The Impact of CRD on Leasing Industry: Opportunities and Risk Management

1. The impact of the CRD on the leasing industry in plain language Dr. Mathias Schmit www.sagora.eu 18 October 2007

2. Managing Risk in Leasing Business Agenda • CRD: Impact on financial performance • Business opportunities under the CRD • Conclusions

3. FINANCIAL STABILITY CAPITAL SUPERVISION DISCLOSURE Managing Risk in Leasing Business Basel II: A new framework disclosure including the control of risks capital requirements based on market, credit, and operational risk qualitative supervision internal process & risk control

4. Managing Risk in Leasing Business Basel II or CRD? • First draft of Basel II in 1999 • EU Official Journal on 30/06/2006 Ref: L 177/201 • How far along is the national transposition process?

5. Managing Risk in Leasing Business CRD complemented… • ”

6. Managing Risk in Leasing Business Basel II Credit Risk and the Balance Sheet Balance sheet credit spreads will change new risk weights for capital requirements RRE/CRE Funding Loan Funding Leasing Capital ROE will be impacted Other Capital Off-balance instruments credit spreads will change

7. Managing Risk in Leasing Business Regulatory capital for real estate investment • Capital may differ from a ratio of 1 to 5 in respect to: • The approach adopted by the credit institution • STD: product vs. counterparty approach • IRB approaches (PD, LGD) • The type of product / Counterparty (STD) • CRE/ Lease/ Specialized lending • Retail / Corporate / PSE • What if a lease to a PSE? • Qualitative requirements are met or not • Independent valuation • Legal certainty • Insurance

8. OK but… Hiiiiiiiiiiiii !!! Yeahhhhh!! Managing Risk in Leasing Business Regulatory capital for equipment lease Source: Schmit M., Journal of Banking and Finance, April 2004.

9. Managing Risk in Leasing Business Guaranteed residual value EU translation : IRB Guaranteed Residual Values or Bargain Option lease exposures as the minimum lease payments under IAS 17 Assumptions: PD=1% LGD=30% Guaranted residual value Basel II EU Directive 0% 20% 40% 2,6% 3,7% 4,8% 2,6% 2,6% 2,6% Guarantee: conditions on the guarantor and on the guarantee

10. Managing Risk in Leasing Business Evolving business environment • Competition and pressures • Pressure to have higher RV (e.g. car manufacturers) • Business needs and opportunities are evolving • Product lifecycle decreases • Assess the value chain to define adequate actions • New regulations (IAS, Basel II, etc…) • Give new incentives and opportunities to leverage business benefits if: • All impacts of regulations are clearly understood by all parties (and thus to the bank partners and other stakeholders) • A clear vision of the business partners emerges to generate collaborative advantages • A wide buy-in by the different stakeholders

11. Managing Risk in Leasing Business New opportunities Client • Fleet management • Leasing contract • Buy risk mitigants • Reduction in ‘excess capital requirement’ • Response to change pricing dynamics Vendor Bank • Portfolio management • Market and commercial knowledge • Ancillary services • Risk appraisal • Calibration and managing RV • Risk coverage (premium)

12. Managing Risk in Leasing Business New opportunities • Identify your potential partners given your strategic objectives • Multi or mono brand vendor • Proposed ancillary services • Re-marketing strengths • Etc… • Understand the benefit and risks of all parts of the business value chain • Customers: creditworthiness, volume, country • Structure of the transactions • Vendor characteristics and services • Build your win-win relationship • Adequate structure • Mitigate risk if needed: e.g. lower LGDs, PD, EAD • Adequate rewards: risk vs. volume

13. Managing Risk in Leasing Business Conclusions • The better knowledge of risk is key to be compliant and/or in line with the best practices • Regulated vs. non-regulated • Lease specificities • Having an integrated risk management framework will allow to better identified and assessed business opportunities • Rethinking leasing business relationships will offer new opportunities under the EU implementation of the CRD • Examples of new business models already (being) achieved

14. Managing Risk in Leasing Business Some references • Schmit M., “Credit risk in the leasing industry”, Journal of Banking and Finance, 2004, 28, pp. 811-833. • Schmit M.,“Is automotive leasing a risky business?”, Finance, forthcoming. • Schmit M., “The new Basel capital accord and the future of the European financial system”, Report of a CEPS (Centre for European Policy Studies) Task Force, pp. 47-50, 2004. • Laurent M- P and M. Schmit, “Estimating “distressed” LGD on defaulted exposures: A portfolio model applied to leasing contracts”, in Recovery risk: the next challenge in credit risk management, a RiskBooks publication edited by Altman E., A. Resti and A. Sironi, pp. 307-322, 2005. • Laurent M-P, “Asset return correlation in Basel II: Implications for credit risk management”, under review in Risk.

15. Managing Risk in Leasing Business For More Information Dr. Mathias Schmit Partner SAGORA, Lease and Risk Management Avenue de Haveskercke, 28 B-1190 Brussels Mobile: (32)-496.93.22.70 Email: m.schmit@sagora.eu Website: www.sagora.eu Thank you for your attention !

16. Managing Risk in Leasing Business www.sagora.eu

17. Initial text Actual calculation of capital requirement for leasing: Major commitment in terms of cost of opportunity Inappropriate compared to the risk incurred BUT Major step forward Managing Risk in Leasing Business (Un)guaranteed Residual Values 100% * 8% * RV to be set aside over all the term of the lease (100% /T) * 8% * RV each year Substantial gains of capital and opportunity cost RESULT