Enterprise Risk Management (ERM)
ABN AMRO Business Unit North America (BU NA)
Risk Outlook Process
May 14, 2007
Table of Contents
1
Questions to Address During this Time of Uncertainty
[Presentation to RMC on May 11]
2
Historical Loss Perspective
3
Top Risks Identified
4
What do we need from the ERM-C?
5
Appendix
2
Overview
 The proposed sale of the LaSalle Bank Corporation (“LBC”, in conjunction
with a proposed merger or sale of the remaining ABN AMRO group) has
changed our risk state from “business as usual” to “business in transition.”
 While LBC can be isolated as a legal entity with separate financial
statements, the Group structure requires Business Unit North America (“BU
NA”) to continue until a final transaction is completed.
 The uncertainty over the deal structure and the potential acquirer raises
issues around how to match incentive programs to an uncertain deal horizon;
how to best retain customers and employees; and how to proactively protect
the local interests of LBC.
 This growing uncertainty lends itself to increasing risk levels.
 As a result, the ERM Working Group has detailed questions for the RMC to
discuss (and potentially address) in this time of uncertainty.
3
Key Issues and Concerns
Customers
Key Issues
and
Concerns
Staff
Retention
Data Loss /
Privacy
Competitors
Franchise
Value
Deal
Horizon
Loss
Events
Regulators
IT / Access
Control
Profit
Collapse
Compliance
Intellectual
Property
Rating
Agencies
Shareholders
LBC vs.
BUNA
Legal
Liquidity
Deal
Quality
Alignment
with AA
4
Top questions for the RMC
External Issues





Customers – What has the RMC done to
ensure that there is a consistent message
communicated to customers regarding
press information?
Internal Issues

Competitors – Does the RMC have a
contingency plan if revenue falls by 20% in
the next six months? What steps can the
RMC take to discourage employee
“poaching”?
Regulators – Has the RMC evaluated
staffing levels to address heightened
regulatory scrutiny and deal execution?
Has the RMC discussed the possibility of
reprioritizing/deferring certain exams?
Rating Agencies – What will the impact
be of a drop in ratings?
Shareholders – How can LaSalle (and its
employees) ensure that the shareholders
support the best long-term value
proposition?

BU NA
–
How will the RMC ensure adequate BU NA
representation (i.e. is the RMC too LaSalle
focused)?
–
If the deal progresses with Barclays, how will
the RMC oversee the disentanglement of
Global Clients and Global Markets (without
disruption to LaSalle or GC/GM)?
–
How will the RMC oversee cross-border self
interest between ABN AMRO and LaSalle?
Employees
–
How will the RMC react to whole team
defections (e.g. derivatives, payroll, loan
syndications, etc.)?
–
What steps is the RMC taking to reduce the
“distraction effect” (i.e. employee apathy,
frustration and/or anxiety) leading to reduced
efficiency?
5
Top questions for the RMC
External Issues


Liquidity – What steps have been taken
to protect liquidity in the event of a ratings
decrease or litigation charge?
Internal Issues

Legal
–
How will the DOJ issue be resolved? Who
maintains contingent liability (Group vs. BU
NA)?
–
Who is overseeing legal issues from a LaSalle
perspective?

Human Resources – How quickly can HR
implement appropriate incentives to curb
undesirable behavior (e.g. minimize
suboptimal behavior in short term)?
Operations – What steps has the RMC
taken to protect the bank against
heightened operational risk?
–
IT / Access security?
–
Data loss / privacy protection?
–
Disaster recovery?
–
Sabotage / Fraud?
–
IT contracts / Outsourcing?
–
Protection of Intellectual Property (e.g.
trademarks and trade secrets)
6
Top questions for the RMC
External Issues

Execution Risk
–
Has the RMC considered all of the legal and
transactional steps necessary to “break apart”
LaSalle Bank as a standalone entity from the
ABN AMRO group?
–
What risks increase if the transaction takes
longer than expected?
Internal Issues



Deal quality – How will the RMC ensure
that underwriting standards do not fall
(particularly if competition increases and
our loss horizon shortens)?
Compliance – What steps will the RMC
take to ensure all employees continue to
fulfill compliance requirements?
Capital management – How will the RMC
ensure discipline is maintained? Do we
continue costly hedges?
7
Table of Contents
1
Questions to Address During this Time of Uncertainty
2
Historical Loss Perspective
3
Top Risks Identified
4
What do we need from the ERM-C?
5
Appendix
8
Historical Loss Perspective
 In April, the ERM Committee (“ERM-C”) requested that Risk Management
provide a historical loss perspective with which the members could assess
the survey results.
 This historical loss perspective should be used to determine whether the
average loss impact was “on target” or “needs adjustment.”
 Risk Management utilized average gross credit and operational losses as a
point of comparison. Losses are based upon General Ledger effective dates.
9
Risk Outlook: Ranking our Risks
Distribution of Risks by Probability and Impact
30%
HIGH RISK
MEDIUM RISK
FF
Client/Corporate Credit Default (6)
25%
Average Probability
20%
E
E
15%
System / IT (7)
M General Economy Decline (4)
M
B
B Data Loss/Vulnerability (11)
C Fraud Loss (9)
A
Control Breakdown (13)
H
H Model Risk / Failure (6)
K
K
Failed Business Practices (4)
JJ
10%
D
Declining Employee Morale/Loss of Top Employees (5)
I Real Estate Decline (6)
LL Legal Risk (4)
Material Unpredicted External Event (6)
G
G
Regulatory / Ethical Failure (7)
N Supplier Failure (2)
5%
LOW RISK
MEDIUM RISK
0%
0
10
20
30
40
50
60
Average Expected Impact
Source: Survey of “top risks”
Unacceptable Level
Unknown - Need More Info
Acceptable Level
Un-Rated
10
Risk Outlook: Credit Loss
Client / Corporate Credit Default
Distribution of Risks by Probability and Impact
vs. Historical Average Gross Losses (2004 - 2006)
30%
2005
2004
2006
F
Client/Corporate Credit Default (6)
25%
$1MM
Average Probability
20%
15%
10%
5%
0%
0
10
20
30
40
50
60
Average Expected Impact
Source: Finance
Note: Historical loss data from 2001 / 2002 may indicate higher average gross losses.
11
Risk Outlook: Operational Loss
Business Disruption and Systems Failure
Distribution of Risks by Probability and Impact
vs. Historical Average Gross Losses (2004 - 2006)
30%
25%
Average Probability
20%
Business Disruption and Systems Failure
2006
2004
2005
E
15%
System / IT (7)
B
Data Loss/Vulnerability (11)
$1.5MM
$0.2MM
10%
$0.1MM
5%
0%
0
5
10
15
20
25
30
Average Expected Impact
Source: Corporate Loss Database
12
Risk Outlook: Operational Loss
Clients, Products and Business Practices
Distribution of Risks by Probability and Impact
vs. Historical Average Gross Losses (2004 - 2006)
30%
25%
Average Probability
20%
15%
2006
2005
2004
K
Failed Business Practices (4)
10%
$0.05MM
$85MM
D Regulatory / Ethical Failure (7)
L
$2MM
Legal Risk (4)
5%
0%
0
10
20
30
40
50
60
70
80
90
Average Expected Impact
Source: Corporate Loss Database
13
Table of Contents
1
Questions to Address During this Time of Uncertainty
2
Historical Loss Perspective
3
Top Risks Identified
4
What do we need from the ERM-C?
5
Appendix
14
Top Risks Identified
# of
Responses
13
Average
Probability
Range
10 - 20%
Average
Expected
(Millions)
10 - 30
Average
Probability X
Average
Expected
(Millions)
1-6
B Data Loss/Vulnerability
11
10 - 20%
10 - 40
1-8
C Fraud Loss
9
10 - 20%
1 - 10
0-2
D Regulatory/Ethical Failure
7
0 - 10%
0 - 10
0-1
E System/IT
7
10 - 20%
5 - 20
1-4
F Client/Corporate Credit Default
6
20 - 30%
20 - 60
4 - 20
G Material Unpredicted External Event
6
0 - 20%
10 - 30
0-6
H Model Risk/Failure
6
10 - 20%
10 - 40
1-8
I Real Estate Decline
6
0 - 20%
10 - 50
0 - 10
J Declining Employee Morale/Loss of Top Employees
5
0 - 20%
20 - 60
0 - 12
K Failed Business Practices
4
10 - 20%
20 - 60
2 - 12
L Legal Risk
4
0 - 10%
30 - 80
0-8
M General Economy Decline
4
10 - 20%
10 - 40
1-8
N Supplier Failure
2
0 - 10%
1-5
0-1
#
Short Name
A Control Breakdown
 Does anyone propose any changes to this list?
15
Table of Contents
1
Questions to Address During this Time of Uncertainty
2
Historical Loss Perspective
3
Top Risks Identified
4
What do we need from the ERM-C?
5
Appendix
16
What do we need from the ERM-C?
• Review list of “Top Risks”
• Determine if this list is still representative and fully comprehensive
• Review “business in transition” scenarios to identify risks and mitigants
Next Steps...
• Determine how each risk should be monitored
• ERM-C members to discuss “Top Risks” with respective MTs
17
Table of Contents
1
Questions to Address During this Time of Uncertainty
2
Historical Loss Perspective
3
Top Risks Identified
4
What do we need from the ERM-C?
5
Appendix
18
Credit Loss Data
Gross Loss (USD Million)
Event Type
Commercial Banking
PFS
Mortgage
Other
OREO
Total Net Charge-offs
Recoveries (USD Million)
Event Type
Commercial Banking
PFS
Mortgage
Other
OREO
Total Net Charge-offs
Net Loss (USD Million)
Event Type
Corporate Credit Default
Commercial Banking
PFS
Mortgage
Other
OREO
Total Net Charge-offs
2004
$176.1
$40.9
$3.0
$0.0
$0.0
$219.9
2004
2005
$94.9
$29.4
$1.2
$0.4
$0.0
$125.9
2005
($77.3)
($12.0)
($0.0)
($41.1)
($11.1)
($0.2)
($89.2)
($52.3)
2004
$98.8
$28.9
$3.0
$0.0
$0.0
$130.7
2005
$53.8
$18.3
$1.0
$0.4
$0.0
$73.6
2006
$56.9
$38.5
$3.3
$0.0
$0.0
$98.7
2004
No. of events
155
261
n/a
416
2005
No. of events
88
263
n/a
351
2006
No. of events
53
273
n/a
326
2006
($26.4)
($6.6)
($0.0)
$0.0
$0.0
($33.0)
2006
$30.5
$32.0
$3.3
$0.0
$0.0
$65.7
19
Operational Loss Data
Gross Loss
(USD Million)
Event Type
Gross Loss
(Number of Events)
2004
2005
2006
Business Disruption and
Systems Failures
$0.1
$8.8
$1.7
Clients, Products and
Business Practices
$0.1
$340.7
$19.2
$3.7
$2.4
$4.5
$0.6
$0.6
$0
$139.1
$119.3
$63.3
$3.4
$2.7
$4.0
$0.2
$1.4
$15.9
$0.1
$0.3
$0.3
Execution, Delivery and
Process Management
2004
2005
2006
Business Disruption and
Systems Failures
1
6
9
Clients, Products and
Business Practices
2
4
10
1
1
17
Employment Practices and
Workplace Safety
3
1
-
Execution, Delivery and
Process Management
89
99
124
40
39
50
5
12
4
1
1
3
142
163
217
Damage to Physical Assets
Damage to Physical Assets
Employment Practices and
Workplace Safety
Event Type
External Fraud
External Fraud
Internal Fraud
Internal Fraud
(blank)
(blank)
Grand Total
Grand Total
$147.2
$476.0
$109.0
20
Risk Outlook: Operational Loss
Fraud – Internal and External
Distribution of Risks by Probability and Impact
vs. Historical Average Gross Losses (2004 - 2006)
30%
25%
External Fraud
Internal Fraud
Average Probability
20%
2004 2005 2006
2006
15%
Fraud Loss (9)
C
$4MM
$0.1MM (2004 - 2006)
10%
$0.1MM (2005)
$0.05M (2004)
5%
0%
0
1
2
3
4
5
6
7
8
9
10
Average Expected Impact
Source: Corporate Loss Database
21
Risk Outlook: Operational Loss
Execution, Delivery & Process Management
Distribution of Risks by Probability and Impact
vs. Historical Average Gross Losses (2004 - 2006)
30%
25%
Average Probability
20%
Execution, Delivery & Process Management
15%
2005
2006 2004
A
H
Model Risk / Failure (6)
10%
Control Breakdown (13)
$0.5MM $2MM
$1MM
N
5%
Supplier Failure (2)
0%
0
10
20
30
40
50
60
Average Expected Impact
Source: Corporate Loss Database
22
Risk Outlook: Operational Loss
Employment Practices and Workplace Safety
Distribution of Risks by Probability and Impact
vs. Historical Average Gross Losses (2004 - 2006)
30%
25%
Average Probability
20%
Employement Practices and Workplace Safety
15%
2006
2004
2005
J
10%
Declining Employee Morale/Loss of Top Employees
(5)
$0
$0.2MM
$0.6MM
5%
0%
0
5
10
15
20
25
30
35
40
45
Average Expected Impact
Source: Corporate Loss Database
23