2014 - belfius banque · credit risk 30 4.1. credit risk management and governance 30 4.2. credit...

Risk report

2014

Risk Report 2014 • Belfius Bank 2

Contents

1. Introduction 41.1. Highlights in 2014 41.2. Basel Framework 61.3. Basel III Implementation 61.4. Governance arrangements 71.5. Risk Charter & Strategy 13

2. Risk Department organisation, role and responsibilities 152.1. General mission 152.2. Risk organisation 152.3. Risk Management Architecture 172.4. Risk Governance 192.5. Belfius risk cartography 22

3. Equity and Capital Adequacy 233.1. Equity 233.2. Capital Requirements by Type of Risk 263.3. Capital Adequacy 27

4. Credit Risk 304.1. Credit Risk Management and Governance 304.2. Credit Risk Exposure 314.3. Impairment, Past-Due and Related Provisions 394.4. Forbearance 424.5. Credit Risk Mitigation Techniques 434.6. AIRB Approaches 46


Contents

4.7. Standardised Approaches 484.8. Counterparty Risk on Derivatives 504.9. Focus on Equity Exposure 514.10. Focus on Securitisation Activities 52

5. Market Risk 605.1. Market Risk Definition 605.2. Market Risk Governance 605.3. Market Risk Management 61

6. Asset & Liability Management 666.1. Policy on asset & liability management 666.2. Liquidity risk 666.3. Interest rate risk 706.4. Foreign exchange risk 706.5. Equity risk 716.6. Pension funds 71

7. Operational Risk 727.1. Policy 727.2. Measuring and managing risk 72

8. Pillar 2 Risks 758.1. Behavioural Risk 758.2. Business Risk 768.3. Strategic Risk 768.4. Reputation Risk 778.5. Model Risk 778.6. Pension Risk 788.7. Settlement Risk 788.8. Securitisation Risk 798.9. Interest Rate Risk (Banking Book) 798.10. Funding Risk 798.11. Liquidity Risk 808.12. Insurance Risk 80

Appendix 1 – Glossary 82Appendix 2 – Internal Rating Systems 86

1. Description of the Internal Rating Process 862. Control Mechanisms for Rating Systems 913. Business Integration of Internal Estimates 92

Appendix 3 – Belfius Bank Originations 94


1.1. Highlights in 20141.1.1. General highlights

The environment in which the banks have to work continued to be very challenging in 2014. The economic recovery that began in the spring of 2013 was still very fragile, both in Belgium and in the eurozone, resulting in the economy all but stagnating during the course of 2014. One striking feature of this was that in general the downturn affected the so-called core countries. In fact, the economy in both Germany and France even contracted slightly. By contrast, in many of the peripheral countries, with the exception of Italy and Greece, where business also shrank, the rate of growth picked up. The growth figures in Spain, Portugal and Ireland were even strikingly high. These countries have also had to implement the most radical economic adjustment programmes in order to crank up their competitive edge – and these measures now seem to be bearing their first fruit. In parallel with the weak economic growth, the recovery in the European employment market has also been modest. Expectations are that unemployment in the eurozone over the coming years will only fall slightly and will still be above its pre-crisis levels in 2016. Although there continue to be significant differences between the member states, the gap is closing as the result of an improvement in the situation in the countries most seriously affected.

Globally though, the recovery continues. Although world growth during the first half of the year was placed under pressure by a number of specific factors that weighed down on private consumption, the pace of business picked up again in the second half of the year. All in all, world growth achieved the same level of growth in 2014 as it did in 2013. Developments tended to occur at different rates in various parts of the globe. Once again, the emerging countries as a whole continued to record the highest growth figures, although several countries had to contend with a steady and sometimes even sharp slowdown in their economy. For example, in the second half of the year, China slumped to its lowest level since the big recession. The economy in Russia appears to have stagnated completely, partly as the result of worsening relations with EU countries in particular, leading among other things to mutual economic sanctions.

The development process to create a risk management model tailored to Belfius Bank was continued in 2014 and, since the beginning of the year, risk management operates according to a new organisation structure. Risk management is no longer organised by risk type (market risk, credit risk, operational risk, etc), but by business segment. This means that there is now a single point of contact for each type of risk per business segment. This enables the Risk Department to fulfil its ambition to challenge the individual business segments by being close to the business itself, by detecting risks proactively and in time, by identifying opportunities that may lower the cost of risk and, if necessary, by making adjustments to the bank’s commercial strategy.

During a substantial part of the year, this new organisation model demonstrated its worth in the context of the ECB’s Comprehensive Assessment – Asset Quality Review (AQR) and the stress test associated with it. On 26 October 2014, exactly one year after the exercise was announced, the European Central Bank (ECB) revealed the final results of this Comprehensive Assessment. The outcome was positive across the board for Belfius Bank, which passed both the AQR and stress test with flying colours. This outstanding result aptly illustrated the relevance of the Belfius strategy. The focus on expanding the commercial franchise caused the operating result to rise and hence also equity capital. The implementation of a tactical de-risking programme also meant that the Legacy portfolios weighed down the bank less heavily.

Since it was first established, Belfius has made considerable efforts in a difficult business climate to reduce its Legacy commitments – consisting of a portfolio with various types of bonds, a portfolio of off-balance sheet loans and exposure to the former parent company and its subsidiaries – so that the risk related to this Legacy could also be reduced tactically and effectively.

In the context of a difficult macroeconomic situation, the bank nevertheless remains alert for a number of challenges, including the continuing low interest rate which among others lead to a greater need of liquidity for cash collateral and an important refinancing wave of mortgage loans, the new bank taxes and a further strengthening of the regulatory framework.

Introduction1.

Introduction


1.1.2. Comprehensive Assessment – Asset Quality Review (AQR)

On 26 October 2014, the ECB and the national supervisory bodies (including the NBB), rounded off a large-scale exercise – known as the “Comprehensive Assessment” – which took the form of a far-reaching assessment of the financial strength of the major banks in the eurozone. The aim of this exercise was threefold: to increase transparency by improving the quality of the information available about the banks’ situation, to remedy banking methods by identifying the measures required to improve solvency and, finally, to reinforce trust in European credit institutions.

This exercise was conducted along two main, complementary, lines. While the Asset Quality Review (AQR) focused mainly on auditing the value of assets in the accounts at 31 December 2013, the main aim of the stress tests consisted of determining the ability of credit institutions to absorb economic and macroeconomic shocks over a period of three years. Two main scenarios were used for the stress tests. The first, called the “baseline scenario”, was based on the economic outlook drawn up under the direction of the European Commission at the end of 2013. This scenario equated to a difficult situation for the banks, taking account of the gloomy outlook in terms of economic growth, as well as other shocks. The second scenario, so-called “adverse scenario”, simulated a serious deterioration in the economic situation and in no way constituted a forecast as to future events. In order to determine whether the institutions subjected to the Comprehensive Assessment should implement corrective measures, a minimum threshold for the solvency ratio, calculated in terms of base capital (Common Equity Tier 1, or CET1), was set at 8%, both for the quality assessment of the assets and for the baseline scenario of the stress test, and at 5.5% for the adverse scenario of the stress test.

As reported in its press release dated 26 October 2014, Belfius passed the ECB’s Comprehensive Assessment with flying colours:

→ After the AQR on the balance sheet at 31 December 2013, the CET1 capital ratio of Belfius was 13.5%. This was based on a thorough examination of the books with an analysis of more than 50% of the weighted risk volume. The adjustments required by the ECB were restricted to 0.35% of the CET1 capital ratio and were attributed virtually in their entirety to minor adjustments to the valuation models for financial instruments. The regulatory adjustments for credit risks on a total portfolio in excess of EUR 100 billion amounted to just EUR 15 million.

→ After application of a highly unfavourable stress scenario, the CET1 ratio in 2016 in the context of these stress tests was still 7.30%, which was 1.80% above the 5.50% benchmark. This could be translated at the time into a capital buffer after stress test of EUR 1.13 billion.

This result demonstrated the relevance of the strategy applied at Belfius: on the one hand, the focus on developing the commercial franchise caused the operating result – and hence equity capital – to rise. On the other hand, tactical de-risking caused the risk-weighted volume of the Legacy portfolio to fall. Consequently, Belfius Bank has a solid base for the future, enabling it to continue its strategy on customer satisfaction.

1.1.3. Stress tests

In 2014, along with 123 European banks, Belfius took part in EBA stress tests in the EU. The stress exercise commenced in April and was monitored by Belgian and European supervisory teams. Various departments at Belfius (Risk, Finance, IT, Legal, etc) were closely involved, as was management. The ECB published the results of these stress tests in October, confirming the fact that Belfius is strong enough to withstand the extreme external crises tested for.

1.1.4. Recovery plan

Within the framework of the guidelines of the National Bank of Belgium, Belfius drew up at the end of 2013 an initial Recovery Plan. This plan provides for a set of recovery measures that would be taken to restore the bank’s long-term viability in the event of a significant deterioration in this financial situation due to severe general macroeconomic or individual stress scenarios. In the context of the new Banking Law of 25 April 2014 and the Bank Recovery and Resolution Directive (BRRD of 15 May 2014) of the European Union, this plan should be updated annually.

Introduction


1.2. Basel FrameworkBasel regulatory framework defines the capital requirements for banking institutions.

The main objectives of the capital agreement (“Basel framework”) put in place by the Basel Committee on Banking Supervision are to improve the regulatory framework in order i) to further strengthen the soundness and stability of the international banking system, ii) to promote the adoption of stronger risk management practices by the banking industry and iii) to prevent any competitive regulatory inequal-ity among internationally active banks.

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

→ The first pillar – minimum capital requirements – defines the way banking institutions calculate their regulatory capital requirements in order to cover credit risk, market risk and operational risk. The framework provides different approaches for calculating credit risk (3 approaches: Standardised, Foundation Internal Rating-Based and Advanced Internal Rating-Based), market risk (2 approaches: Standardised Approach and Internal Model Approach) and operational risk (3 approaches: Basic Indicator Approach, Standardised Approach and Advanced Measurement Approach).

→ The second pillar – supervisory review – provides the national regulators with a framework to help them in assessing the adequacy of banks’ internal capital to be used to cover credit risk, market risk and operational risk but also other risks not identified in the first pillar, such as concentration risk.

→ The third pillar – market discipline – encourages market discipline by developing a set of qualitative and quantitative disclosures which will allow market participants to make a better assessment of capital, risk exposure, risk assessment processes, and hence the capital adequacy of the institution. The requirements of the third pillar are met by this publication.

Basel III is a reform package for the existing Basel II framework. It was published in December 2010 as a response to the financial crisis. It is a global standard for bank capital adequacy, liquidity requirements and leverage ratio.

The Basel III requirements are translated into European law through the Capital Requirements Directive (CRD IV) and the Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms (CRR). The new regulation will gradually enter into force starting on 1 January 2014, and be fully implemented by 1 January 2019.

1.3. Basel III Implementation1.3.1. Pillar 1

Credit RiskSince 1 January 2008, Belfius has been authorised to use the Advanced Internal Rating-Based Approach (AIRB Approach) for the determi-nation of its regulatory capital requirements under Basel II Pillar 1 for credit risk and for the calculation of its solvency ratios.

Belfius has also decided to maintain a Standardised Approach for some portfolios for which this approach is specifically authorised by the Basel framework, such as small business units, non-material portfolios, portfolios corresponding to activities in run-off or to be sold or portfolios and entities for which Belfius has adopted a phased rollout of the AIRB Approach.

Market RiskIn terms of market risk, Belfius Bank calculates its capital requirements on the basis of the Internal Model Approach for general interest rate risk and foreign exchange risk and the Standardised Approach for specific interest rate risk, equity risk and commodity risk.

Operational RiskFor operational risk, Belfius Bank applies the Standardised Approach.

1.3.2. Pillar 2

This ICAAP (Internal Capital Adequacy Assessment Process), applicable since the end of 2008, requires banks to demonstrate to the regulators the adequacy of their risk profile and their capital and aims at providing an overview of the internal consolidated Belfius process for assessing its Capital Adequacy in relation to its risk profile and organisation. In this context, appropriate governance has been put in place for the calculation and management of the risks and the assessment of the economic capital needs from a Risk Appetite perspective.

Introduction

Chairman Lutgart Van den Berghe

Members Jozef Clijsters Chairman of the Board of Directors of Belfius Bank and Belfius Insurance

Carine Doutrelepont


1.3.3. Pillar 3 – Disclosure policy

Frequency of DisclosureThe Pillar 3 disclosures have been prepared in accordance with the Regulation (EU) No. 575/2013 (CRR) and are organised on an annual basis. Nevertheless, intermediate updates will be published if considered relevant by Belfius Bank due to significant changes in its risk profile.

SupportThis Risk Report is published on the Belfius website (www.belfius.com).

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

Certain figures in this report may not tally exactly due to rounding.

Scope of ApplicationThe Pillar 3 disclosure requirements under the Basel capital framework are applicable to the upper level of Consolidation, Belfius Bank SA, based at Boulevard Pachéco 44, B-1000 Brussels, Belgium.

Belfius is considered a financial conglomerate, received a waiver from the National Bank of Belgium allowing it to use the Danish Compromise method. For the regulatory scope of reporting, the participation in Belfius Insurance is consequently weighted at 370%.

Pillar 3 ContentsPart of the information provided within Pillar 3 is similar to the Annual Report. In order to facilitate reading the present document, this information has been duplicated in the Pillar 3 document.

The information provided in this report has not been subject to an external audit, but the quality of information is guaranteed by a strong process of validation within the Belfius Bank SA Management Board.

A comparison with the previous year is included, unless this is not possible due to a change in scope or methodology.

1.4. Governance arrangements1.4.1. Number of directorships held by the members of the board of directors

As at 31 December 2014 the directors of Belfius Bank held 34 directorships in other trading companies (including 13 directorships in trading companies of Belfius Group).

1.4.2. Nomination Committee

The Nomination Committee plays an advisory role and prepares decisions of the Board of Directors of Belfius Bank in relation to appointments. It also ensures the application of provisions concerning corporate governance. With a view to efficiency and consistency regarding group policy, this committee also prepares decisions of the Board of Directors of Belfius Insurance in this regard.

CompositionGeneral aspectsAs at 31 December 2014, the Nomination Committee for Belfius Bank consisted of the following members:

Introduction


Mr Wouter Devriendt was a member of the Nomination and Remuneration Committee until 11 March 2014.

Independence and remitThe members of the Nomination Committee are all non-executive directors.

→ Baroness Lutgart Van den Berghe, Doctor of Economics, is managing director at Guberna and extraordinary professor at the Vlerick Business School (and at the University of Ghent).

→ Mrs Carine Doutrelepont, Doctor of Law, is a lawyer and professor at the Université Libre de Bruxelles. → Mr Jozef Clijsters, Master in Applied Economics, is Chairman of the Board of Directors of Belfius Bank and of Belfius Insurance.

At least one member of the Nomination Committee must sit on the Board of Directors of Belfius Bank and Belfius Insurance.

Two of the three members of the Nomination Committee (situation at the end of 2014) are independent directors within the meaning of Article 526ter of the Companies Code.

One of the members also sits on the Nomination and Remuneration Committee of a listed company.

One member has professional experience in the financial sector.

All the members have professional experience as executive director and additional professional experience as non-executive directors in various sectors of activity.

Consequently, the members of the Nomination Committee have the required skills, on the basis of their education and professional experience, to give a competent and independent opinion on the composition and operation of the bank’s management bodies, in particular on the individual and collective skills of their members and their integrity, reputation, independence of spirit and availability.

RemitThe Nomination Committee:

→ identifies and recommends, for approval by the Shareholders Meeting or by the Board of Directors as the case may be, candidates suited to filling vacant seats on the Board of Directors, evaluates the balance of knowledge, skills, diversity and experience within the Board of Directors, prepares a description of the roles and capabilities for a particular appointment and assesses the time commitment expected. The Nomination Committee also decides on a target for the representation of the underrepresented gender within the Board of Directors and prepares a policy on how to increase the number of underrepresented gender in order to meet that target.

→ periodically, and at least annually, assesses the structure, size, composition and performance of the Board of Directors and makes recommendations to it with regard to any changes;

→ periodically, and at least annually, assesses the knowledge, skills, experience, degree of involvement and in particular the attendance of members of the Board of Directors and advisory committees, both individually and collectively, and reports to the Board of Direc-tors;

→ periodically reviews the policies of the Board of Directors for selection and appointment of members of the Management Board, and makes recommendations to the Board of Directors accordingly;

→ prepares proposals for the appointment or mandate renewal as the case may be of directors, members of the Management Board, the Chairman of the Board of Directors and the Chairman of the Management Board;

→ assesses the aptitude of a director or a candidate director to meet the criteria set forth for being considered as an independent director; → examines questions relating to problems with the succession of directors and members of the Management Board; → establishes a general and specific profile for directors and members of the Management Board; → ensures the application of provisions with regard to corporate governance; → prepares proposals for amendments to the internal rules of the Board of Directors and the Management Board; → assesses the governance memorandum each year and if necessary proposes amendments; → checks observance of corporate values; → at least annually discusses and analyses the quantitative statement and qualitative analysis of communications regarding stress,

burn-out and inappropriate behaviour at work and actions to be taken to remedy situations.

Introduction

Chairman Lutgart Van den Berghe

Members Jozef Clijsters Chairman of the Board of Directors of Belfius Bank and Belfius Insurance

Carine Doutrelepont


In performing its duties, the Nomination Committee ensures that decision-taking within the Board of Directors is not dominated by one person or a small group of persons, in a way which might be prejudicial to the interests of the bank as a whole.

The Nomination Committee may use any types of resources that it considers to be appropriate to the performance of its task, including external advice, and receives appropriate funding to that end.

1.4.3. Remuneration Committee

The Remuneration Committee plays an advisory role and prepares decisions of the Board of Directors of Belfius Bank regarding remune-ration. With a view to efficiency and consistency regarding group policy, this committee also prepares decisions of the Board of Directors of Belfius Insurance in this regard.

CompositionGeneral aspectsAs at 31 December 2014, the Remuneration Committee for Belfius Bank consisted of the following members:

Mr Wouter Devriendt was a member of the Nomination and Remuneration Committee until 11 March 2014.

Independence and remitThe members of the Remuneration Committee are all non-executive directors.

→ Baroness Lutgart Van den Berghe, Doctor of Economics, is managing director at Guberna and extraordinary professor at the Vlerick Business School (and at the University of Ghent).

→ Mrs Carine Doutrelepont, Doctor of Law, is a lawyer and professor at the Université Libre de Bruxelles. → Mr Jozef Clijsters, Master in Applied Economics, is Chairman of the Board of Directors of Belfius Bank and of Belfius Insurance.

At least one member of the Remuneration Committee must sit on the Board of Directors of Belfius Bank and Belfius Insurance.

Two of the three members of the Remuneration Committee (situation at the end of 2014) are independent directors within the meaning of Article 526ter of the Companies Code.

One of the members also sits on the Nomination and Remuneration Committee of a listed company.

One member has professional experience in the financial sector.

All the members have professional experience as executive directors and additional professional experience as non-executive directors in various sectors of activity.

Consequently, the members of the Remuneration Committee have the required skills, on the basis of their education and professional experience, to give a competent and independent opinion on remuneration policies and practices and on the incentives created for managing risks, capital and liquidity of the bank.

Introduction


RemitRemuneration policyThe Remuneration Committee prepares the decisions of the Board of Directors that relate among others to:

→ develop the remuneration policy, as well as to make practical proposals for the chairman, the non-executive members of the Board of Directors and the members of the advisory committees under the Board of Directors. The Board of Directors will submit this remuneration to the general meeting for approval;

→ develop the remuneration policy, as well as to make practical proposals for the remuneration of the chairman of the Management Board and, at his proposal, the remuneration of the members of the Management Board;

→ provide advice about the proposals made by the chairman of the Management Board of Belfius Bank in relation to the severance remuneration for members of the Belfius Bank Management Board. At the proposal of the Remuneration Committee, the Board of Directors of Belfius Bank determines the severance remuneration of the chairman and members of the Belfius Bank Management Board;

→ advise the Board of Directors in relation to the remuneration policy for employees whose activity has a material effect on the risk profile of the Belfius Group (known as “Identified Staff”);

→ remuneration and objectives of the individuals responsible for the independent audit functions: • the Remuneration Committee exercises direct supervision of the remuneration of the individuals responsible for the independent

audit functions (Chief Risk Officer, General Auditor and Compliance Officer),• the Remuneration Committee supervises the development of the objectives of these employees, as well as developing the

remuneration policy; → preparation of the remuneration report approved by the Board of Directors and published in the annual report; → the periodic checking to ensure that the remuneration programmes are achieving their purpose and are in line with the conditions

that apply; → the annual assessment of the performance and objectives of the members of the Management Board.

RemunerationProcedureThe Board of Directors decides about the remuneration of the members of the Management Board at Belfius Bank based on the advice of the Remuneration Committee and the chairman of the Management Board.

To offer remuneration that is in line with the market, the Remuneration Committee periodically refers to an external benchmark study. It defines, with the agreement of the Board of Directors, the reference group of the companies to be included in the benchmark, as well as the positioning of Belfius Bank in relation to this reference group.

Based on this benchmark study the Remuneration Committee may propose adjustments to the Board of Directors of the amounts of fixed remuneration and, if necessary, the adjustment of the extent of the performance-related remuneration, as well as all other changes justified by developments in the market.

In 2014, it was decided not to carry out this benchmark exercise.

The remuneration of the senior managers who may have a material impact on the risk profile of Belfius Bank, subject to the nature or level of the positions in question and/or their remuneration, is determined by the Management Board within the framework of the remuneration policy. The Remuneration Committee gives advice regarding this policy and takes note of the individual information.

Regulatory contextOver the course of recent years, the regulation on the remuneration of company managers in the financial sector has been the subject of many changes.

During 2012, the Board of Directors introduced an overall remuneration policy for the Belfius Group, in line with Belgian and European regulations in place at the time, as well as in accordance with the principles that existed at the time in terms of sound remuneration practices.

In 2014, this remuneration policy was fully rewritten to bring it into line with the latest regulations, in the first instance to comply with the new banking law. It also incorporated a number of key issues raised by the National Bank and recommendations relating to internal audit. This adjusted policy was approved at the meeting of the Board of Directors held on 17 December 2014.

The Belfius remuneration policy was developed by Human Resources and the Legal Department and submitted for advice to the Belfius Bank Remuneration Committee. The Risk Committee was also involved in developing the remuneration policy.

Introduction


The remuneration policy includes on the one hand general principles that apply to all Belfius Bank employees. It also contains, taking the principle of proportionality into account, specific provisions that apply exclusively to the members of the Management Board and to employees whose activity has a material effect on the risk profile of Belfius Bank, given the nature or level of the positions themselves and/or their remuneration.

Strategy guidelines approved by the Board of Directors in accordance with regulationsFixed remuneration forms an appreciable part of total remuneration and is designed to reward the performance of employees, taking into account their experience, education and qualifications, their duties, responsibility and the level of their position. By restricting the performance-related part of their remuneration, they are dissuaded from taking excessive risks. Yet it remains important to make a targeted and flexible policy on performance-related pay possible. This approach enables Belfius Bank, for the employees in question or for some of them, to reduce performance-related remuneration – or even to reduce it to zero – in the event of poor (collective or individual) performance, taking the employee’s hierarchical level into account and/or the statutory footing on which their performance-related remuneration is based.

Risk-related indicators have been included in the targets set for members of the Management Board and for those employees whose activity has a material effect on the risk profile of Belfius Bank since the 2014 performance year. The aim is to take proper account of the various types of risk (current and future) at any time in the assessment cycle.

The establishment, monitoring and assessment of these risk indicators is coordinated by the Chief Risk Officer (CRO) and submitted to the Remuneration Committee and the Risk Committee. Where appropriate, the CRO will confer with the Auditor General and the Compliance Officer and will also consult regularly with the Human Resources Department. The aim is to penalise poor performances on the performance-related pay. In the event of repeated or serious problems, the person’s performance-related pay can be set to zero.

Remuneration of members of the Management BoardThe remuneration of members of the bank’s Management Board consists of a fixed part and a performance-based part.

The fixed and performance-based remuneration of members of the Management Board constitutes a whole from which are deducted any attendance fees or directors’ fees paid to a member of the Management Board by a third-party company for which the member performs a mandate on behalf of Belfius Bank.

The remuneration of the Management Board is approved by the Board of Directors. The chairman and members of the Management Board do not participate in the discussions, or make decisions in this regard.

Fixed remuneration is determined considering the nature and importance of the responsibilities assumed by each person and taking account of market benchmarks for comparable positions.

The members of the Management Board of Belfius Bank received no performance-based remuneration for the year 2014.

Option plansDuring 2014, no option was granted to members of the Management Board, or exercised by the latter.

Remuneration of employees whose activity has a material impact on the risk profile of Belfius Bank (33 individuals)No deferred part of performance-related remuneration was allocated to any individual in 2014.

In 2014 no options were allocated to or exercised by employees whose activity has a material impact on the risk profile of Belfius Bank.

The performance-related remuneration envelope (2014 performance) was defined based on the evolution of the company’s results. For senior management, the target budget is calculated on the basis of 25% of the midpoint of the pay brackets.

On the advice of the Remuneration Committee, the Board of Directors approved the update to the Identified Staff group at its meeting on 17 December 2014. The approval was based on the guidelines issued by Europe. This update means that in the future, the number of Identified Staff at Belfius Bank will be 132 individuals.

Remuneration of members for the Board of DirectorsThe total remuneration granted to the members of the Board of Directors for 2014 includes the emoluments granted for their mandate as directors, as well as their fees for attending meetings of the Board of Directors and various advisory committee meetings.

The number of remunerated meetings of advisory committees is limited to a maximum 6 per committee and per non-executive director.

Introduction

Chairman Rudi Vander Vennet

Members Wouter Devriendt

Pierre Francotte


1.4.4. Risk Committee

The Risk Committee is one of the advisory committees established within the Board of Directors.

CompositionGeneral aspects

The Risk Committee has a minimum of three members. The members of the Risk Committee are non-executive directors.

The Chairman of the Management Board, the Chief Risk Officer, the Chief Financial Officer and the member of the Management Board responsible for Public and Wholesale Business and Treasury and Financial Markets attend meetings of the Risk Committee as permanent invitees.

The other members of the Management Board and non-executive directors may attend meetings of the Risk Committee on its invitation.

The members of the Risk Committee must individually have the knowledge, skills, experience and aptitudes necessary to enable them to understand the bank’s risk strategy and appetite level.

As at 31 December 2014, the Risk Committee consisted of the following members:

Independence and remitThe Risk Committee of Belfius Bank consists of two independent directors, namely Mr Rudi Vander Vennet (also a member of the Audit Committee until 19 November 2014) and Mr Pierre Francotte (also a member of the Audit Committee from 19 November 2014).

→ Mr Rudi Vander Vennet, Doctor in Economics, is a Professor in Finance and Banking Sector at the University of Ghent. He holds or has held various positions in Credibe, the European Banking Authority, CGER Bank, ICCH and OBK Bank.

→ Mr Wouter Devriendt, Master in Economics, is an independent adviser to the Federal Holding and Investment Company. He has held various positions in Fortis Bank and ABN Amro.

→ Mr Pierre Francotte holds a law degree and a special degree in law, specialising in economic and finance law. For several years he was Chairman of the Management Board at Euroclear Bank and then at Euroclear. He is a Professor at the Solvay Brussels School of Economics and Management.

→ Mr Jozef Clijsters was a member of the Risk Committee until 11 March 2014 and was replaced, from 12 March 2014 by Mr Wouter Devriendt.

→ Mr Serge Wibaut was a member of the Risk Committee until 30 September 2014, when he resigned his mandate as a director of Belfius Bank.

The former and current members of the Risk Committee have the individual expertise and professional experience required to define strategy regarding risk and the level of risk appetite of an institution. They have acquired the specialisation necessary in particular as directors with other institutions and/or in their university training. As a consequence, the Risk Committee has the required individual knowledge and expertise.

RemitThe Risk Committee has advisory powers and responsibilities with regard to the Board of Directors in the following areas:

→ appetite and strategy regarding the bank’s current and future risks, more particularly the effectiveness of the risk management function and the governance structure to support them;

→ monitoring implementation of risk appetite and strategy by the Management Board; → allocating the risk appetite to various categories of risks and defining the extent and limits of risk in order to manage and restrict

major risks; → considering the risks run by the bank with its customer tariffs; → assessing activities which expose the bank to real risks;

Introduction


→ supervising requirements in terms of capital and liquidity, the capital base and the bank’s liquidity situation; → the guarantee that risks are proportional to the bank’s capital; → formulating an opinion with regard to major transactions and new proposals for strategy activities that have a significant impact on

the bank’s risk appetite; → obtaining information and analysing management reports as to the extent and nature of the risks facing the bank; → monitoring the Internal Adequacy Assessment Process (ICAAP) and the Recovery Plan.

OperationThe Risk Committee meets at least once per quarter. It also meets on an ad-hoc basis in relation to specific matters.

The Risk Committee operates independently of the Risk & Underwriting Committee of Belfius Insurance. On the request of the Chairman of the bank’s committee, a joint Risk Committee of Belfius Bank and Belfius Insurance may be held. To promote sound remuneration policy and practices, subject to the tasks of the Nomination Committee and the Remuneration Committee, the Risk Committee examines whether incentives in the remuneration system take proper account of the institution’s risk management, equity requirements and liquidity position, as well as the probability and distribution of profit over time.

The Risk Committee and the Audit Committee periodically exchange information in particular concerning the quarterly risk report, the specific report on operational risks, the senior management report on the assessment of internal control and the risk analyses performed by the Legal, Compliance and Audit Departments. The aim of this exchange of information is to enable the two committees to perform their tasks properly and to take the form of a joint meeting.

1.5. Risk Charter & Strategy1.5.1. Risk Charter

Belfius Bank has encoded the main principles and guidance for all stakeholders, and more specifically for Belfius Risk Management in a Risk Charter.

This Risk Charter forms the backbone on which to address adequately customer needs, in order to

→ (i) provide a continuous qualitative service in a “sound partnership” (timely and adapted to the customer’s needs); → (ii) within an acceptable and desired risk profile; and (iii) taking into account legislation, regulation and the prescriptions of the

prudential authorities. It is an essential part of a bigger picture that, based on sound Risk Management and corporate governance, is completed inter alia with policies and guidelines, a complete Risk Governance Policy as well as a Risk Appetite Framework (RAF) and a yearly updated Risk Strategy document.

The Belfius Risk Charter is summarised in “10 commandments”:

1. The overall objective of the Risk Department is to assure the implementation of a sound, prudent and effective Risk Management in a cost-effective way based on a full understanding of the risks and a swift and proactive identification of and alerting to potential risks.

2. The cornerstone of Risk Governance is a coherent and simple set of Belfius Risk Committees, where decisions are taken at the appropriate level, and a coherent set of up-to-date Risk Policies and Guidelines, covering all risk in their scope.

3. The Risk Appetite Framework (RAF) is the expression at the highest consolidation level of the risk Belfius is ready to take. The RAF is a key tool to monitor and limit risks and to support discussions at the highest level. It is furthermore declined in operational limits and measures.

4. The Risk Management function must be independent. It reports to the Management Board and to the Board of Directors through the Risk Committee.

5. Risk Management is a key player in the management of the global balance between the bank’s solvency, liquidity and profitability.6. An appropriate (global) Belfius Risk Culture is a key success factor of the Risk Management Strategy. The Front Office is the bank’s

first risk manager and must therefore have a common view on risk management and share the good practice (risk) principles.7. Understanding the transaction and the customer are key risk features.8. The New Product Approval Process is an important building block contributing to sound risk management.9. Risk Management ensures an effective process to identify, measure, monitor, assess or mitigate risk, enhanced by timely and accurate

reporting to make management aware of all the material risks and the overall risk profile in order to ensure appropriate decision-taking as well as clear risk recommendations.

10. The Risk Charter and the other essential building blocks of the Risk Management Framework are presented to and evaluated by the adequate decision and advisory levels on an annual basis.

Introduction


1.5.2. Risk Strategy

Via its Risk Strategy, Belfius Bank fixes and communicates the overall objectives for the Risk Department, its team members and its main stakeholders (Finance & Business).

The Risk Strategy expresses the overall and the Risk Management objectives, actions and priorities of the Risk Department with a focus on their implementation in the strategic/tactical plan (1-2 years time horizon) and stretches over the same horizon as the financial plan in order to achieve major progress in Risk Management.

Strong Risk Management and fostering risk awareness throughout Belfius in a pragmatic way while respecting risk, business and regula-tory expectations and accompanying Belfius de-risking and new regulatory compliance strategy remains the core mission.

Besides building a strong and responsible risk culture as the main challenge and opportunity, Risk Management priorities and processes are in the current Risk Strategy focused on:

→ ensuring continuous alignment between Risk Appetite and Bank strategy (new business focus), and aligning Risk Practice with it; → ensuring continuous compliance with risk regulatory requirements, with a special focus on the transition towards SMM and the AQR

exercise; → further empowerment of the risk organisation, with clear accountability while underlining an ex-ante/proactive risk management

perspective; → continuous search for (inter)department synergies through effectiveness and efficiency; → the management of emerging risks.

Concrete objectives have furthermore been defined and developed around 3 clusters:

→ Risk Appetite and Risk Awareness; → Regulatory; → Risk Management Organisation and Process.


2.1. General missionThe mission and role of the Risk Department is to define and implement a robust Risk Management framework based inter alia on the following cornerstones:

→ an acceptable Risk Appetite in line with the commercial and financial objectives; → a set of independent and integrated risk measures for different types of risk (credit, concentration, market, liquidity, operational and

other non-financial risks), enhanced by internal limits themselves consistent with the approved risk appetite; → an effective process to identify, measure, monitor, assess or mitigate risks to which Belfius Bank is or might be exposed, enhanced

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

The Risk Department has the responsibility to establish a set of policies and guidelines defining the risk governance and management including an adequate committee structure with clear and consistent assignment of responsibilities.

The overall objective of the Risk Department is to assure the implementation of sound, prudent and effective Risk Management based on the basis of a full understanding of the risks and based on a swift and proactive identification of and alerting to potential risks.

2.2. Risk organisationAt Belfius Bank, the Risk Department is organised in the following way:

→ business line oriented; → enforced integration of transversal functions in the Risk Department.

This Risk organisation takes into account:

→ Belfius Bank as a new actor in the Belgian financial sector/context serving Belgian society/economy; → the size of Belfius Bank; → the strategic objectives of Belfius Bank; → the needed cooperation between methodological and operational risk teams; → the extension and reinforcement of regulations (Basel III) and additional (inter)national regulatory control; → the liquidity, solvency and profitability challenges; → the necessary promotion of a risk culture at Belfius Bank.

These are the missions of the different divisions of the Risk Department:

Risk Department organisation, role and responsibilities2.

Risk Department organisation, role and responsibilities

Credits RCB–PWB Risk Management

TFM Risk Management

Integrated Risk Management

(ALM incl.)Validation

Risk Framework Operational Risk Management

RISK DEPARTMENT

RCB PWB

FINANCE

TFM


2.2.1. RCB-PWB Risk Management

The goal pursued by RCB-PWB Risk Management is the development and maintenance of an efficient and robust Risk Management framework for the RCB and PWB activities, based on proactive risk control and risk-challenger view, putting in perspective all of the risks present in these segments (“business risk expertise centre”). Basically, the focus is on credit risk, which does not exclude also giving due consideration to other types of risk.

2.2.2. TFM Risk Management

The focus of TFM Risk Management is to develop and maintain an efficient and robust Risk Management framework for treasury, portfolio and financial markets activities including advice, supervision and support in terms of risk assessment (credit, market and portfolio), in strict compliance with the risk appetite and the business strategy of Belfius Bank.

2.2.3. Integrated Risk Management

Integrated Risk Management is in charge of establishing a consolidated view of risks and its interdependencies (credit, market, liquidity, business and operational risks) and define/manage the framework for risk appetite.

Integrated Risk Management is also in charge of proposing strategies and tools to help optimise the financial balance (risk capital vs. return vs. liquidity) while meeting the objectives of appetite for risk as well as the objectives of Belfius Bank.

2.2.4. Validation

The primary task of Validation is to ensure quality, reliability, proper functioning and adequate use of the models developed by Belfius Bank as well as their compliance with regulatory requirements, and that during their entire life cycle.

Validation also plays an important role in the assessments/communication of the strengths and weaknesses of models to help all stake-holders to improve their use and understanding.


RCRP

C/RI

SK D

EPAR

TMEN

T

BUSI

NES

S &

SUPP

ORT

LIN

ES

Risk Appetite Framework Recovery Plan

Risk

Cha

rter

Risk

Str

ateg

y

New Product Approval Policy

Risk

Gov

erna

nce

Polic

y

Planning/ Calendaria

Structural

Day-to-day

Risk Policies

Risk Guidelines

Limit HandbookTranslation of RAF


2.2.5. Risk Framework

Risk Framework is the preferential contact and main line of communication with ECB/NBB. It is the competence and knowledge centre for all Basel matters and is in charge of monitoring changes in prudential regulation and setting up of impact studies related thereto.

It is also in charge of ensuring the organisation and coordination of the various risk committees e.g. RC (Risk Committee), RPC (Risk Policy Committee), MMM (Model Management Meeting), etc and of providing guidance in the Policies and Guidelines process within the Risk Department. It also acts as a Competence Centre for the computation, analysis and simulation of RWA/CRE.

Risk Framework has project management abilities to monitor projects with IT/EUC impact in order to optimise the Risk Management systems while maintaining a consistent Risk architecture. It is an IT/IS4F privileged interlocutor.

2.2.6. Operational Risk Management

Operational Risk Management is in charge of defining the operational risk policy, guidelines and methodology, adopting a proactive approach to day-to-day management and prevention of operational risk. ORM has the second-line responsibility for setting up, maintaining and continuously developing the bank’s operational risk framework.

It is also ORM’s job to ensure business continuity and to play the role of crisis manager in addition to conducting an information risk policy and keeping that information secure.

2.3. Risk Management ArchitectureThe Risk Management Architecture aims to implement sound, prudent and effective Risk Management and corporate governance.

The Risk Management Architecture, composed of essential building blocks, aims in a coherent way to cover all elements needed for sound Risk Management. It principally defines the interactions between the Risk Department and Business.



2.3.1. The Risk Appetite Framework (RAF):

→ is the expression, at the highest consolidated level, of the risks Belfius is (not) prepared to take as a stand-alone company pursuing its own strategy and financial targets;

→ applies group-wide and all (sub-)limits and risk guidelines have to be consistent with it; → is composed of a series of quantitative and qualitative elements, designed to express the risk levels and types that are (not) acceptable,

tolerated and targeted, in order to achieve the business strategy.

2.3.2. The Risk Charter:

→ is considered as vade-mecum and encodes the main risk principles and guidance for all stakeholders and departments involved, and more specifically for the Risk Department;

→ forms the backbone to adequately address customer needs in order to (i) provide a continuous qualitative service in a “sound partnership” (timely and adapted to the client’s needs); (ii) within an acceptable and desired risk profile; and (iii) taking into account legislation and regulations;

→ guidance permitting management and staff members to prepare/take decisions, even when specific and adapted policies, guidelines or procedures have not yet been established.

2.3.3. The Risk Strategy:

→ expresses the overall and the Risk Management objectives, actions and priorities of the Risk Department with a focus on their implementation during the strategic/tactical plan (1-2 years time horizon) and stretches over the same horizon as the financial plan in order to achieve major progress in Risk Management;

→ builds a strong and responsible risk culture as the main challenge and opportunity.

2.3.4. The Risk Governance Policy:

→ defines a robust set-up of Risk Committees incorporating effective communication and reporting lines with clear and consistent as-signment of responsibilities and authority;

→ consistently assigns roles and responsibilities to both Risk/Risk & Business Committees; → positions decision taking (and their monitoring) at an adequate management level in a consistent manner (Strategic/Tactical - Operational

Committees); → optimises Committees and encourages a double signature process where possible.

2.3.5. Policies & Guidelines:

→ an aggregated set of specific risk policies a nd guidelines to give shape to the desired global Risk Management governance and culture; → defining strategies, roles and responsibilities, concepts and objectives of an activity; → gives clear instructions for stakeholders to be applied in day-to-day business context.

2.3.6. New Product Approval Policy (NPAP):

→ is an umbrella policy which coordinates practices related to the “new product” culture of the business and activity lines. The first phase concerns the decision on the application of the NPAP, and, in the positive case, the determination of the strategic or non-strategic level of the proposal;

→ specifies that, in addition to business and activity lines, support lines have an important role in the decision-taking process for new products (mandatory and/or optional advise of the involved departments on a case by-case basis);

→ describes a transparent process assuring consistency with commercial and financial objectives and in line with both RAF and the interests of our customers.

2.3.7. The Recovery Plan:

→ regulatory imposed tool; → an essential tool for strengthening crisis management frameworks; → outlines the different options that can be envisaged in response to major shock to the bank liquidity or solvency.

2.3.8. The Limit Book:

→ aims to cluster all major limits applicable within Belfius Bank in one sole document.


BOAR

D OF

DI

RECT

ORS

Risk Committee


2.4. Risk GovernanceThe presence of an effective Risk Governance structure is considered by the regulator to be a keystone to sound Risk Management. Such a set-up ensures a two-way process of Risk Management instructions and feedback enabling senior management to fulfil its management and supervisory obligations.

2.4.1. Risk Committee operating within the Board of Directors: Risk Committee (RC)

The Risk Committee (RC) is one of the advisory committees operating within the Board of Directors. It has been established in accordance with Article 27 and Article 29 of the law on the status and supervision of credit institutions.

The RC provides advice on the current and future risk appetite and risk strategy. The RC assists the Board of Directors in the monitoring of the implementation of decided strategy by the Management Board. The RC ensures that the prices of products offered to customers take account of the risks run by the bank, in particular reputational risk items. The RC assists the Board of Directors in supervising equity and liquidity objectives and requirements, as well as transactions having an impact on the bank’s liquidity or equity.

To promote sound compensation practices and a healthy remuneration policy, the RC examines the incentives defined in the remuneration practices in order to verify whether or not these practices take into account sound Risk Management principles, the capital needs and liquidity position of the bank, as well as the probability of profits and the spread in the time of these profits.

When deemed necessary and without restrictions, the CRO can go straight to the chairman of the Risk Committee and/or the Audit Committee.

2.4.2. Risk Committees at Strategic Level operating in the Management Board

The Risk Policy Committee (RPC) monitors the definition and the implementation of the bank’s principal Risk Management and measurement policies, processes and methodologies, and supervises their validation status. Its prime responsibility is to ensure that Risk Governance is commensurate with the risk appetite and strategy of the bank, compliant with regulatory requirements and in line with best practices.

The Risk Appetite Committee (RAC) monitors Belfius Bank’s risk appetite, capital adequacy and capital allocation. It manages the bank’s economic capital and stress test framework, ensures the adequacy of this framework in relation to the nature and complexity of the bank’s risk profile and business composition and supervises its practical implementation.

The Basel III Steering Committee monitors Belfius Bank’s Basel III status and ensures an overall smooth project organisation. It validates business and methodological choices, planning, simulations, impact analyses and the final results.

MAN

AGEM

ENT

BOAR

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Risk Policy Committee

Risk Appetite Committee

Basel III Steering Committee


MA

NA

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ME

NT

BO

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Risk Executive Committee

Assets & Liabilities CommitteePortfolio Investment CommitteeInvestment CommitteeFair Value Committee

(Central) Risk Committee RCB(Central) Risk Committee PWBTFM Risk Committee

Basel III Project CommitteePrudential Watch Committee

Risk Policy Committee

Risk Appetite Committee

Basel III Steering Committee

CDC Central/Regional Regional Risk Com RCB/PWBFM Credit Limits Committee Watch List Committee FMInternational Trade Finance Default CommitteeRating Committee Impairment CommitteeLeasing/Factoring/Crefius

Credit RiskFunctional Domain

Operational Risk ManagementCompliance

Non-Financial RisksFunctional Domain

TACTICAL/OPERATIONALSTRATEGIC


In addition to these three committees, two functional areas also report to the Management Board without a separate committee set up for them. These two areas deal with credit-related topics and the non financial risks. For the credit-related items, a set of tactical/opera-tional committees has been set up with a focus on the one hand on Risk Management issues and on the other hand on performing and non-performing loans.

2.4.3. Risk Committees at Tactical/Operational level

The Management Board delegates certain decisions to a tactical/operational level. The details of this delegation are set out in the applicable committee charters. For matters that fall outside the jurisdiction of this delegation, the tactical/operational level provides information or puts forward opinions to the Management Board, which then decides.

The Committees that are part of the tactical/operational level are committees on which the Risk Department generally participates along with the business. Risk Committees steered by the Risk Department principally focus on risk appetite and methodology. Risk/Business committees steered jointly by Risk Department/Business principally focus on guidelines, transactions and counterparty risks. The Risk Department has a right of veto in these committees, as well as the ability to have any decisions taken at a higher level.

The Risk Executive Committee (Risk ExCom) is responsible for the day-to-day deployment of the Risk Strategy of Belfius Bank within the Risk Appetite Framework as defined by the Board of Directors (RC) and/or the Management Board (RPC, RAC & Basel III Steering Committee).

The Assets & Liabilities Committee (ALCo): while the Management Board and the Board of Directors have the ultimate responsibility for setting the strategic risk appetite and business objectives, they delegate to the ALCo the effective ALM management within the regulatory framework.



The Portfolio Investment Committee (PIC) acts as the central supervisory and decision body on all matters regarding the portfolio management of legacy portfolios. Its principal missions consist of approving (de-)investment transactions, reviewing portfolio strategy and performance and assuring alignment of portfolio management with the de-risking strategy and business objectives, set forward by TFM RM and validated by the Management Board and the RC.

The Investment Committee gives advice to the Management Board regarding the acquisition of participations (equity investments) by the business lines PWB and RCB TFM.

The Fair Value Validation Committee (FVVC) acts as the assessing/challenging forum regarding methodological changes in Financial Instruments Fair Value in order to check compliance with IFRS rules.

The Risk Committee RCB is a platform for structural consultation and dialogue, in order to increase the involvement of all stakeholders in the strategy and the functioning of Risk Management RCB. This includes the discussion of general and transversal items such as inter alia governance, watchlist and impairment cycle, analysis and decision making process, risk projects, and so on.

The Risk Committee PWB is a platform for structural consultation and dialogue, in order to increase the involvement of all stakeholders in the strategy and the functioning of Risk Management PWB. This includes the discussion of general and transversal items such as inter alia governance, watch list and impairment cycle, analysis and decision making process, risk projects, and so on.

The TFM Risk Committee (TRC): the prime function of the TFM Risk Committee is to provide effective Risk Management oversight and steering of the Treasury and Financial Markets activities. This includes reviewing business, risk and P/L reports and providing for an appropriate Risk Management and governance framework, aligned to the risk appetite and business objectives put forward by the Management Board.

The Basel III Project Committee ensures the exhaustive coverage of regulatory requirements by screening the CDR/CRR IV texts & consultative papers, lists the relevant topics and allocates them to the working groups concerned, defines the planning and key milestones of the project, monitors the results of the different working groups and reports finally to the Basel III Steering Committee.

The Prudential Watch Committee (PWaC): the prime function of the PWaC is to anticipate, to understand, to follow up and to steer the implications of (evolving) prudential guidelines. This role requires a proactive assessment of new and changing regulations on the bank’s governance, capital basis, business conduct and profitability. Although PWaC principally focuses on risk and finance related regulation, its follow-up covers all banking domains.

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

→ approves new credit transactions PWB and RCB and annual reviews of existing credit files (based on updated financial statements, i.e. without any adjustment of the current risk), that do not exceed its delegation limits and/or that do not lead to an exceeding of the prevailing credit limits;

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

The FM Credit Limits Committee (FM CLC):

→ approves specific limit requests for all TFM business lines and PWB Trade Finance, and this within the global Credit Limit Framework approved by the Management Board for Financial institutions, Sovereigns and International Public Finance;

→ approves an eventual decrease of current (effective) Country limits; → develops various activities in relation to risk monitoring, such as the optimisation of TFM lines per activity line, the review of the list

of frozen limits, the follow-up of limits being exceeded and the drawing-up of the relevant imperative action plans.

The CDC International Trade Finance makes decisions with regard to transactions managed by the International Trade Finance Department of Distribution ITF.

The Rating Committee: the main aim of the Rating Committee is to supervise the correct and coherent application of the different In-ternal Rating Systems within Belfius Bank and its subsidiaries, together with an assessment of their performance.

The CDC Leasing handles new credit applications, extension of lines with a specific duration as well as the periodic review of files.

The CDC Factoring handles new credit applications, extension of lines with a specific duration as well as the periodic review of files.

Crefius handles new credit applications and the review of mortgage loans.


Pillar 1 Pillar 2Covered

by Capital

Financial Risks

Credit Risk

Solvency Risk x x YesCountry Risk x x YesResidual/Recovery Risk x YesSetllement Risk x Yes

Market and Balance-Sheet Management Risk

Interest Rate Risk - Banking x YesInterest Rate Risk - Trading x x YesPrice Risk(1) x x YesCurrency Risk - Banking x YesCurrency Risk - Trading x x YesSpread Risk - Banking x YesSpread Risk - Trading x x YesOther Market Risks x Yes

Other Risks Insurance Specific Risks x Yes

Operational Risks

Operational Risk Operational Risk x x Yes

Other Risks

Funding Risk x YesBehavioural Risk x YesBusiness Risk x YesModel Risk x Yes

Qualitative Risks

Liquidity Risk x NoReputation Risk x NoStrategic Risk x NoSecuritisation Risk x No

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


The Regional Risk Committee RCB monitors the regional loan portfolio, with a special focus on the counterparties whose credit profile is weakened (watch list). Organised by region (NO, NW, SE, SO and Centrum).

The Regional Risk Committee PWB monitors the regional loan portfolio, with a special focus on the counterparties whose credit profile is weakened (watch list). Organised by region (NO, NW, SE, SO and Centrum).

The Watch List Committee FM closely monitors counterparties for which there is evidence that their credit profile has (severely) deteriorated.

The Default Committee (DC): the objective of the DC is to decide on and follow up the default status of counterparties, i.e. being a necessary condition for an impairment to be recognised.

The Impairment Committee (IC): approves the individual impairment amounts and reviews the collective impairment amount, before these figures are communicated to Accounting for transcription in the financial accounts. The IC with regard to the RCB & PWB portfolios is organised at 2 levels, with competences linked to the amount of the impairment (new, additional or withdrawal).

2.5. Belfius risk cartographyThe following table illustrates the risk identification process within Belfius. It represents the risk cartography of Belfius as at 31 December 2014, which aims at screening all risks to ensure they are identified, quantified and/or monitored.

The RICAP (Risk Identification and Cartography Assessment Process) was implemented in 2011. The RICAP consists of a series of meetings with key business representatives to ensure all risks are identified. The profitability of business lines and volatility of earnings are also analysed to identify risks that could be beneath the radar. All risk types are classified in financial, operating and qualitative risks. Financial and operating risks are capitalised as opposed to qualitative risks.

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

→ Credit Risk, part 4; → Market Risk, part 5 and Asset & Liability Management Risk, part 6; → Operational Risk, part 7; → Other Risks, part 8.

Comparison of core shareholders’ equity (financial statements) and regulatory core own funds

01/01/14 31/12/14

Core shareholders’ equity Elimination of insurance groupNon-controlling interests REGULATORY CORE OWN FUNDS

7,343 7,804 319 98 0 0 7,662 7,902


3.1. Equity Belfius reports on its solvency on consolidated level in line with the CRR IV/CRD IV regulations. The regulations issued by the European Parliament on 26 June 2013 consist of a set of regulations (CRR IV – EU 575/2013) and a directive (CRD IV – 213/36/EU), these regulations are the European conversion of the texts of the Basel committee (the Basel III accords). These European regulations were supplemented further by the publication in the Belgian Official Gazette on 15 May 2014 of the national options from the National Bank of Belgium (NBB) in accordance with the regulations of 4 March 2014. These national options relate mainly to the transitional period from Basel II to Basel III. The CRR IV/CRD IV regulations and the national options are applicable as from 1 January 2014.

The reporting obligation under CRR IV/CRD IV was applicable as from 31 March 2014 and is in line with the COREP guidelines established by the European Banking Authority (EBA) and the NBB.

Belfius is required to comply with the required solvency ratios that calculate the ratio of regulatory own funds and the total risk weighted assets.

The accent is on the Common Equity Tier 1 capital ratio (CET1 ratio) which emphasises more stable and stronger forms of capital and tighter capital requirements. The CET1 ratio presents the ratio of the CET1 capital and the total risk weighted assets. From a regulatory point of view, as described in CRR IV (pillar 1), the CET1 ratio should minimally reach 4% in 2014 and 7% in 2019 (at the end of the transition period as described in CRR IV/CRD IV).

The total capital ratio presents the ratio between the total regulatory own funds and the total risk weighted assets. From a regulatory point of view (pillar 1) this ratio should minimally reach 8% in 2014 and 10.5% in 2019 (at the end of the transition period as described in CRR IV/CRD IV).

Belfius also has to comply with the regulatory solvency ratios as described in CRD IV (pillar 2). In the beginning of 2015 the European Central Bank (ECB) has finalised its “Supervisory Review and Evaluation Process” (SREP) based on the methodology of the NBB.

3.1.1. Accounting and Regulatory Equity Figures

In line with regulatory capital, Belfius has chosen to limit the scope of Pillar 3 to banking institutions. Therefore, the scope of consolidation of Pillar 3 differs from the scope of consolidation of the financial statements (as released in the Belfius annual report).

For regulatory reporting purposes, the Belfius insurance group included in Belfius is not consolidated and is thus treated as a financial fixed asset. As a result, there are significant differences between the equity in the consolidated annual report and the regulatory calculations.

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

The following table shows a comparison between total equity as per financial statements and total equity as start base of Tier 1 and total regulatory capital at year-end.

Equity and Capital Adequacy3.

Equity and Capital Adequacy

Basel II

31/12/13

Tier 1 capitalTotal regulatory capital

6,5707,052


3.1.2. Regulatory Capital

Regulatory own funds consists of:

→ Common Equity Tier 1 capital (CET1 capital) including: • subscribed capital, • additional paid-in capital, • reserves, • retained earnings (including profit for the current year(1)), • conversion differences, • non-controlling interests, • remeasurement of defined benefit plans, • remeasurement of available for sale reserve on securities,minus • intangible fixed assets, • dividends to be paid, • net positions retained in own shares, • goodwill, and • certain investments in CET1 capital instruments in entities from the financial sector;

→ additional Tier 1 capital including capital instruments that meet specific conditions, minus investments in similar instruments in other entities from the financial sector;

→ Tier 2 capital, consisting of the calculated regulatory usable value of subordinated long-term debts, minus investments in similar instruments in other entities from the financial sector.

In accordance with IFRS accepted by the European Commission:

→ the fair value reserves related to gains and losses on cash flow hedges on financial instruments and the changes in the value of own credit standing are excluded from regulatory own funds;

→ additional regulatory value adjustments due to the requirements for more prudent regulatory valuation of available for sale assets are deducted from CET1 capital;

→ other elements such as deferred tax assets are also taken into consideration.

The NBB has given Belfius permission to apply article 49 of the CRR and hence to cease deducting the holdings by Belfius Bank of capital instruments of Belfius Insurance from the regulatory own funds, but rather to include it in the total risk exposure by applying a weighting of 370% (the so called “Danish Compromise”).

At the end of 2013, the Basel II regulations were still applicable and Belfius reported the following regulatory capital:

For the purpose of comparability, the figures for 2013 have been restated to the CRR IV/CRD IV regulations, which are applicable as from 1 January 2014.

(1) If the conditions described in CRR IV/CRD IV are fulfilled.


COMMON EQUITY TIER 1 CAPITAL (CET1 CAPITAL) Base for the regulatory core own funds GAINS AND LOSSES NOT RECOGNISED IN THE STATEMENT OF INCOMERemeasurement defined benefit plansRemeasurement available-for-sale reserve on securities and frozen fair value adjustments of reclassified financial assetsOther reservesFilter on the fair value reserves related to gains and losses on cash flow hedges in financial instrumentsTransitional measures DEDUCTIONS AND PRUDENTIAL FILTERSDeferred tax assets on losses carried forwardInvestments in securitisation positionsChanges in the value of own credit standingValue adjustments due to the requirements for prudent valuationIntangible fixed assetsGoodwillTransitional measures TIER 2 CAPITALTier 2 capital instrumentsExcess of provisions IRBTransitional measures REGULATORY OWN FUNDS (AFTER APPROBATION OF PROFITS)

Regulatory own funds

(In millions of EUR) 01/01/14 31/12/14

7,282 7,276 7,662 7,902 (119) (38) 125 99 (1,411) (815) 0 (10) 0 10 1,167 678 (262) (589) (284) (291) 0 (244) (15) (24) 0 (79) (86) (80) (104) (104) 227 233 689 705 489 477 25 39 175 190 7,970 7,981


In the regulatory own funds calculation under Basel III, the transitional measures provided for in CRR IV/CRD IV are taken into account as set out in the applicable national regulations.

At the end of 2014, the base for the regulatory core own funds amounted to EUR 7,902 million, an increase of EUR 240 million compared with 1 January 2014. This increase stems mainly from the profit generated in 2014 in the banking group.

CET1 capital amounted to EUR 7,276 million, compared with EUR 7,282 million on 1 January. The significant increase in CET1 capital results from the year-end profit and the improvement in the remeasurement in the reserves of securities available for sale of EUR 107 million (including transitional measures). However, this increase in CET1 capital is mainly offset by the new deduction of the investments in securitisation positions of EUR 244 million and the additional deduction for regulatory prudent valuation of EUR 79 million.

Tier 1 capital is equal to the CET1 capital given that the bank does not hold any additional Tier 1 capital.

Tier 2 capital increased from EUR 689 million to EUR 705 million. This increase was mainly the result of the increase in the excess of the IRB provision, being the difference between the booked provisions and the calculated expected losses on portfolios treated in the internal rating based method in credit risk.

At the end of 2014, total regulatory own funds was EUR 7,981 million, compared with EUR 7,970 million at 1 January 2014.


Type of risk Basel II treatment Exposure class Weighted risks

31/12/13BII

31/12/2014BIII

Evolution 31/12/14 –

31/12/13

Credit Risk

Standard

Regional governments or local authorities 37,223 128,839 91,616Public sector entities 3,243,651 1,029,044 (2,214,607)Institutions 367,486 340,259 (27,227)Corporates 3,854,086 4,032,902 178,816Retail 190,075 176,325 (13,750)Secured by real estate property 18,131 12,478 (5,653)Past due items 52,539 93,553 41,014Items belongning to regulatory high-risk categories 157,951 90,630 (67,321)Covered bonds 0 0 0Collective investments undertakings (CIU) 1 4,809 4,808Equity 0 6,256,198 6,256,198Other items 1,513,595 1,588,397 74,802TOTAL 9,434,738 13,753,434 4,318,696

Advanced Central governments and central banks 1,792,259 2,954,593 1,162,334Institutions 1,507,841 3,303,115 1,795,274Corporates 17,805,756 17,065,320 (740,437)Retail 3,396,853 3,004,802 (392,051)Equity IRB 197,348 317,386 120,038Securitisation positions IRB 3,699,022 336,852 (3,362,170)Other non credit-obligation assets 30,127 256 (29,871)TOTAL 28,429,206 26,982,323 (1,446,883)

Other Credit valuation adjustment 3,704,294 3,704,294Contributions to the default fund of a CCP 151,645 151,645Other own funds requirements 1,088,835 1,074,044 (14,791)TOTAL 1,088,835 4,929,984 3,841,149

Market Risk

Standard Traded debt instruments 97,000 98,189 1,189Equity 314,060 276,750 (37,310)Commodities 2,246 1,204 (1,042)TOTAL 413,306 376,143 (37,163)

Internal Models Risk exposure amount for Position, foreign exchange and commodities risks under internal models (IM) 899,336 729,246 (170,091)TOTAL 899,336 729,246 (170,091)

Operational Risk Basic 2,502,470 2,740,938 238,468TOTAL 42,767,891 49,512,068 6,744,177


3.2. Capital Requirements by Type of RiskThe following table shows the weighted risks and capital requirements for each type of risk (and exposure class for credit risk) at year-ends 2013 and 2014. The minimum capital requirements correspond to 8% of the risk weighted assets (RWA).

The adoption of the Basel III framework had several significant impacts on the RWA:

→ the use of the sovereign rating for unrated Public Sector Entities under the standard method caused a decrease of 1,940 billion (87% of the observed variation on the period);

→ the evolution of the RWA for Institutions under the Advanced method is mainly due to the combined effect of the introduction of the Asset Value Correlation multiplier and the revised treatment of posted collateral;

→ introduction of the Credit Valuation Adjustment capital charge for derivatives (EUR +3,704 billion).

The increase by EUR 1,162 billion on Central governments and central banks is mainly due to the adjustment of the risk parameters used in our models (e.g. on Italy).

In the meantime, the High Risk ABS positions are now directly deducted from own funds causing a decrease of EUR -2,9 billion in RWA. The residual decrease observed in securitisations is due to further deleveraging, mostly on Spanish RMBS.


Basel II

31/12/13

Tier 1 ratioCAD ratio

15.4%16.5%

Basel III (phased-in)

01/01/14 31/12/14

Common Equity Tier 1 capital ratio (CET1 ratio)Tier 1 capital ratio (T1 ratio)Total Capital ratio

13.8%13.8%15.1%

14.7%14.7%16.1%


Under the Danish Compromise rule, the significant Investment in Belfius Insurance is not longer deducted from the own funds causing an increase of EUR 6,256 billion in RWA.

Gross income is the main driver of the evolution for operational risk (EUR +0,238 billion).

3.3. Capital Adequacy3.3.1. Regulatory Solvency Ratios

At the end of 2013, the Basel II regulations were still applicable. On 31 December 2013, Belfius reported the following ratios:

For the purpose of comparability, the figures below have been restated to the CRR IV/CRD IV regulations, taking account of the transi-tional measures, as set out in these regulations and the applicable national regulations.

The CET1 ratio increases with 94 basis points compared to 1 January 2014 and amounts to 14.7%. This increase is attributable mainly to the strengthening of the underlying CET1 capital that was thus able to fully absorb the deduction of capital of a number of investments in securitisation positions (these investments are no longer weighted in the total risk weighted assets which show a significant decrease) and also to the tactical de-risking within the “Side” portfolio.

The Tier 1 capital ratio is equal to the CET1 ratio because Belfius does not hold any additional Tier 1 capital.

At the end of 2014, the total capital ratio was 16.1%, which was an increase of 106 basis points compared with the end of 2013.

Excluding the effect of the transitional measures, in accordance with the “Fully Loaded” CRR IV/CRD IV regulations, the solvency ratios end 2014 amounted to a CET1 ratio of 13.2% and a total capital ratio of 14.3%, compared to 11.5% and 12.5% at 1 January 2014 (pro forma).

3.3.2. Internal Capital Adequacy

Risk AppetiteRisk appetite is the level of risk that an institution is prepared to take given the expectations of the main stakeholders (shareholders, creditors, regulators, rating agencies, customers and so on), in order to achieve its strategic and financial objectives. This risk appetite is above all defined by the Board of Directors, on proposals from the Management Board. The Risk Department prepares the Management Board’s proposals and the Board of Directors’ decisions, setting the rules and the framework for implementation of those rules.

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

→ for guiding strategy and planning; → for framing performance in terms of growth and value creation; → for facilitating daily day-to-day operating and commercial decisions.


Operational Risk:5% ●

Underwriting Risk:6% ●

Other Risks (prepayment,spread, funding, …): 12% ●

● Market Risk: 30%

● Credit Risk: 47%

Breakdown of economic capital by type of risk

31/12/14


The Bank’s risk appetite consists of a series of quantitative elements (target ratios) and qualitative elements (statements) that are designed to express the risk levels and types that are not tolerated and not targeted. This is for the purpose of achieving the aims of the business strategy. The quantitative framework is based on a mix of accounting ratios (gearing), regulatory ratios (Tier 1, weighted risks) and economic ratios (economic capital, Earnings at Risk), and also includes liquidity and funding structure ratios, as well as credit concentration limits.

Limits have been defined on each of these ratios and are validated each year by the competent bodies. The Risk and Finance Departments are responsible for monitoring these ratios, and if there are discrepancies, propose measures to the Management Board to ensure the limits are observed.

Economic CapitalDefinitionThe economic capital is defined as the potential deviation of Belfius’ economic value from its expected economic value, and this within a given interval of confidence and time horizon. The confidence threshold (99.94%) chosen for scenarios involving losses in value corresponds to the bank’s required debt rating at a horizon of one year (A-rating for 2014).

The economic capital quantification process is organised in three phases: identifying the risks (definition and cartography, as well as the annual update, in collaboration with the various business lines), measuring the risks (mainly on the basis of statistical methods and/or scenarios) and aggregating them based on an inter-risk correlation matrix.

Most risks are capitalised based on measuring the unexpected loss; however, some risks are not capitalised if alternative management techniques (limits, other buffers than capital, governance and so on) are considered more appropriate to cover them.

The economic capital is a central element in the context of Belfius’ risk appetite.

Economic Capital AdequacyThe Management Board, which acts as the Risk Appetite Committee (RAC), is responsible for managing the capital level and allocation process and has authority in all matters relating to economic capital. The RAC analyses the various models involved in calculating the economic capital and also monitors the (regulatory and economic) ratios, limits and triggers.

Belfius economic capital was EUR 5,761 million at the end of 2014 (against EUR 5,360 million at the end of 2013).

In 2014, the distribution between the main categories of risks remained stable: credit risk represented approximately 47% of the economic capital and was the main contributor; market risk (inter alia including interest rate risk, foreign-exchange rate risk, spread risk and equity risk) was 30%, underwriting risk 6%, operational risk 5% and other risks (prepayment, spread, funding, …) 12%.


Retail andCommercialBusiness:41% ●

Public andWholesale Business:16% ● ● Side: 17%

● Group center:26%

Breakdown of economic capital by business line

31/12/14


By business line, the economic capital was allocated as follows: the “Side” segment, including the investment portfolio of Legacy bonds and the portfolio of credit derivatives, accounted for 17% of the economic capital at Belfius; the Retail and Commercial Business and Public and Wholesale Business represented 41% and 16% respectively of Belfius’ economic capital; the balance was made up of 26% allocated to the Group Center (mainly for the Belfius’ general balance sheet management in terms of interest and liquidity risk).

Stress TestsStress tests are designed to measure the bank’s sensitivity in terms of the losses to be expected, weighted risks, liquidity needs or equity capital requirements in scenarios featuring significant unexpected shocks on the financial markets and/or in the bank’s own financial situation at Belfius.

Belfius itself also sets out extremely severe scenarios to conduct its own internal stress testing. As such, the bank developed an alternative and very tough macroeconomic scenario designed to anticipate the bank’s main weaknesses and to simulate how Belfius might be affected under these circumstances. These stress tests were submitted to the Management Board as well as to the Board of Directors.


4.1. Credit Risk Management and Governance4.1.1. Definition

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

4.1.2. Governance and committees

Belfius has a structure of credit committees, which is organised hierarchically. The delegation of powers is contained in detailed procedures. It implies that as the amount of the credit transaction increases, the credit limit LMTR (Limite Maximale Théorique de Risque, or Maximum Theoretical Risk Limit) becomes material or the rating quality of the counterparty declines, decisions are made by a senior level of committee.

The general principle is that credit committees have equal numbers of Risk and Business representatives. The credit committees are chaired by a Risk team member. Mainly for the credit decisions in the segment Retail and Commercial Business (RCB), Belfius relies increasingly on an advanced and automated decision-taking process with behavioural or financial indicators as cornerstones. The parameters leading to decisions in these systems are of course determined by Risk.

In addition, a very important role is assigned to the risk control function. Once Belfius has credit commitments on a counterparty, it is essential to monitor and control the risk evolution, possibly to take the necessary corrective measures in case of quality deterioration and, where appropriate, to establish provisions for foreseen credit losses.

To this end, Belfius has a system of indicators based on behavioural or financial indicators. Counterparties showing signs of weakness are followed by the Watch List Committee. Its main task is to detect emerging risks as quickly as possible and to monitor them. The business units play a very important role because they maintain the closest contact with customers. In this sense, they fulfil the role of first line risk controller.

Belfius Bank also applies the EBA formulated directives regarding Forbearance. Credits giving rise to application of this principle are those where the borrower, in serious financial difficulties, asks a concession from the bank regarding the credit liabilities and to which the bank agrees by adapting the contractual credit conditions.

If a counterparty fails seriously to meet its obligations towards the bank, it is put in a default status. The formal decision is the competence of the default committee, composed of Risk team members. The default status is laid down, on the one hand, by a series of automatic criteria, such as the bankruptcy of the counterparty, but also on the other hand, by a discretionary decision on the basis of qualitative criteria. For each party in a default status, the bank must then verify that, given the value of any guarantees provided by the counterparty, there is good reason to make provisions for impairment. This evaluation is performed by the Impairment Committee.

Methodological committees have a special place in the functioning of Belfius. Their main aim is to validate internal rating systems and quality control, points to be discussed later in this report.

Credit Risk4.

Credit Risk

31/12/13

Eurozone Rest of Europe US and Canada Rest of the world

Total

SovereignPublic sector entitiesFinancial institutionsMonolinesCorporateProject financeSMERetailSecuritisationEquitiesOtherTOTAL Danish CompromiseDeferred Tax AssetsTOTAL

22,287 845 503 23,635 46,105 106 47 614 46,873 8,955 2,211 2,496 295 13,957 1,819 1,130 308 3,257 9,713 3,261 72 1,118 14,162 633 734 75 357 1,799 13,256 5 0 32 13,292 27,074 38 13 45 27,170 1,925 410 462 293 3,089 263 0 9 14 285 0 0 0 130,210 9,429 4,303 3,578 147,520 0 0 130,210 9,429 4,303 3,578 147,520


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

→ the net carrying amount for balance sheet assets other than derivative contracts (i.e. accounting value after deduction of impairments); for assets classified in “Loans and advances” without fair value hedge;

→ the fair value of derivatives and of financial collateral received; → the full commitment amount for off-balance sheet commitments (the full commitment amount is either the undrawn part of liquidity

facilities or the maximum amount Belfius Bank is committed to pay for the guarantees it has granted to third parties); → the financial guarantees.

As from the Risk Report 2014, equity exposures are included as well in the following tables.

Inter-company exposures with Belfius Insurance are presented separately (cf. 1.3.3. Pillar 3 – Disclosure policy - Scope of Application).

The most important evolutions between 2013 and 2014 (concerning tables in parts 4.2.1., 4.2.2., 4.2.3., 4.2.4.) can be explained by the following elements:

→ the increase of exposures on Rest of Europe (“Sovereign”), principally the result of operations with the European Central Bank, is largely compensated by the decrease of exposures on the eurozone (termination of the “government-guaranteed bonds”) (4.2.1.);

→ the increase of exposures on Financial institutions, due to the introduction of exposures for Central Counterparties for Basel III, is moderated by the decrease of exposures non investment grade due to the unwinding of covered bonds (4.2.2.);

→ the decrease observed in Securitisations is due to further deleveraging, mostly on Spanish RMBS (EUR -942 million) (4.2.3.); → the shift from the exposures from “1 year to 3 years” to “Less than 3 months” (respectively EUR -9,242 million and EUR +10,315 million)

is due to the termination of the “government-guaranteed bonds” (4.2.4.).

The evolution in average risk weight for Public sector entities in the standard approach (-42.9%) is principally explained by the increasing use of external ratings since Basel III (4.7.4.).

The historical low interest rates have an impact on the gross EAD for exchange derivatives and rate derivatives (table 4.8.2.).

4.2.1. Exposure by Exposure Class and Geographic Area

The table below shows the total exposure with a breakdown by exposure class and geographic area at year-ends 2013 and 2014 as well as the evolution between 2013 and 2014.

Credit Risk

31/12/14


Total

Evolution 31/12/14 - 31/12/13


Total



19,458 2,886 409 22,754 45,874 75 45 832 46,827 9,049 3,801 2,652 500 16,003 2,887 1,112 3,999 9,518 3,673 60 1,021 14,272 820 515 109 435 1,880 13,817 7 2 7 13,832 28,288 44 13 48 28,392 1,047 448 359 293 2,147 272 0 12 17 301 84 6 0 90 128,228 14,344 4,363 3,562 150,498 1,649 1,649 391 391 130,269 14,344 4,363 3,562 152,538

(2,829) 2,041 0 (94) (882) (231) (31) (2) 218 (46) 94 1,590 156 206 2,046 0 1,068 (19) (308) 742 (194) 413 (11) (97) 110 187 (219) 35 79 81 561 2 1 (25) 540 1,214 6 0 3 1,222 (877) 38 (103) 0 (942) 9 0 3 4 16 83 6 0 0 90 (1,982) 4,915 60 (16) 2,978 1,649 0 0 0 1,649 391 0 0 0 391 59 4,915 60 (16) 5,018


Credit Risk

31/12/13

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

NR Default Total

31/12/14


NR Default Total



18,658 4,419 174 384 23,635 31,644 14,298 434 272 224 46,873 2,043 8,825 3,049 21 20 13,957 3,249 8 3,257 1 8,066 5,476 234 386 14,162 1,253 546 1,799 2 5,595 6,496 944 255 13,292 15,533 7,712 3,737 1 188 27,170 770 1,966 353 1 3,089 20 221 30 11 3 285 0 0 68,671 55,605 20,301 1,867 1,076 147,520 0 0 68,671 55,605 20,301 1,867 1,076 147,520

17,324 4,859 37 534 0 22,754 31,556 14,597 304 157 213 46,827 4,430 10,073 1,434 51 15 16,003 3,997 2 3,999 1 8,397 5,284 324 267 14,272 1,217 647 1 15 1,880 2 5,808 6,684 1,024 315 13,832 15,936 8,016 4,242 2 196 28,392 923 950 274 2,147 27 216 45 11 2 301 90 90 70,199 58,129 18,953 2,195 1,022 150,498 1,649 1,649 350 41 391 70,549 59,820 18,953 2,195 1,022 152,538


4.2.2. Exposure by Exposure Class and Obligor Grade

a) Total ExposureThe following tables show the total exposure with a breakdown by exposure class and obligor grade at year-ends 2013 and 2014 as well as the evolution between 2013 and 2014.

For reporting purposes, a rating “masterscale” has been applied. This scale is structured in grades ranging from AAA to CCC and the modifiers plus, flat and minus (except for both extremes of the scale).

Credit Risk

Evolution 31/12/14 - 31/12/13


NR Default Total


(1,334) 440 (136) 149 0 (882) (88) 299 (130) (115) (11) (46) 2,388 1,248 (1,615) 30 (5) 2,046 0 748 (6) 0 0 742 (1) 331 (192) 91 (119) 110 0 (36) 101 1 15 81 (1) 213 188 80 60 540 403 304 505 1 9 1,222 153 (1,016) (78) (1) 0 (942) 7 (6) 16 0 (2) 16 0 0 0 90 0 90 1,528 2,525 (1,349) 327 (54) 2,978 0 1,649 0 0 0 1,649 350 41 0 0 0 391 1,878 4,215 (1,349) 327 (54) 5,018

Average figures 31/03/14 - 30/06/14 - 30/09/14 - 31/12/14


NR Default Total


18,116 4,790 145 468 3 23,522 32,291 14,465 353 349 218 47,677 3,132 11,497 2,270 38 17 16,954 0 3,717 5 0 0 3,722 1 8,148 5,288 318 303 14,057 0 1,256 638 5 21 1,919 2 5,688 6,522 1,066 324 13,601 15,864 7,714 3,835 1 195 27,609 775 1,188 265 0 0 2,228 22 207 44 16 2 292 0 0 0 23 0 23 70,203 58,671 19,367 2,283 1,081 151,604 0 1,644 0 0 0 1,644 355 41 0 0 0 396 70,557 60,356 19,367 2,283 1,081 153,643


b) Average ExposureThe following table shows the average exposure with a breakdown by exposure class and obligor grade for 2014.

Credit Risk

31/12/13

Sovereign Public sector

entities

Financial institu-

tions

Monolines Corporate Project finance

SME Retail Securiti-sation

Equities Other Total

IndustryConstructionTrade-TourismServices

Transportation and storageInformation and communicationFinancial and insurance activitiesReal estate activitiesProfessional, scientific and technical activitiesAdministrative and support service activitiesPublic administration and defence-compulsory social securityHuman health and social work activitiesArts, entertainment and recreationOther service activitiesOther services

OtherTOTAL Danish CompromiseDeferred Tax AssetsTOTAL

0 4,793 4,773 464 1,107 0 66 11,203 70 1,005 899 1,760 0 8 3,742 804 1,529 21 2,743 1 0 5,097

599 39 2,620 126 374 5 0 3,763 146 18 335 326 1 826 1,752 670 12,932 3,257 1,111 6 973 0 203 180 21,082 446 969 1,979 252 2,004 10 12 5,670 88 396 27 1,843 0 1 2,356 135 182 4 747 0 1 1,068 21,246 35,566 0 54 21 17 13 56,917 2,988 91 1,046 0 1 4,126 62 33 160 254 235 4 160 0 398 637 272 0 24 934 0 0 51 5 27,154 2,870 2 0 30,083 23,635 46,873 13,957 3,257 14,162 1,799 13,292 27,170 3,089 285 0 147,520 0 0 23,635 46,873 13,957 3,257 14,162 1,799 13,292 27,170 3,089 285 0 147,520


4.2.3. Exposure per Exposure Class and Economic Sector

The following tables show the total exposure with a breakdown by economic sector and exposure class at year-ends 2013 and 2014 as well as the evolution between 2013 and 2014.

Credit Risk

31/12/14


entities

Financial institu-

tions




Evolution 31/12/14 - 31/12/13


entities

Financial institu-

tions










4,687 5,074 537 1,129 0 74 11,501 28 1,074 711 1,791 0 9 3,613 16 1 1,609 14 2,777 0 1 4,419

940 1,985 313 371 5 0 3,614 92 15 259 477 7 851 2,943 529 15,985 3,999 1,244 6 1,136 0 202 177 26,221 379 1,996 269 2,138 5 7 4,793 0 86 548 28 1,879 0 4 2,545 281 2 180 3 739 0 0 1,204 18,877 36,086 0 51 22 1 16 55,053 2,850 80 1,008 0 1 3,939 61 27 169 258 315 0 10 161 0 486 934 288 0 30 1,252 190 0 134 5 28,382 1,945 4 90 30,749 22,754 46,827 16,003 3,999 14,272 1,880 13,832 28,392 2,147 301 90 150,498 1,649 1,649 350 41 391 23,104 46,827 16,044 3,999 14,272 1,880 13,832 28,392 2,147 1,950 90 152,538

0 (106) 0 0 301 73 23 0 0 8 0 298 0 (42) 0 0 69 (188) 32 0 0 1 0 (129) 0 (788) 1 0 81 (8) 34 0 0 1 0 (679)

0 340 (39) 0 (634) 187 (3) 0 0 0 0 (149) 0 (54) (3) 0 (76) 0 151 0 0 6 0 24 1,191 (140) 3,053 742 133 0 164 0 (1) (3) 0 5,139 0 (67) (969) 0 17 17 134 (5) 0 (4) 0 (877) 0 (3) 0 0 152 1 36 0 0 3 0 189 0 146 2 0 (2) (1) (8) 0 0 0 0 137 (2,369) 520 0 0 (3) 0 1 0 (16) 3 0 (1,865) 0 (138) 0 0 (11) 0 (38) 0 0 0 0 (187) 0 0 0 0 (5) 0 9 0 0 0 0 4 0 80 0 0 6 0 2 0 0 0 0 88 297 16 0 0 0 0 5 0 0 0 0 318 0 190 0 0 82 0 0 1,228 (925) 2 90 666 (882) (46) 2,046 742 110 81 540 1,222 (942) 16 90 2,978 0 0 0 0 0 0 0 0 0 1,649 0 1,649 350 0 41 0 0 0 0 0 0 0 0 391 (531) (46) 2,087 742 110 81 540 1,222 (942) 1,665 90 5,018


Credit Risk


Main exposures are further detailed in the following tables.

4.2.4. Exposure by Exposure Class and Residual Maturity

The following tables show the total exposure with a breakdown by exposure class and residual maturity at year-ends 2013 and 2014 as well as the evolution between 2013 and 2014.

Financial intermediation (split by rating class)

31/12/13 31/12/14 Evolution 31/12/14 - 31/12/13

AAA+ to AA-ABBBOtherSpeculative grade

2,0435,4282,624

412,797

16%42%20%

0%22%


4,4296,2353,838

661,417

28%39%24%

0%9%


2,386807

1,21425

(1,380)

+117%+15%+46%+61%-49%)

12,932 15,985 3,053

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

31/12/13 31/12/14 Evolution 31/12/14 - 31/12/13

BelgiumFranceGermanyItalyOther

33,992880203

0491

96%2%1%0%1%


34,445959352

0330

95%3%1%0%1%


45379

1490

(160)

+1%+9%

+73%-92%-33%

35,566 36,086 520

Sovereign: Public administration, social security (split by country)(1)

31/12/13 31/12/14 Evolution 31/12/14 - 31/12/13

BelgiumFranceItalyOther EU countriesOther

9,7976,4933,933

664358

46%31%18%

3% 2%

BelgiumFranceItalyOther EU countriesOther

8,4225,2604,461

441292

45%28%24%

2%1%

BelgiumFranceItaly(2)

Other EU countriesOther

(1,375)(1,233)

528(223)

(66)

-14%-19%

+13%-34%-18%

21,246 18,877 (2,369)(1) Direct and indirect exposure. (2) Notional unchanged.

31/12/13

Less than 3 months

3 months to 1 year

1 year to 3 years

3 years to 5 years

More than 5 years

No defined maturity

Total

751 3,255 10,141 1,533 6,638 1,316 23,635 1,598 2,437 3,208 4,112 34,894 624 46,873 2,063 995 1,842 1,287 6,086 1,683 13,957 265 224 222 2,547 3,257 2,671 1,164 1,191 1,192 7,347 598 14,162 73 118 110 84 1,410 3 1,799 1,576 857 1,372 1,233 7,787 468 13,292 138 283 1,096 1,373 24,267 12 27,170 255 105 2,729 3,089 7 0 0 0 277 285 0 0 0 0 0 0 8,877 9,375 19,439 11,141 93,982 4,705 147,520 0 0 8,877 9,375 19,439 11,141 93,982 4,705 147,520


Credit Risk


31/12/14

Less than 3 months

3 months to 1 year

1 year to 3 years

3 years to 5 years

More than 5 years

No defined maturity

Total

Evolution 31/12/14 - 31/12/13

Less than 3 months

3 months to 1 year

1 year to 3 years

3 years to 5 years

More than 5 years

No defined maturity

Total

11,067 311 899 205 7,812 2,460 22,754 2,522 2,522 2,334 4,651 33,539 1,260 46,827 3,047 655 1,468 577 6,294 3,962 16,003 58 2,684 1,257 3,999 2,527 720 1,023 1,226 6,718 2,058 14,272 195 253 73 2 1,224 132 1,880 1,561 889 1,509 1,308 8,093 473 13,832 160 303 1,108 1,454 25,361 7 28,392 2 2,146 2,147 0 0 0 0 300 301 0 0 0 0 45 45 90 21,079 5,711 8,415 9,422 94,215 11,655 150,498 170 1,479 1,649 41 350 391 21,079 5,711 8,586 9,422 95,735 12,005 152,538

10,315 (2,945) (9,242) (1,328) 1,174 1,145 (882) 924 85 (874) 539 (1,355) 636 (46) 984 (340) (374) (710) 207 2,279 2,046 0 (207) (224) (222) 137 1,257 742 (143) (444) (168) 34 (629) 1,460 110 121 135 (37) (82) (186) 129 81 (14) 31 137 75 307 5 540 22 20 11 80 1,094 (5) 1,222 0 0 (253) (105) (583) 0 (942) (7) 0 0 0 23 0 16 0 0 0 0 45 45 90 12,201 (3,664) (11,024) (1,719) 233 6,950 2,978 0 0 170 0 1,479 0 1,649 0 0 0 0 41 350 391 12,201 (3,664) (10,854) (1,719) 1,753 7,301 5,019



Credit Risk


4.3. Impairment, Past-Due and Related Provisions4.3.1. Definitions of Past-Due/Impaired and Adjustments/Provisions

Belfius Bank records allowances for impairment losses when there is objective evidence that a financial asset or group of financial assets is impaired as a result of one or more events occurring after initial recognition and evidencing (a) a decline in the expected cash flows and (b) an impact on the estimated future cash flows that can be reliably estimated.

Financial assets carried at amortised costBelfius first assesses whether objective evidence of impairment exists individually for financial assets. If no such evidence exists, financial assets are included in a group of financial assets with similar credit risk characteristics and collectively assessed for impairment.

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

Specific impairmentsIf there is objective evidence that loans or other receivables or financial assets classified as held-to-maturity are impaired, the amount of the impairment on specifically identified assets is calculated as the difference between the carrying amount and the estimated recoverable amount, being the present value of expected cash flows, including estimations on the amounts recoverable from guarantees and collateral, discounted at the financial instrument’s original effective interest rate). When an asset is assessed as being impaired, a specific impairment loss will be recognised.

Collective impairmentsCollective impairments cover losses “incurred but not yet reported” on segments (portfolios) where there is objective evidence of losses. Belfius estimates these impairments based on the historical patterns of losses in each segment, the credit ratings allocated to the borrowers and reflecting the current economic environment in which the borrowers operate. For that purpose, Belfius develops credit-risk models using an approach that combines appropriate default probabilities and loss-given defaults that are subject to regular back testing and risk models, consistently with the “incurred-loss” model. Assumptions are made when defining the way inherent losses are modelled and to determine the required parameters, based on historical experience.

Belfius recognises changes in the amount of impairment losses in the statement of income and reports them as “Impairment on loans and provisions for credit commitments”. The impairment losses are reversed through the statement of income if the increase in future cash flows relates objectively to an event occurring after the impairment was recognised.

Available for sale (AFS) assets are only subject to specific impairment.

“Available for sale” quoted equities are measured at fair value through “Gains and losses on securities not recognised in the statement of income” or within the statement of income in the case of impairment. For equities quoted in an active market, objective evidence of impairment is a significant (more than 40%) or prolonged (more than 3 years) decline in fair value compared to the acquisition price. In addition, management can decide to recognise impairment losses should other objective evidence be available. An impairment is recognised for non-quoted equities when objective evidence is available such as financial difficulties of the issuer or an increased probability of bankruptcy.

In the case of interest-bearing financial instruments, impairment is triggered based on the same criteria as applied to individually impaired financial assets valued at amortised cost.

When AFS financial assets are impaired, the total AFS reserve is recycled and these impairment losses are reported by Belfius in the statement of income. Impairments on equity securities cannot be reversed in the statement of income due to later recovery of the fair value.

The reported figures refer to the regulatory scope as defined in part 3.1.1.

Credit Risk

Financial assets available for sale (excluding variable income securities)Loans and advances (at amortised cost)Investments held to maturityOther financial instruments – at cost TOTAL(1) Restatement 2013 due to changes in the scope of consolidation.

Financial assets available for sale (excluding variable income securities)Loans and advances (at amortised cost)Investments held to maturityOther financial instruments – at cost TOTAL

31/12/13(1)

Past-due but not impaired financial assets Carrying amount of individually impaired financial assets, before deducting any

impairment loss≤ 90 days > 90 days

≤ 180 days> 180 days

31/12/14

Past-due but not impaired financial assets Carrying amount of individually impaired financial assets, before deducting any

impairment loss≤ 90 days > 90 days

≤ 180 days> 180 days

42 258 12 14 2,086 5 258 12 14 2,133

37 295 10 12 2,030 5 295 10 12 2,072


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

The following tables show the amount of impaired and past-due credit risk exposure broken down by classification at year-end 2013 and 2014.

The carrying amount of individually impaired financial assets on loans and advances amounted to EUR 2.0 billion as at 31 December 2014, in line with 31 December 2013. The carrying amount of individually impaired financial assets of the available for sale decreased by EUR 5 million to reach an amount of EUR 37 million at year-end 2014.

Credit Risk


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

The following tables show the amount of provisions for impaired exposure to credit risk broken down by type of asset at year-end 2013 and 2014.

Type of Asset Exposure at year-end 2013(1)

As at 1 Jan. 2013

Utilisation Amounts set aside for

estimated probable

loan losses

Amounts reserved for

estimated probable

loan losses

Other adjustments

As at 31 Dec. 2013

Recoveries directly

recognised in profit

or loss

Charge-offs directly


or loss

(1,234) 73 (253) 245 5 (1,164) (13) 3 (10) (2) (1,182) 45 (235) 243 4 (1,125) 6 (89) 0 0 (36) 25 (18) 0 1 (28) (21) 20 0 0 1 0 (15) 5 (18) 0 0 (28) 0 0 (3) 2 (1) 0 0 (469) 0 (188) 308 0 (349) (5) (2) 5 (2) (464) (186) 303 (347) (1,703) 73 (441) 553 5 (1,513) 6 (91) (6) (4) 4 (6)

SPECIFIC ALLOWANCES FOR INDIVIDUALLY ASSESSED FINANCIAL ASSETS AND SPECIFIC ALLOWANCES FOR COLLECTIVELY ASSESSED FINANCIAL ASSETSLoans and advances due from banksLoans and advances to customersHeld to maturity investmentsAvailable for sale financial assets (except Equity Method) of which fixed income instruments of which equity instrumentsAssets from insurance activitiesOther accounts and receivablesOther assets COLLECTIVE IMPAIRMENT ON NOT SPECIFICALLY IMPAIRED LOANS AND DEBT INSTRUMENTSLoans and advances due from banksLoans and advances to customersInvestments held to maturity TOTAL PROVISION FOR OFF-BALANCE-SHEET CREDIT COMMITMENTS

(1) Restatement 2013 due to changes in the scope of consolidation.

Credit Risk

Type of Asset Exposure at year-end 2014

As at 1 Jan. 2014

Utilisation Amounts set aside for

estimated probable

loan losses

Amounts reserved for

estimated probable

loan losses

Other adjustments

As at 31 Dec. 2014

Recoveries directly


or loss

Charge-offs directly


or loss

(1,164) 61 (202) 136 (8) (1,177) (10) 10 0 (10) (1,125) 43 (198) 136 (8) (1,152) 13 (65) 0 0 (28) 8 (4) (24) 0 0 (28) 8 (4) (24) 0 0 (1) (1) 0 0 (349) 0 (91) 105 0 (335) (2) (6) 2 (6) (347) (85) 103 (329)

(1,513) 61 (293) 241 (8) (1,512) 13 (75) (6) (11) 2 (15)

SPECIFIC ALLOWANCES FOR INDIVIDUALLY ASSESSED FINANCIAL ASSETS AND SPECIFIC ALLOWANCES FOR COLLECTIVELY ASSESSED FINANCIAL ASSETSLoans and advances due from banksLoans and advances to customersHeld to maturity investmentsAvailable for sale financial assets (except Equity Method) of which fixed income instruments of which equity instrumentsAssets from insurance activitiesOther accounts and receivablesOther assets COLLECTIVE IMPAIRMENT ON NOT SPECIFICALLY IMPAIRED LOANS AND DEBT INSTRUMENTSLoans and advances due from banksLoans and advances to customersInvestments held to maturity TOTAL PROVISION FOR OFF-BALANCE-SHEET CREDIT COMMITMENTS


In 2014, specific allowances increased by EUR 13 million to EUR 1.2 billion. Collective impairments (or allowances for incurred but not reported losses on financial assets) decreased by EUR 14 million compared with 2013. The provision for off-balance-sheet commitments increased by EUR 9 million to EUR 15 million.

4.4. Forbearance4.4.1. Definition

During the course of 2014, the European Banking Authority (EBA) refined and clarified its guidelines on Forbearance. In practical terms, Forbearance boils down to the granting of concessions to borrowers in financial difficulties. These concessions may take the form of modifications to the loan contract or refinancing. The introduction of Forbearance as a general and uniform reporting concept is designed to enable the EBA to examine the quality of credit portfolios and hence also the risk profile of all European banks in a better and more structured way.

4.4.2. Exposure, Impairment and collateral and financial guarantees received

The Forbearance guidelines were transposed into a Belfius guideline in 2014 and also integrated into the bank’s risk and financial reporting. Specific criteria were established for each business segment. These provide a practical interpretation of the concepts of “financial difficulties” and “concession”. When granting a concession, the bank is always led by a number of mainly business-related and economic factors. The fact that concessions such as these are allowed is one of the watch list indicators in the business sectors at Belfius. At the end of 2014, an amount of EUR 729 million in loans at Belfius complied with the Forbearance definition. Appropriate specific or collective impairments were recorded in relation to this volume of Forbearance loans via the usual risk processes.

Credit Risk

31/12/14

Gross carrying amount

of exposures with

forbearance measures

Impairment Collateral received and financial guarantees received

Collateral received

on exposures with

forbearance measures

Financial guarantees

received on exposures

with forbearance

measures

Debt Instruments at amortised costLoan commitments – given

705 (119) 262 0 24


The following table shows the amount of forborne exposures.

4.5. Credit Risk Mitigation Techniques4.5.1. Description of the Main Types of Credit Risk Mitigants (CRM)

The Basel regulation recognises three main types of CRM:

→ collateral; → guarantees and credit derivatives; → netting agreements (applicable to on-balance-sheet and off-balance-sheet netting agreements – refer to part 4.5.2.).

Main Types of CollateralCollateral is a financial product or a physical object set to hedge an exposure. Belfius Bank manages a wide range of collateral types. From a regulatory point of view, three main categories of collateral exist:

→ pledges on financial assets: cash, blocked accounts, term deposits, bonds and equity portfolios; → pledges on real estate (residential mortgages, commercial mortgages, mortgage mandates); → pledges on commercial assets.

Main Types of GuaranteesGuarantees refer to personal guarantees, first demand guarantees, support commitments and “tri-party conventions”. The credit assessment concentrates on the quality of the underlying loan or asset (refer to part 4.5.4.).

Main Types of Netting AgreementsNetting agreements consist of a technique for mitigating credit risk. Banks have legally enforceable netting arrangements for loans and deposits by which they may calculate capital requirements on the basis of net credit exposures subject to specific regulatory conditions.

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

Credit Risk


4.5.2. Policies and Processes

Collaterals and Guarantees/Credit DerivativesWithin Belfius, managing the CRM involves the following tasks:

→ analysis of the eligibility of all CRM under the Standardised and Advanced Approaches; → collateral valuation in mark-to-market; → description of all CRM characteristics in internal Risk Systems, such as:

• mortgage: rank, amount and maturity,• financial collateral: valuation frequency and holding period,• guarantee/credit derivative: identification of the guarantor, analysis of the legal mandatory conditions, check whether the credit

derivative covers restructuring clauses,• security portfolio: description of each security;

→ periodic review of the descriptive data of its CRM.

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

At an operational level, different IT tools are used to manage collateral. These IT tools are used to record any relevant data needed pre-cisely to identify collateral characteristics, eligibility criteria and estimated value, in accordance with the Basel III framework.

On and Off-Balance-Sheet NettingBelfius does not make use of on or off-balance-sheet netting for regulatory purposes, except for over-the-counter (OTC) derivative products.

For these products, internal policies document the eligibility criteria and minimum requirements that netting agreements need to meet in order to be recognised for regulatory purposes under Basel III. Eligibility criteria are different for on-balance-sheet netting agreements and off-balance-sheet netting agreements. In particular they require formal acceptance from the regulator before considering any netting agreement as eligible. Adequate documentation should also be put in place. Appropriate internal procedures and minimum requirements have been implemented in the internal risk management process.

Information about Market or Credit Risk ConcentrationsConcentration risk is related to a concentration of collateral on one issuer, country, industry or market. As a result, credit deterioration might have a significant impact on the overall value of collateral held by Belfius to mitigate its credit exposure.

Belfius monitors concentration risk at regular intervals.

4.5.3. Basel III Treatment

For netting agreements (and subject to eligibility conditions), Belfius recognises their impact by applying the netting effect of these agreements on the calculation of its Exposure at Default (EAD).

For guarantees and credit derivatives, Belfius recognises the impact by substituting the PD, LGD and risk weight formula of the guarantor to those of the borrower (i.e. the exposure is considered to be directly towards the guarantor) if the risk weight of the guarantor is lower than the risk weight of the borrower.

→ For collateral (both financial and physical), the Belfius methodology relating to eligible CRM depends on the Basel III approach. AIRB Approach exposures:• for retail exposures, CRM are incorporated into the calculation of LGD based on internal loss data and calculated by the AIRB

Approach models;• for non-retail exposures, an unsecured LGD is used, CRM (after regulatory haircuts) are taken into account directly through the

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

Credit Risk

Exposure class 31/12/14

Financial and physical

collateral

Guarantee and credit

derivatives

Repos Total

SovereignsFinancial institutionsCorporates TOTAL

0 94 0 94 57,047 11,126 10,377 78,550 2,370 5,163 0 7,532 59,417 16,382 10,377 86,176


4.5.4. Exposure Covered by Credit Risk Mitigants by Exposure Class

This section provides an overview of the EAD covered by Basel eligible CRM (after regulatory haircuts) broken down by exposure class at year-end 2014. The amounts shown in the tables below take netting agreements into account and include collateral values for repo transactions.

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

Financial institutions are mainly composed of banks and insurers. Credit risk mitigants for financial institutions (banks and insurance companies) are mainly related to funding transactions (reverse repo) and guarantees received from banks and monoline insurance companies.

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

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

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

The “public sector entities” exposures represent a predominant part of the Belfius credit portfolio. A large part of this portfolio is treated in the AIRB Approach method with a very low average LGD and with ratings exceeding A-.

Overview of Collateral by Nature and Credit QualityOnly collateral eligible (including repo transactions) under Basel II and directly held by Belfius is considered:

→ Physical collateral: mortgages on residential or small commercial real estate and pledges on various other assets (receivables, business goodwill). This physical collateral mainly covers SME and retail exposures.

→ Financial collateral: cash, debt securities, quoted equity and Undertaking for Collective Investment (UCI). The part of the EAD covered by collateral (including repo transactions) is predominantly composed of cash collateral and the remaining part of debt securities. Debt securities are mainly sovereigns (rated between AAA and AA-) and investment grade banks.

Overview of Guarantees and Credit Derivatives by ProviderThe guarantees and credit derivatives are only taken into account when the risk weight of the guarantor is more favourable than the risk weight of the initial counterparty.

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

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

Credit Risk


4.6. AIRB Approaches4.6.1. Competent Authority’s Acceptance of Approach

By letter sent on 21 December 2007 by the Banking, Finance and Insurance Commission (CBFA), the Belgian Regulator, Dexia SA was authorised to use the Advanced Internal Rating-Based Approach (AIRB Approach) for the calculation and the reporting of its capital requirements for credit risk starting from 1 January 2008. This acceptance was applicable to all entities and subsidiaries consolidated within the Dexia Group, which are established in a Member State of the European Union and are subject to the Capital Requirement Directive, and among them Belfius Bank (formerly Dexia Bank Belgium). The teams at the bank have also been among the mainstays of this approval, and its risk management is in perfect continuity with the know-how developed so far.

4.6.2. Internal Rating Systems

The internal rating systems used by Belfius Bank are set up to evaluate the three Basel parameters: Probability of Default (PD), Loss Given Default (LGD) and Credit Conversion Factor (CCF). For each counterparty type in the advanced method, a set of two models, one for PD and one for LGD, has been developed. Regarding the CCF parameters, a new dedicated model has been developed for retail counterparties and will be subjected to NBB review in early 2015 while the non-retail counterparties will use the regulatory values as agreed by the regulator.

The PD models estimate the one-year probability of default on a through-the-cycle basis. Each model has its own rating scale and each rating on the scale corresponds to a probability of default used for regulatory and reporting purposes. The correspondence between rating and PD for each scale is set during the calibration process, as part of the model development, and is reviewed and adjusted during the yearly back testing when applicable. The number of ratings on each scale depends on the characteristics of the underlying portfolio (the number of counterparties, their homogeneity, whether it is a low default portfolio or not) and varies between 6 and 17 non-default classes. In addition each scale has been attributed two default classes (named D1 and D2).

For non-retail, LGD models estimate the ultimate loss incurred on a defaulting counterparty before taking the credit risk mitigants into account. The unsecured LGD depends on different factors such as the product type, the level of subordination or the rating of the counterparty. The granularity of the estimate is a function of the quantity and quality of data available. For retail, LGD is mainly determined by product type based on workout recoveries. Professional loans are segmented in 5 classes in function of collateral value.

CCF models estimate the portion of off-balance-sheet commitments that would be drawn should a counterparty go into default. The regulation authorises the use of CCF models only when CCF under the Foundation Approach is not equal to 100% (as it is for credit substitutes for instance). CCF granularity also depends on availability of data.

Internal estimates of Basel parameters are used within Belfius Bank in addition to the calculation of the regulatory risk-weighted exposure amounts. They are notably used in the decision-making process, credit risk management and monitoring, internal limit determination, provisioning methodology and pricing.

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

→ Validation, that encompasses both Model Validation and Operational Control is an independent Direction within the Risk Department. It reports directly to the CRO and is not involved in any model development in order to guarantee its independence. Validation performs a global control on all the aspects of the production of results by the models, from a methodological but also an operational (imple-mentation, usage) viewpoint. It intervenes prior to the first use of the models and afterwards performs a regular monitoring of their functioning.

→ Audit is responsible for auditing the general consistency and compliance with the regulation of the IRS. According to the CRD minimal requirement 131, Annex VII Part 4, “Internal Audit has to include in its plan, at least once a year, a review of the IRS and its functioning, including credit scoring and estimation of PD, LGD, expected loss (EL) and CCF. Compliance with all the minimum requirements has also to be verified. Within Belfius, this annual review has been delegated to the Validation Direction. Audit acts then as an addi-tional level of control, included in its Audit plan.

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

Credit Risk

Exposure class 31/12/14

EAD Average risk weight

Retail product 31/12/14


19,189 11% 36,782 3% 13,344 24% 3,622 25% 11,505 84% 1,809 38% 10,728 56% 28,194 9% 201 30% 212 155% 0 2,060 127,646 0 0% 350 250% 127,997

20,901 5.36% 85 10.48% 7,209 18.91% 28,194

SovereignPublic sector entitiesFinancial institutionsMonolinesCorporateProject financeSMERetailSecuritisationEquitiesOtherDefaultTOTAL Danish CompromiseDeferred Tax AssetsTOTAL

Retail mortgage loansRevolving retail consumer loansOther retail products TOTAL


4.6.3. EAD and Average Risk Weight by Exposure Class

The following table shows the total exposure at default and exposure-weighted average risk weights broken down by exposure class at year-end 2014.

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

For information, the following table shows the total exposure at default and exposure average risk-weights broken down by retail product at year-end 2014.

4.6.5. Back testing

The purpose of the back test is to assess the performance of the internal rating system ensuring an appropriate balance between capital and risk. As the formulas to calculate the bank’s capital are provided by the Basel Committee on Banking Supervision, the internal back test relating to Pillar 1 rating systems is based on the back test of the input parameters PD, LGD and CCF in the Basel credit risk portfolio model. Please note that even if the non-retail CCF parameters are not the result of a dedicated model they are subject to a monitoring in order to ensure the used values are suited.

The back test is the evaluation of the predictive power of the rating system and the assessment of its time evolution to detect any reduced performance of the rating system early. Decreased performance of the rating system may reduce the bank’s profitability and will impact the risk assessments of the defined risk buckets. The performance is tracked by analysing the ability to discriminate between high and low risk and the stability of the data inputs into the rating system.

The back test procedure is mainly related to assess the following:

CalibrationCalibration normally denotes the mapping of the Probability of Default (PD) to the rating grades. A rating system is well calibrated if the estimated PDs (or LGDs) deviate only marginally from the actual default rates (or loss).

Credit Risk


Discriminatory PowerThe discriminatory power of rating systems denotes their ex-ante ability to identify borrowers in danger of defaulting. A rating system with maximum power would be able to classify all borrowers such that defaulters would be ranked strictly worse than all defaulters. In practice, however, such perfect rating systems do not exist. A rating system demonstrates a high discriminatory power if the “good” grades subsequently turn out to contain only a small percentage of defaulters and a large percentage of non-defaulters, with the converse applying to the “poor” grades. Regarding LGD model, discriminatory power relates to its ability to recognise between high and low loss levels.

StabilityThe stability of the population and its data characteristics are analysed in order to make sure that the model applied is in line with the reference data sets used for construction, and that the population characteristics do not change significantly over time.

The results of the back testing are assessed using statistical significance tests. The outcome of the significance tests will drive required action plans. For instance, following the conclusions of these exercises, the loss given default related to retail counterparties was reviewed and submitted to the NBB for approval in 2014.

The additional part of the back test procedure is related to the impact of judgemental aspects i.e. the importance of judgemental qualitative variables in the final rating and the effect of expert overruling.

4.6.6. Stress Testing

Pillar 1 stress tests are defined within Basel to deal with minimum capital requirements. They assess how the risk parameter levels (weighted risk levels, expected loss levels and realised loss levels) may vary in the credit portfolio during periods of stress, in order to draw conclusions on individual asset classes and portfolios, as well as on the whole portfolio itself.

The focus of the stress testing Pillar I lies on the application of realistic and meaningful expert scenarios.

Univariate tests are important in keeping an eye on the distribution of each variable, particularly in stressed scenario.

Expert scenarios can essentially be designed in two distinct ways:

→ testing the robustness of the model by computing PD/LGD in an alternative (stressed) manner and comparing the results to the model outputs: the purpose is to challenge the model;

→ stressing model results: this measures the impact on risk measures given the assumption that the model is correct.

These stress tests are performed on an annual basis on a firm-wide basis. Stress test reports are presented initially to the Validation Direction. After validation of the overall process of the stress test implementation, a report on the main portfolio weaknesses and strengths is produced in order to allow proposals for management actions. The final files are submitted to the Risk ExCom.

4.7. Standardised Approaches4.7.1. Introduction

Belfius Bank uses the Advanced Internal Rating-Based Approach (AIRB Approach) to calculate its capital requirements for credit risk. Nevertheless, it applies the Standardised Approach for some portfolios corresponding to cases specifically authorised by regulation such as:

→ small business units; → non-material portfolios; → portfolios corresponding to activities in run-off or to be sold; → portfolios for which it has adopted a phased roll-out of the AIRB Approach.

Credit Risk

Standard & Poor’s Moody’s Fitch Credit quality step

AAA to AA- Aaa to Aa3 AAA to AA- 1A+ to A- A1 to A3 A+ to A- 2BBB+ to BBB- Baa1 to Baa3 BBB+ to BBB- 3BB+ to BB- Ba1 to Ba3 BB+ to BB- 4B+ to B- B1 to B3 B+ to B- 5CCC+ and below Caa1 and below CCC+ and below 6

Exposure class 31/12/13 31/12/14 Evolution 31/12/14 – 31/12/13




5,272 25% 9,209 16% 3,937 -9.4% 5,488 67% 6,634 24% 1,146 -42.9% 2,708 45% 3,832 31% 1,123 -14.0% 130 50% 130 +50.0% 1,219 94% 1,261 104% 43 +10.1% 11 100% 18 98% 7 -2.2% 1,964 95% 2,294 94% 330 -1.1% 1 76% 2 86% 1 +9.7% 0 0 0.0% 135 149% 72 150% (62) +0.5% 0 100% 68 100% 67 0.0% 16,798 23,520 6,722 1,649 1,649 41 41 16,798 25,210 8,412



4.7.2. Roll-Out Plan

Within the Basel homologation process, Belfius Bank informed the regulator of the models to be developed or changed in coming years on business segments and Basel parameters.

The majority of models have been validated internally and have already been sent to the regulator. In the meantime, Belfius Bank maintains the corresponding exposures under the Basel Standardised Approach, except for the CCF calculation for the non-retail segment where the regulator agreed in 2014 on continuing the use of the Foundation IRB approach.

4.7.3. Nominated External Credit Assessment Institutions (ECAI)

The Standardised Approach provides weighted risk figures based on external ratings. In order to apply the Standardised Approach for risk-weighted exposure, Belfius Bank uses the external ratings assigned by the following rating agencies: Standard & Poor’s, Moody’s and Fitch.

If two ratings are available, the rating used for the regulatory capital calculation is the lower of the two ratings. If three ratings are available, Belfius will take the lower of the best two ratings. If no external rating is available, the Standardised Approach provides specific risk weights.

Credit rating agencies and credit quality step under Standardised Approach (long term mapping).

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

4.7.4. Exposure at Default and Average Risk Weights

The following table shows the total exposure at default and exposure weighted-average risk weights broken down by exposure class at year-ends 2013 and 2014 as well as the evolution between 2013 and 2014.

Credit Risk


4.8. Counterparty Risk on Derivatives4.8.1. Management of the Risk

A counterparty risk on derivatives exists in all Over-The-Counter (OTC) transactions such as interest rate swaps, foreign exchange swaps, inflation or commodity swaps and credit default swaps.

Counterparty risk is measured and monitored according to the general principles described in the Belfius credit risk policies. The credit risk equivalent for derivative transactions is based on the mark-to-market value of the derivatives plus the application of an add-on, which is a function of the complexity, the maturity, and the underlying of the derivative.

To reduce the counterparty risk, Belfius OTC derivatives are in most cases concluded within the framework of a master agreement (i.e. the International Swap and Derivative Association – ISDA) taking account of the general rules and procedures set out in the Belfius credit risk policies. Collateral postings for derivative contracts are regulated by the terms and rules stipulated in the Credit Support Annex (CSA) negotiated with the counterparty.

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

All OTC transactions are monitored within the credit limits set up for each individual counterparty and are subject to the general delegation rules. Sub-limits may be put in place for each type of product.

On non-collateralised swaps (concluded with a very limited number of counterparties, such as local authorities, project SPVs, some corporates, monoline insurers), as well as for collateralised swaps (although limited in credit risk amount due to the daily exchange of collateral), the counterparty risk is managed through a Credit Value Adjustment (CVA); this holdback reserve is updated, on a regular basis, on the basis of the evolution of the value of the derivatives and the credit quality of the counterparty.

4.8.2. Regulatory Treatment

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

The following table shows the gross EAD and net EAD (after taking the impact of netting agreements and collateral posting into account) broken down by type of derivative product at year-ends 2013 and 2014 as well as the evolution between 2013 and 2014.

Type of derivatives 31/12/13 31/12/14 Evolution 31/12/14 – 31/12/13

Gross EAD Net EAD Gross EAD Net EAD Gross EAD Net EAD

5,663 4,931 6,377 5,404 714 473 1,369 637 1,390 792 21 155 603 459 583 485 (20) 26 694 105 589 88 (105) (17) 73 73 218 218 146 146 4,294 4,294 4,987 4,612 693 318 0 0 4,294 4,294 4,987 4,612 693 318 24,601 5,297 44,528 9,695 19,926 4,399 0 0 221 28 237 46 16 18 1,434 385 2,548 615 1,113 230 22,946 4,884 41,743 9,035 18,797 4,151 30,265 10,228 50,905 15,099 20,640 4,871

CREDIT DERIVATIVESTRADING BOOK

CDS back to backOther CDSTotal return swap

BANKING BOOKCDS boughtCDS sold

OTHER DERIVATIVESCommoditiesEquity derivativesExchange derivativesRate derivatives

TOTAL

Credit Risk


4.9. Focus on Equity Exposure4.9.1. Regulatory Treatment and Accounting Rules

4.9.1.1. Regulatory TreatmentFor the calculation of the capital requirement for equity exposure, Belfius Bank has decided to treat them as follows:

→ for exposures booked before 31 December 2007, Belfius Bank applies the grandfathering clause (ending 31 December 2017); → for exposures booked after 1 January 2008, Belfius Bank applies the PD/LGD method. If the PD/LGD method can not be applied

(e.g. no ratings), the Simple Risk Weight method will be used.

Besides:

→ at the beginning of 2014, the NBB granted the Danish Compromise option (financial conglomerate) to Belfius allowing a new pruden-tial treatment for Belfius Insurance participation and subordinated debts (370% risk weight);

→ items classified as significant investments according to Article 48 of Regulation 575/2013 are weighted at 250%.

4.9.1.2. Accounting RulesAvailable-for-sale financial assets are subsequently re-measured at fair value based on quoted bid prices and/or bid prices derived from available market spreads or amounts derived from internal valuation models in the case of inactive markets. Unrealised gains and losses arising from changes in the fair value of financial assets classified as available-for-sale are recognised within equity.

Available-for-sale quoted equities are measured at fair value through “Gains and losses on securities not recognised in the statement of income” or within the statement of income in the case of impairment. Belfius analyses all quoted equities in an active market that have declined by more than 40% compared to the acquisition price or when a risk is identified by Management and takes the decision to assess and impair when there is an objective evidence of impairment according to IAS 39. A significant or prolonged decline in the fair value below its cost is also objective evidence of impairment. Impairments on equity securities cannot be reversed in the statement of income in the case of later recovery of quoted prices.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Quoted market prices in an organised market (such as a recognised stock exchange) are to be used as fair value, as they are the best evidence of the fair value of a financial instrument. Quoted market prices are not available for all financial assets and liabilities held or issued by Belfius.

If a financial instrument is not traded on an active market, recourse is provided by valuation models. A valuation model reflects the trans-action price on the measurement date in an arm’s length exchange and motivated by normal business considerations, i.e. the price that would be received by the holder of the financial asset in an orderly transaction that is not a forced liquidation or forced sale or the price to transfer the liability.

The valuation model takes into account all factors that market participants consider when pricing the asset. Measuring the fair value of a financial instrument requires consideration of current market conditions. To the extent that observable inputs are available, they are incorporated into the model.

Credit Risk

Type of market 31/12/13 31/12/14 Evolution 31/12/14 – 31/12/13

EAD Weighted risks EAD Weighted risks EAD Weighted risks

278 361 281 407 3 46 0 0 0 0 0 0 25 26 19 6 (6) (20) 303 387 300 413 (3) 26 1,649 6,102 1,649 6,102 0 303 387 1,949 6,515 1,646 6,128

Private equityRecognised marketUnrecognised marketTOTAL Danish CompromiseDeferred Tax AssetsTOTAL

Basel II Treatment 31/12/13 31/12/14 Evolution 31/12/14 – 31/12/13

EAD Weighted risks EAD Weighted risks EAD Weighted risks

135 189 72 95 (62) (94) 168 197 228 317 60 120 303 387 300 413 (3) 26 1,649 6,102 1,649 6,102 0 303 387 1,949 6,515 1,646 6,128

Standardised approachPD/LGDTOTAL Danish CompromiseDeferred Tax AssetsTOTAL


4.9.2. Equity Exposure

Exposures at year-ends 2013 and 2014 as well as the evolution between 2013 and 2014, by type of Equity:

Exposures at year-ends 2013 and 2014 as well as the evolution between 2013 and 2014, by type of treatment (exposures under grand-fathering clause regime being classified in standardised approach):

4.9.3. Gains or losses

4.9.3.1. Unrealised Gains or Losses Included in Own FundsThe total unrealised gains or losses related to equity instruments amounted to EUR 53 million as at 31 December 2014 (compared to EUR 53 million at 31 December 2013). This amount is net of tax.

4.10. Focus on Securitisation Activities4.10.1. Objectives and Roles of Belfius Bank

Objectives PursuedDepending on the role played by Belfius Bank regarding securitisation transactions, the objectives can vary from bringing differentiation in the long-term funding mix, reduction of the economic capital requirement, to improvement of the risk-return ratio.

During 2014 and previous years, Belfius Bank was able to pledge eligible asset-backed securities as collateral for repurchase agreements with ECB, which allows banks to swap high quality asset-backed securities for cash, among other things.

RolesBelfius Bank as OriginatorBelfius Bank, as originator, carries out securitisation transactions related to various asset classes: mainly residential mortgage loans, public finance loans and loans to SMEs. These transactions are in general carried out with a view to optimise the liquidity and funding profile.

Belfius Bank as InvestorBelfius Bank will only invest in specific securitisation transactions, within a very restrictive Risk Appetite Framework.

Credit Risk


Belfius Bank as ServicerIn transactions where Belfius Bank is the originator, Belfius Bank in general continues to service the assets being securitised.

Belfius Bank as Arranger of Securitisation Transactions for CustomersBelfius Bank acts as arranger or advisor on securitisation transactions for customers. In these instances, Belfius Bank will structure or advise on the securitisation transaction (or part of a transaction), and could take up other roles such as swap counterparty, account bank or liquidity provider at arm’s length market rates. In general Belfius Bank receives fees for structuring or advising on transactions.

Belfius Bank in another RoleDepending upon the specific details of a transaction, Belfius Bank may undertake various roles in securitisation transactions ranging from account bank to swap provider or liquidity facility provider. Belfius Bank may also act as calculation agent, paying agent or corporate services provider.

Belfius Bank does not act as a sponsor for ABCP, third party assets or multi-seller programmes, and it does not provide liquidity facilities to such programmes.

Involvement of Belfius Bank in each Securitisation TransactionDepending upon the role Belfius Bank plays in the securitisation transactions, the involvement can vary. When Belfius Bank acts solely as an investor, the extent of the involvement in the transaction is limited. However when Belfius Bank is acting as an originator or where several roles are played by Belfius Bank, the extent of this involvement can become significantly more important.

4.10.2. Management of the Risk

4.10.2.1. Securitisation Activity as OriginatorWhere securitisations are put in place for Belfius Bank’s own balance sheet, a strong framework of guidelines and policies ensures compliance with various requirements (cf. Securitisation Risk). These policies aim not only at identifying the regulatory requirements/procedures for new transactions, but also at defining the decision tree and actions for deal follow-up. Overall supervision of the correct implementation of these policies is in the hands of a dedicated Risk team within Belfius Bank. In relation to securitisation activities, the Risk Department is also responsible for maintaining contacts with relevant banking regulators. In addition to specific point-in-time analysis of files submitted, there is regular follow-up of all projects.

As Belfius Bank does not hedge the risks related to retained or re-securitisation exposures, there are no specific policies in place to address these issues.

In practice, the steering of the set-up for securitisation transactions is performed by the Asset Based Solutions Department with the support of the dedicated organisation/project management departments. As such, both prior to and after the closing of a transaction, transversal task forces are set up including all relevant departments, such as accounting, asset and liability management, credit risk, market risk, back-office, transaction processing, etc.

Post closing, the transaction follow-up concerns the efficiency and effectiveness of the servicing, the appropriate monitoring of the transaction from a credit, market and liquidity risk perspective as well as the reliability of the reporting being produced.

All outstanding transactions were carried out with a view of obtaining long-term funding or establishing a liquidity buffer.

No assets have been originated with the intention to securitise. The underlying assets have been originated in the regular course of lend-ing business to retail, public and corporate customers of Belfius Bank. Hence no assets on the balance sheet awaiting securitisation can be identified as such. Only performing assets are included in the securitisation transactions, and no profit no losses are realised upon sale of the assets to the SPV.

Engaged ECAIs include Moody’s, Fitch Ratings, Standard & Poor’s and DBRS.

Credit Risk

Exposure at 2013 year-end

Residential mortgage loans

Public sector loans

Corporate & SME exposures

ABS/MBS Total

Exposure at 2014 year-end

Residential mortgage loans

Public sector loans

Corporate & SME exposures

ABS/MBS Total

NA 10,041 4,511 2,771 17,323 69 0 9 78 0 84 0 84 0 0 0 0 NA NA NA NA NA

Penates Funding Dexia Secured Atrium-1, Atrium-2 NA (Penates-1, Funding Belgium Mercurius Funding Penates-4) (DSFB-2, DSFB-4) (Mercurius-1)

NA 8,304 4,236 3,531 16,071 92 0 13 106 0 154 1,162 1,316 0 0 0 NA NA NA NA NA

Penates Funding Dexia Secured Atrium-1, Atrium-2 NA (Penates-1, Funding Belgium Mercurius Funding Penates-4) (DSFB-2, DSFB-4) (Mercurius-1)

TRADITIONAL SECURITISATIONSUnderlying assetsDefaulted assets(1)

of which exposures securitised in 2013(2)

Gains and losses on sales in 2013SYNTHETIC SECURITISATIONSUnderlying assetsDefaulted assets(1)


RELATED SPVs

TRADITIONAL SECURITISATIONSUnderlying assetsDefaulted assets(1)


Gains and losses on sales in 2014SYNTHETIC SECURITISATIONSUnderlying assetsDefaulted assets(1)


RELATED SPVS

(1) Amount of defaulted assets (as of the date of default) using the definitions used in the securitisation transaction. (2) Gross amount of exposure (as of year end based on reference obligations).

(1) Amount of defaulted assets (as of the date of default) using the definitions used in the securitisation transaction. (2) Gross amount of exposure (as of year end based on reference obligations).


The following table shows the securitisation activity (Belfius Bank as originator): amount of exposure securitised, and gains and losses on sales during the period, the amount of underlying assets (amount of defaulted assets disclosed separately) originated by Belfius Bank by nature of securitisation and type of underlying assets.

Belfius Bank has not yet securitised any revolving exposures or liquidity facilities which are shared between investors and Belfius Bank as originator. The main changes impacting 2014 in comparison to 2013 relate to:

→ the issuance of the Mercurius 2014-1 notes, whereby the proceeds were used to purchase EUR 1.16 billion of new Corporate and SME exposures and to redeem early the Mercurius 2012-1 notes;

→ amortisation in the underlying portfolios of assets securitised.

Credit Risk

Type of securitisation

31/12/13

[0 - 8%] ]8% - 16%] ]16% - 106%] ]106%-1,250%[ 12.5 Total Trading


31/12/14

[0 - 8%] ]8% - 16%] ]16% - 106%] ]106%-1,250%[ 12.5 Total Trading


Evolution 31/12/14 - 31/12/13

[0 - 8%] ]8% - 16%] ]16% - 106%] ]106%-1,250%[ 12.5 Total Trading

49 33 190 16 1 288 98 0 327 298 438 865 122 215 1.938 437 347 471 1.055 138 215 2.227 863

1 83 84 0 398 471 385 333 30 1,218 447 471 468 333 30 0 1,302 845

(49) 50 (190) (16) (1) (205) (98) 0 0 0 0 0 0 71 172 (53) (532) (92) (215) (720) 10 124 (3) (722) (108) (215) (925) (17)

ABSCDOMBS TOTAL

ABSCDOMBS TOTAL

ABS CDOMBS TOTAL

Seniority 2013 2014

Total Banking Total Trading Total Banking Total Trading

67 212 242 2,290 88 1,373 82 2,357 300 1,373 324

ABS Non-GranularABS Resec SeniorABS Senior Granular TOTAL


4.10.2.2. Securitisation Activity as InvestorThe following table shows the outstanding amount of securitisation positions retained or purchased, separately for the trading and the non-trading book, broken down by type of securitisation and risk-weight class at year-ends 2012 and 2013 as well as the evolution between 2012 and 2013.

Belfius invests almost exclusively in originally AAA externally rated transactions, explaining the current low weighted risks associated to this portfolio.

The decreasing “exposures” for the securitisation Activity as Investor are also due to unwinding (mostly Spanish RMBS).

The following table shows the outstanding amount of securitisation positions retained or purchased, separately for the trading and the non-trading book, broken down by seniority at year-end 2013 and 2014.

Credit Risk

Total Amount Outstanding (in EUR) 4,515,000,000.00

Current Weighted Average Fixed Coupon 1.70%

Weighted Average Remaining Average Life 7.34


4.10.3. Covered Bond Activity

On 3 August 2012, the Belgian legislation on covered bonds was adopted (the covered bond act´), as well as an act on the use of receivables for financing purposes (the ´mobilisation act´). A special feature of Belgian covered bonds lies in the fact that the underlying assets are ring-fenced in a special estate – on the balance sheet of the issuer (no SPV) – within the general estate of the issuer. Ring-fencing within the estate of the issuing credit institution will increase the protection for the covered bond holders. In case of insolvency, the bond holders will have a dual recourse: one against the issuer’s general estate, and one against the cover pool.

Eligible assets are residential mortgage loans, commercial mortgage loans or public sector exposures. Belgian covered bonds that meet certain criteria are called Pandbrieven/Lettres de Gage.

Belgian law permits the issuance of Belgian covered bonds only to those institutions which are authorised by the NBB after an assessment inter alia of the internal organisation and proven ability to risk follow-up. A cover pool monitor must be appointed who will verify compliance with the legal framework and report to the NBB.

Belfius Bank has set up two programmes for the continuous offer of Belgian pandbrieven (Belgische pandbrieven/lettres de gage belges) in accordance with the legal framework for Belgian covered bonds, i.e. a Mortgage Pandbrieven and a Public Pandbrieven programme.

The NBB, in its capacity as Belgian prudential supervisory authority of financial institutions, has admitted both programmes to the list of authorised programmes for the issuance of covered bonds under the category Belgian pandbrieven (Belgische pandbrieven/lettres de gage belges). Ernst & Young has been appointed as cover pool monitor for both programmes.

The pandbrieven constitute direct, unconditional, unsubordinated and unsecured obligations of the bank and rank at all times pari passu, without any preference among themselves, with all other outstanding unsecured and unsubordinated obligations of the bank, present and future.

4.10.3.1. The Belgian Mortgage Pandbrieven ProgrammeAll Mortgage Pandbrieven issued under the Programme are covered by the same special estate (bijzonder vermogen/patrimoine spécial) (the “Special Estate”). The main asset class of the Special Estate consists of residential mortgage loans originated by Belfius Bank (the “Residential Mortgage Loans”, and together with any other assets registered as cover assets (dekkingswaarden/actifs de couverture), the “Cover Assets”).

As issuer, Belfius Bank, will ensure that the value of the residential mortgage loans calculated in accordance with the Covered Bond Regulations (and including any collections in respect thereto) will at all times represent at least 105% of the aggregate nominal outstanding amount of the Mortgage Pandbrieven. The issuer will maintain a cover register in which both the issued Mortgage Pandbrieven and the Cover Assets are registered (the “Cover Register”).

The Programme limit is set at EUR 10,000,000,000.

At the end of 2014 Belfius had EUR 4,515 million of outstanding covered bonds, backed by Belgian residential mortgage loans.

The Belfius Mortgage Pandbrieven are rated AAA (stable outlook) by Fitch and AAA (negative outlook) by S&P at the end of 2014.

Credit Risk

Characteristics of Cover Assets as at 31 December 2014

a/ Public Finance Assets

b/ Registered Cash

c/ Public Sector Exposure

6,100,132,279.00 61,764 98,767 98,765.18 61,762.86 79.48% 61.10% 31.26 16.82 19.49 9.54 8.32 6.88 5.21 8.65 88.33% 11.67% 0.349% 0.362% 0.245%

646,508,097.43

Position 1 BE0000291972 Kingdom of Belgium OLO 31 EUR 71,000,000.00

Outstanding balance of residential mortgage loansNumber of borrowersNumber of loansAverage outstanding balance per borrowerAverage outstanding balance per loanWeighted average original loan to initial valueWeighted average current loan to current valueWeighted average seasoning (in months)Weighted average remaining maturity (in years, at 0% CPR)Weighted average initial maturity (in years, at 0% CPR)Remaining average life (in years, at 0% CPR)Remaining average life (in years, at 2% CPR)Remaining average life (in years, at 5% CPR)Remaining average life (in years, at 10% CPR)Remaining average life to interest reset (in years, at 0% CPR)Percentage of fixed-rate loansPercentage of resettable-rate loansWeighted average interest rate Weighted average interest rate fixed rate loansWeighted average interest rate resettable-rate loans

Registered cash proceeds under the residential mortgage loans

ISIN Issuer nameSeriesCurrencyNominal amount

Total Amount Outstanding (in EUR) 1,750,000,000.00

Current Weighted Average Fixed Coupon 0.55%

Weighted Average Remaining Average Life 6.25


Currently no derivatives are included in the special estate. All assets and liabilities are euro denominated so there is no currency risk.

4.10.3.2. The Belgian Public Pandbrieven ProgrammeIn 2014, Belfius launched its second pandbrieven programme, the Public Pandbrieven programme.

All Public Pandbrieven to be issued under the Programme are covered by the same special estate (bijzonder vermogen/patrimoine spécial) (the “Special Estate”). The main asset class of the Special Estate consists of public sector loans originated by Belfius Bank (the “Public Sector Loans”, and together with any other assets registered as cover assets (dekkingswaarden/actifs de couverture), the “Cover Assets”).

As issuer, Belfius Bank, will ensure that the value of the public sector loans calculated in accordance with the Covered Bond Regulations (and including any collections in respect thereto) will at all times represent at least 105% of the aggregate nominal outstanding amount of the Public Pandbrieven. The issuer will maintain a cover register in which both the issued Public Pandbrieven and the Cover Assets are registered (the “Cover Register”).

The Programme limit is set at EUR 10,000,000,000.

At the end of 2014 Belfius had EUR 1.75 billion of outstanding covered bonds, backed by Belgian public sector loans.

The Belfius Public Pandbrieven are rated AAA (negative outlook) by S&P and Aaa by Moody’s at the end of 2014.

Credit Risk

Characteristics of Cover Assets as at 31 December 2014

a/ Public Finance Assets

b/ Registered Cash

2,310,660,917.04 961 32,135 2,404,433.84 71,904.81 57.89 14.72 19.59 8.34 7.89 6.98 6.22 8.34 100.00% 0.00% 3.646% 3.646% 0.000%

2,258,112.42

Outstanding Balance of Public Sector AssetsNumber of borrowersNumber of loansAverage Outstanding Balance per borrowerAverage Outstanding Balance per loanWeighted average seasoning (in months)Weighted average remaining maturity (in years, at 0% CPR)Weighted average initial maturity (in years, at 0% CPR)Remaining average life (in years, at 0% CPR)Remaining average life (in years, at 1% CPR)Remaining average life (in years, at 3% CPR)Remaining average life (in years, at 5% CPR)Remaining average life to interest reset (in years, at 0% CPR)Percentage of Fixed Rate LoansPercentage of Resettable Rate LoansWeighted average interest rateWeighted average interest rate Fixed Rate LoansWeighted average interest rate Resettable Rate Loans

Registered cash proceeds under the Public Sector Exposures


Currently no derivatives are included in the special estate. All assets and liabilities are euro denominated so there is no currency risk.

4.10.3.3. Key points RiskThese key points apply to both pandbrieven programmes.

1. Key points on risk based on the Legal FrameworkA. 85% test: the value of cover assets from one of the 3 main categories must represent at least 85% of the nominal amount of the

outstanding Pandbrieven. This test serves two purposes: it prevents mixed asset cover bond programmes and limits the so-called “substitution assets”.

B. 105% test: the value of cover assets must represent at least 105% of the nominal amount of the outstanding Pandbrieven. This test determines the legal minimum over-collateral level, from a regulatory “value calculation” point of view. Due to the concept of value for residential mortgage loans, this will in practice result in an even higher over-collateral level from a nominal amount point of view.

C. Amortisation test: the sum of revenues stemming from the cover assets must be equal to or greater than the amount of interest, principal and costs related to the outstanding Pandbrieven and their management.

D. Liquidity test: the cover assets must generate sufficient liquidity or contain sufficient liquid assets to meet all unconditional payments over a 6 month horizon.

E. Additional stress tests to cover interest rate and currency risk: the cover asset tests and liquidity test must be met also in the case of sudden and unexpected movements in interest rates and exchange rates. For the simulation, the issuer can use internal stress tests or the option to simulate an immediate increase or decrease of interest rates with 2% and of exchange rates with 8%. The issuer and the cover pool monitor must regularly report to the NBB on compliance with the regulations and whether all of the above tests have been met. In case of breach the cover pool monitor has to inform immediately the NBB.

F. Asset encumbrance limit: the Belgian legal framework is one of the few to include an asset encumbrance limit with respect to covered bonds. A credit institution can no longer issue new Belgian pandbrieven if the amount of cover assets exceeds 8% of the credit institution’s total non-consolidated assets. As from 2014, this asset encumbrance limit will be monitored by an Asset Encumbrance Committee.

Credit Risk


2. Additional Key Points on Risk in the Belfius FrameworkIn addition to the legal requirements, Belfius Bank has implemented internal risk guidelines to monitor the programme that go beyond the legal requirements, both in terms of asset coverage as well as liquidity. The internal guidelines include early warning triggers and inter alia are aimed at ensuring that the current ratings are maintained as far as possible. To prevent large distortions between asset and issuance profile, rating agencies estimate the over-collateral at higher levels than the legal limit.

Through issuer covenants, which are disclosed in the prospectus of each programme, Belfius Bank has taken the commitment to adhere to some programme-specific additional requirements. For example the limit under 1.A. as described above (85% in the law) is set at 105% for each of both programmes. In terms of liquidity, liquid bonds will be added to the special estate to cover all interest payments due under the Pandbrieven programme over a specified period for each programme. For the mortgage pandbrieven this period is 1 year, for the public pandbrieven this period is 6 months.


5.1. Market Risk DefinitionOverall, the market risk can be understood as the potential adverse change in the value of a portfolio of financial instruments due to movements in market price levels, changes as to the instrument’s liquidity, changes in volatility levels for market prices or changes in the correlations between the levels of market prices.

Management of the market risk within Belfius is focused on all treasury and financial market activities and encompasses the interest rate risk, the spread risk and the associated credit risk/liquidity risk, the foreign-exchange risk, the equity risk (or price risk), the inflation risk and the commodity price risk.

5.2. Market Risk GovernanceWith the purpose of effectively managing the market risks Belfius Bank is facing, TFM Risk Management has identified the following cornerstones as key pillars of the risk management of the risks Belfius Bank is confronted with for its Treasury and Financial Market (TFM) activities:

→ An efficient organisation fostering an accurate identification, analysis and reporting of the different risks Belfius Bank is bearing, as well as a continued training of people in order to remain up to date with the latest evolutions in theories, regulatory issues, metrics or market changes.

→ A robust limit framework with differentiated limits by activity or risk factor that is respected by all of the parties involved in market activities. On top of the VaR limits or P&L triggers, several other metrics have been identified as key controlling tools in the risk man-agement process:• limits on notional amounts;• limits on maturities;• limits on type of products;• limits on sensitivities (known as “Greeks”: delta, etc);• stress tests.

→ Finally, this framework is regularly submitted for revision to the TFM Risk Committee in order to be commensurate to the risk appetite defined by the board of directors of Belfius Bank.

Committees

The TFM Risk Committee (TRC) meets on a monthly basis and is responsible for a wide range of topics such as: risk and statement of income trigger reporting analysis(1) and related decisions, definition and revision of limits, proposals for the approval of new products, discussion of guidelines, risk governance and standards, risk concepts and measurement methodology and the quality of valuation processes.

Ad-hoc TRC can be organised to decide on specific issues when required from a business and/or a risk management perspective.

The Risk Policy Committee validates all major changes in risk profile or risk governance.

Market Risk5.

(1) Statement of income triggers warn of a deterioration of results and is expressed as a percentage of VaR limits: typically at 50%, 75% and 100% for triggers 1, 2 and 3 and stop the activity at 300% of VaR.

Market Risk

Value-at-Risk by activity

VaR (99%, 10 days)

(In millions of EUR)

2013 2014

IR(1) & FX(2) Equity Spread Other risks(3) IR(1) & FX(2) Equity Spread Other risks(3)

By activity Average End of Year Maximum Minimum Global Average End of Year Maximum Minimum Limit(1) IR: interest rate risk. (2) FX: forex risk. (3) Inflation and CO2 risk.

6.0 1.2 10.7 1.6 6.2 1.3 10.5 0.9 4.8 0.8 10.5 1.6 4.4 1.8 10.1 1.4 10.3 2.6 14.5 2.3 9.6 5.7 13.4 1.9 3.4 0.6 9.1 1.1 2.3 0.7 8.6 0.6

19.5 18.9 17.1 17.8 24.2 23.3 15.2 14.0 41.0 32.0


5.3. Market Risk Management5.3.1. Market Risk Measures

The Value-at-Risk (VaR) concept is used as the principal metric for proper management of the market risk Belfius is facing. The VaR measures the maximum loss in Net Present Value (NPV) the bank might be facing in normal and/or historical market conditions over a period of 10 days with a confidence interval of 99%. The following risks are monitored at Belfius using a VaR computation:

→ The interest rate and foreign-exchange rate risk: this category of risk is monitored via an historical VaR based on an internal model approved by the National Bank of Belgium in June 2013 to replace the parametric VaR. The historical simulation approach consists of managing the portfolio through a temporal series of historical asset yields. These re-valuations generate a distribution of portfolio values (yield histogram) on the basis of which a VaR (% percentile) may be calculated. The main advantages of this type of VaR are its simple methodology and the fact that it does not assume a normal but a historical distribution of asset yields (distributions may be non-normal and the behaviour of the observations may be non-linear).

→ The equity risk: general and specific equity risks are measured on the basis of a historical VaR with full valuation based on 300 scenarios. → The spread risk: specific interest rate risk is measured via a historical approach, which applies 300 observed variations on the

sensitivities. → The inflation risk: inflation risk is measured by a historical approach applying 300 observed sensitivity variations.

Since the end of 2011, Belfius has computed a Stressed Value-at-Risk (S-VaR) on top of its regular VaR, which also enters into the computation of weighted risks for Market Risk. This S-VaR measure consists of calculating an additional VaR based on a 12 consecutive months observation period which generates the largest negative variations of Net Present Value in the bank’s current portfolio of financial instruments.

5.3.2. Market Risk Exposure

Treasury and Financial Markets (excluding bond portfolio)To remain in line with the risk appetite adopted by Belfius, the overall average VaR was reduced from EUR 27.2 million in 2011, to EUR 19.5 mil-lion in 2013 and to EUR 18.9 million in 2014. This was within a limit that fell from EUR 65 million in 2001 to EUR 41 million in 2013 and to EUR 32 million in 2014.

Market Risk


Bond PortfolioBelfius Bank manages bond portfolios (Legacy portfolio and ALM Bank portfolio) amounting to EUR 16.1 billion as at 31 December 2014 (against EUR 19.6 billion as at 31 December 2013). The sensitivity in economic value of these bond portfolios is very limited, as interest rate risk is hedged.

A major proportion of the bond portfolios is classified in Loans & Receivables (EUR 6.8 billion) and in 2014 another portion of the portfolio (EUR 2.0 billion) was transferred from AFS to HTM. The AFS reserve of these securities is insensitive to market spread evolution. Regarding the other bond portfolios classified in AFS, the sensitivity of the AFS reserve value after a basis point credit-spread increase amounted to EUR -7.9 million (by bp).

Given the illiquidity and the reduced possibility of having “observable” prices/spreads, for certain categories of bonds or markets, in the valuation process, a mark-to-model valuation development was performed.

5.3.3. Stress Testing

Although the VaR is a very useful risk management tool for controlling day-to-day loss-risk exposures, it does not withstand the test of abnormal market movements, and it does not always give a clear picture of market exposure. By contrast, stress tests reveal such information by gauging Belfius’ vulnerability of the market position to exceptional events and hence by providing additional information about market risks falling outside those encompassed by the VaR. These risks include those associated with extreme price movements and those associated with scenarios not reflected in recent history or implied by the parameters used to compute the VaR. Consequently, Belfius Bank uses stress tests in conjunction with the VaR approach.

The stress testing framework applied at Belfius Bank can be described as follows:

→ Sensitivity tests are run on the following risk factors: interest rates, foreign-exchange risk, volatilities, credit spreads, correlation, IR basis (difference between the Eonia rate and the Euribor 3-month rate) and dividends/share prices.

→ Historical scenarios, which consist of simulations mirroring simultaneous significant historical market movements on several risk factors. More specifically, the following scenarios are applied:• equity crash of 1987;• monetary crisis of 1992;• market movements of 2001;• financial crisis of 2008.

→ Combined scenario where shocks on interest rates and credit spreads are simultaneously applied.

Market Risk

Type Stress Test Description

Interest Rate Risk FX Risk EUR

EQT Risk Volatility Risk Credit Spread Risk

Inflation Risk

Correlation Risk

1M 1Y 2Y 5Y 10Y IR FX EQT

Sensitivity Stress Test

Parallel Shifts of the interest rate curves 6 scenarios

100 bp

100 bp

100 bp

100 bp

100 bp

-100 bp -100 bp -100 bp -100 bp -100 bp200 bp 200 bp 200 bp 200 bp 200 bp

-200 bp -200 bp -200 bp -200 bp -200 bp300 bp 300 bp 300 bp 300 bp 300 bp

-300 bp -300 bp -300 bp -300 bp -300 bpFlattening of interest rate curves 100 bp 0 bp -11 bp -44 bp -100Steepening of interest rate curves -100 bp 0 bp 11 bp 44 bp 100EUR appreciates against all currencies +10%EUR depreciates against all currencies -10%Increase of Equity prices

+10%

Decrease of Equity prices

-25%

Increase of the Volatility in each market +25% +25% +25%Decrease of the Volatility in each market -25% -25% -25%Increase of all the spreads

25 bp

Decrease of all the spreads

-25 bp

Dividend : +99% Dividend: +99%

Dividend : -99% Dividend: -99%

EU-BE inflation spread / 2

EU-BE inflation

spread / 2Historical Scenarios

Equity crash (1987) -50 bp -50 bp -50 bp -50 bp -50 bp -25% +15% +30% 30 bp (OLOs: 15 bp)

Monetary crisis (1992)(1) 150 bp 131 bp 110 bp 80 bp 30 bp -8%Terrorist attack (2001)(1) -80 bp -66 bp -50 bp -39 bp -20 bp 3% -10% 15% 15% 15% 25 bpFinancial crisis (2008) EUR(DKK*):

-245 USD: -530 TRY: -190

GBP*: -350

EUR(DKK*): -240

USD: -290TRY: -160

GBP*: -300

EUR (DKK*): -170

USD: -190TRY: -345

GBP*: -100JPY*: -25

EUR (DKK*): -90

USD: -185TRY: -325GBP*: -50JPY*: -50

-25% EUR: +15%USD: +30%TRY: +25%”

10% 40% By asset & accounting

class

Specific Stress Test

Asset class (2008) By asset & accounting

classStress Test on Customer CVA: 4 scenarios

100 bp 100 bp 100 bp 100 bp 100 bp 100 bp *1.5

200 bp 200 bp 200 bp 200 bp 200 bp 200 bp *1.5-100 bp -100 bp -100 bp -100 bp -100 bp -100 bp *1.5-200 bp -200 bp -200 bp -200 bp -200 bp -200 bp *1.5

CMS Correlation: Smile steepening

5 bp steepening

CMS Correlation: Parallel shift 2%

1%

CMS Correlation: Parallel shift 1% (except 30y-2y)

1% except 30y-2y

CMS Correlation: Term structure

Term structure deformation

IR basis widening Widening of basisIR basis tightening Tightening of basis

(1) Interest rate shifts: linear interpolation, extrapolation flat.


A global overview of the stress test framework at Belfius Bank is presented in the table below.

The stress tests containing banking and trading books are presented at least on a quarterly basis to the TFM Risk Committee (TRC).

Market Risk


5.3.4. Regulatory Internal Model and Back Testing

Basel TreatmentBelfius Bank applies the internal VaR model for the regulatory capital requirement calculation on foreign exchange risk and general interest rate risk within the trading scope. Stressed VaR is used in addition to internal VaR to determine regulatory capital.

The other market risks are treated under the Basel standardised approach.

Belfius Bank uses its internal VaR model for the regulatory capital requirement calculation on foreign exchange risk and general interest rate risk within the trading scope (refer to part 3.2. for figures on market risk capital requirements).

Beside the VaR described above, Belfius Bank calculates a Stressed VaR (SVaR). The SVaR is computed on a weekly basis using parameters from the period May 2008-June 2009.

The regulatory capital is calculated as the sum of both the VaR and the Stressed VaR.

The aim of back testing is to test the accuracy and the mathematical soundness of the internal market risk measurement methodologies by comparing the calculated market risk figures with the volatility of the actual results. Back testing is a prerequisite for banks that want to use internal models to calculate their regulatory capital requirement.

The result of the back test is the number of actual market losses greater than their corresponding VaR figures (i.e. “the number of exceptions”). According to this number, the regulators among others will also decide on the multiplier used for determining the regulatory capital base for market risks.

Currently, two types of back testing are processed at Belfius Bank:

→ Hypothetical back testing compares the hypothetical results, minus any provisions adjustments and other non-involved risk factors, calculating the VaR over a holding period of one day. The hypothetical results only take account of the day-to-day movement in interest rates and prices, without the intraday changes in positions. In 2014, there were only three exceptions to the hypothetical back testing.

→ Real back testing simply compares real results purged of possible provisions, corrections and other non-concerned risk factors, with VaR outcomes over a 1-day holding period. The real results take not only into account the daily evolution of the interest rates and the prices, but also the intraday evolution of the positions. Only two exceptions to real back testing were observed in 2014.

On the risks for which capital requirements are calculated according to the standardised approach (spread, equity) hypothetical back testing is performed daily on the trading scope. Hypothetical back testing runs under the following scenarios: change in all market data, change in interest rate alone, change in exchange rate alone, change in equity price and change in credit spread.

For back testing purposes, the VaR amounts need to be recalculated using a 1-day holding period. For VaR figures calculated under a parametric approach, re-scaling is achieved through the application of a square root of 10 conversion. For any other VaR approach, a 1-day VaR figure is calculated.

Risk reports are based on end-of-day positions meaning that risk figures refer to the maximum loss at the chosen confidence interval over the holding period for the portfolio that is held at the end of the business day. With a 1-day holding period, this figure is compared with the variation of the statement of income of the following business day. The back testing processes provide a view of the number of (hypothetical and real) exceptions. The maximum between these two numbers is taken into account to adjust the multiplier used for calculating the bank’s risk capital requirements for market risk under the internal model approved by the regulator. The multiplier has a minimum value of 4, but in the event that back testing proves the risk measurement models to be inappropriate or some recommendations on uniform application of the methodology are outstanding, the multiplier can be increased up to 5.

Market Risk

3,000,000

2,000,000

1,000,000

0

-1,000,000

-2,000,000

-3,000,000

-4,000,000

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Hypothetical Back Testing

Hypothetical Back Testing VaR 1 day with sign

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Real Back Testing

Real Back Testing VaR 1 day with sign


The following charts show back testing in 2014 on interest rate and foreign exchange perimeters:

5.3.5. Validation

Validation is responsible for the overall assessment of the market risk and valuation models. The process set up to endorse the validation of models deployed within Belfius Bank is multi-layered, ensuring total compliance with regulatory requirements. Validation controls all the aspects of the production of results by the models, from a methodological but also an operational (implementation, usage) viewpoint. It intervenes prior to the first use of a new model or of any significant change of an existing model. It also regularly reviews the performance of the models (at least every two or three years, depending on the importance of the model). Validation works are summarised in reports indicating the controls that were performed, their findings, proposed corrective actions and a validation status.

The decisions regarding the Market models are taken by the TFM-Risk Committee (TRC), composed of the CRO, the Board Member in charge of Financial Markets and their direct reports in charge of Market activities(1):

→ green light to put new models or model updates in production; → endorsement of the corrective action plans recommended by Validation.

The TRC decisions are further presented for approval to the Risk Policy Committee.

5.3.6. Systems and Controls

On a daily basis, TFM Risk Management calculates, analyses and reports the risks and results at an entity and consolidated level. On a monthly basis, the TFM Risk Committee (TRC) meets to discuss the risks and results, the market limits, procedures, guidelines and policies and approves or amends new valuation methodologies.

All market activities are backed by specific guidelines describing the objectives, the authorised products, sensitivity, VaR and/or outstand-ing limits. The systems and controls established inside Belfius are described in various procedures to ensure a complete and formal framework established to support all the market risk responsibilities.

(1) The decisions regarding the Portfolio Risk Models (e.g. Stress Tests or VaR) are taken by the Risk Executive Committee, composed of the CRO and of its direct reports.


6.1. Policy on asset & liability managementThe ALM risk can be defined as the sensitivity of the whole bank’s value and income with regard to unexpected interest rate movements, fluctuations in foreign-exchanges rates and changes in the financing conditions of Belfius Bank.

The Assets & Liabilities Committee (ALCo) manages interest rate risk, exchange risk, liquidity risk and the solvency risk of the bank’s balance sheet within a framework of normative limits and reports to the Management Board. Important files at a strategic level are submitted for final decision to the Management Board.

The ALCo of the bank is responsible for guiding and monitoring balance sheet and off-balance-sheet commitments and, doing so, places an emphasis on:

→ the creation of a stable income flow; → the maintenance of economic value; → the insurance of robust and sustainable funding; → the control of solvency.

The ALCo meets regularly, chaired by the Chief Financial Officer (CFO), with meetings attended by the Chief Risk Officer (CRO) and members of the Management Board responsible for commercial business lines.

Management of the interest rate, liquidity and solvability risk at Belfius Insurance is entrusted to the Belfius Insurance ALCo (see the Belfius Insurance annual report). The risk indicators are calculated based on a harmonised risk method for Belfius, supplemented by factors specific to Belfius Insurance relating to risk management.

6.2. Liquidity risk6.2.1. Liquidity management framework

Belfius manages its liquidity using internal and regulatory liquidity ratios. In addition, strict limits are applied to the balance sheet amount which can be funded over the short term and on the interbank market. Available liquidity reserves play a pivotal role regarding liquidity: at any time, Belfius ensures it has sufficient quality assets to cover any temporary liquidity shortfalls, both in daily management and under stress scenarios.

Liquidity and Capital Management (LCM) within Finance is the front-line manager for the liquidity and capital requirements of Belfius Bank. It identifies, analyses and reports on current and future liquidity positions and risk, and then defines and coordinates the action needed to keep them in the right direction, under the operational responsibility of the Chief Financial Officer (CFO) and under the general responsibility of the Management Board. The CFO also bears final operational responsibility for managing the interest rate risk contained in the balance sheet via the ALM Direction and the ALCo, meaning that total balance sheet management comes under its operational responsibility.

LCM holds committee meetings each week attended by the CFO, the Risk Department, the Treasury Department and the Retail and Commercial Business and Public and Wholesale Business business lines. This committee implements the decisions taken by LCM in relation to obtaining short-term and long-term funding on the institutional market or in the commercial franchise.

LCM also monitors the funding plan to guarantee Belfius Bank will still comply with its internal and regulatory liquidity ratios.

Asset & Liability Management6.

Asset & Liability Management

Liquid assets vs unsecured funding need < 1 year(In billions of EUR)

31/12/13 31/12/14

● Available liquid asset buffer ● Wholesale funding < 1 year

31.636.1

3.77.7


LCM reports on a daily and weekly basis to the Management Board about the bank’s liquidity situation.

Second-line controls for monitoring the liquidity risk are performed by the Risk Department, which ensures that the reports published are accurate, challenges the retained hypothesis and models, realises simulation over stress situations and oversees compliance with limits, as laid down in the Liquidity Guideline.

6.2.2. Exposure to liquidity risk

The liquidity risk at Belfius Bank is affected mainly by:

→ the amounts of commercial funding collected from Retail and Private customers, small, medium-sized and large companies, public and similar customers and the way these funds are allocated to customers through commercial loans;

→ the volatility of the collateral that is freezed with counterparties as part of the framework of derivative and repo transactions (so called cash & securities collateral);

→ the value of the liquid reserves by virtue of which Belfius Bank can collect funding on the repo market and/or from the ECB; → the capacity to obtain interbank and institutional funding.

6.2.3. Consolidation of the liquidity profile

During 2014, Belfius Bank continued its efforts to improve and diversify its liquidity profile by:

→ stabilising its funding surplus within the commercial balance sheet; → continuing to obtain long-term funding from institutionals with the issue, amongst other, of covered bonds backed by quality loans.

In addition to the pandbrieven programme in place since 2012, Belfius Bank introduced in 2014 a programme also enabling it to use public sector loans as guarantee of covered bonds;

→ collecting short and medium-term (CP/CD/EMTN) deposits from institutional customers; → continuing to downsize the Legacy portfolio;

Belfius Bank was able to reduce its dependency on the European Central Bank, with outstanding LTRO funding falling from EUR 13.5 billion at the end of 2013 to EUR 3.5 billion at the end of 2014. At the same time, Belfius participated in the new ECB TLTRO funding programme in an amount of EUR 1.5 billion with the purpose to finance investments in projects from SMEs, etc.

The National Bank of Belgium (NBB) regulatory liquidity ratio at one month is broadly respected.

The Liquidity Coverage Ratio(1) (LCR) introduced within the framework of the Basel III reforms will become a mandatory ratio for European banks on 1 October 2015 (at a level of 60%). The NBB has already indicated that it has the intention for the Belgian banks to require a LCR ratio of 100% from that date.

The LCR ratio is calculated monthly by Belfius since end 2013 and from then is taken into account in the set-up of its funding plan, which integrates the strategy for diversification of funding sources. Belfius Bank closed the year 2014 with an LCR ratio at 122%.

6.2.4. Liquidity reserves

At the end of 2014 Belfius Bank had solid and quickly mobilisable liquidity reserves of EUR 36.1 billion. These reserves consist of EUR 2.0 billion in cash, EUR 23.9 billion in ECB eligible bonds, EUR 8.7 billion in other assets also available from the ECB and EUR 1.5 billion in other liquid bonds.

These assets represent almost 5 times the bank’s unsecured (senior unsecured) institutional funding with a remaining maturity of less than one year.

(1) The Liquidity Coverage Ratio (LCR) refers to the ratio between the stock of high quality liquid assets and the total net cash outflow over the month and is based on Belfius’ current interpretation of the European regulation.


Liabilities(In billions of EUR) 31/12/14

COMMERCIAL LIABILITIESLONG-TERM WHOLESALE FUNDING

LT Subordinated FundingLT Senior Unsecured FundingCovered BondsLT Secured FundingECB: (T)LTRO

SHORT-TERM WHOLESALE FUNDINGST Unsecured FundingRepoECB (MRO)

CASH COLLATERALGROUP CENTER(1)

SIDEDexia Group

NON CASH(2)

BANK PERIMETERCORRECTION INTRAGROUP TRANSACTIONSBELFIUS INSURANCE AND OTHER SUBSIDIARIES BELFIUS CONSOLIDATED

8021

15645

11470

1012

11

36171

(1)24

194

Assets(In billions of EUR) 31/12/14

COMMERCIAL ASSETSLIQUIDITY MANAGEMENT

ALM BondsMoney market & other short term wholesale assets

CASH COLLATERALGROUP CENTER(1)

SIDEDexia GroupLegacy

NON CASH(2)

BANK PERIMETERCORRECTION INTRAGROUP TRANSACTIONSBELFIUS INSURANCE AND OTHER SUBSIDIARIES BELFIUS CONSOLIDATED

7312

7

5

245

21101136

171(3)26

194

(1) Group Center comprises capital and non-interest bearing liabilities at the liabilities side and participations and non-interest bearing assets on the assets side.(2) Non cash comprises notably the mark-to-market valuation of derivatives.


6.2.5. Structure of the balance sheet at Belfius Bank

An analytical (non-accounting) view of the Belfius consolidated balance sheet, used to manage the balance sheet from an ALM and LCM point of view, is provided in the table below.

Funding sourcesBelfius Bank has a historical stable volume of commercial funding that comes mainly from its RCB and PWB customers.

Belfius Bank also receives medium-to-long-term wholesale funding, including EUR 5.0 billion in ECB funding (LTRO and TLTRO) and EUR 6.3 billion from covered bonds (EUR 4.5 billion in mortgage loans and EUR 1.8 billion in public loans) as at 31 December 2014.

The balance of the bank’s funding requirements comes from institutional short-term deposits (Treasury) obtained from repos and unsecured funding.

Allocation of funding sourcesCommercial deposits are used to issue commercial loans.

Belfius Bank also has a historical bond portfolio, including an ALM portfolio for liquidity management purposes, with high-value liquid assets and a historical bond portfolio (Legacy bond portfolio) that was built up between 2003 and 2008.

Historically by taking out derivative contracts to cover the interest rate risk of its activities, Belfius Bank has an outstanding position in derivatives for which collateral must be posted and received (cash & securities collateral). Against the background of historical low interest rates, in net terms Belfius Bank posts more collateral than it receives.

The loan-to-deposit ratio, which indicates the proportion between commercial assets and liabilities, was 92% at the end of 2014.


As at 31 december 2014 Carrying amount of

encumbered assets

Fair value of encumbered

assets

Carrying amount of

unencumbered assets

Fair value of unencumbered

assets

As at 31 december 2014 Fair value of encumbered collateral received or own debt

securities issued

Fair value of collateral received or own debt securities issued

available for encumbrance

As at 31 december 2014 Matching liabilities, contingent liabilities or securities lent

Assets, collateral received and own debt securities issued other

than covered bonds and ABSs encumbered

50,901 120,937 0 0 1,706 1,706 10,386 10,393 20,980 21,877 0 39,326

3,071 779 0 0 3,071 779 0 0 0 584

46,037 51,224

ASSETS OF THE REPORTING INSTITUTION Equity instruments Debt securities Other assets

COLLATERAL RECEIVED BY THE REPORTING INSTITUTION Equity instruments Debt securities Other collateral received Own debt securities issued other than own covered bonds or ABS

CARRYING AMOUNT OF SELECTED FINANCIAL LIABILITIES


6.2.6. Encumbered assets

According to the current Belfius’ interpretation of the EBA guideline on the matter, the encumbered assets at Belfius Bank level amount to EUR 54 billion end 2014 and represent 31% of total bank group balance sheet and collateral received under securities format, which amounts to EUR 176 billion (EUR 172 billion assets and EUR 4 billion collateral received).

1. Assets

2. Collateral received

3. Encumbered assets/collateral received and asociated liabilities

The strategy for growth and diversification of wholesale funding sources has a direct impact on asset encumbrance of the bank.

Since the set up of the first covered bond program in 2012 the bank has issued covered bonds for a total amount of EUR 6.3 billion. End 2014, the assets encumbered for this funding source are composed of commercial loans (Public and Mortgage) and amount to EUR 8.5 billion. A few years ago the bank also securitised public loans through securitisation vehicles called DSFB 2 & 4. The amount of assets encumbered for these structures are EUR 4.1 billion.

The bank is also collecting funding through repo markets and other collateralised deposits. The total amount of assets used as collateral for this activity amounts to EUR 15.1 billion, of which EUR 6.6 billion is linked to the ECB funding of EUR 5.0 billion end 2014. It is worth mentioning that ECB funding decreased from EUR 13.5 billion end 2013 to EUR 5.0 billion end 2014; this contributed to the general decrease of the balance sheet encumbrance notwithstanding the issuance of covered bonds detailed above.

The balance of encumbered assets is mainly linked to collateral pledged for the derivatives exposures for EUR 23.6 billion, under the form of cash or securities. A significant part of collateral pledged is financed through collateral received from other counterparties with whom the bank concluded derivatives in the opposite direction.

Regarding the “Other assets” (unencumbered) on balance sheet, they are mainly composed of assets not available for encumbrance such as derivatives value, fair value revaluation of portfolio hedge and tax assets.



6.3. Interest rate risk6.3.1. Measuring interest rate risk

The structural interest rate risk at Belfius Bank results from the structural imbalance between its assets and liabilities on the balance sheet in terms of volumes, durations and interest rate sensitivity.

Changes in interest rates can have a positive or negative effect on both the income and the economic value of the bank. This results in two separate but complementary viewpoints in assessing the bank’s interest rate risk: from an income and an economic value perspective.

The management of indefinite duration products and (in part) non-interest-bearing products (such as sight and savings accounts) use portfolio replication techniques. The underlying hypotheses concerning expected duration, rate-fixing period and tariff evolution are subject to constant monitoring and, if necessary, they are adjusted by the ALCo.

Derivatives in the ALM perimeter are concluded within the framework of a coverage (portfolio hedge) of the balance sheet’s interest rate risk.

Sensitivity of economic value in relation to interest rate fluctuations: Value approach Movements in interest rates affect the economic value of the assets and liabilities on the balance sheet, as well as hedging derivatives.

An interest rate sensitivity limit defines the maximum sensitivity allowed for bank balance sheet interest rate risk and measures the Basis-Point-Value (BPV), the change in the net economic value of the balance sheet in the event of a parallel move by 1% across the interest rate curve.

The rate curve may also vary in a non-parallel manner and cause a change of value despite a total sensitivity of the total economic value that appears neutral. This is called curvature risk. This risk is assessed using specific measurements of the curve sensitivity within each maturity bucket, measuring expected variations of value following the movement of a single point on the interest rate curve.

Interest rate sensitivity of interest margin: Earnings at Risk (EaR) approachThe EaR approach keeps management up to date with the expected income shifts over time of a sudden change in value. The interest rate level affects external credit tariffs of commercial investment products and credits as well as the expected behaviour of early redemptions and therefore affects the bank’s future interest rate result. This sensitivity enables an estimate to be made of the potential profit or potential loss of income in the current year and the following years, depending on the various interest rate simulations.

6.3.2. Exposure to interest rate risk

Interest rate sensitivity measures the net change in the ALM balance sheet economic value if interest rates move by 1% across the entire curve. The long-term sensitivity of the ALM perimeter was EUR 803 million/% as at 31 December 2014 (against EUR 103 million/% as at 31 December 2013), excluding positions of insurance companies and pension funds of Belfius Bank.

6.4. Foreign exchange riskAlthough Belfius uses the euro as its reporting currency, part of its assets, liabilities, income and expenses are also generated in several other currencies. The elements (BGAAP) of the profit & loss accounts which are generated in foreign currencies were systematically and on an ongoing basis converted in euro when they are realised.

The net positions in such profit & loss accounts elements are relatively limited.



6.5. Equity risk6.5.1. Equity risk measures

The major part of the equity risk is in the insurance perimeter (see the annual report of the insurance company), given that the equity portfolio of the bank entity has been almost totally reduced.

A VaR calculation is used to assess the portfolio’s sensitivity to a negative movement in the prices, volatility or correlation of equities. Market risk management includes Earnings at Risk and stress test measurements that provide an indication of the potential accounting loss under different scenarios. An “early warning system” was developed for the purpose of reallocating assets in stress scenarios in order to protect solvency ratios.

6.5.2. Balance sheet sensitivity to equities (listed equities)

Equity-Value at Risk (VaR with an interval of confidence of 99% over a period of ten days) measures the potential maximum change in market value.

6.6. Pension fundsSpecific reports on the pension funds are submitted to the investment committees of those funds following the delegation given by the ALCo at Belfius Bank. They contain factors relating to interest rate, inflation and equity risk.

Information technologyand infrastructure ● failures: 0.4%

Execution,delivery andprocessmanagement:41.6% ●

Damageto tangible assetsand public safety: 1.0% ●

● Internal fraud: 2.7%

● External fraud: 49.4%

Client, productsand business ● practices: 4.8%

Breakdown of total losses by standard categoryof incidents over the past three years

31/12/14


7.1. PolicyRegarding operational risks, Belfius policy involves various risks and controls being regularly identified, in order to check compliance of the risk level by activity. Specific attention is also paid to new types of risk, such as those associated with cybercrime.

7.2. Measuring and managing riskManaging operational risk is based on the following elements:

7.2.1. Decentralised responsibility

Each of the bank’s line management organisations has the primary responsibility for monitoring the operational risk in its individual sphere of activity. It establishes the way its activities are organised, including the checks that need to be implemented to restrict operational risk. It also defines the corrective measures required to counter significant incidents or when major risks have been identified. Operational Risk Management ensures the regular monitoring of risks and incidents and establishes a quarterly report for all activities. This process allows the internal control system to be improved on an ongoing basis.

7.2.2. Gathering data about operational risks

The systematic collection and control of data on operational incidents is one of the main requirements of the Basel Committee regarding operational risk management, whatever the approach adopted for capital calculation (“Standardised Approach” or “Advanced Measurement Approach”).

The reporting mechanisms ensure that the parties responsible are notified quickly if incidents occur. Major incidents are also reported to the Management Board and feature an action plan for avoiding or limiting any risk in the future. This is developed under the responsibility of line management.

For the period 2012-2014, average annual losses were EUR 6.9 million.

The main areas of operational loss were due essentially to incidents associated with external fraud (cybercrime with various separate minor incidents) and incidents in relation to execution, delivery and process management. Other categories remain limited in number and amount.

The greatest financial impact resulting from operational incidents is in the bank’s Retail business.

Operational Risk7.

Operational Risk


7.2.3. Risk and Control Self-Assessment

Another important area is examining the main potential risks for Belfius. This is achieved through bottom-up Risk and Control Self- Assessment exercises held in all departments and subsidiaries at Belfius. These exercises may result in action plans being developed to limit the risk further. They provide a good overview of the main risk areas in the various businesses and the results are reported to management throughout the whole organisation. These Risk and Control Self-Assessments are conducted annually and form the basis for the annual report submitted to the regulator regarding the assessment of internal control.

7.2.4. Securing information and business continuity

The policy relating to securing information and its associated guidelines, norms and practices are aimed at safeguarding the information assets(1) of Belfius.

In the area of the information security, the end of 2013 saw the beginning of the business rollout of a major project in the context of Identity & Access Management (IAM): ensuring that employees have proper access to this information at all times. After an initial phase in 2014, this rollout will be staged further across 2015.

Belfius outsources its ICT infrastructure to IS4F, a subsidiary of IBM. As part of the proper management of the way information is secured, the existing governance process in this area was reinforced in 2014 with the establishment of a Security Steering Committee chaired by the Chief Risk Officer (CRO). In addition, the realisation of existing projects is monitored closely by way of a security roadmap.

The policy on business continuity requires the various departments to analyse the business impact on critical activities, develop recovery plans and provide the necessary documentation, as well as to ensure that the plans regarding business continuity are tested and if necessary adjusted at least once a year. Based on regular reporting, the Management Board approves the strategies on recovery, any residual risks and action plans aimed at achieving ongoing improvement.

7.2.5. Managing insurance policies

The possible financial impact of Belfius’ operational risks are also limited to a maximum level by taking out insurance policies, principally covering professional liability, fraud, theft and interruption of business. This is standard practice in financial institutions.

7.2.6. Coordination with other functions involved in the internal audit system

There is regular consultation between Operational Risk Management, Compliance and Audit to assess risks and develop a coordinated approach.

7.2.7. Fraud policy

In collaboration with Audit and Compliance, a global fraud policy was established last year. It is reflected by the validation of a Directive concerning Fraud Policy. This Directive specifies the governance and shapes the framework of internal controls aimed at preventing and detecting fraud as well as taking the necessary corrective measures.

Fraud management is the responsibility of the CRO, member of the Management Board. A fraud consultation body coordinating fraud policy, consists of participants from Audit, Compliance and ORM.

Each year, a fraud report is submitted to the Management Board and Audit Committee from which any corrective measures required are taken.

(1) Information or data which are valuable to the company and which need to be protected accordingly.

Operational Risk


7.2.8. Calculating regulatory capital requirements

To calculate its regulatory capital in the light of its operational risk management, Belfius has decided to use the Basel standardised approach.

This calculation consists of applying a percentage (called the Beta factor, between 12% and 18%) to the gross income calculated for each of the eight business lines defined by the Basel Committee (Corporate Finance, Commercial Banking, Retail Banking, Trading and Sales, Asset Management, Agency Services, Retail Brokerage, Payment and Settlement).

Profit consists mainly of the operating profit from the underlying businesses, including net interest and commission income. Income from the insurance business is not included because this is considered prudentially as third-party business (under the Danish Compromise).

The total regulatory capital for each business line is used to calculate the total capital requirements for operational risk in the form of an average over the past three years. This calculation is updated annually.


Credit risk, market risk and operational risk described in the previous parts of this report and subject to the Pillar 1 framework are also included in the Pillar 2 framework.

The Pillar 1 and Pillar 2 approaches to the same risks might differ at four levels:

→ the perimeter; → the methodology; → the risk parameters used; → the level of severity.

The perimeter of Pillar 2 risks is larger as Pillar 2 aims at exhaustiveness. Other risks than those included in the Pillar 1 framework are then specifically included in the Belfius Pillar 2 framework i.e. interest rate risk (banking book), funding risk, behavioural risk, business risk, strategic risk, reputation risk, model risk, pension risk, currency risk, insurance risk, liquidity risk, settlement risk and securitisation risk.

Methodologies and risk parameters used by Belfius lead to the calculation of economic capital. It is defined as the potential deviation of the Group’s economic value in relation to the value expected at a determined interval of confidence and time horizon. The choice made by Belfius is to estimate its risks at a severity level of (99.94%, 1 year) instead of (99.9%, 1 year) as required by the Pillar 1.

Several risks such as reputation, strategic, liquidity, currency and securitisation risks are part of the Pillar 2 but are not capitalised, either because they are considered as not material (currency and securitisation risks) or because they are managed by other means.

8.1. Behavioural RiskDefinition

Behavioural risk is defined as the potential change of exposure to interest rate and funding risks due to the uncertain behaviour of retail type customers.

It exclusively consists, on the asset side, of the uncertainty arising from mortgage prepayment schedules i.e. Prepayment Risk.

The uncertain amortisation of non-maturing liabilities, such as certain types of deposits, forms the Outflow risk and is integrated within Funding Risk approach. For example, customers may decide to reduce their savings or their sight accounts impacting the bank’s interest rate position.

Organisation and Management of the Risk

Behavioural risk is managed through sensitivity and convexity measures in reporting to the members of the Belfius ALM Committee. In addition, this risk is included in the Belfius Economic Capital reporting.

Capitalisation

Behavioural risk is capitalised through a prepayment risk capital approach which consists of a statistical model.

Pillar 2 Risks8.

Pillar 2 Risks


8.2. Business RiskDefinition

Business risk reflects the unexpected decrease of profitability from the expected (or budgeted) one, resulting from other risks than those for which economic capital is calculated separately.


The business risk is at the heart of the daily management of the bank.

Indeed, SPC as an independent department is responsible for the consolidation of data necessary to calculate income, expenses and profitability, as well as related reporting.

The steering of future profitability is operated through the various business line committees and ultimately by the Board of Directors: the latter defines any strategic decisions to achieve the levels of expected profitability as announced to the market and ensures the survival of the Group and its business lines.

Capitalisation

The methodology to compute business risk capital aims at analysing the volatility of the revenues/expenses ratio in order to estimate its potential reduction, given a fixed severity level (i.e. 99.94%, one year).

8.3. Strategic RiskDefinition

Strategic risk is defined as the current or prospective loss of value arising from adverse business decisions, improper implementation of decisions or lack of responsiveness to changes in the business environment.


The principles underlying the mitigation of the strategic risk are the following:

→ to ensure the adequacy of the strategic plan to the business environment; → to react efficiently to changes in the business environment or to development opportunities; → to ensure the correct implementation of decisions taken by top management in the business lines/entities.

The strategic orientation and its correct implementation within the entities are the Board of Directors’ responsibilities. The strategy is developed on the basis of the following principles:

→ the responsibility of the Management Board is to take the initiative to study and propose projects of a strategic nature to the Strategy Committee and to the Board of Directors;

→ the Board of Directors and the Strategy Committee formed within it may ask the Management Board to study a strategic option; → projects that meet at least one of the following criteria are considered to be of a strategic nature.

Capitalisation

This risk is not covered by capital but is handled and managed through an appropriate governance process at Belfius.

Pillar 2 Risks


8.4. Reputation RiskDefinition

Reputation risk is the potential decrease in the value of Belfius arising from adverse perception of the image of the financial institution on the part of customers, counterparties, shareholders, investors, regulators and other stakeholders.


Due to its very broad definition, reputation risk is managed by different departments such as:

→ Compliance; → Operational Risk Management; → Legal; → Communication.

These key internal control actors have set up appropriate risk management frameworks and policies to prevent, detect and monitor potential reputation impacts on the risks of which they are primarily in charge.

They each assess risks relating to their areas of expertise on a regular basis, in order to identify areas that might not yet be sufficiently covered and accordingly to define corrective actions. This exercise is performed on a consolidated basis within the bank using harmonised methodologies and tools.

Meetings between the different departments are organised on a regular basis in order to share information and to ensure a consistent and exhaustive risk management approach within the bank.

Capitalisation

The risk is not capitalised and is managed through strong corporate governance and compliance rules within Belfius as described above.

8.5. Model RiskDefinition

Model risk is defined as the potential risk assessment errors resulting from inadequate methodology and models, and/or data uncertainty or inappropriate use of models.

The major issues that should be addressed by model risk are the following:

→ risk of poor model development; → risk of incorrect model calibration; → wrong data use and/or data problems; → inadequate model usage; → risk of population and/or performance non-stationarity.


In addition to the Economic Capital assessment carried out for Model Risk, the risk of each issue described above is mitigated by a process-oriented handling of Model Risk.

Without being exhaustive, the following practices are considered for containing Model Risk:

→ allocating experienced professionals to the development of risk models; → providing a systematic “four eyes approach” via model validation; → monitoring and capitalising Model Risk within the Belfius Economic Capital framework.

Pillar 2 Risks


Capitalisation

For each risk type and each Risk Capital calculation methodology, the potential increase (not decrease) of Risk Capital resulting from Model Risk is assessed using a unified scorecard approach. It includes the result of quantitative and qualitative assessments of the mod-els, and is also linked to the outstanding validation recommendations. This judgement results in an “uncertainty coefficient” depending on the perceived comfort “with which the model has been developed and implemented, and is being fed and used”.

8.6. Pension RiskDefinition

Pension risk is the risk stemming from commitments on employee pensions and benefits.

The risk for an employee benefits plan is the risk that the actual value of future commitments (liabilities of the plan) will change on the basis of changing market parameters (interest rates and inflation risk). A pension fund is created to meet the future commitments. The contributions paid into the plan are invested in assets (the pension fund).

The risk for a pension fund is the risk that the net present value of its liabilities (future commitments) is greater than the net present value of its assets (existing investments plus future contribution investments).

As a result, pension risk is not one risk but a set of risks. It is handled by its main specific risks: market risk (interest rate risk, equity risk, inflation risk), credit risk (solvency risk) and behavioural risk (turnover, mortality).


A three-level structure constituting the governing body of the pension plan, ranging from strategic through tactical to the operational management level, establishes a rigorous process by which investment activities are carried out.

A dedicated committee approves the investment mandates and grants them to the pension fund asset manager. These investment mandates establish clear investment objectives for the pension fund consistent with the characteristics of the pension fund and the acceptable degree of risk for the pension fund.

The approach for achieving these objectives takes account of the need for proper risk management, diversification needs, liquidity requirements and asset allocation limitations.

Capitalisation

Pension risk is capitalised. Risk capital is the aggregation of different calculations by type of risk.

8.7. Settlement RiskDefinition

Settlement risk is defined as the risk that the credit institution will deliver the sold asset or cash to the counterparty, and will not receive the purchased asset or cash as expected.

This risk is not to be confused with the operational risk classified under “Execution, delivery and process management risk”. Settlement risk only refers to the situation where the delivery process fails because of a solvency issue.


The most general way to reduce settlement risk is to proceed through an intermediary performing Delivery Versus Payment (DVP). For Forex in particular, there is one main agent: Continuous Linked Settlement (CLS). With DVP one can say that the risk becomes negligible. Belfius intends then to generalise the recourse to DVP.

Pillar 2 Risks


Historically, there has been no instance of loss related to this risk at Belfius and very few externally (the best known example is the one that resulted from the failure of a small German bank, Herstatt, in 1974). In fact, losses would only occur if Belfius simultaneously faces a mismatch in the delivery against settlement process and the default of the counterparty bearing the resulting temporary exposure. Of course both events can be strongly correlated: a bank close to bankruptcy is much more likely to fail in its settlement duties.

Capitalisation

Settlement risk capital is currently not computed via a statistical model but rather results from the occurrence of a single settlement problem (a presumably very rare event). It therefore consists of a fixed amount set a priori on the basis of a judgemental assessment.

8.8. Securitisation RiskDefinition

Securitisation risk refers to uncertainty on the economic substance of a transaction and its risk transfer level.

Capitalisation

At the end of 2013, Belfius has no securitisations, involving a risk transfer, in place.

Existing securitisation transactions were set up for funding reasons and the underlying risks are capitalised, for both regulatory and economic purposes, as if they had not left Belfius’ balance sheet.

8.9. Interest Rate Risk (Banking Book)Definition

Interest Rate Risk can be defined as the potential decrease of the bank’s value due to interest rate movements increasing the cost of interest rate liabilities or decreasing the value of interest rate assets.


Please refer to 6.3. Asset & Liability Management for a detailed description of the Organisation and Management of the Interest Rate Risk.

Capitalisation

The methodology for computing interest rate risk Economic Capital consists of a one year 99.94% simulation VaR on the basis of interest rate curve scenarios applied to ALM sensitivities.

8.10. Funding RiskDefinition

Funding Risk is the risk that the refinancing cost for Belfius increases.


For more details regarding the Organisation and Management of Funding Risk, please refer to 2.2.1. Risk Organisation.

Capitalisation

Funding risk capital is not computed via a statistical model. Its calculation is based on a scenario analysis, with a severe liquidity Stress Test considering a combined systemic and severe lack of confidence of the market about Belfius solvency during a global liquidity crisis and affecting its income statement.

Pillar 2 Risks


This liquidity stress scenario will generate a Funding Risk which can be defined as the sum of P&L impacts resulting from, on the one hand, the cost linked to the replacement of the existing funding that left the balance sheet by funding obtained through pledging the assets from liquidity buffer at ECB and, on the other hand, the capital losses due to sales of non-ECB-eligible bonds to close potential liquidity gap.

In line with economic capital standards, the loss incurred over one year is measured and the confidence interval of the considered scenario (a presumably very rare event) is assumed to be 99.94%.

Note that the various outflow scenarios included within the liquidity stress test scenario materialise the Outflow Risk which is considered to be integrated within the Funding Risk calculation.

8.11. Liquidity RiskDefinition

Liquidity Risk consists of the risk that the bank will not be able to meet both expected and unexpected current and future cash flows and collateral needs.


For more information on the management and measurement of liquidity risk, please refer to 6.2. Liquidity Risk.

Capitalisation

Liquidity Risk is actively monitored and managed through gap limits and stress tests and is therefore actually not capitalised.

8.12. Insurance RiskDefinition

Belfius Insurance, as a part of Belfius, takes up risk through the insurance contracts that it underwrites. The risks within the underwriting risk category are associated with both the perils covered by the specific line of insurance (Life, Non-Life, Health) and the specific processes associated with conducting insurance business (claims processing, premium collection, pricing, selection, etc).

The risks that apply to all lines of the insurance business can be globally categorised as follows.

→ Life underwriting risk: is the risk arising from the underwriting of life insurance contracts. It is split into:• Mortality risk is the risk that mortality should increase. It applies to all undertakings for which the benefits expected to be paid out

increase if there is a rise in mortality.• Longevity risk is the opposite of the mortality risk. It applies to policies for which a fall in mortality would result in an increase in the

expected payouts (e.g. pension policies).• Morbidity or disability risk relates to the risk of loss or disadvantageous movement in expected benefits attributable to changes in

the level, nature, trend or volatility in the degree of disability.• Lapse risk for Life is described as the risk of loss or increase in benefits attributable to a difference between the effective exercise

rate of contractual options by the policyholder and the expected exercise rate. The term “options” should be viewed in the broad sense of the word: this sub-module contains options in relation to redemption, cancellation or premium reduction, as well as the expansion of the guarantees. For some policies, exercise may be of benefit to the insurance company, while for others it may result in a loss. As a result, this sub-module features two scenarios: one in which the options are exercised more frequently than expected and another where they are exercised less frequently.

• The risk relating to management costs corresponds with the risk that those management costs are higher than expected or that they experience higher inflation than expected.

• Revision risk only applies for the annuities whose amounts may be valued negatively for the insurer as the result of a change in the statutory environment or in the policyholder’s health situation.

• Catastrophe risk is restricted to policies where an immediate and dramatic rise in mortality would result in an increase in benefits.

Pillar 2 Risks


→ Non-Life underwriting risk: is the specific insurance risk arising from Non-Life insurance contracts. It relates to the uncertainty about the results of the insurer’s underwriting. This includes uncertainty about:• Premium risk is the risk where the amount of premiums received is not sufficient to pay claims that occur during the coverage

period to which the premiums relate.• Reserve risk is the risk of loss or unfavourable change in the value of the insurance undertakings arising from changes in the fre-

quency and severity of the insured events, as well as in the date and amount of the claims paid.• Catastrophe risk is the risk of a major event happening that is not covered by the previous two risks.


Risk Management within Belfius Insurance is aligned with Belfius practices and guidelines, subject to specific insurance policies for underwriting, reserving and reinsurance. The risk appetite of the company is integrated into the global Belfius approach, and Belfius Bank is represented in the main risk committees. The methodology and governance for using risk concepts in management decisions has however to be approved by the company’s Management Board.

A risk governance memorandum has been established in cooperation between Belfius Insurance and Belfius Bank and defines the following principles:

→ Risk Management governance must respect each entity’s specifications and responsibilities and be light, simple and transparent. → Risk Management governance allows mutual risk understanding, optimal use of means and quick decision taking. For the sake of

simplicity, Bank and Insurance Risk Appetite and limits add up in consolidation (no compensation). Limit transfers are allowed with the consent of the two parties.

→ Bank and Insurance CROs coordinate among them demands. In case of dispute, an escalation procedure is foreseen to a joint Risk Committee (RC) and Risk and Underwriting Committee (RUC). Joint RC-RUC will be informed by CROs and will propose solutions to respective Management Boards.

Capitalisation

For each category of Life/Non-Life underwriting risks the Solvency 2 framework is implemented to meet economic capital prescriptions.


ABS Asset-Backed Securities Securities issued by a vehicle created for the purpose of buying assets from a bank, a company or a state, like trade receivables or inventories, and to provide the seller with cash and the buyer with a financial product characterised by a certain risk profile and a rate of return.

ABCP Asset-Backed Commercial Paper A programme of securitisations for which the securities issued predominantly take the form of commercial paper with an original maturity of one year or less.

AFS Available For Sale Non-derivative financial assets designated on initial recognition as available for sale or any other instruments that are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.

AIRB Advanced Internal Rating-Based Approach Institutions using the AIRB approach are allowed to determine borrowers’ probabilities of default and to rely on own estimates of loss given default and exposure at default on an exposure-by-exposure basis. These risk measures are converted into risk weights and regulatory capital requirements by means of risk weight formulas specified by the Basel Committee.

ALM Asset and Liability Management Managing of the net risk position between assets and liabilities, particularly with respect to imbalances generated by the evolutions of interest rates, currencies and inflation, but also maturity mismatch, liquidity mismatch, market risk and credit risk.

AQR Asset Quality Review The Asset Quality Review examined the asset side of bank balance sheets as at 31 December 2013. This assessment was broad and inclusive, comprising credit and market exposures, on and off-balance-sheet positions and domestic and non-domestic exposures. All asset classes, including non-performing loans, restructured loans and sovereign exposures, were covered. The asset quality review was conducted with reference to harmonised definitions, including those for non-performing exposures and forbearance.

CAD Capital Adequacy ratio A measure of a bank’s ability to meet its obligations relative to its exposure to risk. According to the Basel regulations, the total capital ratio must be no lower than 8%.

CBFA Commission bancaire, financière et des assurances The Belgian Banking, Finance and Insurance Commission is the former Belgian Financial Institutions regulator.

CCF Credit Conversion Factor The ratio of the currently undrawn amount of a commitment that will be drawn and outstanding at default to the currently undrawn amount of the commitment. The extent of the commitment will be determined by the advised limit, unless the unadvised limit is higher.

CDS Credit Default Swap Swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a pay-off if a credit instrument (typically a bond or loan) undergoes a defined “Credit Event”, often described as a default (fails to pay).

CRD Capital Requirements Directive The Capital Requirements Directive (CRD) for the financial services industry introduces a supervisory framework in the EU which reflects the Basel II rules on capital measurement and capital standards.

CRM Credit Risk Mitigant Range of techniques whereby a bank can, partially, protect itself against counterparty default (for example by taking guarantees or collateral, or buying a hedging instrument).

Appendix 1 – Glossary



CRR Capital Requirements Regulation The CRR, is one of the two legal acts comprising the new Capital Requirements Directives (CRD IV). The other element of the CRD is the Capital Requirements Directive, or CRD for short. The CRD is the legal framework for the supervision of credit institutions, investment firms and their parent companies in all Member States of the European Union and the EEA, and will be the basis of the Single Supervisory Framework when that is formally introduced. The CRR came into force on 27 June 2013, while the supervised entities within its scope are subject to it as of 1 January 2014. The CRR-Regulation is directly applicable to anyone in the European Union and is not transposed into national law. Much of the CRR is derived from the Basel III standards issued by the Basel Committee on Banking Supervision (BCBS). It includes most of the technical provisions governing the prudential supervision of institutions.

CSA Credit Support Annex A credit support annex provides credit protection by setting forth the rules governing the mutual posting of collateral.

CVA Credit value adjustment CVA is the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counterparty’s default. It can be considered as the market value of counterparty credit risk.

DVP Delivery Versus Payment A settlement practice stipulating that cash payment must be made prior to or simultaneously with the delivery of the security.

EAD Exposure At Default Estimate of the amount outstanding (drawn amounts plus likely future drawdowns of yet undrawn lines) in case the borrower defaults.

EBA European Banking Authority The European Banking Authority (EBA) is an independent EU Authority which works to ensure effective and consistent prudential regulation and supervision across the European banking sector. Its overall objectives are to maintain financial stability in the EU and to safeguard the integrity, efficiency and orderly functioning of the banking sector. The main task of the EBA is to contribute to the creation of the European Single Rulebook in banking whose objective is to provide a single set of harmonised prudential rules for financial institutions throughout the EU. The Authority also plays an important role in promoting convergence of supervisory practices and is mandated to assess risks and vulnerabilities in the EU banking sector.

ECB European Central Bank The ECB is the central bank for Europe’s single currency, the Euro. The ECB’s main task is to maintain the Euro’s purchasing power and thus price stability in the Euro area. The Euro area comprises the 19 European Union countries that have introduced the Euro since 1999.

ECAI External Credit Assessment Institutions Under the Basel II agreement of the Basel Committee on Banking Supervision, banking regulators can allow banks to use credit ratings from certain approved Credit Rating Agencies when calculating the risk weight of an exposure. Competent authorities will recognise an ECAI as eligible only if they are satisfied that its assessment methodology complies with the requirements of objectivity, independence, ongoing review and transparency, and that the resulting credit assessments meet the requirements of credibility and transparency.

EL Expected Loss The amount expected to be lost on an exposure from a potential default of a counterparty or dilution over a one-year period.

FSMA Financial Services and Markets Authority The FSMA is the successor to the former Banking, Financial and Insurance Commission (CBFA), which on 1 April 2011 changed its name as a consequence of the changes in its mandate, in particular its exclusive competence for the supervision of rules of conduct. The FSMA is responsible for supervising the financial markets and listed companies, authorising and supervising certain categories of financial institutions, overseeing compliance by financial intermediaries with codes of conduct and supervising the marketing of investment products to the general public, as well as for the “social supervision” of supplementary pensions. The Belgian government has also tasked the FSMA with contributing to the financial education of savers and investors.

HTM Held To Maturity Non-derivative financial asset that has either fixed or determinable payments and a fixed maturity, and for which an entity has both the ability and the intention to hold to maturity. The held to maturity classification does not include financial assets that the entity designates as being at fair value through profit or loss, as available for sale, or as loans or receivables.



IAS International Accounting Standards IAS stands for International Accounting Standards. IAS are used outside the US, predominantly in continental Europe.

ICAAP Internal Capital Adequacy Assessment Process The main objective of the Pillar 2 requirements is to implement procedures which will be more sensitive to an institution’s individual risk profile. This is to be achieved by introducing implementation of internal processes (ICAAP).

IFRS International Financial Reporting Standards International Financial Reporting Standards published by the IASB and adopted by most countries but the USA. They have been designed to ensure globally transparent and comparable accounting and disclosure.

IR Interest Rate Interest expressed as an annual percentage rate.

ISDA International Swap and Derivative Association Trade organisation of participants in the market for over-the-counter derivatives. Its headquarters are in New York, and it has created a standardised contract (the ISDA Master Agreement) to enter into derivatives transactions.

IT Information Technology Study, design, development, implementation, support or management of computer-based information systems, particularly software applications and computer hardware IT deals with the use of electronic computers and computer software to convert, store, protect, process, transmit, and securely retrieve information.

LCR Liquidity Coverage Ratio The Liquidity Coverage Ratio (which comes into force in 2015) forces financial institutions to maintain a sufficient stock of quality liquid assets to withstand a crisis that puts their cash flows under pressure. The assets to hold must be equal to or greater than their net cash over a 30-day period (having at least 100% coverage). The parameters of the stress scenario are defined under Basel III.

LGD Loss Given Default The ratio of the loss on an exposure due to the default of a counterparty to the amount outstanding at default.

MBS Mortgage-Backed Securities Asset-backed securities or debt obligations representing a claim on the cash flows from mortgage loans.

MCRE Maximum Credit Risk Exposure The maximum credit risk exposure (MCRE) represents the accounting net carrying amount of exposures, being the notional amounts after deduction of specific impairments and available for sale reserve amounts, and taking into account accrued interests and impact of fair-value hedge accounting.

NBB National Bank of Belgium The National Bank of Belgium is the current Belgian Financial Institutions regulator.Financial supervision covers two aspects:1. prudential supervision of financial institutions from both micro-prudential and macro-prudential angles, and the prompt detection of

systemic risk;2. supervision of information, the functioning of the financial markets and respect for the code of conduct, together with consumer

protection.The National Bank of Belgium is in charge of prudential supervision, FSMA the other.

OTC Over-The-Counter Over-the-counter (OTC) or off-exchange trading is carried out directly between two parties, negotiating bilaterally and privately without any supervision of an exchange.

PD Probability of Default The probability of default of a counterparty over a one-year period.

P/L Profit and Loss The statement of income is a document showing all wealth-creating revenues and wealth-destroying charges. There are two major statement of income formats: the by-nature statement of income format and the by-function statement of income format. It is also called the profit and loss account (or P&L).



RAROC Risk Adjusted Return On Capital Risk-based profitability measurement framework for analysing risk-adjusted financial performance and providing a consistent view of profitability across businesses.

RMBS Residential Mortgage-Backed Securities RMBS are securities where the primary source of payments is a mortgage loan or a pool of mortgage loans secured mostly on residential real property. Investors receive payments of interest and principal that are derived from payments received on the underlying mortgage loans.

SPV Special Purpose Vehicle Separate legal entity created specially to handle a venture on behalf of a company. In many cases, the SPV belongs from a legal standpoint to banks or to investors rather than to the company. The IASB has however stipulated that the company should consolidate the SPV if it enjoys the majority of the benefits or if it incurs the residual risks arising from the SPV even if it does not own a single share of the SPV.

UCITS Undertakings for Collective Investment in Transferable Securities Set of European Union directives that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state. In practice many EU member nations have imposed additional regulatory requirements that have impeded free operation with the effect of protecting local asset managers.

VaR Value at Risk (VaR) represents an investor’s maximum potential loss on the value of an asset or a portfolio of financial assets and liabilities, based on the investment timeframe and a confidence interval. This potential loss is calculated on the basis of historical data or deduced from normal statistical laws.


1. Description of the Internal Rating ProcessGeneral Organisation of the Internal Rating Process

The internal rating process is organised in three stages: the model development, the maintenance and the control of the internal rating.

The model manager is responsible for the entire process of developing and maintaining a model whereas the control of the internal rating is dispatched through several control functions within the bank (validation, audit, quality control…).

Development of the Models

The model management process is coordinated by the Model Management team within Belfius Bank. Model managers perform the model management activities enhancing both consistency and efficiency.

The different steps are:

→ defining the scope of the counterparties concerned; → identifying and gathering the most relevant available data (financial data, data on defaults of the segment concerned, institutional

framework); → building a database if needed; → defining a broad list of financial ratios and qualitative criteria; → testing these ratios (repetitive processes between statisticians and analysts); → building the score function. A score function is the mathematical function that allows determination of the counterparty (or exposure)

PD, LGD or CCF on the basis of its characteristics. Score function is established by the modelling team on the basis of statistical analysis and modelling techniques;

→ testing the score function; → developing IT tools; → validating and implementing the model; → adjusting risk policies to take internal risk systems into account; → documentation (user guide, documentation for the regulator, notes concerning the building of the model). Nevertheless, some steps

in the development process detailed above (such as building the score function, testing the function, etc) are not applied for some specific models:• models based on an expert approach (such as the model used for Regions and Communities) do not include a score function. They

are based on internal experience and qualitative knowledge and not on statistical data (which may not be available due to very low number of defaults for instance),

• models based on a derivation approach are derived from an existing model,• models based on an assimilation approach are not stricto sensu models due to the fact that counterparties treated by assimilation

simply inherit the rating of their “master” counterparty; → assimilations and derivations are applied when it is neither financially intuitive nor statistically relevant to develop, adapt or use an

existing model. Such cases occur typically for low default portfolios with a low number of observations, limited data availability (both for design and for model use) and for portfolios where strong relations exist between the “master’ counterparty and the “assimilated” or “derived” counterparty. These relations can be legally bound or based upon long-term past experience and practice.

Appendix 2 – Internal Rating Systems


ProcessChanges modules→ Request for changes by users (methodological or IT

changes)→ Quality control alarm→ Back testing

Model Manager→ List the evolution request→ Prioritise the evolution request

Evolution draft

Tests/Impacts analysis/Development

Results of the tests/Development

IT development→ New version of the model→ Update the documentation

Proposition of setting→ Exploitation date

Communication of the new version of the model under the responsibility of the Model Manager

Committees

Rating Committee

Rating Committee by delegation of RPC(1)

Validation/Risk ExCom

Validation/Risk ExCom

NO GO

GO

NO GO

GO

GO


Maintenance of the Models

As mentioned above, the model manager is responsible for the entire process linked to the model developed, including the maintenance of the model.

The model maintenance process is detailed in the diagram hereafter.

(1) RPC: Risk Policy Committee.

Internal Rating Process by Broad Exposure Class

Type of Exposure Included in Each Exposure Class

Belfius has developed a wide range of models to estimate PD, LGD and CCF of the following types of counterparties.

Sovereigns

SovereignsThe scope of the model encompasses sovereign counterparties, defined as central governments, central banks and embassies (which are an offshoot of the central government), and all debtors of which liabilities are guaranteed irrevocably and unconditionally by central governments or central banks.

Assimilations to SovereignsThe in-depth analysis of some public sector counterparties (such as some public institutions, like the National Social Security Office or Buildings Agency) shows that they share the same credit risk as the “master” counterparties to whom they are assimilated (usually local authorities or sovereigns). They are consequently assimilated to these “master” counterparties and benefit from the same PD and LGD as their “master” counterparties.



Retail

Retail – IndividualsThese models encompass retail customers (individuals). Individuals are defined as retail counterparties without a self-employed activity or a liberal profession and are not linked to the activity of a legal entity.

Retail – Small ProfessionalsThese models encompass small professional retail customers defined as individuals with a self-employed activity or a liberal profession (i.e. doctors, lawyers, etc) or small companies generating a turnover lower than a certain threshold. A split is made between individuals with self-employed activity or liberal profession and small companies.

Retail – Small CompaniesThe models encompass small companies which are defined as companies generating a turnover higher than a certain threshold but that are still considered as retail counterparties on the basis of distinctive criteria (i.e. not considered as mid-corporate or corporate counterparties).

Recent Information about Retail Sector Modelling within Belfius → Ripar, Ribus, RSC are in place, back tested and stress tested; → Calibration of Ribus has been adapted.

Project Finance (Specialised Lending)

This model encompasses the project financing activity of Belfius on all segments of activity in which Belfius intervenes (which are actually mainly Energy and Infrastructure). The specialised lending portfolio is a subgroup of the corporate portfolio which has the following characteristics: the economic objective is to finance or acquire an asset; the flows generated by this asset are the sole or practically the sole source of repayment; this financing represents a significant debt in respect of the liabilities of the borrower; the main distinguishing criterion of risk is essentially the variability in flows generated by the financed asset, much more than the borrower’s ability to repay.

Insurance Companies (including Monolines)

Insurance companies are legal entities having insurance activities as their usual profession. The insurance activity consists of covering the potential damage from an uncertain event against the receipt of premiums from policyholders. The received premiums are invested and used as a source of profit by the insurance company. When an event covered by the insurance contract occurs, the policyholder sends a claim to the insurance company, and the claim is paid using the pool of premiums from all policyholders.

Financial Institutions

BanksThe scope of the model encompasses worldwide bank counterparties, defined as legal entities which have banking activities as their usual profession. Banking activities consist of the receipt of funds from the public, credit operations and putting these funds at customers’ disposal, or managing means of payment. Bank status is gained by the delivery of a banking license given by the supervisory authority.

Corporates

Two models have been designed for corporate counterparties: corporate and mid-corporate models.

CorporatesThe scope of the model encompasses worldwide corporate counterparties. Belfius Bank defines a corporate as a private or a publicly-quoted company with total annual sales higher than EUR 50 million or belonging to a group with total annual sales higher than EUR 50 million which is not a bank, a financial institution, an insurer or a satellite.

Mid-CorporatesThis model encompasses mid-corporates from Belgium. Belfius Bank defines a mid-corporate as a private company with total turnover lower than EUR 50 million and belonging to a group with consolidated total turnover lower than EUR 50 million and with total assets higher than EUR 3 million. This company is not a bank, a financial institution, an insurer or a satellite.

NB: for Belgian and Luxemburg companies the frontier is set at EUR 250 million turnover.



Public Sector Entities

Public sector entities represent a large proportion of the Belfius Bank portfolio. Some differences between counterparties have been noticed within this portfolio, and this explains the number of models.

West European Local AuthoritiesThis model encompasses Belgian local authorities, namely municipalities and provinces.

Belfius defines local authorities as sub-sovereign governmental elected bodies empowered by the legislation with specific responsibilities in providing public services and with certain resources and capacity to decide their own practical organisation in terms of administrative procedures, personnel, buildings, equipment, etc.

Belgian Regions and CommunitiesAn expert methodology has been developed to rate the five Belgian regions and communities which are the French Community, German Community, Flemish Community (including Flemish Region), Walloon Region and Brussels Capital Region.

Assimilations to Public Sector EntitiesThe in-depth analysis of some public sector counterparties (such as church companies, municipalities’ Social Service Departments, intermunicipal police zones) shows that they share the same credit risk as the “master” counterparties to which they are assimilated (usually local authorities or sovereigns). They are consequently assimilated to these “master” counterparties and benefit from the same PD and LGD as their “master” counterparties.

Recent Information about Public Sector Modelling within Belfius → Public sector Western Europe models are being back tested and stress tested, → Models handled as assimilation have been back tested and no concern was raised, → Public satellites model is currently in roll-out.

Other SatellitesThe model encompasses Belgian non-public satellites.

Satellites are entities:

→ whose main activity - i.e. the one generating a very large proportion of their income – is a Public Authority’s commitment which has been delegated to the concerned entity; and

→ whose most of the “shareholders” – i.e. those who have the power of final decisions within the entity - are not-for-profit entities; and → where these two main characteristics are not likely to be changed within a year

Among all the “satellites”, the “Public Satellites” are those:

→ whose strategic decisions (include financial) are made (or approved) by the Public Authority; and → whose business cannot be closed down:

• in particular the entity cannot be declared bankrupt;• or if so, either a public authority gets Assets and Liabilities back, or an equivalent entity does.

The “satellites” which do not correspond to this definition are the “other satellites” and are (Belgian perimeter) or will be covered by a specific Internal Rating System.

The public satellite model is currently in a use-test period. A homologation file was delivered to NBB in December 2013.

Equity and Securitisation Transactions

No internal models have been developed specifically for equity or securitisation transactions which follow a different regulatory approach. Securitisation risk weighting is based on external and not internal ratings (Rating-Based Approach – refer to part 4.10); equities do not require the development of specific models (refer to part 4.9).

Default Definition Used in the ModelsThe “default” notion is uniform, covering all business segments with some minor exceptions due to special characteristics.


Main Principles Used for Estimating the PD

Types of Counterparties

Through the Cycle Models Default Definition Time Series Used

Internal/ External Data

Sovereigns Models are forward looking and through the cycle. They are designated to be optimally discriminative over the long term. The through the cycle aspect of the rating is also addressed in a conservative calibration of the PD.

Default at first day > 10 years ExternalBanks Default at first day > 10 years ExternalInsurance companies Transverse > 10 years ExternalCorporates Transverse > 10 years Internal +

ExternalLocal Public Sector Default at 90th day > 10 years Internal +

ExternalSpecialised Lending Transverse 6 years InternalMid-corporates Transverse 6 years Internal +

ExternalOther Satellites Transverse 5 years InternalRetail Transverse 2 years InternalEquity Specific approach: PD/LGD Approach. N/A N/A N/ASecuritisation Specific approach: Rating-Based

Approach.Default if related ABS is classified as

impairment 1 (loss probability > 50%) or impairment 2 (loss probability = 100%).

N/A N/A

Main Principles Used for Estimating the LGD

Types of Counterparties

Main Hypotheses Time Series Used

Internal/ External Data

Sovereigns Expert score function on the basis of Fitch country loss risk methodology and internal expert knowledge to discriminate between high and low loss risk.

> 10 years Internal + External

Banks Statistical model derived from LGD corporate model and integrating additional risk factors adapted to banking counterparties (country of residence, business profile, etc).

> 10 years Internal + External

Insurance Companies Statistical model based on external rating agencies loss data. The LGD depends on counterparty rating, exposure seniority level, geographic region and macro-economic factors.

> 10 years Internal + ExternalCorporates

Local Public Sector Statistical model based on the internal existing default cases observed which were related to French municipalities. Final LGD are segmented on the basis of the number of inhabitants and on an economic parameter.

> 10 years Internal

Specialised Lending This model belongs to the "Workout LGD" type: the LGD computation was developed according to the workout of the bank during a 10-year period concerning internal Project Finance default facilities. Cash flows are estimated on the basis of the observed historical recovery process, and LGD is computed by means of discounted cash flows.

10 years

Internal

Mid-Corporates The LGD model is a white box model with explanatory variables: number of workout years. The LGD is calculated as the multiplication of the LGD unsecured (LGD when the loans are not collateralised) and of the haircut factor taking into account the collateralisation of the loan.

7 years Internal

Other Satellites On the basis of internal observation. 5 years InternalRetail LGD determined by product type based on workout recoveries flows.

Huge number of counterparts, individual valorization of collateral impossible. Professional loans are segmented in 5 classes based on value of collateral.

7 years

Equity Specific approach: PD/LGD Approach. N/A N/ASecuritisation Specific approach: Rating-Based Approach. N/A N/A


The notion of default has been harmonised from the beginning of the Basel II project with the impairment notion used in IFRS. All credits in default and only those flagged as in default give rise to an impairment test (that can or cannot eventually lead to an impairment).

The notion of default is not automatically related to the notion of potential loss (for instance, a loan may present unpaid terms but may be totally collateralised and consequently present a nil expected loss) or to the notion of denunciation (which is decided on the basis of the interest the bank may have to do so).

Definition, Methods and Data for Estimating PD, LGD and CCF



2. Control Mechanisms for Rating SystemsThe Basel III regulation requires internal control of the internal rating systems. Within Belfius, these controls cover the whole chain of production of the regulatory parameters under all its aspects, e.g. (non-exhaustively):

→ the data input• are they correctly loaded and up to date?• are the counterparties addressed to the right model?

→ the models• do they meet regulatory requirements?• are they meaningful?• are they sufficiently discriminating?• are they stable and robust?• are they correctly implemented?• are they sufficiently conservative?

→ the work of the analysts• do they use the models correctly?• are the final ratings sufficiently motivated?• are the rating procedures respected?• are they auditable?• are the (re)ratings per formed in a timely manner?

→ the usage of the model and its outcomes• are the parameters used in credit and risk management decisions?• are they correctly stored in the systems?• do all the users master well the model?

and during the whole life-cycle of each IRS:

→ before its first usage or any update• in-depth control of methodological and operational issues

→ on an annual basis while being used• back testing aimed at checking whether the IRS continues to per form well• audit of the whole production process

→ on a quarterly basis for the work of the analysts• endorsement of the rating overrides above a tolerance threshold• control of the respect of the rating procedures

Responsibilities and Decision Process

The controls are performed by the Validation Direction(1), while Audit acts as an additional level of control, included in its audit plan(2).

The decisions regarding the IRS are taken by two Committees.

The Risk Executive CommitteeComposed of the CRO and of its direct reports, it takes the decisions regarding the models:

→ green light to put new models or model updates in production; → endorsement of the validation reports on the recurrent model follow-ups (annual back testing and operational audit); → endorsement of the corrective action plans recommended by Validation.

The Risk ExCom decisions are further presented for approval to the Risk Policy Committee.

(1) Annual back tests are performed by the Credit Modelling team and validated by Model Validation. (2) According to the CRD minimal requirement 131, Annex VII Part 4, “Internal Audit has to include in its plan, at least once a year, a review of the IRS and its functioning, including credit scoring and estimation of PD, LGD, EL and CCF. Also compliance with all the minimal requirements has to be verified”. At Belfius Bank, this annual verification has been delegated to the Validation Direction.



The Rating CommitteeThe key role of the Rating Committee is to monitor the appropriate use of internal rating systems within the bank as a whole and to ensure that these IRS are effective. For these reasons, the Rating Committee:

→ validates overrides, above tolerance threshold, proposed by analysts; → monitors the homogeneous application within the bank of the rating and derogation principles; → validates operational establishment of the models once they are validated by the Risk ExCom.

Validation

Validation is a direction within the Risk Department. It reports directly to the CRO and is not involved in any model development in order to guarantee its independence. Its main missions are:

→ to guarantee the reliability of the model outcomes used within Belfius and to verify their compliance with the regulation; → to highlight their possible weaknesses and to communicate them to all stakeholders (from analysts to top management).

Its scope covers all the models whether they are used for regulatory purposes, for risk assessment and monitoring, for (post-trade) valuations …

Validation controls all the aspects of the production of results by the models, from a methodological but also an operational (implementation, usage) viewpoint. It intervenes prior to the first use of the models and afterwards regularly reviews their functioning.

Validation works are summarised in reports indicating the controls that were per formed, their findings, proposed corrective actions and, when required, a validation status.

3. Business Integration of Internal EstimatesInternal estimates of Basel parameters are used within Belfius Bank, at present covering a large number of applications in addition to the calculation of the regulatory risk-weighted exposure amounts. They are notably used in the following fields:

→ decision-making process; → credit risk management and monitoring; → internal limit determination; → provisioning methodology; → capital allocation; → pricing.

Decision-Making Process

Basel parameters are key elements considered by the Credit Committee in assessing the opportunity to accept or reject a transaction. Credit guidelines have been updated in order to integrate Basel parameters while assessing credit proposals.

Credit Risk Management and Monitoring

Basel parameters are actively used in periodic credit risk reporting and also for the individual follow-up of distressed transactions and counterparties within Watchlist Committees.

Belfius Bank integrates the Basel parameters to define new internal reporting on the basis of a unique and common reporting credit risk data warehouse and uniform concepts. The counterparty internal ratings, the LGD, the level of EL and the regulatory weighted risks are the key Basel parameters used within the new internal reporting and the credit risk portfolio review.

A central database registers internal ratings and keeps them available for all relevant needs.



Internal Limit Determination

Basel parameters have been integrated for fine-tuning the Belfius Bank credit limit system and determining delegation levels for credit acceptance.

Provisioning Methodology

The implementation of Basel parameters has made it possible to develop more synergies between accounting and prudential issues (IFRS/Basel), while relying on the processes, data and tools of the Basel project.

The Basel notion of default and the accounting notion of impairment have converged in relation to specific impairments.

As a consequence, only defaulted assets identified as such in the Basel compliant risk management systems are identified as impaired assets for both accounting and risk management purposes. However, some exceptions to this general principle exist in relation to some specific segments such as Equity, Undertakings for Collective Investment in Transferable Securities (UCITS) or Asset-Backed Securities (ABS). For these types of products, the notion of default cannot be applied due to their characteristics; hence the sole notion of impairment prevails.

Capital Allocation

Belfius performs its internal capital allocation to its businesses as part of the budget process which will include an “optimisation” phase, based on strategic, competitive and risk-reward considerations of the Business Lines on the one hand and the liquidity, funding and balance-sheet profile of Belfius on the other hand. Completion of the budget process including capital allocation is a preliminary requirement of the Capital Adequacy process.

More specifically, a financial plan including capital allocation and analysis of the evolution of both the results of activity lines and capital supply is performed by the Belfius Finance division. This financial plan is challenged from a risk and capital point of view jointly by Risk/Finance teams and surveyed by the dedicated RAC Committee.

The RAROC pricing tool enables control by all business units of their Normative Regulatory Equity (NRE) consumption on a transaction by transaction basis. Through this information, business units are able to assess the impact of a particular transaction on their budgeted capital consumption.

Pricing

To support the credit decision process, a RAROC (Risk Adjusted Return on Capital) is always calculated, to measure the expected profitability of the credit transaction or even the full credit relationship with the customer. Account is not only taken of the expected income in form of interest margins but also, inter alia, the operational costs and losses which might be statistically expected on credits. As a consequence, the Basel parameters are integrated in the pricing.


Belfius Bank has five traditional securitisation vehicles: Atrium-1, Atrium-2, Dexia Secured Funding Belgium, Penates Funding and Mercurius Funding. The total assets of these companies amount to EUR 16,438 billion at 31 December 2014 compared to EUR 18,112 billion at 31 December 2013.

Atrium-1 is a Belgian securitisation transaction of social housing loans pursuant to a long-term credit facility between Belfius Bank and Domus Flandria NV (the borrower) and guaranteed by the Flemish Region. The guarantee of the Flemish Region was transferred to the special purpose vehicle (SPV). The original size of the transaction was EUR 188 million. Two classes of fixed-rate notes were issued on 30 April 1996, both carrying a Moody’s rating equal to that of the Flemish government (initially Aa2sf, currently Aa2sf as well). As at 31 December 2014, EUR 20.4 million were still outstanding under the class A2 while the class A1 has been repaid.

Atrium-2 is a Belgian securitisation transaction of social housing loans pursuant to a long-term credit facility between Belfius Bank and Domus Flandria NV (the borrower) and guaranteed by the Flemish Region. The guarantee of the Flemish Region was transferred to the SPV. The original size of the transaction was EUR 129.3 million. Two classes of fixed-rate notes were issued on 19 June 1997, both carrying a Moody’s rating equal to that of the Flemish government (initially Aa2sf, currently Aa2sf as well). As at 31 December 2014, EUR 24.7 million is still outstanding under the class A2.

Dexia Secured Funding Belgium (DSFB) is a Belgian securitisation vehicle (institutionele VBS naar Belgisch recht/SIC institutionnelle de droit belge) with currently six compartments, of which two with activity, namely DSFB-2 and DSFB-4.

DSFB-2 (using the second ring-fenced compartment of DSFB) is a securitisation transaction of loans granted to Belgian entities (public and other). All the loans are 100% guaranteed by one of the three Belgian regions. This EUR 1,621 million transaction was launched on 28 April 2008. One tranche of floating rate notes, rated at closing AA/Aa1/AA+ by respectively S&P, Moody’s and Fitch, was issued. Belfius Bank has guaranteed the full and timely payment of principal and interest on the notes. As at 31 December 2014 EUR 1, 174 million were still outstanding. The notes have a rating of A-sf/A-sf/Baa1 sf.

DSFB-4 (using the fourth ring-fenced compartment of DSFB) is a securitisation transaction of loans granted to Belgian public entities. This EUR 5,060 million transaction was launched on 14 December 2009. Three classes of floating rate notes were issued: EUR 4,700 million Class A notes (rated AAsf at closing by Fitch), EUR 300 million non-rated Class B notes and EUR 60 million non rated Class C notes. As at 31 December 2014, EUR 3, 121 million were still outstanding. The Class A notes had a rating of AA-sf on 31 December 2014.

Penates Funding is a Belgian securitisation vehicle with currently six compartments, of which two with activity, namely, Penates-1 and Penates-4.

On 27 October 2008, Belfius Bank closed a EUR 8,080 million RMBS securitisation transaction. The SPV, Penates Funding acting through its compartment Penates-1, securitised Belgian residential mortgage loans originated by Belfius Bank and issued five classes of notes: EUR 7,600 million Class A Mortgage-Backed Floating Rate Notes due 2041 (Fitch AAAsf/ S&P AAAsf); EUR 160 million Class B Mortgage-Backed Floating Rate Notes due 2041 (Fitch AAsf); EUR 120 million Class C Mortgage-Backed Floating Rate Notes due 2041 (Fitch Asf); EUR 120 million Class D Mortgage-Backed Floating Rate Notes due 2041 (Fitch BBBsf) and EUR 80 million Subordinated Class E Floating Rate Note due 2041 (not rated). As at 31 December 2014 the Class A Notes were Asf at S&P and A+sf at Fitch. The outstanding amounts for all classes of notes are still at their initial amount except for the Class A and the Class E notes where the balance decreased to EUR 2,813 million and EUR 66 million respectively. There was hence EUR 3,279 million outstanding under Penates-1 at 31 December 2014.

On 19 December 2011, Belfius Bank closed a EUR 9,117 million RMBS securitisation transaction. The SPV, Penates Funding acting through its compartment Penates-4, securitised Belgian residential mortgage loans originated by Belfius Bank and issued four classes of notes: EUR 8,077.5 million Class A Mortgage-Backed Floating Rate Notes due 2045 (Fitch AAAsf/Moody’s Aaasf/DBRS AAAsf); EUR 472.5 million Class B Mortgage-Backed Floating Rate Notes due 2045 (Fitch Asf/Moody’s A3sf/DBRS Asf); EUR 450 million Class C Mortgage-Backed Floating Rate Notes due 2045 (unrated) and EUR 117 million Subordinated Class D Floating Rate Notes due 2045 (unrated). As at 31 December 2014, The Class A and the Class B Notes have a A+sf and A-sf rating respectively by Fitch, Aa1(sf) and A3(sf) respectively

Appendix 3 – Belfius Bank Originations

Appendix 3 – Belfius Bank Originations


by Moody’s and A(high)(sf) and A(low) (sf) by DBRS. As at 31 December 2014, the outstanding amounts for all classes of notes were still at their initial amount except for the Class A notes where the balance decreased to EUR 4,168 million. Hence there was EUR 5,208 million outstanding under Penates-4 at 31 December 2014.

Mercurius Funding is a Belgian securitisation vehicle with currently six compartments. It was established in 2012. One compartment, Mercurius-1, had outstanding notes at the end of 2014.

On 7 May 2012, Belfius Bank closed a EUR 4,124 million SME CLO transaction. The SPV, Mercurius Funding acting through its compartment Mercurius-1, securitised Belgian loans to SMEs originated by Belfius Bank and issued two classes of notes: EUR 3,200 million Class A SME Loan-Backed Fixed Rate Notes due 2035; EUR 924 million Class B SME Loan-Backed Fixed Rate Notes due 2037.

On 12 May 2014, the Mercurius-1 issued new notes: EUR 3,200 million Class A SME Loan-Backed Fixed Rate Notes due 2035 (Fitch A+(sf) / Moody’s A1(sf) / DBRS A(high) (sf)); EUR 924 million Class B SME Loan-Backed Fixed Rate Notes due 2037 (not rated). The proceeds were used to purchase an additional portfolio of SME loans and to redeem the old notes.

All the notes still had their initial Fitch, Moody’s and DBRS rating at the end of 2014. As at 31 December 2014, the outstanding amounts for the Class B notes were still at their initial amount. The balance of the Class A notes decreased to EUR 2,687 million. Hence there was EUR 3,611 million outstanding under Mercurius-1 at 31 December 2014.

Contact For further general info about Belfius Bank, feel free to surf www.belfius.com.

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Editor-in-Chief: Belfius Bank SA, Boulevard Pachéco 44, 1000 Brussels

2014 - belfius banque · credit risk 30 4.1. credit risk management and governance 30 4.2. credit...

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