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To the Board of Hypothetical Banking Group (HBG): CARP document Purpose This document summarizes the Capital Assessment

and Risk Profile (CARP) procedures adopted within the HBG to enable management to ensure that they can properly relate to the Boards risk profile the amount of capital and risk management techniques deployed. This document has been prepared in accordance with the Pillar 2 requirements introduced by the Central Bank from 1/1/09. A copy will be provided to the supervisory authority upon request once it has been discussed and approved by the Board. Contents 1. Scope This CARP covers the consolidated operations of HBG as well as our banking insurance and trust operations in the various jurisdictions in the Caribbean that you are aware of. 2. Main conclusions of the capital assessment (see Table below). Our capital is well in excess of the Basel II minimum of 8% of risk weighted assets. These have been computed on the Basel II basis using the standardized approach which, as you know differs from Basel I. The main thrust of those changes is to reduce risk weights for mortgage, retail and small business lending while adding a new capital charge for operational risk. As previously, our market risk is not generally material and we have not done a separate capital calculation for these risks. As part of the move to Basel II, the Central Bank has replaced the minimum 10% requirement with the Pillar 2 requirements. We must assess our capital in relation to all of our risks, not only those with explicit capital charges under Pillar 1 of Basel II. Based on that assessment we show that our target capital would be somewhat less than the actual level of capital we are now holding (including for stress tests.) Thus we have additional capital for growth or acquisitions. However, as we have discussed, the current situation on world financial markets is volatile and we wish to preserve our credit rating (which is key to our risk appetite statement and objectives). Thus we believe we should make no move at this point to reduce our actual capital, nor to deploy our excess in acquisitions. 3. Background and assumptions (Risk appetite and Strategic Objectives) As you know our risk appetite statement is to operate HBG prudently with low to moderate risk consistent with our maintaining our AA rating. We believe our capital policies and capital level, as well as our reasonable level of risk and moderate loan losses supports maintaining that rating. We have no immediate changes in strategies that would require materially more capital. However, growth in our business, which is averaging some 12% y/y will require us to have capital to support. We should be able to do this from ongoing retained income and using our excess capital buffer. This should help us move our ROE from the current 15% to the 20% range. At the end of the three year period our capital plan shows a RAR of 10.8%, well above the historic 10% required level (which investors will likely continue to refer to for some time). We still show a buffer I the third year of our plan of about 80m above our Pillar 1 requirements and our Pillar 2 amounts.

4. Key features: In addition to the well understood credit risk and our new focus on operational risk HBG is exposed to diversification and concentration risk in our on and off balance sheet portfolios. This is because of the nature of the economy and our focus on property lending and mortgages. We also have exposures to other banks and insurers. Ad with other banks we have modest interest rate risk in the banking book, but our scenario tests do not show this to be a material risk to our capital. Accordingly, stress testing has focused on impact of possible downturn scenarios. Our capital plan does not require any major capital raise, though certain preference share issues will be rolling off over the period and will need to be replaced. Given our rating we do not anticipate any problem in normal management of our treasury operations. There are a variety of technical, policy and other documents underpinning the CARP including our board approved risk appetite statement, policies and procedures on credit, operational, trading and interest rate risk and details of the stress tests. 1. Scope This CARP covers the three year time period 2009-2012, as prescribed by the Central Bank and consistent with our strategic and capital plan. It covers our consolidated operations our banking operation in Country A and Country B (commercial and community banking, private banking treasury services) as well as our subsidiaries offering asset management, fund management and trust services in those jurisdictions and in Cayman, Hong Kong and Switzerland. Our private bank in Barbados has been excluded. As you know that is a new venture, balances are small (though we have plans to grow materially), and there is no material risk. We will be including its financial results in our year end financials for the first time this year. Each of our other subsidiaries must meet capital adequacy requirements of the local regulator. In each case these are assumed to continue to be computed on a Basel I basis. While these regulators have announced plans to move to Basel II, the details necessary to estimate impacts will not be available until late in our three year planning period.

Background Information on HBG Bank (all figures in 000,000) Basel I RWA 6700 Total capital 800, of which Tier I 529 RAR Basel I 12% NPL (net of provisions) to capital 14%, up from 5% in 2006 NPL to gross loans 2%; Provisions .5% of loans ROA 1%, ROE 15% Net income before tax 125, tax rate 5% Large exposure to capital 800% Contributions to gross income: net interest income 50%, fees and commissions 30%, dealing profit 10% Mismatch/deposits 8 days 12% (up from 5) 1 month 0; Cash+deposits/deposits 18% Assets under management: 15,000

Assets under administration: 115,000 Our rating from the Central Bank is xxxxx Credit Risk Concentrations (credit risk exposure by sector) and other balance sheet info as follows On balance sheet 500 600 1800 1400/ 100 1150 4050 4800 3600 12000 Off balance sheet 600 300 200

Banks and insurers Commercial Individuals Of which mortgages/credit card Real estate Total credit exposure Total investments Of which held to maturity Total assets

150 1250

Risk Management

Our policies, procedures, risk measurement and management system is the major mitigant to our risks. HKB has an independent risk management function, staffed by four people reporting to our CRO, who in turn reports to the CEO. We have a full set of limits on credit risk exposures with appropriate delegation to business units and amounts above a particular size requiring sign off by the CRO or the CEO, depending on amount. Policies are in place re management of credit risk, trading risk (which we keep purposefully low), FX risk (where our policies are to run fully matched/hedged books so our net exposure is nil). Our operational risk policy is new in the past year, brought into place because of the Basel II focus on this topic. We are starting to collect data on operational loss experience beginning in 1/1/2009. All of our OBS exposures require sign off by both the business line initiating the transactions and the CRO. Most of our investment book is held to maturity. It does contain some securities related to those that have been questioned because of the recent U.S. turmoil, but these are only some 15% of the portfolio. We ceased acquiring these securities I the fall of 2007 and have put in place a monitoring and testing of specific securities. We have a new policy limiting investments in securitized assets. Recent reports by Internal Audit on our policies and processes have shown them to be generally in good shape. We meet AML/CTF requirements including those for know your client and suspicious transaction reporting.

Liqudity risk is managed by our Treasurer, and our policy is to have a 90 day survival horizon under reasonable assumptions about ability to roll over at least part of our funding and deposits. We have generally met those policy requirements. Recently we added an additional person to our treasury group to assist in liquidity management. You receive reports regularly on our risk position for each of our major risk areas.

Capital Assessment and Risk Profile (CARP): Summary All figures in $000 Consolidated Group RISK Type (i) Pillar1 Calculation@8% credit operational market Sub-Total (a) (ii) Pillar2 considerations Lack of diversity Concentrations Residual risk Liquidity risk Included in stress test below Included in stress test below 10% of our CRM capital benefits Risk mitigated due to significant increase in risk management capability recently put in place and by improving liquidity position Impact of 100bps parallel shift is covered by earnings Solo bank tions Observa

480 67 0 547

Approximate 10% reduction due to lower risk weights

IRR in the banking book Op risk adjustment Strategic risk

Not relevant as no changes in strategy requiring capital are planned for next 3 years. 3 year plan shows RAR declining slightly to 11.3% and 10.8%

Reputational risk Pension fund deficit

20 Due to equity market decline (equities are 45% of $135M portfolio) we are assuming needing to replace our previous 10M surplus (booked on balance sheet) and have available funds to cover additional 10m shortfall if necessary

Sub-total (b) Stress test results (c) TOTAL Pillar 1+Pillar 2 requirement (a)+(b)+(c)

572 28 600

Footnote: Current capital available Current surplus (over Pillar1+Pillar2 figure)

Total 800 200

Of which Tier 1


2. Background and assumptions There are material differences between the firms view of the amount of capital required to meet minimum regulatory needs and the amount HBG believes necessary to meet its business objectives. This is because HBG believes that maintaining capital above this is necessary for our desired credit rating from Moodys and SA&P. Rating agencies put considerable stock in tangible common equity which is close to Tier 1 for HBG and HBG believes it needs a Tier 1 ratio of at least 6%. HBGs risk appetite would allow it to accept unanticipated losses of up to one quarters earnings. HBG believes its risk measurement and risk management capabilities are more than sufficient to reduce the likelihood of such losses happening to a negligible risk. There have been occasions historically when that magnitude of loss has occurred, but risk management has been considerably strengthened over the past few years. However, given its considerable earnings power from its significant market position HBG believes its earnings capability is more than adequate to cover unanticipated eventualities. HBG is not planning any new initiatives but is looking through attractive pricing and high quality service to continue to grow its market share in all of its major markets. This is set out in HBGs strategic plan.

3. Key features of the CARP procedures

HBG is exposed to concentration risk and diversification risk because of the nature of its portfolio and the nature of the economy of the countries in which it operates. HBG has chosen to deal with this risk through stress tests. There are three that are relevant. The main scenario considers a downturn in the local economy that results in increased residential mortgage defaults. This scenario is assumed to result in a decline of real estate prices of 10%. Only some 15% of HBGs mortgages (210M) are estimated to be in the 90%+ LTV range (a larger percent are in the 80-90 rangebased on an informal

survey of lending officers and taking account of the recent run up in prices). Assuming a 5% cost to foreclose the impact of this scenario is below 25m. In addition the bank has considered the impact of serious problems with its three largest exposures. Two of these are in the real estate sector (the third is an insurance company). So this is also a proxy scenario for the impacts of the main scenario on commercial real estate clients. These exposures amount to 40m but the bank believes it would be able to realize on collateral so the net loss would only be 33m. The bank earns some $30m a quarter so that even if both of these were to occur simultaneously the impact on capital would be approximately 25-30m. This does not take account of other mitigating moves the bank would naturally take to limit losses by reducing exposures or increasing collateral if such macro economic scenarios appeared likely. So including 28m in the Pillar 2 amounts, which is the middle of the range, appears reasonable. The details are in the stress test methodology paper.