2012 risk report - belfius bank - belfius banque...belfius bank risk report 2012 5contents 3.6.4....

2012 Risk report Pillar 3 of Basel II

2012

Belfius Bank Risk Report 2012 3

2012

Introduction 8

• Basel II Framework 8

• Basel II Implementation 9

• Pillar 1 9

• Pillar 2 9

• Pillar 3 – Disclosure Policy 9

• Compensation Policy and Practices 10

• Governance 10

• Remit 10

• Compensation 11

1. Risk Department Organisation, Role and Responsibilities 13

1.1 Role and Responsibilities 13

1.2. Risk Governance and Organisation 13

1.2.1. Governance 13

1.2.2. Organisation 16

1.3. Belfius Risk Cartography 17

2. Equity and Capital Adequacy 18

2.1. Equity 18

2.1.1. Accounting and Regulatory Equity Figures 18

Contents

4 Belfius Bank Risk Report 2012

Contents

2.1.2. Regulatory Capital 18

2.2. Capital Requirements by Type of Risk 20

2.3. Capital Adequacy 21

2.3.1. Regulatory Solvency Ratios 21

2.3.2. Internal Capital Adequacy 21

3. Credit Risk 24

3.1. Credit Risk Management and Governance 24

3.1.1. Definition 24

3.1.2. Governance and Committees 24

3.2. Credit Risk Exposure 24

3.2.1. Exposure by Type of Product and Geographic Area 25

3.2.2. Exposure by Type of Product and Obligor Grade 26

3.2.3. Exposure per Exposure Class and Economic Sector 27

3.2.4. Exposure by Exposure Class and Residual Maturity 31

3.3. Impairment, Past-Due and Related Provisions 32

3.3.1. Definitions of Past-Due/Impaired and Adjustments/Provisions 32

3.3.2. Impaired and Past-Due Exposure by Large Category of Product 33

3.3.3. Provisions for Impaired Exposure to Credit Risk by Type of Asset 34

3.4. Credit Risk Mitigation Techniques 36

3.4.1. Description of the Main Types of Credit Risk Mitigants (CRM) 36

3.4.2. Policies and Processes 36

3.4.3. Basel II Treatment 37

3.4.4. Exposure Covered by Credit Risk Mitigants by Exposure Class 37

3.5. AIRB Approaches 38

3.5.1. Competent Authority’s Acceptance of Approach 38

3.5.2. Internal Rating Systems 38

3.5.3. EAD and Average Risk Weight by Exposure Class 39

3.5.4. EAD and Average Risk Weight by Type of Retail Product 39

3.5.5. Backtesting 39

3.5.6. Stress Testing 40

3.6. Standardised Approaches 40

3.6.1. Introduction 40

3.6.2. Roll-Out Plan 40

3.6.3. Nominated External Credit Assessment Institutions (ECAI) 40


Contents

3.6.4. Exposure at Default and Average Risk Weights 41

3.7. Counterparty Risk on Derivatives 41

3.7.1. Management of the Risk 41

3.7.2. Basel II Treatment 42

3.8. Focus on Equity Exposure 42

3.8.1. Basel II Treatment and Accounting Rules 42

3.8.1.1 Basel II Treatment 42

3.8.1.2 Accounting Rules 42

3.8.2. Equity Exposure 43

3.8.3. Gains or Losses 43

3.8.3.1. Realised Gains or Losses Arising from Sales and Liquidations in 2011 and 2012 43

3.8.3.2. Unrealised Gains or Losses Included in Own Funds 43

3.9. Focus on Securitisation Activities 44

3.9.1. Objectives and Roles of Belfius Bank 44

3.9.2. Management of the Risk 44

3.9.2.1. Securitisation Activity as Originator 44

3.9.2.2. Securitisation Activity as Investor 46

3.9.3. Covered Bonds Activity 47

3.9.3.1. The Belfius Belgian Mortgage Pandbrieven Programme 47

3.9.3.2. Key Points on Risk 49

4. Market and Balance Sheet Management Risks 50

4.1. Market Risk 50

4.1.1. Market Risk Definition 50

4.1.2. Market Risk Governance 50

4.1.3. Market Risk Management 51

4.1.3.1. Market Risk Measures 51

4.1.3.2. Market Risk Exposure 51

4.1.3.3. Stress-Testing 52

4.1.3.4. Regulatory Internal Model and Backtesting 54

4.1.3.5. Validation 55

4.1.3.6. Systems and Controls 55

4.2. Balance Sheet Management Risk 56

4.2.1. Policy on Balance Sheet Management 56


Contents

4.2.2. Liquidity Risk 56

4.2.2.1. Liquidity Management Framework 56

4.2.2.2. Exposure to Liquidity Risk 56

4.2.2.3. Significant Improvement of the Liquidity Profile in 2012 56

4.2.2.4. Structure of the Balance Sheet at Belfius Bank 57

4.2.2.5. Dexia 58

4.2.3. Interest Rate Risk 60

4.2.3.1. Measuring Interest Rate Risk 60

4.2.3.2. Exposure to Interest Rate Risk 60

4.2.4. Foreign Exchange Rate Risk 60

4.2.5. Equity Risk 60

4.2.5.1. Equity Risk Measures 60

4.2.5.2. Balance Sheet Sensitivity to Equities (Listed Equities) 60

4.2.6. Pension Funds 61

5. Operational Risk 62

5.1. Policy 62

5.2. Measuring and Managing Risk 62

5.2.1. Decentralised Responsibility 62

5.2.2. Gathering Data about Operational Risks 62

5.2.3. Risk and Control Self-Assessment 63

5.2.4. Securing Information and Business Continuity 63

5.2.5. Managing Insurance Policies 63

5.2.6. Greater Coordination with other Functions involved in the Internal Audit System 63

5.2.7. Unwinding Cooperative Links between Belfius and Dexia 63

5.2.8. Calculating Regulatory Capital Requirements 64

6. Pillar 2 Risks 65

6.1. Behavioural Risk 65

6.2. Business Risk 66

6.3. Strategic Risk 66

6.4. Reputation Risk 66

6.5. Model Risk 67

6.6. Pension Risk 68


Contents

6.7. Settlement Risk 68

6.8. Securitisation Risk 69

6.9. Interest Rate Risk (Banking Book) 69

6.10. Funding Risk 70

6.11. Liquidity Risk 70

6.12. Insurance Risk 70

7. Basel III 72

Appendix 1 − Glossary 73

Appendix 2 − Internal Rating Systems 77

1. Structure of Internal Rating Systems 77

2. Description of the Internal Rating Process 77

3. Control Mechanisms for Rating Systems 83

4. Business Integration of Internal Estimates 84

Appendix 3 − Belfius Bank Originations 86

Introduction

After the takeover of Dexia Bank Belgium by the Belgian government via the Federal Holding and Investment Company (FHIC) on 20 October

2011, a start was made immediately on setting-up an independent Risk Management function for Belfius. Risk Management was one of the

most integrated areas within the Dexia Group, the policy on risk and a number of risk functions being managed from a group perspective.

Firstly, work was carried out on providing guidance for making the policies and decision centres at Belfius autonomous. Various initiatives were

taken to outline risk policy – so-called risk appetite – at levels corresponding with the financial capacity and mission of Belfius. Developing a

control framework focused on outlining the policies relating to risk management, as well as directing strategic, tactical and operational matters,

was a key priority for 2012.

A number of activities that had previously been carried out at a Dexia Group level were gradually taken over by teams within Belfius. These

included teams in charge of monitoring the project finance activity, as well as teams charged with more methodological tasks. In October 2012,

this period of transition was completed and the service level agreements terminated under which reciprocal services for risk management tasks

had been carried out between the former entities in the Dexia Group, including Belfius. After these changes had been made, a new organisation

chart was implemented for the various areas of risk that come under the responsibility of the Chief Risk Officer at Belfius Bank.

At the beginning of 2012, a new economic scenario of budget cleansing came into effect for Belgium against a background of financial and

economic crisis on a European and worldwide scale. The sovereign debt crisis and its direct and indirect impact on the financial sector remained

the centre of attention throughout the year. The weak growth performance in the euro zone resulting from the sovereign debt crisis, the impact

and need for budget consolidation measures and the lack of confidence in the economic situation, were all constantly in the news.

As the year progressed, it also became clear in Belgium that achieving the growth figures put forward initially would be a bridge too far and the

figures would have to be revised downwards. Achieving budget targets remained a central theme. A number of major company closures were

announced or carried out, usually with a significant impact on jobs. In this unfavourable context, the Belgian economy was unable to avoid a

minor recession in 2012.

It was in this difficult overall climate in 2012 that one of the priorities for Risk Management at Belfius was managing the risks contained in the

Legacy portfolio that was part of the bank’s bond portfolio after Belfius split from the Dexia Group. For the purpose of controlling the risks in

that Legacy portfolio as much as possible and also conducting a tactical de-risking process, a specific Portfolio Risk Management team was

created. Much of the work carried out in 2012 involved reducing this portfolio and the risks it entailed. In the first instance, emphasis was suc-

cessfully placed on rapidly reducing government bond positions on the peripheral countries in Europe. Attention was then shifted to other parts

of the portfolio and measures were taken to limit any potential losses, restrict balance sheet and statement of income volatility, reduce capital

immobilisation and improve the liquidity of the portfolio.

Basel II Framework

Basel II refers to the revision of the regulatory framework defining the capital requirements for banking institutions.

The main objectives of the capital agreement (“Basel II framework”) put in place by the Basel Committee on Banking Supervision are to improve

the regulatory framework in order i) to further strengthen the soundness and stability of the international banking system ii) to promote the

adoption of stronger risk management practices by the banking industry and iii) to prevent any competitive regulatory inequality among inter-

nationally active banks.

In order to achieve these objectives, the Basel II framework is based on three pillars.

→ The first pillar – minimum capital requirements – defines the way banking institutions calculate their regulatory capital requirements in

order to cover credit risk, market risk and operational risk. The revised framework provides different approaches for calculating credit risk

(3 approaches: Standardised, Foundation Internal Rating-Based and Advanced Internal Rating-Based), market risk (2 approaches: Standard-

ised Approach and Internal Model Approach) and operational risk (3 approaches: Basic Indicator Approach, Standardised Approach and Ad-

vanced Measurement Approach).

→ The second pillar – supervisory review – provides the national regulators with a framework to help them in assessing the adequacy of banks’

internal capital to be used to cover credit risk, market risk and operational risk but also other risks not identified in the first pillar such as

concentration risk.


Introduction

→ The third pillar – market discipline – encourages market discipline by developing a set of qualitative and quantitative disclosures which will

allow market participants to make a better assessment of capital, risk exposure, risk assessment processes, and hence the capital adequa-

cy of the institution. The requirements of the third pillar are met by this publication.

Basel II Implementation

Pillar 1

Credit Risk

Belfius Bank relies on the former Dexia Group homologation application file which was successfully presented for final decision to the Manage-

ment Board of the Banking, Finance and Insurance Commission on 18 December 2007. Consequently, since 1 January 2008, Belfius has been

authorised to use the Advanced Internal Rating-Based Approach (AIRB Approach) for the determination of its regulatory capital requirements

under Basel II Pillar 1 for credit risk and for the calculation of its solvency ratios.

Belfius has also decided to maintain a Standardised Approach for some portfolios for which this approach is specifically authorised by the

Basel II framework, such as small business units, non-material portfolios, portfolios corresponding to activities in run-off or to be sold or port-

folios and entities for which Belfius has adopted a phased rollout of the AIRB Approach.

Market Risk

In terms of market risk, Belfius Bank calculates its capital requirements on the basis of the Internal Model Approach for general interest rate

risk and foreign exchange risk and the Standardised Approach for specific interest rate risk, equity risk and commodity risk (refer to

part 4 – Market and BSM Risks).

Operational Risk

For operational risk, Belfius Bank applies the Standardised Approach.

Pillar 2

In the context of the redeployment of its activities following the dismantling of the Dexia Group, Belfius ensured in 2012 in close collaboration

with its supervisors the consolidation of its Pillar 2.

This process, applicable since the end of 2008, requires banks to demonstrate to the regulators the adequacy of their risk profile and their

capital (Internal Capital Adequacy Assessment Process − ICAAP). In this context, appropriate governance has been put in place for the calcula-

tion and management of the risks and the assessment of the economic capital needs from a Risk Appetite perspective.

Pillar 3 – Disclosure Policy

Frequency of Disclosure

The Pillar 3 document has been published since 2008 in line with the Circular PPB-2007-15-CPB-CPA – Title XIV (Belgian transposition of the

Capital Adequacy Directive – Annex XII).

Pillar 3 disclosure is organised on an annual basis. Nevertheless, intermediate updates will be published if considered relevant by Belfius Bank

due to significant changes in its risk profile.

Support

Belfius Bank will release the Pillar 3 document in English on its website (www.belfius.be).

Currency

The figures in the following tables are provided in millions of euro (EUR) unless otherwise stated.

Scope of Application

The Pillar 3 disclosure requirements under the Basel II capital framework are applicable to the upper level of consolidation, Belfius Bank SA,

based at Boulevard Pachéco 44, BE-1000 Brussels, Belgium.

In line with regulatory capital, Belfius Bank has chosen to link the scope of Pillar 3 to banking institutions, meaning that insurance companies

are only consolidated using the equity method.


Introduction

Pillar 3 Contents

Part of the information provided within Pillar 3 is similar to the Annual Report. However, to facilitate the reading of the present document, this

information has been duplicated in the Pillar 3 document.

The information listed in this report has not been subject to an external audit, but the quality of information is guaranteed by a strict process

of validation within the Belfius Bank SA Management Board.

In contrast to the Risk Report of last year, a comparison with the previous year is included unless this is not possible due to a change in scope

or methodology.

Belfius Bank is authorised as other financial institutions, not to communicate information if it is considered to be non significant or confidential.

Compensation Policy and Practices

Governance

There has been an Appointments and Compensation Committee in place within the bank since 16 February 2012.

The Appointments and Compensation Committee is made up of three non-executive directors, one of whom is the Chairman of the Board of

Directors. The majority of the Committee’s members are independent directors.

The Chairman of the Appointments and Compensation Committee is an independent director.

As representatives of the Management Board, the Chairman of the Management Board and the Head of Human Resources attend meetings of

the Appointments and Compensation Committee.

The Chairman of the Management Board of Belfius Insurance attends meetings of the Appointments and Compensation Committee for ques-

tions relating to Belfius Insurance and its subsidiaries.

This Committee is required to have the necessary expertise in matters regarding compensation and appointments policy.

As of 31 December 2012, the Appointments and Compensation Committee at Belfius Bank was made up of the following members:

Chairman Alfred Bouckaert • Chairman of the Board of Directors

Members Lutgart Van Den Berghe

Wouter Devriendt

Remit

The Appointments and Compensation Committee prepares the decisions of the Board of Directors relating to:

→ the compensation policy;

→ the compensation paid to the Chairman of the Management Board and, on its proposal, the compensation of members of the Management

Board;

→ the compensation report published in the Annual Report.

The Appointments and Compensation Committee:

→ regularly checks with management to see whether the compensation programme is achieving its aim and complies with the provisions in

force;

→ assesses each year the performance and activities of the members of the Management Board of Belfius Bank and Belfius Insurance;

→ evaluates each year the criteria for independence on the basis of which independent directors can be appointed. It also puts forward propos-

als to the general meeting of shareholders;

→ makes proposals for the appointment or renewal of the term of office for the Chairman and members of the Management Board of Belfius

Bank and Belfius Insurance.


Introduction

The Appointments and Compensation Committee acts for both Belfius Bank and Belfius Insurance.

Compensation

Procedure

The Board of Directors sets the compensation of the members of the Management Board of Belfius Bank on the basis of the proposal put

forward by the Appointments and Compensation Committee.

The Appointments and Compensation Committee issues an opinion on the compensation of the members of the Management Board on the

proposal of the Chairman of the Management Board of Belfius Bank. In order to be able to offer compensation packages that are in line with

the market, the Appointments and Compensation Committee intends to commission a benchmarking study every three years. The committee

determines the reference group of companies to be included in the benchmark, as well as the positioning of Belfius Bank vis-à-vis this reference

group. This study was conducted in June 2012 with the assistance of Towers Watson, a specialist external consultant.

When this benchmark analysis is carried out every three years, the Appointments and Compensation Committee proposes amounts for fixed

compensation to the Board of Directors as well as, where appropriate, an adjustment within the pay bracket linked to performance and any

other modifications justified by movements in the market.

In view of the fact that the legal context relating to the compensation of the members of the Management Board has yet to be finalised, the

Appointments and Compensation Committee has decided to defer drawing conclusions from the results of this benchmarking exercise. Debate

on this issue will commence once the legal context is clear.

Regulatory Context

Over the past three years, the question of pay for the executives of companies in the financial sector has undergone numerous regulatory

changes.

In 2012, the Board of Directors introduced an overall policy on compensation for the Belfius group. This policy is in line with Belgian and Euro-

pean regulations, as well as the principles recently adopted in the area of healthy compensation practices.

The compensation policy at Belfius was developed by the Human Resources division and submitted to the Appointments and Compensation

Committee of Belfius Bank for its views.

The compensation policy applicable to compensation paid from 2012 on the one hand sets out the general principles applicable to all Belfius

Bank employees. On the other hand, observing the principle of proportionality, it contains specific provisions, exclusively applicable to members

of the Management Board and senior managers likely to impact the risk profile of Belfius Bank by virtue of the nature or level of their functions

and/or compensation.

Strategic Guidelines Approved by the Board of Directors in Accordance with Regulations

Taking account of the instructions featured in the Royal Decree of 22 February 2011(1), the Board of Directors has reviewed the balance between

the various salary packages.

Fixed compensation constitutes a significant proportion of total compensation and is aimed at rewarding the work carried out by those em-

ployees to whom the current policy on compensation applies, taking into account their experience, their years of service, their education and

their skills, as well as their duties, responsibility and operating level. With this in mind, the policy aims at creating a balance between the fixed

part of compensation and the part linked to performance. This is to ensure that excessive risks are not taken and to allow a flexible policy with

regard to the granting of performance-linked pay. The system in effect enables Belfius Bank to reduce performance-based compensation for

the employees concerned, or for some of them, and even to reduce it to zero should collective or individual performance be poor. This also takes

into account the hierarchical level of the person in question and/or the legal base on which this performance-linked pay resides.

Compensation of Members of the Management Board

The compensation of members of the Management Board consists of a fixed part and a variable part.

The fixed and variable compensation of members of the Management Board constitutes a whole from which are deducted any attendance fees

or directors’ fees paid to a member of the Management Board by a company in the Belfius group or by a third-party company in which a mandate

is performed in the name and on behalf of Belfius Bank.

Fixed compensation is determined considering the nature and importance of the responsibilities assumed by each person (and taking account

of market benchmarks for comparable positions).

On 12 March 2013, on the proposal of the Appointments and Compensation Committee, the Board of Directors decided not to grant variable

compensation for 2012 to members of the Management Board and not to pay the deferred part of the bonus for 2010 due for payment in 2013.

(1) Royal Decree of 22 February 2011 approving the CBFA regulation dated 8 February 2011 regarding the compensation policy of financial establishments.


Introduction

For the sake of completeness, it should be stated that since it was established, albeit most recently in 2008, the Dexia Group has offered stock

option plans in favour of a certain category of employees. These stock options issued as part of these plans entitle the holder, for a limited

period, to purchase Dexia shares at an exercise price corresponding to the value of a Dexia share at the time the option was granted.

During 2012, no options reaching maturity or granted to members of the Management Board were exercised.

Compensation of Risk-Takers

The term “risk-takers” is understood to mean:

→ senior managers whose professional activities have an impact on the risk profile of Belfius Bank;

→ individuals exercising a supervisory function, i.e. the Direct Reports in the Finance, Risk, Compliance, Audit and Legal departments of

Belfius Bank and the individuals whose professional activities have an impact on the risk profile of Belfius Bank, i.e. the Direct Reports of

the Public and Wholesale Banking, Retail and Commercial Banking and Treasury and Financial Markets divisions.

On 12 March 2013, on the proposal of the Appointments and Compensation Committee, the Board of Directors decided not to pay to senior

staff whose professional activities have a major impact on the bank’s risk profile (“risk-takers”) the deferred part of their bonus relating to

2009 and 2010 and due for payment in 2013.

Compensation of Members of the Board of Directors

The total compensation granted to members of the Board of Directors for 2012 includes the emoluments granted for their mandate as direc-

tors, as well as their fees for attending meetings of the Board of Directors and various advisory committee meetings.


1. Risk Department Organisation, Role and Responsibilities

1.1. Role and Responsibilities

The mission and role of the Risk Department is to define and implement a robust risk management framework on the basis of inter alia the

following cornerstones:

→ an acceptable risk appetite in line with the commercial and financial objectives;

→ a set of independent and integrated risk measures for different types of risk (credit, concentration, market, liquidity, operational and other

non-financial risks), completed with internal limits themselves consistent with the approved risk appetite;

→ an effective process to identify, measure, monitor, assess or mitigate risks Belfius has or might be exposed to, completed with timely and

accurate reporting to make management aware of all the material risks and the overall risk profile in order to ensure appropriate decision-

taking.

The Risk Department has the responsibility to establish a set of policies and guidelines defining the risk governance and management including

an adequate committee structure with clear and consistent assignment of responsibilities.

The overall objective of the Risk Department is to assure the implementation of a sound, prudent and effective risk management on the basis

of a full understanding of the risks and of a swift and proactive identification and alerting on potential risks.

1.2. Risk Governance and Organisation

1.2.1. Governance

Sound Risk Management includes an adequate Committee set-up incorporating effective communication and reporting lines with clear and

consistent assignment of responsibilities and authority.

Belfius has opted for an interactive system ensuring risk appetite and strategic business objectives are cascaded downwards while business

information is escalated upwards enabling senior management to execute its management and supervisory function appropriately.

Belfius has also opted for an efficient structure with fewer committees through the implementation of a double signature process where pos-

sible, and with the activation of the most appropriate expert level creating added value in the decision-taking process tailored to the clients.

On the one hand, there are Risk Committees, steered by the Risk Department and focusing mainly on risk appetite, policies and methodology

completed with the definition of a risk/return plan assuring sufficient profitability.

On the other hand there are also Risk/Business Committees steered jointly by the Risk Department and the Business, and focusing mainly on

guidelines, transactions and counterparty risks.


Risk Department Organisation, Role and Responsibilities

The Belfius Risk Committee decision and oversight structure is delineated in the following diagram.

Board of Directors

Management Board

1Risk Committees

Risk / Business Committees

Risk Policy Committee

Risk Appetite Committee

Basel III Steering Committee

Risk and Capital Committee

4

3

2

Delegation Information Advice

Delegation

Escalation Advice

Risk Executive Committee

5

TFM Risk Committee

Investment PortfolioCommittee

6 7 8

Assets & Liabilities Committee

Prudential Watch Committee

9

Reg

ardi

ng P

olic

y

Reg

ardi

ng R

isk

App

etite

FM CLC

Credit Risk Committees

SM & WL Committee Default Committee

Impairment Committee Rating Committee

10

11

12

13

14

15

1. Risk and Capital Committee (RCC)

The RCC surveys the bank’s risk appetite and risk strategy and specifically the effectiveness of the risk management function and the govern-

ance structure to support it. It supports the Board of Directors in its consideration of the activities that expose the bank to material risks with

an explicit and dedicated focus on current and forward-looking aspects of risk exposure.

2. Basel III Steering Committee

The Basel III Steering Committee surveys Belfius’ Basel III status and ensures an overall smooth project organisation. It validates the business

and methodological choices, the planning, the simulations, the impact analyses and the final results.

3. Risk Appetite Committee (RAC)

The RAC surveys Belfius’ risk appetite, capital adequacy and capital allocation. It manages the bank’s economic capital and stress-test frame-

work, ensures the adequacy of this framework against the nature and complexity of the bank’s risk profile and business composition and su-

pervises its practical implementation.

4. Risk Policy Committee (RPC)

The RPC surveys the definition and the implementation of the bank’s principal risk management and measurement policies, processes and

methodologies, and supervises their validation status. Its prime responsibility is to ensure a risk governance that is commensurate with the risk

appetite and strategy of the bank, compliant with regulatory requirements and in line with best practices.

5. Risk Executive Committee (Risk Ex Com)

The Risk Ex Com is responsible for the day-to-day deployment of the risk strategy of Belfius Bank within the Risk Appetite Framework as defined

by the Board of Directors (RCC) and/or the Management Board (RPC, RAC and Basel III Steering Committee).



6. TFM Risk Committee (TRC)

The prime function of the TFM Risk Committee is to provide effective risk management oversight and steering of the Treasury and Financial

Market activities. This includes reviewing business, risk and statement of income reports and providing for an appropriate risk management

and governance framework, aligned to the risk appetite and business objectives, set forward by the Management Board.

7. Assets & Liabilities Committee (ALCo)

While the Management Board and the Board of Directors have the ultimate responsibility for setting the strategic risk appetite and business

objectives, they delegate to the ALCo the effective ALM management within the regulatory framework.

8. Investment Portfolio Committee (IPC)

The IPC acts as the central supervisory and decision-taking body on all matters regarding management of legacy portfolios. Its principal missions

consist of approving (dis)investment transactions, reviewing portfolio strategy and performance and assuring alignment of portfolio manage-

ment with the de-risking strategy and business objectives, set forward by PRM (Portfolio Risk Management) and validated by the Management

Board and the RCC.

9. Prudential Watch Committee (PWaC)

The prime function of the PWaC is to anticipate, to understand, to follow up and to steer the implications of (evolving) prudential guidelines.

This role requires a proactive assessment of new and changing regulations on the bank’s governance, capital basis, business conduct and

profitability. Although the PWaC principally focuses on risk and finance-related regulation, its follow-up covers all banking domains.

10. Financial Markets Credit Limits Committee (FM CLC)

The FM CLC:

→ approves specific limit requests for all Treasury and Financial Market activities and Public and Wholesale Banking Trade Finance, and this

within the global credit limit framework approved by the Management Board for financial institutions, sovereigns and international public

finance;

→ approves any decrease of current (effective) country limits;

→ develops various activities in relation to risk monitoring, such as the optimisation of TFM lines per activity line, the review of the list of

frozen limits, the follow-up of limit excesses and the drawing up of the relevant imperative action plans.

11. Credit Risk Committees

The main Credit Risk Committee, the CDC 1 (specific delegations have been given to various lower credit risk committees):

→ approves new Public and Wholesale Banking and Retail and Commercial Banking credit transactions and annual reviews of existing credit

files (on the basis of updated financial statements, i.e. without any adjustment of the current risk), that do not exceed its delegation limits

and/or that do not lead to an exceeding of the prevailing credit limits;

→ advises on new deals or limits, that must be presented to the Management Board.

12. Special Mention & Watchlist Committee (SM&WLC)

The SM&WLC ensures a close monitoring of counterparties for which there is evidence that their credit profile has deteriorated. Four specific

SM&WLC’s are organised, with competences linked to specific domains (Retail and Commercial Banking, Public and Wholesale Banking core and

non-core and Financial Markets).

13. Default Committee (DC)

The objective of the DC is to decide on and monitor the default status of counterparties, i.e. being a necessary condition for an impairment to

be recognised.

14. Impairment Committee (IC)

The IC approves the individual impairment amounts and reviews the collective impairment amount, before these figures are communicated to

Accounting for transcription in the financial statements. The IC with regard to the Retail and Commercial Banking and Public and Wholesale

Banking portfolios is organised at two levels, with competences linked to the amount of the impairment (new, additional or write-back).

15. Rating Committee (RC)

The main aim of the RC is to supervise the correct and coherent application of the different Internal Rating Systems within Belfius Bank and

its subsidiaries, together with an assessment of their performance.



1.2.2. Organisation

The following chart presents the Belfius Risk Department Organisation existing at the end of 2012.

Risk Management

Credit Risk Management

Market and ALM Risk Management

Operational Risk Management

Risk Framework & Strategies

ValidationPortfolio Risk Management

1. Credit Risk Management (CRM)

The mission of the Credit Risk Management department (CRM) is to contribute to the bank’s strategy:

→ by adjusting the level of risk on the basis of the Risk Appetite;

→ by seeking, through a better allocation, to reduce the regulatory and economic capital allocated to credit risk via an appropriate process for

selecting and managing credit loans.

Its strategic objective is to ensure the quality of the loan portfolio and its management at the level required to maintain the financial objectives

of Belfius, and to do so in particular by maintaining the following criteria at a satisfactory level:

→ the ratio between the rate of losses on loans and the commercial margin achieved on these (Raroc);

→ the stress levels determining unexpected losses on loans and the coefficient for covering these losses using equity capital;

→ the operating efficiency of the processes for granting and monitoring loans, both in terms of the individual account and on the basis of the

portfolio.

2. Market and ALM Risk Management

The Market and ALM Risk Management department supervises the market risk. The department is responsible for identifying, analysing,

monitoring and reporting the risks and results (including the valuation of assets) associated with market activities.

Market risk is defined as the exposure to a reduction in value following a variation in market prices. It is made up of general interest rate risks,

specific interest rate risks, equity risks, exchange risks and commodity risks.

The general interest rate risk reflects the exposure to overall variations in interest rates. The specific interest rate risk – also called the spread

risk – reflects the exposure to changes in the solvency of individual issuers. The equity risk is the exposure to variations in equity prices. The

exchange risk is the exposure to variations in exchange rates. The commodity risk is the exposure to variations in the price of commodities.

Monitoring consists of the following activities: implementing the limit framework, calculating the risk indicators, monitoring the limits, alignment

with strategic planning and accounting and reporting to the regulator and regulatory bodies. These activities are documented in guidelines and

procedures.

3. Operational Risk Management (ORM)

ORM is responsible for defining the operational risk policy, guidelines and methodology, adopting a proactive approach, as well as to the day-

to-day management and prevention. The department also exercises second-line responsibility for setting up, maintaining and continuously

developing the bank’s operational risk framework.

This risk framework encompasses the tasks of identifying, measuring, managing, monitoring, auditing, reducing and reporting on operating

risks. This is carried out in line with the bank’s capital requirements, as well as the risk profile defined. It is also ORM’s job to ensure business

continuity and to play the role of crisis manager in addition to conducting an information risk policy and keeping that information secure.

4. Risk Framework and Strategies

The objective of the Risk Frameworks and Strategies department is to develop a Risk Management framework and formulate a Risk Manage-

ment strategy that reflect and complete the bank’s commercial and financial objectives, while taking account of external factors relating to

control and regulations.

This objective is realised in close collaboration with the other departments of the Risk Management support line and the bank (the Business

Lines and Finance in the first instance) and forms the base for the bank’s risk culture.

The department’s competence centres for risk appetite and regulations play an essential strategic role.

5. Validation

The task of the Model Validation Department (MVD) is to monitor the reliability of the models used at Belfius, as well as to highlight any weak-

nesses, check that they are consistent with regulatory requirements, communicate these results to the official bodies involved and contribute

to the reflections on issues related to modelling (objectives, supervision, priorities).



In doing so, the aim is for these models to be used in a correct manner. More specifically, the aim is to provide the decision-making bodies (Risk

Department, Front-Office, etc.) with the elements they need to judge whether a model is sufficiently reliable to be used – the objectives of the

model and the framework it is used in having been clarified beforehand – and, where appropriate, to enable these bodies to assess the correc-

tive measures to be put in place. As no model is ever perfect, Validation provides the necessary detachment, both for the users of the models

and the people for whom the results are intended.

The intervention of MVD is mandatory for all models under regulation. This mainly concerns the models developed in the context of the Basel

regulations, the valuation models and the risk monitoring models enabling Belfius to comply with the necessary requirements.

At the request of the Risk Department or other departments, MVD may also intervene on other models used internally (e.g. management or

decision-making models).

6. Portfolio Risk Management

This department monitors the risks associated with the bank’s various bond portfolios (including credit derivatives – Legacy Portfolio and ALM

Bank).

The management of these portfolios includes the valuation of bonds, the recommendations on the allocation of assets, the line-by-line monitor-

ing of the assets of the various portfolios, as well as the accounting audit of assets registered in the Legacy Portfolio and ALM Bank.

The aim is to optimise the allocation of assets by reducing the risks incurred as much as possible (counterparties, interest rate, foreign exchange

and structures) and maximising liquidity targets.

1.3. Belfius Risk Cartography

The following table illustrates the risk identification process within Belfius. It represents the risk cartography of Belfius as at 31 December

2012, which aims at screening all risks to ensure they are identified, quantified and/or monitored.

Pillar 1 Pillar 2

Financial risks

Credit risk Solvency riskCountry riskResidual/Recovery riskSettlement risk

xx

xxxx

Market and balance-sheetmanagement risk

Interest-rate risk - BankingInterest-rate risk - TradingPrice risk (1)

Currency risk - BankingCurrency risk - TradingSpread risk - BankingSpread risk - TradingOther market risks

xx

x

x

xxxxxxxx

Other risks Insurance specific x

Operating risks

Operational risk Operational risk x x

Other risks Funding riskBehavioural riskBusiness riskModel risk

xxxx

Qualitative risks

Liquidity riskReputation riskStrategic riskSecuritisation risk

xxxx

(1) Price Risk includes risk on Equity exposures and Property exposures in the Banking Book

The RICAP (Risk Identification and Cartography Assessment Process) was implemented in 2011. The RICAP consists in a series of meetings with

key business representatives to ensure all risks are identified. The profitability of business lines and volatility of earnings is also analysed to

identify risks that could be outside the radar screen. All risk types are classified in financial, operating and qualitative risks. Financial and oper-

ating risks are capitalised as opposed to qualitative risks.

The risks listed above are described in more detail in the following parts of the disclosure:

→ Credit risk, part 3;

→ Market risk and balance-sheet management risk, part 4;

→ Operational risk, part 5;

→ Other risks, part 6.


2. Equity and Capital Adequacy

2.1. Equity

Belfius Bank reports on its solvency in accordance with the Banking, Finance and Insurance Commission circular PPB-2007-1-CPB (CBFA deci-

sion of 17 October 2006). That circular is based on the rules and capital ratios defined by the Basel Committee for the supervision of banks and

on the basis of the European Capital Requirement Directive (CRD).

These ratios, the capital adequacy ratio (CAD) and the Tier 1 ratio, compare the regulatory capital (total regulatory capital (CAD) and Tier 1

capital) with total weighted risks. For regulatory purposes, they should amount to a minimum of 8% for the CAD ratio and 4% for the Tier 1

ratio.

Another indicator used by Belfius Bank in the context of monitoring its solvency is the Core Tier 1 ratio. This ratio compares the amount of

regulatory Tier 1 capital, excluding hybrid Tier 1 capital, with total weighted risks.

The National Bank of Belgium (NBB) requires Belfius Bank to submit the calculation of capital necessary for its activity in accordance with the

prudential banking regulations.

2.1.1. Accounting and Regulatory Equity Figures

In line with regulatory capital, Belfius has chosen to limit the scope of Pillar 3 to banking institutions. Therefore, the scope of consolidation of

Pillar 3 differs from the scope of consolidation of the financial statements (as released in the Belfius annual report).

For Belfius, the difference in consolidation between the accounting methods and the prudential methods is the manner in which the Insurance

companies are consolidated. For prudential purposes, the equity method is used instead of full consolidation for accounting purposes. Belfius

Insurance is the main insurance company of Belfius.

The exhaustive list of the insurance companies concerned is available on request.

The following table shows a comparison between total equity as per financial statements and total equity as start base of Tier 1 and total

regulatory capital at year-end.

Comparison between total equity (financial statements) and total regulatory capital calculated for regulatory purposes

31/12/11 31/12/12

(in millions of EUR)Financial

statementsRegulatory

purposesFinancial

statementsRegulatory

purposes

Total shareholders’ equity 3,259 3,244 5,340 5,340

Non-controlling interests 16 0 19 0

of which core shareholders’ equity 17 0 18 0

of which gains and losses not recognised in the statement of income (1) 0 2 0

TOTAL EQUITY 3,275 3,244 5,359 5,340

In the regulatory calculations, insurance companies are accounted for by the equity method. For this reason, non-controlling interests differ from those published in the financial statements.

2.1.2. Regulatory Capital

Regulatory capital consists of:

→ capital in the strict sense, including hybrid capital (Tier 1 capital), which is made up of share capital, additional paid-in capital, retained earn-

ings (including net income for the period), foreign currency conversion differences and non-controlling interests, less intangible fixed assets,

dividends to be paid, long positions in own shares and goodwill, as well as certain elements of the subordinated debt from equities in finan-

cial institutions (see below);

→ the additional components of capital (Tier 2 capital) which is made up of the eligible part of subordinated long-term debt, less the remaining

subordinated debt from and equities in financial institutions that have not yet been deducted from capital in the strict sense.


Equity and Capital Adequacy

In line with the IFRS standards adopted by the European Commission:

→ the AFS reserves on bonds and cash flow hedge reserve are not part of regulatory capital;

→ the AFS reserves on equities are added to Tier 2 capital if positive (with a 90% haircut) or deducted from Tier 1 capital if negative (for the

full 100%);

→ certain IFRS adjustments on subordinated debts, non-controlling interests and debts must be added in order to reflect the ability of those

instruments to absorb losses;

→ other elements (Special Purpose Vehicles (SPV), deferred taxes and so on) are also taken into account on the basis of requirements from

the National Bank of Belgium.

On 1 January 2007, pursuant to the Capital Requirement Directive, the Banking, Finance and Insurance Commission changed its definition of

regulatory capital. The main effect for Belfius Bank was a transitional measure for items that were previously deducted from the additional

components of capital: holdings in financial companies accounted for by the equity method, holdings in financial companies or subordinated

debt issued by such financial companies. 50% of these items is deducted from Tier 1 capital and 50% from total regulatory capital. For holdings

in insurance companies, this new deduction rule applies from 1 January 2013.

The following table shows Belfius regulatory capital calculated under Basel II at year-end.

Regulatory Capital

(in millions of EUR) 31/12/11 31/12/12

TOTAL REGULATORY CAPITAL (AFTER PROFIT APPROPRIATION) 7,994 6,941

TIER 1 CAPITAL 6,736 6,702

Core shareholders’ equity 6,591 7,006

Prudential filters (36) 90

Dividend paid (non-controlling interests) 0 0

Items to be deducted (317) (394)

Intangible fixed assets and goodwill (206) (198)

Securities and shares in other credit institutions and financial institutions where the holding is more than 10% (50%) (21) (21)

Subordinated claims and other instruments in insurance companies where the holding is more than 10% (50%) (91) (176)

Hybrid Tier 1 capital 499 0

TIER 2 CAPITAL 1,257 239

Subordinated debt with unspecified term 879 264

Subordinated debt with specified term 1,141 863

AFS reserve on equities (+) 48 48

Residual IRB provision excess (+) or shortfall (-) 50% 11 41

Items to be deducted (111) (196)

Securities and shares in other credit institutions and financial institutions where the holding is more than 10% (50%) (21) (21)

Subordinated claims and other instruments in insurance companies where the holding is more than 10% (50%) (91) (176)

Holdings in insurance companies (711) (781)

In the regulatory calculations, insurance companies are accounted for by the equity method. For this reason, non-controlling interests differ

from those published in the financial statements.

At the end of 2012, Tier 1 capital was EUR 6,702 million, compared with EUR 6,736 million at the end of 2011. However, this stability is the

result of two movements in opposite directions: the strengthening of core shareholders’ equity with the net income for the period and the

reduction in Hybrid Tier 1 capital after the buyback operation at the beginning of the year.

In 2012, Belfius bought back and cancelled a number of Tier 1 and Tier 2 instruments.

The outstanding Tier 1 instrument from Dexia Funding Luxembourg, with a nominal value of EUR 500 million, was bought back to a large extent

in the first quarter of 2012 by Belfius Bank and the remaining outstanding, with a nominal value of EUR 40.8 million, was then converted into

an unsubordinated loan. This resulted in the Hybrid Tier 1 capital being reduced to zero and the Core Tier 1 capital being equivalent to the Tier 1

capital.

In addition, Belfius also bought back a number of Tier 2 instruments. As a result of these buyback operations, the outstanding Upper Tier 2

instruments (unspecified term) and Lower Tier 2 instruments (specified term) fell by EUR 612.1 million and EUR 257.1 million respectively over

the year. At the end of 2012, the additional component of capital (Tier 2 capital) stood at EUR 239 million.



Belfius booked capital gains on these buyback operations, which strengthened the bank’s core shareholders’ equity (up 6.3% compared with

the end of 2011, at EUR 7,006 million as at 31 December 2012). These transactions were also in line with the bank’s strategy, in the context of

the forthcoming introduction of Basel III regulations, of converting additional capital into higher quality components of regulatory capital (core

shareholders’ equity).

As a result, core shareholders’ equity was strengthened and total regulatory capital decreased by 13.2%, to EUR 6,941 million as at 31 Decem-

ber 2012.

2.2. Capital Requirements by Type of Risk

The following table shows the weighted risks and capital requirements for each type of risk (and exposure class for credit risk) at year-ends

2011 and 2012. The minimum capital requirements correspond to 8% of the weighted risks.

Type of risk Basel II treatment Exposure class Weighted risks

31/12/11 31/12/12

Evolution31/12/12 -

31/12/11

Credit risk Advanced Central governments and central banks 1,023,463 737,504 (285,959)

Institutions 8,327,088 6,560,423 (1,766,665)

Corporate 19,653,963 17,581,327 (2,072,636)

Retail 3,508,713 3,385,566 (123,147)

Equity IRB 159,925 129,683 (30,242)

Securitisation positions 2,504,375 5,713,898 3,209,523

Other 549,800 28,659 (521,141)

TOTAL 35,727,327 34,137,060 (1,590,267)

Standard Regional governments and local authorities 42,438 25,793 (16,645)

Public sector entities 4,270,375 4,276,567 6,192

Institutions 13,813 18,974 5,161

Corporate 3,744,250 3,605,791 (138,459)

Retail 177,500 168,891 (8,609)

Secured by real estate property 86,550 14,821 (71,729)

Past due items 110,438 130,057 19,619

Items belonging to high risk categories 7,413 35,230 27,817

Covered bonds 3,100 6,189 3,089

Collective investment undertakings 75 2,990 2,915

Other items 2,468,525 1,941,998 (526,527)

TOTAL 10,924,477 10,227,302 (697,175)

Market risk Internal models TOTAL 1,850,225 908,899 (941,326)

Standard General and specific risk 1,321,512 835,271 (486,241)

Specific risk securitisation positions 40,313 1,224,121 1,183,808

Equity IRB 247,325 215,458 (31,867)

Commodities 34,450 991 (33,459)

TOTAL 1,643,600 2,275,840 (632,240)

Operational risk Basic 2,878,088 2,711,608 (166,480)

TOTAL 53,023,717 50,260,710 (2,763,007)

Concerning credit risk (Basel II Advanced treatment) there is a significant decrease in the category Institutions (EUR -1,767 billion) due to the

unwinding of the activities with Dexia and its subsidiaries and the category Corporate (EUR -2,073 billion) due to the declining outstanding for

this segment. For securitisation positions, there is an increase of EUR 3,210 billion due to the downgrading of specific ABS which thereby ob-

tained a weighting of 1,250%. The evolution concerning the Basel II standard treatment method is quite stable. The increase of market risk

(EUR 1,184 billion) for specific risk securitisation positions is due to a temporary condition (sale fully handled during 1Q 2013) of a bond in

trading position and this in the context of the unwinding of the deals with Goldman Sachs.



2.3. Capital Adequacy

2.3.1. Regulatory Solvency Ratios

The following table shows Belfius weighted risks and solvency ratios at 2012 and 2011 year-end. Since 1 January 2008, Belfius has used the

Basel II framework to calculate the capital requirements for credit risks and to publish its solvency ratios.

31/12/11 31/12/12

Core Tier 1 ratio 11.8% 13.3%

Tier 1 ratio 12.7% 13.3%

Capital adequacy ratio (CAD) 15.1% 13.8%

The core Tier 1 ratio stood at 13.3%, up 157 basis points compared with the end of 2011, resulting from the increase in Core Tier 1 capital made

possible by the profit realised in 2012 (contribution of +87 basis points) and the EUR 2.7 billion reduction in weighted risks (contribution of +70

basis points).

The Tier 1 ratio rose in 2012 by 63 basis points to 13.3%, as a result of a fall in total weighted risks (contribution of +70 basis points), combined

with a slight fall in Tier 1 capital of EUR 34 million (impact of -7 basis points).

The capital adequacy ratio (CAD) amounted to 13.8% at the end of 2012, down 127 basis points on the end of 2011, mainly as the result of the

buyback of Tier 2 instruments.

2.3.2. Internal Capital Adequacy

Risk appetite

Risk appetite is the level of risk that an institution is prepared to take given the expectations of the main stakeholders (shareholders, creditors,

regulators, rating agencies, clients and so on), in order to achieve its strategic and financial objectives.

Based on a holistic approach, risk appetite is a central reference point:

→ for guiding strategy and planning;

→ for framing performance in terms of growth and value creation;

→ for facilitating daily investment decisions.

The risk appetite of Belfius is illustrated by a series of ratios that constitute a key element in the definition of limits in major financial balances.

This framework is based on a mix of accounting ratios (gearing), regulatory ratios (Tier 1, weighted risks) and economic ratios (economic capital,

Earnings at Risk), and integrates liquidity and funding structure ratios, as well as credit concentration limits.

Limits have been defined on each of these ratios and are validated each year by the competent bodies. The Risk and Finance departments are

responsible for monitoring these ratios, and if necessary propose measures to the Management Board to ensure the limits are observed.

In 2012, Belfius reviewed its framework in relation to risk appetite to adjust it to the context of an autonomous bank, with a revised strategy

and new objectives. This adjusted framework was approved by the Board of Directors. In addition to the quantitative elements already in place,

a qualitative part was added to create a clearer link between the bank’s main tasks and the risk framework in which it operates.

Economic Capital

Definition

Economic capital is defined as the potential deviation between the economic value of the bank in relation to the value expected within a given

interval of confidence and time horizon. The confidence threshold chosen for scenarios involving losses in value corresponds with the bank’s

required debt rating at a horizon of one year (AA for 2012).

The economic capital quantification process is organised in three phases: identifying the risks (definition and cartography, as well as the an-

nual update, in collaboration with the various business lines), measuring the risks (mainly on the basis of statistical methods and/or scenarios)

and aggregating them on the basis of an inter-risk diversification matrix.

Most risks are capitalised based on measuring the expected loss; however, some risks are not capitalised if alternative management techniques

(limits, scenarios, governance and so on) are considered more appropriate to cover them.

Economic capital remains an important element in the context of risk appetite.



Economic Capital Adequacy

The Management Board, which acts as the Risk Appetite Committee (RAC), is responsible for managing the capital adequacy process and has

authority in all matters relating to economic capital. The RAC analyses the various models involved in calculating the economic capital and also

monitors the (regulatory and economic) ratios, limits and triggers.

Belfius’ economic capital amounted to EUR 5,429 million at year-end 2012.

In 2012, the distribution between the main categories of risk remains stable: credit risk represents approximately 44% of the economic capital

and remains the main contributor; market risk (inter alia including interest rate risk, exchange rate risk, spread risk and equity risk) is 36% and

operational risk 20% (including operational risks and business risks).

Credit Risk: 44%

Operational Risk: 20%

Market Risk: 36%

By business line, the economic capital is allocated as follows: the activity of the investment portfolio, including the investment portfolio of

Legacy bonds and the portfolio of credit derivatives, accounts for 26% of economic capital at Belfius; the Public and Wholesale Banking (PWB)

and Retail and Commercial Banking (RCB) business lines represent 14% and 24% respectively; the balance is made up of 17% allocated to the

Group Center and 18% to insurance-related business.

Insurance -

related business:

18%

RCB: 24%

Investment

portfolio: 26%

Group Center:

17% PWB: 14%



Stress Tests

In 2012, Belfius implemented its reinforced governance with regard to stress test exercises aimed at providing a transversal and integrated

approach for the bank’s and insurance company’s risk management.

Stress tests are aimed at measuring the bank’s sensitivity, in situations where there is a sudden adverse shock, to expected losses, weighted

risks, liquidity requirements and needs in terms of capital.

In 2012, Belfius conducted a series of stress tests (analysis of sensitivity, analysis on the basis of scenarios, evaluation of potential vulnerabil-

ities) that made it possible to assess the potential consequences on its financial equilibrium of a hypothetical event or combination of hypo-

thetical events. In the fourth quarter of 2012, Belfius also took part in the stress test exercises conducted as part of the “Belgian Financial

Sector Assessment Programme” for the International Monetary Fund, in conjunction with the National Bank of Belgium.


3. Credit Risk

3.1. Credit Risk Management and Governance

3.1.1. Definition

Credit risk represents the potential loss (decrease of asset value or payment default) which Belfius may incur as a result of deterioration in the

solvency of any counterparty.

3.1.2. Governance and Committees

Belfius has a structure of credit committees, which is organised hierarchically. The delegation of powers is contained in detailed procedures. It

implies that as the amount of the credit transaction increases, the Maximum Theoretical Risk Limit (MTRL) becomes material or the rating

quality of the counterparty declines, decisions are made by a senior level of committee.

The general principle is that credit committees have equal numbers of Risk and Business representatives. The credit committees are chaired

by a Risk team member. Mainly for credit decisions in the segment Retail and Commercial Banking (RCB), Belfius relies increasingly on an advanced

and automated decision-taking process with behavioural or financial indicators as cornerstones. The parameters leading to the decision in these

systems are of course determined by Risk.

In addition, a very important role is assigned to the risk control function. Once Belfius has credit commitments on a counterparty, it is essential

to monitor and control the risk evolution, possibly to take the necessary corrective measures in case of quality degradation and, where ap-

propriate, to take impairments for foreseen credit losses.

To this end, Belfius has a system of indicators based on behavioural or financial indicators. Counterparties showing signs of weakness are fol-

lowed by the watch list committee. Its main task is to detect emerging risks as quickly as possible and to monitor them. The business units play

a very important role because they maintain the closest contact with customers. In this sense, they fulfil the role of first line risk controller.

If a counterparty fails seriously to meet its obligations towards the bank, it is put in a default status. The formal decision is the competence of

the default committee, composed of Risk team members. The default status is laid down, on the one hand, by a series of automatic criteria,

such as the bankruptcy of the counterparty, but also on the other hand, by a discretionary decision on the basis of qualitative criteria. For each

party under the default status, the bank must then verify that, given the value of any guarantees provided by the counterparty, there is good

reason to take impairments. This evaluation is performed by the impairment committee.

Methodological committees have a special place in the functioning of Belfius. Their main aim is to validate internal rating systems and quality

control, points to be discussed later in this Report.

3.2. Credit Risk Exposure

Credit risk is expressed as Maximum Credit Risk Exposure (MCRE) and includes:

→ the net carrying amount for balance sheet assets other than derivative contracts (i.e. accounting value after deduction of impairments); for

assets classified in “Loans and advances” without fair value hedge;

→ the fair value of derivatives and of financial collateral received;

→ the full commitment amount for off-balance-sheet commitments. The full commitment amount is either the undrawn part of liquidity fa-

cilities or the maximum amount Belfius Bank is committed to pay for the guarantees it has granted to third parties;

→ the financial guarantees.

The most important evolutions between 2011 and 2012 (concerning parts 3.2.1., 3.2.2., 3.2.3., 3.2.4.) can be explained by the following elements.


Credit Risk

The decreasing “exposures” for Given Guarantees (e.g. line with FSA), Loans and Advances and Repos are due to the unwinding of the activities

with Dexia and its subsidiaries, the unwinding of CDS and decreasing outstanding for the corporate segment. For retail loans Eurozone

(EUR -2,590 million) there has been the sale of the mortgages in the subsidiary Elantis to Belfius Insurance. These target groups usually have

a rating between A+ and BBB- (decrease by EUR 28,721 million in table 3.2.2.) and usually belong to the sector “Financial and insurance activi-

ties” (decrease by EUR 30,607 million in Table 3.2.3.). We also observed a decrease in the corporate segment (EUR -2,138 million) and the

public sector (EUR -3,685 million). These were in general also short-term transactions (“less than 3 months” in table 3.2.4.).

3.2.1. Exposure by Type of Product and Geographic Area

The table below shows the total exposure with a breakdown by type of product and geographic area at year-ends 2011 and 2012 as well as the

evolution between 2011 and 2012.

31/12/11

Euro-zone (1) Rest of Europe (2) US and Canada Rest of the world Total

ABS 2,723 310 1,638 231 4,903

Debt securities 27,139 2,794 2,810 1,189 33,932

Derivatives 4,331 1,701 1,182 69 7,283

Given guarantees 32,747 2,135 5,997 1,730 42,609

Loans and advances 60,534 1,820 205 402 62,961

Other assets 438 1,626 5 606 2,674

Repos 9,518 1,982 120 8 11,628

Retail loans 36,724 66 13 41 36,844

TOTAL 174,153 12,435 11,971 4,276 202,834

31/12/12

Euro-zone Rest of Europe US and Canada Rest of the world Total

ABS 2,378 435 803 345 3,962

Debt securities 27,481 3,022 2,465 1,362 34,330

Derivatives 3,722 1,602 662 122 6,107

Given guarantees 26,533 1,452 3,254 1,688 32,927

Loans and advances 42,315 830 157 357 43,659

Other assets 298 1,479 1 615 2,392

Repos 4,279 1,078 108 1 5,466

Retail loans 34,134 31 10 38 34,213

TOTAL 141,139 9,928 7,462 4,527 163,056

Evolution 31/12/12 − 31/12/11

Euro-zone Rest of Europe US and Canada Rest of the world Total

ABS (345) 125 (835) 114 (941)

Debt securities 342 227 (344) 173 398

Derivatives (609) (99) (520) 53 (1,175)

Given guarantees (6,213) (683) (2,743) (42) (9,682)

Loans and advances (18,219) (990) (48) (45) (19,302)

Other assets (140) (147) (3) 9 (282)

Repos (5,239) (904) (12) (8) (6,163)

Retail loans (2,590) (35) (3) (3) (2,631)

TOTAL (33,014) (2,507) (4,509) 251 (39,778)


Credit Risk

3.2.2. Exposure by Type of Product and Obligor Grade

The following tables show the total exposure and the average exposure with a breakdown by type of product and obligor grade at year-ends

2011 and 2012 as well as the evolution between 2011 and 2012.

For reporting purposes, a rating “masterscale” has been applied. This scale is structured in grades ranging from AAA to CCC and the modifiers

plus, flat and minus (except for both extremes of the scale).

31/12/11

AAA+ to AA- A+ to BBB- Default Non investment

grade

NR Total

ABS 3,690 956 0 186 69 4,903

Debt securities 20,024 11,328 385 2,193 2 33,932

Derivatives 2,492 4,522 9 242 17 7,283

Given guarantees 19,374 18,455 166 4,124 491 42,609

Loans and advances 26,219 31,860 940 3,767 175 62,961

Other assets 615 1,438 0 16 605 2,674

Repos 384 11,130 1 113 0 11,628

Retail loans 13,210 13,034 530 9,051 1,020 36,844

TOTAL 86,008 92,724 2,031 19,692 2,379 202,834

31/12/12


grade

NR Total

ABS 1,357 1,933 436 236 3,962

Debt securities 19,490 12,105 26 2,398 311 34,330

Derivatives 1,769 4,042 2 272 22 6,107

Given guarantees 13,635 14,699 198 3,940 455 32,927

Loans and advances 25,803 12,845 980 3,726 305 43,659

Other assets 14 1,743 0 20 614 2,392

Repos 41 5,385 39 0 5,466

Retail loans 13,398 11,250 525 8,250 790 34,213

TOTAL 75,507 64,003 1,731 19,081 2,734 163,056

Evolution 31/12/12 − 31/12/11


grade

NR Total

ABS (2,333) 976 (0) 249 166 (941)

Debt securities (534) 777 (359) 205 309 398

Derivatives (723) (481) (6) 30 5 (1,175)

Given guarantees (5,738) (3,755) 31 (184) (35) (9,682)

Loans and advances (416) (19,015) 40 (41) 129 (19,302)

Other assets (601) 305 0 4 10 (282)

Repos (343) (5,745) (1) (74) 0 (6,163)

Retail loans 188 (1,783) (5) (802) (230) (2,631)

TOTAL (10,501) (28,721) (300) (611) 355 (39,778)


Credit Risk

3.2.3. Exposure by Exposure Class and Economic Sector

The following tables show the total exposure with a breakdown by economic sector and exposure class at year-ends 2011 and 2012 as well as

the evolution between 2011 and 2012.

31/12/11

Economic sector

Corpo-rate

Finan-cial

institu-tions

Mono-lines

Project finance

Public sector

entities

Retail Securi–tisation

Sove-reign

Other Total

Industry 6,121 191 454 3,172 281 6 10,224

Construction 2,200 392 139 602 3,333

Trade-Tourism 3,056 0 15 13 1,161 4,245

Services Transportation and storage 4,006 94 142 1,804 91 51 6,188

Information and communication 577 23 68 183 851

Financial and insurance activities 2,496 52,717 4,190 1,520 250 160 2,206 63,540

Real estate activities 3,404 1,042 245 318 518 5,526

Professional, scientific and technical activities 1,459 70 853 2,382

Administrative and support service activities 713 294 284 0 1,291

Public administration and defence-compulsory social security 71 0 42,191 2 3 21,999 64,266

Human health and social work activities 346 2,764 707 3,816

Arts, entertainment and recreation 118 86 50 254

Other service activities 56 224 100 381

Other services 4 308 12 190 514

Other 246 3 288 30,362 4,740 374 9 36,023

TOTAL 24,874 54,070 4,190 1,247 53,259 35,458 4,903 24,825 9 202,834


Credit Risk

31/12/12

Economic sector

Corpo-rate

Finan-cial

institu-tions

Mono-lines

Project finance

Public sector

entities


Sove-reign

Other Total

Industry 5,907 182 512 5,021 333 0 11,956

Construction 1,985 599 168 670 3,423

Trade-Tourism 3,038 0 12 883 1,304 5,238

Services Transportation and storage 3,554 95 146 761 107 4,664

Information and communication 471 20 84 205 780

Financial and insurance activities 1,959 22,110 3,208 1,444 294 207 2,369 31,590

Real estate activities 3,279 1,018 317 347 583 5,545

Professional, scientific and technical activities 1,282 11 103 949 2,346

Administrative and support service activities 668 197 299 1,164

Public administration and defence-compulsory social security 70 0 36,751 2 22 22,262 59,108

Human health and social work activities 347 2,875 755 3,977

Arts, entertainment and recreation 91 58 62 212

Other service activities 46 237 107 390

Other services 4 374 17 274 669

Other 34 - 269 27,267 3,733 614 78 31,995

TOTAL 22,736 23,426 3,208 1,597 49,574 32,956 3,962 25,519 78 163,056


Credit Risk

Evolution 31/12/12 − 31/12/11

Economic sector

Corpo-rate

Finan-cial

institu-tions

Mono-lines

Project finance

Public sector

entities


Sove-reign

Other Total

Industry (214) (8) - 58 1,849 52 - (5) - 1,732

Construction (215) - - 207 30 68 - - - 90

Trade-Tourism (18) (0) - (2) 870 143 - - - 993

Services Transportation and storage (452) 1 - 4 (1,042) 16 - (51) - (1,524)

Information and communication (106) (3) - - 15 22 - - - (71)

Financial and insurance activities (538) (30,607) (982) - (76) 43 47 163 - (31,950)

Real estate activities (124) (24) - 72 29 65 - - - 19

Professional, scientific and technical activities (177) - - 11 33 96 - - - (37)

Administrative and support service activities (45) - - - (97) 15 - (0) - (128)

Public administration and defence-compulsory social security (1) (0) - - (5,440) 0 19 263 - (5,158)

Human health and social work activities 1 - - - 111 48 - - - 161

Arts, entertainment and recreation (27) - - - (28) 12 - - - (42)

Other service activities (11) - - - 13 7 - - - 10

Other services 0 - - - 66 5 - 85 - 155

Other (213) (3) - - (18) (3,095) (1,007) 240 69 (4,028)

TOTAL (2,138) (30,644) (982) 351 (3,685) (2,502) (941) 694 69 (39,778)


Credit Risk

Main exposures are further detailed in the following diagrams.

Financial intermediation (split by rating class)

31/12/11 31/12/12 Evolution 31/12/12 − 31/12/11

AAA+ to AA- 3,026 6% AAA+ to AA- 503 2% AAA+ to AA- (2,524) -83%

A 42,099 80% A 5,522 25% A (36,577) -87%

BBB 5,379 10% BBB 13,332 60% BBB 7,953 148%

Other 113 0% Other 100 0% Other (14) -12%

Speculative grade 2,099 4% Speculative grade 2,654 12% Speculative grade 555 26%

52,716 22,110 (30,607)

PSE: Public administration, social security (split by country)

31/12/11 31/12/12 Evolution 31/12/12 − 31/12/11

Belgium 40,731 97% Belgium 35,130 96% Belgium (5,601) -14%

France 825 2% France 909 2% France 84 10%

Germany 97 0% Germany 160 0% Germany 64 66%

Italy 3 0% Italy 3 0% Italy 1 22%

Other 536 1% Other 549 1% Other 13 2%

42,191 36,751 (5,440)

Sovereign: Public administration, social security (split by country) (*)

31/12/11 31/12/12 Evolution 31/12/12 − 31/12/11

Belgium 9,836 45% Belgium 12,047 54% Belgium 2,211 22%

France 5,341 24% France 5,090 23% France (251) -5%

Italy 3,744 17% Italy 3,825 17% Italy 81 2%

Other 422 2% Other 359 2% Other (63) -15%

Other EU countries 2,758 12% Other EU countries 940 4% Other EU countries (1,818) -66%

22,102 22,262 160

(*) Direct and indirect exposure


Credit Risk

3.2.4. Exposure by Exposure Class and Residual Maturity

The following tables show the total exposure with a breakdown by exposure class and residual maturity at year-ends 2011 and 2012 as well as

the evolution between 2011 and 2012.

31/12/11

Less than 3 months

3 months to 1 year

1 year to 3 years

3 years to 5 years

More than 5 years

No defined maturity

Total

Corporate 5,270 1,564 2,386 1,721 12,761 1,162 24,866

Equities - - 8 1 - - 9

Financial institutions 15,510 3,672 13,133 8,086 11,681 1,988 54,069

Monolines 1 28 609 625 2,927 - 4,190

Project finance 107 70 1 124 944 1 1,247

Public sector entities 3,538 3,565 4,575 3,562 36,286 1,731 53,259

Retail 723 2,014 1,789 2,046 28,716 170 35,458

Securitisation 1 185 203 173 4,342 - 4,903

Sovereign 15,621 545 137 418 7,515 589 24,825

Other - - - 1 8 - 9

TOTAL 40,770 11,643 22,840 16,758 105,181 5,642 202,834

31/12/12

Less than 3 months

3 months to 1 year

1 year to 3 years

3 years to 5 years

More than 5 years

No defined maturity

Total

Corporate 4,560 1,433 1,887 1,213 12,610 1,025 22,728

Equities - - 8 - 12 - 20

Financial institutions 2,911 1,998 3,603 3,019 9,373 2,509 23,413

Monolines 191 94 575 102 2,246 - 3,208

Project finance 169 70 - 117 1,239 1 1,597

Public sector entities 2,933 2,619 3,408 2,513 37,126 975 49,574

Retail 459 648 1,575 1,962 28,119 193 32,956

Securitisation 2 - 45 352 3,563 - 3,962

Sovereign 2,943 245 13,038 1,641 6,993 659 25,519

Other - - - - 77 - 78

TOTAL 14,168 7,107 24,138 10,920 101,360 5,362 163,056

Evolution 31/12/12 − 31/12/11

Less than 3 months

3 months to 1 year

1 year to 3 years

3 years to 5 years

More than 5 years

No defined maturity

Total

Corporate (710) (132) (499) (508) (151) (137) (2,138)

Equities - - - (1) 12 - 12

Financial institutions (12,599) (1,674) (9,530) (5,067) (2,308) 521 (30,656)

Monolines 189 66 (34) (523) (680) - (982)

Project finance 62 - (1) (6) 296 - 351

Public sector entities (605) (946) (1,167) (1,050) 840 (756) (3,685)

Retail (264) (1,365) (214) (83) (598) 22 (2,502)

Securitisation 2 (185) (158) 179 (779) - (941)

Sovereign (12,678) (300) 12,901 1,223 (522) 70 694

Other - - - (1) 70 - 69

TOTAL (26,602) (4,536) 1,298 (5,838) (3,821) (280) (39,778)


3.3. Impairment, Past-Due and Related Provisions

3.3.1. Definitions of Past-Due/Impaired and Adjustments/Provisions

Belfius Bank records allowances for impairment losses when there is objective evidence that a financial asset or group of financial assets is

impaired. The impairments represent the management’s best estimates of losses at each balance-sheet date.

An interest-bearing financial asset is impaired if its carrying amount exceeds its estimated recoverable amount.

Financial assets carried at amortised cost

If there is objective evidence of impairment for financial assets carried at amortised cost, the amount of the impairment loss is calculated as

the difference between the asset’s carrying amount and the estimated recoverable amount, being the present value of expected future cash

flows, including judgements on the amounts recoverable from guarantees and collateral, discounted at the financial instrument’s original ef-

fective interest rate (except for reclassified financial assets – see below) or current effective interest rate determined under the contract for

variable-rate instruments.

Allowances for impairment losses on financial assets at amortised cost are recorded in the following way:

Specific impairments

The amount of the impairment on specifically identified assets is the difference between the carrying amount and the recoverable amount,

being the present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted using the effective

interest rate at the time of impairment or using the effective interest rate at the reclassification date for reclassified debt instruments. Finan-

cial assets with small balances (including retail loans) that share similar risk characteristics are generally aggregated in this measurement. When

an asset is assessed as being impaired, a specific impairment loss will be recognised.

Collective impairments

Collective impairments cover losses in segments of portfolios or lending-related commitments. Belfius Bank distinguishes two types of collec-

tive impairments: statistical and sector provisions. These have to a large extent been estimated on the basis of historical patterns of losses in

each segment or lending-related commitments, the credit ratings allocated to the borrowers and reflecting the current economic environment

in which the borrowers operate.

When the financial asset is determined by management to be uncollectable, it is written off against its related impairment; subsequent recov-

eries are reversed via the statement of income, in the heading “Impairment on loans and provisions for credit commitments”. If the amount of

the impairment subsequently decreases due to an event occurring after the write-down of the initial impairment, the write-back of the impair-

ment is credited to the “Impairment on loans and provisions for credit commitments”.

“Available for sale” (AFS) assets

These are only subject to specific impairment.

“Available for sale” quoted equities are measured at fair value through “Gains and losses on securities not recognised in the statement of income”

or within the statement of income in the case of impairment. For equities quoted in an active market, Belfius considers any significant decline

in their price (more than 50% at the reporting date) or a prolonged decline (5 years) compared to the acquisition price as an objective evidence

of impairment. In addition, management can decide to recognise impairment losses should other objective evidence be available. An impairment

is recognised for non-quoted equities when objective evidence is available, such as financial difficulties of the issuer or a probability of bank-

ruptcy. Impairments on equity securities cannot be reversed in the statement of income due to later recovery of quoted prices.

Reversal impairment on debt securities is addressed on a case-by-case basis in accordance with the standard.

When AFS financial assets are impaired, the total impairment losses are reported in the statement of income as “Net income on investments”.

Off-balance-sheet exposures such as credit substitutes (e.g. guarantees and standby letters of credit) and loan commitments are usually

converted into on-balance-sheet items when called. However, there may be circumstances such as uncertainty about the counterparty, where

the off-balance-sheet exposure should be considered as impaired. Belfius classifies loan commitments as impaired if the creditworthiness of

the client has deteriorated to an extent that makes repayment of any loan and associated interest payments doubtful.

With regard to past-due items, Belfius Bank uses the IFRS standards definition, i.e. a financial asset is past-due when a counterparty has failed

to make a payment when contractually due. This is considered by contract. For instance, if a counterparty fails to pay the required interests at

due date, the entire loan is considered as past-due.

The reported figures refer to the regulatory scope as defined in part 2.1.1.

Credit Risk


3.3.2. Impaired and Past-Due Exposure by Large Category of Product

The following tables show the amount of impaired and past-due credit risk exposure broken down by large category of product at year-end

2012 and 2011.

Exposure at year-end 2011

Past-due but not impaired financial assets Carrying amount of individually impaired

financial assets, before deducting any

impairement loss

Collateral received on past-due or impaired loans≤ 90 days > 90 days

≤ 180 days> 180 days

Financial assets available-for-sale (excluding variable income securities)(1) 1,250

Loans and advances (at amortized cost)(2) 486 50 36 2,551 2,194

Investments held to maturity 0

Other financial instruments - at cost 38

TOTAL 486 50 36 3,839 2,194

(1) Debt instruments – in the category “Loans and advances” – accounted for an amount of EUR 102 million in 2011.


Past-due but not impaired financial assets Carrying amount of individually impaired

financial assets, before deducting any

impairement loss

Collateral received on past-due or impaired loans≤ 90 days > 90 days

≤ 180 days> 180 days

Financial assets available-for-sale (excluding variable income securities)(1) 29

Loans and advances (at amortized cost)(2) 292 24 10 2,532 1,329

Investments held to maturity 0

Other financial instruments - at cost 6

TOTAL 292 24 10 2,567 1,329

(1) Debt instruments – in the category “Loans and advances” – accounted for an amount of EUR 166 million in 2012.

The carrying amount of individually impaired financial assets on loans and advances amounted to EUR 2.5 billion as at 31 December 2012,

stable compared to 31 December 2011. The carrying amount of individually impaired financial assets available for sale decreased with

EUR 1.22 billion to reach an amount of EUR 29 million at year-end 2012. Refer also to note 12.2.4. to the consolidated financial statements in

the Annual Report 2012 (page 165).

Credit Risk


3.3.3. Provisions for Impaired Exposure to Credit Risk by Type of Asset

The following tables show the amount of provisions for impaired exposure to credit risk broken down by type of asset at year-end 2012 and

2011.


Type of Asset As at 1 Jan. 2011

Utilisation Amounts set aside for

estimated probable

loan losses

Amounts reserved for

estimated probable

loan losses

Other adjustments

As at 31 Dec. 2011

Recoveries directly

recognised in profit or

loss

Charge-offs directly


loss

Specific allowances for individually assessed financial assets and specific allowances for collectively assessed financial assets (868) 241 (1,355) 94 (2) (1,890)

Loans and advances due from banks (25) 15 (2) 0 (13) (15)

Loans and advances to customers (586) 34 (528) 88 (1) (994) 6 (41)

Held to maturity investments 0 0

Available for sale financial assets (except Equity Method) (257) 193 (825) 6 (1) (884)

of which fixed income instruments (246) 189 (825) 6 (1) (422)

of which equity instruments (11) 4 0 0 (7)

Collective impairment on not specifically impaired loans and debt instruments (386) (207) 170 0 (422)

Loans and advances due from banks (6) (2) 4 0 (4)

Loans and advances to customers (380) (205) 166 0 (419)

Investments held to maturity 0 0

TOTAL (1,254) 241 (1,562) 264 (2) (2,313) 6 (55)

Provision for off-balance-sheet credit commitments (23) 0 (8) 1 (1) (30)

Credit Risk



Type of Asset As at 1 Jan. 2012

Utilisation Amounts set aside for

estimated probable

loan losses

Amounts reserved for

estimated probable

loan losses

Other adjustments

As at 31 Dec. 2012

Recoveries directly


loss

Charge-offs directly


loss

Specific allowances for individually assessed financial assets and specific allowances for collectively assessed financial assets (1890) 91 (356) 926 3 (1,226)

Loans and advances due from banks (13) 0 0 0 0 (13) 0 0

Loans and advances to customers (994) 55 (352) 107 3 (1,182) 5 (55)

Held to maturity investments 0 0

Available for sale financial assets (except Equity Method) (884) 37 (4) 819 0 (32)

of which fixed income instruments (876) 37 0 819 0 (21)

of which equity instruments (7) 0 (4) 0 (11)

Assets from insurance activities 0 0 0 0

Other accounts and receivables (33) 29 0 (3)

Other assets 0 0

Collective impairment on not specifically impaired loans and debt instruments (422) (200) 153 0 (469)

Loans and advances due from banks (4) (3) 1 0 (5)

Loans and advances to customers (419) (197) 152 0 (464)

Investments held to maturity 0 0

TOTAL (2,313) 91 (556) 1,079 3 (1,695) 5 (55)

Provision for off-balance-sheet credit commintments (30) 0 (4) 28 0 (6)

In 2012, specific allowances decreased by 35% to EUR 1.2 billion. The “Loans and advances to customers” were impacted by the specific impair-

ments (EUR 188 million) of the newly-identified impaired loans. The decrease of the impairments on the available for sale portfolio for an amount

of EUR 852 million is mainly due to the sale of the Greek government bonds. Collective impairments (or allowances for incurred but not re-

ported losses on financial assets) increased with 11% versus 2011. This increase of EUR 47 million is linked to the business line Retail and

Commercial Banking.

Credit Risk


3.4. Credit Risk Mitigation Techniques

3.4.1. Description of the Main Types of Credit Risk Mitigants (CRM)

The Basel II regulation recognises three main types of CRM:

→ collateral;

→ guarantees and credit derivatives;

→ netting agreements (applicable to on-balance-sheet and off-balance-sheet netting agreements – refer to part 3.4.2.).

Main Types of Collateral

Collateral is a financial product or a physical object set to hedge an exposure. Belfius Bank manages a wide range of collateral types. From a

regulatory point of view, three main categories of collateral exist:

→ pledges on financial assets: cash, blocked accounts, term deposits, bonds and equity portfolios;

→ pledges on real estate (residential mortgages, commercial mortgages, mortgage mandates);

→ pledges on commercial assets.

Main Types of Guarantees

Guarantees refer to personal guarantees, first demand guarantees, support commitments and “tri-party conventions”.

The credit assessment concentrates on the quality of the underlying loan or asset (refer to part 3.4.4.).

Main Types of Netting Agreements

Netting agreements consist of a technique for mitigating credit risk. Banks have legally enforceable netting arrangements for loans and depos-

its by which they may calculate capital requirements on the basis of net credit exposures subject to specific regulatory conditions.

Types of netting are payment netting, novation netting, close-out netting or multilateral netting.

3.4.2. Policies and Processes

Collaterals and Guarantees/Credit Derivatives

Within Belfius, managing the CRM involves the following tasks:

→ analysis of the eligibility of all CRM under the Standardised and Advanced Approaches;

→ collateral valuation in mark-to-market;

→ description of all CRM characteristics in internal Risk Systems, such as:

→ mortgage: rank, amount and maturity,

→ financial collateral: valuation frequency and holding period,

→ guarantee/credit derivative: identification of the guarantor, analysis of the legal mandatory conditions, check whether the credit de-

rivative covers restructuring clauses,

→ security portfolio: description of each security;

→ periodic review of the descriptive data of its CRM.

Detailed procedures for collateral eligibility, valuation and management are documented in line with the Basel II standards.

At an operational level, different IT tools are used to manage collateral. These IT tools are used to record any relevant data needed precisely to

identify collateral characteristics, eligibility criteria and estimated value, in accordance with the Basel II framework.

On and Off-Balance-Sheet Netting

Belfius does not make use of on or off-balance-sheet netting for regulatory purposes, except for over-the-counter (OTC) derivative products.

For these products, internal policies document the eligibility criteria and minimum requirements that netting agreements need to fulfil in order

to be recognised for regulatory purposes under Basel II. Eligibility criteria are different for on-balance-sheet netting agreements and off-balance-

sheet netting agreements. In particular they impose a formal acceptance from the regulator before considering any netting agreement as eli-

gible. Adequate documentation should also be put in place. Appropriate internal procedures and minimum requirements have been imple-

mented in the internal risk management process.

Information about Market or Credit Risk Concentrations

Concentration risk is related to a concentration of collateral on one issuer, country, industry or market. As a result, credit deterioration might

have a significant impact on the overall value of collateral held by Belfius to mitigate its credit exposure.

Belfius monitors concentration risk at regular intervals.

Credit Risk


3.4.3. Basel II Treatment

For netting agreements (and subject to eligibility conditions), Belfius recognises their impact by applying the netting effect of these agreements

on the calculation of its Exposure at Default (EAD) used for calculating its weighted risks.

For guarantees and credit derivatives, Belfius recognises the impact by substituting the PD, LGD and risk weight formula of the guarantor to

those of the borrower (i.e. the exposure is considered to be directly to the guarantor) if the risk weight of the guarantor is lower than the risk

weight of the borrower.

For collateral (both financial and physical), the Belfius methodology relating to eligible CRM depends on the Basel II approach.

→ AIRB Approach exposures – two methodologies might be applied:

→ CRM are incorporated into the calculation of LGD on the basis of internal loss data and calculated by the AIRB Approach models (the so

called preliminary LGD);

→ CRM are not incorporated into the LGD computed by the model. The impact of each individual CRM is taken into account in the LGD ac-

cording to each transaction.

→ Standardised exposures: eligible CRM (after regulatory haircuts) are directly taken into account in the EAD.

3.4.4. Exposure Covered by Credit Risk Mitigants by Exposure Class

This section provides an overview on the EAD covered by Basel II eligible CRM (after regulatory haircuts) broken down by exposure class at

year-end 2012. The amounts shown in the tables below take netting agreements into account and include collateral values for repo transactions.

31/12/12

Exposure classFinancial and

physical collateralGuarantee and

credit derivativesRepos Total

Sovereigns - 75 0 75

Financial institutions 28,246 15,268 10,308 53,822

Corporates 2,021 4,495 0 6,516

TOTAL 30,267 19,837 10,308 60,412

The main comments on the exposures considered in the table above are:

Financial institutions are mainly composed of banks and insurers. Credit risk mitigants for financial institutions (banks and insurance companies)

are mainly related to funding transactions (reverse repo) and guarantees received from banks and monoline insurance companies.

Exposures to small and medium-sized companies (SME) included in the Corporate exposure class are mainly covered by financial or physical

collateral.

The table does not take account of exposure classes with CRM incorporated in the preliminary LGD as Project Finance and Retail exposures.

A very large part of the retail portfolio is covered by physical collateral (mortgage registration for example).

The “public sector entities” exposures represent a predominant part of the Belfius credit portfolio. A large part of this portfolio is treated in the

AIRB Approach method with a very low average LGD and with ratings exceeding A-.

Overview of Collateral by Nature and Credit Quality

Only collateral eligible (including repo transactions) under Basel II and directly held by Belfius is considered.

→ Physical collateral: mortgages on residential or small commercial real estate and pledges on various other assets (receivables, business

goodwill). This physical collateral mainly covers SME and retail exposures.

→ Financial collateral: cash, debt securities, quoted equity and Undertakings for Collective Investment (UCI). The part of the EAD covered by

collateral (including repo transactions) is predominantly composed of cash collateral and the remaining part of debt securities. Debt securi-

ties are mainly sovereigns (rated between AAA and AA-) and investment grade banks.

Overview of Guarantees and Credit Derivatives by Provider

The guarantees and credit derivatives are only taken into account when the risk weight of the guarantor is more favourable than the risk weight

of the initial counterparty.

The main types of providers of guarantees and credit derivatives according to the covered EAD are central local authorities and sovereigns.

A large proportion of the guarantee providers are rated above investment grade.

Credit Risk


3.5. AIRB Approaches

3.5.1. Competent Authority’s Acceptance of Approach

By letter sent on 21 December 2007 by the Banking, Finance and Insurance Commission (CBFA), the Belgian Regulator, Dexia SA was authorised

to use the Advanced Internal Rating-Based Approach (AIRB Approach) for the calculation and the reporting of its capital requirements for

credit risk starting from 1 January 2008. This acceptance was applicable to all entities and subsidiaries consolidated within the Dexia Group,

which are established in a Member State of the European Union and are subject to the Capital Requirement Directive, and among them Dexia

Bank Belgium (currently Belfius Bank). The bank’s teams have also been among the mainsprings of this approval, and its risk management is in

perfect continuity with the know-how developed so far.

3.5.2. Internal Rating Systems

The internal rating systems used by Belfius Bank are set up to evaluate the three Basel II parameters: Probability of Default (PD), Loss Given

Default (LGD) and Credit Conversion Factor (CCF). For each counterparty type in the advanced method, a set of three models, one for each

parameter, has been or will be developed as part of the roll-out plan.

The PD models estimate the one-year probability of default on a through the cycle basis. Each model has its own rating scale and each rating

on the scale corresponds to a probability of default used for regulatory and reporting purposes. The correspondence between rating and PD

for each scale is set during the calibration process, as part of the model development, and is reviewed and adjusted during the yearly backtest-

ing when applicable. The number of ratings on each scale depends on the characteristics of the underlying portfolio (the number of counterpar-

ties, their homogeneity, whether it is a low default portfolio or not) and varies between 6 and 17 non-default classes. In addition each scale has

been attributed two default classes (named D1 and D2).

LGD models estimate the ultimate loss incurred on a defaulting counterparty before taking the credit risk mitigants into account. The unsecured

LGD depends on different factors such as the product type, the level of subordination or the rating of the counterparty. The granularity of the

estimate is a function of the quantity and quality of data available.

CCF models estimate the part of off-balance-sheet commitments that would be drawn should a counterparty go into default. The regulation

authorises the use of CCF models only when CCF under the Foundation Approach is not equal to 100% (as it is for credit substitutes for instance).

CCF granularity also depends on availability of data.

Internal estimates of Basel II parameters are used within Belfius Bank in addition to the calculation of the regulatory risk-weighted exposure

amounts. They are notably used in the decision-making process, credit risk management and monitoring, internal limit determination, provision-

ing methodology and pricing.

The control mechanisms for Internal Rating Systems (IRS) are organised on two levels.

→ Model Validation & Quality Control is an independent department within Risk Management. It reports directly to the CRO and is not involved

in any model development in order to guarantee its independence. Model Validation & Quality Control performs a global control on all the

aspects of the production of results by the models, from a methodological but also an operational (implementation, usage) viewpoint. It in-

tervenes prior to the first use of the models and afterwards performs a regular monitoring of their functioning.

→ Audit is responsible for auditing the general consistency and compliance with the regulation of the IRS. According to the CRD minimal require-

ment 131, Annex VII Part 4, “Internal Audit has to include in its plan, at least once a year, a review of the IRS and its functioning, including

credit scoring and estimation of PD, LGD, expected loss (EL) and CCF and propose their validation to the Validation Committee and then

consecutively to the Risk Policy Committee”. Compliance with all the minimal requirements has also to be verified. Within Belfius, this an-

nual review has been delegated to the Model Validation & Quality Control department. Audit acts then as an additional level of control, in-

cluded in its Audit plan.

Refer to appendix 2 for more details regarding Internal Rating Systems.

Credit Risk


3.5.3. EAD and Average Risk Weight by Exposure Class

The following table shows the total exposure at default and exposure-weighted average risk weights broken down by exposure class at year-

end 2012.

31/12/12

Exposure classEAD Average

risk weight

Corporate 17,205 84%

Financial institutions 22,176 30%

Monolines 3,149 21%

Project finance 1,349 32%

Public sector entities 39,194 3%

Retail 32,411 11%

Sovereign 24,925 3%

Equities 74 175%

Default 2,741

TOTAL 143,225

Due to the downgrading of Dexia SA from A- to BBB, there is an increase in the average risk weight of 10% (from 20% to 30%) for the financial

institutions. The unwinding of lower quality CDS leads to a decrease in the average risk weight (12.1%).

3.5.4. EAD and Average Risk Weight by Type of Retail Product

For information, the following table shows the total exposure at default and exposure average risk-weights broken down by retail product at

year-end 2012.

31/12/12

Retail productEAD Average

risk weight

Retail mortgage loans 19,792 5.12%

Revolving retail consumer loans 61 11.61%

Other retail products 12,558 19.49%

TOTAL 32,411

3.5.5. Backtesting

The purpose of the backtest is to assess the performance of the internal rating system ensuring an appropriate balance between capital and

risk. As the formulas to calculate the bank’s capital are provided by the Basel Committee on Banking Supervision, the internal backtest relating

to Pillar 1 rating systems is based on the backtest of the input parameters PD, LGD and EAD in the Basel II credit risk portfolio model.

The backtest is the evaluation of the predictive power of the rating system and the assessment of its time evolution to detect any reduced

performance of the rating system early. Decreased performance of the rating system decision tool may reduce the bank’s profitability and will

impact the risk assessments of the defined risk buckets. The performance is tracked by analysing the ability to discriminate between high and

low risk and the stability of the data inputs into the rating system.

The backtest procedure is mainly related to backtesting the following:

Calibration

Calibration normally denotes the mapping of the Probability of Default (PD) to the rating grades. A rating system is well calibrated if the esti-

mated PDs (or LGD) deviate only marginally from the actual default rates (or loss).

Discriminatory Power

The discriminatory power of rating systems denotes their ex-ante ability to identify borrowers in danger of defaulting. A rating system with

maximum power would be able precisely to identify in advance all borrowers that subsequently default. In practice, however, such perfect rat-

ing systems do not exist. A rating system demonstrates a high discriminatory power if the “good” grades subsequently turn out to contain only

a small percentage of defaulters and a large percentage of non-defaulters, with the converse applying to the “poor” grades.

Credit Risk


Stability

The stability of the population and its data characteristics: the aim is to make sure that the model applied is in line with the reference data sets

used for construction, and that the population characteristics do not change significantly over time.

The results of the backtesting will be assessed using statistical significance tests. The outcome of the significance tests will drive required

action plans.

The additional part of the backtest procedure is related to the impact of judgemental aspects i.e. the importance of judgemental qualitative

variables in the final rating and the effect of the expert overrulings.

3.5.6. Stress Testing

Pillar 1 stress tests are defined within Basel II to deal with minimum capital requirements. They assess how the risk parameter levels (weighted

risk levels, expected loss levels and realised loss levels) may vary in the credit portfolio during periods of stress, in order to draw conclusions on

individual asset classes and portfolios, as well as on the whole portfolio itself.

The different stress tests impact either full portfolio quality or risk parameters. They are organised as follows:.

→ Sensitivity stress tests: sensitivity of the weighted risks, EL and losses towards changes in explanatory risk parameters (PD, LGD, CCF).

→ Scenario stress tests: impact of unlikely but plausible scenarios on the weighted risks, EL and losses. These scenarios can be historical or

expert-based and are checked via benchmarking of the hypotheses when possible.

Sensitivity tests and scenario based stress tests are performed for the main internal rating systems (IRS).

These stress tests are performed on an annual basis on a firm-wide basis. Belfius opted for a level of severity of a “once in 25 years” event.

Time horizon of scenario stress tests, set in accordance with the maturity and the liquidity of the positions, is at least 3 years.

Stress test reports are presented initially to the Validation department. After validation of the overall process of the stress test implementation,

a report underlying the main portfolio weaknesses and strengths is produced in order to allow proposals for management actions. The final files

are submitted to the Risk Ex Com.

3.6. Standardised Approaches

3.6.1. Introduction

On the basis of the principles of Basel II, Belfius Bank makes use of the Advanced Internal Rating-Based Approach (AIRB Approach) to calculate

its capital requirements for credit risk. Nevertheless, it applies the Standardised Approach for some portfolios corresponding to cases spe-

cifically authorised by regulation such as:

→ small business units;

→ non-material portfolios;

→ portfolios corresponding to activities in run-off or to be sold;

→ portfolios for which it has adopted a phased roll-out of the AIRB Approach.

3.6.2. Roll-Out Plan

Within the Basel II homologation process, Belfius Bank informed the regulator of the models to be developed in the coming years on business

segments and Basel II parameters.

The majority of models have been validated internally and some CCF homologation files have already been sent to regulators. In the meantime,

Belfius Bank maintains the corresponding exposures under the Basel II Standardised Approach.

3.6.3. Nominated External Credit Assessment Institutions (ECAI)

The Standardised Approach provides weighted risk figures on the basis of external ratings. In order to apply the Standardised Approach for

risk-weighted exposure, Belfius Bank uses the external ratings assigned by the following rating agencies: Standard & Poor’s, Moody’s and Fitch.

If two ratings are available, the rating used for the regulatory capital calculation is the lower of the two ratings. If three ratings are available,

Belfius will take the lower of the best two ratings. If no external rating is available, the Standardised Approach provides specific risk weights

(usually 100% or 150% depending on the counterparty type).

Credit Risk


Credit rating agencies and credit quality step under Standardised Approach

Standard and Poor’s Moody’s Fitch NBB credit quality step

AAA to AA- Aaa to Aa3 AAA to AA- 1

A+ to A- A1 to A3 A+ to A- 2

BBB+ to BBB- Baa1 to Baa3 BBB+ to BBB- 3

BB+ to BB- Ba1 to Ba3 BB+ to BB- 4

B+ to B- B1 to B3 B+ to B- 5

CCC+ and below Caa and below CCC+ and below 6

Risk weights are mainly determined in relation to the credit quality step and the exposure class.

3.6.4. Exposure at Default and Average Risk Weights

The following table shows the total exposure at default and exposure weighted-average risk weights broken down by exposure class at year-

ends 2011 and 2012 as well as the evolution between 2011 and 2012.

31/12/11 31/12/12 Evolution 31/12/12 – 31/12/11

Exposure classEAD Average

risk weightEAD Average

risk weightEAD Average

risk weight

Corporate 3,017 94% 2,783 94% (234) 0.4%

Financial institutions 1,741 41% 1,702 40% (39) -1.8%

Public sector entities 6,201 81% 5,908 82% (293) 0.6%

Sovereign 5,172 29% 6,365 26% 1,194 -2.9%

Project finance 11 100% 15 100% 4 0.0%

Retail 490 60% 231 76% (259) 15.9%

Equities 139 151% 137 150% (2) -1.0%

Other 6 100% 77 100% 71 0.0%

TOTAL 16,777 17,219 442 0.0%

There is an increase in the “Sovereigns” of EUR 1,194 million (e.g. impact buildings, taxes, ...).

3.7. Counterparty Risk on Derivatives

3.7.1. Management of the Risk

A counterparty risk on derivatives exists in all the Over-The-Counter (OTC) transactions such as interest rate swaps, foreign exchange swaps,

inflation or commodity swaps and credit default swaps.

Counterparty risk is measured and monitored according to the general principles described in the Belfius credit risk policies. The credit risk

equivalent for derivative transactions is based on the mark-to-market value of the derivatives plus the application of an add-on, which is a

function of the complexity, the maturity, and the underlying of the derivative.

To reduce the counterparty risk, Belfius OTC derivatives are in most cases concluded within the framework of a master agreement (i.e. the

International Swap and Derivative Association – ISDA) taking account of the general rules and procedures set out in the Belfius credit risk

policies. Collateral postings for derivative contracts are regulated by the terms and rules stipulated in the Credit Support Annex (CSA) negoti-

ated with the counterparty.

These terms might depend on the credit rating of the counterparties. The impact of potential downgrades is analysed and managed by the

Belfius Collateral Management team.

All OTC transactions are monitored within the credit limits set up for each individual counterparty and are subject to the general delegation

rules. Sub limits may be put in place for each type of product.

On non-collateralised swaps (concluded with a very limited number of counterparties, such as local authorities, project SPVs, some corporates,

monoline insurers), the counterparty risk is managed through a Credit Value Adjustment (CVA); this holdback reserve is updated, on a regular

basis, on the basis of the evolution of the value of the derivatives and the credit quality of the counterparty.

Credit Risk


3.7.2. Basel II Treatment

For swap and derivative products, the mark-to-market method is used.

The following table shows the gross EAD and net EAD (after taking the impact of netting agreements and collateral posting into account)

broken down by type of derivative product at year-ends 2011 and 2012 as well as the evolution between 2011 and 2012.

31/12/11 31/12/12 Evolution 31/12/12 – 31/12/11

Type of derivatives Gross EAD Net EAD Gross EAD Net EAD Gross EAD Net EAD

Credit derivatives 8,700 7,684 7,482 6,587 (1,218) (1,096)

Trading book 2,755 1,739 1,923 1,029 (832) (711)

CDS back to back 1,811 1,510 1,097 854 (715) (656)

Other CDS 862 148 751 100 (111) (48)

Total return swap 81 81 75 75 (6) (6)

Banking book 5,945 5,945 5,559 5,559 (386) (386)

CDS bought 0 0

CDS sold 5,945 5,945 5,559 5,559 (386) (386)

Other derivatives 29,234 14,018 34,412 6,697 5,178 (7,320)

Commodities 0 0

Equity derivatives 415 126 267 61 (148) (65)

Exchange derivatives 2,954 1,314 2,521 642 (433) (673)

Rate derivatives 25,865 12,577 31,624 5,995 5,759 (6,583)

TOTAL 37,934 21,701 41,894 13,285 3,960 (8,417)

The outstanding of the CDS in the trading (EUR 1,218 million) and banking book (EUR -386 million) declined significantly.

3.8. Focus on Equity Exposure

3.8.1. Basel II Treatment and Accounting Rules

3.8.1.1. Basel II Treatment

For the calculation of the capital requirement for equity exposure, Belfius Bank has decided to treat them as follows:

→ for exposures booked before 31 December 2007, Belfius Bank applies the grandfathering clause;

→ for exposures booked after 1 January 2008, Belfius Bank applies the PD/LGD method.

The grandfathering clause allows banking institutions to apply the standardised approach to calculate the risk weights of the equity portfolio

held as at 31 December 2007 and this for a maximum period of ten years (CRD 267). Traded securities therefore receive a risk weight of 100%

and non-traded securities receive a risk weight of 150%.

3.8.1.2. Accounting Rules

Available-for-sale financial assets are subsequently remeasured at fair value on the basis of quoted bid prices and/or bid prices derived from

available market spreads or amounts derived from internal valuation models in the case of inactive markets. Unrealised gains and losses arising

from changes in the fair value of financial assets classified as available-for-sale are recognised within equity.

Available-for-sale quoted equities are measured at fair value through “Gains and losses on securities not recognised in the statement of income”

or within the statement of income in the case of impairment. Belfius analyses all equities that have declined by more than 25% compared to

the acquisition price or when a risk is identified by Management and takes the decision to assess and impair when there is objective evidence

of impairment according to IAS 39. A significant or prolonged decline in the fair value below its cost is also objective evidence of impairment.

Impairments on equity securities cannot be reversed in the statement of income in the case of later recovery of quoted prices.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length

transaction. Quoted prices on an active market (such as a recognised stock exchange) are used as fair value, as it is the best evidence of the

fair value of a financial instrument. Quoted prices are not, however, available for a significant number of financial assets and liabilities held or

issued by Belfius. Therefore, for financial instruments where no such quoted prices are available, the fair values have been estimated using the

bank’s proper valuation model and market assumptions, i.e. present value or other estimation and valuation models or techniques (hereafter

called models) on the basis of market conditions existing at balance-sheet date.

Credit Risk


3.8.2. Equity Exposure

Exposures at year-ends 2011 and 2012 as well as the evolution between 2011 and 2012, by type of market:

31/12/11 31/12/12 Evolution 31/12/12 – 31/12/11

Type of marketEAD Weighted

risksEAD Weighted

risksEAD Weighted

risks

Private equity 209 330 193 272 (15) (58)

Recognised market 0 0 0 0 0 0

Unrecognised market 13 26 24 47 11 21

TOTAL 222 355 217 319 (4) (36)

Exposures at year-ends 2011 and 2012 as well as the evolution between 2011 and 2012, by type of treatment (exposures under grandfather-

ing clause regime being classified in standardised approach):

31/12/11 31/12/12 Evolution 31/12/12 – 31/12/11

Basel II TreatmentEAD Weighted

risksEAD Weighted

risksEAD Weighted

risks

Standardised approach 139 196 137 189 (2) (6)

PD/LGD 82 160 80 130 (2) (30)

Simply risk weight 0 0

TOTAL 222 355 217 319 (4) (36)

3.8.3. Gains or Losses

3.8.3.1. Realised Gains or Losses Arising from Sales and Liquidations in 2011 and 2012

The following table shows the cumulative realised gains or losses arising from sales and liquidations in 2011 and 2012.

Gains or Losses 2011 (*) 2012

Gains on available-for-sale financial assets 8 (*) 12

Gains on assets and liabilities held for sale 0 (*) 0

Total gains 8 (*) 12

Losses on available-for-sale financial assets (152) (*) (1)

Losses on assets and liabilities held for sale (68) (*) 0

Total losses (220) (*) (1)

TOTAL (212) (*) (11)

(*) Pro forma figures

3.8.3.2. Unrealised Gains or Losses Included in Equity

The total unrealised gains or losses related to equity instruments amounted to EUR 48 million as at 31 December 2012 (same amount as at

31 December 2011). This amount is net of tax.

Credit Risk


3.9. Focus on Securitisation Activities

3.9.1. Objectives and Roles of Belfius Bank

Objectives Pursued

Depending on the role played by Belfius Bank regarding securitisation transactions, the objectives can vary from bringing differentiation in the

long-term funding mix, reduction of the economic capital requirement, to improvement of the risk-return ratio.

During 2012 and previous years, Belfius Bank was able to pledge eligible asset-backed securities as collateral for repurchase agreements with

the ECB, which allows banks to swap high quality asset-backed securities for cash, among other things.

Roles

Belfius Bank as Originator

Belfius Bank, as originator, carries out securitisation transactions related to various asset classes: mainly residential mortgage loans, public

finance loans, loans to SMEs. These transactions are carried out with a view to optimising the liquidity profile, diminishing risk concentration,

lowering economic capital held, fundraising or seizing an arbitrage opportunity. In 2012, Belfius Bank originated one securitisation transaction,

MERCURIUS-1, a SME CLO transaction. The underlying assets are loans to Belgian SMEs originated through the Belfius Bank branch network

in its regular course of business.

Belfius Bank as Investor

Belfius Bank will only invest in specific securitisation transactions, within a very restrictive Risk Appetite Framework.

Belfius Bank as Servicer

In transactions where Belfius Bank is the originator, Belfius Bank in general continues to service the assets being securitised.

Belfius Bank as Arranger of Securitisation Transactions for Customers

Belfius Bank acts as arranger or advisor of securitisation transactions for customers. In these instances, Belfius Bank will structure or advise

on the securitisation transaction (or part of a transaction), and could take up other roles such as swap counterparty, account bank or liquidity

provider at arm’s length market rates. In general Belfius Bank receives fees for structuring or advising on transactions.

Belfius Bank in Another Role

Depending upon the specific details of a transaction, Belfius Bank may undertake various roles in securitisation transactions ranging from ac-

count bank to swap provider or liquidity facility provider. Belfius Bank may also act as calculation agent, paying agent or corporate services

provider.

Belfius Bank does not act as a sponsor for ABCP, third party assets or multi-seller programmes, neither does it provide liquidity facilities to such

programmes.

Involvement of Belfius Bank in each Securitisation Transaction

Depending upon the role Belfius Bank plays in the securitisation transactions, the involvement can vary. When Belfius Bank acts solely as an

investor, the extent of the involvement in the transaction is limited. However when Belfius Bank is acting as an originator or where several roles

are played by Belfius Bank, the extent of this involvement can become significantly more important.

3.9.2. Management of the Risk

3.9.2.1. Securitisation Activity as Originator

Where securitisations are put in place for Belfius Bank’s own balance sheet, a strong framework of guidelines and policies ensures compliance

with various requirements (ref Securitisation Risk). These policies aim not only at identifying the regulatory requirements/procedures for new

transactions, but also at defining the decision tree and actions for deal follow-up. Overall supervision of the correct implementation of these

policies is in the hands of a dedicated Risk Management team within Belfius Bank. In relation to securitisation activities, Risk Management is

also responsible for maintaining contacts with relevant banking regulators. In addition to specific point-in-time analysis of files submitted, there

is regular follow-up of all projects.

As Belfius Bank does not hedge the risks related to retained or re-securitisation exposures, there are no specific policies in place to address

these issues.

In practice, the steering of the set-up for securitisation transactions is performed by the Asset-Based Solution department with the support

of the dedicated organisation/project management departments. As such, both prior to and after the closing of a transaction, transversal

taskforces are set up including all relevant departments, such as accounting, balance sheet management, credit risk, market risk, back-office,

transaction processing, etc.

Credit Risk


Post closing, the transaction follow-up concerns the efficiency and effectiveness of the servicing, the appropriate monitoring of the transac-

tion from a credit, market and liquidity risk perspective as well as the reliability of the reporting being produced.

Belfius Bank has launched only one transaction including some risk transfer and regulatory capital relief so far (Dublin Oak, launched in 2007).

The other transactions were carried out with a view of obtaining long-term funding or establishing a liquidity buffer. In 2012 one operation was

closed (Mercurius-1).

No assets have been originated with the intention to securitise. The underlying assets have been originated in the regular course of lending

business to retail, public and corporate clients of Belfius Bank. Hence no assets on the balance sheet awaiting securitisation can be identified

as such. Only performing assets are included in the securitisation transactions, and no profit or losses are realised upon sale of the assets to

the SPV.

Engaged ECAIs include Moodys, FitchRatings, Standard&Poors and DBRS.

The following table shows the securitisation activity (Belfius Bank as originator): amount of exposure securitised, and gains and losses on sales

during the period, the amount of underlying assets (amount of defaulted assets disclosed separately) originated by Belfius Bank by nature of

securitisation and type of underlying assets.

Exposure at 2011 year-end

Residential mortgage

loans

Public sector loans

Corporate exposures

ABS/MBS Total

Traditional securitisations NA

Underlying assets 14,557 7,070 116 21,743

Defaulted assets (1) 21 0 0 21

of which exposures securitised in 2011 (2) 9,000 0 0 9,000

Gains and losses on sales in 2011 0 0 0 0

Synthetic securitisations NA NA NA

Underlying assets 1,528 1,528

Defaulted assets (1) 0 0

of which exposures securitised in 2011 (2) 0 0

Related SPVs Penates Funding

(Penates-1, Penates-4)

Dexia Secured Funding Belgium

(DSFB-1, DSFB-2, DSFB-4)

Atrium-1, Atrium-2

Dublin Oak

(1) Amount of defaulted assets (as of the date of default) using the definitions used in the securitisation transaction.(2) Gross amount of exposure (as of year end based on reference obligations).

Exposure at 2012 year-end

Residential mortgage

loans

Public sector loans

Corporate & SME

exposures

ABS/MBS Total

Traditional securitisations NA

Underlying assets 11,977 5,003 3,507 20,487

Defaulted assets (1) 40 0 2 42

of which exposures securitised in 2012 (2) 0 119 3,424 3,543

Gains and losses on sales in 2012 0 0 0 0

Synthetic securitisations NA NA NA

Underlying assets 1,113 1,113

Defaulted assets (1) 0 0

of which exposures securitised in 2012 (2) 0 0

Related SPVs Penates Funding

(Penates-1, Penates-4)

Dexia Secured Funding Belgium

(DSFB-2, DSFB-4)

Atrium-1, Atrium-2,

Mercurius Funding

(Mercurius-1)

Dublin Oak

(1) Amount of defaulted assets (as of the date of default) using the definitions used in the securitisation transaction.(2) Gross amount of exposure (as of year end based on reference obligations).

Credit Risk


Belfius Bank has not yet securitised any revolving exposures or liquidity facilities which are shared between investors and Belfius Bank as

originator. The main changes impacting 2012 in comparison to 2011 relate to:

→ closing of the Mercurius-1 transaction;

→ early redemption of the DSFB-1 transaction;

→ amortisation in the underlying portfolios of assets securitised.

3.9.2.2. Securitisation Activity as Investor

The following table shows the outstanding amount of securitisation positions retained or purchased, separately for the trading and the non-

trading book, broken down by type of securitisation and risk-weight class at year-ends 2011 and 2012 as well as the evolution between 2011

and 2012.

31/12/11

Type of securitisation [0 - 8%] ]8% - 16%] ]16% - 106%] ]106%-1250%[ 1250% Total Trading

ABS 387 257 22 4 27 696

CDO 59 34 135 69 298 734

Consumer Asset Securitisation 0

MBS 1,253 1,498 411 121 35 3,318 87

Other ABS 0

TOTAL 1,699 1,789 568 125 131 4,312 821

31/12/12


ABS 310 175 71 34 2 591 6

CDO 3 42 1 6 68 120 300

Consumer Asset Securitisation 0

MBS 440 788 1,142 120 314 2,804 399

Other ABS 0

TOTAL 752 1,004 1,213 160 384 3,515 705

Evolution 31/12/12 – 31/12/11


ABS (77) (82) 49 30 (25) (105) 6

CDO (56) 8 (134) 6 (1) (178) (435)

Consumer Asset Securitisation 0 0 0 0 0 0 0

MBS (813) (710) 731 (1) 279 (514) 313

Other ABS 0 0 0 0 0 0 0

TOTAL (947) (784) 646 35 253 (797) (116)

Belfius invests almost exclusively in originally AAA externally rated transactions explaining the current low weighted risks associated with this

portfolio.

The following table shows the outstanding amount of securitisation positions retained or purchased, separately for the trading and the non-

trading book, broken down by seniority at year-end 2011 and 2012.

2011 2012

Seniority Total Banking Total Trading Total Banking Total Trading

ABS Non-Granular 67 67

ABS Non-Senior Granular 196 202

ABS Resec Non-Senior 72 242 70

ABS Resec Senior 11 214 1 221

ABS Senior Granular 3,967 365 3,585 95

TOTAL 4,312 821 3,925 316

Credit Risk


3.9.3. Covered Bond Activity

On 3 August 2012, the long-awaited Belgian legislation on covered bonds was adopted (the “covered bond act”), as well as an act on the use of

receivables for financing purposes (the “mobilisation act”). As one of the last countries in the EU, Belgian credit institutions are able to issue

covered bonds, a product which in the financial crisis proved its worth as being the only product offering some liquidity access for many banks.

A special feature of Belgian covered bonds lies in the fact that the underlying assets are ring-fenced in a special estate – on the balance sheet

of the issuer (no SPV) – within the general state of the issuer. Ring-fencing within the estate of the issuing credit institution will increase the

protection for the covered bond holders. In case of insolvency, the bondholders will have a dual recourse: one against the issuer’s general estate,

and one against the cover pool.

Eligible assets are either residential mortgage loans, commercial mortgage loans or public sector exposures. Belgian covered bonds that meet

certain criteria are called Pandbrieven/Lettres de Gage.

Belgian law permits the issuance of Belgian covered bonds only to those institutions which are authorised by the NBB after an assessment

among others of the internal organisation and proven ability to risk follow-up. A cover pool monitor must be appointed who will verify compliance

with the legal framework and report to the NBB.

3.9.3.1. The Belfius Belgian Mortgage Pandbrieven Programme

In November 2012 Belfius Bank set up a programme for the continuous offer of Belgian pandbrieven (Belgische pandbrieven/lettres de gage

belges) (the “Mortgage Pandbrieven”) in accordance with the Law of 3 August 2012 on the legal framework for Belgian covered and its execut-

ing Royal Decrees and regulations.

The NBB, in its capacity as Belgian regulatory supervisory authority of financial institutions, has admitted the Mortgage Pandbrieven programme

to the list of authorised programmes for the issuance of covered bonds under the category Belgian pandbrieven (Belgische pandbrieven/lettres

de gage belges). Ernst & Young has been appointed as cover pool monitor.

All Mortgage Pandbrieven to be issued under the Programme will be covered by the same special estate (bijzonder vermogen/patrimoine spé-

cial) (the “Special Estate”). The main asset class of the Special Estate will consist of Belfius’ residential mortgage loans within the meaning of

the Covered Bond Regulations (the “Residential Mortgage Loans”, and together with any other assets registered as cover assets – dekkings-

waarden/actifs de couverture –, the “Cover Assets”).

As issuer, Belfius Bank will ensure that the value of the residential mortgage loans calculated in accordance with the Covered Bond Regulations

(and including any collections in respect thereto) will at all times represent at least 105% of the aggregate nominal outstanding amount of the

Mortgage Pandbrieven of all Series. The Issuer will maintain a cover register in which both the issued Mortgage Pandbrieven and the Cover

Assets are registered (the “Cover Register”).

The Programme limit is set at EUR 10,000,000,000.

The Mortgage Pandbrieven constitute direct, unconditional, unsubordinated and unsecured obligations of the Issuer and rank at all times pari

passu, without any preference among themselves, with all other outstanding unsecured and unsubordinated obligations of the Issuer, present

and future.

A few days after obtaining the regulatory licences and authorisations, Belfius launched an inaugural issue of covered bonds, backed by Belgian

mortgage loans:

ISIN Curr. Outstanding Amount

Issue Date Maturity Date Extended Maturity Date

Next Interest Payment

Date

Coupon Type Coupon Soft/ Hard Bullet

BE0002419910 EUR 1,250,000,000 27/11/2012 27/11/2017 27/11/2018 27/11/2013 Fixed 1.25% Soft

The Belfius Mortgage Pandbrieven are rated AAA/AAA (negative outlook) by Fitch and S&P.

Credit Risk


Characteristics of Cover Assets as at 31 December 2012

a/ Residential Mortgage LoansOutstanding balance of residential mortgage loans EUR 2,701,887,071.06

Number of borrowers 30,031

Number of loans 42,742

Average outstanding balance per borrower EUR 89,969.93

Average outstanding balance per loan EUR 63,213.87

Weighted average original loan to initial value 79.23%

Weighted average current loan to current value 63.56%

Weighted average seasoning (in months) 32.07

Weighted average remaining maturity (in years, at 0% CPR) 18.03

Weighted average initial maturity (in years, at 0% CPR) 20.45

Remaining average life (in years, at 0% CPR) 10.45




Remaining average life to interest reset (in years, at 0% CPR) 9.17

Percentage of fixed-rate loans 84.61%

Percentage of resettable-rate loans 15.39%

Weighted average interest rate 3.816%

Weighted average interest rate fixed-rate loans 3.969%

Weighted average interest rate resettable-rate loans 2.975%

b/ Registered CashRegistered cash proceeds under the residential mortgage loans 66,435,765.11

c/ Public Sector ExposurePosition 1

ISIN BE0000300096

Issuer name Kingdom of Belgium

Series OLO 40

Currency EUR

Nominal amount 42,750,000.00

Currently no derivatives are included in the special estate. All assets and liabilities are euro denominated so there is no currency risk.

Credit Risk


3.9.3.2. Key Points on Risk

1 Key Points on Risk on the basis of the Legal Framework

a/ 85% test: the value of cover assets from one of the 3 main categories must represent at least 85% of the nominal amount of the outstand-

ing Pandbrieven. This test serves two purposes: it prevents mixed asset cover bond programmes and limits the so-called “substitution assets”.

b/ 105% test: the value of cover assets must represent at least 105% of the nominal amount of the outstanding Pandbrieven. This test deter-

mines the legal minimum overcollateral level, from a regulatory “value calculation” point of view. Due to the concept of value for residential

mortgage loans, this will in practice result in an even higher overcollateral level from a nominal amount point of view.

c/ Amortisation test: the sum of revenues stemming from the cover assets must be equal to or greater than the amount of interest, principal

and costs related to the outstanding Pandbrieven and their management.

d/ Liquidity test: the cover assets must generate sufficient liquidity or contain sufficient liquid assets to meet all unconditional payments over

a 6 month horizon.

e/ Additional stress tests to cover interest rate and currency risk: the cover asset tests and liquidity test must be met also in the case of sudden

and unexpected movements in interest rates and exchange rates. For the simulation, the issuer can use internal stress tests or the option to

simulate an immediate increase or decrease of interest rates with 2% and of exchange rates with 8%.

The issuer and the cover pool monitor must regularly report to the NBB on compliance with the regulations and whether all of the above tests

have been met. In case of breach the cover pool monitor has to inform immediately the NBB.

f/ Asset encumbrance limit: the Belgian legal framework is one of the few covered bond laws to include an asset encumbrance limit. A credit

institution can no longer issue further Belgian Pandbrieven if the amount of cover assets exceeds 8% of the credit institution’s total non-

consolidated assets.

2 Additional Key Points on Risk in the Belfius Framework

In addition to the legal requirements, Belfius Bank has implemented internal risk guidelines to monitor the programme that go beyond the legal

requirements, both in terms of asset coverage and liquidity. The internal guidelines include early warning triggers and are a.o. aimed to ensure

that the current ratings are maintained as far as possible. To prevent large distortions between asset and issuance profile, rating agencies

estimate the overcollateral at higher levels than the legal limit.

Through issuer covenants, as disclosed in the prospectus of the programme, Belfius Bank has taken the commitment to adhere to some addi-

tional requirements. For example the limit under test 2.1 a/ as described above (85% in the law) is set at 105%. In terms of liquidity, liquid bonds

will be added to the special estate to cover all interest payments due under the Pandbrieven for a 1 year period.

Credit Risk


4. Market and Balance Sheet Management Risks

4.1. Market Risk

4.1.1. Market Risk Definition

Management of the market risk within Belfius is focused on all treasury and financial market activities and encompasses the interest rate risk,

the spread risk, the foreign exchange risk, the equity risk (or price risk), the inflation risk and the commodity price risk.

Overall, the market risk can be understood as the potential adverse change in the value of a portfolio of financial instruments due to movements

in market price levels, changes as to the instrument’s liquidity, changes in volatility levels for market prices or changes in the correlations be-

tween the levels of market prices.

4.1.2. Market Risk Governance

With the purpose of adequately managing the market risks Belfius is facing, market risk management has identified the following cornerstones

as key pillars of an extensive understanding of the risks Belfius Bank is confronted with for its Treasury and Financial Market (TFM) activities:

→ Efficient organisation fostering an accurate identification, analysis and reporting of the different risks Belfius is bearing as well as a con-

tinued training of people in order to remain up to date with the latest evolutions in theories, regulatory issues, metrics or market changes.

→ A sound limit framework with differentiated limits by activity or risk factor which has gained acceptance from all the actors involved in

market activities. On top of the VaR limits or P&L triggers, several other metrics have been identified as key controlling tools in the risk

management process:

→ limits on notional amounts;

→ limits on maturities;

→ limits on type of products;

→ limits on sensitivities (Greeks);

→ stress tests.

→ Finally, this framework is being frequently submitted for revision to the TFM Risk Committee in order to be commensurate to the risk ap-

petite defined by the Belfius Management Board.

Committees

The TFM Risk Committee (TRC) meets on a monthly basis and is responsible for a wide range of topics such as: risk and statement of income

trigger reporting analysis(1) and related decisions, definition and revision of limits, proposals for the approval of new products, discussion of

guidelines, risk governance and standards, risk concepts and measurement methodology and the quality of valuation processes.

Ad-hoc TRC are organised to decide on specific issues when required from a business and/or a risk management perspective.

The Risk Policy Committee validates all major changes in risk profile or risk governance.

(1) Statement of income triggers warn of a deterioration of results and are expressed as a percentage of VaR limits: typically at 50%, 75% and 100% for triggers 1, 2 and 3 and stop the activity at 300% of VaR.


Market and Balance Sheet Management Risks

4.1.3. Market Risk Management

4.1.3.1. Market Risk Measures

The Value-at-Risk concept has been identified as the principal metric for proper management of the risk Belfius is facing. The VaR measures

the maximum loss in Net Present Value (NPV) the bank might be facing in normal market conditions over a period of 10 days with a confidence

interval of 99%. Actually, the following risks are covered by a VaR computation:

→ Interest rate and foreign exchange rate risk: until approval of the historical methodology is granted by the regulator (see further), this risk

category is currently being covered mainly by a parametric VaR. Overall, this approach consists of computing the variance and covariance

matrix of returns of interest and foreign exchange rates and assuming lognormal distributions for these returns.

→ Equity risk: general and specific equity risks are measured using a historical Value-at-Risk with full valuation on the basis of 300 scenarios.

→ Spread risk: specific interest rate risk (also known as spread risk) is measured via a historical approach, which applies 300 observed variations

on the sensitivities.

The VaR framework is currently evolving towards an integrated historical VaR approach. The historical simulation approach consists of running

the actual portfolio across a time-series of historical asset returns. These revaluations will generate a distribution of portfolio values (histogram

of returns) on the basis of which a VaR (% percentile) can be calculated.

The main benefits of this method are its straightforward methodology and the fact that it does not assume a normal distribution of asset returns

(distributions can be non-normal, and securities behaviour can be non-linear).

Since 31 December 2011, Belfius has had to compute a Stressed Value-at-Risk (S-VaR) on top of its regular VaR, which also enters into the

computation of weighted risks for Market Risk. This S-VaR measure consists of calculating an additional VaR on the basis of a 12 consecutive

months observation period related to significant losses specific for the bank.

4.1.3.2. Market Risk Exposure

Treasury and Financial Markets (Excluding Bond Portfolio)

The detailed VaR use of Treasury and Financial Markets (bond portfolio in banking book not included) is disclosed in the table below. Average

global Value at Risk of Belfius Bank amounted to EUR 23.7 million in 2012 (as compared to EUR 27.2 million in 2011).

Substantial limit reductions have been implemented, in line with the risk appetite reduction as included in the overall Belfius transformation

plan.

Value-at-Risk by activity

VaR 10 days, 99% 2011 2012

(in millions of EUR)

IR & FX (Trading and

Banking)*

Eqt Trading Spread Trading

Otherrisks**

IR & FX (Trading and

Banking)*

Eqt Trading Spread Trading

Otherrisks**

By activity

Average 12.2 1.9 10.9 2.3 8.3 1.3 12.0 2.1

End of period 8.7 0.8 8.0 2.2 6.4 1.6 14.0 1.6

Maximum 22.2 5.6 17.7 3.8 14.1 3.9 17.9 4.5

Minimum 7.9 0.7 7.7 0.9 5.0 0.6 7.8 1.5

Global

Average 27.2 23.7

End of period 19.7 23.5

Maximum 37.6 30.4

Minimum 19.7 17.9

* Without ALM risk.** Inflation and CO2.



Bond Portfolio

Belfius Bank manages bond portfolios (Legacy portfolio and ALM Bank portfolio) amounting to EUR 22.8 billion as at 31 December 2012 (against

EUR 25.0 billion as at 31 December 2011). The sensitivity in economic value of these bonds portfolios is very limited, as interest rate risk is

hedged.

An important part of the bond portfolios is classified in Loans & Receivables (EUR 8.2 billion). The AFS reserve of these securities is insensitive

to the market spread evolutions. Regarding the other bonds portfolios classified in AFS, the sensitivity of the AFS reserve value after a basis

point credit-spread increase amounted to EUR -11.0 million (by bp).

Given the illiquidity of some markets and the reduced possibility of having “observable” prices/spreads, for certain categories of bonds, in the

valuation process, a mark-to-model valuation development was performed on the illiquid part of the available-for-sale bond perimeter (AFS).

4.1.3.3. Stress-Testing

The scenario framework (stress-testing) is of particular importance at Belfius. The range of possible scenarios has been constantly revised and

updated. Stress tests are intended to explore a range of low probability events that lie outside the predictive capacity of VaR measurement

techniques. VaR measures market risk in a daily market environment, while stress-testing measures market risk in a distorted market environ-

ment.

The numerous stress tests carried out by Belfius Bank can be grouped in three categories:

→ sensitivity stress tests (on interest rates, foreign exchange risks, volatilities, credit spreads and on equity prices);

→ historical stress tests on a wide range of risk factors (equity crash of 1987, monetary crisis of 1992, terrorist attack of 2001, the turmoil

triggered by the Lehman default and called “Financial crisis of 2008” and the last one simulating the recent sovereign debt crisis in the

Eurozone);

→ Specific stress tests (which are oriented towards the risks specific to certain TFM activity lines): correlation, IR basis, dividends, CVA.


A global overview of the stress test framework at Belfius Bank is presented in the table below.

The stress tests containing banking and trading books are presented at least on a quarterly basis to the Market Risk Guidelines Committee.

Type Stress Test Description

Interest rate risk FX Risk EUR

EQTrisk

Volatility Risk Credit Spread

risk

Correlation Risk

1M 1Y 2Y 5Y 10Y IR FX EQT

Sensitivity Stress test

Parallell Shifts of the interest rate curves 6 scenarios

100 bp 100 bp 100 bp 100 bp 100 bp

-100 bp -100 bp -100 bp -100 bp -100 bp

200 bp 200 bp 200 bp 200 bp 200 bp

-200 bp -200 bp -200 bp -200 bp -200 bp

300 bp 300 bp 300 bp 300 bp 300 bp

-300 bp -300 bp -300 bp -300 bp -300 bp

Flattening of interest rate curves 100 bp 0 bp -11 bp -44 bp -100

Steepening of interest rate curves -100 bp 0 bp 11 bp 44 bp 100

EUR appreciates against all currencies +10%

EUR depreciates against all currencies -10%

Increase of Equity prices +10%

Decrease of Equity prices -25%

Increase of the Volatility in each market +25% +25% +25%

Decrease of the Volatility in each market -25% -25% -25%

Increase of all the spreads 25 bp

Decrease of all the spreads -25 bp

Historical Scenarios

Equity crash (1987)

-50 bp -50 bp -50 bp -50 bp -50 bp -25% +15% +30%

30 bp (OLOs: 15 bp)

Monetary crisis (1992)1 150 bp 131 bp 110 bp 80 bp 30 bp -8%

Terrorist attack (2001)1 -80 bp -66 bp -50 bp -39 bp -20 bp 3% -10% 15% 15% 15% 25 bp

Financial crisis (2008) EUR (DKK*):

-245USD: -530TRY: -190

GBP*: -350

EUR (DKK*): -240

USD: -290TRY: -160

GBP*: -300

EUR (DKK*): -170

USD: -190TRY: -345

GBP*: -100JPY*: -25

EUR (DKK*): -90

USD: -185 TRY: -325GBP*: -50JPY*: -50 -25%

EUR: +15% USD: +30% TRY: +25% 10% 40%

By asset & accounting

class

Specific Stress test

Asset class (2008) By asset & accounting

class

Stress Test on Customer CVA: 4 scenarios 100 bp 100 bp 100 bp 100 bp *1.5

200 bp 200 bp 200 bp 200 bp *1.5

-100 bp -100 bp -100 bp -100 bp *1.5

-200 bp -200 bp -200 bp -200 bp *1.5

CMS Correlation: Smile steepening

5 bp steepening

CMS Correlation: Parallel shift 2% 1%

"CMS Correlation: Parallel shift 1% (except 30y-2y)”

1% except30y-2y

CMS Correlation: Term structure

Term structure

deformation

IR basis widening Widening of basis

IR basis tightening Tightening of basis

(1) Interest rate shifts: linear interpolation, extrapolation flat.



4.1.3.4. Regulatory Internal Model and Backtesting

Basel Treatment

Belfius Bank applies the internal VaR model for the regulatory capital requirement calculus on foreign exchange risk and general interest rate

risk within the trading scope. Stressed VaR is used in addition to internal VaR in order to determine regulatory capital.

The other market risks are treated under the Basel II standardised approach.

Belfius Bank uses its internal VaR model for the regulatory capital requirement calculation on foreign exchange risk and general interest rate

risk within the trading scope (refer to part 2.2. for figures on market risk capital requirements).

Beside the VaR described above, Belfius Bank calculates a Stressed VaR (SVaR). The SVaR will be computed on a weekly basis using parameters

from the period May 2008-June 2009.

The regulatory capital will be calculated as the sum of both the VaR and the Stressed VaR.

Actually, two types of backtesting are being processed within Belfius Bank on the internal model scope for its IR and FX perimeter:

→ Hypothetical backtesting assumes that the portfolio composition does not change during the holding period and that it is only impacted by

the risk factors integrated in the VaR calculation. That is, end-of-day trading positions are input into the risk measurement model, which

assesses the possible change in the value of this static portfolio due to price and rate movements over the assumed holding period.

→ The real backtesting simply compares real results with VaR-outcomes over a 1-day holding period. It means that the P&L used is impacted

by all the risk factors and by the intra-day evolution of the positions. It is only available for interest rate and foreign interest rate risk.

On the risks for which capital requirements are calculated according to the standardised approach (spread, equity) a hypothetical backtesting

is performed daily on the trading scope. Hypothetical backtesting runs under the following scenarios: change in all market data, change in inter-

est rate alone, change in exchange rate alone, change in equity price, or change in credit spread.

The result of the backtest is the number of losses exceeding their corresponding VaR figures (i.e. “the number of exceptions”). According to

this number, the regulators will decide on the multiplier used for determining the regulatory capital base applied on the internal model scope.

For backtesting purposes, the VaR amounts need to be recalculated using a 1-day holding period. For VaR figures calculated under a paramet-

ric approach, rescaling is achieved through the application of a square root of 10 conversion. For any other VaR approach, a 1-day VaR figure is

calculated.

Risk reports are based on end-of-day positions meaning that risk figures refer to the maximum loss at the chosen confidence interval over the

holding period for the portfolio that is held at the end of the business day. With a 1-day holding period, this figure is compared with the variation

of the statement of income of the following business day. The backtesting processes provide the Market Risk Management department with

a view of the number of (hypothetical and real) exceptions. The maximum between these two numbers is taken to adjust the multiplier used

for calculating the bank’s risk capital requirements for market risk under the internal model approved by the regulator. The multiplier has a

minimum value of 4 but in the event that backtesting proves the risk measurement models to be inappropriate or some recommendations on

uniform application of the methodology are outstanding, the multiplier can be increased up to 5.

In 2012, Belfius Bank noticed on internal models for its IR and FX perimeter:

→ no “downward” exception for hypothetical back testing;

→ 1 “downward” exception for real back testing in Q4 2012 due to the P&L of book equity on equity risk factors.



The following charts are showing backtesting in 2012 on interest rate and foreign exchange rate perimeter:

Hypothetical backtesting

-6,000,000

-5,000,000

-4,000,000

-3,000,000

-2,000,000

-1,000,000

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

2/0

1/1

2

2/0

2/1

2

2/0

3/1

2

2/0

4/1

2

2/0

5/1

2

2/0

6/1

2

2/0

7/1

2

2/0

8/1

2

2/0

9/1

2

2/1

0/1

2

2/1

1/1

2

2/1

2/1

2

Backtesting VaR 1 day with sign

Real backtesting

-6,000,000

-4,000,000

-2,000,000

0

2,000,000

4,000,000

6,000,000

2/0

1/1

2

2/0

2/1

2

2/0

3/1

2

2/0

4/1

2

2/0

5/1

2

2/0

6/1

2

2/0

7/1

2

2/0

8/1

2

2/0

9/1

2

2/1

0/1

2

2/1

1/1

2

2/1

2/1

2

Backtesting VaR 1 day with sign

4.1.3.5. Validation

Validation is responsible for the overall assessment of the market risk models. The process set up to endorse the validation of models deployed

within Belfius Bank is multi-layered, ensuring total compliance with regulations and local regulatory requirements through the work-out of

proposals by the Validation Department, an approval of these proposals by the TFM Risk Committee (TRC) and a final endorsement by the Risk

Policy Committee, composed of members of the Belfius Management Board.

4.1.3.6. Systems and Controls

On a daily basis, FMR calculates, analyses and reports the risks and results at an entity and consolidated level. On a monthly basis, the regular

TFM Risk Committee (TRC) meets to discuss the risk and results, discuss and propose the market limits, discuss procedure, guidelines and

policies and approve or amend new valuation methodologies.

All market activities are backed by specific guidelines describing the objectives, the authorised products, sensitivity, VaR and/or outstanding

limits. The systems and controls established inside Belfius are described in various procedures to ensure a complete and formal framework

established to support all the market risk responsibilities.



4.2. Balance Sheet Management Risk

4.2.1. Policy on Balance Sheet Management

The ALM risk can be defined as the sensitivity of the bank’s value and income with regard to unexpected rate movements and changes to the

financing terms and conditions applied by Belfius Bank.

All important matters relating to the interest rate, foreign exchange rate and liquidity risk of the bank’s balance sheet are monitored by the

ALCo (Assets & Liabilities Committee).

The role of the ALCo, based on a framework of normative limits, is to keep a strict eye on management of the interest rate risk, liquidity position

and foreign exchange rate risk.

The ALCo meets regularly in person (once or twice a month) and is chaired by the Chief Financial Officer (CFO), with meetings attended by

various members of the Management Board. For urgent matters, the ALCo has an electronic decision-taking procedure.

4.2.2. Liquidity Risk

4.2.2.1. Liquidity Management Framework

The Liquidity and Capital Management (LCM) department was established in 2012 as part of the Finance department. The LCM is the front-line

manager for the liquidity and capital requirements of Belfius Bank. This means that it identifies, analyses and reports on current and future

liquidity positions and risk, and then defines and coordinates the action needed to keep them in the right direction. Hence the ultimate respon-

sibility for managing liquidity falls on the Chief Financial Officer (CFO). The CFO also bears final responsibility for managing the interest rate

risk contained in the balance sheet via the ALM department and the ALCo, meaning that total balance sheet management comes under its

responsibility.

LCM holds committee meetings each week attended by the CFO, Risk Management and the Treasury department, which implements the deci-

sions taken by LCM in relation to obtaining short-term and long-term funding on the institutional market.

LCM also monitors the funding plan to guarantee in the years ahead that Belfius Bank will still comply with its internal and regulatory liquidity

ratios.

LCM reports on a daily and weekly basis to the Management Board about the bank’s liquidity situation.

Second-line controls for monitoring the liquidity risk are performed by the Risk Management department, which ensures that the reports

published are accurate and oversees compliance with limits, as laid down in the Liquidity Guideline.

The liquidity management of Belfius Bank is guided by internal and regulatory liquidity ratios. In addition, there are also strict limits regarding

the part that can be financed short-term and the part that has to be obtained on the interbank market. Central to this are the available reserves:

Belfius is required at all times to have sufficient quality assets available that can be used to accommodate any temporary liquidity needs, both

in day-to-day management and in stress scenarios.

4.2.2.2. Exposure to Liquidity Risk

The liquidity risk at Belfius Bank is affected mainly by:

→ the amounts of commercial funding collected from retail and private clients, small, medium-sized and large companies and similar clients

and the way these funds are allocated to clients through commercial loans;

→ the volatility of the collateral that is placed with counterparties as part of the framework of derivative and repo transactions (so called cash

& securities collateral);

→ the value of the liquid reserves by virtue of which Belfius Bank can collect funding on the repo market or from the ECB;

→ the capacity to obtain interbank funding.

4.2.2.3. Significant Improvement of the Liquidity Profile in 2012

The crisis around the Dexia Group at the end of 2011 also placed the liquidity of Belfius Bank under pressure. As a result, it was no longer pos-

sible to comply with the National Bank of Belgium’s (NBB) regulatory one-month liquidity ratio. The main reason for this was the sharp increase

in the Dexia Group’s need for liquidity, which meant that a call was made on the available funding capability of Belfius Bank, which was the liquid-

ity competence centre for the whole Dexia Group. Belfius Bank provided substantial secured and unsecured funding to the other entities in the

Dexia Group. Significant falls in interest rates also generated additional requirements for collateral linked to historical derivative contracts.

During the crisis, Belfius Bank obtained a temporary exemption from the NBB (until September 2012). This exemption was coupled with an

action plan requiring the funding granted to the Dexia Group to be reduced significantly and quickly.



During the first three quarters of 2012, the bank made liquidity the organisation’s greatest priority by:

→ introducing a robust liquidity framework with centralised liquidity management;

→ reducing the credit risk vis-à-vis the Dexia Group;

→ converting parts of its loans to small and medium-sized companies into liquid reserves: the securitisation vehicle Mercurius can be used as

collateral in money market transactions in repo or with the ECB;

→ converting deposits from public and corporate clients with uncertain stability into deposits with maturities of more than one month;

→ selling its Elantis portfolio of mortgage loans to Belfius Insurance;

→ collecting long-term funding by issuing a Belgian covered bond backed by quality mortgage loans: the Belfius Belgian Mortgage Pandbrieven;

→ attracting medium-term deposits from institutional clients.

As a result of the implementation of its action plan and other ongoing efforts, Belfius Bank has again complied with the NBB’s regulatory liquid-

ity stress test since September 2012.

At the end of 2011 and the beginning of 2012, Belfius Bank also took part in the European Central Bank’s 3-year Longer-Term Refinancing

Operation (LTRO) for a total amount of EUR 25 billion. Belfius Bank’s financial plan provides for a structural improvement in the independence

of funding from the ECB. At the end of February 2013, this LTRO funding amounted to EUR 15 billion.

4.2.2.4. Structure of the Balance Sheet at Belfius Bank

Funding sources

→ Belfius Bank has a stable volume of commercial funding that comes mainly from its Retail and Commercial Banking and Public and Wholesale

Banking clients.

→ Belfius Bank also receives medium-to-long-term Wholesale Funding, including EUR 25 billion in LTRO from the ECB and EUR 1.3 billion from

covered bonds, the Belfius Belgian Mortgage Pandbrieven.

→ The balance of the bank’s funding requirements comes from institutional short-term deposits (Treasury) obtained from repos and unsecured

funding.

Allocation of funding sources

→ Commercial deposits are used to issue commercial loans.

→ Belfius Bank has a bond portfolio, including an ALM portfolio for liquidity purposes, with high-value liquid assets and a historical bond port-

folio that was built up between 2003 and 2008.

→ Historically by taking out derivative contracts to cover its activities, Belfius Bank has an outstanding position in derivatives for which the

collateral must be posted and received (cash & securities collateral). In net terms, Belfius Bank posts more collateral than it receives.



Analytical (non-accounting) picture of the consolidated balance sheet at Belfius, used to manage the balance sheet from an ALM and LCM point

of view:

31 December 2012

ASSETS LIABILITIES

Commercial Assets 74 Commercial Liabilities 82

Bonds 23 LT Wholesale Funding 36

ALM 7 Unsecured 2

Legacy 16 Secured Funding 8

Subordinated debt 1

ECB (LTRO) 25

Cash collateral 24 Cash collateral 10

CLM and other short-term wholesale assets 5 CLM and other short-term wholesale funding 11

Reverse Repo 2 Repo 10

Monetary Reserve 0 ECB 0

Unsecured 3 Unsecured 2

Dexia Group 21 Dexia Group 2

Government guaranteed bonds 14 Repo 0

Reverse repo & repo-like 7 Unsecured 2

Central assets* 6 Central assets* 9

Non cash** 39 Non cash** 41

BANK PERIMETER 191 BANK PERIMETER 191

Correction intragroup transactions -4 Correction intragroup transactions -1

Belfius Insurance and other subsidiaries 26 Belfius InsuranceI and other subsidiaries 23

o/w ALM portfolio insurance 13 o/w technical reserves 18

o/w mortgage loans 4

o/w Dexia Group 1

BELFIUS CONSOLIDATED 213 BELFIUS CONSOLIDATED 213

* Central assets comprises capital and non-interest bearing liabilities at the liabilities side and participations and non-interest earning assets at the assets side.** Non cash comprises the mark-to market valuation of derivatives.

The loan-to-deposit ratio that shows the ratio between commercial assets and commercial liabilities, improved at the end of 2012 to 90%,

compared with 98% at the end of 2011.

4.2.2.5. Dexia

1. Reduction of Funding to the Dexia Group

In October 2011, after Belfius was taken over by the Belgian federal government through the Federal Holding and Investment Company (FHIC),

a transition committee was set up with representatives from Belfius, Dexia and FHIC, aimed at achieving a smooth unwinding of all links between

Belfius and the Dexia Group. The funding that Belfius had been granting to Dexia was one of the key areas that the committee needed to

monitor, given that at the time this funding amounted to EUR 56 billion, of which EUR 22.5 billion was unsecured.

A first major step in this direction was taken in December 2011 with the signing of a contract with the Dexia Group aimed at reducing the un-

secured funding as quickly as possible.

All of the transactions provided for in this contract have since been put into effect.

→ Belfius significantly reduced its unsecured funding in December 2011 by buying bonds issued by Dexia Crédit Local and guaranteed by the

Belgian, French and Luxembourg governments for an amount of EUR 13.6 billion and with a 3-month term. At the end of February 2012,

Belfius subscribed to a renewal tranche with a term of 3 years.

→ Purchasing these government-guaranteed bonds halved Belfius’ unsecured funding to Dexia. At the end of December 2011, total funding

was down to EUR 44 billion, of which approximately EUR 10 billion was unsecured.

→ Measures were also taken aimed at providing Belfius with greater legal security for funding transactions for which Belfius received collat-

eral, and at reducing the dependence of Belfius on the European Central Bank (ECB) (as the result of the funding needs of the Dexia Group).

→ Also:

→ repo transactions in which Belfius acted as an intermediary between the Dexia Group and the repo market or the ECB were terminated,

totalling EUR 3.9 billion;

→ long-term loans against which Belfius had received ECB eligible bonds for an amount of EUR 3.2 billion were terminated;

→ long-term loans against which Belfius had received ECB non-eligible bonds for an amount of EUR 4.7 billion, were terminated or con-

verted into repos.



As a result, major progress was already made in the first quarter of 2012. By the end of March 2012, unsecured funding had been almost reduced

to zero, with total funding still amounting to EUR 28 billion.

In the second half of the year, secured funding was reduced further. At the end of September 2012 and beginning of October 2012, Dexia

completed the sales of both DenizBank and Banque Internationale à Luxembourg. In line with the sales agreement between Dexia and the

Federal Holding and Investment Company, the proceeds from these sales were allocated to a further reduction of the funding granted by

Belfius to the Dexia Group. As a result, by 31 December 2012, total (secured) funding to Dexia amounted to EUR 21.9 billion.

At the end of January 2013, Dexia completed the sale of Dexia Municipal Agency. This sale generated approximately EUR 12 billion of addi-

tional liquidity for Dexia, of which over EUR 5.5 billion was used to repay the remaining debt to Belfius. As a result, secured funding was reduced

further to EUR 15.5 billion at the end of February 2013: EUR 13.8 billion are bonds issued by Dexia Crédit Local, but which are guaranteed by

the Belgian, French and Luxembourg governments, EUR 0.3 billion are covered bonds issued by Dexia LDG Banque and EUR 1.2 billion are

“multi-party” repos that mature in 2013 and 2014 or are reduced further.

Reduction of Funding Granted to Dexia (rounded figures)

Reduction of Funding Granted to Dexia (rounded figures)(1)

(1) The calculation of secured funding is based on the full implementation of all netting agreements.

EUR 56 billion

EUR 23 billio n

EUR 33 billio n

EUR 44 billion

EUR 10 billio n

EUR 20 billio n

EUR 14 billio n

EUR 28 billion

EUR 14 billio n

EUR 14 billio n

EUR 22 billion

EUR 8 billio n

EUR 14 billio n

EUR 15,5 billion

20/10/2011

Total Unsecured Secured Government Guaranteed Bonds

31/12/2011 31/03/2012 31/12/2012 28/02/2013

EUR 14 billio n

EUR 1,5 billio n

2. Liquidity Lines

In August 2008, Belfius granted Financial Security Assurance, which at the time was still a subsidiary of the Dexia Group, a liquidity line amount-

ing to USD 4.4 billion.

At the beginning of 2012, Belfius signed an agreement with Assured Guaranty, which at the end of 2008 had acquired Financial Security As-

surance from Dexia, aimed at reducing this liquidity line to USD 1.5 billion by the end of June 2012, to be followed by a gradual amortisation so

as to reach USD 1 billion at the latest by the end of June 2013.

At the end of December 2012, this liquidity line (which is not drawn) amounted to USD 1.25 billion.

3. Concentration Risk

Because the bank has not been part of the Dexia Group since October 2011, its former sister companies became external counterparties. As a

result, the bank became subject to the regulatory limitation standards for risks on the same counterparty. At the end of 2011, Belfius provided

significant funding to the Dexia Group, as a result of which the concentration risk – which had previously been “acceptable” according to the

regulations, because it was within the same group – then became far too high.

In consultation with the National Bank of Belgium (NBB) and the Dexia Group, Belfius drew up an action plan designed to reduce this concentra-

tion risk. On the basis of this plan, the NBB allowed for an exemption for non-compliance with this concentration risk limit until 31 December

2012.



During 2012, funding to Dexia was reduced significantly, but still insufficiently to allow Belfius to comply with the concentration risk require-

ments by the end of 2012. After further consultation with the NBB, an additional action plan was put in place granting Belfius a further exemp-

tion until 30 June 2013. With the completion of the sale of Dexia Municipal Agency at the end of January 2013, funding to Dexia has been reduced

further.

4.2.3. Interest Rate Risk

4.2.3.1. Measuring Interest Rate Risk

The structural interest rate risk at Belfius Bank results from the structural imbalance between its assets and liabilities on the balance sheet in

terms of volumes, durations and interest rate sensitivity.

Changes in interest rates can have a positive/negative effect on both the income and the economic value of the bank. This results in two

separate but complementary viewpoints in assessing the bank’s interest rate risk.

Sensitivity of economic value in relation to interest rate fluctuations: Value approach

Movements in interest rates affect the economic value of the assets and liabilities on the balance sheet, as well as off-balance-sheet hedging

derivatives.

A consolidated interest rate sensitivity limit defines the maximum sensitivity allowed for bank balance sheet interest rate risk and measures

the change in the net economic value of the balance sheet in the event of a parallel move by 1% across the interest rate curve.

The rate curve may also vary in a non-parallel manner and cause a change of value despite total sensitivity of the total economic value appear-

ing neutral. This is called curvature risk. This risk is assessed using specific measurements of the curve sensitivity within each maturity

bucket, measuring expected variations of value following the movement of a single point on the interest rate curve.

Interest rate sensitivity of income and interest margin: Earnings at Risk (EaR) approach

The interest rate level affects the external interest rates on commercial investment products and loans, as well as expected early repayment

behaviour. As a result, it has an effect on the bank’s future interest rate results. This sensitivity enables an estimate to be made of the poten-

tial profit or potential loss of income in the current year and the following years, depending on the various interest rate simulations. This EaR

approach keeps management up to date with the expected income shifts over time of a sudden change in value.

4.2.3.2. Exposure to Interest Rate Risk

Interest rate sensitivity measures the net change in the ALM balance sheet economic value if interest rates move by 1% across the entire curve.

The long-term sensitivity of the ALM perimeter was EUR 129 million/% as at 31 December 2012 (compared with EUR 83 million/% as at 31

December 2011), excluding positions of insurance companies and pension funds.

The derivative contracts in the ALM perimeter are entered into as an economic hedge (portfolio hedge) of the balance sheet’s interest rate risk.

However, as the IFRS exclude certain balance sheet items (e.g. savings accounts) as a hedged underlying element, some of these derivatives

cannot be defined as an “IFRS hedge relationship” under accounting norms and generate volatility in IFRS earnings. This sensitivity of IFRS

earnings to a 1% rise across the interest rate curve was EUR 10 million/% as at 31 December 2012, compared with EUR 8 million/% as at 31

December 2011.

4.2.4. Foreign Exchange Rate Risk

Although Belfius uses the euro as its reporting currency, part of its assets, liabilities, income and expenses are also expressed in many other

currencies. As was the case last year, these exposures were systematically hedged on an ongoing basis.

The structural risks associated with the funding of holdings with equity in foreign currency, as well as the volatility of the bank’s solvency ratio,

are also monitored regularly.

4.2.5. Equity Risk

4.2.5.1. Equity Risk Measures

A VaR calculation is used to assess the portfolio’s sensitivity to a negative movement in the prices, volatility or correlation of equities. Market

risk management includes Earnings at Risk and stress test measurements that provide an indication of the potential accounting loss under

different scenarios. The equity portfolios of bank entities were strongly reduced. In the insurance arm, an “early warning system” was developed

for the purpose of reallocating assets in stress scenarios in order to protect solvency ratios.

4.2.5.2. Balance Sheet Sensitivity to Equities (Listed Equities)

Equity-Value at Risk (VaR with an interval of confidence of 99% over a period of ten days) measures the potential change in market value.



4.2.6. Pension Funds

Specific reports on the pension funds are submitted to the ALCo at Belfius Bank. They contain factors relating to interest rate, inflation and

equity risk.

Management of the market, liquidity and interest rate risk at Belfius Insurance is entrusted to the Belfius Insurance ALCo (see the Belfius Insur-

ance annual report), whose meetings are attended by the ALM teams at Belfius Bank. The risk indicators are calculated on the basis of a har-

monised risk method for Belfius, supplemented by specific factors relating to risk management.



5. Operational Risk

5.1. Policy

Regarding operational risks, Belfius policy involves various risks and controls being regularly identified, in order to check compliance of the risk

level by activity. Specific attention is also paid to new types of risk, such as those associated with cybercrime.

5.2. Measuring and Managing Risk

Managing operational risk is based on the following elements:

5.2.1. Decentralised Responsibility

Each of the bank’s line management organisations has the primary responsibility for monitoring the operational risk in its individual sphere of

activity. It establishes the way its activities are organised, including the checks that need to be implemented to restrict operational risk. It also

defines the corrective measures required to counter significant incidents or when major risks have been identified. Operational Risk Manage-

ment ensures the regular monitoring of risks and incidents and establishes a quarterly report for all activities. This process allows the internal

control system to be improved on an ongoing basis and enables the main risks to be effectively curbed.

5.2.2. Gathering Data about Operational Risks

The systematic collection and control of data on operational incidents is one of the main requirements of the Basel Committee, whatever the

approach adopted for capital calculation (“Standardised Approach” or “Advanced Measurement Approach”).

As a result, the risks remain strictly under control. The reporting mechanisms ensure that the parties responsible are notified quickly if incidents

occur. Major incidents are also reported to the Management Board and feature an action plan for limiting any risk in the future. This is developed

under the responsibility of line management.

Breakdown of total losses by standard category of incidents over the past three years

Breakdown of total losses by standard category of incidents over the past three years

Information,Technology & Infrastructure Failures: 2 %

Employment Practices (HR) & Workplace Safety: 1 %

Execution,Delivery &Process Management: 55 %

Internal Fraud: 2 %

Damage to

Assets & Public Safety: 1 %

External Fraud: 36 %

Client, Products &

Business Practices: 3 %

During that period, the main areas of operational loss were due essentially to incidents associated with external fraud (cybercrime with various

minor incidents), incidents in relation to execution, delivery and process management. Other categories remain limited in number and amount.

When major incidents occur, management validates the corrective action.

The greatest financial impact is in the Retail business.


Operational Risk

5.2.3. Risk and Control Self-Assessment

Another important area is examining the main potential risks for Belfius. This is achieved through bottom-up risk and control self-assessment

exercises performed in all departments and subsidiaries at Belfius. These exercises may result in action plans being developed to limit the risk

further. They provide a good overview of the main risk areas in the various businesses and the results are reported to management throughout

the whole organisation. These risk and control self-assessments are conducted annually and form the basis for the annual report submitted to

the regulator regarding the assessment of internal control (Circular NBB_2011_09).

5.2.4. Securing Information and Business Continuity

The policy relating to securing information and its associated guidelines, norms and practices is aimed at safeguarding the information assets(1)

of Belfius.

In the area of keeping information secure, a great deal of work was carried out in 2012 on developing a major Identity & Access Management

(IAM) project. Initial handover was at the end of 2012. There will be a number of further handovers in 2013. The project included following ac-

tions:

→ increasing awareness in the various departments regarding information security;

→ identifying critical and sensitive information (data classification);

→ certification by owners and managers of existing accesses to information assets.

The policy on business continuity requires the various departments to analyse the business impact on critical activities, develop recovery plans

and provide the necessary documentation, as well as to ensure that the plans regarding business continuity are tested and adjusted at least

once a year. On the basis of regular reporting, the Management Board approves the strategies on recovery, any residual risks and action plans

aimed at achieving ongoing improvement.

5.2.5. Managing Insurance Policies

The operational risks of Belfius are also limited by taking out insurance policies, principally covering professional liability, fraud, theft and inter-

ruption of business.

5.2.6. Greater Coordination with Other Functions Involved in the Internal Audit System

There is regular consultation between Operational Risk Management, Compliance and Audit to assess risks and develop a coordinated approach.

5.2.7. Unwinding Cooperative Links between Belfius and Dexia

As a result of the dismantling of the Dexia Group and the creation of an independent Belfius, a major effort has been required to separate out

the various IT applications.

This meant significant investment was required in 2012, particularly for the Risk Management department. Total spending here for Belfius on

all projects was approximately EUR 13 million (cost of business, IT, Infrastructure). The majority (over 60%) came from separating out applica-

tions shared with Dexia in the Risk Management department.

In view of the extent of these developments and the scheduled completion date for unwinding the applications, this package of projects was

monitored closely by management. Special attention was also paid to transferring staff and building the knowledge required within Belfius. The

operational risk inherent to this operation was significant.

One final part of this unwinding still to be carried out relates to the future of Associated Dexia Technology Services (ADTS). ADTS is the Dexia

Group’s former IT infrastructure company. ADTS is currently still owned (over 99% of the shares) by Dexia SA. The Board of Directors at ADTS

has taken the decision to seek an industrial partner for the company in order to secure the future of ADTS as a commercial IT infrastructure

provider, as well as to offer the best guarantee for the continuity of the services it provides to its current clients, principally Belfius and its

subsidiaries.

(1) Information or data which are valuable to the company and which are to be protected accordingly.


Operational Risk

5.2.8. Calculating Regulatory Capital Requirements

To calculate its regulatory capital in the light of its operational risk management, Belfius has decided to use the standardised approach under

Basel II.

This calculation consists of applying a percentage (called the Beta factor, between 12% and 18%) to the gross income calculated for each of

the eight business lines defined by the Basel Committee (Corporate Finance, Commercial Banking, Retail Banking, Trading and Sales, Asset

Management, Agency Services, Retail Brokerage, Payment and Settlement).

Income consists mainly of the operating income from the underlying businesses, including net fee and commission income. Income from the

insurance business is not included as it is not subject to the Basel II regulations.

The total regulatory capital for each business line is used to calculate the total capital requirements for operational risk, taken as an average

over the past three years. This calculation is updated annually.

Between 2011 and 2012, the capital requirement for operational risks fell from EUR 230 million to EUR 217 million. The calculation of this re-

quirement is based on an average of income for the three most recent years.


6. Pillar 2 Risks

Credit risk, market risk and operational risk described in the previous parts of this report and subject to Pillar 1 framework are also included in

Pillar 2 framework.

The Pillar 1 and Pillar 2 approaches of the same risks might differ at four levels:

→ the perimeter;

→ the methodology;

→ the risk parameters used;

→ the level of severity.

The perimeter of Pillar 2 risks is larger as Pillar 2 aims at exhaustiveness. Other risks than those included in the Pillar 1 framework are then

specifically included in the Belfius Pillar 2 framework i.e. interest rate risk (banking book), funding risk, behavioural risk, business risk, strategic

risk, reputation risk, model risk, pension risk, insurance risk, liquidity risk, settlement risk and securitisation risk.

Methodologies and risk parameters used by Belfius lead to the calculation of economic capital. It is defined as the potential deviation of the

Group’s economic value in relation to the value expected at a determined interval of confidence and time horizon. The choice made by Belfius

is to estimate its risks at a severity level of (99.97%, 1 year) instead of (99.9%, 1 year) as required by the Pillar 1.

Qualitative risks such as reputation, strategic, liquidity and securitisation risks are part of the Pillar 2 but are not capitalised, either because

they are considered as not material (securitisation) or because they are managed by other means.

6.1. Behavioural Risk

Definition

Behavioural risk is defined as the potential change of exposure to interest rate and funding risks due to the uncertain behaviour of retail type

customers.

It includes on the liability side the uncertain amortisation of non-maturing liabilities, such as certain type of deposits, and mortgage prepayment

schedules on the asset side.

For example, customers may decide to reduce their savings or their sight accounts impacting the bank’s interest rate position.

Organisation and Management of the Risk

Behavioural risk is managed through sensitivity and convexity measures in reporting to the members of the Belfius ALM Committee. In addition,

this risk is included in the Belfius Economic Capital reporting.

Capitalisation

Behavioural risk is capitalised as follows:

→ prepayment risk capital is calculated through a statistical model;

→ outflow risk capital is defined as the potential depreciation of the value of the stock of non-maturing liabilities in comparison with an ex-

pected level with a severity level of 99.97% (interval of confidence at a one-year time horizon), hereby generating a drop in income caused

by the uncertain behaviour of the bank’s retail clients.


Pillar 2 Risks

6.2. Business Risk

Definition

Business risk reflects the unexpected decrease of profitability from the expected (or budgeted) one, resulting from other risks than those for

which economic capital is calculated separately.


The business risk is at the heart of the daily management of the bank.

Indeed, management control as an independent department is responsible for the consolidation of data necessary to calculate income, ex-

penses and profitability, as well as related reporting.

The steering of future profitability is operated through the various business line committees and ultimately by the Board of Directors: the lat-

ter defines any strategic decisions to achieve the levels of expected profitability as announced to the market and ensures the survival of the

Group and its business lines.

Capitalisation

The methodology to compute business risk capital aims at analysing the volatility of the revenues/expenses ratio in order to estimate its po-

tential reduction, given a fixed severity level (i.e. 99.97%, one year).

6.3. Strategic Risk

Definition

Strategic risk is defined as the current or prospective loss of value arising from adverse business decisions, improper implementation of deci-

sions or lack of responsiveness to changes in the business environment.


The principles underlying the mitigation of the strategic risk are the following:

→ to ensure the adequacy of the strategic plan to the business environment;

→ to react efficiently to changes in the business environment or to development opportunities;

→ to ensure the correct implementation of decisions taken by top management in the business lines/entities.

The strategic orientation and its correct implementation within the entities are Board of Directors’ responsibilities.

The strategy is developed on the basis of the following principles:

→ the responsibility of the Management Board is to take the initiative to study and propose projects of a strategic nature to the Strategy

Committee and to the Board of Directors;

→ the Board of Directors and the Strategy Committee formed within it may ask the Management Board to study a strategic option;

→ projects that meet at least one of the following criteria are considered to be of a strategic nature.

Capitalisation

This risk is not covered by capital but is handled and managed through an appropriate governance process of Belfius.

6.4. Reputation Risk

Definition

Reputation risk is the potential decrease in the value of Belfius arising from adverse perception of the image of the financial institution on the

part of customers, counterparties, shareholders, investors, regulators and other stakeholders.


Pillar 2 Risks


Due to its very broad definition, reputation risk is managed by different departments such as:

→ Compliance;

→ Operational Risk Management;

→ Secretary General, Tax & Legal;

→ Communication.

These key internal control actors have set up appropriate risk management frameworks and policies to prevent, detect and monitor potential

reputation impacts of the risks of which they are primarily in charge.

They each assess risks relating to their areas of expertise on a regular basis, in order to identify areas that might not yet be sufficiently covered

and accordingly to define corrective actions. This exercise is performed on a consolidated basis within the Bank using harmonised methodolo-

gies and tools.

Meetings between the different departments are organised on a regular basis in order to share information and to ensure a consistent and

exhaustive risk management approach within the Bank.

Capitalisation

The risk is not capitalised and is managed through strong corporate governance and compliance rules within Belfius as described above.

6.5. Model Risk

Definition

Model risk is defined as the potential risk assessment errors resulting from inadequate methodology and models, and/or data uncertainty or

inappropriate use of models.

The major issues that should be addressed by model risk are the following:

→ risk of poor model development;

→ risk of incorrect model calibration;

→ wrong data use and/or data problems;

→ inadequate model usage;

→ risk of population and/or performance non-stationarity.


In addition to the Economic Capital assessment carried out for Model Risk, the risk of each issue described above is mitigated by a process-

oriented handling of Model Risk.

Without being exhaustive, the following practices are considered for containing Model Risk.

→ allocating experienced professionals to the development of risk models;

→ providing a systematic “four eyes approach” via model validation;

→ monitoring and capitalizing Model Risk within the Belfius Economic Capital framework.

Capitalisation

For each type of risk and each risk capital calculation methodology, the potential increase (not decrease) of risk capital resulting from model

risk is assessed by expert judgment. This judgment results into an “uncertainty coefficient” depending on the perceived comfort with which

the model has been developed and implemented, and which is used to calibrate a buffer of capital covering this risk.


6.6. Pension Risk

Definition

Pension risk is the risk stemming from commitments on employee pensions and benefits.

The risk for an employee benefits plan is the risk that the actual value of future commitments (liabilities of the plan) will change on the basis of

changing market parameters (interest rates and inflation risk). A pension fund is created to meet the future commitments. The contributions

paid to the plan are invested in assets (the pension fund).

The risk for a pension fund is the risk that the net present value of its liabilities (future commitments) is greater than the net present value of

its assets (existing investments plus future contribution investments).

As a result, pension risk is not one risk but a set of risks. It is handled by its main specific risks: market risk (interest rate risk, equity risk, inflation

risk), credit risk (solvency risk) and behavioural risk (turnover, mortality).


A three-level structure constituting the governing body of the pension plan, ranging from strategic through tactical to the operational manage-

ment level, establishes a rigorous process by which investment activities are carried out.

A dedicated committee approves the investment mandates and grants them to the pension fund asset manager. These investment mandates

establish clear investment objectives for the pension fund consistent with the characteristics of the pension fund and the acceptable degree

of risk for the pension fund.

The approach for achieving these objectives takes account of the need for proper risk management, diversification needs, liquidity requirements

and asset allocation limitations.

Capitalisation

Pension risk is capitalised. Risk capital is the aggregation of different calculations by type of risk.

6.7. Settlement Risk

Definition

Settlement risk is defined as the risk that the credit institution will deliver the sold asset or cash to the counterparty, and will not receive the

purchased asset or cash as expected.

This risk is not to be confused with the operational risk classified under “Execution, delivery and process management risk”. Settlement risk

only refers to the situation where the delivery process fails because of a solvency issue.


The most general way to reduce settlement risk is to proceed through an intermediary performing DVP Delivery Versus Payment (DVP). For

Forex in particular, there is one main agent: CLS (Continuous Linked Settlement). With DVP one can say that the risk becomes negligible.

Belfius intends then to generalise the recourse to DVP.

Historically, there has been no instance of loss related to this risk at Belfius and very few externally (the best known example is the one that

resulted from the failure of a small German bank, Herstatt, in 1974). In fact, losses would only occur if Belfius simultaneously faces a mismatch

in the delivery against settlement process and the default of the counterparty bearing the resulting temporary exposure. Of course both events

can be strongly correlated: a bank close to bankruptcy is much more likely to fail in its settlement duties.

Capitalisation

Settlement risk capital is not computed via a statistical model but rather results from the occurrence of a single settlement problem (a presum-

ably very rare event). It therefore consists of a fixed amount set a priori on the basis of a judgmental assessment.

Pillar 2 Risks


6.8. Securitisation Risk

Definition

Securitisation risk refers to uncertainty on the economic substance of a transaction and its risk transfer level.


The key elements of the prudential review process of the securitisation activity are the following (and are monitored by specific committees).

Risk Transfer

The significance of credit risk transfer will be assessed on the basis of a formal threshold of at least 50%. If a securitisation transaction does

not respect the 50% risk transfer threshold at inception, then the issue can be submitted to the Financial Services and Markets Authority

(FSMA) for regulatory clearance. If the bank only retains exposure risk weighted at 1.250% (such as “first loss” tranches for instance), the

achievement of a “significant” risk transfer is to be considered as fulfilled, i.e. the securitisation will be automatically considered as satisfying

this risk transfer requirement.

Belfius currently calculates the risk transferred at inception on the basis of a regulatory weighted risk calculation and will calculate the risk

transferred on the basis of an economic capital tool as a second step.

Maturity Mismatches in Synthetic Securitisation

There is a maturity mismatch when the residual maturity of the credit protection is less than the residual maturity of the underlying credit

exposure. Maturity mismatches impact the calculation of the risk weight of the transaction (after the origination) used to assess the risk

transfer.

When the residual maturity of the credit protection is less than three months and less than the residual maturity of the underlying exposure,

the credit protection is not recognised. When the initial maturity of the credit protection is less than one year, the credit protection is not

taken into account.

Implicit Support

At origination Belfius will pay attention to the absence of any clause or practice that could be qualified as implicit support.

During the life of the transaction, an additional prudential review is carried out in the event of a modification of the structure validated at incep-

tion or in case of buy-backs by Belfius Bank.

The securitisation risk is currently managed through appropriate procedures. So far, only two operations have been performed including some

risk transfer and regulatory capital relief. These were partially funded synthetic operations, fully documented and compliant with Basel II rules.

In addition, the danger of not fulfilling the conditions for regulatory capital relief is documented in Belfius Bank securitisation guidelines.

Capitalisation

The benefits of outsourcing the risk of securitised assets is taken into account in the Economic Capital framework and is covered by internal

procedures under Pillar 2.

6.9. Interest Rate Risk (Banking Book)

Definition

Interest Rate Risk can be defined as the potential decrease of the bank’s value due to interest rate movements increasing the cost of interest

rate liabilities or decreasing the value of interest rate assets.


Please refer to 4.2.3. BSM Risk Governance for a detailed description of the Organisation and Management of the Interest rate Risk.

Capitalisation

The methodology to compute interest rate risk Economic Capital consists of a one year 99.97% simulation VaR on the basis of interest rate

curve scenarios applied to ALM sensitivities.

Pillar 2 Risks


6.10. Funding Risk

Definition

Funding Risk is the risk that the refinancing cost for Belfius increases.


For more details regarding the Organisation and Management of Funding Risk, please refer to 1.2.1. Governance.

Capitalisation

Funding risk capital is not computed via a statistical model but is rather based on a scenario analysis, considering a combined systemic and

severe lack of confidence of the market about Belfius solvency during a global liquidity crisis.

The capital requirement is defined as the cost difference between the “normal” refinancing cost of Belfius and the refinancing cost under

stress. In line with economic capital standards, the loss incurred over one year is measured and the confidence interval of the considered sce-

nario (a presumably very rare event) is assumed to be 99.97%.

6.11. Liquidity Risk

Definition

Liquidity Risk consists of the risk that the bank will not be able to meet both expected and unexpected current and future cash flows and col-

lateral needs.


For more information on the management and measurement of liquidity risk, please refer to 4.2.2. Liquidity Risk.

Capitalisation

Liquidity risk is actively monitored and managed through gap limits and stress tests and is therefore actually not capitalised.

6.12. Insurance Risk

Definition

Belfius Insurance, as a part of Belfius takes up risk through the insurance contracts that it underwrites. The risks within the underwriting risk

category are associated with both the perils covered by the specific line of insurance (Life, Non-Life, Health) and the specific processes as-

sociated with conducting insurance business (claims processing, premium collection, pricing, selection, etc).

The risks that apply to all lines of the insurance business can be globally categorised as follows.

→ Life underwriting risk: is the risk arising from the underwriting of life insurance contracts. It is split into biometric risks, lapse risk, expense

risk, revision risk and catastrophe risk.

→ Biometric risks are the risks associated with the changes in trends of mortality risk, longevity risk or disability/morbidity risk

→ Lapse risk relates to the loss, or adverse change in the value of insurance liabilities, resulting from changes in the level or volatility of the

rates of policy lapses, terminations, changes to paid-up status (cessation of premium payment) and surrenders.

→ Expense risk arises from the variation in the expenses incurred in servicing insurance or reinsurance contracts.

→ Revision risk is the risk of adverse variation of an annuity’s amount, as a result of an unanticipated revision of the claims process. Although

annuities follow a life calculation methodology, it is expected that revision risk would be more often related to claims arising from the

Non-Life and the Health businesses.

→ Life catastrophe risks stem from extreme or irregular events (e.g. a pandemic)

Pillar 2 Risks


→ Non-Life underwriting risk: is the specific insurance risk arising from Non-Life insurance contracts. It relates to the uncertainty about the

results of the insurer’s underwriting. This includes uncertainty about:

→ the amount and timing of the eventual claim settlements in relation to existing liabilities; this includes inflation risk;

→ the volume of business to be written and the premium rates at which it will be written; and

→ the premium rates which would be necessary to cover the liabilities created by the business written.

→ Non-Life catastrophe risks stem from extreme or irregular events that are not sufficiently captured by the charges for premium and

reserve risk.


Risk Management of Belfius Insurance is aligned with Belfius practices and guidelines, subject to specific insurance policies for underwriting,

reserving and reinsurance. Risk appetite of the company is integrated in the global Belfius approach, and Group is represented in the main risk

committees. The methodology and governance for using risk concepts in management decisions has however to be approved by the company’s

Management Board.

Capitalisation

For each category of Life/Non-Life underwriting risks an adapted approach largely inspired by the Solvency 2 framework has been designed

to meet economic capital prescriptions.

Pillar 2 Risks


7. Basel III

The Basel III proposals encompass a far-reaching set of reforms aimed at strengthening regulation, as well as supervising and managing bank-

ing sector risk. The aim is to make the financial sector better able to cope with crisis situations, in the main through stricter capital requirements,

more restrictive definitions of the same capital, higher weighted risks, new liquidity standards and the introduction of a non-risk-related finan-

cial leverage ratio.

It is true that the Basel III proposals, which will come into effect after approval from Europe of the revised Capital Requirement Regulation and

Directive (CRD IV package), still include many uncertain factors, inter alia in relation to differences in enforcement within the various national

legislations, the timing of the measures coming into effect, whether or not to apply some prudential filters and several other technical speci-

fications that are as yet still lacking. Adjusting the current reporting instruments on time is another project that requires appropriate care, all

the more so because the final requirements are not yet fully known.

The Basel III reforms will have repercussions on the profitability of banks and their strategies on risk management, as well as on the market

itself. More than ever, banks will be required to incorporate all risk parameters (weighted risks, capital, funding, leverage ratio) into their strat-

egies, decisions and pricing. To keep proper control over the various topics, a specific Basel III project structure has been set up within Belfius,

with a steering committee within the Management Board.

On the basis of the wording approved by the European Commission on 20 July 2011 (CRD IV package), Belfius is analysing the impact of Basel III

on its solvency and making appropriate arrangements in anticipation.

The various versions of the wording of Basel III, which are currently being discussed in the European Parliament, are being monitored in order

to assess their future impact.

On 31 December 2012, the (phased-in) common equity solvency ratio under Basel III was estimated at 10.6%.

Weighted risks under Basel III increased by EUR 9.1 billion to EUR 59.4 billion (pro forma), mainly as a result of credit value adjustments (CVA)

(EUR 5 billion) and asset value correlation (AVC) (EUR 2.3 billion).


Appendix 1 – Glossary

ABS Asset-Backed Security

Securities issues by a vehicle created for the purpose of buying assets from a bank, a company or a state, like trade receivables or inventories,

and to provide the seller with cash and the buyer with a financial product characterised by a certain risk profile and a rate of return.

ABCP Asset-Backed Commercial Paper

A programme of securitisations the securities issued by which predominantly take the form of commercial paper with an original maturity of

one year or less.

AFS Available For Sale

Non-derivative financial assets designated on initial recognition as available for sale or any other instruments that are not classified as (a) loans

and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.

AIRBA Advanced Internal Rating-Based Approach

Institutions using the IRB approach are allowed to determine borrowers’ probabilities of default and to rely on own estimates of loss given

default and exposure at default on an exposure-by-exposure basis. These risk measures are converted into risk weights and regulatory capital

requirements by means of risk weight formulas specified by the Basel Committee.

ALM Asset and Liability Management

Action – for instance in a financial institution or a corporate – of managing the net risk position between assets and liabilities, particularly with

respect to imbalances generated by the evolutions of interest rates, currencies and inflation, but also maturity mismatch, liquidity mismatch,

market risk and credit risk.

CAD ratio Capital Adequacy ratio

A measure of a bank’s ability to meet its obligations relative to its exposure to risk. According to the Basel regulations, the total capital ratio

must be no lower than 8%.

CBFA Commission bancaire, financière et des assurances

The Belgian Banking, Finance and Insurance Commission is the former Belgian Financial Institutions regulator.

CCF Credit Conversion Factor

The ratio of the currently undrawn amount of a commitment that will be drawn and outstanding at default to the currently undrawn amount

of the commitment. The extent of the commitment will be determined by the advised limit, unless the unadvised limit is higher.

CDO Collateralised Debt Obligation

Type of structured asset-backed security (ABS) the value of and payments for which are derived from a portfolio of fixed-income underlying

assets. CDO securities are split into different risk classes, or tranches, whereby “senior” tranches are considered the safest securities. Interest

and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices

to compensate for additional default risk.

CDS Credit Default Swap

Swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a pay-off if a credit instrument

(typically a bond or loan) undergoes a defined “Credit Event”, often described as a default (fails to pay).

CLN Credit Linked Note

A credit linked note (CLN) is a form of funded credit derivative. It is structured as a security with an embedded credit default swap allowing the

issuer to transfer a specific credit risk to credit investors. The issuer is not obliged to repay the debt if a specified event occurs. This eliminates

a third-party insurance provider.

CPR Conditional Prepayment Rate

A loan prepayment rate that is equal to the proportion of the principal of a pool of loans that is assumed to be paid back prematurely in each

period. The calculation of this estimate is based on a number of factors such as historical prepayment rates for previous loans comparable to

the loans in the pool and on future economic outlook.


Appendix 1 − Glossary

CRD Capital Requirements Directive

The Capital Requirements Directive (CRD) for the financial services industry introduces a supervisory framework in the EU which reflects the

Basel II rules on capital measurement and capital standards.

CRM Credit Risk Mitigant

Range of techniques whereby a bank can, partially, protect itself against counterparty default (for example by taking guarantees or collateral,

or buying a hedging instrument).

CVA Credit Value Adjustment

CVA is the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counter-

party’s default. It can be considered as the market value of counterparty credit risk.

DVP Delivery Versus Payment

A settlement practice stipulating that cash payment must be made prior to or simultaneously with the delivery of the security.

EAD Exposure At Default

Estimate of the amount outstanding (drawn amounts plus likely future drawdowns of yet undrawn lines) in case the borrower defaults.

ECB European Central Bank

The ECB is the central bank for Europe’s single currency, the euro. The ECB’s main task is to maintain the euro’s purchasing power and thus price

stability in the euro area. The euro area comprises the 17 European Union countries that have introduced the euro since 1999.

ECAI External Credit Assessment Institutions

Under the Basel II agreement of the Basel Committee on Banking Supervision, banking regulators can allow banks to use credit ratings from

certain approved Credit Rating Agencies when calculating the risk weight of an exposure. Competent authorities will recognise an ECAI as eli-

gible only if they are satisfied that its assessment methodology complies with the requirements of objectivity, independence, ongoing review

and transparency, and that the resulting credit assessments meet the requirements of credibility and transparency.

EL Expected Loss

The amount expected to be lost on an exposure from a potential default of a counterparty or dilution over a one-year period.

FSMA Financial Services and Markets Authority

The FSMA is the successor to the former Banking, Financial and Insurance Commission (CBFA), which on 1 April 2011 changed its name as a

consequence of the changes in its mandate, in particular its exclusive competence for the supervision of rules of conduct. The FSMA is respon-

sible for supervising the financial markets and listed companies, authorising and supervising certain categories of financial institutions, over-

seeing compliance by financial intermediaries with codes of conduct and supervising the marketing of investment products to the general

public, as well as for the “social supervision” of supplementary pensions. The Belgian government has also tasked the FSMA with contributing

to the financial education of savers and investors.

FX Foreign Exchange

Transaction of international monetary business, as between governments or businesses of different countries.

IAS International Accounting Standards

IAS stands for International Accounting Standards. IAS are used outside the US, predominantly in continental Europe.

ICAAP Internal Capital Adequacy Assessment Process

The main objective of the Pillar 2 requirements is to implement procedures which will be more sensitive to an institution’s individual risk profile.

This is to be achieved by introducing implementation of internal processes (ICAAP).

IMF International Monetary Fund

The International Monetary Fund (IMF) is an organisation of 188 countries, working to foster global monetary cooperation, secure financial

stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

IFRS International Financial Reporting Standards

International Financial Reporting Standards published by the IASB and adopted by most countries but the USA. They have been designed to

ensure globally transparent and comparable accounting and disclosure.

IR Interest Rate

Interest expressed as an annual percentage rate.

ISDA International Swap and Derivative Association

Trade organisation of participants in the market for over-the-counter derivatives. Its headquarters are in New York, and it has created a stand-

ardised contract (the ISDA Master Agreement) to enter into derivatives transactions.



IT Information Technology

Study, design, development, implementation, support or management of computer-based information systems, particularly software applica-

tions and computer hardware. IT deals with the use of electronic computers and computer software to convert, store, protect, process, trans-

mit, and securely retrieve information.

LGD Loss Given Default

The ratio of the loss on an exposure due to the default of a counterparty to the amount outstanding at default.

MBS Mortgage-Backed Securities

Asset-backed securities or debt obligations representing claims on the cash flows from mortgage loans.

MCRE Maximum Credit Risk Exposure

The maximum credit risk exposure represents the accounting net carrying amount of exposures, being the notional amounts after deduction

of specific impairments and available for sale reserve amounts, and taking into account accrued interests and impact of fair-value hedge ac-

counting.

NBB National Bank of Belgium

The National Bank of Belgium is the current Belgian Financial Institutions regulator.

Financial supervision covers two aspects:

1. prudential supervision of financial institutions from both the micro-prudential and the macro-prudential angles, and the prompt detection

of systemic risk;

2. supervision of information, the functioning of the financial markets and respect for the code of conduct, together with consumer protection.

The National Bank of Belgium is in charge of prudential supervision.

OLO Obligation Linéaire/Lineaire Obligatie

OLOs are:

• medium-, long-term and very long-term securities;

• denominated in euro;

• issued in different ways:

o by auctions on the basis of the prices offered by the bidders;

o by syndication (e.g. when issuing the first tranche of a new line).

• dematerialised securities held in a securities account system to which Clearstream and Euroclear have access;

• issued in tranches forming a line;

• having an identical nominal interest rate and redemption date within a line;

• fungible within each line (i.e. giving subscribers and issuer the same rights and obligations);

• fixed-rate securities, but for one line − the FRN one − which presents a floating rate linked to the EURIBOR 3 month.

OTC Over The Counter

Over-the-counter (OTC) or off-exchange trading is carried out directly between two parties, negotiating bilaterally and privately without any

supervision of an exchange.

PD Probability of Default

The probability of default of a counterparty over a one-year period.

P&L Profit and Loss

The statement of income is a document showing all wealth-creating revenues and wealth-destroying charges. There are two major statement

of income formats: the by-nature statement of income format and the by-function statement of income format. Also called profit and loss

account (or P&L).

RAROC Risk Adjusted Return On Capital

Risk-based profitability measurement framework for analysing risk-adjusted financial performance and providing a consistent view of profit-

ability across businesses.

RMBS Residential Mortgage-Backed Securities

RMBS are securities where the primary source of payments is a mortgage loan or a pool of mortgage loans secured mostly on residential real

property.

Investors receive payments of interest and principal derived from payments received on the underlying mortgage loans.

SPV Special Purpose Vehicle

Separate legal entity created specially to handle a venture on behalf of a company. In many cases, the SPV belongs from a legal standpoint to

banks or to investors rather than to the company. The IASB has however stipulated that the company should consolidate the SPV if it enjoys

the majority of the benefits or if it incurs the residual risks arising from the SPV even if it does not own a single share of the SPV.



UCITS Undertakings for Collective Investment in Transferable Securities

Set of European Union directives that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single

authorisation from one member state. In practice many EU member nations have imposed additional regulatory requirements that have im-

peded free operation with the effect of protecting local asset managers.

VaR Value at risk

Value at risk (VaR) represents an investor’s maximum potential loss on the value of an asset or a portfolio of financial assets and liabilities, on

the basis of the investment timeframe and a confidence interval. This potential loss is calculated on the basis of historical data or deduced from

normal statistical laws.


Appendix 2 − Internal Rating Systems

1. Structure of Internal Rating Systems

The internal rating systems developed by the former Dexia Group and taken over by Belfius Bank are set up to evaluate the three Basel II pa-

rameters: Probability of Default (PD), Loss Given Default (LGD) and Credit Conversion Factor (CCF). For each counterparty type in the advanced

method, a set of three models, one for each parameter, has been or will be developed as part of the roll-out plan validated by the regulator.

The PD models estimate the one-year probability of default. Each model has its own rating scale and each rating on the scale corresponds to a

probability of default used for regulatory and reporting purposes. The correspondence between rating and PD for each scale is set during the

calibration process, as part of the model development, and is reviewed and adjusted during the yearly backtesting when applicable. The number

of ratings on each scale depends on the characteristics of the underlying portfolio (the number of counterparties, their homogeneity, whether

it is a low default portfolio or not) and varies between 6 and 17 non-default classes. In addition each scale has been attributed two default

classes (named D1 and D2).

For reporting purposes, a “masterscale” has been set up. This masterscale is structured in grades ranging from AAA to CCC and the modifiers

plus, flat and minus (except for both extremes of the scale). The two default classes D1 and D2 are also reported. Each rating corresponds to a

bucket of PD set up according to the one-year average default rate of rating agencies. This rating is obtained by mapping its probability of

default as estimated by the relevant IRS (Internal Rating System) into the masterscale bucket. Rating classes provided in the present document

stem from the masterscale.

LGD models estimate the ultimate loss incurred on a defaulting counterparty before taking the credit risk mitigants into account. The unsecured

LGD depends on different factors such as the product type, the level of subordination or the rating of the counterparty. The granularity of the

estimate is a function of the quantity and quality of data available.

CCF models estimate the part of off-balance-sheet commitments that would be drawn should a counterparty go into default. The regulation

authorises the use of CCF models only when CCF under the Foundation Approach is not equal to 100% (as it is for credit substitutes for instance).

CCF granularity also depends on the availability of data.

The relation between the outcome of internal rating systems and external agency ratings is at two levels.

→ While designing the models: some internal rating systems have been designed and calibrated on the basis of external ratings. This is typi-

cally the case when internal default data are scarce.

→ While establishing reporting: information on the portfolio is reported using the masterscale which is representative for the external agency

probability of default.

2. Description of the Internal Rating Process

General Organisation of the Internal Rating Process

The internal rating process is organised in three stages: the model development, the maintenance and the control of the internal rating.

The model manager is responsible for the entire process of developing and maintaining a model whereas the control of the internal rating is

dispatched through several control functions within the Bank (validation, audit, quality control…).

Development of the Models

The model management process is coordinated by the Model Management team of Belfius Bank. Model managers are physically situated close

to the business and the credit analysts and perform the model management activities enhancing both consistency and efficiency.


The different steps are:

→ defining the scope of the counterparties concerned;

→ identifying and gathering the most relevant available data (financial data, data on defaults of the segment concerned, institutional frame-

work);

→ building a database if needed;

→ defining a broad list of financial ratios and qualitative criteria;

→ testing these ratios (repetitive processes between statisticians and analysts);

→ building the score function. A score function is the mathematical function that allows determination of the counterparty (or exposure) PD,

LGD or CCF on the basis of its characteristics. Score function is established by the modelling team on the basis of statistical analysis and

modelling techniques;

→ testing the score function;

→ developing IT tools;

→ validating and implementing the model;

→ adjusting risk policies to take internal risk systems into account;

→ documentation (user guide, documentation for the regulator, notes concerning the building of the model). Nevertheless, some steps in the

development process detailed above (such as building the score function, testing the function, etc) are not applied for some specific models:

→ models based on an expert approach (such as the model used for Regions & Communities) do not include a score function. They are based

on internal experience and qualitative knowledge and not on statistical data (which may not be available due to very low number of de-

faults for instance),

→ models based on a derivation approach are derived from an existing model,

→ models based on an assimilation approach are not stricto sensu models due to the fact that counterparties treated by assimilation simply

inherit the rating of their “master” counterparty;

→ assimilations and derivations are applied when it is neither financially intuitive nor statistically relevant to develop, adapt or use an existing

model. Such cases occur typically for low default portfolios with a low number of observations, limited data availability (both for design and

for model use) and for portfolios where strong relations exist between the “master’ counterparty and the “assimilated” or “derived” coun-

terparty. These relations can be legally bound or based upon long-term past experience and practice.

Maintenance of the Models

As mentioned above, the model manager is responsible for the entire process linked to the model developed, including the maintenance of the

model.

The model maintenance process is detailed in the diagram hereafter.

Process

Changes modules→ Request for changes by users (methodological or IT

changes)→ Quality control alarm→ Backtesting

Model Manager→ List the evolution request→ Prioritise the evolution request

Evolution draft

Tests/Impacts analysis/Development

Results of the tests/Development

IT development→ New version of the model→ Update the documentation

Proposition of setting→ Exploitation date

Communication of the new version of the model under the responsibility of the Model Manager

Committees

Rating Committee

Rating Committee by delegation of RPC

Validation/Risk excom

Validation/Risk excom

NO GO

GO

NO GO

GO

GO

Legend: Risk Policy Committee (RPC).




Internal Rating Process by Broad Exposure Class

Type of Exposure Included in Each Exposure Class

Belfius has developed a wide range of models to estimate PD, LGD and CCF of the following types of counterparties.

Sovereigns

Sovereigns

The scope of the model encompasses sovereign counterparties, defined as central governments, central banks and embassies (which are an

offshoot of the central government), and all debtors of which liabilities are guaranteed irrevocably and unconditionally by central governments

or central banks.

Assimilations to Sovereigns

The in-depth analysis of some public sector counterparties (such as some public institutions, like the National Social Security Office or Buildings

Agency) shows that they share the same credit risk as the “master” counterparties to whom they are assimilated (usually local authorities or

sovereigns). They are consequently assimilated to these “master” counterparties and benefit from the same PD and LGD as their “master”

counterparties.

Retail

Retail – Individuals

These models encompass retail customers (individuals). Individuals are defined as retail counterparties without a self-employed activity or a

liberal profession and are not linked to the activity of a legal entity.

Retail – Small Professionals

These models encompass small professional retail customers defined as individuals with a self-employed activity or a liberal profession

(i.e. doctors, lawyers, etc) or small companies generating a turnover lower than a certain threshold.

Retail – Small Companies

The models encompass small companies which are defined as companies generating a turnover higher than a certain threshold but that are still

considered as retail counterparties on the basis of distinctive criteria (i.e. not considered as mid-corporate or corporate counterparties).

Recent Information about Retail Sector Modelling within Belfius

→ Elantis, Ripar, Ribus, RSC are in place, backtested and stress-tested;

→ LGD mortgages and CCF models were recently updated;

→ Rating small corp (Elantis) is still in roll-out (validation is planned).

Project Finance (Specialist Lending)

This model encompasses the project financing activity of Belfius on all segments of activity in which Belfius intervenes (which are actually

mainly Energy and Infrastructure). The specialist lending portfolio is a subgroup of the corporate portfolio which has the following character-

istics: the economic objective is to finance or acquire an asset; the flows generated by this asset are the sole or practically the sole source of

repayment; this financing represents a significant debt in respect of the liabilities of the borrower; the main distinguishing criterion of risk is

essentially the variability in flows generated by the financed asset, much more than the borrower’s ability to repay.

Insurance Companies (including Monolines)

The scope of the model encompasses worldwide insurance companies. An insurance company is restricted by the terms of its status, to writing

financial guarantees or insurance policies related to a single type of risk.

Financial Institutions

Banks

The scope of the model encompasses worldwide bank counterparties, defined as legal entities which have banking activities as their usual

profession. Banking activities consist of the receipt of funds from the public, credit operations and putting these funds at customers’ disposal,

or managing means of payment. Bank status is gained by the delivery of a banking license given by the supervisory authority.


Undertakings for Collective Investment in Transferable Securities (or UCITS)

This model is used to score direct risk exposure to UCITS counterparties such as loans or facilities (this model is not aimed at rating investments

made by Belfius Bank in UCITS).

The sole object of a UCITS is the collective investment in transferable securities and/or other liquid financial assets of capital raised from the

public and which operate on the principle of risk spreading.

In order to be treated by the UCITS internal rating system, the considered fund must satisfy these criteria: being an open-ended fund, being

quoted, having a prospectus and presenting sufficient information.

The existing models for banks, countries, insurances, built in 2003, have been recently updated and validated.

Corporates

Two models have been designed for corporate counterparties: corporate and mid-corporate models.

Corporates

The scope of the model encompasses worldwide corporate counterparties. Belfius Bank defines a corporate as a private or a publicly-quoted

company with total annual sales higher than EUR 50 million or belonging to a group with total annual sales higher than EUR 50 million which is

not a bank, a financial institution, an insurer or a satellite.

Mid-Corporates

This model encompasses mid-corporates from Belgium. Belfius Bank defines a mid-corporate as a private company with total turnover lower

than EUR 50 million and belonging to a group with consolidated total turnover lower than EUR 50 million and with total assets higher than

EUR 2 million. This company is not a bank, a financial institution, an insurer or a satellite.

Public Sector Entities

Public sector entities represent a large part of the Belfius Bank portfolio. Some differences between counterparties have been noticed within

this portfolio, and this explains the number of models.

West European Local Authorities

This model encompasses Belgian local authorities, namely municipalities and provinces.

Belfius defines local authorities as sub-sovereign governmental elected bodies empowered by the legislation with specific responsibilities in

providing public services and with certain resources and capacity to decide their own practical organisation in terms of administrative proce-

dures, personnel, buildings, equipment, etc.

Belgian Regions and Communities

An expert methodology has been developed to rate the five Belgian regions and communities which are the French community, German com-

munity, Flemish community (including Flemish Region), Walloon Region and Brussels Capital Region.

Assimilations to Public Sector Entities

The in-depth analysis of some public sector counterparties (such as church companies, municipalities’ Social Service Departments, intermu-

nicipal police zones) shows that they share the same credit risk as the “master” counterparties to which they are assimilated (usually local au-

thorities or sovereigns). They are consequently assimilated to these “master” counterparties and benefit from the same PD and LGD as their

“master” counterparties.

Recent Information about Public Sector Modelling within Belfius

→ Public sector Western Europe models are being backtested and stress-tested,

→ Models handled as assimilation have been backtested since June 2012 (no concerns),

→ Public satellites model is currently in roll-out.

Other Satellites

The model encompassed Belgian non-public satellites.

→ The “satellites” are entities, the main activity of which is a public authority’s responsibility which has been delegated to the satellite concerned

and of which the majority of stakeholders are not-for-profit entities.

→ Among all the “satellites”, the “public satellites” are those of which the business cannot be closed down (in particular the entity cannot be

declared bankrupt), or if so, either a public authority gets assets and liabilities back, or an equivalent entity does so, and those of which

strategic (including financial) decisions are made (or approved) by the public authority. The public satellite model is currently in a use-test

period. The homologation file was delivered to NBB in April 2011. Feedbacks are still expected.



Equity and Securitisation Transactions

No internal models have been developed specifically for equity or securitisation transactions which follow a different regulatory approach

under Basel II: securitisation risk weighting is based on external and not internal ratings (Rating-Based Approach – refer to part 7); equities do

not require the development of specific models (refer to part 8).

Default Definition Used in the Models

The “default” notion is uniform, covering all business segments with some minor exceptions due to special characteristics.

The notion of default has been harmonised from the beginning of the Basel II project with the impairment notion used in IFRS. All credits in

default and only those flagged as in default give rise to an impairment test (that can or cannot eventually lead to an impairment).

The notion of default is not automatically related to the notion of potential loss (for instance, a loan may present unpaid terms but may be totally

collateralised and consequently present a nil expected loss) or to the notion of denunciation (which is decided on the basis of the interest the

bank may have to do so).

Definition, Methods and Data for Estimating PD, LGD and CCF

Main Principles Used for Estimating the PD

Types of Counterparties Through the Cycle Models Default Definition Time Series Used

Internal/ External Data

Sovereigns Models are forward looking and through the cycle. They are designated to be optimally discriminative over the long term. The through the cycle aspect of the rating is also addressed in a conservative calibration of the PD.

Default at first day > 10 years External

Banks Default at first day > 10 years External

Insurance companies Transverse > 10 years External

Local Public Sector Default at 180th day> 10 years

Internal + External

Corporates Transverse> 10 years

Internal + External

Specialised Lending Transverse 6 years Internal

Mid-corporates Transverse6 years

Internal + External

Other Satellites Transverse 5 years Internal

Retail Transverse 2 years Internal

UCITS Default at first day, if the net asset value is lower than the equity value. N/A Internal

Equity Specific approach: PD/LGD Approach. N/A N/A N/A

Securitisation Specific approach: Rating-Based Approach.

Default if related ABS is classified as impairment 1 (loss probability > 50%) or impairment 2 (loss probability = 100%). N/A N/A



Main Principles Used for Estimating the LGD

Types of Counterparties Main Hypotheses Time Series Used

Internal/ External Data

Sovereigns Expert score function on the basis of Fitch country loss risk methodology and internal expert knowledge to discriminate between high and low loss risk. > 10 years

Internal + External

Banks Statistical model derived from LGD corporate model and integrating additional risk factors adapted to banking counterparties (country of residence, business profile, etc). > 10 years

Internal + External

Insurance Companies Statistical model based on external rating agencies loss data. The LGD depends on counterparty rating, exposure seniority level, geographic region and macro-economic factors. > 10 years

Internal + External

Corporates

Local Public Sector Statistical model based on the internal existing default cases observed which were related to French municipalities. Final LGD are segmented on the basis of the number of inhabitants and on an economic parameter. > 10 years Internal

Specialised Lending This model belongs to the ‘Workout LGD’ type: the LGD computation was developed according to the workout of the bank during a 10-year period concerning internal Project Finance default facilities. Cash flows are estimated on the basis of the observed historical recovery process, and LGD is computed by means of discounted cash flows. 10 years Internal

Mid-Corporates The LGD model is a white box model with explanatory variables: number of workout years. The LGD is calculated as the multiplication of the LGD unsecured (LGD when the loans are not collateralised) and of the haircut factor taking into account the collateralisation of the loan. 7 years Internal

Other Satellites On the basis of internal observation. 5 years internal

UCITS Merton-like model when expected losses and implicit LGD are also estimated by this model. N/A

Internal + External

Equity Specific approach: PD/LGD Approach. N/A N/A

Securitisation Specific approach: Rating-Based Approach. N/A N/A

Main Principles Used for Estimating CCFAt present Belfius Bank does not use CCF models for regulatory purposes except for Specialised Lending CCF model. Otherwise, Foundation

Approach is applied.

Most of the CCF models were calibrated and internally validated in 2008 or 2009 on the basis of a statistical approach using the data of the

internal loss database or on the basis of expert approaches when such approaches are not available.

CCF homologation files have been delivered to NBB in 2011. These models will be allowed to be applied for regulatory purposes after NBB

validation.



3. Control Mechanisms for Rating Systems

The Basel II regulation requires internal control of the internal rating systems. Within Belfius, these controls cover the whole chain of produc-

tion of the regulatory parameters under all its aspects, e.g. (non exhaustively):

→ the data input

→ are they correctly loaded and up to date?

→ are the counterpartiess addressed to the right model?

→ the models

→ do they meet regulatory requirements?

→ are they meaningful?

→ are they sufficiently discriminant?

→ are they stable and robust?

→ are they correctly implemented?

→ are they sufficiently conservative?

→ the work of the analysts

→ do they use the models correctly?

→ are the final ratings sufficiently motivated?

→ are the rating procedures respected?

→ are they auditable?

→ are the (re)ratings performed in a timely manner?

→ the usage of the model and its outcomes

→ are the parameters used in credit and risk management decisions?

→ are they correctly stored in the systems?

→ do all the users master well the model?

and during the whole life-cycle of each IRS:

→ before its first usage or any update

→ in-depth control of methodological and operational issues

→ on an annual basis while being used

→ annual backtesting aimed at checking whether the IRS continues to perform well

→ annual audit of the whole production process

→ on a quarterly basis for the work of the analysts

→ endorsement of the rating overrides above a tolerance threshold

→ control of the respect of the rating procedures

Responsibilities and Decision Process

The controls are performed by the Model Validation and Quality Control department, while Audit acts as an additional level of control, in-

cluded in its audit plan(1).

The decisions regarding the IRS are taken by two Committees.

The Risk Executive Committee

Composed of the CRO and of its direct reports, it takes the decisions regarding the models:

→ green light to put new models or model updates in production;

→ endorsement of the validation reports on the recurrent model follow-ups (annual backtesting and operational audit);

→ endorsement of the corrective action plans recommended by Validation.

The Risk Ex Com decisions are further presented for approval to the Risk Policy Committee.

(1) According to the CRD minimal requirement 131, Annex VII Part 4, “Internal Audit has to include in its plan, at least once a year, a review of the IRS and its functioning, including credit scoring and estimation of PD, LGD, EL and CCF. Also compliance with all the minimal requirements has to be verified”. At Belfius Bank, this annual verifi-cation has been delegated to the Validation and Quality Control department.



The Rating Committee

The key role of the Rating Committee is to monitor the appropriate use of internal rating systems within the bank as a whole and to ensure that

these IRS are effective. For these reasons, the Rating Committee:

→ validates overrides, above tolerance threshold, proposed by analysts;

→ monitors the homogeneous application within the bank of the rating and derogation principles;

→ validates operational establishment of the models once they are validated by the Risk Ex Com.

Model Validation and Quality Control

Model Validation and Quality Control is a department within Risk Management. It reports directly to the CRO and is not involved in any model

development in order to guarantee its independence. Its main missions are:

→ to guarantee the reliability of the model outcomes used within Belfius and to verify their compliance with the regulation;

→ to highlight their possible weaknesses and to communicate them to all stakeholders (from analysts to top management).

Its scope covers all the models be they used for regulatory purposes, for risk assessment and monitoring, for (post-trade) valuations …

Model Validation and Quality Control controls all the aspects of the production of results by the models, from a methodological but also an

operational (implementation, usage) viewpoint. It intervenes prior to the first use of the models and afterwards regularly monitors their func-

tioning.

Validation works are summarised in reports indicating the controls that were performed, their findings, proposed corrective actions and, when

required, a validation status.

4. Business Integration of Internal Estimates

Internal estimates of Basel II parameters are used within Belfius Bank, at present covering a large number of applications in addition to the

calculation of the regulatory risk-weighted exposure amounts. They are notably used in the following fields:

→ decision-making process;

→ credit risk management and monitoring;

→ internal limit determination;

→ provisioning methodology;

→ capital allocation;

→ pricing.

Decision-Making Process

Basel II parameters are key elements considered by the Credit Committee in assessing the opportunity to accept or reject a transaction.

Credit guidelines have been updated in order to integrate Basel II parameters while assessing credit proposals.

Credit Risk Management and Monitoring

Basel II parameters are actively used in periodic credit risk reporting and also for the individual follow-up of distressed transactions and coun-

terparties within Watchlist Committees.

Belfius Bank integrates the Basel II parameters to define a new internal reporting on the basis of a unique and common reporting credit risk

data warehouse and uniform concepts. The counterparty internal ratings, the LGD, the level of EL and the regulatory weighted risks are the

key Basel II parameters used within the new internal reporting and the credit risk portfolio review.

A central database registers internal ratings and keeps them available for all relevant needs.

Internal Limit Determination

Basel II parameters have been integrated for fine-tuning the Belfius Bank credit limit system and determining delegation levels for credit

acceptance.



Provisioning Methodology

The implementation of Basel II parameters has made it possible to develop more synergies between accounting and prudential issues (IFRS/

Basel II), while relying on the processes, data and tools of the Basel II project.

The Basel II notion of default and the accounting notion of impairment have converged in relation to specific impairments.

As a consequence, only defaulted assets identified as such in the Basel II compliant risk management systems are identified as impaired assets

for both accounting and risk management purposes. However, some exceptions to this general principle exist in relation to some specific seg-

ments such as Equity, Undertaking for Collective Investment in Transferable Securities (UCITS) or Asset-Backed Securities (ABS). For these

types of products, the notion of default cannot be applied due to their characteristics; hence the sole notion of impairment prevails.

Capital Allocation

The capital allocation process is managed through reporting, budgeting and cost control procedures within the bank. This capital allocation

relates to both regulatory and economic capital.

All credit files submitted to the Belfius Bank Credit Committees include a weighted risk calculation based either on the regulatory Basel II pa-

rameters (PD, LGD, CCF) or on economic parameters.

Pricing

Basel II parameters are integrated in the RAROC calculation tool. As a consequence, the Basel II parameters are integrated in the pricing. RAROC

is the risk adjusted return on capital generated on a transaction or a portfolio.



Appendix 3 − Belfius Bank Originations

Belfius Bank has five traditional securitisation vehicles: Atrium-1, Atrium-2, Dexia Secured Funding Belgium, Penates Funding and Mercurius

Funding. The total assets of these companies amounted to EUR 20.5 billion at 31 December 2012 compared to EUR 21.7 billion at 31 December

2011. Belfius Bank has one securitisation vehicle for synthetic securitisation: Dublin Oak. Since November 2012 Belfius Bank has also a mort-

gage covered bond programme, the Belfius Belgian Mortgage Pandbrieven Programme.

Atrium-1 is a Belgian securitisation transaction of social housing loans pursuant to a long-term credit facility between Belfius Bank and Domus

Flandria NV (the borrower) and guaranteed by the Flemish Region. The guarantee of the Flemish Region was transferred to the special purpose

vehicle (SPV). The original size of the transaction was EUR 188 million. Two classes of fixed-rate notes were issued on 30 April 1996, both

carrying a Moody’s rating equal to that of the Flemish government (initially Aa2sf, currently Aa2sf as well). As at 31 December 2012,

EUR 42.5 million were still outstanding under the class A2 while the class A1 has been repaid.

Atrium-2 is a Belgian securitisation transaction of social housing loans pursuant to a long-term credit facility between Belfius Bank and Domus

Flandria NV (the borrower) and guaranteed by the Flemish Region. The guarantee of the Flemish Region was transferred to the SPV. The

original size of the transaction was EUR 129.3 million. Two classes of fixed-rate notes were issued on 19 June 1997, both carrying a Moody’s

rating equal to that of the Flemish government (initially Aa2sf, currently Aa2sf as well). As at 31 December 2012, EUR 40.7 million were still

outstanding under the class A2.

Dexia Secured Funding Belgium (DSFB) is a Belgian securitisation vehicle (institutionele VBS naar Belgisch recht/SIC institutionnelle de droit

belge) with currently six compartments, of which two with activity, namely DSFB-2 and DSFB-4. The DSFB-1 transaction was terminated in

September 2012.

DSFB-2 (using the second ring fenced compartment of DSFB) is a securitisation transaction of loans granted to Belgian entities (public and

other). All the loans are 100% guaranteed by one of the three Belgian regions. This EUR 1,621 million transaction was launched on 28 April 2008.

One tranche of floating-rate notes, rated at closing AA/Aa1/AA+ by respectively S&P, Moody’s and Fitch, was issued. Belfius Bank has guaran-

teed the full and timely payment of principal and interest on the notes. As at 31 December 2012 EUR 1,330 million were still outstanding. The

notes have a rating of A-sf/A-/Baa1.

DSFB-4 (using the fourth ring fenced compartment of DSFB) is a securitisation transaction of loans granted to Belgian public entities. This

EUR 5,060 million transaction was launched on 14 December 2009. Three classes of floating-rate notes were issued: EUR 4,700 million Class

A notes (rated AAsf by Fitch), EUR 300 million non-rated Class B notes and EUR 60 million non rated Class C notes. As at 31 December 2012,

EUR 3,673 million were still outstanding.

Penates Funding is a Belgian securitisation vehicle with currently six compartments. Two compartments, Penates-1 and Penates-4, had out-

standing notes at the end of 2012. Penates-2 was called in April 2010 and Penates-3 was called in December 2011.

On 27 October 2008, Belfius Bank closed a EUR 8,080 million RMBS securitisation transaction. The SPV, Penates Funding acting through its

compartment Penates-1, securitised Belgian residential mortgage loans originated by Belfius Bank and issued five classes of notes: EUR 7,600 mil-

lion Class A Mortgage-Backed Floating-Rate Notes due 2041 (Fitch AAAsf/ S&P AAAsf); EUR 160 million Class B Mortgage-Backed Floating-Rate

Notes due 2041 (Fitch AAsf); EUR 120 million Class C Mortgage-Backed Floating-Rate Notes due 2041 (Fitch Asf); EUR 120 million Class D

Mortgage-Backed Floating Rate Notes due 2041 (Fitch BBBsf) and EUR 80 million Subordinated Class E Floating Rate Note due 2041 (not

rated). As at 31 December 2012 the Class A Notes were downgraded by S&P to A+sf due to S&P’s revised counterparty criteria and by Fitch

to Asf due to the downgrade of Belfius Bank. The outstanding amounts for all classes of notes are still at their initial amount except for the

Class A notes where the balance decreased to EUR 4,283.4 million. There was hence EUR 4,763.4 million outstanding under Penates-1 as at 31

December 2012.

On 19 December 2011, Belfius Bank closed a EUR 9,117 million RMBS securitisation transaction. The SPV, Penates Funding, acting through its

compartment Penates-4, securitised Belgian residential mortgage loans originated by Belfius Bank and issued four classes of notes: EUR 8,077.5 mil-

lion Class A Mortgage-Backed Floating-Rate Notes due 2045 (Fitch AAAsf/Moody’s Aaasf/DBRS AAAsf); EUR 472.5 million Class B Mortgage-

Backed Floating-Rate Notes due 2045 (Fitch Asf/Moody’s A3sf/DBRS Asf); EUR 450 million Class C Mortgage-Backed Floating-Rate Notes due

2045 (unrated) and EUR 117 million Subordinated Class D Floating-Rate Notes due 2045 (unrated). As at 31 December 2012, The Class A and

the Class B Notes were downgraded by Fitch to A+sf and A-sf respectively due to the downgrade of Belfius Bank by Fitch. The Class A Notes

were put on negative watch by Moody’s due to the downgrade of Belfius Bank by Moody’s. As at 31 December 2013, the outstanding amounts

for all classes of notes were still at their initial amount except for the Class A notes where the balance decreased to EUR 6,771.8 million. There

was hence EUR 7,811.3 million outstanding under Penates-4 as at 31 December 2012


Appendix 3 − Belfius Bank Originations

Mercurius Funding is a Belgian securitisation vehicle with currently six compartments. It was established in 2012. One compartment, Mercu-

rius-1, had outstanding notes at the end of 2012.

On 7 May 2012, Belfius Bank closed a EUR 4,124 million SME CLO transaction. The SPV, Mercurius Funding, acting through its compartment

Mercurius-1, securitised Belgian loans to SMEs originated by Belfius Bank and issued two classes of notes: EUR 3,200 million Class A SME Loan-

Backed Fixed-Rate Notes due 2035 (Fitch A+sf/ Moody’s A1sf/ DBRS A(low)sf ); EUR 924 million Class B SME Loan-Backed Fixed-Rate Notes

due 2037 (not rated). All the notes still have their initial Fitch, Moody’s and DBRS rating. As at 31 December 2012, the outstanding amounts for

the Class B notes were still at their initial amount. The balance of the Class A notes decreased to EUR 2,687.9 million. There was hence

EUR 3,611.9 million outstanding under Mercurius-1 as at 31 December 2012.

Dublin Oak is a partially funded balance-sheet CDO transaction on a USD 3 billion portfolio of Asset-Backed Securities (ABS) entered into by

Belfius Bank Dublin Branch on 15 May 2007. The securitised portfolio consisted of 127 different ABS, at the time of origination all rated AAA

by one or more rating agencies. The portfolio is diversified among a number of ABS asset classes including student loans, RMBS and CMBS.

Belfius Bank was selling the credit risk related to the AAA ABS portfolio to external parties by means of two credit default swaps: a non-

funded super senior credit default swap with an OECD bank and a junior credit default swap with Dublin Oak Ltd, a special purpose vehicle

registered in Ireland. Dublin Oak has issued 3 tranches of CLNs to transfer the credit risk to the market. Moody’s has withdrawn the ratings of

the CLNs issued by Dublin Oak. Therefore, the CLNs currently have no rating anymore. At the end of 2012, part of the ABS portfolio remained

on the Belfius Bank Dublin Branch balance sheet and was still managed by the portfolio management team based in Dublin. The outstanding

balance of the reference portfolio at the end of 2012 amounted to USD 1,472 million.

In November 2012 Belfius Bank set up a Belgian pandbrieven programme. The first issuance for an amount of EUR 1,250 million took place on

27 November 2012. Before year end 2012 three subsequent issuances took place for a total amount of EUR 90 million. The cover pool consists

of residential mortgage loans originated by Belfius Bank and amounted to EUR 2,716.4 million at the end of 2012. The cover pool also contained

a liquid bond position of EUR 48.4 million and a cash position of EUR 30.4 million. The outstanding balance of all mortgage pandbrieven issued

by Belfius at the end of 2012 amounted to EUR 1,340 million.

Contact

For further general info over Belfius Bank & Insurance, feel free

to surf www.belfius.be.

Got a question about Belfius Bank’s results or strategy? Then please

e-mail [email protected].

Any other queries? Then call +32 2 222 12 01

(Mon-Fri: 8 a.m.-10 p.m./Sat: 9 a.m.-5 p.m.).

And, of course, you can always follow us on the social networks:

facebook.com/Belfius

twitter.com/Belfius

LinkedIn.com/company/Belfius

YouTube.com/BelfiusBe

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