enterprise risk management (erm) abn amro business unit north america (bu na)
DESCRIPTION
Enterprise Risk Management (ERM) ABN AMRO Business Unit North America (BU NA). Presentation to the Federal Reserve Bank of Chicago. August 14, 2007. Table of Contents. 1. Introduction. Program Update. 2. 3. Appendix A: Emerging Risk Task Force. 4. - PowerPoint PPT PresentationTRANSCRIPT
Enterprise Risk Management (ERM)ABN AMRO Business Unit North America (BU NA)
Presentation to the Federal Reserve Bank of Chicago
August 14, 2007
2
Table of Contents
Program Update2
Introduction1
Appendix A: Emerging Risk Task Force3
Appendix B: ERM Dashboards (Weekly and Monthly)4
3
Business in Transition
The proposed sale of the LaSalle Bank Corporation (“LBC”, in conjunction with a proposed merger or sale of the remaining ABN AMRO group, announced in April 2007) has changed our risk state from “business as usual” to “business in transition.”
The change in risk state led to a heightened level of uncertainty.
However, the future of LBC became more clear on July 13, 2007, when the Dutch Supreme Court ruled that the sale of LBC to Bank of America can proceed without shareholder approval. This ruling overturned the previous Enterprise Chamber Court ruling in May 2007.
July 13, 2007
July 13, 2007
Supreme Court Decision
Supreme Court Decision
December 31, 2007
BoA transaction expected to close
March 31, 2008
Barclays transaction expected to close
March 31, 2008
Consortium transaction expected to close
September, 2007
Shareholder vote (Barclays vs. Consortium)
September, 2007
Shareholder vote (Barclays vs. Consortium)
BoA TRANSITION PERIOD
BARCLAYS TRANSITION PERIOD
BoA INTEGRATION PERIOD
BARCLAYS INTEGRATION PERIOD
2009 / 2010
RBS / CONSORTIUM TRANSITION PERIOD RBS / CONS. INTEGRATION PERIOD
2009 / 2010
Royal Bank of Scotland (“RBS”) / Consortium
Barclays / Bank of America (“BoA”)IL
LUSTR
ATIVE
4
Business in Transition
Uncertainty still remains for the Business Unit North America ex-LBC (BUNA ex-LBC). The future for BU NA ex-LBC is expected to become more clear after the shareholder vote planned for September 20, 2007.
As a result of the uncertainty across all of BU NA, an Emerging Risk Task Force was formed in May to identify new risks or heightened risks (“emerging risks”).
The Task Force played a role during the pre-transition period by assembling a cross-functional team to re-evaluate enterprise-wide risks.
For our ERM Program, this “business in transition” state has resulted in a change in prioritization of projects as well as change in focus to “emerging risks.”
5
Table of Contents
Program Update2
Introduction1
Appendix A: Emerging Risk Task Force3
Appendix B: ERM Dashboards (Weekly and Monthly)4
6
“To timely identify, manage and report all material risks in an integrated manner
to enable optimal informed and efficient decision making, resulting in increased
enterprise value.”
ABN AMRO ERM VISION
Program Objective:
“Getting the right information, to the right people, at the right time, to make the right decisions.”
This will be accomplished by:
Understanding the decisions we must inform
Providing the information necessary to inform each decision via integrated, concise, and relevant communication of risk information
Defining and establishing the components and interactions necessary to ensure that this information is collected, aggregated, analyzed, and delivered in a timely and quality manner to decision makers.
ERM Vision and Program Objective
UPDATED
7
Q3 2007
• January - Communication from Norm Bobins regarding adherence to Bank policies and Standards of Conduct, and prompt escalation of security, compliance and risk issues• February – ERM Program Plan, Organizational Structure (new ERM Committee), Risk Outlook Process and second ERM Dashboard approved and endorsed by NA RMC.• March – ERM Committee Charter approved in principle; Standards of Conduct updated to include Risk Issue Escalation and Risk Incident Reporting sections.
• April – inaugural ERM Committee meeting. Preliminary findings and recommendations from Risk Independence Review presented to RMC.• May – Emerging Risk Task Force formed. List of emerging risks developed and “top questions” presented to RMC.• June – Emerging Risk questionnaire developed and interviews of senior management completed. “Creating a No Surprises Culture” communication from Robert Moore and Terry Bulger sent to all North American bank employees.
Q4 2007Q1 2007 Q2 2007
PLANNED
Communications:“Everyone is a Risk Manager”
Management Information:Enterprise-wide
Stress Test
Risk Oversight and Independence:Emerging Risk Task Force
Support for Transition TeamModel Governance Review
Management Information:ERM Dashboard (weekly and monthly updates)
Strategic and Alignment:Risk Appetite
ERM Projects - 2007
8
Table of Contents
Program Update2
Introduction1
Appendix A: Emerging Risk Task Force3
Appendix B: ERM Dashboards (Weekly and Monthly)4
9
In May 2007, at the request of the RMC and the ERM Committee, the Emerging Risk Task Force was formed to respond to the changing risk state from “business as usual” to “business in transition.”
Emerging Risks are defined as those risks which are new to the organization or are heightened due to our changed risk state.
The Emerging Risk Task Force is led by Group Audit with representation from Finance, Compliance, Legal, HR, Group Security, ERM PMO, Operational Risk Management and Technology Risk Management.
The objective for the Emerging Risk Task Force is to help management identify and report to the RMC on the new and increasing risks to our organization.
At this time, no previously unidentified risks were noted. However, as the transaction unfolds, the task force expects the potential for risk to increase.
This high-level risk identification process is a continuation of the “Top Risk” process started earlier this year by the ERM PMO.
This process will continue to evolve as more clarity is provided around the expected transaction.
Overview
10
Common Emerging Risk Themes
Personnel
Most commonly cited concern was accelerated loss of key personnel and the inability to replace them. Implications noted were inability to meet service and financial performance goals.
Operations
Common theme is that quality of controls will decline due to loss of qualified staff and/or existing staff distracted by merger news. Capacity and flexibility to handle change, recover from problems, and maintain security will be diminished.
Customers
Concerns were loss of customers and difficulty in attracting new clients (or expanding existing relationships) due to going concern issues. Customer losses increasing due to departure of relationship managers and poaching by competitors.
11
D R A F T FOR DISCUSSION PURPOSES
Emerging Risks SweitserReport owner: McNally
At the request of the RMC, a task force was created to identify emerging risks related to the current merger activities. Personnel were assigned representing all BU NA business units. Task force members interviewed RMC members and their direct reports to identify emerging risks. These tables summarize the significant task force findings.
Recommendation: RMC members review the emerging risks identified, consider if applicable to their respective business units, and report on mitigating actions that need to be taken.
Issue Theme Interview observations Actual / potential mitigating actions Cited By 1 Dashboard 2
Personnel Issues Loss of experienced employees (attrition, turnover, poaching) and inability to hire qualified replacements (perms or temps). Existing retention and CIP bonus plans insufficient to retain key personnel.
Retention program; market increases; CIP bonuses; discretionary bonuses; enhance / expand bonus plans; identify key staff; guarantees to top staff; active communications with staff; regular meetings with staff; reorganize remaining personnel
Compliance; Risk; Legal; Services; GSTS; TB; Audit; Com’l; GM; GC;
Finance; PFS; AM; BAN
Strategic Human Capital
Services Legal
Controls weakened due to employee lack of interest, lost focus, diluted coverage, distractions, or fatigue. Service levels degraded due to SBR results / distractions of employees
Re-prioritize tasks; reallocate resources; maintain communications between management and staff; continuously monitor processes; monitor staff performance; adjust assignments; identify temp services
GSTS; Legal; Finance; Services:
Audit; HR
Legal Services (?)
Audit (?)
Files or systems sabotaged by disgruntled employees Monitor to detect problems; make quick corrective actions; restrict physical access; restrict systems access
Services Services
Conflicting short-term and long-term goals due to BPE; BPE revenue targets above industry growth rates; With changing staff motivations (short-term with BPE) will staff still escalate issues
Align goals; reinforce standards of conduct (SoC); reinforce escalation processes
Compliance; PFS; Audit
Strategic Finance
Complications from dual reporting lines; conflicting interests; poor or no coordination
Escalate to global management for resolution TB TBD
1: BU’s shaded color indicates the interviewees’ assertions of the overall risk to BUNA. Red=High; Yellow=Medium; Green=Low; Gray=Undefined 2: Reference to related analytics in ERM Dashboard. Blue text indicates either potential future additions or areas requiring more research.
12
D R A F T FOR DISCUSSION PURPOSES
Emerging Risks SweitserReport owner: McNally
Operational Issues Proprietary information lost; customer information lost / stolen / taken
Raise awareness; confirm SoC; send Ethics letters to departed employees; consider sending letters to competitors; evaluate obligations per PSA
Privacy; GSTS; PFS
Services Reputation
Processing functions weakened due to loss of resources; unable to service clients (internal and/or external); unable to meet regulatory obligations; loss of history / information; less global cooperation
Document procedures; identify key positions; cross-train staff; create succession plans; identify back-ups; draft retention plans; update files; complete records
HR; Privacy; GC; PFS; BAN
Services Operational Compliance
Audit Increased incidence of security breaches due to employee carelessness or lack of motivation; increase in cyber-crime due to higher profile, fewer resources available to detect and defend
Raise awareness of employees on threats / actions; escalate issues to senior management; monitor actively
Compliance; TB Reputation Services (?)
Unable to maintain systems due to loss of staff Reduce number of projects, monitor actively; determine and maintain minimum staffing requirements
PFS; Fin; TB; Services
Services
Ownership of applications, software, licenses, memberships; separating support processes, employees, clients, financials, etc.
Determine application users / owners and impact; assign all processes, employees, clients, financials, etc.
TB; Finance; GC; Risk; AM; PFS
Transition Team (?)
Customer Issues Increasing upgrades and covenant lite loans; accepting unsuitable clients or developing unsuitable products to meet short-term goals
Perform additional reviews; analyze data; monitor client acceptance processes; oversight by Product Committee
Risk; PFS Credit Operational
Loss of current and potential clients due to: loss of confidence, lured away by competitors, fewer referrals, shrinking pipeline
Make senior management available to meet and assure customers; provide materials to address reputational risks; active reassurance of customers; market products not brand; maximize existing client relationships
GM; GC; PFS; Com’l; BAN
Risk Appetite Com’l Banking
Indicators Eagle Pipeline DDA Activity
Loss of customers as they follow departing Relationship Managers, Portfolio Managers, etc.
Retain talent through stabilization plan. Promote: professional development, succession plan, cross-training, monitoring, communications from mgmt to staff; letters to departed employees on fiduciary responsibilities & possible legal actions
PFS; AM; Com’l TBD
Other Issues Department of Justice negotiation motivations Close monitoring of negotiations Legal Strategic
Reputation
13
Table of Contents
Program Update2
Introduction1
Appendix A: Emerging Risk Task Force3
Appendix B: ERM Dashboards (Weekly and Monthly)4
14
ERM – Flow of Management InformationL
evel
of
De
tail
Monthly ERM Dashboard
Weekly ERM Dashboard
Emerging Risk Issues
“Top 5”Risk Issues
Line of Business and Functional Reporting Packages
15
ERM Dashboard
The ERM Dashboard was created to represent a holistic view of all risks across the
enterprise and to increase transparency of risk for BU NA.
As seen on the previous slide, there were numerous line of business and functional
reporting packages. However, prior to the creation of the ERM Dashboard, BU NA did
not have a consolidated risk reporting package. This issue was also highlighted by the
Federal Reserve earlier this year. The ERM Dashboard fills this gap and meets with
regulatory requirements.
In constructing the ERM Dashboard, BU NA’s Enterprise Risk Reporting team utilized a
“hub and spoke” structure to leverage existing risk reports while centralizing enterprise-
wide risk issues into a consistent reporting template.
This risk reporting framework is expected to support the governing committees as it
balances decision making between business and risk.
BU NA’s Dashboard was also used as a template for creation of a Group Dashboard.
16
ERM Dashboard The ERM Dashboard has been in production since February 2007. The dashboard
was originally produced as a monthly report. However, due to more frequent risk
information requests (regulatory), our Enterprise Risk Reporting team has started to
produce a few key metrics on a weekly basis (e.g. Human Capital, Loan Pipeline and
Liquidity).
The content of the report is fact-based, identifying risks assessed by functions across
BU NA, such as:
Credit Risk, Operational Risk, Market Risk, Interest Rate Risk, Liquidity Risk,
Business Risk, Reputational Risk, Strategic Risk, Capital Management Group,
Compliance, Human Resources, Information Technology, Legal, Sarbanes-Oxley,
and Internal Audit.
On the top right of each page, an RMC member is listed to denote responsibility for
delivering fact-based risk data and to establish accountability, highlighting “de facto”
risk owners.
17
D R A F T FOR DISCUSSION PURPOSES
Risk Management North America
Weekly Enterprise Risk Management DashboardAugust 8, 2007
information is otherwise made publicly available by ABN AMRO
ABN AMRO ConfidentialThe information given in this presentation and given to you orally during the presentation is confidential and proprietary
information and may not be disclosed by you to any third parties without our prior written approval unless such
18
D R A F T FOR DISCUSSION PURPOSES
Dashboard Summary
• Commercial loans are down (1.1%) and DDA balances are down (15.4%) the last 45 days.
• Com’l balances down in all portfolios except Financial Institutions and NA Sectors in the last 45 days.
• Commercial loans are down (1.1%) and DDA balances are down (15.4%) the last 45 days.
• Com’l balances down in all portfolios except Financial Institutions and NA Sectors in the last 45 days.
Commercial Banking Indicators
Commercial Banking Indicators
PipelinePipeline
Human CapitalHuman Capital
• Voluntary resignations still comparable to one year ago at Jul-07 YTD (191 Jul-07 YTD vs. 194 Jul-06 YTD).
• 27 retention group employees (up 4 from last week) and 20 SVP+ (up 1 from last week) have resigned since June 15th.
• Voluntary resignations still comparable to one year ago at Jul-07 YTD (191 Jul-07 YTD vs. 194 Jul-06 YTD).
• 27 retention group employees (up 4 from last week) and 20 SVP+ (up 1 from last week) have resigned since June 15th.
Liquidity RiskLiquidity Risk• Policy level for LBC’s Liquid Assets/Volatile funding ratio was decreased LBC now within
limit. Other limit breaches waived by BU NA and Group ALCOs and are expected to be back into limit by September 30.
• Policy level for LBC’s Liquid Assets/Volatile funding ratio was decreased LBC now within limit. Other limit breaches waived by BU NA and Group ALCOs and are expected to be back into limit by September 30.
• New approvals totaled $325mln the week ending 8/4; the two lowest annual “new” weekly approval volumes have occurred in the last 45 days.
• New approvals totaled $325mln the week ending 8/4; the two lowest annual “new” weekly approval volumes have occurred in the last 45 days.
DDA VolumeDDA Volume• Volume of DDA accounts closed continues to exceed new accounts opened.• Services grouping looking to exclude escrow accounts which might be diluting the Com’l
activity.
• Volume of DDA accounts closed continues to exceed new accounts opened.• Services grouping looking to exclude escrow accounts which might be diluting the Com’l
activity.
• Rates rise Monday, as stocks rally and investors lower demand for government debt.• Rates rise Monday, as stocks rally and investors lower demand for government debt.Market Developments
Market Developments
19
D R A F T FOR DISCUSSION PURPOSES
Market DevelopmentsRates rise Monday, as stocks rally and investors lower demand for government debt
WeimerReport owner:Caldwell
Following a week of market fluctuation, treasury prices tumbled the most since July on Monday, as the strongest U.S. stock rally in four years reduced investor demand for lower-risk government debt. The benchmark 10-year U.S. treasury note ended the week at 4.686%, climbing back to 4.739% by the end of the trading day Monday. Yields rose further on speculation that regulatory restraints for Fannie Mae and Freddie Mac may ease. Treasuries had advanced for four straight weeks on concern that a continued fallout in the housing market may result in widespread weakness throughout the economy. Last week’s labor indicators strengthened treasury gains, as Nonfarm Payrolls increased 92,000 in the month of July, down from 126,000 in the month of June. Meanwhile, the Unemployment rate increased to 4.6% from 4.5% in the previous month.
10-Yr Swap v. 2-Yr Swap
Sell / CLN7 COMB Comdty (R) 69.10
Buy / SPU7 Index (L) 1560.10
Unsecured Credit Spreads Secured Credit Spreads
Volatility
Swap Rates
Oil & S&P Futures Commentary
20
D R A F T FOR DISCUSSION PURPOSES
Commercial Banking IndicatorsCommercial loans are down (1.1%) and DDA balances are down (15.4%) the last 45 days
• Commercial loan volume (excluding MFG & CMBS) is up $3.1bln compared to one year ago. Primary growth realized in NA Sectors ($1.1bln), CRE ($677mln) and RECM ($511mln).
• Commercial deposits are down $609mln from a year ago due; deposits down in all business lines with exception of NA Sectors (up $19mln) and RECM (up $2mln).
• Com’l balances down in all portfolios except Financial Institutions and NA Sectors in the last 45 days.
Source: Finance Mgmt. Reporting
HolmesReport owner: Connolly
Commercial Banking Loans 12-Month Trend
46,57646,308
44,879
44,720
42,50043,00043,50044,00044,50045,00045,50046,00046,50047,000
$ M
illio
ns
Commercial Banking Quartly Loan Bal. Linear (Commercial Banking)
Commercial Banking DDA 12-Month Trend
4,0564,114
4,5744,287
3,9654,034
4,4454,103
3,500
3,700
3,900
4,100
4,300
4,500
4,700
4,900
$ M
illio
ns
Commercial Banking Quartrly DDA Bal. Comm'l Adjusted* Qrtly Adjusted* Linear (Commercial Banking)
21
D R A F T FOR DISCUSSION PURPOSES
Eagle PipelineNew LCP activity has been below 12 month average over the last 45 days, loans outstanding are down 4.1% Jul-YTD
• New approval volume has averaged $819mln the last 12 months but averaged $584mln per week the last 45 days.
• New approvals totaled $325mln the week ending 8/4; the two lowest annual “new” weekly approval volumes have occurred in the last 45 days.
• Loans outstanding are down 4.1% to $99.97bln Jul-YTD; loans declined in July due to CMBS securitization.
• Approximately 44.7% of “new” exposure approved in March & April have funded.
BulgerReport owner: Daw
Last 45 Days: $584mln “new” approved on avg.
New & Renewal Volume Trend*
Commercial Unfunded Approvals Aging
*Committee & Signature Authority Approvals
New 12 month avg. = $819mln
*Committee & Signature Authority Approvals
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
08/19/06 12/30/06 03/31/07 08/04/07
Ap
pro
ved
Lim
it (
$mln
s)
New Approvals Avg New New & Renewals
March April May June July8/6/2007 44.5% 45.0% 34.6% 21.6% 8.5%
7/30/2007 44.5% 45.6% 34.3% 21.9%7/25/2007 41.9% 38.5% 34.3% 14.8%7/16/2007 40.3% 30.6% 31.8% 12.1%7/9/2007 40.2% 31.0% 32.3% 12.3%7/2/2007 41.0% 34.7% 32.2% 11.9%
Commerical "New" Approvals - Funding Levels
($4)
($2)
$0
$2
$4
$6
$8
Feb-06 May Aug Nov Feb May
Ch
ang
e ($
bln
s)
$0
$25
$50
$75
$100
$125
To
tal
Lo
ans
($b
lns)
Commercial Global Markets/Clients PFS Other Total
*Graph excludes 1Q07 NAT RES sale
$99.97bln, down 4.1% Jul-YTD
BU NA Loans Outstanding*
22
D R A F T FOR DISCUSSION PURPOSES
DDA Open & Closed Account ActivityReport includes all DDA accounts opened and closed in 2007
RosenthalReport owner: Flom/Gialamas
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
Jan Feb Mar Apr May Jun Jul
# o
f A
cco
un
ts
Closed New Net
Total - DDA New/Closed
• Net change in Retail can be attributable to several factors including:
Account openings tend to peak in the summer months – especially when a promotion is being offered
During the early months of ’07 several of our competitors may have had promotional offerings – we did not
In a rising rate environment, people tend to move money toward savings and CDs
• Services group looking to exclude escrow accounts which might be diluting the Commercial activity.
-2,000
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
Jan Feb Mar Apr May Jun Jul
# o
f A
cco
un
ts
Closed New Net
Commercial - DDA New/Closed
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
Jan Feb Mar Apr May Jun Jul
# o
f A
cco
un
ts
Closed New Net
Retail - DDA New/Closed
23
D R A F T FOR DISCUSSION PURPOSES
Human Capital
-
100
200
300
400
500
600
Jan-06 Mar May Jul Sep Nov Jan-07 Mar May July
Tu
rno
ver
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
To
tal B
UN
A H
ead
cou
nt
Voluntary Involuntary Staff Reduction Total Headcount
BU NA Turnover
Total BU NA headcount of 13,465 down from 18,444 at YE06
BU NA Turnover by Group (Aug-YTD) • Due to the current state, we can expect to see voluntary resignations increase within the next month.
• Some small but critical increases in voluntary resignations, e.g. retention group departures in Compliance, Finance and PFS (Wealth Mgmt), as well as resignations in revenue generating roles in Commercial, Global Markets and GSTS.
• Attrition is a lagging indicator - from the time an employee acts to leave (beings interviewing) through his/her departure from payroll can be from weeks to months.
*Total Headcount as of 1/30/07
VanDerWerffReport owner: Kaiser
Voluntary Turnover
-
50
100
150
200
250
300
350
Jan-06 Mar May Jul Sep Nov Jan-07 Mar May July
Hea
dco
un
t
-
50
100
150
200
250
300
350
Ave
rag
e
Nonexempt Exempt Officers Average
Voluntary InvoluntaryStaff
Reduction Total% of
Total*New Hires
Open Req.
Asset Mgmt. 6 8 8 22 24.4% 5 8 Audit 7 - - 7 7.2% 6 4 Com'l Banking 188 15 212 415 19.4% 78 2 Compliance 28 5 33 15.2% 15 - Global Clients 3 - 2 5 10.4% 4 - Global Markets 44 2 40 86 18.4% 22 2 GSTS 74 30 38 142 18.9% 279 159 HR 18 18 31 67 18.8% 10 - Legal 8 - 11 19 14.1% 8 - Office of the CEO 57 1 23 81 13.4% 21 2 PFS 689 319 386 1,394 24.1% 983 113 Risk Mgmt. 38 - 29 67 16.0% 10 1 Services 182 61 151 394 13.3% 126 40 Transaction Banking 17 - 26 43 15.0% 2 - Total 1,359 459 957 2,775 18.9% 1,569 331
24
D R A F T FOR DISCUSSION PURPOSES
Liquidity RiskMooreReport owner: Ide/Steffen
Limit breach at 6/30; waived by BU NA and Group ALCOs
Liquidity Ratios LBC Region NA BU NA Ex-LBCCurrent Current Projected Current Current Projected Current
Status Limit 30-Jun-07 31-Jul-07 Status Limit 30-Jun-07 31-Jul-07 30-Jun-07
1) Liquid Assets/ Volatile Funding P 63% Min 72.1% 72.9% P 50% Min 57.4% 56.9% 44.7%
2) (Liquid and Less Liquid Assets)/ Volatile Funding O 78% Min 75.6% 74.9% O 78% Min 73.7% 72.3% 72.0%
3) Stable Funding/ Non-Liquid Assets P 85% Min 90.9% 98.4% O 91% Min 85.4% 86.5% 73.7%
4) (Liquid and Less Liquid Assets)/ Irr. Commitments P 55% Min 72.0% 68.6% P 25% Min 43.1% 41.9% 31.7%
5) Total Borrowing Capacity/ Pot'l Funding Needs P 100% Min 124.3% 128.4% For informational
6) One Day Turnover/ Average Assets P 20% Max 9.0% 3.7% purposes only -
7) Upstream Reliance Ratio P 15% Max 3.9% 0.8% No Limit
Weekly Funding Position LBC Global Markets/Global Clients26-Jul-07 2-Aug-07 $ Change % Change 26-Jul-07 2-Aug-07 $ Change % Change
Retail Deposits 22,258 22,433 174 0.8% N/ A N/ A N/ A N/ A
GSTS (Trust) Deposits 1,189 923 (266) -22.3% N/ A N/ A N/ A N/ A
Other Deposits 12,478 12,189 (289) -2.3% (1,771) 1,600 3,371 -190.3%
Brokered Deposits 7,656 7,711 55 0.7% N/ A N/ A N/ A N/ A
Unsecured Purchased Funds 54,236 53,144 (1,092) -2.0% 82,052 80,560 (1,491) -1.8%Secured Purchased Funds 16,591 18,540 1,949 11.7% 67,379 70,634 3,255 4.8%
Total Funding Base 114,409 114,941 532 0.5% 147,660 152,795 5,135 3.5%
Comments Group ALCO has set new limits for global liquidity ratios at both LBC and Region NA levels.
Policy level for LBC's Liquid Assets/ Volatile Funding ratio was decreased; LBC is now within limit.
Policy level for Region NA's Liquid and Less Liquid Assets/ Volatile Funding ratio and Stable Funding/ Non-Liquid Assets were increased; Region NA is now out of limit. BU NA ALCO and Group ALCO have temporarily waived the limit breaches for both LBC and Region NA and expect BU NA to bring all ratios back into limit by September 30.
1) Liquid Assets/Volatile Funding (Region NA)
50%60%70%80%90%
100%
Jul-0
6Au
g-06
Sep-
06Oc
t-06
Nov-
06De
c-06
J an-
07Fe
b-07
Mar-07
Apr-07
May-
07J u
n-07
25
D R A F T FOR DISCUSSION PURPOSES
Risk Management North America
Enterprise Risk Management DashboardAugust 2007
information is otherwise made publicly available by ABN AMRO
ABN AMRO ConfidentialThe information given in this presentation and given to you orally during the presentation is confidential and proprietary
information and may not be disclosed by you to any third parties without our prior written approval unless such
26
D R A F T FOR DISCUSSION PURPOSES
Changes from Last Month
Business RiskBusiness Risk
• Volatile credit markets resulted in minimal July profits with Global Markets and Com’l Real Estate being the most affected.
• Direct sub-prime exposure is small, however our indirect exposure as a lender is significant (American Home exposure – now in bankruptcy).
• Need to address BUNAELS (BU NA ex-LaSalle) disentanglement issues (payroll, tax, etc.)
• Volatile credit markets resulted in minimal July profits with Global Markets and Com’l Real Estate being the most affected.
• Direct sub-prime exposure is small, however our indirect exposure as a lender is significant (American Home exposure – now in bankruptcy).
• Need to address BUNAELS (BU NA ex-LaSalle) disentanglement issues (payroll, tax, etc.)
Risk AppetiteRisk Appetite CMBS securitization resulted in a decline in loans outstanding in July. Cash flow funded exposure within $2.7bln limit at Jul-07 and Supervisory LTV within limit at 2Q07.CMBS securitization resulted in a decline in loans outstanding in July. Cash flow funded exposure within $2.7bln limit at Jul-07 and Supervisory LTV within limit at 2Q07.
Liquidity RiskLiquidity RiskPolicy level for LBC’s Liquid Assets/Volatile funding ratio was decreased, LBC now within limit. Other limit breaches waived by BU NA and Group ALCOs and are expected to be back into limit by September 30.
Policy level for LBC’s Liquid Assets/Volatile funding ratio was decreased, LBC now within limit. Other limit breaches waived by BU NA and Group ALCOs and are expected to be back into limit by September 30.
Human CapitalHuman CapitalNew measure for mid-year reviews indicated strong completion rates. New measure for critical positions with replacements indicates strong readiness in the event of losing critical position incumbents.
New measure for mid-year reviews indicated strong completion rates. New measure for critical positions with replacements indicates strong readiness in the event of losing critical position incumbents.
LOWLOW
LOWLOW
LOWLOW
Emerging RisksEmerging RisksGroup Audit and Risk are identifying and monitoring emerging risks related to the current merger activities. Significant observations as a result of interviewing Management from across BU NA business units have been identified.
Group Audit and Risk are identifying and monitoring emerging risks related to the current merger activities. Significant observations as a result of interviewing Management from across BU NA business units have been identified.
MEDMED
HIGHHIGH
LegalLegal Complex Products – monitoring impact of industry change on market value swapsComplex Products – monitoring impact of industry change on market value swaps MEDMED
Market RiskMarket Risk Global STCG (Strategic Credit Trading Group) experienced substantial losses at which 80% was allocated to Global Markets NA.Global STCG (Strategic Credit Trading Group) experienced substantial losses at which 80% was allocated to Global Markets NA.
MEDMED
Investment RiskInvestment RiskMarket conditions have not been favorable as higher levels of volatility hurt mortgage-backed securities positions and some dealers are selling MBS to raise cash to shore up other positions.
Market conditions have not been favorable as higher levels of volatility hurt mortgage-backed securities positions and some dealers are selling MBS to raise cash to shore up other positions.
MEDMED
27
D R A F T FOR DISCUSSION PURPOSES
Changes from Last Month
IT SOX issues greater than 18 months improved to 3 issues from 26 issues last month.IT SOX issues greater than 18 months improved to 3 issues from 26 issues last month.Finance/SOXFinance/SOX
Audit Audit Transaction Banking risk level increased from low to moderate as there have been two less than satisfactory audit reports in the last three months.Transaction Banking risk level increased from low to moderate as there have been two less than satisfactory audit reports in the last three months.
MEDMED
ReputationReputationVirus/Electronic Theft – Increasing expertise of hackers and use of web-based viruses to enable account access and theft puts entire industry at risk. Reputation risk increases if customers determine online banking insufficiently secure.
Virus/Electronic Theft – Increasing expertise of hackers and use of web-based viruses to enable account access and theft puts entire industry at risk. Reputation risk increases if customers determine online banking insufficiently secure.
MEDMED
LOWLOW
28
D R A F T FOR DISCUSSION PURPOSES
ERM DashboardKey Risk Indicators Common Emerging Risk Themes
BU NA* Key Performance Indicators
Bulger/KillipsReport owner: Daw
NOTE: 2007 Target adjusted for reclassification of Mortgage gain to Disc. Ops.
Full year Forecast adjusted for impact of WorldCom settlement, unanticipated GM severance and bonus payouts for 2006, and retention
Revenue growth excludes 2006 Talman Settlement
Full Year Forecast 2007 and Target exclude TEA
Forecast 2007 includes Jun-YTD Actuals and Jul-Dec Forecast
*excludes Global Clients
Overall BU NAJun-07
YTDForecast
2007 StatusReturn on ARC 25.1% 20.7% √Efficiency Ratio 64.6% 65.4% √Total Rev Growth (YOY) 7.9% 2.3% √
• Personnel Most commonly cited concern was accelerated loss of key personnel and the inability to replace them. Implications noted were inability to meet service and financial performance goals.
• Operations Common theme is that quality of controls will decline due to loss of qualified staff and/or existing staff distracted by merger news. Capacity and flexibility to handle change, recover from problems, and maintain security will be diminished.
• CustomersConcerns were loss of customers and difficulty in attracting new clients (or expanding existing relationships) due to going concern issues. Customer losses increasing due to departure of relationship managers and poaching by competitors.
Com'l PFS GSTS Total
Business – – – – – – – – – – –
Credit – – N/A N/A √ N/A N/A N/A N/A N/A –
Operational √ √ √ – √ √ √ √ √ – –
Market N/A N/A N/A – √ N/A N/A N/A N/A N/A √
Interest N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A √
Liquidity N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A √
Investment N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A –
Strategic ! ! ! ! ! ! ! ! ! ! !
Compliance – – √ – – √ √ – – ! –
BU NA - RWA ! √ √ √ √ √ √ √ √ √ !
Human Cap. – – √ – TBD √ √ √ TBD √ √
Services √ √ √ √ √ √ √ √ √ √ √
Legal – – – – – – – – – – –
Finance/SOX N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Audit ! ! – ! TBD ! √ – TBD ! TBD
Global Clients
Transaction
Banking
Private Clients Services
Qu
alit
ativ
e R
isk
ALMAsset Mgmt.
Qu
an
itat
ive
Ris
k
GlobalMarkets
29
D R A F T FOR DISCUSSION PURPOSES
Strategic Business ReviewMooreReport owner: Gehring
Metrics are in place to monitor any potential increased risk in the organization due to SBR initiatives. To date, there has not been a significant decline in any of the key metrics.
$14,2136/0701/07Gross Value of Losses, Month to Date (Threshold of $5,000)GSTS
100%6/0796.9%6/06Essbase Availability (meeting SLA)Finance
831,4346/29/07863,45312/31/06Number of Retail Checking AccountsMarketing
167/18/07 YTD157/10/07 YTDRetention List ResignationsHuman Resources/ Training
16/0701/07Number of Operational Risk Management Events (Month to Date, Threshold Indicator of $5,000)
GSTS
94%6/0790%1/07% of Service Requests Closed w/in48 hours (Treasury Mgmt)Transaction Banking
3%6/073%1/07% of Abandoned Calls (Treasury Mgmt)Transaction Banking
5.5%7/9/079.7%11/16/06Past Due Annual Renewals (UCR 4- and Worse)Commercial/ Specialty Banking
7.1%7/9/076.4%11/16/06Past Due Annual Renewals (UCR 0 -4)Commercial/ Specialty Banking
5766/071,2126/06Commercial Bnkg. Critical Document ExceptionsCommercial/ Specialty Banking
$36.8 mln6/30/07 YTD$30.2 mln6/30/06 YTDCommercial Net Charge Offs ($ mln)Commercial/ Specialty Banking
$104 mlnQ2 2007($1,547) mlnQ2 2006Net Upgrades/Downgrades, excluding CRE ($ mln), [+ is good] Commercial/ Specialty Banking
$38,4416/07$88,2211/07Gross Value of Losses, Month to Date (Threshold of $5,000)Services
46/0761/07Number of Operational Risk Management Events (Month to Date, Threshold Indicator of $5,000)
Services
6/07
6/07
3/07
6/07
6/07
Date of Metric
6/06
6/06
5/06
6/06
6/06
Date of Metric
Personal Financial Services
Personal Financial Services
Personal Financial Services
Personal Financial Services
Personal Financial Services
Business Unit
5341Sales Per Banker Per Month
7%7%Call Center – Abandoned Calls
75% of calls62% of callsCall Center - % of calls answered in 20 seconds or less
$187k$1,543kIndicator of Teller Errors ($ Amount of Shortage/ Overage/ Overall Fraud)
1,9141,590Teller Transactions Per Week
Post-SBR MetricPre-SBR MetricMetric
$14,2136/0701/07Gross Value of Losses, Month to Date (Threshold of $5,000)GSTS
100%6/0796.9%6/06Essbase Availability (meeting SLA)Finance
831,4346/29/07863,45312/31/06Number of Retail Checking AccountsMarketing
167/18/07 YTD157/10/07 YTDRetention List ResignationsHuman Resources/ Training
16/0701/07Number of Operational Risk Management Events (Month to Date, Threshold Indicator of $5,000)
GSTS
94%6/0790%1/07% of Service Requests Closed w/in48 hours (Treasury Mgmt)Transaction Banking
3%6/073%1/07% of Abandoned Calls (Treasury Mgmt)Transaction Banking
5.5%7/9/079.7%11/16/06Past Due Annual Renewals (UCR 4- and Worse)Commercial/ Specialty Banking
7.1%7/9/076.4%11/16/06Past Due Annual Renewals (UCR 0 -4)Commercial/ Specialty Banking
5766/071,2126/06Commercial Bnkg. Critical Document ExceptionsCommercial/ Specialty Banking
$36.8 mln6/30/07 YTD$30.2 mln6/30/06 YTDCommercial Net Charge Offs ($ mln)Commercial/ Specialty Banking
$104 mlnQ2 2007($1,547) mlnQ2 2006Net Upgrades/Downgrades, excluding CRE ($ mln), [+ is good] Commercial/ Specialty Banking
$38,4416/07$88,2211/07Gross Value of Losses, Month to Date (Threshold of $5,000)Services
46/0761/07Number of Operational Risk Management Events (Month to Date, Threshold Indicator of $5,000)
Services
6/07
6/07
3/07
6/07
6/07
Date of Metric
6/06
6/06
5/06
6/06
6/06
Date of Metric
Personal Financial Services
Personal Financial Services
Personal Financial Services
Personal Financial Services
Personal Financial Services
Business Unit
5341Sales Per Banker Per Month
7%7%Call Center – Abandoned Calls
75% of calls62% of callsCall Center - % of calls answered in 20 seconds or less
$187k$1,543kIndicator of Teller Errors ($ Amount of Shortage/ Overage/ Overall Fraud)
1,9141,590Teller Transactions Per Week
Post-SBR MetricPre-SBR MetricMetric
30
D R A F T FOR DISCUSSION PURPOSES
Emerging Risks SweitserReport owner: McNally
Group Audit and Risk are identifying and monitoring emerging risks related to the current merger activities. As a result of interviewing Management from various BU NA business
units, the following significant observations were identified:
• Lack of clarity around AANA organization could cause process and control weaknesses in AANA post legal day 1.
• Concerns noted that some business-as-usual activities that continue to occur may lack relevance (e.g., budget adjustments for 2007, RSAs, special projects that may or may not be sustainable post-split) and take focus away from the transition.
• Key resources may be over-stretched for transition activities. Talented resources are being pulled into transition activities, leaving a lack of focus over business-as-usual activities. Uncertainty continues to impact morale.
• Significant tax implications exist from the unwinding of entities staying and going.
• Uncertainty regarding Bank of America’s views on relationship banking. Concerns were noted regarding the ability of the Bank to service clients as they do today and the retention of relationship management teams.
31
D R A F T FOR DISCUSSION PURPOSES
Business RiskCom'l PFS GSTS
Global
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Business Risk – – – – – – – – – – –
MooreReport owner:Tannenbaum
General Assessment: AMBER
Our central expectation is for continued expansion.— Economic growth rebounded solidly in the second quarter. Exports were a highlight; foreign economies are performing very well.— Housing is enduring a "double-dip," with sales still in decline. Sellers in many regions are facing more price concessions.— Credit markets have struggled during the past two weeks, with spreads widening and issues delayed. Liquidity in some sectors is almost completely absent. A flight to quality has brought long-term rates down sharply.— Most analysts view this as a temporary repricing of risk that will normalize. If the paralysis persists, however, it would represent a significant problem for the economy.— The strong job market should limit contagion to consumers. The Fed is not likely to react to recent market events in the near-term.
Possible Risk ScenariosExcessive supply creates steep (>10% nationwide) downward pressure on home prices. Reduced home equity causes consumer retrenchment.
Investors struggle to overcome recent aversion to risk. Credit spreads widen further; new issues stack up; market liquidity becomes tight.
— Weak spending initiates production cutbacks— Important equity market correction— Rising unemployment— Mild to moderate recession; potential financial dislocations
— Significant losses in a range of investment sectors— Potential contagion to financial institutions— Firms pull back from investments and hiring— Negative impact on consumer spending
Housing Correction Becomes Crash
Extended Credit Crunch
Energy Supply Shock Geopolitical events (terrorist attack on production, stress between Russia and the West) conspire to raise the price of crude to over $100 per barrel
— Inflation rises dramatically; consumers retrench— Federal Reserve takes a hard line to restrain the price level— Potential failure of agents trading in the energy markets— Transportation sector hit very hard
GDP Trends & Forecast
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07
Yield (%)
Forecast
Forecast
Employment Trends
-300
-200
-100
0
100
200
300
400
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-070
1
2
3
4
5
6
7
New Payroll Jobs (left) Unemployment Rate (right)
PercentThousands
Employment Trends
-300
-200
-100
0
100
200
300
400
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-070
1
2
3
4
5
6
7
New Payroll Jobs (left) Unemployment Rate (right)
PercentThousands
Employment Trends
-300
-200
-100
0
100
200
300
400
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-070
1
2
3
4
5
6
7
New Payroll Jobs (left) Unemployment Rate (right)
PercentThousands
Inflation Trends
0.0
1.0
2.0
3.0
4.0
5.0
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
CPI
CPI CORE
Y/Y Percent Change Forecast
32
D R A F T FOR DISCUSSION PURPOSES
Business Risk MooreReport owner:Tannenbaum Com'l PFS GSTS
Global
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Business Risk – – – – – – – – – – –
Focus Areas
Regional Trends
Housing Market
6.0
6.5
7.0
7.5
8.0
8.5
9.0
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07150
175
200
225
250
Sales (left) Prices (right)Million units 000s $
Credit Default Swap Costs125 Company Composite, Investment Grade
0
10
20
30
40
50
60
70
80
90
100
5/1 5/15 5/29 6/12 6/26 7/10 7/24
Bas
is P
oin
ts
Manufacturing Activity
-4
-2
0
2
4
6
8
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
40
45
50
55
60
65
70
Industrial production, YOY - left Chicago PMI - right%
Unemployment by State
3.0
4.0
5.0
6.0
7.0
8.0
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
Per
cen
t R
ate
National Michigan Illinois Ohio
Home Prices YOY
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
Cleveland Detroit Chicago National
Regular GasolinePrice per Gallon
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
33
D R A F T FOR DISCUSSION PURPOSES
U.S. Default Surveillance Tool Kit*In July, the US distress ratio increased to 0.9% from its all-time low of 0.8% in June. One year ago the distress ratio was 3.2%. Distress across sectors appears consistent in recent months. In the US, healthcare and retail/restaurant
sectors displayed the highest propensity for distress.
Recommendation: Monitoring changes in economic, financial, and credit variables that go into the default surveillance tool kit offers a valuable insight into the default outlook. A rising distress ratio signals an increased need for capital and could act as a precursor to more defaults if accompanied by a credit crunch.
BulgerReport owner: Daw
Unemployment rate, slope of yield curve, corporate profits, and Standard and Poor’s outlook distribution are inputs into the Standard and Poor’s U.S. speculative-grade default rate forecast model. Risks to the default rate reflect a one-year time horizon for all variables aside from the distress ratio, which reflects a nine-month time horizon. Source: Standard and Poor’s Global Fixed Income Research.
decline in
default rate
small change in
default rate
increase in
default rate
*Published monthly
Unemployment Rate
Fed Survey on Lending Conditions
Industrial Production
Slope of the Yield Curve
Corporate Profits
Equity Market Volatility (VIX)
High Yield Spreads
Interest Burden
Distress Ratio
S&P Outlook Distribution
Ratio of Downgrades to total Rating Actions
Proportion of SG issuance rated B- or lower
Change
Credit Environment
July 2007June 2007
Economic Indicators
Financial Indicators
Economic Indicators
Financial Indicators
Credit Environment
34
D R A F T FOR DISCUSSION PURPOSES
Stress Cases
Stress Testing is a fundamental component of enterprise risk management. A Bank is expected to conduct periodic stress tests to evaluate the potential effects on it’s financial condition of a specific event and/or movement in a set of (financial) variables.
Below are the results of a modified “2001 recession” scenario stress test (modified to be more board base than the 2001 recession).
Credit’s expected loss increases $370 million, partially offset by $128 million of interest rate and market risk gains.
Recommendation: Further conform modeling methodologies and techniques, create documentation per P-GRC formal stress testing policies, include conclusions/mitigation based on results, establish a formal oversight function and governance structure.
BulgerReport owner: Widuch
Enterprise wide stress testing is in the developmental stage across the industry. The results below are an enterprise wide stress test for BU NA under 2007 EC methodology. Currently working on a worst case
scenario based on merger.
Economic capital under stress grows to $8.5bln, in excess of Tier I capital as well as BU NA’s PfC economic capital figure of $6.3bln. The $2.1bln excess is significant, but is overstated in that it can be assumed management would intervene via risk/capital reduction activities (CLOs, hedges, swaps, etc.) and/or shrink the balance sheet to manage this figure.
Next Stress Test: Oct-07
($mlns)
Risk TypeBase Line
Stress Test
Net Increase
Percent Increase
Net Increase
Percent Increase
Non-Retail Credit Risk 3,118 4,838 1,720 55% 345 12%Retail Credit Risk 452 595 143 32% 25 45%All Other Modeled Risk 1,341 1,341 n/a n/a (128) n/aModeled Risk - Sub Total 4,911 6,774 1,863 38% 242 n/aCapital for Un-modeled Risk 1,228 1,694 466 38%Total Assigned Capital 6,139 8,468 2,329 38%
Economic CapitalExpected Loss /
P&L Impact
35
D R A F T FOR DISCUSSION PURPOSES
Risk Appetite
Recommendation: Continue to monitor Cash Flow portfolio and Supervisory LTV on a monthly basis. Cash Flow funded exposure within $2.7bln limit at Jul-07 and Supervisory within limit at 2Q07. Risk monitoring Eagle Pipeline statistics on a weekly basis.
BulgerReport owner: Daw
BU NA Trading Risk VaR Exposure Top 10 (Jul-07)
Changes in the loan portfolio have been more volatile in 2007; CMBS securitization resulted in July decline
($4)
($2)
$0
$2
$4
$6
$8
Feb-06 May Aug Nov Feb May
Ch
ang
e ($
bln
s)
($125)
($100)
($75)
($50)
($25)
$0
$25
$50
$75
$100
$125
To
tal
Lo
ans
($b
lns)
Commercial Global Markets/Clients PFS Other Total
BU NA Loans Outstanding – Trend & Change*BU NA Loans down 4.1% form YE06
Source: Essbase (LOB Mgmt cube) *Graph excludes NAT RES Sale
24%
9%7% 7%
0%
5%
10%
15%
20%
25%
30%
Real Estate Public Sector General Retailers IndustrialEngineering
% o
f E
C
Industry Clusters exceeding 6% of BU NA EC (May-07)
Credit Risk, 3,379 ,
73.8%
Interest Rate Risk,
84 , 1.8%
Operational Risk,
705 , 15.4%
Business Risk,
360 , 7.9%
Market Risk, 53 ,
1.2%
EC by Risk Type ($000) – 2Q07
Current Exposure Limit % of usage 10 Day VaR**
Distressed Security Trading 5,238,242 10,000,000 52% 16,564,777
TRAM - Inflation CD Hedge Portfolio 4,603,166 8,160,000 56% 14,556,488
LOCAL MARKETS TRADING 4,429,874 6,800,000 65% 14,008,492
Treasury Risk and Asset Management Trading 2,458,993 7,500,000 33% 7,776,020
MM-Chicago-BANKING 2,280,369 6,800,000 34% 7,211,160
TRAM - Callable CD Hedge Portfolio 1,656,068 5,440,000 30% 5,236,947
LOCAL MARKETS FX TRADING 931,680 2,500,000 37% 2,946,232
Options & Exotics Trading 588,455 4,080,000 14% 1,860,857
ABS Trading 515,220 1,360,000 38% 1,629,270
Swap Trading desk 417,030 6,800,000 6% 1,318,764* Please note that VaR is not a worst case scenario, it a statistical risk measure, which the bank has chosen to set at a 99% confidence interval. It is based on the last 400 business days and might therefore be understating the risk if the volatility in the financial market substantially increases vs. this observed period.** The 10 day VaR is shown for information and comparison purposes only and does not represent an official calculation.
Value at Risk (in USD)*
36
D R A F T FOR DISCUSSION PURPOSES
Credit RiskCom'l PFS GSTS
Global
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Credit Risk – – N/A – √ N/A N/A N/A N/A N/A –
“Investors alternately focus on concerns like sub-prime loans and rising energy prices and positives like low unemployment, low interest rates and still-growing corporate profits resulting in a turbulent stock market.” NY Times
BulgerReport owner: Daw
*Source: Goldman Sachs CDS Market Recap**KMV = change in EDF (Expected Default Factor)
*source: markit.com
0.51%0.47% 0.46% 0.47%
0.36% 0.36%
0.20% 0.20%0.24% 0.25% 0.23%
0.20%
0.21%0.24%
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07
EL
/EA
D
Commercial (LBC) Commercial (BUNA) Retail
EL/EAD Trend
-$8,000
-$6,000
-$4,000
-$2,000
$0
$2,000
$4,000
$6,000
$8,000
1Q06 3Q Commercial
1Q07 1Q06 3Q CRE
1Q07 1Q07 X-WCSCom'l
Co
mm
itm
ents
($m
lns)
Upgrades (1-2) Upgrades (>2) Downgrades (1-2)Downgrades (>2) Net
Recommendation: Continue to monitor upgrades and downgrades closely, on a monthly basis. Upgrades have outpaced downgrades in the Commercial portfolio in 2007 as last year credit quality was satisfactory. The improved performance has been picked up by MRA and has resulted in better risk ratings. Majority of upgrades in 1 to 2 notch category which is inline with stable economic conditions.
Jun May
5year CDS 1m chg EDF EDF
Consumer Products 48.7 18.0 0.33 0.36Cyclicals 132.2 62.5 n/a n/aFinancials 117.4 62.5 0.43 0.38Healthcare 38.0 18.5 0.39 0.32Industrials 90.0 36.0 0.18 0.18Insurance 63.9 35.5 0.06 0.06Metals & Mining 37.5 1.0 0.31 0.31Oil and Gas 41.7 17.8 0.49 0.46REITs 70.0 47.0 0.05 0.05Retail 89.2 40.7 0.16 0.15
Jul 31CDS Mkt Recap* KMV**
0.0%
1.0%
2.0%
3.0%
4.0%
Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
First Mortgages Second Mortgages Consumer Loans SME
Retail 90DPD Trend
Non-Retail Upgrade – Downgrade Trend by Quarter
First mtg. trend = post sale
37
D R A F T FOR DISCUSSION PURPOSES
Credit Risk
0%
10%
20%
30%
40%
50%
60%
70%
YE02 YE03 YE04 YE05 YE06 1Q07* 2Q07*
Special Mention Total Classified
Trend in Criticizes Assets to Capital
0
10
20
30
40
50
60
70
80
90
YE01 YE02 YE03 YE04 YE05 1Q06 2Q06 3Q06 YE06 1Q07
%
Total Crit/Capital
Peer Crit
BulgerReport owner: Daw
BU NA Criticized Exposure/Adj Capital
*2007 includes Large Corporate. Non-Accrual outstandings used for nonaccrual exposure for Large Corporate.
LBC Criticized Exposure/Adj Capital
*Peer source OCC, peers are OCC Large Bank Program
LBC and peer criticized/adj capital ratios both increasing slightly while the classified ratio is converging
Com'l PFS GSTSGlobal
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Credit Risk – – N/A – √ N/A N/A N/A N/A N/A –
0%
10%
20%
30%
40%
50%
60%
70%
YE02 YE03 YE04 YE05 YE06 1Q07* 2Q07*
Special Mention Total Classified
*2007 includes Large Corporate.
BU NA Criticized Outstanding/Adj Capital
Trend in Classified Assets to Capital
0
5
10
15
20
25
30
35
40
45
50
YE01 YE02 YE03 YE04 YE05 1Q06 2Q06 3Q06 YE06 1Q07
%
Clfd/Capital
Peer Clfd
LBC Classified Exposure/ Adj. Capital
38
D R A F T FOR DISCUSSION PURPOSES
Operational RiskCom'l PFS GSTS
Global
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Operational √ √ √ – √ √ √ √ √ – –
BulgerReport owner: Wajda
4
7
6
2
3
5
1
2007 “Expected”
Region Ranking
176,531,6427Damage to Physical Assets
9,620,8776Employment Practices & Workplace Safety
18,261,4635Internal Fraud
13,259,2614External Fraud
1,250,763,9373Clients, Products & Business Practices
17,802,3392Business Disruption & System Failures
49,526,5641Execution, Delivery & Process Management
BUNA ORAP & RSA Residual Risk
Ranking
2007 “Tail” Region
Loss Amount
Risk Event Type
4
7
6
2
3
5
1
2007 “Expected”
Region Ranking
176,531,6427Damage to Physical Assets
9,620,8776Employment Practices & Workplace Safety
18,261,4635Internal Fraud
13,259,2614External Fraud
1,250,763,9373Clients, Products & Business Practices
17,802,3392Business Disruption & System Failures
49,526,5641Execution, Delivery & Process Management
BUNA ORAP & RSA Residual Risk
Ranking
2007 “Tail” Region
Loss Amount
Risk Event Type
Anticipated In
25
50
75
90
95
99 99.9
99.9
5100,000
1,000,000
10,000,000
100,000,000
1,000,000,000
10,000,000,000
Percentile
Operational Risk Profile for 2007
(Simulated using Internal and External Data)
Anticipated Increase in “Expected” Operational Risk Loss
In reaction to the pending acquisition and SBR, we do anticipate some increase in “expected” losses, but do not anticipate increased “tail” losses.
While Execution, Delivery and Process Management has the greatest frequency of operational loss, the businesses need to also focus on Client, Product and Business Practice events as these losses potentially have the greatest financial impact.
Business as usual risk assessments and simulated loss expectations indicate potential operational losses to be most frequent for Execution, Delivery and Process Management events. Top 3 event types from risk assessment tools make up 96% of total high and medium residual risks identified (Execution, Delivery and Process Management events (52%); Business Disruption and System Failures (31%); and Clients, Products and Business Practices (13%)).
39
D R A F T FOR DISCUSSION PURPOSES
Market RiskCom'l PFS GSTS
Global
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Market N/A N/A N/A – √ N/A N/A N/A N/A N/A √
BulgerReport owner: Bakker
Recommendation: MRM NA is taking steps together with its colleagues across the globe to enhance the transparency of globally run trading books.
North American Total Trading VaR exposure (7/1 to 7/31)
-15
-10
-5
0
5
10
7/2 7/5 7/10 7/13 7/18 7/23 7/26 7/31
Va
R / P
&L
(E
UR
m
io
)
DailyVaR
HypoP&L
ActualP&L
Stress Scenarios for the regional NA Trading Books per 31-Jul Market Risk Comments
The average Market Risk VaR increased slightly with 0.2 mio over the last month, mostly due some more positions taking in the middle of the month. The average VaR for the period under review was EUR 6.5mm.
The Market Risk indicator for Global Markets has been changed to amber, since the Global SCTG desk (Strategic Credit Trading Group) experienced substantial losses of which 80% was allocated to Global Markets NA. The market risks of this Global SCTG desk are monitored and controlled centrally in London and are not included in the above numbers and graph.
Stress Scenario TotalBLACK MONDAY (58,796,235) BOND CRISIS (1,308,824) EMERGING MARKET CRISIS (3,412,989) EMS CRISIS (2,020,456) FINICIAL MARKET CRISIS 1998 (42,986,441) SEP11 (9,001,019)
40
D R A F T FOR DISCUSSION PURPOSES
Interest Rate Risk
In compliance with all limits.
Recommendation: Continue to monitor
Source: BU NA ALM
MooreReport owner: Tannenbaum
Com'l PFS GSTSGlobal
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Interest N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A √
Proforma as of 7/31/07 Position Status Limit CommentsEarnings Risk Risk positions are proforma as of 7/ 31/ 07.Rates Rise 6 mth -1.6% P -12% "Neutral" duration is defined as 3.7 years; deviations
1 yr 0.0% P -12% between official month-end duration and neutral level typically 2 yr 1.1% P -12% attract economic capital.
Rates Fall 6 mth -0.6% P -12% BU NA duration of 3.4 years includes 0.3 years from Global Markets1 yr -0.5% P -12% and 3.1 years from LBC.2 yr -0.9% P -12% BU NA duration of 3.4 years at 7/ 31/ 07 vs 3.6 years at 6/ 30/ 07
YC Flattening 6 mth -0.3% P -12% reflects:1 yr 0.2% P -12% basis point decrease in long-term interest rates in J uly2 yr 0.6% P -12% which caused duration to shorten by 0.5 years.
Market Value Risk Steering transactions to adjust overall duration.Rates Rise -2.1% P -5% The majority of the Duration decrease occurred at the 5 yrRates Fall 1.3% P -5% "partial" bucket.YC Flattening -0.2% P -5%Optionality Risk -0.4% P -3%PV01 (in millions) -3.8 P -7.9
Market Value % Change
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
-100 -50 0 50 100
Parallel Rate Shock (bps)
(2.0)
(1.0)
-
1.0
2.0
3.0
4.0
5.0
Partial Durations
Partial Durations 0.3 0.0 0.4 0.2 2.7 (1.6) 0.7 0.7 0.0 3.4
PV01 0.4 0.0 0.5 0.2 2.9 (1.7) 0.7 0.7 0.0 3.8
3 Mo 1 Yr 2 Yr 3 Yr 5 Yr 10 Yr 20 Yr 30 Yr Oth Tot
41
D R A F T FOR DISCUSSION PURPOSES
Liquidity Risk MooreReport owner: Tannenbaum
Recommendation: Continue to monitor.
Limit breach at 6/30; waived by BU NA and Group ALCOs
Com'l PFS GSTSGlobal
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Liquidity N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A √
Liquidity Ratios LBC Region NA BU NA Ex-LBCCurrent Current Projected Current Current Projected Current
Status Limit 30-Jun-07 31-Jul-07 Status Limit 30-Jun-07 31-Jul-07 30-Jun-07
1) Liquid Assets/ Volatile Funding P 63% Min 72.1% 72.9% P 50% Min 57.4% 56.9% 44.7%
2) (Liquid and Less Liquid Assets)/ Volatile Funding O 78% Min 75.6% 74.9% O 78% Min 73.7% 72.3% 72.0%
3) Stable Funding/ Non-Liquid Assets P 85% Min 90.9% 98.4% O 91% Min 85.4% 86.5% 73.7%
4) (Liquid and Less Liquid Assets)/ Irr. Commitments P 55% Min 72.0% 68.6% P 25% Min 43.1% 41.9% 31.7%
5) Total Borrowing Capacity/ Pot'l Funding Needs P 100% Min 124.3% 128.4% For informational
6) One Day Turnover/ Average Assets P 20% Max 9.0% 3.7% purposes only -
7) Upstream Reliance Ratio P 15% Max 3.9% 0.8% No Limit
Weekly Funding Position LBC Global Markets/Global Clients26-Jul-07 2-Aug-07 $ Change % Change 26-Jul-07 2-Aug-07 $ Change % Change
Retail Deposits 22,258 22,433 174 0.8% N/ A N/ A N/ A N/ A
GSTS (Trust) Deposits 1,189 923 (266) -22.3% N/ A N/ A N/ A N/ A
Other Deposits 12,478 12,189 (289) -2.3% (1,771) 1,600 3,371 -190.3%
Brokered Deposits 7,656 7,711 55 0.7% N/ A N/ A N/ A N/ A
Unsecured Purchased Funds 54,236 53,144 (1,092) -2.0% 82,052 80,560 (1,491) -1.8%Secured Purchased Funds 16,591 18,540 1,949 11.7% 67,379 70,634 3,255 4.8%
Total Funding Base 114,409 114,941 532 0.5% 147,660 152,795 5,135 3.5%
Comments Group ALCO has set new limits for global liquidity ratios at both LBC and Region NA levels.
Policy level for LBC's Liquid Assets/ Volatile Funding ratio was decreased; LBC is now within limit.
Policy level for Region NA's Liquid and Less Liquid Assets/ Volatile Funding ratio and Stable Funding/ Non-Liquid Assets were increased; Region NA is now out of limit. BU NA ALCO and Group ALCO have temporarily waived the limit breaches for both LBC and Region NA and expect BU NA to bring all ratios back into limit by September 30.
1) Liquid Assets/Volatile Funding (Region NA)
50%60%70%80%90%
100%
Jul-0
6Au
g-06
Sep-
06Oc
t-06
Nov-
06De
c-06
J an-
07Fe
b-07
Mar-07
Apr-07
May-
07J u
n-07
42
D R A F T FOR DISCUSSION PURPOSES
Investment Portfolio RiskCom'l PFS GSTS
Global
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Investment N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A –
MooreReport owner: Tannenbaum
Recommendation: Continue to monitor, currently compliant with all limits.
Market conditions have not been favorable as higher levels of volatility hurt mortgage-backed securities positions (because we are short options) and some dealers are selling MBS to raise cash to shore up other positions.
* AMP less Funding results also include the Actively Managed Portion of the AABS portfolio starting in April
Portfolio is fully invested (constrained by Risk Weighted Assets) AMP (Actively Managed Portfolio) performance has been negatively impacted by year-to-date
performance of mortgage securities. View is that mortgage assets will return to long-term performance expectations.
Position Status Limit
0.15 P 0.54/ -0.46 J un-YTD Jun-07 Jun-YTD Jun-07 Jun-YTD
-0.017 P -0.030 AMP 16,724 -617.50% 146.50% (65,225) -0.160%6.55 P 8.00 Other Agency 4,423 112.20% 420.90% (97,083)
-37.74 P -40.00 MuniTOPS 7,591 1437.70% 5501.00% 25,342
15,296 P 17,000 Municipals 0 20.00% 10.40% 5,643Other/ Collateral 1,428 -45.20% 414.70% 266Total IP 30,166 907.20% 6493.50% (131,057)
74% P 200% Max BOLI 1,706 212.30% 1209.20% 0
Actual AAA ($) AA ($) AA- ($) A ($) BBB ($) No Rating ($)
1,404.6 1,404.6
14,440.9 14,440.9
3,275.1 3,274.9 0.2
429.0 429.0
4,481.1 4,481.1
337.1 306.3 12.0 18.8
1,629.4 1,629.4
6,012.6 5,893.1 108.6 10.1 0.8
791.3 0.0 791.3
1.1 (0.0) 1.1
551.0 551.0
33,353.3 32,410.3 120.8 18.8 10.1 - 793.3
RoARCPortfolio Risk Summary as of 06/30/07
24,813 P 35,000
Policy Hedged PortfolioAMP Effective Duration (%)
AMP CV01 ($ millions)
AMP Mtge Spread Duration ($ millions)
US Treasury and Agency
Agency MBS
Avg Settled Bal. (Millions)
Total Mtge Concentraion (MBS +
Mtge Loans) ($ Millions)
12 Mo. Turnover (AFS Sales/ Avg Bal) (%)
Total MBS Concentration ($ millions)
AMP Volatility Duration ($ millions)
PLMBS
CMBS
SBA
Student Loan Security
Unrealized Gain/Loss
AMP less Funding
Trading
Total
Investment Portfolio Credit Rating Composition: Jun 2007(In Millions)
Municipals - Escrowed
Municipals - Non-Escrowed
FRB & FHLB Stock
Foreign Bonds
43
D R A F T FOR DISCUSSION PURPOSES
Capital Management MooreReport owner: Lentino
Recommendation: BU NA should maintain a contingency plan of short-dated relief actions that can be quickly executed should clearinghouse capacity be unavailable in a given quarter.
- Actual, budget and forecast figures for RWA reflect BU NA on a standalone basis (i.e. excluding GM and GC)
- Actual, budget and forecast figures are pro-forma to reflect the sale of AAMG
• BU NA is pursing a strategy of using the CMG global capital clearinghouse capacity wherever possible to stay within its capital budget limits. Forecasting of RWA numbers continues to improve.
BU NA RWA Trend RoARC by Line of Business
-Return on ARC figure for North America includes returns from Global Clients and Global
Markets segments in addition to BU NA.
Com'l PFS GSTSGlobal
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
BU NA - RWA ! √ √ √ √ √ √ √ √ √ !
20% 18%
184%
11%
119%
47%
27%
€ 0
€ 20
€ 40
€ 60
Com
mer
cial
Ban
king P
FS
ALM
GS
TS
Glo
bal
Clie
nts
Glo
bal
Mar
kets
RW
A in
Eur
o B
lns
0%
50%
100%
150%
200%
RoA
RC
by
LOB
RWA by LOB Return on ARC Total Return on ARC
€ 60,000
€ 65,000
€ 70,000
€ 75,000
€ 80,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
(Eur
o m
lns)
BU NA RWA Budget BU NA RWA Forecast BU NA RWA Actual
44
D R A F T FOR DISCUSSION PURPOSES
Compliance RiskCom'l PFS GSTS
Global
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Compliance – – √ – – √ √ – – ! –
Risk ratings presented below are based on net residual risks from the Compliance Risk Assessment Methodology (CORe). The above “Compliance Risk” row reports the highest risk rating carried upward from grid.
Recommendation: Action plans have been developed to mitigate the high risks noted in the Compliance Risk Assessments. Compliance will be monitoring, tracking and reporting on the action plans.
BiernReport owner: Moffitt
CORe MethodologyAn evaluation of Inherent Risk (High, Medium, or Low) and the Quality of Risk Management (Satisfactory or Needs Improvement) was made by the Business Unit Compliance Officers. Residual Risk (noted above) is the risk that remains after consideration of the Quality of Risk Management on mitigating Inherent Risk. Residual Risk may be High, Medium or Low. The risk assessment of all Compliance obligations relating to products/services within a particular business unit were concurred with by business unit management. Risk ratings in the grid above represents the professional judgments of the respective Business Unit Compliance Officers.
High Risk CategoryIT has a High risk in Dealing with Customers with regards to Client Confidentiality -Gramm Leach Bliley Act (GLBA) - Protection and Privacy of Customer Information. The GLBA risks are related to information security, current use of production data in a testing environment and consistent controls over change management.
Updates: Although no other Regulatory Categories are rated High, a High risk rating exists within the following sub-category and Business Unit: AML Risk Assessment/Enhanced Due Diligence/Client Acceptance (Global Markets).
Additionally, the following High risk ratings within these sub-categories and Business Units have been upgraded since the last ERM report and will be reflected in the 2007 iCORe update:• Disclosure Obligations for Retail PFS will be upgraded to Medium. • Regulatory Reporting non-AML for Community Reinvestment Act will be upgraded to Medium. • AML Client Identification and Verification for LaSalle Bank Corp. will be upgraded to Low.
Regulatory Categories Com'l PFS GSTSGlobal
MarketsALM
Asset Mgmt.
Global Clients
Trans. Banking
Private Clients
Services
Medium Medium Low Low Medium Low Low Low N/A High
N/A Low N/A Medium Medium N/A Low N/A Low Low
Medium Medium Low Medium Medium Low Low Medium Medium Medium
Medium Medium Low Medium Medium Low N/A Low Medium Medium
Dealing with Customers
Market Conduct
Anti-Money Laundering
Internal Compliance Systems
45
D R A F T FOR DISCUSSION PURPOSES
Human Capital Risk
New measure for mid-year reviews indicates strong completion rates. New measure for Critical Positions with Replacements indicates strong readiness in the event of losing critical position incumbents. For Resignations, amber is coded for increase over July >.5% or red for increase over July >1%. BU NA Human Investment Ratio has continued to decline from Q1, indicating less return on total compensation spend (target is 2.46, was achieved in March). Overall, resignation rates are running in line with last year and less than established industry benchmarks, indicating a stable organization.
VanDerWerffReport owner: S. Kaiser
ABN AMRO Confidential
This information is confidential and proprietary information and may not be disclosed by you to any third parties without prior written approval unless such information is otherwise made publicly available by ABN AMRO
Recommendation: July is a critical month for attention to staff. Leaders are encouraged to reach out to ensure staff concerns are answered before staff resign. Ensure replacement planning is utilized actively managed by the business.
AcceptableWatch: Outside ThresholdWarning: Significantly Outside Threshold
¹ Includes Ex-pats² Data Source: PeopleSoft, July 31, 2007 (Year-to-Date)³ Data Source: Essbase, July 31, 2007 (Year-to-Date)
n/a = Not Available
*Percentage of PFS does not include 3,000 people from the Branch Network, who will complete review cycle at later date.**Global Clients are not included in overall count due to different review cycle.
% staff with approved SMARTS
(as of 7.31)
% staff with mid-year review
(as of 8.6)
Critical positions with Replacements
Retention List
(as of 8.6)
Top performers (Officers + Rated 4-5)
SVPs +Officers -
FVPsExempt/
Prof'lNon-
ExemptHeadcount as of 7.31
Headcountas of 1.30
SBR Staff Reduction
(as of 7.31)
Revenue/FTE
Op Exp/FTE
Human Investment
Ratio
Commercial 98% 96% 95% 10 out of 357 2.7% 1.1% 4.1% 2.0% 0.6% 1763 2144 202 320 170 3.61
Retail PFS 99% 99%* 97% 6 out of 420 0.6% 0.1% 1.0% 1.2% 8.9% 5990 5773 385 68 55 1.69
GSTS 95% 100% 90% 0 out of 80 1.9% 0.0% 2.8% 4.8% 1.5% 888 752 38 127 72 2.39
Global Mkts 98% 74% n/a 0 out of 2 2.1% 0.6% 4.9% 0.9% 0.0% 427 467 40 620 483 1.77
Asset Mgmt 96% 97% 88% 0 out of 1 0.0% 1.1% 2.2% 0.0% 0.0% 68 90 8 182 135 1.58
Global Clients 94% n/a** 100% 0 out of 1 0.0% 0.0% 0.0% 2.1% 0.0% 47 48 2 885 931 0.70
TB 100% 98% 97% 0 out of 42 0.3% 0.0% 1.7% 2.4% 0.7% 304 287 25
Finance 98% 89% 100% 3 out of 94 2.6% 0.5% 4.3% 1.5% 0.7% 471 604 23 96 68 1.8
HR¹ 99% 98% 92% 0 out of 42 1.7% 0.3% 2.0% 2.5% 0.3% 281 357 29
Legal 100% 97% 100% 0 out of 24 3.0% 0.0% 2.2% 0.0% 0.0% 112 135 11
Risk Mgmt 100% 99% 87% 2 out of 39 2.9% 0.5% 3.1% 2.6% 0.5% 286 418 29
Audit 100% 100% 100% 0 out of 16 0.0% 1.0% 4.1% 0.0% 0.0% 95 97 0
Compliance 100% 100% 100% 2 out of 29 0.0% 0.0% 6.0% 1.8% 0.5% 180 217 0
Services 99% 99% 90% 4 out of 353 0.8% 0.0% 0.9% 1.2% 2.7% 2583 2961 150
Svcs Ops n/a n/a n/a 3 out of 263 0.4% 0.0% 0.4% 0.9% 3.6% 1866 2059 9
Svcs Other n/a n/a n/a 1 out of 90 1.6% 0.0% 1.9% 1.9% 0.7% 717 953 141
OVERALL 98% 96% 95% 27 out of 1500 1.2% 0.3% 2.0% 1.6% 4.4% 13495 14350 942
OVERALL BU NA
Managing Performance and Talent²
Human Capital Returns³Resignations (Regretted Turnover)² Managing Headcount²
Com'l PFS GSTSGlobal
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Human Cap. – – √ – TBD √ √ √ TBD √ √
46
D R A F T FOR DISCUSSION PURPOSES
Human Capital Risk
Qualitative Commentary by HR Business Partners regarding critical staff resignations, including staff from Retention Group (June 12 through August 6, 2007).
VanDerWerffReport owner: S. Kaiser
ABN AMRO Confidential
This information is confidential and proprietary information and may not be disclosed by you to any third parties without prior written approval unless such information is otherwise made publicly available by ABN AMRO
LOB Critical Staff SituationActions to
Mitigate Risk
•Wealth Mgmt •One Senior Private Banker•One SVP, Team Leader
•Both went to Wells Fargo to work with a previous manager due to uncertainty of the transaction
• Both were on Retention List. Accounts have been reassigned internally, with follow-up calls being made to clients.
Critical Staff lost prior to August 6
•Commercial •One SVP
•One Lead Loan Officer
• SVP recruited by RBS in non-compliance with Non-Poaching Agreement
•Lead Loan Officer hired by JP Morgan Chase, with uncertainty that position would continue under BAC
•Work has been reassigned internally.
•Work has been reassigned internally.
•3 Leadership losses•One Managing Director
•GSTS •None within last month •3 Analysts•3 CDO Employees•One Senior Trust Analyst
•Risk Mgmt •One Relationship Manager • Left to take another position outside the Bank
• Work has been distributed to other members of the team.
•Trading Risk Mgmt Group•One loss in Hedge Funds NY
•Four Portfolio managers •One Business Development Officer
•Compliance •None within last month •One Vice President
•Finance •One Analyst • Relocating out of state • Work has been reassigned internally and he has been added to the Retention Group.
•None
•Commercial•Commercial
•Commercial
Previously Reported
Com'l PFS GSTSGlobal
Markets ALMAsset Mgmt.
Global Clients
Transaction Bank.
Private Clients Services Total
Human Cap. – – √ – TBD √ √ √ TBD √ √
47
D R A F T FOR DISCUSSION PURPOSES
Services RosenthalReport owner: Flom
Com'l PFS GSTSGlobal
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Services √ √ √ √ √ √ √ √ √ √ √
Trend Health Comments
Human Resources - T/O and Open Positions
NJ Securities Operations Watch MediumOperations are stabilizing. One individual who recently resigned has rejoined the Bank. Reinforcing retention in other ops. areas.
Services Risk Issues
Application Access Revalidation Status Negative High
IBM's performance is down sharply due to scheduled increases in contracted service levels that occurred in May 2007. The downward trend in service by IBM continued in June but is not accelerating. IBM's performance will be closely monitored to ensure that this is corrected.
Policy Compliance - IT Audit Issues Negative High YTD: 120 new, 124 closed, 71 currently open (20 are SOXA issues).
IBM Vendor Contract Performance Watch Medium
IBM performance is down sharply due to scheduled increases in contracted service levels that occurred in May 2007. The vendor performance will be closely monitored to ensure that this is corrected.
IT Service Disruption (time to restore service) Watch Medium
CashPro was negatively impacted by four incidents that cumulatively caused 8 hours of downtime. This downtime caused the CashPro service to miss its minimum service level. All incidents were network related. There is an ongoing CashPro Improvement Plan that will address these issues. In addition, ACH Web missed the minimum service level due to a related network incident. Online Banking was negatively impacted by one incident that caused 4 hours of downtime. This downtime caused the OLB service to miss its minimum service level.
Significant IT Incidents Stable LowThe year-to-date number of significant incidents continues to trend 40% less than experienced in 2007 than in 2006.
IT Vendors (IBM, Infosys, SyBase, Oracle, etc.) Negative High
Financial risk heightened as a result of commercial disagreements. Items under discussion are: (1) role and functions definitions, (2) deployment of licenses. We have resolved the Sybase dispute. Close to resolving IBM (W2W). FPPA dispute with INF still continues. Oracle and MSFT still being negotiated.
Transition Services Provided to AAMG (NatRes) Stable LowTransition services are stable; both stranded costs and Citi revenue forecast expected to be slightly favorable to budget.
Offshoring to ACES Stable Low Attrition issues under control.
Transaction Banking - Cash Pro BCP/DR Negative HighUnavailability of Internet Point of Presence (IPOP) for CashPro in the event of a Service Center failure.
Services Company - BCP/DR Negative High
1. Unavailability of Internet Point of Presence (IPOP) for the CashPro system in the event of a Service Center failure.2. Recovery of OMR in the event of a 540 Plaza outage is currently not in place.
48
D R A F T FOR DISCUSSION PURPOSES
Legal Risk
Recommendation:
RounsavilleReport owner: Taylor
Com'l PFS GSTSGlobal
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Legal – – – – – – – – – – –
Operation = risk of error/omission creating possible legal liabilityRegulatory = risk of investigation/fines/penaltiesLitigation = risk of suit by regulatory or third party
Monitor industry best practicesGM/GC, Retail, Mortg, Trans. Banking
Operation, Regulatory, Litigation
Complex Products – monitoring impact of industry change on market value swaps
Support proposals for reasonable legislation. Monitor industry best practices
GM/GC, Retail, Transaction Banking, PFS, GSTS
Operation, Regulatory, Litigation
Assessing impact of regulatory changes on procedures (ie, FACT Act, Credit Agreement Act, Reg R)
External counsel engaged to conduct audit of Fair Labor Standards practices
AllLitigationIncreased Fair Labor Standards Act claims
Enforce current policies concerning collection of ABN issued electronic devices at time of departure
AllReputation, LitigationConfidentiality/privacy concerns (ie, computers/files left by departing staff)
Enforce current policies/ Monitor industry best practices
GM/GC. Retail Regulatory. LitigationInsider dealing/Market Abuse
Actively defend patent troll litigation/ monitor and support proposals for legislative change
AllLitigationIncreased Patent Infringement litigation/issuance of Business Method Patents
Enforce current policies/ Monitor industry best practices.
GM/GC, Retail, TrustOperation, LitigationConflicts of interest/breach of fiduciary duty
Outside counsel engaged to develop improved policies/procedures
AllOperational, LitigationImproving record management policies and procedures to comply with new federal rules
Counsel engaged to advise. New CAAML policies implemented
BANRegulatory, LitigationInvestigations re: AML/KYC issues
Merit based decisions, adverse impact reviews, implementation of uniform severance package
AllOperational litigationRetention/Attrition
Decision made to terminate relationships that are not in compliance with US regulations.
Retail, Asset Management, Private Client, BAN
Regulatory, Reputation, Litigation
Foreign affiliates dealings with US Persons in potential violation of US laws
Mitigation/Potential MitigationAffected Business Lines
Type of RiskIssueRisk Level
Monitor industry best practicesGM/GC, Retail, Mortg, Trans. Banking
Operation, Regulatory, Litigation
Complex Products – monitoring impact of industry change on market value swaps
Support proposals for reasonable legislation. Monitor industry best practices
GM/GC, Retail, Transaction Banking, PFS, GSTS
Operation, Regulatory, Litigation
Assessing impact of regulatory changes on procedures (ie, FACT Act, Credit Agreement Act, Reg R)
External counsel engaged to conduct audit of Fair Labor Standards practices
AllLitigationIncreased Fair Labor Standards Act claims
Enforce current policies concerning collection of ABN issued electronic devices at time of departure
AllReputation, LitigationConfidentiality/privacy concerns (ie, computers/files left by departing staff)
Enforce current policies/ Monitor industry best practices
GM/GC. Retail Regulatory. LitigationInsider dealing/Market Abuse
Actively defend patent troll litigation/ monitor and support proposals for legislative change
AllLitigationIncreased Patent Infringement litigation/issuance of Business Method Patents
Enforce current policies/ Monitor industry best practices.
GM/GC, Retail, TrustOperation, LitigationConflicts of interest/breach of fiduciary duty
Outside counsel engaged to develop improved policies/procedures
AllOperational, LitigationImproving record management policies and procedures to comply with new federal rules
Counsel engaged to advise. New CAAML policies implemented
BANRegulatory, LitigationInvestigations re: AML/KYC issues
Merit based decisions, adverse impact reviews, implementation of uniform severance package
AllOperational litigationRetention/Attrition
Decision made to terminate relationships that are not in compliance with US regulations.
Retail, Asset Management, Private Client, BAN
Regulatory, Reputation, Litigation
Foreign affiliates dealings with US Persons in potential violation of US laws
Mitigation/Potential MitigationAffected Business Lines
Type of RiskIssueRisk Level
49
D R A F T FOR DISCUSSION PURPOSES
Reputation RiskIssue Management working group (IMWG) is the BU NA tool for monitoring issues that could have a significant impact
on firm’s reputation.
RounsavilleReport owner: S. Gordy
Functions represented in working group include Legal, Privacy, Civic and Sustainable Development, Business Continuity, Human Resources, Marketing, Office of the President, Operational Risk, and Compliance. Additionally, others are queried regularly.
Public Image· Sale/Merger – The sale of LaSalle to Bank of America presents a host of reputation risks. Customers and clients, employees, and
community groups and leaders all have concerns. Recent story regarding Bank of America ATM fee increase may raise questions.
Public Image
· Litigation Publicity -- Legal dispute resulted in an effort to amend the Illinois Credit Agreements Act. The debate at the state capitol
referenced LaSalle litigation.
· String of incidences – ABN Amro reserve for Justice Department settlement, Federal Reserve AML fine, flood insurance fine,
employee fraud - may be connected by media for reputation damaging new s story. Lifting of Cease and Desist could ameliorate.
Information Privacy
· Data Breach – Transition period and resulting employee attrition create potential loss or exposure of customer data. Privacy office
w orking w ith transition team to mitigate.· Donation/Disposal of Computer Hardware – Transition period may create additional risks related to disposal of used computers,
cellular phones, and PDAs. Privacy office and others w orking to mitigate.
· Viruses/Electronic Theft – Increasing expertise of hackers and use of w eb-based viruses to enable account access and theft puts
entire industry at risk. Reputation risk results if customers determine online banking insufficiently secure.
Consumer Lending
· Mortgage Lending - Subprime market challenges and increased foreclosures industry-w ide have prompted heightened scrutiny by
government and press.
· Student Loans - Investigations by multiple state attorneys general and new spapers have revealed suspect business practices and
questionable relationships betw een some lenders and university financial aid offices. Multiple settlements and headlines in recent w eeks.
50
D R A F T FOR DISCUSSION PURPOSES
Finance/SOX
Recommendation: The SOX office tracks these issues weekly and informs management of any significant issues, and the SOX office should continue to do so.
Com'l PFS GSTSGlobal
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Finance/SOX N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
The SOX heat map is a summary of individual internal control deficiencies, with regards to financial reporting, that aggregate to potential material issues that should be reviewed by management.
MooreReport owner: Ingwersen
Po
ten
tial
Imp
act
on
Fin
anci
al S
tate
men
tsA
s a
perc
enta
ge o
f AB
N A
MR
O
Gro
up E
arni
ngs
Bef
ore
Tax
Low(up to 1%)
€20 mil
Inadequate controls around application and database security (moved to lower severity due to control gaps being remediated/mitigated with all of the individual gaps being deemed low)
Inadequate monitoring controls around the application of hedge accounting (moved to lower severity due to materiality of accounts deemed to be low after thorough review performed)
Inadequate intercompany account reconciliations controls
Inadequate segregation of duties – identified 4 issues across business and IT (moved to lower severity due to control gaps being remediated/mitigated with 100% of the individual gaps being deemed low)
High( > 5% )
Medium(1% to 5%)
Difficulty Of Remediation
Low Medium High
Managing Board
BU
BU BU
MB Aware
Local Country Local Country
BU
BU BU
Local Country
BU AWARE
Difficulty Of Remediation
Low Medium High
Managing Board
BU
BU BU
MB Aware
Local Country Local Country
BU
BU BU
Local Country
BU AWARE
Key Risks:
IT: There exists 3 IT issues that remain open and have been an ongoing issue for eighteen months:
2 – Access
1 - Other
Attrition of Resources: Process Group Owners, Key Control Resources, and Audit Staff (i.e. no validation that controls are operating effectively)
Maintaining focus in current environment
Insufficient resources for gap remediation
Alignment and/or interdependency issues
Opportunities:
Achieved control reduction of over 50%
Result: less ownership, validation and testing burden
Control sets are streamlined by business process
51
D R A F T FOR DISCUSSION PURPOSES
Audit SweitserReport owner: Hyman
Average Age
Total Open Issues
Total Past Due Issues
0
50
100
150
200
250
300
350
400
450
Jul-06 Aug-06
Sep-06 Oct-06 Nov-06
Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07
Jun-07 Jul-07
Issue TrendsPervasive issues:• Lack of systematic business
management review of access control over applications and adequacy of segregation of functions in automated processes;
• Deficiencies in systems security over IT systems and infrastructure;
• Need of improved control over access to privacy sensitive information
• Need for improved control over sourcing, procurement and payment processes – including control over building and construction projects;
• Need to improve control over end user IT development and maintenance.
Outlook:• Remediation of control deficiencies before
Payments Systems Risk Self Assessment;• Full clarity on rescoping and consequences
of Basel 2 project;• Full clarity on rescoping and consequences
of SOXA project;• Remediate existing SOXA gaps and improve
senior management involvement in walkthrough and sign off - specifically for non-LBC;
• Implementation of new Standards of Conduct and Expense Control policies;
• Adequate management attention for timely and adequate closing of open audit and regulatory issues;
• Understanding end-to-end consequences of SBR impact on processes (focus on changed controls, if any).
Com'lRetail PFS
GSTSGlobal
MarketsCapital Markets
Asset Mgmt.
Global Clients
Trans. Banking
Services Operations
Services IT
Group Functions
Adjusted Assessment of Control Effectiveness ! ! - ! - - - ! ! !
Monthly Control Effectiveness Rating -28 -22 -4 -16 -4 0 18 -14 -28 -36 -32
Average Age of Issues (days) 251 168 180 147 401 148 0 161 239 248 194Total Repeat Issues 4 1 2 1 0 0 0 0 1 6 2Total Reopened Issues 1 1 0 1 0 0 0 0 2 24 3Total Issues with Extensions 14 7 3 1 3 1 0 4 18 11 41Total Past Due Issues 8 3 1 6 2 5 0 6 24 51 34Total Open Issues (H/E/R/M) 22 15 2 9 6 7 0 9 41 85 108Average Issue Rating (Open H/E/R/M) 2.6 2.4 2.5 2.0 2.3 2.3 0.0 2.4 2.3 2.5 2.5Average Issue Ratings-Last 3 Months (H/E/R/M) 2.6 2.0 0.0 2.0 2.3 2.2 0.0 2.3 2.2 2.5 2.3Less Than Satisfactory Audit Reports - Last 3 Months 0 1 0 2 0 0 0 2 3 4 8
Annual Assessment of Control Effectiveness 50 50 50 21 50 38 50 75 43 33 48
Annual Inherent Risk Measured to Regional Significance 83 57 50 100 100 88 100 100 93 67 83
Con
trol
Effe
ctiv
enes
s M
odifi
ers
Assessment of Control
Effectiveness
Legend:
Improving No Change Weakening
! Weak- Average Strong
Com'l PFS GSTSGlobal
Markets ALMAsset
Mgmt.
Global
Clients
Transaction
Bank.
Private
Clients Services Total
Audit ! ! – ! TBD ! √ – TBD ! TBD