18 October 2007www.sagora.eu The impact of the CRD on the leasing industry in plain language Dr. Mathias Schmit

© sagora.eu 2 Managing Risk in Leasing Business Agenda CRD: Impact on financial performance Business opportunities under the CRD Conclusions

© sagora.eu 3 Managing Risk in Leasing Business Basel II: A new framework CAPITALDISCLOSURESUPERVISION FINANCIAL STABILITY capital requirements based on market, credit, and operational risk disclosure including the control of risks qualitative supervision internal process & risk control

© sagora.eu 4 Managing Risk in Leasing Business Basel II or CRD? First draft of Basel II in 1999 EU Official Journal on 30/06/2006 Ref: L 177/201 How far along is the national transposition process?

© sagora.eu 5 Managing Risk in Leasing Business CRD complemented… ”

© sagora.eu 6 Managing Risk in Leasing Business Basel II Credit Risk and the Balance Sheet new risk weights for capital requirements ROE will be impacted credit spreads will change Balance sheet RRE/CRE Loan Leasing Other Funding Capital Off-balance instruments Capital

© sagora.eu 7 Managing Risk in Leasing Business Regulatory capital for real estate investment Capital may differ from a ratio of 1 to 5 in respect to: –The approach adopted by the credit institution STD: product vs. counterparty approach IRB approaches (PD, LGD) –The type of product / Counterparty (STD) CRE/ Lease/ Specialized lending Retail / Corporate / PSE What if a lease to a PSE? –Qualitative requirements are met or not Independent valuation Legal certainty Insurance

© sagora.eu 8 Managing Risk in Leasing Business Source: Schmit M., Journal of Banking and Finance, April Hiiiiiiiiiiiii !!! Yeahhhhh!! OK but… Regulatory capital for equipment lease

© sagora.eu 9 Managing Risk in Leasing Business EU translation : IRB Guaranteed Residual Values or Bargain Option Basel IIEU Directive lease exposures as the minimum lease payments under IAS 17 Guaranted residual value 0% 20% 40% 2,6% 3,7% 4,8% 2,6% Assumptions: PD=1% LGD=30% Guaranteed residual value Guarantee: conditions on the guarantor and on the guarantee

© sagora.eu 10 Managing Risk in Leasing Business Evolving business environment Competition and pressures –Pressure to have higher RV (e.g. car manufacturers) –Business needs and opportunities are evolving Product lifecycle decreases Assess the value chain to define adequate actions New regulations (IAS, Basel II, etc…) –Give new incentives and opportunities to leverage business benefits if: All impacts of regulations are clearly understood by all parties (and thus to the bank partners and other stakeholders) A clear vision of the business partners emerges to generate collaborative advantages A wide buy-in by the different stakeholders

© sagora.eu 11 Managing Risk in Leasing Business New opportunities VendorBank Portfolio management Market and commercial knowledge Ancillary services Risk appraisal Calibration and managing RV Risk coverage (premium) Buy risk mitigants Reduction in ‘excess capital requirement’ Response to change pricing dynamics Client Fleet management Leasing contract

© sagora.eu 12 Managing Risk in Leasing Business New opportunities Identify your potential partners given your strategic objectives –Multi or mono brand vendor –Proposed ancillary services –Re-marketing strengths –Etc… Understand the benefit and risks of all parts of the business value chain –Customers: creditworthiness, volume, country –Structure of the transactions –Vendor characteristics and services Build your win-win relationship –Adequate structure –Mitigate risk if needed: e.g. lower LGDs, PD, EAD –Adequate rewards: risk vs. volume

© sagora.eu 13 Managing Risk in Leasing Business Conclusions The better knowledge of risk is key to be compliant and/or in line with the best practices –Regulated vs. non-regulated –Lease specificities Having an integrated risk management framework will allow to better identified and assessed business opportunities Rethinking leasing business relationships will offer new opportunities under the EU implementation of the CRD Examples of new business models already (being) achieved

© sagora.eu 14 Managing Risk in Leasing Business Some references Schmit M., “Credit risk in the leasing industry”, Journal of Banking and Finance, 2004, 28, pp Schmit M., “Is automotive leasing a risky business?”, Finance, forthcoming. Schmit M., “The new Basel capital accord and the future of the European financial system”, Report of a CEPS (Centre for European Policy Studies) Task Force, pp , Laurent M- P and M. Schmit, “Estimating “distressed” LGD on defaulted exposures: A portfolio model applied to leasing contracts”, in Recovery risk: the next challenge in credit risk management, a RiskBooks publication edited by Altman E., A. Resti and A. Sironi, pp , Laurent M-P, “Asset return correlation in Basel II: Implications for credit risk management”, under review in Risk.

© sagora.eu 15 Managing Risk in Leasing Business For More Information Dr. Mathias Schmit Partner SAGORA, Lease and Risk Management Avenue de Haveskercke, 28 B-1190 Brussels Mobile: (32) Website: Thank you for your attention !

© sagora.eu 16 Managing Risk in Leasing Business

© sagora.eu 17 Managing Risk in Leasing Business (Un)guaranteed Residual Values Major step forward RESULT Substantial gains of capital and opportunity cost Initial text Actual calculation of capital requirement for leasing: 100% * 8% * RV to be set aside over all the term of the lease (100% / T ) * 8% * RV each year Major commitment in terms of cost of opportunity Inappropriate compared to the risk incurred BUT