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Deloitte perspectives Basel III: Transforming the bank capital landscape March 2011

Deloitte perspectives

Basel III: Transforming the bank capital landscape

March 2011

Deloitte perspectives Basel III: Transforming the bank capital landscape March 2011

Table of contents

What is Basel III

2

Basel III overview

9

Financial services industry impacts

23

Implementation considerations

32

Client focus — Preparing for change

40

Why Deloitte? A leader in bank capital

45

Americas contacts

51

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

What is Basel III ?

• Evolution of Basel III guidance

• Scope of Basel III

• Timeframe for Basel III implementation

Evolution of Basel III guidance

• “Basel III” refers to guidance issued by Basel Committee for Banking Supervision (BCBS) as a comprehensive response to the global credit crisis. Basel II and Basel III, together, replace most elements of Basel I.

• Basel III formalizes the April 2008 recommendations of the Financial Stability Forum (FSF) and the G20's November 2008 action plan.

• Also includes revisions to the market risk rules.

– European Union (EU) Capital Requirements Directive (CRD) implemented the 2005 market risk rules, but the revisions were not incorporated in the U.S. rules.

– EU will only have to implement additional changes to the market risk rules.

Relative to Basel II, international rules for Basel III have been finalized over a relatively short period.

Evolution of Basel III guidance (cont.)

• Basel III development

Jul’09 Dec’09

Apr’10

Jul’10

Sep’10

Nov’10 Dec’10

QIS
QIS
Dec’09 Apr’10 Jul’10 Sep’10 Nov’10 Dec’10 QIS – Revisions to Basel framework – Capital and liquidity

Revisions to Basel framework

Capital and liquidity consultative papers issued

QIS Results

Quantitative impact study (QIS) conducted in early 2010

– Revised Basel III guidance issued

Basel committee agreement announced in Sep.

Ratification at the G20 meeting in Seoul in Nov.

Final BCBS rules released mid-December 2010

– Implementation timeframe occurs between

2012–2018

• Individual countries can now start the rule-making process

– Several areas in the rules for local regulators/national discretion

– Likelihood of divergences from Basel Committee’s final guidance

With international guidance largely finalized, rule making in individual jurisdictions is expected to be influenced by local regulatory and political landscape.

Evolution of Basel III guidance (cont.) Basel III final guidance consolidates several BCBS items

The core of the Basel III framework is revised capital standards, stronger capital definitions, and systemic risk overlays along with a new international framework for liquidity risk.

Enhancements to the Basel III framework

Revisions to Basel III market risk framework

Guidelines for incremental risk charge (IRC) calculation

Principles for sound liquidity risk management

calculation Principles for sound liquidity risk management International LRM framework Strengthening the resilience of
calculation Principles for sound liquidity risk management International LRM framework Strengthening the resilience of
calculation Principles for sound liquidity risk management International LRM framework Strengthening the resilience of
calculation Principles for sound liquidity risk management International LRM framework Strengthening the resilience of

International

LRM framework

sound liquidity risk management International LRM framework Strengthening the resilience of the banking sector

Strengthening the resilience of the banking sector

framework Strengthening the resilience of the banking sector Regulators’ consensus July 26, Capital calibration 2010

Regulators’

consensus July 26,

Capital calibration

2010 September 12, 2010

July 26, Capital calibration 2010 September 12, 2010 Requirements for liquidity risk, a subject of debate
July 26, Capital calibration 2010 September 12, 2010 Requirements for liquidity risk, a subject of debate

Requirements for liquidity risk, a subject of debate over the years, makes it appearance in Basel III, with possibly far-reaching implications.

Scope of Basel III

Basel III is incremental to Basel II; together, Basel III and Basel II replace Basel I.

• Basel II implementation continues in the U.S with several core* banks in parallel reporting.

• The scope of Basel III is comprehensive and far reaching

Capital
Capital
Leverage ratio
Leverage ratio

Capital — Quality and transparency

Credit & market risk
Credit & market
risk
Liquidity risk
Liquidity risk

• Revised capital definitions to improve quality of capital, additional Buffers, and enhanced minimum capital standards.

Leverage ratio

• An international leverage ratio has been defined.

* Large U.S. Bank holding companies that meet the U.S. regulatory criteria for the Basel II implementation

Basel III is not a replacement for Basel II

Scope of Basel III (cont.)

• The scope of Basel III is comprehensive and far reaching (cont.)

– Credit and market risk revisions

• Changes to counterparty credit risk rules, re-securitization exposures, use of external ratings, etc.

• Extensive revisions to market risk rules — incremental risk charge (IRC), stressed value at risk (VaR), and trading book securitizations.

– Liquidity risk

• A new framework for liquidity risk measurement, standards, and monitoring.

• Several provisions of the Dodd-Frank legislation may shape U.S. regulatory standards for common Basel III elements.

– Systemic risk (systemicly important financial institution or SIFI) designations

– Orderly liquidation authority (living wills)

– Volcker rule on proprietary trading

– Collins amendment on bank capital

– Credit retention requirements on securitizations

– Credit rating agencies regulation

– Derivatives clearing

In the U.S., the Dodd-Frank legislation will impact implementation of Basel III.

Time frame for Basel III implementation

All dates as of Jan 1

2011

2012

2013

2014

2015

2016

2017

2018

2019

Regulatory adjustments to common equity

     

20%

40%

60%

80%

100%

100%

Capital instruments that no longer qualify

     

Phased out over 10 yrs, beginning 2013

 

Capital conservation buffer

         

0.625%

1.25%

1.875%

2.50%

Minimum common equity capital ratio 1

   

3.5%

4.0%

4.5%

4.5%

4.5%

4.5%

4.5% (7.0%)

(3.5%)

(4.0%)

(4.5%)

(5.125%)

(5.75%)

(6.375%)

Minimum Tier 1 capital 1

   

4.5%

5.5%

6.0%

6.0%

6.0%

6.0%

6.0% (8.5%)

(4.5%)

(5.5%)

(6.0%)

(6.625%)

(7.25%)

(7.875%)

Minimum total capital 1

   

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0% (10.5%)

(8.0%)

(8.0%)

(8.0%)

(8.625%)

(9.125%)

(9.875%)

   

3%

 

3%

       

Leverage ratio

Supervisory monitoring

(Parallel

run)

3%

(Disclosure

starts)

3%

3% (re-

calibration)

Migration to

Pillar 1

 

Observation

               

Liquidity coverage ratio

period

Start

   

Observation

             

Net stable funding ratio

period

Start

Market risk-weighted assets (RWA) changes

 

Start

             

Credit RWA changes

 

Start

             

1 Amount in bracket includes conservation buffer

 

Initial implementation date for target minimum capital and leverage ratioMany banks have already announced strategic actions to mitigate adverse capital impacts from Basel III,

Many banks have already announced strategic actions to mitigate adverse capital impacts from Basel III, and intent to meet targets in advance of deadlines.

Final level of capital ratios including conservation buffer 

 

Basel III overview

• Capital

• Leverage ratio

• Market and credit risk revisions

• Liquidity framework

Shift in regulatory mindset

Capital

More Capital Stronger capital Buffer for stress conditions
More Capital
Stronger
capital
Buffer for
stress
conditions
Capital Stronger capital Buffer for stress conditions Counter cyclical buffer SIFI surcharge Macro prudential
Counter cyclical buffer SIFI surcharge
Counter
cyclical buffer
SIFI surcharge

Macro

prudential

overlays for

system risk

More capital, i.e., higher minimum capital standards.

Increases minimum capital ratios for Tier 1 and Tier 1 common, while Tier 2 remains same.

Many banks received public sector support to avoid failure.

Losses were borne by the common equity holders, and not other Tier 1 and Tier 2 components.

Basel III is designed to require that common equity is the dominant component of capital, other regulatory capital instruments are converted into equity, if a bank is deemed non-viable.

Capital conservation buffer of 2.5% to withstand future periods of stress.

Regulators can impose restrictions on bank’s ability to distribute earnings, i.e., dividends, share buybacks, when capital levels fall below buffer.

Supervisors may impose time limits on a bank to exit the buffer range.

Additional macro-prudential overlay to address Systemic risk: risk of financial system disruptions that can impact the broader economy.

• A capital overlay of 0 — 2.5% can be imposed to dampen excessive credit growth.

• Objective is to reduce pro-cyclicality.

• Buffer would build up during periods of excessive credit growth, and can be released during a down cycle.

• Applied to largest financial firms that are interconnected due to common exposures, and pose disproportionate level of systemic risk.

• National supervisors to establish systemic capital surcharge, recommended range 0–3%.

Tier 1 Common equity requirements for the largest banks in some jurisdictions could approach double digits.

Capital

Basel III capital measures focus on quality and transparency

• Strengthening the definition of capital, focusing on its overall quality, consistency, and transparency.

• Higher capital standard that promotes long-term stability and sustainable growth.

• Regulatory capital must be simple and harmonised across jurisdictions.

Exclusion of several instruments from Tier 1 capital may alter the capital structure at many banks.

Tier 1 — Going-concern capital

• Predominantly common equity.

• High-quality capital capable of absorbing losses.

• Subordination to all claims in liquidation, no repurchase obligation or mandatory dividend, etc.

Noncommon equity criteria: senior and distribution preference only to common equity; callable only after five years; principal repayment subject to regulatory approval, etc.

principal repayment subject to regulatory approval, etc. Components of capital Tier 1 capital strengthened

Components of capital

Tier 1 capital strengthened

Tier 2 capital simplified

Tier 3 capital abolished

Tier 2 capital simplified Tier 3 capital abolished Tier 2 — Gone-concern capital • Subordinate to

Tier 2 — Gone-concern capital

• Subordinate to depositors and all creditors; can’t be secured or covered by issuer guarantee; callable after five years; no accelerated credit feature.

• Restriction that Tier 2 cannot exceed Tier 1 is eliminated.

• A full reconciliation of regulatory capital elements back to the balance sheet in the audited financial statements is required.

Capital

Tier 1 capital — What is in and what is out

Tier 1 Capital

• Common equity will be the predominant form of Tier 1, with specific minimum requirements.

• Perpetual preferred stock can remain in Tier 1.

• Tax advantaged hybrid securities mostly excluded.

– Step-up convertibles (due to incentives to redeem, else rates go up).

– Cumulative preferred (due to full access to cancelled dividends).

– Trust preferred (due to maturity date, payments are noncancellable and lack of loss absorption).

While Basel II scope in the U.S. is limited to “core” banks only, Basel III changes in capital definition, deductions, and filters should apply to banks more broadly.

Capital

Tier 1 capital — What is in and what is out (cont.)

Tier 1 and Tier 1 common adjustments • A series of adjustments and filters are applied to book equity to determine Tier 1 common equity; Some, of the adjustments are similar to those under Basel I.

Deferred tax assets (DTA)

Investments in financial institutions

Mortgage servicing rights (MSR)

AFS unrealized gains and losses

Allowance for loan and lease losses vs. ECL

Defined benefit pension assets

Minority Interest

50/50

deductions

Goodwill and other intangibles

Fair value option changes due to own credit risk

Nonfinancial equity investments

Insurance subsidiaries

risk Nonfinancial equity investments Insurance subsidiaries Limited to 10% individually And 15% in aggregate Deducted

Limited to 10% individually And 15% in aggregate

Limited to 10% individually And 15% in aggregate Deducted from Tier 1 common Similar to current

Deducted from Tier 1 common

And 15% in aggregate Deducted from Tier 1 common Similar to current adjustments Individual and aggregate

Similar to current adjustments

Individual and aggregate limits on inclusion of certain items from Tier 1 may have significant implications for U.S. banks

Leverage

ratio

Leverage ratio is introduced as a supplementary measure

• As part of Basel III framework, a nonrisk-based leverage ratio is introduced as a supplementary measure or a “backstop” to the risk-based capital (RBC) ratios.

• The objective of leverage ratio is to constrain the build up of leverage in the system, irrespective of risk sensitivity.

Tier 1 capital Leverage ratio = Gross exposure
Tier 1 capital Leverage ratio = Gross exposure
Tier 1 capital

Tier 1 capital

Tier 1 capital Leverage ratio = Gross exposure
Tier 1 capital Leverage ratio = Gross exposure
Tier 1 capital Leverage ratio = Gross exposure
Tier 1 capital Leverage ratio = Gross exposure
Tier 1 capital Leverage ratio = Gross exposure
Tier 1 capital Leverage ratio = Gross exposure

Leverage ratio

=

Gross exposure

Tier 1 capital Leverage ratio = Gross exposure
Tier 1 capital Leverage ratio = Gross exposure
Tier 1 capital Leverage ratio = Gross exposure Leverage ratio requirements have been in place in
Tier 1 capital Leverage ratio = Gross exposure Leverage ratio requirements have been in place in
Tier 1 capital Leverage ratio = Gross exposure Leverage ratio requirements have been in place in
Tier 1 capital Leverage ratio = Gross exposure Leverage ratio requirements have been in place in
Tier 1 capital Leverage ratio = Gross exposure Leverage ratio requirements have been in place in

Leverage ratio requirements have been in place in U.S.; hence this may not pose issues for U.S. banks, and in light of high common equity targets.

have been in place in U.S.; hence this may not pose issues for U.S. banks, and
have been in place in U.S.; hence this may not pose issues for U.S. banks, and

• Minimum leverage ratio is set at 3%.

• Gross Exposure includes on balance sheet assets (book value) and off balance sheet times translated to balance sheet equivalent.

– Unused credit card commitments converted at 10%, all other commitments at 100%.

• In contrast to Europe, U.S. banks have traditionally been subject to a leverage ratio requirement.

• Credit card banks and trading operations are more adversely affected by leverage measure.

Market and credit risk revisions

Credit and

market risk

Revisions to Basel II framework were intended to eliminate capital arbitrage between the banking book and trading book, and significantly expand capital charges for certain products, practices, and activities.

 

• Inclusion of Stressed VaR in internal models approach.

• Banking book risk weights for securitization exposures in the trading book.

Market risk revisions

• IRC for credit risk from default and migration.

 

Market risk capital can possibly increase by 2–4 X leading to smaller trading book.

 

• Higher asset value correlation multiplier for exposure to large, or unregulated, financial firms.

Credit risk refinements

• Enhance methodologies to calculate counterparty credit risk (CCR), and CCR management practices.

Significant credit risk capital increases for securitizations and capital market products are likely to lead to reduced activity and squeeze profitability.

• Higher risk weights for re-securitization exposures.

• Reduced reliance on external ratings.

 

• Enhanced governance of securitization related risks, compensation practices, etc.

Pillar 2 and 3 changes

• Detailed disclosure of securitization activities.

Credit and

market risk

Market risk background and evolution

• In 1996, BCBS published amendment to the 1988 Basel I capital accord to incorporate market risk rules. The Market Risk Amendment finalized in 1997, introduced two key approaches to capture market risk for trading positions:

– Standardized measurement method

– Internal Models Approach (IMA)

• Market risk rules were again revised in 2005 to incorporate the following changes:

U.S. rule making on market risk has been slower relative to Europe.

– Enhancements to the treatment of specific risks, including the introduction of incremental default risk

– Specific capital treatment for failed and unsettled transactions

Credit and

market risk

Market risk background and evolution (cont.)

• In 2009, BCBS published revisions to the market risk framework in response to the financial crisis which have now been incorporated in Basel III for implementation by 2012. Key changes include:

– Introduction of IRC to capture default and migration risk under IMA for unsecuritized products.

– Banking book charges for specific risk of securitization exposures in the trading book.

– Introduction of stressed VaR measure in addition to existing VaR calculations.

– Conservative treatment of correlation trading portfolios.

– Increased frequency of data updates from every three months to monthly.

– More stringent guidance around treatment and valuation of illiquid positions.

U.S. rule making on market risk has been slower relative to Europe.

• The 2005 changes were implemented in Europe as part of Basel II, but not in the U.S.

– U.S. Regulators issued market risk Notice for Proposed Rulemaking in December 2010, which consolidates the 2005 BCBS rules with the 2009 revisions.

Credit and

market risk

Stressed VaR and IRC will likely lead to much higher capital for market risk

Stressed VaR

• The 12-month stress period likely corresponds to 2007-08 period with extreme volatility and large losses.

Capital

Current formula

Add on stressed VaR

charge

capital charge

Multiplication factors may be different 3 ≦ mb ≦4 m = 3 Stressed VaR ×
Multiplication
factors may be
different
3 ≦ mb ≦4
m = 3
Stressed VaR
×
Newly
introduced
Multiplication
factor m
capital charge
VaR
VaR
×
×
Multiplication
Multiplication
factor mb
factor mb

Current

Revised

VaR is measured over a 99% confidence interval over a 10-day period.

Incremental risk charge

IRC definition

• Captures potential for loss from an obligor’s default and credit migration risk.

IRC scope

• Positions subject to interest rate risk under IMA approach, excluding securitizations and credit default swap.

Requirements Highlights

• Measured at 99.9% confidence level over one year horizon considering market liquidity.

• Liquidity horizon has a floor of three months

• Includes correlations in default and migrations among borrowers, but excludes diversification with other trading positions.

• Incorporates issuer and market concentration risks.

• Extensive model validation requirements related to design, testing and maintenance, with emphasis on stress testing, scenario analysis and sensitivity analysis.

Credit and

market risk

Credit risk changes impact securitizations and counterparty risk

Significant revisions to Basel II framework for securitizations were finalized in July 2009 impacting all three pillars. The December 2010 publication finalizes changes to counterparty credit risk rules. All changes are targeted for implementation by December 2011. Key provisions are summarized below:

 

• Resecuritizations defined to include collateralized debt obligations (CDOs) and liquidity facilities to asset-backed commercial paper programs, and higher risk weights established.

• Banks not permitted to use external rating that benefit from self guarantees. Such exposures in the trading book have a capital requirement no less that that when held in the banking book.

Securitizations

• Must perform credit analysis of securitization exposures instead of solely relying on rating agency conclusions.

• Banks must have continuous access to up-to-date performance information for all underlying pools of their securitization exposures, both in banking or trading book.

• Very conservative treatment for securitization liquidity facilities.

• Eliminates favorable treatment for market disruption liquidity facilities.

 

• Inputs for counterparty credit risk (CCR) capital to be based on stressed inputs, so EPE calculations to include data reflecting periods of stress.

• Improve exposure at default (EAD) calculation to promote more robust collateral management practices.

Counterparty

• Higher asset value correlation for exposures to large (>$100Bn), or unregulated, financial firms.

credit risk

• Extend margin period of risk for transactions to large netting sets

• Includes capital add-on charge for potential mark-to-market losses, i.e., credit valuation adjustments (CVA).

• Include an explicit capital-charge under Pillar 1 for specific wrong-way risk.

• Increase incentives for firms to use clearinghouse counterparties, which get a nominal RWA.

Liquidity risk

Basel III introduces global standards for liquidity for the first time

• The core of the framework consists of two liquidity measures calibrated to address stressed conditions.

• These ratios have been developed to achieve two separate but complementary objectives.

• Liquidity coverage ratio

– Objective is to promote short-term resiliency with sufficient high-quality liquid resources.

• Net stable funding ratio

– Objective is to promote medium-and-long term resiliency by creating additional incentives for funding with more stable sources.

• The framework also proposes four metrics for liquidity monitoring

– Contractual maturity mismatch

– Funding concentration

– Available unencumbered assets

– Market-related monitoring tools (not bank specific)

• Public disclosure

Global liquidity standards that have been finalized with Basel III have the potential to alter the cost and structure of bank funding.

Liquidity coverage ratio

Liquidity risk

• Liquidity coverage ratio (LCR) has a very short-term focus and is based on cash flow perspectives.

LCR

=

Stock of high-quality

liquid assets

Net cash outflows

≥ 100% over 30 day time horizon

• LCR defines level of liquidity buffer to be held to cover short-term funding gaps under severe, but plausible, stressed conditions.

• Assets considered for inclusion are high-quality liquid assets with haircuts for each category.

• Net cash outflow is calculated using supervisor-defined haircuts that are applied to each category of liabilities, contingent liabilities, and receivables.

• A categorization scheme is provided

– Liabilities (stable deposits, less stable deposits, unsecured wholesale funding, etc.).

– Receivables (retail inflows, wholesale inflows, repos/reverse repos inflows, etc.).

Many large global banks have indicated that they currently fall short of the Basel III liquidity standards, which was confirmed by Basel Committee QIS results.

Net stable funding ratio

Liquidity risk

• Net stable funding ratio (NSFR) is a medium-to-long term measure and has a balance sheet focus.

NSFR

=

Available amount of

stable funding

Required amount of stable funding

≥ 100% over 1 year

• NSFR defines minimum acceptable amount of stable funding in an extended firm-specific stress scenario.

• Amount of stable funding is defined as various categories of funding sources, and their applicable haircuts.

– e.g. capital, stable retail deposits, less stable retail deposits, etc.

• Required stable funding is calculated by applying fixed factors to various defined categories of assets and contingent liabilities.

• NSFR was recalibrated in the BCBS final rules.

Many European banks with large retail deposit franchises, may be slightly better positioned than U.S. counterparts.

– e.g., cash, loans and securities with maturities < 1 year, marketable securities, etc.

Financial services industry impacts

• Key areas of impact

• BCBS QIS summary

• Basel III international comparisons

• Expected industry trends in response to Basel III

Basel II

impacts

Basel III has significant potential implications for banks

Due to its broad scope and reach, Basel III is expected to have a transformative effect on the banking industry landscape, especially the large, global institutions. For these firms, Basel III will likely impact:

– Strategic decisioning

– Tactical near-term choices

– Infrastructure and operations

Some potential implications from the evolving bank capital regulatory standards are shown below:

Return on equity cost of capital
Return on equity
cost of capital

Simpler capital

structure

TB and BB securitizations Pricing for trade finance products
TB and BB
securitizations
Pricing for trade
finance products
Wholesale short-term funding costs Clearinghouse settlement volumes
Wholesale short-term
funding costs
Clearinghouse
settlement volumes
Financial cross holdings/ownership Credit card limits, home equity lines and personal LOCs Competition for retail
Financial cross
holdings/ownership
Credit card limits,
home equity lines and
personal LOCs
Competition for retail
demand and term
deposits
Rating agency role and influence
Rating agency role
and influence
Fee-based businesses Off balance sheet products such as guarantees and contingent credit lines
Fee-based businesses
Off balance sheet
products such as
guarantees and
contingent credit lines
OTC, CDOs, repos, PB, and correlation trading
OTC, CDOs,
repos, PB, and
correlation trading
Inter-bank Collateral and transactions margin
Inter-bank
Collateral and
transactions
margin
Large banking mergers
Large
banking
mergers
Mortgage servicing rights
Mortgage servicing
rights

The extended implementation timeframe allows for an orderly approach to transition to target state.

Basel III

impacts

Results of Basel Committee Quantitative Impact Study

• BCBS conducted a comprehensive study to understand the impact of the Basel III guidance, including changes to RWA from market risk and credit risk revisions.

• Results summarized for Group 1 (i.e., international banks with greater than 3 billion euros in Tier 1 capital as of Q4 2009) and Group 2 banks (all other participating banks).

– 13 U.S. banks were included in the study, all Group 1

• Basel III rules applied on a pro-forma basis assuming full implementation based on December 31, 2009, data.

Large, internationally active banks with sizeable capital markets portfolios have the potential to be adversely affected by Basel III, according to the BCBS QIS.

Basel III

impacts

Results of Basel Committee Quantitative Impact Study (cont.)

• Highlights of QIS study and key findings

– Large global banks far more adversely effected than smaller banks; this result is consistent for capital ratios, leverage ratio, liquidity ratios and RWA changes.

– For Group 1 banks, Common equity Tier 1 (CET1) ratio drops from 11.1% to 5.7% when Basel III definition of capital used, and filters and deductions applied, to common equity, along with RWA changes due to market risk and credit risk revisions.

– Relative to 7% CET1 standard, banks have a shortfall of $577 billion to be addressed through 2019. BCBS noted that net income after taxes at Group 1 banks for 2009 was 209 billion euros.

– Average leverage ratio for large banks was 2.8% while smaller banks, at 3.8%, were well above minimum requirement of 3%.

– Liquidity ratio requirements create a significant funding shortfall for large banks.

– RWA goes up significantly for Group 1 banks with large trading operations and securitization exposures.

Capital ratios are adversely impacted under Basel III due to changes in capital definition along with increases in risk weighted assets.

Basel III

impacts

Group 1 banks results summary

Estimated Basel III item Sample average (as of Dec 31, 2009) Minimum Current* shortfall Key
Estimated
Basel III item
Sample
average (as of
Dec 31, 2009)
Minimum
Current*
shortfall
Key drivers
requirement
(Euros)

Common equity

11.1%

5.7%

7.0%

 

Goodwill, intangibles, financial cross holdings, and 15% limit on DTA/MSR/Investments

Tier 1

Tier 1 capital

10.5%

6.3%

8.5%

577bln^

Total capital

14.0%

8.4%

10.5%

Leverage ratio*

2.8%

3.0%

Cancellable lines, potential exposure

Liquidity**-LCR

83%

100%

1.73 tln

Outflows to unsecured Fis, collateral, securitizations, etc.

Liquidity**-NSFR

93%

100%

2.08 tln

RWA

+23%

CCR, sVaR, IRC securitization

8%

7%

6%

5%

4%

3%

2%

1%

0%

Breakdown of increase in RWA (+23%) Definition of Counterparty Securitization Stressed VaR Equity Std Capital
Breakdown of increase in RWA (+23%)
Definition of
Counterparty
Securitization
Stressed VaR
Equity Std
Capital
Credit Risk
Banking Book
Measuremet
IRC & Trading
Book Securzn

Method

^ Tier 1 and total capital shortfall should be less than CET1, and easily addressed by meeting CET1.

* Leverage ratio requirement can be exceeded easily by meeting CET1 standard.

** Liquidity shortfall for LCR and NSFR not additive.

Basel III

impacts

Basel III international comparisons

• Credit Lyonais Securities Asia (CLSA) analyzed the Basel II impact using more recent financials, and included the effects from mitigation actions already announced by several banks.

• The study compared Basel III impacts across a set of 44 banks (16 global, 24 regional) across U.S., Europe, and Asia.

 

Large global banks

 

Regional banks

   
   

Current

Basel impact*

Current

Basel impact*

 

U.S.

10.3%

7.4%

9.6%

7.8%

 

Europe

9.2%

7.1%

8.3%

8.0%

 

Asia

12.5%

10.5%

11.0%

-

   

-

   

Total

10.0%

7.6%

9.4%

7.9%

Results are directionally consistent with Bank for International Settlements study.

While global institutions have higher capital ratios than regional banks, their decline in CET1 ratio is much higher than that for regional banks (240 bps vs. 150 bps).

Source: CLSA (Credit Lyonais Securities Asia) U.S. banks sector outlook, Nov 5, 2010,“Basel III – International comparisons” used with permission

Basel III

impacts

Basel III international comparisons (cont.)

• Asian banks appear to be better positioned from capital standpoint to absorb Basel III changes.

• U.S.-based global banks are more impacted (290 bps) than their Asian or EU counterparts (200 bps and 210 bps decline, respectively).

– Current common equity capital at U.S. banks are higher than European banks, likely due to capital raised in 2009 following Fed’s SCAP/stress testing initiative results.

Source: CLSA (Credit Lyonais Securities Asia) U.S. banks sector outlook, Nov 5, 2010,“Basel III – International comparisons” used with permission

Basel III

impacts

Expected industry trends in response to Basel III

• As a result of Basel III and other regulations (e.g., Dodd-Frank in U.S), banking will be more heavily regulated.

• We can expect a trend towards simplicity in balance sheet composition and simpler capital structure.

• Due to significantly higher capital requirements, capital markets trading and structured finance transactions may see reduced levels of activity and a squeeze on profitability.

– With greater volumes of over-the-counter derivatives cleared through centralized counterparties such as exchanges (given favorable capital charges) will continue to add pressure on profitability.

• Banks will likely be less inclined to use various forms of off balance sheet financing and investment vehicles due to implications for capital, leverage, and liquidity.

– It is conceivable that some of these volumes are directed to unregulated segments of

the financial services industry.

With stronger capital and liquidity measures, large global banks can be expected to have more stable and predictable earnings stream, and may be less prone to boom and bust cycles.

Basel III

impacts

Expected industry trends in response to Basel III (cont.)

• Retail deposits as a share of overall funding for large global banks will likely need to increase to meet liquidity standards.

– Competition for retail deposits may be spurred, and may lead to acquisitions of small, niche banks with local deposit share.

– The low-interest rate environment may encourage banks to lock in longer-term funding through debt markets.

– Short-term wholesale funding markets such as brokered CDs and commercial paper may be adversely impacted with lower liquidity and higher spreads.

• An acceleration in trends is likely towards fee based businesses such as wealth management and private banking due to lower capital charges

• Various forms of mortgage credit may see tighter lending standards and a return to traditional products and collateral requirements. Fees and pricing for home equity lines and credit cards is likely to increase.

• Dividend payout ratios should stabilize, but at levels below the pre-crisis levels.

Basel III greatly increases the attractiveness of retail deposits as the preferred form of bank funding.

Implementation

considerations

• Program management

• Risk management

• Corporate treasury

• External reporting

Change to

Program

management

Basel III may impact bank infrastructure in several dimensions

• Basel III implementation may impact several aspects of a bank’s infrastructure and operations, especially:

– Risk management (especially risk functions supporting capital markets and structured finance)

– Corporate treasury

– External reporting

• Institutions may be well served to remember the lessons from Basel II implementation, where costs and complexity significantly exceeded expectations resulting in huge budget over-runs and above-plan spend.

Our Basel II observations

• Lack of end-to-end implementation perspective covering business, data, technology, process, analytics, and reporting.

• Program management

– Design, structure, and role of project management office (PMO) underwent several iterations.

– Traditional “operations” centric PMO were not very effective.

– Excessive reliance on subject-matter experts to influence program direction.

– Inability of PMO to manage and contain scope.

• Basel II also exposed limitations of large complex organizations in many respects

– Limitations to cross functional collaboration

– Misalignment of objectives between business and technology

– Ownership and accountability for “requirements”

• Excessive focus on some narrow areas left large components without focus and plans till late in the game

– Data quality

– Traceability of requirements

– Risk exposure to general ledger reconciliation

– Sustainability model

Our perspective on Basel III applicability

• Critical to consider establishing a top down, end-to-end view of the program for all stakeholders (business, risk, treasury, reporting).

• Program management

– PMO should serve as the “Requirements Clearinghouse” balancing considerations of business/risk, technology, regulatory expectations, and executive management.

– Basel II domain expertise, understanding of industry/peer bank approaches, and regulatory trends in the PMO can be important.

– PMO should manage scope aggressively in face of rationalization from business and information technology.

• Communication strategy must again address the “core” and “extended” stakeholders.

– Front office, middle office and back office

– Training and education is core part of communications

• A structured approach to planning and governance

– Early focus on data definitions, data governance and data quality.

– Clear definition of ownership and accountability.

– Detailed upfront project planning.

– Establish and enforce standards.

Risk

management

Risk management infrastructure at the largest banks is responding to change

• Regulations, such as Basel II, Dodd-Frank (Volcker rule, Collins Amendment, etc), stress testing, etc.

– Regulatory information requests, horizontal and targeted exams.

– Technology integration from mergers and acquisitions activity that occurred during credit crisis and impacted several large financial firms.

– In the U.S., newly formed bank holding companies are transitioning to a very different regulatory landscape.

– Core investments in risk infrastructure/technology/reporting that were deferred.

Given the myriad of regulatory initiatives, flexibility, and adaptability may be key from a risk management infrastructure

Risk

management

Risk management data and operational challenges

• Basel III rules introduces a variety of new data, analytical, and technology requirements.

– Guidance disproportionately impacts areas already undergoing significant changes such as derivatives and securitizations.

– Significant requirements around collateral, risk management, stress testing, and model validation that are difficult to implement and maintain.

– Requirements for IRC are both analytically and operationally intensive, although current processes and systems may be extended for sVaR calculations.

– Requirements to produce an additional set of effective expected positive exposure (EEPE) based on stressed conditions is likely to be both systems and human resource intensive.

• Computation of leverage ratio based on varying local accounting rules at the legal-entity level and harmonization at parent level for large internationally active banks could be operationally challenging.

Implementation of credit and market risk RWA rules by 2012 will likely impose significant costs, and be associated with implementation and compliance risks.

Corporate

treasury

Considerations for corporate treasury

• A number of Basel III requirements — capital, liquidity standards (LCR and NSFR), leverage ratio — are core to corporate treasury’s strategic and functional role in a bank.

• Strategic considerations

– Active role in capital management including capital structure, cost of capital, distributions, etc.

– Long-term funding and liquidity management strategies, with flexibility to refine and react to market.

– Much tighter integration of treasury with business strategy and plans, with capital implications addressed proactively.

– Alignment with risk management due to dependencies such as limit management, collateral, and exposure management, etc.

While capital- and liquidity-related changes are significant, the level of investment for infrastructure enhancements should be lower than costs associated with Basel II.

Corporate

treasury

Considerations for corporate treasury (cont.)

• Operational considerations

– Treasury data, systems, processes, analytics, and reporting will likely require significant enhancements.

– Stressed liquidity ratios will likely require new data and system feeds, mapping and categorization efforts, reconciliation to accounting books, and harmonization across jurisdictional requirements.

• Sustainable operational processes to support external disclosure and regulatory reporting requirements around liquidity and capital will likely require a change in mindset.

– Treasury processes and reporting serve internal management (and board) needs such as interest rate risk management, liquidity, and capital planning/management.

– Recent regulatory requests relating to capital adequacy assessment, stress testing, etc., have been addressed largely through ad hoc and one-time efforts.

– ALM systems may be subject to higher level of change management and controls.

– Formal monitoring and reporting requirements relating to maturity.

Addressing data quality and operational requirements for treasury are expected to be substantive.

External

reporting

Changes in external reporting are evolutionary

• Basel III increases reporting and disclosure requirements, which may continue to pressure bank functions involved in regulatory reporting/external reporting.

– However, some reporting requirements (leverage ratio, capital, funding mismatch, etc.) could be able to leverage existing processes and infrastructure.

• External reporting is typically downstream of most applications where the disclosure information is derived, aggregated and assimilated.

– Basel II reporting and disclosure required close coordination between risk management and regulatory reporting.

– Basel III could enhance coordination and collaboration of Regulatory Reporting with treasury.

• Significant disclosure requirements relating to counterparty exposures and securitizations will rely on risk management to provide the data and analytics; the existing Basel II reporting processes may be enhanced to address these requirements.

Meeting enhanced disclosure and reporting requirements is expected to be less challenging than other aspects of Basel III.

External

reporting

Changes in external reporting are evolutionary (cont.)

• Reporting of newly defined capital components may not pose additional complexities, as it will likely continue to be general ledger-based, and tightly integrated with financial reporting.

– The elimination of 50/50 deductions from Tier 2, and change in approach to incorporate deductions related to risk exposures in the RWA computations, in effect simplifies some aspects of calculation of regulatory capital measures.

• Existing bank processes relating to interest rate risk management and liquidity management may be able to support Basel III reporting and disclosure requirements, with some enhancements.

• While the BCBS leverage ratio requirement has some differences to the current U.S. definition, information on incremental items (such as credit card lines, EPE, etc.) can be obtained from Basel II sources.

For Basel III reporting, synergies with Basel II data, and reporting infrastructure must be actively explored.

Client focus — Preparing for change

• Assessment and analysis

• Planning and design

• Strategic implications

Preparing for change

Assessment

and analysis

• The long timetable for Basel III implementation allows for methodical planning and preparation for the Basel III target state.

– 13 U.S. banks participated in BCBS QIS in early 2010, and others have assessed impacts of Basel III.

– Several large banks have already announced plans to mitigate an adverse impact on capital and liquidity from Basel III.

– Practically, we expect investors and regulators to influence banks to adopt revised capital standards well in advance of the Basel III timelines.

– However, the extended timeframe could also induce complacency for some institutions which may chose to push out implementation efforts.

• Interdependencies and linkages across capital markets, risk management, corporate treasury, and external reporting make Basel III implementation complex, though less invasive as Basel II.

– Individual requirements for calculations (excluding credit and market risk RWA) on the

surface likely be manageable

– Early focus on dependencies can help mitigate execution risk

Delay in final rules and inadequate planning adversely affected Basel II programs. Basel committee final rules provide a reasonable foundation to initiate program design and programming for Basel III.

Preparing for change (cont.)

Assessment

and analysis

• Preparations for Basel III should be considered in different stages.

– Strategic actions for balance sheet composition, funding, capital management, and business planning necessitate a solid understanding of issues and robust action plan. • Execution of business strategies and changes to funding mix, liquidity profile, or capital structure can also depend on macro variables, competitive environment, market conditions, and business opportunities; as such, some may take several years to accomplish.

– Initial planning, PMO set up and design activities in preparation of U.S. rule making.

– Detailed planning and requirements, execution and testing.

Advanced planning, program management, and end to end requirement definitions are critical for a successful and cost effective implementation.

Assessment

and analysis

With BCBS rules finalized, clients should consider a variety of activities in preparation for U.S. Basel III rules

Pro-forma assessment and scenario analysis

• Detailed pro-forma assessment of capital, liquidity, and leverage ratio impacts from BCBS rules (December 16, 2010) [Update BCBS QIS from 2009 may be used].

• Projections of capital and liquidity measures, along with market-based scenario analysis.

• Identification of significant issues and “shortfall” drivers for Basel III items.

 

• Results analysis, issue identification, and strategic assessment of choices/options.

• Catalog and prioritization of actions for the short, medium and long term.

Basel III business and capital strategy

• Senior management buy in, endorsement and sponsorship.

• Mitigation action plan with agreement of timeframe and assignment of accountability.

 

• Analysis of various capital and liquidity levers, and sensitivities, simultaneously leading to optimal balance sheet composition and capital structure

 

• Establish PMO and associated governance structure for Basel III execution.

• Define protocols for interactions with key stakeholders (e.g., board, steering committee, business executives, internal audit, regulators, etc.).

PMO design and set up

• Establish work threads with clear accountability, and define approach to manage requirements with coverage across data, process, technology and business.

 

• Develop a high-level program roadmap and develop materials for stakeholder/senior management education, support, and buy-in.

Program road

• Data requirements and source map — Assessment and analysis of potential sources for broad sets of data requirements.

• Develop top down end -o-end logical design for Basel III liquidity framework solution, and identify leverage points of integration with Basel II infrastructure.

map and high- level design

Strategic

implications

Basel III may necessitate close alignment of business strategy with capital planning, funding decisions and liquidity management

• Basel III requirements require careful consideration of several factors, and banks may be advised to develop detailed action plans in line with organizational strategy goals and objectives.

• Integration of business strategy with capital plans along with consistent funding approach can be critical as shown below.

• Clients may be advised to pay attention to related Dodd-Frank provisions and evolving accounting standards.

Business strategy

• Target size of capital markets and structured finance businesses

• Business mix of proprietary risk taking vs. market making

• Role of strategic equity investments and partnerships

• Market opportunities for expanding asset management, investment banking, and other less capital intensive businesses

• Disposition of nonstrategic, capital-consuming portfolios and businesses

• Role of mortgage banking products and services; own vs. securitize

• Pricing and appetite for trade finance and merchant banking products

Accounting considerations

• Loan loss provisions

• Rules for netting of derivatives and repos

• FAS 166/167 SPV consolidation

• FASB vs. IFRS differences

Business Funding strategy and Basel III liquidity Capital
Business
Funding
strategy
and
Basel III
liquidity
Capital
Funding strategy and Basel III liquidity Capital Capital planning and optimization • Retirement of tax
Funding strategy and Basel III liquidity Capital Capital planning and optimization • Retirement of tax

Capital planning and optimization

• Retirement of tax advantaged hybrid instruments

• Target plans for earnings retention, payout ratios and capital repurchases

• Coordination with business and accounting functions to optimize levels of capital deduction items

• Investment portfolio strategy (AFS vs. HTM) to limit capital volatility

• Manage capital buffers to enable stable dividend policies

• Consider role of bail-in capital

• Optimize across capital, leverage, liquidity and concentration considerations – economic and regulatory

Funding and liquidity management

• Funding sources: wholesale vs. retail funding

• Funding maturity: short term vs. long term

• Long-term debt issuance — instruments, timing, and cost

• Expansion of retail deposits through pricing, promotions, internet banking, branch acquisitions, etc.

• Contingent sources of liquidity

Dodd-Frank provisions

• Collins amendment

• Systemic risk regulation

• Orderly liquidation authority (Living Will)

• Volcker rule

• Derivatives clearing

• Bureau of consumer protection

• Credit ratings (NSRSO)

• Credit risk retention rules

Why Deloitte? A leader in bank capital

• Global footprint

• End-to-end service capabilities

• Marketplace eminence and thought leadership

Deloitte in financial services

Deloitte’s global breadth and depth

• One of the largest professional services organization in the world, with 169,000 people in 140 countries.

• A professional services organization that offers a complete range of audit, tax, consulting and financial advisory services.

• One of the largest global financial services consultancy, with $26 billion in global revenues in FY2009.

• U.S. practice with 90 offices, 42,000 professionals, and fiscal 2009 revenues of approximately US$10.7 B.

Europe, Middle East, Africa People: 56,000 Americas Asia Pacific People: 53,000 People: 26,000
Europe, Middle East, Africa
People: 56,000
Americas
Asia Pacific
People: 53,000
People: 26,000

Global

footprint

heading

Global Financial Services Industry organization

• A global network of more than 21,000 dedicated professionals, including 2,880 partners in 40 countries, combining assurance, tax consulting, and financial advisory experience.

• Serve 88% of financial services companies in the Fortune Global

500.

• Deloitte member firms serve:

– All of the top 20 global banks

– 18 of the top 20 global insurance companies

– 17 of the top 20 global asset management firms

• Contributes more than 25% of our organization’s global revenues

• Representative financial services clients:

AXA Banco Santander Bank of Tokyo Mitsubishi, UFJ BB&T BNP Paribas Goldman Sachs E*Trade Financial

Fifth Third Bancorp Huntington Bancshares Lazard Frères ING Morgan Stanley Northern Trust RBC Bancorp UBS

Source: Kennedy; Public Sector Consulting Marketplace 2009-2012; © BNA Subsidiaries, LLC; used with permission

End-to-end

service

capabilities

Basel III requires a broad array of services and competencies

• Successful transition to Basel III may require robust business and capital strategies supported by strong execution and technology implementation capabilities anchored in domain knowledge of credit and market risk, capital markets, asset liability management, accounting, and regulatory reporting.

• Deloitte is a professional services organization with an integrated strategy that has been key to our marketplace successes in delivering large scale, complex programs such as Basel II.

• Our competitive Basel II marketplace footprint provides a strong foundation for assisting clients to successfully implement and comply with Basel III.

We have a prestigious portfolio of referenceable “core” Basel II bank clients, and one of the largest dedicated Basel and bank capital team of any professional services organization.

• Our implementation approach incorporates bank’s business strategy and an end-to-end view of requirements.

• We have deep subject-matter knowledge in bank capital rules, credit risk, treasury, traded and structured products, and regulatory reporting.

• Our accounting and infrastructure capabilities supports regulatory reporting and disclosure at legal entity and consolidated levels.

Data management, data governance, and data quality are integral to our practice.

• We utilize proprietary tool kits for gap assessment, requirements traceability, project planning, and end-to-end testing.

• Our standardized PMO techniques and tools enable stakeholder involvement, project execution, communication, knowledge transfer, and education.

• With several former regulators in our practice, we have strong regulatory relationships and deep insights into regulatory expectations.

and deep insights into regulatory expectations. • Tax Risk management Regulatory Accounting

Tax

Risk

management

Regulatory

Accounting

Treasury and

capital markets

Corporate

finance

advisory

Technology

PMO

Strategy &

operations

Implementation

and testing

Deloitte remains as the only professional services organization with service capabilities spanning risk, treasury, accounting, tax, corporate finance, and technology.

accounting, tax, corporate finance, and technology. 47 Deloitte Perspectives — Basel III: Transforming the

Marketplace

eminence and

thought leadership

Deloitte’s visibility, eminence, and thought leadership on Basel III

• Knowledge Congress Webinar “Tougher Laws Woven into Basel”, February 18, 2010

– Michael Bleier, Partner, Reed Smith LLP;

– Alok Sinha, Principal, Deloitte & Touche LLP;

– Nancy Hunt, Acting Associate Director of the Capital Markets Branch, Policy Section, Division of Supervision and Consumer Protection, Federal Deposit Insurance Corp (FDIC)

– Michael Stevens, Conference of State Bank Supervisors

• 11th Annual Risk Conference New York (February 9, 2010); Keynote panel discussion “Global Regulatory Reform”

– Greg Hands, MP; Shadow Treasury Minister, U.K;

– Martha Cummings, Chief Risk Officer, Banco Santander;

– Til Schuerman, Vice President, Federal Reserve Bank of New York

– Alok Sinha, Principal, Deloitte & Touche LLP;

• 2nd European Risk Congress, London, June 9, 2010

– Presentation, “Basel III Guidance,: Overview and Implications”, Alok Sinha, Principal, Deloitte & Touche LLP

• Freddie Mac 2010 Executive Forum ”Future State of Mortgage Industry”: Panel Discussion, September 1, 2010

– Laurie Goodman, Senior M.D., Amherst Securities

– Alok Sinha, Principal, Deloitte & Touche LLP ( Basel III Implications for Mortgage Industry)

– Mark Willis, Furman Center for Real Estate & Urban Policy

• CLSA Luncheon Speaker Series Topic, New York, (October 13, 2010), ”Capital at U.S. Banks — How high is enough?”

Marketplace

eminence and

thought leadership

Deloitte’s visibility, eminence, and thought leadership on Basel III (cont.)

eminence, and thought leadership on Basel III (cont.) Banking & Securities Dbriefs Tuesday, January 11, 2:00

Banking & Securities Dbriefs

Tuesday, January 11, 2:00 PM EST

Basel III: Bank Regulatory Capital Landscape Continues to Evolve

• Robert Maxant, Partner, Deloitte & Touche LLP

• Alok Sinha, Principal, Deloitte & Touche LLP

• Andrea di Giovanni, Director, Deloitte & Touche LLP

• Knowledge Congress Live Webcast “Basel 3: Important Updates”, January 25, 2011

– Nancy Hunt, Acting Associate Director of the Capital Markets Branch, Policy Section, Division of Supervision and Consumer Protection, Federal Deposit Insurance Corp (FDIC)

– Bobby Bean, Chief, Capital Markets Policy Section, Federal Deposit Insurance Corp (FDIC)

– Michael Stevens, SVP & Director of Regulatory Affairs, Conference of State Bank Supervisors (CSBS)

– Michael Bleier, Partner, Reed Smith LLP;

– Alok Sinha, Principal, Deloitte & Touche LLP

In summary

• Basel III rules have been recently finalized by the BCBS Supervision, and implementation timeframe extends through 2019.

– Bank capital landscape will evolve with the largest, global banks holding more capital, stronger capital instruments, and capital buffers to protect from systemic risk.

– Basel III introduces a global framework for liquidity for the first time and a leverage ratio measure.

• Banks will likely need to have much closer alignment between business strategy, capital, and liquidity planning and funding decisions.

• Enhancements will be necessary for infrastructure supporting corporate treasury, risk management, capital markets, and external reporting functions.

• U.S. rule-making process for Basel III should incorporate related Dodd-Frank provisions.

• Costs of implementation may be be significant, but likely not as high as Basel II for well structured and executed programs.

Americas contacts

Americas contacts Alok Sinha Principal, Deloitte & Touche LLP Leader — Banking & Securities Sector San
Americas contacts Alok Sinha Principal, Deloitte & Touche LLP Leader — Banking & Securities Sector San
Americas contacts Alok Sinha Principal, Deloitte & Touche LLP Leader — Banking & Securities Sector San

Alok Sinha

Principal, Deloitte & Touche LLP Leader — Banking & Securities Sector San Francisco, CA Phone: +1 415 783 5203 E-mail: asinha@deloitte.com

Andrea di Giovanni

Director, Deloitte & Touche LLP Governance, Regulatory & Risk Services New York, NY Phone: +1 212 436 7094 E-mail: andigiovanni@deloitte.com

Carrie Cheadle

Director, Deloitte & Touche LLP Governance, Regulatory & Risk Services Chicago, IL Phone: +1 312 486 4095 E-mail: ccheadle@deloitte.com

IL Phone: +1 312 486 4095 E-mail: ccheadle@deloitte.com Robert Maxant Partner, Deloitte & Touche LLP Leader
IL Phone: +1 312 486 4095 E-mail: ccheadle@deloitte.com Robert Maxant Partner, Deloitte & Touche LLP Leader
IL Phone: +1 312 486 4095 E-mail: ccheadle@deloitte.com Robert Maxant Partner, Deloitte & Touche LLP Leader

Robert Maxant

Partner, Deloitte & Touche LLP Leader – FSI Treasury Services New York, NY Phone: +1 212 436 7046 E-mail: rmaxant@deloitte.com

Lakshmanan Balachander (Bala)

Director, Deloitte & Touche LLP Governance, Regulatory & Risk Services New York, NY Phone: +1 212 436 5340 E-mail: lbalachander@deloitte.com

Edward T. Hida, CFA

Partner, Deloitte & Touche LLP Global Leader — Risk & Capital Management New York, NY Phone: +1 212 436 4854 E-mail: ehida@deloitte.com

This presentation contains general information only and Deloitte is not, by means of this presentation,

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this presentation.

Copyright © 2011 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited