Securitization A useful tool for the Bank of the 21st Century

1. SecuritizationA useful tool for the Bank of the 21st Century Presentation to the Association of Serbian Banks Belgrade, December 6, 2007

2. Agenda • Why Securitization? • What are the challenges? • The US Sub prime Crisis • What is the future?

3. Why Securitization? „In our country, banks are not interested in securitization because they have enough liquidity and equity.“Senior Manager of a large CEE bank But why do the world‘s largest banks apply the securitization? They also have enough liquidity and equity. Because securitization can significantly improve the profitability of any bank and provides another source of liquidity!

4. 1. Why Securitization

5. The Fundamental Business Motivation Funding Risk Transfer/Equity Relief

6. The Basic Options • True Sale • Sale of loan portfolio • Funding plus risk transfer • Legally more complex to implement • Synthetic • Only „guarantee“ • Risk transfer but no funding • Less local structuring required • Multi-seller transactions easier to implement • Sovereign rating ceiling of less relevance

7. Typical True Sale Structure ONSHORE OFFSHORE Public / PrivateInvestor markets Senior Notes BankOriginator Purchase Price Special Purpose Vehicle ( SPV) Loan Instalments Mezzanine Notes Non-recourse sale of portfolio Loan Portfolio Junior NoteInvestor(e.g. Originator) Junior Notes

8. Typical Synthetic Structure ONSHORE OFFSHORE Public / PrivateInvestor markets Bank-to-backSuper Senior Hedge BankOriginator Guarantee/CDS SpecialPurpose Vehicle( SPV)orhighly ratedInstitution(e.g. KfW) Loan Instalments Bank-to-backSenior/Mezz Hedge Poss. Inter-mediated by SPV Loan Portfolio Bank-to-backJunior Hedge Junior Investor(e.g. Originator)

9. Our Fundamental Business Motivation • Risk Transfer / Equity Relief • Freed-up equity can be re-invested and generates additional income. This is profitable if you have • Growing portfolios • Profitable portfolios • You improve the ROE to your shareholders. • Funding • In certain cases, securitization provides cheaper funding (currently rather the exception). • Becomes more relevant if maturity mismatches (and resulting Pillar 2 capital charges) are considered • In the long run, access to dis-intermediated funding sources will become crucial.

10. Securitization improves the ROE

11. 2. What are the challenges ?

12. There are generally challenges: • Legal & Regulatory issues • Transferability of loan portfolios • Tax/Stamp duty • Registration of collateral • Acceptance by the regulator – EU Directives create certain standards • Accounting • On-balance sheet vs off-balance sheet • Internal target setting mechanisms • Go for ROE rather than absolute profit and asset targets • Early mover challenges • Interest from investment banks • Pricing • Basel 2 considerations • Focus on portfolios with higher PDs or volatile capital consumption

13. Specific Issues in Serbia • Securitization can be supported by • Aligning individual legal clauses in the concerned laws • Drafting a specific securitization law which covers all relevant points • A specific securitization law is generally appreciated by rating agencies • However, it needs to be to the point in order to really facilitate securitization • Issues to be considered for the Serbian Securitization Act is : • The act should provide a flexible framework • Reflecting the Basel II Accord • Certain structural issues (foreign vs. domestic SPVs; treatment of synthetic securitizations) are already covered by other provisions • Scope of assets that may be securitized should be determined by market participants • The framework should allow for cost-efficient structures • The management supervisory model is very similar to the patterns used in regulated industries • Securitization structures used in the international markets should be allowed • Ensuring bankruptcy remoteness in a cost-efficient way is the key element of any such law

14. 3. Implications of theUS Sub-prime Crisis

15. Market Developments • Overweighed investments into subprime market • Major funding through credit wholesale markets • Weak credit policy causes deteriorating credit quality Triggers • Increasing customer defaults (Teaser rates) • Liquidity shortfall even applying to prime names • Lack oftrust and confidence (Counterparty risk) Conclusions • Manage Exposure according to highest standards • Diversify Funding structure • Spread Curve will widen US Mortgage Subprime CrisisCEE-markets are fundamentally different – However, we have to learn the lesson! iTraxx Crossover 5yr GM und Ford downgraded to 'junk bonds' Subprime downturn 24.Sep: 297 bps  H1/2007 205 bps Source: International Index Company, Bloomberg Spread over USD-Libor (2007, in bps) US Subprime Mortgage Crisis Source: Federal Reserve, BBA

16. 4. What is the future?

17. What can we expect for the future • Western European investors regard CEE as the natural choice for diversifying their portfolio risks • The CEE & CIS securitization markets will grow comparably stronger than the matured markets • Banks will diversify their funding and capital tool box • Securitization is a useful tool but should not be exaggerated • Securitization plays a growing importance in providing market feedback on portfolio risks • Shareholders expect banks to use capital most efficiently and to be transparent in risk management

18. Thank you!