1. 1 Securitization A useful tool for the Bank of the 21st Century Presentation to the Association of Serbian Banks Belgrade, December 6, 2007

2. 2 Agenda Why Securitization? What are the challenges? The US Sub prime Crisis What is the future?

3. 3 Why Securitization? „In our country, banks are not interested in securitization because they have enough liquidity and equity.“ Senior Manager of a large CEE bank But why do the world‘s largest banks apply the securitization? They also have enough liquidity and equity. Because securitization can significantly improve the profitability of any bank and provides another source of liquidity!

4. 4 1. Why Securitization

5. 5 Funding Risk Transfer/ Equity Relief The Fundamental Business Motivation

6. 6 Synthetic Only „guarantee“ Risk transfer but no funding Less local structuring required Multi-seller transactions easier to implement Sovereign rating ceiling of less relevance Synthetic Only „guarantee“ Risk transfer but no funding Less local structuring required Multi-seller transactions easier to implement Sovereign rating ceiling of less relevance True Sale Sale of loan portfolio Funding plus risk transfer Legally more complex to implement True Sale Sale of loan portfolio Funding plus risk transfer Legally more complex to implement The Basic Options

7. 7 ONSHORE Loan Portfolio OFFSHORE Loan Instalments Bank Originator Non-recourse sale of portfolio Non-recourse sale of portfolio Senior Notes Public / Private Investor markets Mezzanine Notes Junior Notes Special Purpose Vehicle ( SPV) Purchase Price Typical True Sale Structure Junior Note Investor (e.g. Originator)

8. 8 ONSHORE Loan Portfolio OFFSHORE Loan Instalments Bank Originator Public / Private Investor markets Special Purpose Vehicle ( SPV) or highly rated Institution (e.g. KfW) Guarantee/CDS Typical Synthetic Structure Junior Investor (e.g. Originator) Bank-to-back Super Senior Hedge Bank-to-back Junior Hedge Bank-to-back Senior/Mezz Hedge Poss. Inter- mediated by SPV

9. 9 Risk Transfer / Equity Relief Freed-up equity can be re-invested and generates additional income. This is profitable if you have Growing portfolios Profitable portfolios You improve the ROE to your shareholders. Funding In certain cases, securitization provides cheaper funding (currently rather the exception). Becomes more relevant if maturity mismatches (and resulting Pillar 2 capital charges) are considered In the long run, access to dis- intermediated funding sources will become crucial. Our Fundamental Business Motivation

10. 10 Securitization improves the ROE

11. 11 2. What are the challenges ?

12. 12 Legal & Regulatory issues –Transferability of loan portfolios –Tax/Stamp duty –Registration of collateral –Acceptance by the regulator – EU Directives create certain standards Accounting –On-balance sheet vs off-balance sheet Internal target setting mechanisms –Go for ROE rather than absolute profit and asset targets Early mover challenges –Interest from investment banks –Pricing Basel 2 considerations –Focus on portfolios with higher PDs or volatile capital consumption There are generally challenges:

13. 13 Securitization can be supported by – Aligning individual legal clauses in the concerned laws –Drafting a specific securitization law which covers all relevant points A specific securitization law is generally appreciated by rating agencies –However, it needs to be to the point in order to really facilitate securitization Issues to be considered for the Serbian Securitization Act is : –The act should provide a flexible framework  Reflecting the Basel II Accord  Certain structural issues (foreign vs. domestic SPVs; treatment of synthetic securitizations) are already covered by other provisions  Scope of assets that may be securitized should be determined by market participants –The framework should allow for cost-efficient structures  The management supervisory model is very similar to the patterns used in regulated industries  Securitization structures used in the international markets should be allowed  Ensuring bankruptcy remoteness in a cost-efficient way is the key element of any such law Specific Issues in Serbia

14. 14 3. Implications of the US Sub-prime Crisis

15. 15 US Mortgage Subprime Crisis CEE-markets are fundamentally different – However, we have to learn the lesson! US Subprime Mortgage Crisis Overweighed investments into subprime market Major funding through credit wholesale markets Weak credit policy causes deteriorating credit quality Market Developments Increasing customer defaults (Teaser rates) Liquidity shortfall even applying to prime names Lack of trust and confidence (Counterparty risk) Triggers Manage Exposure according to highest standards Diversify Funding structure Spread Curve will widen Conclusions iTraxx Crossover 5yr Spread over USD-Libor (2007, in bps) GM und Ford downgraded to 'junk bonds' Subprime downturn  H1/2007 205 bps 24.Sep: 297 bps Source: International Index Company, Bloomberg Source: Federal Reserve, BBA

16. 16 4. What is the future?

17. 17 Western European investors regard CEE as the natural choice for diversifying their portfolio risks –The CEE & CIS securitization markets will grow comparably stronger than the matured markets Banks will diversify their funding and capital tool box –Securitization is a useful tool but should not be exaggerated Securitization plays a growing importance in providing market feedback on portfolio risks –Shareholders expect banks to use capital most efficiently and to be transparent in risk management What can we expect for the future

18. 18 Thank you! Georg Feldscher Head of SPM Raiffeisen International Bank-Holding AG Tel. +43-1-71707 1026 Fax +43-1-71707 1226 e-mail georg.feldscher@ri.co.at