Bucharest, 23 October 2008www.sagora.eu Transform CRD Mandatory Requirements into Business Benefits Dr. Mathias Schmit

© sagora.eu 2 Managing Risk in Leasing Business Agenda Basel II: What is it about? Does Basel II achieve the level playing field objective? How does Basel II impact my business opportunities? Conclusions

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

© sagora.eu 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?

© sagora.eu 5 Managing Risk in Leasing Business In Romania The Capital Requirements Directive and the Lease Industry in Romania 1 st Edition

© sagora.eu 6 Managing Risk in Leasing Business Cover credit risk new risk weights for capital requirements Credi spreads will change credit spreads will change ROE will be impacted Balance sheet RRE/CRE Loan Leasing Other Capital Debt Off-balance instruments Debt

© sagora.eu 7 Managing Risk in Leasing Business And to avoid…. Kerviel, Jérôme US$ 7.1 billion France Société Générale Hunter, Brian US$ 6.5 billion Canada Amaranth Advisors Meriwether, John US$ 4.6 billion United States Long Term Capital Management Hamanaka, YasuoUS$ 2.6 billion Japan Sumitomo Corporation Copper Flöttl, WolfgangUS$ 2.5 billion Austria BAWAG Citron, RobertUS$ 1.7 billion United States Orange County Leeson, NickUS$ 1.4 billion United Kingdom Barings Bank Schimmelbusch, HeinzUS$ 1.3 billion Germany Metallgesellschaft Oil Futures 1993 AND Subprime Crisis Northern Rock Just to name a few….

© sagora.eu 8 Managing Risk in Leasing Business Additional Requirements Challenging areas Organizational Structure Management Body Internal Control Transparency Capital Adequacy vs. Economic Capital Set of guidelines to be implemented and followed in order to achieve these objectives Validation

© sagora.eu 9 Managing Risk in Leasing Business Agenda Basel II: What is it about? Does Basel II achieve the level playing field objective? How does Basel II impact my business opportunities? Conclusions

© sagora.eu 10 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

© sagora.eu 11 Managing Risk in Leasing Business Source: Schmit M., Journal of Banking and Finance, April Hiiiiiiiiiiiii !!! Yeahhhhh!! OK but… Regulatory capital for equipment lease

© sagora.eu 12 Managing Risk in Leasing Business Impact on pricing Capital Requirement RAROC / ROEPricing = (margin constant) = (decrease margin)

© sagora.eu 13 Managing Risk in Leasing Business Agenda Basel II: What is it about? Does Basel II achieve the level playing field objective? How does Basel II impact my business opportunities? Conclusions

© sagora.eu 14 Managing Risk in Leasing Business A fiction?

© sagora.eu 15 Managing Risk in Leasing Business Thoughts from the current crisis Unsustainable products and practices Buyer biais and wishful thinking Unsound credit processes Slice and gambling finance Regulators under the spotlights Embrace rather than resist market conduct regulation: by preventing from the worst abuses, it protects the legitimate responsible players

© sagora.eu 16 Managing Risk in Leasing Business Risk governance methodology Mission & Vision Internal Control & & Documentation & & Reporting Validation Assessment Implementation Guidelines & Requirements Usage Review ©Sagora Internal governance Internal Control & Documentation & Reporting AssessmentImplementation Guidelines & Requirements Usage Review ©Sagora Validation Corporate governance Strategy & Objective & Risk Appetite Mission & Vision

© sagora.eu 17 Managing Risk in Leasing Business Risk Management & Business Support New practices are about an integrated approach of Risk Management Risk management –Is a process effected by people at every level of the organisation –Is applied in strategy setting –Is applied across the enterprise and includes taking an entity-level portfolio view of risk –Is designed to identify events potentially affecting the entity and manage risk within its risk appetite –Provides reasonable assurance to an entity’s management and board –Is geared to the achievement of objectives in one or more separate but overlapping categories

© sagora.eu 18 Managing Risk in Leasing Business Agenda Basel II: What is it about? Does Basel II achieve the level playing field objective? How does Basel II impact my business opportunities? Conclusions

© sagora.eu 19 Managing Risk in Leasing Business Conclusions A deep knowledge of (all) risks is key –Regulated and non-regulated –Lease specificities (low LGD in the car leasing !!) An integrated risk management framework will allow to better identify and assess business opportunities –Risk governance & business support Rethinking leasing business relationships will offer new opportunities Start with a high level gap analysis –A few days (interview based) – Know yourself !! –Analyse all aspects of risk governance in order to support the business –Define a roadmap and implement

© sagora.eu 20 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) Website: Thank you for your attention !