Anglo Pillar_3 31st Dec 2011

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Pillar 3 Disclosures

31 December 2011


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Irish Bank Resolution Corporation Limited


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Table of Contents

1. Background ................................................................................................................................... 4

1.1 Regulatory context .............................................................................................................. 4

1.2 Scope of application .............................................................................................................61.3 Supervision ..........................................................................................................................6

1.4 Transferability of capital .......................................................................................................6

1.5 Date of Pillar 3 disclosures ....................................................................................................6

1.6 Medium/Location of Pillar 3 ..................................................................................................6

1.7 Basis of preparation and consolidation .................................................................................. 7

2. Principal Risks and Uncertainties ....................................................................................................8

2.1 Introduction .........................................................................................................................8

2.2 General economic conditions ................................................................................................8

2.3 Government and restructuring risk ........................................................................................8

2.4 Ratings downgrades .............................................................................................................9

2.5 Eurozone risk .......................................................................................................................92.6 Liquidity and funding risk ................................................................................................... 10

2.7 NAMA ............................................................................................................................... 10

2.8 Credit risk .......................................................................................................................... 10

2.9 Operational risk ................................................................................................................. 11

2.10 Events of default risk .......................................................................................................... 11

2.11 Regulatory compliance risk ................................................................................................. 12

2.12 Taxation risk ...................................................................................................................... 12

2.13 Market risk ........................................................................................................................ 12

2.14 Valuation risk ..................................................................................................................... 13

2.15 Fitness and probity regime ................................................................................................. 13

2.16 Litigation and legal compliance risk .................................................................................... 13

3. Risk Management ........................................................................................................................ 14

3.1 Introduction ....................................................................................................................... 14

3.2 Risk oversight and corporate governance ............................................................................ 15

3.3 Risk appetite and strategy .................................................................................................. 16

4. Material Business Risks ................................................................................................................ 18

4.1 Individual risk types ........................................................................................................... 18

4.2 Credit risk .......................................................................................................................... 18

4.3 Liquidity and funding risk ................................................................................................... 22

4.4 Market risk ........................................................................................................................ 24

4.5 Operational risk ................................................................................................................. 27

4.6 Reputational risk ................................................................................................................ 27

4.7 Legal risk ........................................................................................................................... 28

4.8 Conduct risk ....................................................................................................................... 28

4.9 Governance risk ................................................................................................................. 28

4.10 Compliance and regulatory risk ........................................................................................... 29

5. Capital ........................................................................................................................................ 30

5.1 Capital resources ................................................................................................................ 30

5.2 Pillar I capital approaches ................................................................................................... 315.3 Approach to the calculation of the Banks internal capital ..................................................... 32

5.4 Minimum capital requirements ........................................................................................... 32

6. Credit Risk .................................................................................................................................. 33

6.1 Credit risk quantitative disclosures ...................................................................................... 33


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6.2 Country risk ....................................................................................................................... 38

6.3 Derivative counterparty credit risk ...................................................................................... 38

6.4 Exposure to credit risk ........................................................................................................ 40

6.5 Impairment of financial assets ............................................................................................ 41

6.6 Credit risk mitigation .......................................................................................................... 477. External Credit Assessment Institutions (ECAIs).......................................................................... 498. Equity Holdings ........................................................................................................................... 519. Securitisations ............................................................................................................................ 52

9.1 Group role and involvement in relation to securitisations ..................................................... 52

Appendix A: Remuneration Disclosure ................................................................................................ 54


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1. Background

Irish Bank Resolution Corporation Limited (IBRC, the Group or the Bank), formerly Anglo Irish Bank Corporation Limited(Anglo), was

nationalised by the Irish Government on 21 January 2009 following the signing into law of the Anglo Irish Bank Corporation Act, 2009.

A joint restructuring and work-out plan for the Bank and Irish Nationwide Building Society (INBS) (the Restructuring Plan) was

submitted to the European Commission (EC) on 31 January 2011. This Restructuring Plan provided for the merger of the Bank a nd INBS

following the transfer of the majority of the deposit books and NAMA senior bonds held by both entities at that time to other Irish

financial institutions. Following a Direction Order made by the Irish High Court on 8 February 2011 under the Credit Institutions

(Stabilisation) Act 2010 (CISA) and pursuant to a Transfer Order made by the High Court under CISA on 24 February 2011, the Bank

transferred the majority of its Irish and UK customer deposits to Allied Irish Banks, p.l.c. and AIB Group (UK) p.l.c., together with its NAMA

senior bonds and its Isle of Man subsidiary. The EC, under EU State aid rules, approved the Restructuring Plan on 29 June 2011. On 1 July

2011 all of the assets and liabilities (with the exception of certain excluded liabilities) of INBS were transferred to the Bank by way of a

transfer order made by the Irish High Court under section 34 of CISA (the INBS Transfer Order). The Bank was renamed on 14 October

2011 as Irish Bank Resolution Corporation Limited, and now trades as IBRC.

IBRC is a Government-owned banking entity which, in accordance with the commitments made by the State to the EC, will not be active

in new lending or deposit markets. A Monitoring Trustee was approved by the EC on 8 December 2011 to report on the Groups ad herence

to these Restructuring Plan commitments. The strategic objective of the Bank is to work out its assets in an orderly process over a period

of up to ten years, securing the best outcome for the taxpayer. IBRC will continue to operate as a regulated entity, bound by the Capital

Requirements Directive (CRD) and therefore subject to an 8% minimum capital requirement.

In accordance with its strategic objective, the Bank successfully disposed of the majority of its US loan book during 2011. This process

which began in late 2010 involved individual loan sales early in 2011 combined with a bulk sale of loans which was completed in a number

of tranches during the final quarter of the year. Following this disposal, the Banks representative office in New York was closed in January

2012.

The Banks branches in Austria and Jersey were closed in June 2011 and its branch in Germany closed in August 2011. The Bank h as also

put the properties of the former INBS branch network on the market for sale.

On 30 January 2012 the Bank announced that the Board had approved a strategy and direction put forward by management to wind down

its Wealth Management business in an orderly fashion. This process is currently underway.

1.1 Regulatory context

The Revised Basel Accord (Basel II) framework was implemented in the European Union (EU) through the Capital Requirements

Directive (CRD).

Basel II consists of three mutually reinforcing Pillars, described as follows:

Minimum Capital Requirements (Pillar 1) involves the calculation of minimum capital requirements for credit, market and

operational risk as prescribed by the CRD;

Supervisory Review (Pillar 2) focuses on a banks Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory

Review and Evaluation Process (SREP) by regulators of banks internal capital adequacy; and

Market Discipline (Pillar 3) requires banks to publicly disclose detailed quantitative and qualitative information on their risk

management policies, practices and exposures to allow investors and other market participants to understand the risk profile

of the institution.

This document represents the Groups Pillar 3 disclosures. Quantitative disclosures as required under Annex XII of the CRD ar e provided

throughout the document which should be read in conjunction with the Groups Annual Report & Accounts 20111.

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Pillar 3 disclosures are not required to be audited by the Banksexternal auditors. The disclosures in this document have been subject to a

thorough internal review including final approval by the Board Audit Committee. This document has been prepared in accordance with

the Banks Pillar 3 Policy.

Regulatory capital requirements

The Group is required to maintain a minimum total capital ratio of 8.0% which was set by the Central Bank in October 2010. The level of

risk weighted assets determines the amount of regulatory capital required to maintain this ratio. The Groups minimum capital

requirement represents 8.0% of total risk weighted assets. The Group adopts the Basel II Standardised Approach for the calculation of its

capital requirements for credit risk and operational risk. The capital requirements for market risk are calculated in accordance with the

Standardised Measurement Method. The following table outlines the Groups Pillar 1 capital requirements and its key regulatory capital

ratios.

Risk weighted assets

31 December 2011

m

31 December 2010

m

Credit risk 22,262 33,435

Market risk 702 762

Operational risk 2,112 2,471

Total 25,076 36,668

Key capital ratios

Core tier 1 ratio 15.1% 10.9%

Total capital ratio 16.3% 12.4%

The level of risk weighted assets above reflects the Groups Pillar 1 capital requirements. The Bank is in the process of working out its

assets in an orderly process over a period of up to ten years. As a result of this focus on deleveraging, an updated ICAAP has yet to be

finalised. Accordingly the Group has yet to determine the appropriate level of capital requirements under Pillar 2.

Assessment of capital requirements

The capital requirements of both Anglo and INBS were assessed by the Central Bank in September 2010. As a result of this assessment,

new capital of 6.4bn for Anglo and 2.7bn for INBS was injected by the Irish Government in December 2010, bringing the totalamount of

State capital the two institutions have received since 2009 to 29.3bn and 5.4bn respectively.

In May 2011 the Central Bank published an addendum to the March 2011 Financial Measures Programme (FMP) which provided details of

further analysis done in this regard. This additional work, which was conducted by Blackrock Solutions (Blackrock) and asse ssed by The

Boston Consulting Group, sought to develop an independent view on the loan loss forecasts that were used in the Central Bank s capital

requirement assessment. This work focused on verifying that the loan loss forecasts were sufficiently conservative and consistent with

those forecast by Blackrock as part of the Prudential Capital Assessment Review (PCAR) conducted for other Irish banks. The addendum

to the FMP indicated that Blackrock found the loan loss estimates to be reasonable and that no additional capital investment was

required.

Regulatory environment

The EC amended certain aspects of the CRD when Directive 2009/111/EC was issued in December 2009. This CRD II Directive, which was

transposed into Irish law and came into effect on 31 December 2010, primarily amended aspects of the CRD in relation to new

requirements for hybrid tier 1 capital; the large exposures regulations; risk management requirements for securitisations; and trading

book capital requirements. These amendments have not had a material impact on the capital position of the Group.

On 1 January 2011, the EU Capital Requirements Directive III (CRD III) was implemented with principal enhancements in the a rea of

capital requirements for trading books and for investments in re-securitisations. These amendments have not had a material impact on

the capital position of the Group. In addition, CRD III increased the nature and extent of required disclosures.

In July 2011, the EC introduced proposals to further strengthen banking r egulation through CRD IV which aims to achieve a single rule

book, harmonising prudential requirements across the EU. CRD IV proposes a number of measures to raise the quality, consistency and

transparency of banks capital bases through: higher own funds requirements; improved quality of capital instruments; harmonised


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regulatory adjustments to be made from Common Equity Tier 1; capital buffers to deal with economic cyclicality; and more detailed public

disclosures of regulatory capital bases. CRD IV also proposes:

The introduction of a new leverage ratio which is proposed to be a non-risk-weighted measure aimed at limiting an excessive

build-up of leverage;

New liquidity metrics aimed to improve the short-term liquidity risk profiles of banks and also to encourage banks towards

funding balance sheets from stable, long-term sources; and

Principles and standards for corporate governance regarding the composition of boards, their functioning and their role in risk

oversight and strategy.

Certain aspects of CRD IV are due to be implemented from 1 January 2013 with a planned full implementation of the finalised provisions of

CRD IV by 2019.

1.2 Scope of application

The Banks Pillar 3 disclosures address the operations of IBRC and its subsidiaries on a consolidated basis. Following the approval by the

European Commission of the joint restructuring and work-out plan for the Bank and INBS on 29 June 2011, the Banks primary objective

has become the orderly resolution of the Group over a period of up to ten years, securing the best possible outcome for the taxpayer.

1.3 Supervision

The Group is regulated by the Central Bank of Ireland (Central Bank) in Ireland. The Group is also subject to limited regulation by the

Financial Services Authority in the United Kingdom.

At 31 December 2011, the Group had two banking licenses held by; Irish Bank Resolution Corporation Limited (IBRC) and IBRC Mortgage

Bank (IBRCMB).IBRC is subject to regulatory supervision on a consolidated group basis and also on an individual/solo basis and IBRCMB

is subject to supervision on an individual/solo basis. At no point during the year to 31 December 2011 were minimum regulatory capital

requirements breached by IBRC or IBRCMB.

Subsequent to 31 December 2011, IBRCMB redeemed the remaining 1.8bn of its commercial mortgage asset covered securities in issue,

all of which were held by the Bank. These redemptions were completed following consultation with the Central Bank and in accordance

with the requirements of the independent Cover-Assets Monitor. In addition, the beneficial interests in the portfolio of commercial

mortgage loans acquired by IBRCMB were transferred back to the Bank, significantly reducing the level of assets in IBRCMB. All derivative

hedging contracts entered into between IBRCMB and the Bank have been terminated. IBRCMB continues to be a licensed credit

institution regulated by the Central Bank of Ireland.

1.4 Transferability of capital

IBRC, a credit institution licensed by the Central Bank, is the Groups parent company. At 31 December 2011 the bank had one wholly

owned licensed banking subsidiary, IBRCMB, which is subject to individual capital adequacy requirements. Subject to meeting the

minimum regulatory requirements prescribed to the Bank by the regulatory authorities regarding the maintenance of capital, andcompliance with the Asset Covered Securities Act, 2001, as amended, and the constitutional documents of IBRCMB, there were no

impediments at 31 December 2011 to the prompt transfer of own funds or the repayment of l iabilities between IBRCMB and the Bank.

1.5 Date of Pillar 3 disclosures

The Banks Pillar 3 disclosures are published annually and are based on its financial position as at 31 December.

1.6 Medium/Location of Pillar 3

The medium for the Banks Pillar 3 disclosures is its internet site (www.ibrc.ie) where these disclosures are publicly available.


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1.7 Basis of preparation and consolidation

This section sets out the differences between the basis of consolidation for statutory reporting purposes and prudential reporting

purposes.

Statutory reporting

The Bank prepares its financial statements, on a consolidated basis, to comply with International Financial Reporting Standar ds (IFRS),

as adopted by the European Union (EU), and relevant Irish legislation.

The consolidated financial statements include the financial statements of IBRC and its subsidiary undertakings (including special purpose

entities) prepared to the end of the financial year. An entity is a subsidiary where the Group has the power, directly or indirectly, to control

the financial and operating policies of the entity so as to obtain benefits from its activities. The existence and effect of potential voting

rights that are currently exercisable or convertible are considered in assessing whether the Group controls the entity.

Subsidiaries are consolidated from the date on which control is transferred to the Group until the date that control ceases. Intercompany

balances and any unrealised gains and losses, or income and expenses, arising on transactions between Group entities are eliminated on

consolidation.

The Groups interests in joint ventures and associates are primarily recognised using the equity method of accounting and are initially

recognised at cost, with the exception of interests in joint ventures or associates held under investment contracts which are designated at

fair value through profit or loss. Under the equity method, the Groups share of the post-acquisition profits or losses after taxation of joint

ventures and associates is recognised in profit or loss and its share of post-acquisition movement in reserves is recognised in reserves. The

Group does not recognise any share of post-acquisition profits if a contractual obligation to pay such profits to another entity arises. The

cumulative post-acquisition movements are adjusted against the carrying amount of the investment.

The transfer of assets and liabilities from INBS on 1 July 2011 constituted a business combination involving entities under common

control, as both the Bank and INBS were controlled by the same shareholder, the Minister for Finance. Such transactions are excluded

from IFRS 3 Business Combinations. In accordance with IFRS, the Group has applied the guidance as set out in FRS 6 Acquisi tions and

Mergers. Accordingly, the assets and liabilities of the transferred business were measured upon initial recognition at the amounts

recorded in the consolidated financial statements of INBS, as measured under IFRS, after harmonisation adjustments to give ef fect to the

business combination. The additional amount recognised in shareholders funds on 1 July 2011 represents the harmonised value of the net

assets of INBS on the transfer date. The Bank has incorporated the results of INBS only from the date on which the business combination

occurred and has not restated prior year comparatives.

Prudential reporting

The Group submits Common Reporting (COREP) templates to the Central Bank of Ireland for the assessment of its capita l adequacy on a

monthly basis. The Group consolidates all subsidiaries that are required to be consolidated under IFRS. However, for regulatory capital

adequacy purposes, the Groups life assurance subsidiary company is not fully consolidated and the investment in the undertaking is

deducted from total capital under the national discretion available until 31 December 2012.

The amounts included in the COREP return are based on the Basel II Standardised Approach to calculating Pillar 1 capital requirements

and include the measure, Exposure at Default (EAD). EAD refers to the extent to which the Bank is expected to be exposed in the event

of default. The calculation of EAD takes account of credit risk mitigation and credit conversion factors relating to off balance sheet items.

EAD for a lending customer may therefore include the loan amount outstanding (net of eligible credit risk mitigation), counterparty credit

risk on related derivative contracts and the credit equivalent of undrawn lending commitments. Many of the Pillar 3 disclosures are based

on the EAD measure.

The EAD measurement basis is different from that of the Groups Statutory Financial Statements which are based on IFRS accounting

standards. For example, loans and receivables exposures are initially recognised in the Statutory Financial Statements at fair value

including direct and incremental transaction costs and are subsequently carried on an amortised cost basis. Such differences should be

considered when making comparative assessments between information contained in the Statutory Financial Statements and Pillar 3

disclosures.


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2. Principal Risks and Uncertainties

2.1 Introduction

The Group is subject to a variety of risks and uncertainties in the normal course of its business activities.

The Board of Directors and senior management have ultimate responsibility for the governance of all risk taking activity and have

established a framework to manage risk throughout the Group.

The business risks and uncertainties below are those risks which the Directors currently believe to be the material and principal risks to the

Group. The precise nature of all the risks and uncertainties that the Group faces cannot be predicted and many of these risks are outside of

the Groups control.

2.2 General economic conditions

The Groups results are influenced by macroeconomic and other business conditions in the Groups three historical markets: Ireland, theUK and to a lesser extent the US.

Some sectors in Ireland have sustained their contribution to export-led growth but, overall, economic conditions in Ireland remain

challenging and consequently the results of the Group have been adversely affected. Ireland continues to experience subdued consumer

confidence, high unemployment, and weaker domestic commercial activity. In the short term, austerity measures introduced in

consecutive budgets continue to define domestic business sentiment and inhibit personal disposable income and spending. Such

measures, which form part of the overall adjustment programme for Ireland, have improved the countrys competitiveness.

Further deterioration in property prices could further adversely affect the Groups financial condition and results of its op erations. The

Groups financial performance may also be affected by future recovery rates on assets and the histori cal assumptions underlying asset

recovery may no longer be accurate given the general economic situation.

While there has been some improvement in the UK and US, conditions remain uncertain surrounding the sustainability of both th e global

and relevant regional economic recoveries, particularly if fiscal and monetary supports are withdrawn. The UK economy is still exposed to

changes in UK Government policy initiatives designed to foster growth, which in turn could impact negatively on the broader demand for

goods and services. As a result, unemployment could increase and residential and commercial property would again suffer decreases in

value.

2.3 Government policy and restructuring risk

As the Banks only shareholder, and under legislative powers relevant to the Bank, the Minister for Finance is in a position to exert

significant influence over the Group. The Bank is also wholly reliant on the support of the Irish Government. Government policy in respect

of both the Bank and the wider financial services sector has a major impact on the Group. Changes to government policies or the

amendment of existing policies could adversely impact the financial condition and prospects of the Group.

For instance, if new governmental policies were to require the Bank to r esolve its position over a shorter than expected time frame,

projected asset recovery values could be negatively impacted.

Also, due to the substantial package of assistance for Ireland agreed between the Government, International Monetary Fund (IMF) and

the European Union (EU) in November 2010, which included agreements to reorganise and restructure the Irish banking sector,the IMF

and the EU retain significant influence on the future of the Bank. The Bank also remains subject to risks which could result from any

further measures agreed between the Government, the IMF and the EU.

The Credit Institutions (Stabilisation) Act 2010 ( CISA), enacted on 21 December 2010 following agreement of the assistance package,

gives broad powers to the Minister for Finance to facilitate the reorganisation and restructuring of the banking system in Ireland. In this

context, the Irish Government submitted a joint restructuring plan and work-out plan in respect of the Bank and Irish Nationwide Building


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Society (INBS)to the European Commission (EC) on 31 January 2011 (Restructuring Plan). The Restructuring Plan had been prepared in

conjunction with the Department of Finance and the National Treasury Management Agency (NTMA).

A direction order (the Direction Order) was made by the Irish High Court under Section 9 of CISA on 8 February 2011 under which the

Bank was directed to (a) reduce its net lending in line with forecasts derived from the Restructuring Plan, (b) formulate a detailed steps

plan for the rationalisation and, where appropriate, closure of the Banks UK offices and its branches in Dusseldorf, Vienna and Jersey and

submit it to the NTMA by 31 March 2011, (c) formulate a detailed steps plan for the disposal of the Banks Wealth Management business

and submit it to the NTMA by 31 March 2011, (d) formulate in conjunction with INBS a detailed steps plan for the Banks acquisition

of/merger with INBS and submit it to the NTMA by 31 March 2011, (e) transfer the remaining eligible loan assets (as defined in the

National Asset Management Agency Act 2009 (the NAMA Act) to the National Asset Management Agency (NAMA) by the later of 31

December 2011 or the completion of any ongoing litigation delaying transfer of those loans and (f) take certain steps in co nnection with

an auction process to be operated by the NTMA in connection with the transfer of certain of the Banks deposits and assets.

On 24 February 2011, the Irish High Court made a transfer order under Section 34 of CISA pursuant to which the majority of the Banks

Irish and UK deposit books, certain NAMA bonds and the Banks shares in its wholly-owned deposit-taking Isle of Man subsidiary were

transferred to Allied Irish Banks, p.l.c. (AIB) and AIB Group (UK) p.l.c. (AIB UK) (the AIB Transfer Order). On 31 March 2011, the Bank

submitted the three steps plans referred to at (b), (c) and (d) above to the NTMA. On 7 April 2011 the Minister for Finance issued certain

requirements (Ministerial Requirements) to the Bank under Section 50 of CISA pu rsuant to which the Bank was obliged to implement inall material respects, with the approval of the NTMA, the high level steps plans appended thereto in relation to (i) the rationalisation and,

where appropriate, closure of the Banks UK offices and its branches in Dusseldorf, Vienna and Jersey, (ii) the disposal of the Banks

Wealth Management business and (iii) the Banks acquisition of/merger with INBS. The Bank was also required to prepare, in conjunction

with INBS and the NTMA, a high level restructuring and work-out steps plan, based on the Restructuring Plan (the High Level Steps Plan)

and, subject to the approval of the NTMA, implement that High Level Steps Plan, subject to any variations directed by the EC. The Bank is

proceeding to implement the High Level Steps Plan, following approval by the NTMA on 20 June 2011.

The Restructuring Plan, which was approved by the EC on 29 June 2011, provides for the amalgamation of the Bank with INBS and sets

out in detail how the loan books of the combined entity will be resolved over a period of up to ten years. To ensure that the assets are

managed in a way consistent with the resolution of the combined entity, certain commitments are now binding upon the Bank, including

a commitment that it cannot enter into new activities. A Monitoring Trustee was approved by the EC on 8 December 2011 to report on a

quarterly basis for a period of three years on the Groups adherence to these Restructuring Plan commitments.

The Bank has prepared an operating plan which is intended to form the basis for the implementation of the Restructuring Plan and the

High Level Steps Plan. The operating plan focuses on accelerated deleveraging of the Bank, and includes the accelerated disposal of its US

loan portfolio and the disposal or wind-down of its Wealth Management division in accordance with the Restructuring Plan, the Direction

Order, the Ministerial Requirements and the High Level Steps Plan. The initiatives are subject to operational challenges and market

dependencies in respect of timing and optimal pricing, which will increase the execution risk of the operating plan.

On 30 January 2012, the Bank announced that the Board had approved a strategy and direction put forward by management to wind

down its Wealth Management business in an orderly fashion.

2.4 Ratings downgrades

During 2011, the Banks long-term Standard & Poors (S&P) counterparty credit rating was downgraded by three notches to CCC and

remains below investment grade. Similar action was taken by Moodys during the period (rating cut from Ba3 to Caa2) and by Fitch (rating

cut from BBB- to BB-). In taking these rating actions, credit rating agencies cited concerns about the Irish Governments publically

indicated preference to impose losses on the Group's senior unsecured and unguaranteed debt holders.

Also during the year to 31 December 2011, the Irish Sovereigns senior debt suffered further credit rating downgrades. S&P lowered their

rating from A to BBB+, Moodys adjusted their rating from Baa1 to Ba1, and Fitch reduced their rating from BBB+ (Stable) to BBB+

(Negative).

2.5 Eurozone risk

During 2011, the economic, monetary and political uncertainty in a number of eurozone members increased. The cost and availabili ty of

funding available to European banks, including the Group, may be affected by any further escalation of the sovereign crisis, and could also


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materially adversely affect the Groups financial condition and results of operations due to the impact on economic conditions in the

eurozone and the European Union in general.

2.6 Liquidity and funding risk

Liquidity and funding risk is the risk that the Group does not have sufficient financial resources available at all times to meet its

contractual and contingent cash flow obligations or can only secure these resources at excessive cost. This risk is inherent in all banking

operations and can be affected by a range of institution-specific and market-wide events. The Groups liquidity may be adversely affected

by a number of factors, including significant unforeseen changes in interest rates, ratings downgrades, higher than anticipated losses on

loans and disruptions in the financial markets generally.

In response to major market instability and illiquidity, governments and central banks around the world have intervened in order to inject

liquidity and capital into financial markets and, in some cases, to prevent the failure of systemically important financial institutions. These

various initiatives to stabilise financial markets are subject to revocation or change, which could have an adverse effect on the availability

of funding to the Group.

In common with many other banks, the Groups access to traditional sources of liquidity remains constrained. The Bank has experienced

greater reliance on Government and monetary authority support mechanisms due to the AIB Transfer Order and the maturity of debt

securities. The Banks continued reliance on support from central banks includes access to special funding facilities, a key factor in

ensuring successful implementation of the operating plan as well as adapting to potential regulatory developments. The funding support

from central banks and monetary authorities amounted to 42.2bn at 31 December 2011, representing 87%of total funding, and included

40.1bn borrowed under special liquidity facilities. This support increased from December 2010 (70% of total funding) following the

transfer of certain Irish and UK deposits and NAMA bonds to AIB and AIB UK under the AIB Transfer Order.

Should monetary authorities materially change their eligibility criteria or limit the Banks access to such special funding facilities without

providing an alternative funding source, this would adversely affect the Groups financial condition and prospects. Additionally, credit

rating downgrades may impact on the eligibility of assets currently pledged as collateral for central bank open market sale and repurchase

agreements.

2.7 NAMA

The Bank continues to be designated as a participating institution in NAMA. The NAMA Act provides for the acquisition by NAMA from

participating institutions of eligible bank assets, which may include performing and non-performing loans made for the purpose, in whole

or in part, of purchasing, exploiting or developing development land and loans associated with these loans.

As NAMA reserves the right to adjust the consideration paid for assets previously transferred when the due diligence is completed, the

final adjustment to transfer values will only be determined when full due diligence in respect of the assets has been completed. These

adjustments have the potential to be either positive or negative, depending on the assessment of the underlying loans.

At 31 December 2011 the Bank had 0.1bn of loans remaining to transfer to NAMA. Not all of the remaining assets may ultimately transfer

to NAMA. The Group may also be required to indemnify NAMA in respect of various matters, including NAMAs potential liability arising

from any error, omission, or misstatement on the part of the Group in information provided to NAMA. In addition, the EC may a ssess the

compatibility and price of the transferred assets and could invoke a claw-back mechanism in the case of excess payments.

The NAMA Act provides that up to 5% of the debt securities that will be issued to a participating institution may be subordinated. If NAMA

ultimately makes a loss, the Group may not recover the full value of those subordinated bonds.

2.8 Credit risk

Credit risk is the risk that the Group will suffer a financial loss from a counterpartys failure to pay interest, repay capital or meet a

commitment, and the collateral pledged as security is insufficient to cover the payments due. It arises primarily from the Groups lending

activities to customers, interbank lending, investment in available-for-sale debt securities and derivative transactions.

Adverse changes in the credit quality of the Groups borrowers, counterparties and their guarantors, and adverse changes arising from the


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general deterioration in global economic conditions, have reduced the recoverability of the Groups loan assets and have continued to

increase the quantum of impaired loans and impairment charges during the period.

The Group has exposures to a range of customers in different geographies, including exposures to investors in, and developers of,

commercial and residential property. At 31 December 2011, 67% of the Groups loans and advances to customers (excluding loansheld for

sale to NAMA and impairment provisions) were in Ireland, 31% were in the UK and 2% in the US.

Irish property prices continued to show significant declines throughout the last year and developers of commercial and residential

property are facing particularly challenging market conditions, including substantially lower prices and volumes. In addition, the Groups

exposure to credit risk is exacerbated when the collateral it holds cannot be realised or is liquidated at prices that are not sufficient to

recover the full amount of the loan, which is most likely to occur during periods of illiquidity and depressed asset valuations, such as those

currently being experienced.

As a result of the integration of the INBS business into the Group pursuant to the Restructuring Plan, the Direction Order, the Ministerial

Requirements and the High Level Steps Plan, the Bank now also has exposure to residential mortgages, which have a higher reliance on

sustained employment levels to ensure continued servicing of existing debt. Residential mortgages totalling 1.9bn transferred to the

Bank by way of the INBS Transfer Order.

The Irish property market remains severely impacted by a lack of confidence and liquidity which has led to further reductions in property

collateral values. This, together with an extremely difficult operating environment in the Groups key markets, particularly in Ireland, and

the erosion of clients net worth has resulted in a substantial deterioration in the asset quality of the Banks loan b ook.

The Groups financial performance will be affected by future recovery rates on loan assets. Any further deterioration in property prices,

any failure of prices to recover to their long term averages or any delay in realising collateral secured on th ese loan assets will further

adversely affect the Groups financial condition and results of operations.

Following the approval of the Restructuring Plan by the EC, the Group is also exposed to additional recovery risk given that counterparties

are aware that the plan provides for an orderly work-out of its loan book over a period of years as well as being dependent on efficient

execution of debt restructurings where required. As a result, amounts recoverable may be reduced.

2.9 Operational risk

Operational risk is the risk of loss arising from inadequate controls and procedures, unauthorised activities, outsourcing, human error,

systems failure and business continuity. Operational risk is inherent in every business organisation and covers a wide spectrum of issues.

The Groups management of its exposure to operational risk is governed by a policy prepared by Group Risk and approved by the Risk and

Compliance Committee.

The Groups exposure to operational risk is elevated due to the transitional support arrangements in place following the making of the AIB

Transfer Order, which resulted in the immediate transfer of the majority of the Banks Irish and UK deposit books and certainNAMA

bonds to AIB and AIB UK, as well as the integration process resulting from the INBS Transfer Order, which effected the transfer of the

INBS business into the Bank and orderly work-out of the combined entitys loan book over ten years. There is also the added risk of a

weakened control environment while the Group implements the operational plan to give effect to the approved Restructuring Plan and

High level Steps Plan. The lack of career prospects and incentives in the medium term may lead to loss of experienced staff and

indifference among remaining staff, with an increased associated risk of material error. Separately, the current economic climate

increases the risk of the occurrence of fraud.

2.10 Events of default risk

The Group's debt securities programmes and subordinated capital instruments contain contractual covenants and terms for events of

default which, if breached or triggered, could result in an actual or potential default that might result in the debt concerned becoming

payable immediately, or other adverse consequences occurring.

CISA includes important provisions that are designed to prevent rights in respect of a potential event of default, or an event of default

becoming exercisable because of the making of orders or issuing of certain requirements under CISA or anything done on foot o f such an

order or requirements, including implementation of the High Level Steps Plan. CISA provides that orders or requirements made under


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CISA may take effect as a reorganisation measure under the Credit Institutions Reorganisation and Winding Up Directive (CIWUD) and

any law giving effect to it. The relevant protective provisions of CISA apply in relation to the Direction Order, the AIB Transfer Order, the

Ministerial Requirements and the INBS Transfer Order. Each such order and requirement was declared to be a reorganisation measure for

the purposes of CIWUD. Accordingly, CISA and laws giving effect to CIWUD confer important protections to the Bank with respect to the

laws of EU member states against certain default risks in respect of the matters and timelines contained in the relevant orders and

requirements.

2.11 Regulatory compliance risk

Regulatory compliance risk primarily arises from a failure or inability to comply fully with the laws, regulations, standards or codes

applicable specifically to regulated entities in the financial services industry. The Bank continues to operate as a regulated entity and, as

such, is therefore subject to certain minimum prudential and other regulatory requirements. At 31 December 2011, the Bank is not in full

compliance with all Irish regulatory requirements. While the Bank ensures that the relevant Authorities are kept fully informed in this

regard, non-compliance may result in the Group being subject to regulatory sanctions, material financial loss and/or loss of reputation.

Capital risk is the risk that the Group has insufficient capital resources to meet its minimum regulatory capital requirements. Losses

incurred by the Bank during the past two years have placed significant stress on the Bank's regulatory capital resources and resulted in the

Minister for Finance, as the Banks sole shareholder, providing 29.3bn of capital. The Groups Total capital ratio at 31 December 2011 is

16.3%. Further losses, as well as any increased capital requirements, could again lead to regulatory capital concerns in the future. The

Group has also yet to update its Internal Capital Adequacy Assessment Process (ICAAP). Accordingly, the Group has yet to determine the

appropriate level of capital requirements under Pillar 2.

Changes in government policy, legislation or regulatory interpretation applying to the financial services industry may adversely affect the

Groups capital requirements and, consequently, reported results and financing requirements. These changes include possible

amendments to government and regulatory policies and solvency and capital requirements.

2.12 Taxation risk

Taxation risk is the compliance risk associated with changes in tax law or in the interpretation of tax law. It also includes the risk ofchanges in tax rates and the risk of failure to comply with procedures required by tax authorities. Failure to manage tax risk effectively

could lead to additional tax charges. It could also lead to financial penalties for failure to comply with required tax procedures or other

aspects of tax law. The Group is subject to the application and interpretation of tax laws in all countries in which it operates. In relation to

any tax risk, if the costs associated with the resolution of the matter are greater than anticipated, it could negatively impact the financial

position of the Group.

In accordance with applicable accounting rules, the Group has also recognised deferred tax assets on losses available to relieve profits to

the extent that it is probable that such losses will be utilised. The assets are quantified on the basis of current tax legislation and are

subject to change in respect of the tax rate or the rules for computing taxable profits and allowable losses. In the event that there are no

taxable profits to be relieved or changes to tax legislation arise, there may be a reduction in the recoverable amount of the deferred tax

assets currently recognised in the financial statements.

2.13 Market risk

Market risk is the risk of a potential adverse change in the Groups income or financial position arising from movements in interest rates,

exchange rates or other market prices. Changes in interest rates and spreads may affect the interest rate margin realised between income

on lending assets and borrowing costs. While the Group has implemented risk management methods to mitigate and control these and

other market risks to which it is exposed, it is difficult to accurately predict changes in economic or market conditions and to anticipate

the effects that such changes could have on the Group.

Borrowings from central banks and a large proportion of the Groups other funding balances are denominated in euro while some of the

Groups lending assets are denominated in sterling and US dollars. As a consequence, the Group has made extensive use of foreign

currency derivatives to manage the currency profile of its balance sheet during the period. Continued access to market participants is

required to enable the Group to continue with this risk management strategy.


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The promissory notes, which are fixed rate instruments, have resulted in the Group having significant interest rate risk exposure. The Bank

has hedged a total of 4.3bn of the nominal amount using interest rate swaps. A further 5.7bn of economic hedges existsin the form of

the Groups capital and fixed rate debt issuance. However, significant fixed rateexposure remains, with limited capacity to hedge further

amounts with market counterparties.

In current market circumstances it is envisaged that the Bank will have to continue to rely on support mechanisms provided by monetary

and governmental authorities.

2.14 Valuation risk

To establish the fair value of financial instruments, the Group relies on quoted market prices or, where the market for a financial

instrument is not sufficiently active, internal valuation models that utilise observable market data. In certain circumstances, observable

market data for individual financial instruments or classes of financial instruments may not be available. The absence of quoted prices in

active markets increases reliance on valuation techniques and requires the Group to make assumptions, judgements and estimates to

establish fair value. In common with other financial institutions, these internal valuation models are complex, and the assumptions,

judgements and estimates the Group is required to make often relate to matters that are inherently uncertain. These judgements and

estimates are updated to reflect changing facts, trends and market conditions and any resulting change in the fair values of the financial

instruments could have an adverse effect on the Groups earnings and financial position.

2.15 Fitness and probity regime

The Central Bank of Ireland published its Regulations and Standards of Fitness and Probity, issued under Part 3 of the Central Bank

Reform Act 2010 (the 2010 Act), on 1 September 2011.These statutory standards came into effect on 1 December 2011.

The 2010 Act provides for a fitness and probity regime for the review of individuals performing controlled functions and p re-approval

controlled functions, including directors and chief executiveofficers, in regulated financial service providers other than credit unions.

Where the review causes the Head of Financial Regulation of the Central Bank of Ireland to form the opinion that there is reason to

suspect the persons fitness and probity to perform the relevant function, an investigation may be conducted which may result in a

prohibition notice being issued preventing the person from carrying out the function. The Group could suffer reputational damage or

adverse financial performance if any issues were to arise under the fitness and probity regime.

2.16 Litigation and legal compliance risk

The Groups business is subject to the risk of litigation by counterparties, customers, employees, pre-nationalisation shareholders or other

third parties through private actions, class actions, regulatory actions, criminal proceedings or other litigation or actions. The outcome of

any such litigation, proceedings or actions is difficult to assess or quantify. The cost of defending such litigation, proceedings or actions

may be significant. As a result, such litigation, proceedings or actions may adversely affect the Groups business, financial condition,

results, operations or reputation.

In the period since December 2008, various regulatory bodies in Ireland have initiated investigations (including in some cases, criminal

investigations) into certain aspects of the Banks business, including certain loan and other transactions involving former Directors and

certain third parties. These investigations are ongoing and it is not possible at this stage to give any indication as to whether these

investigations will result in civil, administrative or criminal proceedings against the Bank or any of its current or former Directors or

officers.

Due to the complexity of the restructuring of the Bank, including integration of the former INBS into the Group, there is a potential for

unforeseen legal risks to arise.


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3. Risk Management

3.1 Introduction

Group Risk is an independent function that reports directly to the Group Chief Executive of the Bank with responsibility for ensuring that

risks are identified, assessed and managed throughout the Group. The Bank has a risk management framework in place for identifying,

evaluating and managing the significant risks faced by the Group. This framework is regularly reviewed and updated. The risk

management framework is designed to manage rather than eliminate the risk associated with the Groups business objectives and

provides reasonable but not absolute assurance against material financial mis-statement or loss.

Since the Bank was taken into State ownership in 2009, the new management team has focussed on the stabilisation and de-risking of the

Bank, while maximising the recovery of outstanding loans. As set out in the Restructuring Plan, the Bank's primary strategic objective is

the working out of its assets in an orderly process over time, while minimising the loss to the Irish taxpayer. A Monitoring Trustee was

approved by the EC on 8 December 2011 to report on a quarterly basis for a period of three years on the Group's adherence to the

commitments included in the Restructuring Plan. In this regard, the balance sheet continues to be reduced. Total assets at 31 December

2011 amount to 55.5bn, which represents a decrease of 17.4bn or 24% on a constant currency basis from the position at 31 De cember

2010. This sizeable reduction in total assets demonstrates the Banks commitment to deleverage the balance sheet in line with the

objective of an orderly resolution over a period of up to ten years. The reduction in the Banks total exposures also means a reduction in

total borrowing requirements.

Overall, the deleveraging process leads to a reduction in risk exposures. However, the complex resolution process must be carefully

managed and controlled in order to minimise the cost to the Bank and the Shareholder. The reduction in total exposures in the year

primarily results from the transfer of NAMA senior bonds to AIB pursuant to the AIB Transfer Order and the ongoing deleveraging of the

Groups loan portfolios, including the sale of US assets with a carrying value of 5.1bn.Against this, 7.4bn of assets and 6.7bn of

liabilities were transferred to the Bank on 1 July 2011 under the INBS Transfer Order. At 31 December 2011 net customer lending of

18.0bn and the Government promissory notes of 29.9bn, which pay a fixed rate of interest, represent 86% of total assets.

The Bank is not active in new lending or deposit markets and continues to operate independently as a regulated entity with its own Board,

governance functions and group management team. The objective of this model is to minimise the risk of further losses and to

concentrate expertise in managing the work-out of loans over a period of years. The merged entity is bound by the Capital Requirements

Directive and thus is subject to a minimum 8% regulatory capital requirement.

Following the INBS Transfer Order, the Bank has integrated the INBS business into the Groups combined risk management framework.

The transferred INBS loan portfolio consisted of commercial and residential books comprising total gross loans of 1.0bn and 1.9bn

respectively. Monitoring of the INBS commercial book has been incorporated into the Banks existing credit committee and loanreview

processes, whereas the residential book is managed and monitored separately. Management oversight and monitoring of the residential

mortgage portfolio is the responsibility of the Credit and Collections Forum (CCF), which is chaired by the Group Chief Risk Officer

('CRO').

The principal risks and uncertainties identified by the Group include general macro-economic conditions, as well as specific risks. Thematerial risks identified and managed by the Group in its day-to-day business are credit risk, liquidity and funding risk, market risk,

operational risk, reputational risk, legal risk, conduct risk, governance risk and compliance and regulatory risk. In order to effectively

minimise the impact of these risks, the Board of Directors ('the Board') has established a risk management framework covering

accountability, measurement, reporting and management of risk throughout the Group. In accordance with the direction of the

Shareholder, a key objective over the coming years is to reduce the risk profile of the business. Management recognises the importance of

the support functions of Group Risk, Group Compliance and Operational Risk, and Group Finance within the Bank in assisting with this

process.

This section describes the risk management and control framework in place in the Bank and sets out the key risks which could impact the

Banks future results and financial position. The risks discussed below should not be regarded as a complete and comprehensive

statement of all potential risks and uncertainties as there may be risks and uncertainties of which the Bank is not aware or which the Bank

does not currently consider significant but which may become significant in the future.


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3.2 Risk oversight and corporate governance

The Bank is cognisant of industry best practice in respect of risk management and internal controls, which at a minimum requires that:

Banks should have an effective internal controls system and a risk management function (including a Chief Risk Officer or

equivalent) with sufficient authority, stature, independence, resources and access to the Board;

Risks should be identified and monitored on an ongoing firm-wide and individual entity basis, and the sophistication of the Bank's

risk management and internal control infrastructures should keep pace with any changes to the Bank's risk profile (including its

growth) and to the external risk landscape;

Effective risk management requires robust internal communication within the Bank about risk, both across the organisation and

through reporting to the Board and senior management; and

The Board and senior management should effectively utilise the work conducted by the internal audit function, external auditor, and

internal control functions.

The Central Bank of Ireland has introduced a Corporate Governance Code for Credit Institutions and Insurance Undertakings which applies

from 1 January 2011. This governance code, amongst other matters, sets out the requirements for Irish credit institutions to preparedocumented risk appetite statements and establish risk committees with responsibility for oversight and advice to the Board on current

risk exposures of the entity and future risk strategy.

The Banks approach to corporate governance and risk management is to ensure that there is independent checking of key decisi ons by

management. The Bank has an established risk oversight framework to deliver on this approach.

Risk and Compliance Committee

The Risk and Compliance Committee's role is to oversee risk management and compliance within the Group. It reviews, on behalf of the

Board, the key risks and compliance issues inherent in the business and the system of internal control necessary to manage them and

presents its findings to the Board. This involves oversight of management's responsibility to assess and manage the Group's risk profile

and key risk exposures covering credit, liquidity and funding, market, operational, and compliance and regulatory risks.

The key responsibilities of the Committee include:

Review and oversight of the risk and compliance profile of the Group within the context of the Board determined risk appetite;

Making recommendations to the Board concerning the Groups risk appetite and particular risk or compliance management

practices of concern to the Committee;

Review and oversight of managements plans for mitigation of the material risks faced by the various business un its of the Group;

and

Oversight of the implementation and review of risk management and internal compliance and control systems throughout the

Group.

The Bank's current risk appetite statement was approved by the Board on 30 November 2011. The Committee also monitors progress ofthe Bank's internal NAMA unit which has management responsibility in respect of NAMA asset transfers and loan management for such

assets, subject to the over-riding authority of NAMA itself.

The Board delegates its monitoring and control responsibilities to the Credit Committees for credit risk (including banking and

counterparty credit risk) and to the Group Asset and Liability Committee ('ALCO') for market risk, and liquidity and funding risk. These

Committees comprise senior management from throughout the Group. Separate Credit Committees exist to manage credit risk in the

commercial and residential mortgage portfolios of the Bank, and are supported by a dedicated Group Risk function which is headed by the

CRO. All key areas of the Group contribute to and are represented on the ALCO, which is supported by Group Balance Sheet Management

('GBSM'). The CRO reports directly to the Group Chief Executive, and also has independent access to the Risk and Compliance

Committee.

GBSM is responsible for the management of balance sheet risks, with particular emphasis on the Bank's current and projected liquidity,

interest rate and foreign exchange risks. Balance sheet risk exposures and related issues, together with mitigation strategies, are reported


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to the ALCO and the Risk and Compliance Committees. GBSM is also responsible for ensuring the execution of approved strategies

through the Financial Markets team.

Audit Committee

The Audit Committees role in the Risk Management Framework includes ensuring Group compliance with regulatory, prudential and

financial reporting responsibilities. It also reports to the Board on the effectiveness of both financial and non -financial control processes

operating throughout the Group. The Committee is supported by Group Finance and Group Internal Audit, which are central control

functions independent of the business units. Group Internal Audit provides independent, objective assurance as to whether the Groups

Risk Management and Control Framework is appropriate and functioning effectively.

Group Risk

Group Risk is responsible for developing and embedding risk policy, measurement and frameworks to ensure that risk is identified,

managed and controlled across the Bank. The management of risk is a fundamental activity performed throughout the Bank, and the

adequacy and effectiveness of risk management processes are important elements in achieving a successful work-out of the Banks

business activities. These processes remain subject to continuous review and enhancement. Management of risk is the responsibility of

staff at all levels. However, primary responsibility for managing risk and for ensuring adequate controls are in place lies with the GroupRisk function. The Group Risk function is responsible for:

Supporting senior management and the Board in setting the Groups risk appetite and policies;

Supporting management in business decision making through independent and objective challenge to business unit management of

risk and exposures in line with agreed risk appetites;Developing and communicating risk management policies, procedures, appetites and accountabilities; and

Analysing, monitoring and reporting risk management information across all risk types and geographies to

present an aggregated view of the Groups risk appetite to the senior management tea m and the Risk and Compliance

Committee.

During the year the Group Risk function initiated general improvements as part of an ongoing process review. Teams were reorganised,

resulting in a more robust control environment. Some examples include:

Formation of a Credit Underwriting Group through the merger of credit risk teams ;

Formation of a Risk Operating Group through centralisation of a number of teams in order to support management with the policies

and processes required to execute the strategy of the Bank;

Centralisation of model development into a single area of expertise and;

Formation of a Quality Assurance function (initiated in 2010) which provides an objective and independent assessment of the quality

of loan portfolios and the effectiveness of the credit risk management process.

3.3 Risk appetite and strategy

Risk appetite can be defined as the total exposure to risk the Bank is willing to accept in pursuit of its strategic objectives. This is outlined

in detail in the Bank's Risk Appetite Statement.

The Bank has adopted a highly risk-averse attitude to new risk taking, consistent with its obligations to the authorities to discharge the

Restructuring Plan approved on 29 June 2011 in a manner that minimises the cost to the Irish State arising from the Banks activities. The

overall current risk exposure is in line with the Banks risk bearing appetite, as measured by its capacity to absorb further loss, and

assuming that there is no significant deterioration in core UK and Ireland markets. Nonetheless, reduction in risk exposure will remain a

priority throughout the resolution process of the Bank.

Scenarios and stress testing

The Group uses stress testing as an important instrument in the measurement, monitoring, management and mitigation of its individual

risks as these arise.

However, arising from the ongoing financial crisis and in light of significant new guidance from regulatory bodies, the Bank revised its


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Group-wide Stress Testing Framework in 2010. This revised framework addresses all regulatory requirements and takes cognisance of

regulatory guidance and best practice where identified.

The Group-wide Stress Testing Framework addresses the risks to which the Bank is exposed arising from its day-to-day operations and

general business activities across the Group. Therefore, it applies to all of the Bank's business operations across all geographies and

captures both on-balance sheet and off-balance sheet exposures and trading and hedging positions of the Bank.

This Group-wide stress testing analysis is referred to as cross-divisional analysis of stress testing. The purpose of this analysis is to ensure

that the stress testing programme captures inter-relationships and inter-dependencies between exposures, which may only become

apparent and/or more pronounced under Group-wide stressed scenarios.

The Group's stress testing programme also addresses the risks that arise within a specific risk category (e.g. credit risk or market risk),

with this referred to as intra-divisional risk analysis. These risks, which are associated with the normal operation of banking business, are

addressed through their own separate policies.

The Group utilises a variety of modelling approaches to its stress testing programme. These mainly include the Scenario Approach and the

Sensitivity Analysis Approach. Each of the modelling approaches used by the Group has its own merits and demerits; hence, the adequacy

of the approaches is reviewed by the Group on a regular basis.

The practical aspects of the design, implementation and reporting of the output of the stress testing programme are the responsibility of

the Bank's senior management.


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4. Material Business Risks

4.1 Individual risk types

In addition to the principal risks and uncertainties identified in section 2, which include general macro-economic conditions, specific risks

also arise from the use of financial instruments. The precise nature of all the risks and uncertainties that the Group faces cannot be

predicted and many of these risks are outside of the Groups control. In order to effectively minimise the impact of these ri sks the Board of

Directors (the Board) has established a risk management framework covering accountability, measurement,reporting and management

of risk throughout the Group. In accordance with the wishes of the Shareholder, a key objective over the coming years is to r educe the risk

profile of the business. Management recognises the importance of the support functions of the Group Risk, Group Compliance and

Operational Risk, and Group Finance within the Bank in assisting with this process.

The material risks identified by the Group in its day-to-day business are:

Credit risk;

Liquidity and funding risk;

Market risk;

Operational risk;

Reputational risk;

Legal risk;

Conduct risk;

Goverance risk; and

Compliance and regulatory risk.

4.2 Credit risk

Credit risk is the risk that the Group will suffer a financial loss from a counterpartys failure to pay interest, repay capi tal or meet a

commitment and the collateral pledged as security is insufficient to cover the payments due. The Group's credit risk arises primarily from

its lending activities to customers (commercial borrowings and residential mortgages) but also from interbank lending, investment in

available-for-sale debt securities and derivative transactions. Credit risk includes the following types of risk:

Country risk is the risk of losses arising from economic difficulties or political unrest in a country, including the risk of losses

resulting from nationalisation, expropriation and debt restructuring.

Settlement risk is the risk of loss when payments are settled e.g. payments for foreign currency transactions and the

purchase or sale of debt securities.

Credit risk continues to be the Banks dominant risk exposure due to the challenging operating environment. The loan portfolio is th e

most significant source of credit risk within the Bank. Due to the changed focus of the Banks activities, it no longer engages in any new

business which could increase the current credit risk profile, and is required to manage the existing loan book in accordance with the

provisions of the approved Restructuring Plan. In order to continue to reduce the amount at risk, the Bank will continue with its

programmes of loan collections, restructuring and sales. Gross loans have reduced by 29% (excluding INBS additions) in the ye ar and

amounted to 29.1bn at 31 December 2011.

The Group's policy on credit risk is set out in a detailed Group Credit Policy (the 'Credit Policy') which is approved by the Board following

recommendation by the Risk and Compliance Committee. It has been framed in the context of the Bank's present position in terms of

ownership, State guarantees and short/medium term strategy. It is also consistent with the Bank's Risk Appetite statement. The Credit

Policy forms the core of the Banks credit risk ethos and represents a comprehensive guide to policies and underwriting criteria which

govern the way in which the Bank conducts its credit business with a focus on recovery management. The Credit Policy also:

Sets out the process surrounding credit approval;

Outlines the manner in which credit risk is managed; and

Sets out the context for the Bank's business and how the Bank strives to reduce risk.


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Consistency of approach to banking credit risk across the Group is ensured through the implementation of the Credit Policy and presence

of key personnel at all Credit Committee meetings. The Credit Committee is the most senior forum for approving credit exposures and

consensus is required before authorising a credit exposure with each individual credit application approved by a valid quorum composed

of business and risk management officers.

With regard to the Banks transaction approval and review processes, the Credit Risk team, in conjunction with the Quality Assurance

team within Group Risk oversees the Credit Committee meetings and periodic loan reviews. Furthermore, to monitor the ongoing quality

of the loan book, the Banking Credit Risk team undertakes frequent asset quality reviews on significant exposures.

The independent credit teams within Group Risk monitor any treasury counterparty exposures which have materially deteriorated in

credit quality since approval. Such exposures are reported to the Credit Committee on a regular basis, where an action plan for each case

is agreed. This may involve cancelling limits or actively managing down or selling an exposure.

To support commercial customers that encounter financial difficulties the Bank has a dedicated unit, Recovery Management Ireland

(RMI), which is responsible for the ongoing assessment and management of certain impaired exposures principally Irish impaired loans.

The RMI is target driven, with the expressed objective of maximising loan recovery. The unit maintains its focus through a systematic loan

management process that formulates work plans to achieve timely resolution, and its senior management team is actively involved in allstages of the process to ensure that the agreed plans for resolution are achieved within agreed timeframes.

A number of potential strategies exist through which the Group can maximise recovery of commercial exposures that are experiencing

financial stress or are impaired. The Group would consider any of these relief options, or a combination thereof, after a thorough review of

the underlying business performance of the relevant borrower. These strategies include temporary covenant relief or amendment of

covenants in exchange for revised contractual terms, variation in margin accompanied by renegotiated facility exit fees, or loan

rescheduling to facilitate customer liquidity or refinancing restraints.

In addition, lending terms could also be renegotiated to result in a partial or total exchange of debt for equity, or other benefit sharing

arrangements. This may occur in circumstances where a viable business exists and projected cash flows from operational activities have

been assessed to be sufficient to service the revised facility, supported in some cases by the introduction of additional capital into the

business, or an increase in the collateral provided by the customer. This option is only utilised when maintaining the custom ers businessas a going concern with a manageable level of debt would realise more value for the Group than disposal of the underlying assets. In all

cases, the Group considers the net present value of alternative recovery strategies in order to maximise the amount recoverable on a loan.

Since the transfer of the residential mortgage portfolio from INBS into the Bank, oversight and monitoring have been undertaken by the

CCF. The Banks aim in relation to this portfolio is to manage the underlying exposures through their remaining lifetimes, wh ile assisting

customers who experience financial difficulties with measures to ensure the most appropriate outcome for both the Bank and the

customer.

The Banks Collections and Recoveries Unit ('CRU') for residential mortgages aims to provide a responsive and effective operation for the

end to end arrears management process. This encompasses an early communication with those borrowers identified as experiencing

difficulty with their normal payment terms, obtaining their commitment to maintain payment obligations and re-establishing a regular

payment history. The management of arrears includes several activities ranging from, but not limited to, establishing repayment plans(including appropriate forbearance), voluntary sale or surrender of the mortgaged property, taking possession and selling mortgaged

properties, and ultimately, the closure of customers accounts, following an agreed settlement arrangement for any deficit on the

mortgage.

All requests for alternative repayment arrangements by borrowers are assessed in accordance with the Banks Recovery Management

Policy. Separate procedures are in place for owner occupier and buy to let borrowers. The CRU Underwriting Unit considers all

applications, with those meeting qualifying criteria sanctioned by an approved panel acting under a delegated authority, and those falling

outside qualifying criteria but which are accepted for individual underwriting sanctioned by Credit Committee. The Recovery

Management Policy is subject to annual review.

Support for those residential mortgage borrowers who are experiencing financial difficulties with their scheduled residential mortgage

repayments are managed within the Arrears Support Unit, which is part of CRU. Forbearance options for these customers are consideredon a case-by-case basis and are consistent with industry guidance and practice. These options include arrears capitalisation, interest only


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concession, less than interest only concession, greater than interest only concession, a payment holiday, term extension for lending

secured on property, or a hybrid of these measures. In the normal course of business, a payment holiday is not offered as an option. All

account management and forbearance options across the secured residential mortgage portfolio are fully recognised within the Banks

impairment assessment process.

Residential mortgages restructured onto a short term forbearance arrangement are treated as impaired where the present value of future

cash flows are less than the outstanding loan balance. Monitoring of the arrears profile within the portfolio is overseen by the CCF. At all

times the Bank complies with the Central Bank of Irelands statutory codes of conduct for mortgage lenders when dealing with mortgage

arrears.

Credit risk relating to the commercial loan book is identified and assessed using a combination of top-down and bottom-up risk

assessment processes on a portfolio-wide basis. Top-down processes focus on broad risk types and common risk drivers, rather than

specific individual risk events, and adopt a forward-looking view of perceived threats. Bottom-up risk assessment is performed on a loan-

by-loan basis, focusing on risk events that have been identified through specific qualitative or quantitative measurement tools. In line with

the Credit Policy, the Credit Risk team is taking steps to reduce concentration risk related to single counterparties and/or groups of c losely

related counterparties. The top exposures are reported on a monthly basis to senior management and the Risk and Compliance

Committee.

The performance of individual facilities is closely monitored by Credit Risk on an ongoing basis, which maintains a list of lower quality

cases. These cases, while considered lower quality, are not impaired but require increased management attention to prevent any further

deterioration in asset quality. Credit Risk also maintains a l ist of satisfactory cases for exposures that continue to represent satisfactory

quality loans but which are subject to closer monitoring.

Credit risk relating to the residential mortgage book is identified and assessed using a combination of published economic indicators and

individual case assessment processes on a portfolio-wide basis. Behavioural scoring models are not deployed. Ongoing monitoring of the

residential mortgage portfolio is undertaken by Group Risk, with monthly reporting to the CCF and the Risk and Compliance Committee.

Specific provisions in both the commercial and residential mortgage loan books are created where one or more loss events or i mpairment

triggers have been recognised and as a result a shortfall is expected between the Groups exposure and the estimated recoverable

amount. The recoverable amount is calculated by discounting the value of expected future cash flows by the exposures original effectiveinterest rate.

An additional incurred but not reported ('IBNR') collective provision is created to cover losses inherent in both the commercial and

residential mortgage loan books. This provision takes account of observable data indicating that there is a measurable decrease in the

estimated future cash flows from a group of loans with similar credit risk characteristics, although the decrease cannot yet be identified

within the individual loans in the group.

This provision is calculated by applying incurred loss factors to groups of loans sharing common risk characteristics. Loss factors are

determined by historical loan loss experience as adjusted for current observable market data. Adjustments reflect the impact of current

conditions that did not affect the years on which the historical loss experience is based and remove the effects of conditions in the

historical period that do not exist currently. The provision amount is also adjusted to reflect the appropriate loss emergence period. The

loss emergence period represents the time it takes following a specific loss event on an individual loan for that loan to be identified asimpaired. The loss emergence period applied in the period was six months (2010: six months).

Renegotiated loans are those facilities that, during the financial period, have had their terms renegotiated resulting in an upgrade from

impaired to performing status. This upgrade can be based on, among other things, subsequent good performance or an improvement in

the credit profile of the borrower. Renegotiated loans and advances were 120m as at 31 December 2011 (2010: 28m).

Where a facility has been moved to the impaired list and subsequently there is objective evidence of such improvement in the

fundamentals of the loan facility that it is the view of the lending team that it should return to unimpaired status, then this

recommendation must be made to Credit Risk accompanied by a detailed assessment of the rationale for its designation as unimpaired. A

facility can only be restored to unimpaired status when the contractual amount of both the principal and interest can be fully collected in

accordance with the terms of the facility agreement. The Groups decision to restore a facilitys unimpaired status is supported by

objective evidence consisting of an up to date documented credit evaluation of the borrowers financial position and other factorsaffecting the prospects for repayment.


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The Bank

Documents

Anglo Pillar_3 31st Dec 2011