Market Risk Management in KBC Bank Investor Relations conference 2 July 2001 Maurits Verherstraeten Global Risk Manager

2 Risk management Key success factors Risk profile ALM Core deposits : savings accounts ALM : evolution of BPV Tracking equity portfolio Risk profile FX/MM trading Trading interest rate risk Trading FX risk Risk profile equity trading Credit risk Preparing for Basel-2 Time axis expected loss models Summary Topics

3 Key success factors Active involvement of senior management Market Committee (trading risks) and Investment Committee (ALM risks) with representation by 3 members of Executive Committee Executive Committee: 5 out of 8 have been/are member of Market and Investment Committees  deep understanding and active dialogue Audit Committee: at least quarterly presentation of risk profile Board of Directors: yearly approval of limits

4 Key success factors Strong risk management at bank group level Independent Risk Management Division reporting to CEO “Global framework” sets out principles of risk management organization on groupwide basis with focus on functional authority of central Risk Management Division and common methodology Everybody knows what he/she can or cannot do Active committees: Weekly meetings Market and Investment Committees with members senior management and ad hoc specialists Alco abolished Pro-active involvement and strong cultural impact

5 Executive Committee Risk Management Division Market risk Trading Metho - dology Global Treasury Investment Division Board of Directors Audit Committee Credit risk Credit Divisions Market risk ALM Institutional framework INVESTMENTINVESTMENT COMMITTEECOMMITTEE MARKETMARKET COMMITTEECOMMITTEE

6 Key success factors M ethodology, systems and people Methodology: Linear trading risks: Value-at-Risk (var/covar, 99%,10 d holding), gaps, BPV, maturity restrictions, stop-losses Options: scenario analysis and Greeks. From fixed to probability based shifts in underlying and volatility and finally towards historical VAR? ALM: interest rate sensitivity, BPV, duration, VAR Limits: Hard limits As low as possible without hindering strategic positioning Since 2 years limits reduced by 40% accompanied with increase in quality of profits

7 Key success factors M ethodology, systems and people Systems: Implementation Algorithmics expected 30/7/2001 Towards internal model for FX/MM and KBC FP Brussels Market data project Savings of 600 mln EUR in regulatory capital Active daily follow-up of various risk measures on basis of intranet application (eRIS) with info on exposures, various risk measures, limit systems, simulations, capital requirements, market data, book structure, etc…. Continuous investment People: 35 people centrally and some 60 decentrally (esp. Central Europe)

8

9 Risk profile: ALM Centralization of all structural market risks (esp. interest rate risk) from the retail network into head-office Investment of ‘free’ capital and reserves and core deposits in (mainly) bond and (limited) equity investment portfolio Disciplined use of benchmarking philosophy for non-maturity accounts: define core deposits define appropriate maturity cyclical investment philosophy used for risk measurement and internal transfer pricing Equity holdings: BEL-20 portfolio and Eurostoxx-tracking portfolio: passive and longer term

10 Core deposits: savings accounts

11 ALM: Evolution of BPV

Tracking equity portfolio: VAR

13 Risk profile: FX/MM trading Concentration of limits and risks in Brussels dealingroom Dealingrooms in branches and subs: focus on local funding, sales and niches Concentration on linear interest rate risk in EUR, USD and GBP Small exposure in FX risks and in FX- or IR-options Central Europe: marginal increase in VAR-limits (+4%) to include our Central European subs

14 Trading interest rate risk: VAR

15 Trading FX risk: VAR

16 Risk profile: Equity trading Who and where: KBC Securities: Brussels, Paris, Amsterdam KBC FP: Brussels, London, New York, Tokyo, Hong Kong Peel Hunt (London) Central Europe: Patria (Prague), K&H Investment (Hungary) Relative importance of various centers: FP, Securities, Peel Hunt, Central Europe Predominantly non-linear equity risks

17 Equity trading: global scenario analysis (in mln EUR)

18 Credit risk Development of various internal rating models, based on building blocks such as probability of default, exposure at default and recovery rates Segmentation of the credit portfolio and choice of appropriate tools Internal rating models, verbal definitions, external ratings, KMV  internal rating classes (9 performing) Establishment broad credit risk database Anticipating Basel-2: we can just continue what we had already planned

19 Time axis Expected Loss models SME Large corporates US corporates Banks Extensions behavioural scoring Real estate Other segments Central Europe

20 To summarize Creating risk awareness throughout the organization: risk management is a ‘key function’ and is explicitly mentioned in the strategy statement of the Group Setting up appropriate control and committee structures Continuous investment in methodology, systems and people Contributing to strategic positioning the bank (ALM, internal model, Basel-2) Add shareholder value through higher quality of profits and capital savings

Risk Management in KBC Bank Investor Relations conference 2 July 2001 Maurits Verherstraeten Global Risk Manager