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

1. Market Risk Management inKBC BankInvestor 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 Topics

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 factorsStrong 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. Institutional framework Board of Audit Directors Committee Executive Committee I N V E S T M E N T M A R K E T C O M M I T T E E C O M M I T T E E Risk Management Division Market risk Credit risk Metho Market risk - Trading dology ALM Global Credit Investment Treasury Divisions Division

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)

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

11. ALM: Evolution of BPV

12. Tracking equity portfolio: VAR

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

15. Trading FX risk: VAR

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 (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 2004 2001 2002 2003 2000 Large corporates Central Europe US corporates Other segments Extensions behavioural scoring Banks SME Real estate

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

21. Risk Management inKBC BankInvestor Relations conference 2 July 2001 Maurits VerherstraetenGlobal Risk Manager