Market Risk Management inKBC Bank

Investor Relations conference 2 July 2001

Maurits VerherstraetenGlobal Risk Manager

2

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

Top

ics

3

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

4

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

5

Executive Committee

Risk Management Division

Market risk Trading

Metho-dology

GlobalTreasury Investment

Division

Board of Directors

Audit Committee

Credit risk

CreditDivisions

Market risk ALM

Institutional framework

INVESTMENT

COMMITTEE

MARKET

COMMITTEE

6

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

7

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)

8

9

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

10

Core deposits: savings accounts

0

2

4

6

8

10

12

14

16

18

(in

bln

. E

UR

)

Core 1 Core 2 Volatile Total volume

11

ALM: Evolution of BPV

15

20

25

30

35

40

45

50

55

60

okt-

98

dec-9

8

feb-9

9

apr-

99

jun-9

9

aug-9

9

okt-

99

dec-9

9

feb-0

0

apr-

00

jun-0

0

aug-0

0

okt-

00

dec-0

0

feb-0

1

apr-

01

jun-0

1

(in

mln

. E

UR

)

Risk Quarterly averages

Tracking equity portfolio: VAR

0

10

20

30

40

50

60

okt

-98

de

c-9

8

feb

-99

ap

r-9

9

jun

-99

au

g-9

9

okt

-99

de

c-9

9

feb

-00

ap

r-0

0

jun

-00

au

g-0

0

okt

-00

de

c-0

0

feb

-01

ap

r-0

1

jun

-01

(in

mln

. E

UR

)

Risk Quarterly averages

13

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

14

Trading interest rate risk: VAR

0

5

10

15

20

25

30

35

40

45

okt 98 jan 99 apr 99 jul 99 okt 99 jan 00 apr 00 jul 00 okt 00 jan 01 apr 01

(in

mln

. E

UR

)

Risk Quarterly averages

15

Trading FX risk: VAR

0

1

2

3

4

5

6

7

8

okt 98 jan 99 apr 99 jul 99 okt 99 jan 00 apr 00 jul 00 okt 00 jan 01 apr 01

(in

mln

. E

UR

)

Risk Quarterly averages

16

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), K&H Investment

(Hungary)

Relative importance of various centers: FP, Securities, Peel Hunt, Central Europe

Predominantly non-linear equity risks

17

Equity trading: global scenario analysis

Vol Vol shift = +/ - 5% * SQR (T)

Down 0 Up

Stock

15% -31 7 560% -3 25

-15% 11 -3 -6

(in mln EUR)

18

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

19

Time axis Expected Loss models

2001 2002 2003

SME

20042000

Large corporates

US corporates

Banks Extensions behavioural scoring

Real estate

Other segments

Central Europe

20

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

Risk Management inKBC Bank

Investor Relations conference 2 July 2001

Maurits VerherstraetenGlobal Risk Manager