PETER HUGHES MOBILE +44 (0) ARC BEST PRACTICES LIMITED 2 SYCAMORE STREET LONDON EC1Y 0SF UNITED KINGDOM TELEPHONE +44 (0) MEASURING OP RISK EXPOSURE THE KEY TO A COMPLETE OP RISK MANAGEMENT PROGRAMME

February 22, 2006Operational Risk Management - The Right Way2 TODAY’S AGENDA THE FINITE OP RISK ENVIRONMENT THE BASIC CONCEPTS THE ARC1 WORKFLOW THE OP RISK MEASUREMENTS ARC1 SAMPLE SCREENSHOTS ARC1 SAMPLE DASHBOARDS ABOUT ARC1

February 22, 2006Operational Risk Management - The Right Way3 THE FINITE OP RISK ENVIRONMENT THE EFFECTIVENESS OF OP RISK MANAGEMENT IS LIMITED IF THERE IS NOT A FINITE RISK ENVIRONMENT A FINITE ENVIRONMENT FOR OP RISK IS WHERE: –THE TOTAL POPULATION OF OP RISK EXPOSURES IS QUANTIFIED AND A FINITE FRAMEWORK OF RISK CONTROL TOTALS IS ESTABLISHED –OP RISKS ARE REPORTED WITHIN A UNIFIED FRAMEWORK OF STANDARDISED CORPORATE RISK METRICS THAT CAN BE AGGREGATED AND CONSOLIDATED THIS IS WHAT ARC1 DOES!

February 22, 2006Operational Risk Management - The Right Way4 THE BASIC CONCEPTS END-TO-END TRANSACTION PROCESSING CYCLES ARE DECONSTRUCTED AND REDUCED TO ‘PROCESSES’ EACH PROCESS HAS THREE MEASURABLE PROPERTIES: –ACTIVITY –VOLUME –RISK SCORE BENCHMARK DATA COLLECTED IN 3 STANDARD TABLES WITH RISK QUOTIENTS / WEIGHTINGS ATTACHED: RISK DRIVERTABLES OPERATIONAL ACTIVITY DAILY VOLUMES CAUSES OF OPERATIONAL FAILURE 34 ACTIVITY QUOTIENTS 8 VOLUME BAND WEIGHTINGS 9 CATEGORY/30 SUB-CATEGORY SCORING TEMPLATES

February 22, 2006Operational Risk Management - The Right Way5 Infinity CONSTRUCT PROCESS HIERARCHIES MAP CURRENT / TARGET STATUS TO ARC1 TABLES: 1.ACTIVITY (34 ACTIVITY TYPES / RISK QUOTIENTS) 2.VOLUME (8 VOLUME BAND WEIGHTINGS) 3.RISK SCORING (9 CATEGORIES / 30 SUB-CATEGORIES) INPUT ACTION ITEMS RUN ARC1 THE ARC1 WORKFLOW

February 22, 2006Operational Risk Management - The Right Way6 THE OP RISK MEASUREMENTS ARC1 USES THREE BASIC MEASUREMENTS TO MONITOR AND TRACK OP RISK: –RISK CONCENTRATION OPERATIONAL SIZE – RISK WEIGHTED TRANSACTIONS COMBINATION OF ACTIVITY RISK QUOTIENT AND VOLUME BAND WEIGHTING EXPRESSED IN OPERATIONAL RISK UNITS (ORUs) –RISK MITIGATION INDICATOR - RMI REPRESENTS EFFECTIVENESS OF RISK COUNTERMEASURES EXPRESSED ON A SCALE OF ZERO TO 100 –VALUE-AT-RISK REPRESENTS POTENTIAL IMPACT OF OPERATIONAL FAILURE COMBINATION OF RISK CONCENTRATION AND RMI EXPRESSED IN OPERATIONAL RISK UNITS (ORUs)

February 22, 2006Operational Risk Management - The Right Way7

February 22, 2006Operational Risk Management - The Right Way8 Select peak daily value supported by the Process MAPPING PROCESS TO VOLUME BAND

February 22, 2006Operational Risk Management - The Right Way9

February 22, 2006Operational Risk Management - The Right Way10 GENERATE RISK MEASUREMENTS Generate risk measurements

February 22, 2006Operational Risk Management - The Right Way11 GENERATE RISK REDUCTION PLAN Construct risk reduction plans

February 22, 2006Operational Risk Management - The Right Way12 SAMPLE LOSS EVENT CAPTURE

February 22, 2006Operational Risk Management - The Right Way13 OP RISK OVERVIEW DASHBOARD

February 22, 2006Operational Risk Management - The Right Way14 DEPARTMENTAL ANALYSIS

February 22, 2006Operational Risk Management - The Right Way15 KEY RISK INDICATORS

February 22, 2006Operational Risk Management - The Right Way16 DEPARTMENTAL PROFILE

February 22, 2006Operational Risk Management - The Right Way17 ABOUT ARC1 PLUG-AND-PLAY / INTERNET, INTRANET OR STANDALONE PC / SQL DATABASE / SUPPORTS UNLIMITED USERS FULLY RESEARCHED OP RISK BENCHMARKS COMPILED OVER 6 YEARS OF CONTINUOUS APPLICATION AUDITABLE - STANDARDISED OP RISK MEASUREMENT TABLES LOSS EVENT CAPTURE AND REPORTING MODULE – ATTACHES OP RISK CONTEXT TO LOSS EVENTS COMPREHENSIVE REPORTING CAPABILITY: –SCORECARDS –RISK REDUCTION PLANS –MANAGEMENT DASHBOARDS – OP RISK MEASUREMENTS ACROSS THE COMPANY DRILLING TO INDIVIDUAL DEPARTMENT PROFILES THE ULTIMATE RISK PROFILING TOOL FOR BASEL II / PILLAR 2 RISK MANAGEMENT BECOMES A LEARNING EXPERIENCE

February 22, 2006Operational Risk Management - The Right Way18 CONTACTS ARC1 REPRESENTATIVE IN ROMANIA: PAUL COSTEA CREATIVE BUSINESS PARTNERS TEL. + (40)