1. Barclays Capital Ensuring Capital Efficiency of Russian Securitisation Transactions October 2006

2. 1 Introduction  Why is capital efficiency so important for Russian Banks?  How does securitisation provide capital relief?  How current Russian legislation addresses capital relief for securitisation transactions.  What structural features should a securitisation have to ensure capital relief is achieved? Speaker Michael Strange: Director –Financial Institutions Securitisation.  Worked on over 75 securitisation transactions to date from countries as diverse as Australia to Russia.  Oversees Barclays Capital’s Russian Securitisation franchise – offering public securitisation, private secured lines of credit (“Warehouses”) and securitisation swaps.  Has completed the first public securitisation of Russian consumer loans and Russian residential mortgages.

3. 2 1.Why is Capital Efficiency so Important for Russian Financial Institutions?

4. 3 Rapid growth expected in the retail and mortgage lending sectors  Most experts predict substantial increases in retail and mortgage related lending in the coming years.  The high expected growth rates raise two problems:  How is this growth funded by Russian banks.  Ensuring banks’ capital ratios remain above Central Bank of Russia guidelines. Growth Expectations for the Russian Mortgage Market AHML – Federal Mortgage Finance Agency; IUE – Russian Institute of Urban Economics Source: VTB Source: CBR, Bulletin of Banking Statistics; 2005 Broker reports Growth Expectations for Russian Retail Lending

5. 4 Growth seen to date has impacted capital adequacy ratios  The Central Bank of Russia (CBR”) has set a minimum capital adequacy ratio of 10%.  Institutions that have grown rapidly, and enjoyed a lot of success in the consumer lending market, will have to manage capital closely in the future to allow continued growth:  Russian bank’s are increasingly beginning to explore the international debt capital markets to raise Tier 2 capital:  While attractive, these markets can be volatile and investor demand can vanish at the first sign of bad news.  At present, most Tier 2 capital issuance is limited in term (3 to 5 years) and is therefore not ideal for a bank with long term assets (e.g. mortgage loans).

6. 5 2.How does Securitisation Provide Capital Relief?

7. 6 Securitisation provides risk transfer from originator to ABS investors Class A Notes BBB Class B Notes BB Class C Notes B Sub. Loan - NR Mortgage Portfolio 100% 98.5% - SOLD TO ABS INVESTORS 1.5% - RETAINED BY ORIGINATOR  The priority of payments in securitisation transactions allocate losses (due to borrower default) to the most subordinated debt first of all.  The note classes with most risk therefore are, in order, the Subordinated Loan, the Class C Notes, Class B Notes then the Class A Notes. LOSSESLOSSES LOSSESLOSSES

8. 7 Sale of the subordinated notes results in capital relief  As illustrated previously, sale of the Class B and C Notes transfers material amounts of risk from the originator to the ABS investors:  If capital relief is not required today but funding is required, originators should structure and retain the Class B and C Notes: – If capital relief was required at a later date, these Notes could be sold on the secondary market.  Subsequent to securitisation, originators can therefore materially reduce the amount of capital required to be held against a mortgage portfolio: Pre-Securitisation Capital Requirements Post-Securitisation Capital Requirements Mortgages $100 Capital $10 Assets Capital $1.5 Assets Capital Subordinated Loan to securitisation SPV Capital required to be held against Subordinated Loan

9. 8 Example: Capital and provisions relief

10. 9 3.How current Russian legislation addresses capital relief for securitisation transactions.

11. 10 No securitisation specific Russian guidelines exist at present  No guidelines currently exist, although the Central Bank of Russia (“CBR”) is expected to produce a securitisation policy paper by the end of 2006.  Under existing CBR legislation, the securitised assets have been de-recognised from the originator’s balance sheet as a consequence of “true sale”:  Any subordinated loan is simply seen as a loan to a third party company and could be treated as 100% risk weighted.  This is obviously not prudent as the subordinated loan contains “first loss” risk for the entire securitised portfolio.  Russian originators would be best served treating their securitisations as outlined under Basel I or Basel II:  These regulations are fairly comprehensive and prudent in relation to capital treatment for securitisations.

12. 11 4.What structural features should a securitisation have to ensure capital relief is achieved?

13. 12 Key securitisation structural features in relation to capital relief  Assuming that the CBR follows Basel II principals, it is likely that the following structural points need to be noted:  No credit support from the originator can be provided to the securitisation unless documented at the outset of the transaction: – A Subordinated Loan would be deducted from capital. – Liquidity facilities cannot be provided by the originator. – An originator can provide swaps to the SPV as long as they are executed on “arms length” terms. – Ongoing substitution asset sales must not be at a discount to par (unless agreed at the outset of the transaction).  There can be no put option for the SPV to the originator.  There can be no guarantee of the SPV’s obligations by the originator.  The originator can not have a call option over the assets except for the following options that allow the originator to purchase the assets at their par value: – A 10% clean up call option. – A step up and call option is allowed in residential mortgage securitisations.

14. 13 THANK YOU – ANY QUESTIONS? Michael Strange – Director, Financial Institutions Securitisation Tel - +44 2077731158 Michael.strange@barcap.com