share %     Equity according to IFRS
                                                                                     as at 31 December 2007:
                                                                                               EUR in millions
  Movesta Lease and Finance GmbH, Düsseldorf                                   50                          11




Movesta Lease and Finance GmbH, Düsseldorf, operates in the field of leasing and the project
development and management of real estate and infrastructure financing. Details of the areas of
operation as well as a summary of financial information can be found on the company’s website
(www.movesta.de).



  Special funds included in the consolidated financial statements

  Name                                                          Capital share in %    Fund volume according
                                                                                               to IFRS as at
                                                                                         31 December 2007:
                                                                                             EUR in millions
  Frankfurt I                                                                 100                       1,550
  Frankfurt II                                                                100                       1,873
  Atlantik                                                                    100                         807
  München I                                                                   100                       1,526
  München II                                                                  100                       1,585



The investments held in the special security funds are part of the KfW Group’s strategic asset management.




                                                          145
Notes.




           affiliateD entities not inCluDeD in the ConsoliDateD finanCial stateMents.

         Five affiliated entities, eleven associates, two        KfW because KfW did not exercise any “control”
         jointly controlled entities and two special pur-        over the SPEs within the meaning of SIC 12. KfW
         pose entities (from restructuring in lending busi-      did not obtain any power of disposal over the
         ness) of minor significance to the presentation         SPEs or over the assets in the SPEs as a result of
         of the net assets, financial position and profit or     providing the liquidity lines. KfW acted exclu-
         loss of the KfW Group have not been consoli-            sively as the provider of capital within the frame-
         dated; instead, they are shown in the balance           work of the conduit and did not have any inde-
         sheet under Securities and investments or Loans         pendent decision-making rights with regard to
         and advances to customers and are measured in           the assets in the SPEs or with regard to the SPEs
         accordance with the relevant rules. These com-          as such. After implementation of the restructur-
         panies account for 0.1 % of the balance sheet           ing of the conduit Rhineland Funding Capital
         total of the KfW Group.                                 Corporation, New York/USA, KfW will gain pow-
            As part of the risk protection for IKB, KfW          er of disposal over the corresponding assets.
         has made liquidity lines available to various spe-      These assets will be transferred to two new spe-
         cial purpose entities of the conduit Rhineland          cial purpose entities managed by KfW. The SPEs
         Funding Capital Corporation, New York/USA.              will be funded exclusively by KfW. The two SPEs
         These lines were drawn down successively until          will be consolidated in financial year 2008 upon
         28 January 2008. The provision of the liquidity         transfer of the power of disposal over the port-
         lines has not resulted in any obligation for the        folio.
         special purpose entities to be consolidated by



                                     other DisClosures on shareholDings.

         As a result of the understanding reached be-            Since 1 January 2008 KfW IPEX-Bank GmbH has
         tween the Federal Republic of Germany and the           been conducting its business operations as a
         Commission of the European Union on the con-            legally independent credit institution. To this end
         cept of legally independent promotional banks           an initial portfolio of loan receivables and the
         in Germany and the Promotional Bank Restruc-            corresponding funds were transferred to the
         turing Act (Förderbankenneustrukturierungs-             bank. KfW IPEX-Bank GmbH is a wholly-owned
         gesetz) dated 15 August 2003, an agreement was          subsidiary and thus an affiliated entity of KfW.
         reached to spin off all of KfW’s business activities       A full listing of shareholdings has been made
         that are subject to competition in the financial        accessible in the electronic Federal Gazette (Bun-
         services sector into a credit institution under pri-    desanzeiger).
         vate law. The spin-off involved the business
         areas of corporate finance, loans for infrastruc-
         ture projects, export loans, project and structured
         finance and short-term commercial finance.




                                                           146
                                 suBsequent events (as at 2 april 2008).

      With respect to the risk protection for IKB, KfW,    of receivables against the special purpose entities
      in consistent application of its conservative val-   of the financing conduit Rhineland Funding that
      uation approach, treated the negative develop-       was performed at the end of March 2008 has led
      ments in the first quarter 2008 as an adjusting      to an increase in risk provisioning by EUR 1.8 bil-
      event after the balance sheet date. During the       lion to EUR 5.8 billion. The required changes
      first quarter of 2008 the liquidity crisis has be-   in the consolidated financial statements and
      come considerably worse, default rates in the US     group management report have been made
      subprime segment have risen, and property prices     accordingly.
      in the USA have dropped steeply. The revaluation



                           stateMent By the BoarD of Managing DireCtors.

      The Board of Managing Directors of KfW is            To the best of our knowledge, and in accordance
      responsible for the preparation of the consoli-      with the applicable accounting principles, the
      dated financial statements and the group man-        consolidated financial statements give a true and
      agement report. These comply with the require-       fair view of the net assets, financial position and
      ments of the International Financial Reporting       profit or loss of the KfW Group, and the group
      Standards (IFRS), the International Accounting       management report includes a fair review of the
      Standards (IAS) and the interpretations of the       development and performance of the business
      International Financial Reporting Interpretations    and the position of the KfW Group, together with
      Committee (IFRIC) and of the Standing Interpre-      a description of the principal risks and rewards
      tations Committee (SIC) as applicable in the         associated with the expected development of the
      European Union. They are in accordance with the      KfW Group.
      additional requirements of German commercial
      law pursuant to section 315a of the German
      Commercial Code (Handelsgesetzbuch/HGB).



                                Frankfurt am Main, 29 January 2008 / 2 April 2008
                                                      KfW




Dr Günther Bräunig               Dr Peter Fleischer              Dr Norbert Kloppenburg              Wolfgang Kroh




                     Detlef Leinberger                Ingrid Matthäus-Maier (Spokeswoman)




                                                           147
Auditor’s report reprint.




                                                  auDitor’s report reprint.
                   Having concluded our audit, as at 12 March / 2 April 2008 we offered the following unqualified
                   auditor’s report thereon:



                                                           auDitor’s report.

                   We have audited the consolidated financial state-     that misstatements materially affecting the pres-
                   ments prepared by KfW, comprising the balance         entation of the net assets, financial position and
                   sheet, the income statement, statement of             profit or loss in the consolidated financial state-
                   changes in equity, cash flow statement and the        ments in accordance with the applicable financial
                   notes to the consolidated financial statements,       reporting framework and in the group manage-
                   together with the group management report for         ment report are detected with reasonable assur-
                   the financial year from 1 January to 31 December      ance. Knowledge of the business activities and
                   2007. The preparation of the consolidated finan-      the economic and legal environment of the KfW
                   cial statements and the group management              Group and expectations as to possible misstate-
                   report in accordance with IFRS, as adopted by         ments are taken into account in the determina-
                   the EU, and the additional requirements of Ger-       tion of auditing procedures. The effectiveness of
                   man commercial law pursuant to section 315a (1)       the accounting-related internal control system
                   of the German Commercial Code and supplemen-          and the evidence supporting the disclosures in
                   tary provisions of the Law concerning KfW             the consolidated financial statements and the
                   (KfW Law) and By-Laws of KfW are the respon-          group management report are examined prima-
                   sibility of the parent company’s Board of Manag-      rily on a test basis within the framework of the
                   ing Directors. Our responsibility is to express an    audit. The audit includes assessing the annual
                   opinion on the consolidated financial statements      financial statements of those entities included in
                   and on the group management report based on           consolidation, the determination of the entities
                   our audit.                                            to be included in the consolidated group, the ac-
                       We conducted our audit of the consolidated        counting and consolidation principles used and
                   financial statements in accordance with section       significant estimates made by the Board of Man-
                   317 of the German Commercial Code and Ger-            aging Directors, as well as evaluating the overall
                   man generally accepted standards for the audit        presentation of the consolidated financial state-
                   of financial statements promulgated by the In-        ments and the group management report. We
                   stitute of Public Auditors in Germany (Institut       believe that our audit provides a reasonable basis
                   der Wirtschaftsprüfer/IDW). Those standards re-       for our opinion.
                   quire that we plan and perform the audit such             Our audit has not led to any reservations.




                                                                   148
In our opinion based on the findings of our audit     and results of operations of the KfW Group in
the consolidated financial statements comply          accordance with these requirements. The group
with IFRS as adopted by the EU and the addi-          management report is consistent with the
tional requirements of German commercial law          consolidated financial statements and as a whole
pursuant to section 315a (1) of the German Com-       provides a suitable view of the KfW Group’s
mercial Code and supplementary provisions of          position and suitably presents the risks and
the KfW Law and By-Laws of KfW and give a true        rewards associated with future development.
and fair view of the net assets, financial position




                          Frankfurt am Main, 12 March 2008 / 2 April 2008
                                      PricewaterhouseCoopers
                                         Aktiengesellschaft
                                  Wirtschaftsprüfungsgesellschaft




                 Hans Struwe                                       Christoph Theobald
               Wirtschaftsprüfer                                    Wirtschaftsprüfer
            (German Public Auditor)                              (German Public Auditor)




                                                      149
Published by:
KfW Bankengruppe
Communication Department
Palmengartenstrasse 5 – 9, 60325 Frankfurt am Main
Tel +49 69 7431-0, Fax +49 69 7431-2944
infocenter@kfw.de, www.kfw.de

Design and realisation:
MEHR Werbe- und Projektagentur, Düsseldorf

Photography: Marcus Pietrek, Düsseldorf (pages 16/17)

Lithography: Laser Litho 4, Düsseldorf
Printed by: Mareis Druck, Weissenhorn

Printed on PlanoPlus, Schneidersöhne Papier.




                                               150
180102




              KfW Bankengruppe, Palmengartenstrasse 5 – 9, 60325 Frankfurt am Main
         Tel: +49 69 7431-0, Fax: +49 69 7431-2944, infocenter@kfw.de, www.kfw.de

				
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