Ble 2

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Bâle 2 les entreprisesACI Belgium20 octobre
2005
La vision du banquier Alain de Brauwere - Basel2
Coordinator - Fortis Bank
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Agenda

• 1. Banks objectives and constraints
• 2. Fortis Bank overall targets
• 3. Relationship between the bank and its
  customer

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BASEL REVISED FRAMEWORK (June 2004)
Strengthen soundness stability of
international banking system Promote stronger
risk mgt practices
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BASEL REVISED FRAMEWORK (June 2004)
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Basel RF - PILLAR 1 MINIMUM REQUIRED
CAPITALRisk assets ratio

• Unchanged, but
• Impacted by IFRS
• Limited to Unexpected Loss
• Under review by BC EC

• Unchanged, but
• Capital covers Unexpected Loss
• Shortfall coverage EL by provisions

New Add-on

• New approaches
• Risk sensitive
• Based on Bank own estimates
• Credit risk mitigation integrated

Unchanged, but Definition of Banking Trading
Books reviewed
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European Capital Requirements Directive - CRD

• Scope
• All credit institutions (banks)
• All investment firms
• Level of application
• CRD is applicable primarily on an individual
  basis
• CRD is also to be applied at sub- and
  consolidated levels
• Supervision - Responsibilities
• Consolidating supervisor
• Pillar 1 - Modelling
• Pillar 1 - Permission to go IRB and/or AMA
• Pillar 3
• Coordination role
• Host supervisors

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CRD - Level of application
Subsidiaries other than credit institutions
investment firms not submitted at solo level
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CRD - 3 Pillars - Key drivers
PILLAR 1MINIMUM REQUIRED CAPITALSUPERVISOR -
DRIVEN
SUPERVISORS REQ. Approaches Quantitative
requirement Qualitative requirementCalculation
FormulaPermission to go AIRBA AMA
BANKs CHOICE Choice of approachesModelling
PD LGD EAD
VAR Data Use Systems Policy
Pillar 2Capital Adequacy Assessment Banks
-Driven
Pillar 3DisclosureMarket - Driven
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CRD - 3 Pillars - Key drivers
PILLAR 2CAPITAL ADEQUACY ASSESSMENTBANKs
-DRIVEN
Pillar 1 Minimum RequiredCapitalSupervisor -
Driven
ICAAP Produce ICAAP number and assessment
SREP Produce conclusions
Dialogue Challenge
Pillar 3DisclosureMarket - Driven
ICAAP Iteration
Supervisory measures
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CRD - 3 Pillars - Key drivers
Pillar 1 Minimum RequiredCapitalSupervisor -
Driven
PILLAR 3DISCLOSUREMARKET -DRIVEN

Supervisory DisclosuresCRD requirements Banking
industry pressure Market pressure gt
Supervisors Policy
Institution DisclosuresMinimum List CRD
Pillar 1 Market pressure gt Banks Policy
Pillar 2Capital AdequacyAssessmentBanks -
Driven
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CRD - 3 Pillars - Link between Pillars
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CRD - 3 PillarsSome banks use economic capital
ECAP ICAAP
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CRD - 3 Pillars - Reporting
PILLAR 1 Only credit, operational, market
risks Minimum Required Capital Supervisor
- Driven
CoRep
PILLAR 2 All risks Capital Adequacy
Assessment Banks - Driven
Dialogue
PILLAR 3 Banks disclosures Pillar 1
Market - Driven
PILLAR 3 Supervisors disclosures CRD
implementation Market - Driven
Publications
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CRD - 3 Pillars - Reporting
PILLAR 1 Only credit, operational, market
risks Minimum Required Capital Supervisor
- Driven
CoRep
PILLAR 2 All risks Capital Adequacy
Assessment Banks - Driven
Dialogue
Financial Statements
Financial Reporting (FinRep)
Other Reportings
PILLAR 3 Banks disclosures Pillar 1
Market - Driven
PILLAR 3 Supervisors disclosures CRD
implementation Market - Driven
Publications
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Agenda

• 1. Banks objectives and constraints
• 2. Fortis Bank overall targets
• 3. Relationship between the bank and its
  customer

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FORTIS BANK OVERALL TARGET
FROM IMPLEMENTATION DATE, i.e. 1 January
2008,START WITH THE MOST ADVANCED
APPROACHES Pillar 1 Credit risk AIRBA Pillar 1
Operational risk AMA Pillar 1 Market
risk VaR (unchanged) Pillar 2 All
risks VaR Pillar 3 Disclosures Market high
standards

• GOALS
• Have in use an embedded high-performance risk
  management
• Keep in line with the most advanced peer
  banks aiming our competitive position
• Reconcile the management tools and the
  supervisory constraints
• Ensure convergence between regulatory and
  economic capital
• Minimise the P1 Minimum Required Capital and
  P2 Adequate Capital
• Accelerate cross-border integrationUse Basel
  Program as a leverage

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FORTIS BANK OVERALL TARGET

• ACT AS ONE COMPANY
• One cross-border bank, based on business lines
• FB-wide consistent choices of Basel approaches
• Models developed centrally or under central
  supervision
• Centralised data repositories
• Centralised calculation of Risk Weighted Assets
  Capital requirements
• Centralised solvency reporting and market
  disclosures
• Consolidated supervisory review
• Top-down From consolidated level to local level
• Customer is the cornerstone of our business

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FORTIS BANK OVERALL TARGET

• P1 - CREDIT RISK Advanced Internal Ratings
  Based Approach
• Materiality assessment performed on consolidated
  level and consistent top-down
• Outstandings to customers can be linked to B/L
  and legal entity
• One single FB-wide rating by customer
• Central repository and central computing of risk
  weighted assets and minimum required capital
• Economic capital computed bottom-up and using as
  inputs the P1 data
• P1 - OPERATIONAL RISK Advanced Measurement
  Approach
• AMA on a unified basis for parent and
  subsidiaries (CRD art. 105)FB-wide single
  policy framework, consistently implemented
• Qualifying criteria met by the parent and
  subsidiaries considered together (CRD art 105)
• AMA applied at top consolidated level and based
  on business lines
• Central computing of capital requirementsand
  Risk sensitive apportionment of the capital to
  the legal entities
• Same methodology for computing economic and
  regulatory capital

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Pillar 2ICAAP ECAP ForCap
Pillar 2 Internal Capital Adequacy Assessment
Process (ICAAP) Economic Capital
(ECAP) Internal management tool (ForCap)

• Integrated risk management and organisation based
  on Business Lines.
• One single approach, one single management tool,
  one single capital figure
• One single tool ForCAp and one single figure
• ForCap incorporates the full diversification
  within and between risk types
• Bottom-up computing
• Supervisory challenging
• In line with principles 1 (ICAAP) 2 (SREP) of
  Pillar 2
• Approach, methodologies and models fully
  documented
• SREP conclusions gt Dialogue gt ICAAP iteration

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Pillar 2ICAAP ECAP ForCap
Pillar 2 Internal Capital Adequacy Assessment
Process (ICAAP) Economic Capital
(ECAP) Internal management tool (ForCap)

• UNEXPECTED LOSS
• Bank must hold capital to ensure it will remain
  solvent even if it experiences an unusually
  adverse outcome inits activities and thereby
  suffers a large loss. This amount is directly
  proportional to the amount of risk to which the
  bank is exposed.
• Economic capital is the appropriate tool Not
  the Pillar 1 Minimum Required Capital
• The cost of capital is one of the element to be
  covered by the margins
• EXPECTED LOSS
• Bank suffers expected losses linked to the
  current operating of their activities.
• Those expected losses are supported by the P/L
• Expected losses in one of the element to be
  covered by the margins.

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Pillars 1 2Consistency
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Agenda

• 1. Banks objectives and constraints
• 2. Fortis Bank overall targets
• 3. Relationship between the bank and its
  customer

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Credit Risk Pillar 1 Advanced IRB ApproachRisk
components

• Risk components are all based on banks own
  estimates
• Probability of Default is the assessment of the
  likelihood of default of the borrower over one
  year.Expressed as a , and counterparty
  specific.(PD)
• Loss Given Default is the assessment of the loss
  incurred on a facility at default of a
  counterparty. Expressed as a , and transaction
  specific.(LGD)
• Exposure at Default expected gross exposure of
  the facility upon default of the obligor.
  Expressed in amounts, and transaction
  specific.(EAD)
• Maturity the effective maturity of a credit
  facility with a maximum of 5 years (M)

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Credit Risk Risk drivers
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