1. F INANCIAL S ERVICES Institute of International Bankers Enterprise Risk Management October 29, 2007

2. 1 Agenda  Enterprise Risk Management (ERM) Industry Drivers  ERM Framework: Key Elements  Primary Benefits of ERM Programs  Key Considerations for FBOs  ERM Challenges and Critical Success Factors

3. 2 Enterprise Risk Management (ERM) Industry Drivers Expanding Regulatory Scrutiny and Activism Increasing Impact of Extreme Events Increased Risk Interaction Criminal Indictments Irrecoverable Ratings Downgrades Bigger Fines and Settlements Irreparable Reputational Damage goal Make Our Business Better Keep Us Out of Trouble Improved Risk/Return Decisioning New Risks to Recognize and Manage Optimizing Risk-Taking Capacity Aggregate Risk Reporting and Value Management Linking Strategy to Risk and Optimizing Use of Capital Development of Consistent Risk Appetite Effective Use of Risk Mitigation All too confusing and overdone… Except when we get in trouble Must do it… But how do we do it better?

4. 3 ERM Framework: Key Elements Operational Compliance Business Practices and Sales Suitability CreditMarket/Equity/FX Pricing risk Strategic Risk New Risk Management Methods and Approaches Risk Framework & Governance Aggregate Risk Reporting and Value Management Risk Linkages

5. 4 ERM Framework: Risk Framework and Governance  Defining the approach/philosophy to risk  Organizational and governance structure ―Role of the center, the CRO and risk committees ―Role of existing risk silos and infrastructure ―Defining risk taking, risk owner, risk champion, controlling, monitoring, measurement, management, oversight and assurance roles and accountability ―Risk responsibility matrix ―Delegation of authority ―Governance, reporting lines and information/reporting  Risk appetite and limit structure  Incentive alignment ―Linkages to performance measurement and people effectiveness  Strategic value linkage ―Define how risk information will be used in decision making (e.g., pricing, capital allocation) Operational Compliance Business Practices and Sales Suitability Credit Market/equity/FX Pricing risk Strategic Risk New Risk Management Methods and Approaches Risk Framework & Governance Aggregate Risk Reporting and Value Management Risk Linkages

6. 5 ERM Framework: New Risk Management Methods and Approaches  Economic Value - Economic Capital/Embedded Value : ―Increased focus on risk-adjusted return analysis, capital planning and risk budgeting ―Provide additional tool for strategic decision including asset allocation, pricing and performance measurement  Risk identification and assessment methods: ―Emerging risks and key risk identification and assessment ―Emerging practice to manage non-financial risks ―One key challenge: get the buy-in from business units  Convergence of risk controlling activities and risk assessment: ―Integration of existing assessment methodologies (e.g., Sarbanes-Oxley, operational, compliance and IT risk assessment, etc.)  Risk scenarios: ―Stress testing and scenario analysis of drivers of risk ―Scenarios offer additional dimension for risk analysis, in addition to indicative and predictive measures Operational Compliance Business Practices and Sales Suitability CreditMarket/equity/FX Pricing risk Strategic Risk New Risk Management Methods and Approaches Risk Framework & Governance Aggregate Risk Reporting and Value Management Risk Linkages

7. 6 ERM Framework: Aggregate Risk Reporting and Value Management Operational Compliance Business Practices and Sales Suitability CreditMarket/equity/FX Pricing risk Strategic Risk New Risk Management Methods and Approaches Risk Framework & Governance Aggregate Risk Reporting and Value Management Risk Linkages  Reporting of ERM: –Effort to aggregate existing risk reporting packages to develop comprehensive view of risks –Non-financial risks are added to risk reporting –More forward-looking measures help assess potential impact on organization  Limits monitoring and escalation: –Reporting of limits or other policy breaches –Escalating procedures define roles, authority and accountability  Linkage to strategic decision making process: –Strengthening linkage between risk reporting, performance measurement, and strategy –Making decision based on value creation and/or risk-adjusted performance measures, linking top line revenues and risk  Linkage to tactical decision making processes: –Strengthening linkage between holistic view of risks and key decision-making processes –Revising new product development, product pricing, investments/asset allocation, credit risk management, ALM and operational optimization

8. 7 ERM Framework: Risk Linkages  Improve linkage between risk classes and risk organizations: –Alignment of management-level and corporate-level governance structures –Assign ownership for risk monitoring  Correlation and correlation breakage: –Correlation at the mean or correlation at the tail? –Extreme events show that correlation between risks tend to move towards 1  Integration of risk quantification: –Emerging methodologies to quantify non-financial risks –Integration of risk measures allow linkage between measures of risk silos and overall risk appetite and tolerance Operational Compliance Business Practices and Sales Suitability CreditMarket/equity/FX Pricing risk Strategic Risk New Risk Management Methods and Approaches Risk Framework & Governance Aggregate Risk Reporting and Value Management Risk Linkages

9. 8 Primary Benefits of ERM Programs  Optimize capital utilization. Links decision making to risk/capital to ensure returns are adequate for risks taken  Enhance accountability about risks by ensuring there is a process to identify, understand and manage significant risks to protect enterprise value  Potential to reduce the number and impact of surprises  Increase transparency about risks, thereby improving credibility with investors and other stakeholders  Address regulatory focus on enterprise-wide risk perspective

10. 9 Key Considerations for FBOs  Status vs. Structure—what must an FHC build in the US? –No prescriptive regulatory requirements –Receptive to what can be shown to “work” in practice –Practical need to invest in local ERM increases with scale/complexity of US operations –Analogous to home-host challenge for regulators  How to avoid redundancy and conflict with HO risk management, legal entity structures and global BU management? –Ensure comprehensive and timely risk information available locally, since a problem will have to managed here first –Support global risk governance by providing information upstream  HO oversight a key consideration for US regulators –Local ERM can help ensure effective oversight –Local ERM provides a “window” on entire US risk profile for Fed  Focus on risk information and reporting –Local needs and HO needs will differ

11. 10 ERM Challenges and Critical Success Factors  Visible executive support  Solution that is tailored to company  Focus on better management of risk, not just risk reduction  Need to leverage existing risk processes and minimize complexity  Create and reward transparency  Change Management approach is critical  Recognize and compensate for risk capability, competency and culture  Recognize what gets measured gets managed and vise-versa (don’t remove focus on core risks )

12. 11 E&Y Contacts  Hank Prybylski Partner and Practice Leader, Global Financial Services Risk Management (212) 773-2823 lawrence.prybylsky@ey.com  Christopher Maher Partner (212) 773-6524 chris.maher@ey.com  Don Vangel Advisor, Regulatory Affairs (212) 773-2129 donald.vangel@ey.com

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