Tartalom

1. Tartalom • Bázel III. bevezetés, ICAAP • Tőkekövetelmény kalkuláció • Tőkemanagement

2. Bázel III keretrendszer FINANCIALSTABILITY Pillar I Minimum Capital Requirements Pillar II Supervisory Review Process Pillar III Market Discipline Capital requirements for … Credit risk • Standardized Approach • Foundation IRB Approach • Advanced IRB Approach Market risk • Standardized Approach • Internal VaR models Operational risk • Basic Indicator Approach • (Alternative) StandardizedApproach • Advanced Approaches Framework for banks (ICAAP*) • Capital allocation, including • Risk management Supervisory framework (SREP**) • Evaluation of internal systems of banks • Assessment of risk profile • Monitoring of compliance with all regulations • Supervisory measures Disclosure requirements for banks • Transparency for market participants concerning the bank's risk position (scope of application, risk management, detailed information on own funds, etc.) • Enhanced comparability among banks * ICAAP = Internal Capital Adequacy Assessment Process **SREP = Supervisory Review and Evaluation Process

3. ICAAP elvek Az ICAAP • minden intézményben kötelezően előírt, hogy folyamattal, mérésekkel nyomon követhető legyen a kockázati profil • az intézmény felelőssége (saját módszertanok MNB elfogadás mellett megengedettek) • specifikált és dokumentált, az intézmény managementjének felelőssége ennek elvégzése (ICAAP committee) • rendszeresen felülvizsgálatra kell, hogy szoruljon • kockázat alapú. • forward-looking / előretekintő • Része lehet kalkuláció, process • Célja a különböző kockázattípusok és tőkemegfelelési elvárások vizsgálata

4. Kockázattípusok

5. The implementation of ICAAP requires severe changes and a good information base The principle of proportionality: Size and complexity of business is relevant Pillar 2 (ICAAP) I. Given the size and the complexity of RBI Group, the use of „advanced risk methods“ is mandatory The use of regulatory procedures can only be considered as an interims solution Doubleproportionality Overall risk position Risk bearing ability Internal capital Emergency plans ICAAP complexity Accuracy of supervisory review Pillar 2 ICAAP Risk strategy Documentation Stress tests Processes Risk allocation Size of bank Complexity of business Regulatory requirement: Ensuring sufficient capital coverage for the overall bank risk exposure The ICAAP focuses on the bank‘s internal perspective

6. Capital training2nd part: Calculation methods Pillar 2 (ICAAP) II. 2012.08.10

7. Tartalom • Bázel III. bevezetés, ICAAP • Tőkekövetelmény kalkuláció • Tőkemanagement

8. Summary of Basic Terms 2/1 • Várható veszteség (Expected loss): • Expected loss in 1y based on long run estimation • Should be covered by provision (the difference has effect on own funds) • Capital requirement: • To cover unexpected losses on 1y time horizon • Pillar 1 - Regulatory Capital Requirement (RCR): strictly defined - RWA = RCR*12,5 • Pillar 2 - Economic Capital (EC) – liquidation perspective - Loss VaR 99% - going concern (enough capital buffer to absorb losses at 99%) • SREP: between 100%-200% *RCR • Capital available for loss absorption • Pillar 1: Own Funds (OF) • Pillar 2: • Internal Capital (IC) – liquidation perspective • Risk Taking capacity (RTC) – going concern (capital buffer above 8% capital adequacy) • SREP:~ pillar 2 • Capital adequacy ratio (CAR) • Pillar 1: OF / RWA • Pillar 2: IC / EC * 8% (RTC – LVaR 99%) • SREP: IC / SCR * 8% (bottle neck!)

9. Basel logic: the one year loss function Unexpected Loss @ Frequency 99.9% conf . level E xpected Capital Requirement Loss • To understand the impact of some tricky one-offs, it is necessary to understand ”The B2 big picture”: • CAR=8% means: Total own funds do not cover losses above EL occur once in 1000 years (aka. capital requirement) • EL should be fully covered by provision (within ytd profit) but this never holds! So profit should be calculated based on EL instead of Provision (”risk cost”) • ‘Provision less EL’ is a necessary correction in Total own funds Req. for 8%  2 importantelements of Own Funds: Total Own Funds Capital Requirement Ytd profit  Provision – EL  Expected Loss Capital Requirement

10. Basic concepts (reminder) Capital requirement (tőkekövetelmény) (the same: Capital requirement x 12.5 = RWA) Risk Weighted Asset – RWA (kockázattal súlyozott eszközérték) Exposure at Default – EAD (bedőléskori kitettség) Risk Weight – RW (kockázati súly) depends on the • Method (STA, IRB – (Foundation, Advanced) • Asset (customer type, product specificities) • Risk (of the customer, product, collateral…)

11. IRB method – Overview of the elements Internal Ratings Based method – IRB (belső minősítésen alapuló) RW is „unique” for each customer, depending on • Probability of Default – PD (csőd- / bedőlési valószínűség) • Loss Given Default – LGD (bedőléskori veszteségráta) • Asset correlation – ρ (eszközkorrelációs együttható) • Maturity – M (lejárat) • Annual Sales – S (éves árbevétel) F (…) is a function defined by the law

12. IRB method – EAD Credit Conversion Factor – CF / CCF: until default, this percentage of the off-balance exposure will go on-balance. • CF depends on contractual terms (law pre-defines possible values)

13. IRB method – Risk parameters PD is the probability that the borrower defaults within one year Legal minimum 0.03% (except for sovereigns), 100% when in default The „default” event happens when either of the two holds • 90+ DPD: More than 90 days past due on a material obligation • „Unlikeliness to pay”: other signs of a possible loss (like the decease of the customer or high provision coverage) Legal minimum 10%, normally less then 100% For example an LGD of 45% means that if the customer goes to default, then we will lose 45% of its exposure (and can still collect 55% of it from collaterals, or other sources) LGD is the loss percentage (relative to the exopsure) in case the borrower defaults.

14. IRB method – Expected Loss Expected Loss – EL (várható veszteség) calculated on deal level (and then summed up) If for example EAD is 100 Million HUF, PD is 10%, LGD is 45% then EL is 4.5 Million HUF. EL is normally covered by loan loss provisions. Adequate pricing will compensate the bank for this loss. EL is the expected value of loss within one year – i.e. on average borrowers will not pay back this amount of money

15. IRB method – Unexpected Loss Unexpected Loss – UL (nem várt veszteség) calculated on deal level (and then summed up) UL is the same as capital requirement. Pricing should consider the higher cost of fund for capital compared to other liabilities. UL is the 99.9% quantile (VaR) of the one year loss distribution, i.e – the probability that borrowers do not repay more than UL is 0.1%, – in other words: losses might exceed UL once in a 1000 year.

16. IRB method – The RW formula The RW formula – the F(…) function – is • defined by law • but originally was found out by modeling UL Idea behind the formula: • Derive a very pessimistic „PD” from PD: PD99.9% • UL will be (PD99.9% – PD) x LGD x EAD (roughly) Note: this directly gives UL. To get RWA it is multiplied by 12.5 (since 1 / 8% = 12.5 ).

17. IRB method – The precise RW formula where , for non-retail, 0.04 for retail revolving, 0.15 for retail mortgage and for other retail. Notes: • No maturity adjustment for retail (M is 1); M is 2.5 in Foundation IRB • For firm-size adjustment S is in Million EUR, capped between 5 and 50

18. Tartalom • Bázel III. bevezetés, ICAAP • Tőkekövetelmény kalkuláció • Tőkemanagement

19. Pillar 1 Risk categories Credit risk requirement Standardized Internal rating based (Foundation, Advanced) Market risk Standardized Approach Internal VaR models Operational risk Basic Indicator Approach (Alternative) StandardizedApproach Advanced Approaches Risk coverage Regulatory capital: Required to cover unexpected risks Elements of regulatory capital is defined by law Regulatory requirement: Compliance with a bank specific capital objective (capital adequacy ratio > 8% of Risk Weighted Assets - RWA)

20. Definition of internal capital • The definition of internal capital slightly differs from the definition of regulatory capital • HFSA permitted differences to regulatory capital (Pillar 1) • Main differences: Intention: only two different capital concepts (mid term), transparent definitions

21. Basic concepts (reminder) • Capital requirement obtained from Asset side • (Regulatory / solvency) Capital on liability side • Capital adequacy: the following should hold: Capital requirement ≤ Capital • Capital adequacy ratio – CAR (tőkemegfelelési mutató): Capital / capital requirement * 8% • Capital requirement is sum of • credit risk • market risk • operational risk capital reqs. • Capital is sum of • registered shares • retained earnings • other elements, deductions • subordinated loans • balance sheet provision – expected loss (IRB shortfall)