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CONFIDENTIAL

EFMA – Credit Risk & Debt Management An Integrated Framework supporting credit risk based decisions

Eric Hermann – CRO, Belfius Dr Dominique Bourrat – Managing Partner, Risk Dynamics

Brussels, June 06th 2012

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© Risk Dynamics - Confidential

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Always use capital letters for all substantives and verbs in title

Risk Management Framework RD Referential

06/06/2012 2 EFMA Conference

Risk Infrastructure and systems

External Risk communication

Rating agencies

Investors

Regulators (e.g. ICAAP, BIII)

Risk mitigation & contingency plans

Roles and responsibilities

Organisational Structure

KPI’s and Compensation

Internal Communication

Decision authorities (incl. Cttees)

Risk Mission

Risk Appetite

Risk Capacity

Risk Taxonomy & Definitions

Risk policies Strategy & Policies

Review & Control

Operations (Processes)

Methodologies

Risk Governance

Reporting

© Risk Dynamics 2010

Independent Audit Review

Global architecture

Scenario & Stress Testing

Value assessment (incl. FTP)

Risk models

Model management

Risk processes

Risk & finance planning

Model risk

Internal Review

Quarterly monitoring

Training & Communcation

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© Risk Dynamics - Confidential

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Always use capital letters for all substantives and verbs in title

"   Ensure that the risk vision is well aligned with the corporate objectives "   Embed risk into strategy, planning and decision making (e.g. budgeting

process, allocation of scarce resources based on risk / return profile) "   Better manage capital vis-à-vis risk and ensure the long term viability of

the Group "   Harmonise the risk practices across the Group through a consistent Risk

Management Framework "   Institutionalise the way risk culture is fostered within the Group "   Empower Local Entities by improving the accountability and delegation

schemes, in line with their local specificities and their maturity level

Risk Management Framework Expected Benefits

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© Risk Dynamics - Confidential

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Always use capital letters for all substantives and verbs in title

Risk Management Framework The Balance between Risk Capacity and Profile

06/06/2012 4 EFMA Conference

Risk Capacity refers to the ability of the financial institution to manage and absorb the risks it is willing to take, the ‘risk supply’ Risk Capacity is composed of financial and non financial resources enabling the financial institution to face current and future risks (most often at a 3 to 5 year horizon)

Risk Profile refers to the level of risk taken by the financial institution in a prospective manner, the ‘risk demand’ Risk Profile combines a quantitative and a qualitative view of current and future risks the financial institution is exposed to (most often at a 3 to 5 year horizon)

Non Financial Resources

Risk Capacity

Internal Control & Risk Management frameworks

(Quality level assessed through review, validation & audit)

Financial Resources Quantitative View

Risk Profile

Risk Taxonomy & Assessment

Qualitative View

Stress & Scenario Testing

Action Plans Gove

rnan

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All risks currently and potentially faced by the financial institution should be defined and categorised in an appropriate manner (Risk Taxonomy) These risks can then be qualitatively assessed to determine those that are material, their relative importance and how the institution can respond to them (e.g. with more or less sophisticated control frameworks, continuity plans or extra capital buffers)

Financial resources Expressed in terms of capital,

earnings and liquidity

Risk Exposure Assessed in terms of capital,

earnings and liquidity

Non financial resources refer to all components of the Internal Control and Risk Management frameworks (people, processes & systems) that enable the institution to prevent and / or mitigate risks

>

Risk Capacity Risk Profile

© Risk Dynamics 2010

How much can you afford to loose? How much do you accept to loose? Adequacy / Risk Appetite

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© Risk Dynamics - Confidential

Always use capital letters for all substantives and verbs in title

Always use capital letters for all substantives and verbs in title

Credit Risk Methodologies Model Management & Governance Framework

Origination

Design

Roll Out Operations

Review

Independent Validation

Design

Methodological Choices

Prototype

Policies

Documentation

Model Specifications

Roll Out

Implementation

Deployment

Shadow Run

Documentation

Operations

Calibration

Run

Monitoring

Reporting

Environment

Review

Performance

Operations

Use Test

Documentation

Origination

Model Objectives

Model Scope & Perimeter

Background

Requirements & Constraints

Stakeholders

Organisation & Planning

Objectives

Independent Validation

Scope & Perimeter

Governance

Process

Methodology

06/06/2012 EFMA Conference 5

Risk Dynamics Colour Balance

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© Risk Dynamics - Confidential

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Always use capital letters for all substantives and verbs in title

Scenario & Stress Testing Proactive Management through Scenarios

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Origination Scenarios Impacts Reporting Actions

1 2 3 4 5

Trigger Stress Tests Process

Impl

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© Risk Dynamics - Confidential

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Always use capital letters for all substantives and verbs in title

Scenario & Stress Testing Proactive Management through Scenarios

07/03/2012 RMF @ Belfius

Assets Liabilities

Banking Book Loans and receivables

(Amortized cost / HtM)

Investment Book Bonds,

Securitisations (AFS)

Trading book (MtM accounting)

Other tangible and intangible assets Like RE, tax, sub’s

Wholesale & retail deposits

LT Debt

T1 / T2 Capital

RetainedEarnings

Available capital

Change in regulatory

capital ratios

Scenario / Stress parameters

Market parameters

Macro-economic scenario

(translated into parameters where dotted)

Rev. Reserve (**)

Id. trading on assets

Funding cost

Adj. EL/impairments

MtM AFS

MtM trading

Change in RWA, Change in earnings and

available capital

Trading book

ALM hedging (Hedge accounting) Fair Value

Funding cost

PD, EAD, LGD*

EAD (CP risk), IRC, SVar

*TTC for RWA, PIT for Impairments

Ratings (securitisations)

Coupons paid/received

Rev. reserve(**)

7

Risk Dynamics Colour Balance

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© Risk Dynamics - Confidential

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Risk Management Framework Conclusion: Risk as a Partner to Business

"   Optimisation of the institution’s risk / return profile "   Internal allocation of scarce resources (capital, liquidity) "   Limits setting & management "   Risk-adjusted pricing "   Performance measurement & compensation "   Active portfolio management "   Risk based strategic planning "   Risk based budgeting "   Impact assessment of adverse events on B/S and P&L positions "   Forward looking provisioning process "   (…)

06/06/2012 EFMA Conference 8