Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright (c) 2006 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. Standard & Poor’s Capital Project: An Overview Elisabeth Grandin Director, Financial Institutions Ratings – Standard & Poor’s AFGAP seminar Basel 2 – Solvency 2 December 10, 2007

2. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Agenda Why will S&P provide a different capital measure? S&P Risk-Adjusted Capital Framework concepts Interactions with Basel II capital requirements Bank response to Basel II

3. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Why Will S&P Provide a Different Capital Measure?

4. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Two Primary Goals Enhance global comparison of capital ratios –Address Inconsistencies in  Local regulations including the definition of regulatory capital  Risk measures  Regulatory options  Economic capital models Factor our different risk assessment –Horizon –Opinion on credit markets –Correlations / Diversifications

5. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Basel II will become overtime a global regulatory standard More comprehensive and risk sensitive than Basel I Incentive to develop better risk management systems Increased disclosure to the market Weighted percentage of countries adopting Basel 2 by region (source: BIS)

6. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. But issues persist.. Database infrastructure, PD, LGD, EAD and operational risk models have yet to pass the baptism of fire Example: recovery uncertainty for residential mortgages –House realization value –Time to recovery (discounting the cash flows)

7. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Comparing Basel II capital ratios will be a complex exercise …

8. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. National discretion & impact of regulatory options

9. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Transition period could last up to a decade Floors, Grandfathering options (up to 2017 in Europe) Technical challenges to move to advanced methodologies Challenge to compare trends overtime due to continuing changes in methodologies Most bank’s will apply several methodologies at the same time

10. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Trends in Basel II ratios will be difficult to analyse

11. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. S&P Risk-Adjusted Capital Framework Concepts

12. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. What is capital for? Risk-Weighted Assets should cover Unexpected Loss –Consistent with Basel II stress level The Expected Loss will be covered by provisions and earnings –A shortfall would be deducted from available capital Based on a Going Concern view –Multiple horizons (1 year, 3 years) Following a building block approach –by asset class –and risk category –Model factors diversification/concentration

13. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Interactions With Basel 2 Capital Requirements A Basel II adjusted measure

14. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Introduction of Floors per Basel II Asset Classes Floors to the regulatory capital charges to factor in –Either Standard & Poor ’ s different risk assessment –Or uncertainty/lack of robustness of the institution ’ s internal data –Non risk sensitive standardized charges Risk sensitivity will be maintained by differentiating floors between several risk categories under the BCA –We differentiate 10 floor levels for each risk class For operational risk, a revenue based floor similar to Basel II standardized approach Trading risk. Scaling the regulatory measure by a factor or three

15. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. The floor concept allows better comparability and consistency

16. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Capturing Other Risks In addition to our adjustments to “ Pillar I ”, we will reflect the following factors into adjusted RWA: –Concentration & Diversification : Single name, geographic, sector, exposure class, risk types. –Interest rate risk in the banking book A number of risks will not impact capital measures: –Liquidity/Funding risk –Reputation risk

17. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Accounting for Diversification / Concentration Diversification/Concentration is one of the most sensitive factors of loss distributions Results from the IACPM ISDA study (2006) It is not differentiated in Basel 2 Pillar I, which assumes that portfolios are diversified and granular

18. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Bank responses to Basel II

19. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Bank responses could potentially impact rating levels Some banks might seek to ‘spend’ the regulatory benefits of Basel II –Capital buybacks –Higher growth We will assess such changes in capital policy closely –Basel II merely changes the measurement of risk –Not the underlying economic risk itself –Our new risk adjusted capital measure will become our benchmark to assess bank’s risk adjusted capital and risk adjusted profitability. In practice, we expect changes in capitalization to be gradual

20. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Key contacts in Standard & Poor’s regarding capital project Bernard de Longevialle Capital Project Co-chair Elie Hériard Dubreuil Capital Project Coordinator

21. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Selection of Related Publications Latin American Banks In Dissimilar Stages Of Implementation Of Basel II, October 4, 2007 Greater Basel II Pillar III Disclosure would Enhance Transparency and Comparability In the Global Banking Sector, July 10, 2007 FAQ: Building Standard & Poor's Risk-Adjusted Capital Framework, June 5, 2007 Japan ’ s Banks Rethink Fund Investments As Basel II Dawns, February 20, 2007 Where do the Key Formulas Come From?, February 15, 2007 Basel II In EU Gives Banks Greater Incentive To Invest In High-Quality Fixed- Income Funds, January 3, 2007 Assessment Of The Basel II Framework: Incentive To Securitize Corporate Exposures Remains, December 14, 2006 Different Wines from the Same Grape: Implementing Basel II in Brussels and Washington, November 2, 2006 Assessment Of The Basel II Framework: Residential Mortgages, September 28, 2006

22. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process.