Market Risk Management in KBC Bank Investor Relations conference 2 July 2001

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Market Risk Management inKBC BankInvestor
Relations conference 2 July 2001

• Maurits VerherstraetenGlobal Risk Manager

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Risk management

• Key success factors
• Risk profile ALM
• Core deposits savings accounts
• ALM evolution of BPV
• Tracking equity portfolio
• Risk profile FX/MM trading
• Trading interest rate risk
• Trading FX risk
• Risk profile equity trading
• Credit risk
• Preparing for Basel-2
• Time axis expected loss models
• Summary

Topics
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Key success factorsActive involvement of senior
management

• Market Committee (trading risks) and Investment
  Committee (ALM risks) with representation by 3
  members of Executive Committee
• Executive Committee 5 out of 8 have been/are
  member of Market and Investment Committees
• ? deep understanding and active dialogue
• Audit Committee at least quarterly presentation
  of risk profile
• Board of Directors yearly approval of limits

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Key success factors Strong risk management at
bank group level

• Independent Risk Management Division reporting
  to CEO
• Global framework sets out principles of risk
  management organization on groupwide basis with
  focus on functional authority of central Risk
  Management Division and common methodology
• Everybody knows what he/she can or cannot do
• Active committees
• Weekly meetings Market and Investment Committees
  with members senior management and ad hoc
  specialists
• Alco abolished
• Pro-active involvement and strong cultural impact

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Institutional framework
Board of
Audit
Directors
Committee
Executive
Committee
I N V E S T M E N T
M A R K E T
C O M M I T T E E
C O M M I T T E E
Risk Management Division
Market risk
Metho
Credit risk
Market risk
-
Trading
dology
ALM
Global
Credit
Investment
Treasury
Division
Divisions
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Key success factors Methodology, systems and
people

• Methodology
• Linear trading risks Value-at-Risk (var/covar,
  99,10 d holding), gaps, BPV, maturity
  restrictions, stop-losses
• Options scenario analysis and Greeks. From fixed
  to probability based shifts in underlying and
  volatility and finally towards historical VAR?
• ALM interest rate sensitivity, BPV, duration,
  VAR
• Limits
• Hard limits
• As low as possible without hindering strategic
  positioning
• Since 2 years limits reduced by 40 accompanied
  with increase in quality of profits

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Key success factors Methodology, systems and
people

• Systems
• Implementation Algorithmics expected 30/7/2001
• Towards internal model for FX/MM and KBC FP
  Brussels
• Market data project
• Savings of 600 mln EUR in regulatory capital
• Active daily follow-up of various risk measures
  on basis of intranet application (eRIS) with info
  on exposures, various risk measures, limit
  systems, simulations, capital requirements,
  market data, book structure, etc.
• Continuous investment
• People
• 35 people centrally and some 60 decentrally
  (esp. Central Europe)

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Risk profile ALM

• Centralization of all structural market risks
  (esp. interest rate risk) from the retail network
  into head-office
• Investment of free capital and reserves and
  core deposits in (mainly) bond and (limited)
  equity investment portfolio
• Disciplined use of benchmarking philosophy for
  non-maturity accounts
• define core deposits
• define appropriate maturity
• cyclical investment philosophy
• used for risk measurement and internal transfer
  pricing
• Equity holdings BEL-20 portfolio and
  Eurostoxx-tracking portfolio passive and longer
  term

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Core deposits savings accounts
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ALM Evolution of BPV
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Tracking equity portfolio VAR
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Risk profile FX/MM trading

• Concentration of limits and risks in Brussels
  dealingroom
• Dealingrooms in branches and subs focus on local
  funding, sales and niches
• Concentration on linear interest rate risk in
  EUR, USD and GBP
• Small exposure in FX risks and in FX- or
  IR-options
• Central Europe marginal increase in VAR-limits
  (4) to include our Central European subs

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Trading interest rate risk VAR
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Trading FX risk VAR
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Risk profile Equity trading

• Who and where
• KBC Securities Brussels, Paris, Amsterdam
• KBC FP Brussels, London, New York, Tokyo, Hong
  Kong
• Peel Hunt (London)
• Central Europe Patria (Prague), KH Investment
  (Hungary)
• Relative importance of various centers FP,
  Securities, Peel Hunt, Central Europe
• Predominantly non-linear equity risks

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Equity trading global scenario analysis
(in mln EUR)
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Credit risk

• Development of various internal rating models,
  based on building blocks such as probability of
  default, exposure at default and recovery rates
• Segmentation of the credit portfolio and choice
  of appropriate tools
• Internal rating models, verbal definitions,
  external ratings, KMV ? internal rating
  classes (9 performing)
• Establishment broad credit risk database
• Anticipating Basel-2 we can just continue what
  we had already planned

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Time axis Expected Loss models
2004
2001
2002
2003
2000
Large corporates
Central Europe
US corporates
Other segments
Extensions behavioural scoring
Banks
SME
Real estate
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To summarize

• Creating risk awareness throughout the
  organization risk management is a key function
  and is explicitly mentioned in the strategy
  statement of the Group
• Setting up appropriate control and committee
  structures
• Continuous investment in methodology, systems and
  people
• Contributing to strategic positioning the bank
  (ALM, internal model, Basel-2)

Add shareholder value through higher quality of
profits and capital savings
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Risk Management inKBC BankInvestor Relations
conference 2 July 2001

• Maurits VerherstraetenGlobal Risk Manager