Bâle 2 & les entreprises

ACI Belgium20 octobre 2005

La vision du banquier Alain de Brauwere - Basel2 Coordinator - Fortis Bank

2Bâle 2 : La vision du banquier - 20 octobre 2005

AgendaAgenda

1. Bank’s objectives and constraints

2. Fortis Bank overall targets

3. Relationship between the bank and its customer

3Bâle 2 : La vision du banquier - 20 octobre 2005

BASEL REVISED FRAMEWORK (June 2004)

Strengthen soundness & stability of international banking system

Promote stronger risk mgt practices

MinimumRequired Capital

SupervisoryReview

Market Discipline

4Bâle 2 : La vision du banquier - 20 octobre 2005

BASEL REVISED FRAMEWORK (June 2004)

PILLAR 2Supervisory review

4 principles

Intern

al assessmen

t

Su

pervisory review

Cap

ital > m

inim

um

Su

pervisory in

tervention

PILLAR 3Market discipline

Disclosure requir’ts

Cap

ital

Cap

ital adeq

uacy

P 1 m

easurem

ent m

ethod

s and

results

Risk

Exp

osures

PILLAR 1Minimum capital requirement

(New) Standardised Approach - NSA

Evolutionary approaches

Internal Ratings Based - IRB

Foundation IRB Approach - FIRBAAdvanced IRB Approach - AIRBA

Basic Indicator Approach - BIAStandardised Approach - STA

Standard Method (Conversion CRD risk)Simulation Analysis Method

Credit Risk

Operational Risk

Market Risk

Advanced Measurement Appr - AMA

Value at Risk models

5Bâle 2 : La vision du banquier - 20 octobre 2005

Basel RF - PILLAR 1 : MINIMUM REQUIRED CAPITALRisk assets ratio

Capital (Tier 1 + 2 + 3)

Credit risk + Market risk 8%

+ Operational risk

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

Unchanged, butDefinition of Banking& Trading Books reviewed

New : Add-onNew approaches•Risk sensitive•Based on Bank own estimates•Credit risk mitigation integrated

6Bâle 2 : La vision du banquier - 20 octobre 2005

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

7Bâle 2 : La vision du banquier - 20 octobre 2005

Subsidiaries other than credit institutions & investment firms not submitted at solo level

CRD - Level of application

CreditInstitution

Investment Firm

Ultimate Parent Credit Institution

Holding CompanyHolding Company

Diversified Financial GroupDiversified Financial Group

Parent CI

CreditInstitution

8Bâle 2 : La vision du banquier - 20 octobre 2005

Pillar 2Capital Adequacy

Assessment

Bank’s -Driven

PILLAR 1MINIMUM REQUIRED CAPITAL

SUPERVISOR - DRIVEN

Pillar 3

DisclosureMarket - Driven

SUPERVISOR’S REQ.

ApproachesQuantitative requirement Qualitative requirementCalculation FormulaPermission to go :

AIRBAAMA

BANKs CHOICE

Choice of approachesModelling : PD

LGD EAD

VARData UseSystems Policy

CRD - 3 Pillars - Key drivers

9Bâle 2 : La vision du banquier - 20 octobre 2005

PILLAR 2CAPITAL ADEQUACY ASSESSMENT

BANK’s -DRIVEN

ICAAPProduce ICAAP number and assessment

SREPProduce conclusions

Dialogue

Challenge

ICAAPIteration

Pillar 1 Minimum Required

Capital

Supervisor - Driven

Pillar 3Disclosure

Market - Driven

CRD - 3 Pillars - Key drivers

Supervisory measures

10Bâle 2 : La vision du banquier - 20 octobre 2005

Pillar 1 Minimum Required

Capital

Supervisor - Driven

PILLAR 3DISCLOSURE

MARKET -DRIVEN

Pillar 2Capital Adequacy

AssessmentBank’s - Driven

Supervisory Disclosures

CRD requirements

Banking industry pressureMarket pressure

=> Supervisors Policy

Institution Disclosures

Minimum List CRD= Pillar 1

Market pressure

=> Bank’s Policy

CRD - 3 Pillars - Key drivers

11Bâle 2 : La vision du banquier - 20 octobre 2005

CRD - 3 Pillars - Link between Pillars

P1 Min.Req.Capital P2 Adequate Capital Prudential Own funds

Only CR, OR & MR

Supervisory requirements

Supervisory calculation formula

Op

erat

e ab

ove

MR

C

Cap

ital

Mgt

Str

ateg

yAll risks

Bank’s requirements

ICAAP = Bank’s own process + own calculation formula

SREP = Supervisory challenge

= Numerator P1

Supervisory filters

Accountancy figureamended by prudential filters

< <

12Bâle 2 : La vision du banquier - 20 octobre 2005

CRD - 3 PillarsSome banks use economic capital

Rating agencies figuresRating AA

P1 Min.Req.Capital P2 Adequate Capital Prudential Own funds

Only CR, OR & MR

Supervisory requirements

Supervisory calculation formula

Op

erat

e ab

ove

MR

C

Cap

ital

Mgt

Str

ateg

yAll risks

Bank’s requirements

ICAAP = Bank’s own process + own calculation formula

SREP = Supervisory challenge

= Numerator P1

Supervisory filters

Accountancy figureamended by prudential filters

< <

ECAP = ICAAP

13Bâle 2 : La vision du banquier - 20 octobre 2005

CRD - 3 Pillars - Reporting

PILLAR 1 Only credit, operational, market risks Minimum Required Capital

Supervisor - Driven

PILLAR 2 All risks Capital Adequacy Assessment Bank’s - Driven

PILLAR 3 Bank’s disclosures Pillar 1 Market - Driven

PILLAR 3 Supervisors disclosures CRD implementation Market - Driven

CoR

epD

ialo

gue

Pu

bli c

a ti o

ns

14Bâle 2 : La vision du banquier - 20 octobre 2005

CRD - 3 Pillars - Reporting

PILLAR 1 Only credit, operational, market risks Minimum Required Capital

Supervisor - Driven

PILLAR 2 All risks Capital Adequacy Assessment Bank’s - Driven

PILLAR 3 Bank’s disclosures Pillar 1 Market - Driven

PILLAR 3 Supervisors disclosures CRD implementation Market - Driven

CoR

epD

ialo

gue

Pu

bli c

a ti o

ns

Fin

anci

al S

tate

men

ts

Fin

anci

al R

epor

tin

g (F

inR

ep)

Oth

er R

epor

tin

gs

15Bâle 2 : La vision du banquier - 20 octobre 2005

AgendaAgenda

1. Bank’s objectives and constraints

2. Fortis Bank overall targets

3. Relationship between the bank and its customer

16Bâle 2 : La vision du banquier - 20 octobre 2005

FORTIS BANK OVERALL TARGET

FROM IMPLEMENTATION DATE, i.e. 1 January 2008,START WITH THE MOST ADVANCED APPROACHES

Pillar 1 Credit risk AIRBAPillar 1 Operational risk AMAPillar 1 Market risk VaR (unchanged)Pillar 2 All risks VaRPillar 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 integration

Use Basel Program as a leverage

17Bâle 2 : La vision du banquier - 20 octobre 2005

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

18Bâle 2 : La vision du banquier - 20 octobre 2005

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 requirements

and Risk sensitive apportionment of the capital to the legal entities Same methodology for computing economic and regulatory capital

19Bâle 2 : La vision du banquier - 20 octobre 2005

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 => Dialogue => ICAAP iteration

20Bâle 2 : La vision du banquier - 20 octobre 2005

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.

21Bâle 2 : La vision du banquier - 20 octobre 2005

Pillars 1 & 2Consistency

P1 Min Req Capital

Supervisory formula

P1 calculator

Internal Ecap method

ForCap calculator

P2 Adequate Capital

Other P2 risks

Model approvedReady for use

In use

System ready

Ready for sourcing Value at default

Central DWH sourced= Pillar 1

Dwh & calculator ready

22Bâle 2 : La vision du banquier - 20 octobre 2005

AgendaAgenda

1. Bank’s objectives and constraints

2. Fortis Bank overall targets

3. Relationship between the bank and its customer

23Bâle 2 : La vision du banquier - 20 octobre 2005

Credit Risk: Pillar 1 Advanced IRB ApproachRisk components

• Risk components are all based on bank’s 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)

24Bâle 2 : La vision du banquier - 20 octobre 2005

DialogueCustomer

CustomerInformation

Corporate Relation

Inputs calculator

Credit Risk: Risk drivers

Qualitative Quantitative

Externaldata provider

Internaldata

Flashing lights

CalculatedPD - LGD - EAD - M

ModelsOverrideReview

FinalPD - LGD -EAD - M

25Bâle 2 : La vision du banquier - 20 octobre 2005