Risk Management at ANZ Banking Group Jun 18, 2008 Patrick Zhu Head of Retail Risk China Partnerships

2 ANZ is a leading bank in Australia, and the largest bank in New Zealand Established in 1835 Strong market positions in chosen markets Australian “Bank of the Year” six years in a row New Zealand’s largest bank Leading bank in the South Pacific Leading Australian bank in Asia Over 5 million customers, across 30 countries 34,353 employees; 1,265 points of representation Strong annual performance as at 30 September 2007 Annual profit AUD$4.2 billion Total Assets AUD$392 billion Cost/Income ratio 44.8% Rated AA

3 ANZ Risk Management structure is aligned to business and meets Basel requirements for consistency Chief Risk Officer Head of Risk Personal & Chief Retail Credit Officer Head of Risk Personal & Chief Retail Credit Officer Chief Risk Officer ANZNB Head of Operational & Technology Risk Head of Risk, Institutional Head of Risk, Institutional Institutional Group General Manager, Compliance Head of Risk Services Centre Risk Respective Group Managing Directors Chief Executive Officer, New Zealand Head of Risk, Asia Pacific PersonalAsia PacificOTR New Zealand Chief Executive Officer ANZ Board Risk Committee

4 The following key principles which are aligned with Basel II underpin the establishment of the ANZ risk function: 1.Board of Directors should be aware of major aspects of bank’s risks. It should approve and review the bank’s risk management framework which outlines the approach for the identification, assessment, monitoring and control / mitigation of risks. 2.Board of Directors should ensure the bank’s risk management framework is subject to effective and comprehensive internal audit by operationally independent, appropriately trained and competent staff. 3.Senior management should have responsibility for implementing the risk management framework. The framework should be consistently implemented throughout the whole banking organisation. Senior management should also have responsibility for developing policies, processes and procedures for managing risk across all of the bank’s material products, activities, processes and systems. The principles fundamentally require that Risk Management exist as an independent and centralised function. As long as Risk Management is independent and centralised, it can be organised by: –Risk type (credit, market, operational etc) or –Line of Business (Retail, SME, Corporate etc) Typically in order to be more responsive to customer needs, the Risk Management function tends to be organised by Line of Business. Refer to the Appendices for options on organisational structure.

5 Centralised RiskCredit Risk in the Business RISK MANAGEMENT Policy & Framework Reporting & Analysis Risk Modelling Credit Assessment & Approval Problem Credit Management Set and assure policies and frameworks Set the Credit Approval Discretion framework Provide risk reporting and analysis Specify risk measurement tools (eg. statistical risk grade models) Market Risk Operational Risk Portfolio Management Policy & Framework Reporting & Analysis Portfolio Management Risk Modelling Risk Assessment & Approval Policy & Framework Reporting & Analysis Portfolio Management Risk Modelling Risk Assessment Business Continuity Planning Whether the Risk Management Function is organised by risk types or Line of Business, there are fundamental risk capabilities that are required as outlined below: Operate within framework set by Centralised Credit Risk

6 Define Risk Appetite Develop framework to ensure management of risk within acceptable range including: Policies Credit Approval Discretions Risk measurement (e.g. Models) Portfolio Management Operate within risk management framework set by Centralised Risk Management Centralised Risk Management Risk Management in the Business Centralised Risk Management and Risk Management in the Business

7 Risk principles (Level 1) Risk frameworks (Level 2) Risk policies (Level 3) Risk operating procedures (Level 4) FormulateMaintainApproveOversee Chief Risk Officer Board of Directors Chief Risk Officer Centralised Risk Management Department Executive Risk Committee Chief Risk Officer Line of Business (LOB) Risk Management Department Centralised Risk Management Head of LOB Risk Mgmt Dept LOB / Relevant Risk Management Department Head of LOB / Relevant Risk Department (or delegate) The level of policy will determine the owners and approvers, and level of oversight. Policies: Roles and Responsibilities

8 Risk committees are key governance mechanisms Risk Committee Defines risk appetite, strategy Authorises Group Limit framework Delegates authority to committees Group Asset & Liability Committee (ALCO) ANZ Board Operational Risk Executive Committee (OREC) Audit Committee Review risk control framework and compliance (CTC) Credit & Trading Risk Committee (CTC) Policy framework Credit risk Market (traded) risk Approve major lending decisions Approve asset writing strategies Manage bank portfolio Policy framework for all balance sheet risks and operations. Interest rate risk Liquidity & funding Balance sheet structure Structural FX exposures Funds transfer pricing Operational Risk Compliance Information Security

9 Relationship Management Assessment and Administration Assess and Grade Risk Structure Loans and Facilities Execute – Internal and External documentation Security Management Credit Approval Front OfficeLoan ProcessingLOB Risk Management Follow rules Centralised Risk Management Framework & Portfolio Process: Credit Assessment and Approval Ensure compliance to framework

10 Six Key Benefits of a Risk Grading System Earning Warning System that identifies treatment of NPLs Timely and cost-effective decision making and customer response (automation) Centralised understanding and management of risk at the portfolio level Objective, business outcome based staff performance management Guides asset writing and pricing Risk Grading Enables low risk revenue growth – data mining of behavioural scoring

11 Expanded performing risk grade scale provides the capability to build an effective early warning system Risk Grading System – Expanded Scale Equals Expanded Capability 1 Standard 2 Special Mention 3 Substandard 4 Doubtful 5 Loss Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 ANZ’s Credit Rating Scale Estimate of Comparative Scale Traditional rating scales in China

12 Risk Grading System – Fundamentals Predicts likelihood of loss, using 2 distinct dimensions: Risk/Likelihood of default - ability of the customer to repay the loan Loss given default - loss in the event of non-payment of the loan CustomerSecurity Ability to service/repay Risk of default Customer Credit Rating Loan security cover Security Indicator RISK GRADE

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