The BLOG of reference of Solvency II, IAS / IFRS and Basel 2: ERM of the Internal ASSURANCE and of PREVENTION of RISKS

The questions you are facing

At the approach of January 1st, 2008 when the new solvency ratio will be effective and opposable in counterparts, this offer of free simulation is THE SOLUTION which will help make the necessary decisions which are:

• To pass through the transitional phase (data collection and cartography of risks), into the phase of AGGREGATION and MANAGEMENT of risks,

• To go from declarative reporting to the quarterly reporting mastery of risks in real time according to the Directive " transparency " of the EEC transposed with the S.E.C;

• To estimate the advantages of a method AMA with regard to the standard method.

Interest of the simulation / Use test

Historic and forward-looking analysis of data in LDA's perspective AMA (Loss Distribution Approach) to translate statutory constraints (Compliance) into competitive advantages strengthening the future cash flows by a resumption of the loss of value (Cost savings / VAR) significant for the employees, the shareholders and the equivalence of the own capital of your establishment.

Your choice

1- You wish a case study on a sector which interests you:

• Banks,
• Insurances,
• Corporates (Industries and Services);
• EEV life.

To download, email at: contact@riskosoft.com

2- You wish to realize a study in a sector which interests you:

• Banks,
• Insurances,
• Corporates (Industries and Services)
• EEV life.

To receive your personal identification numbers (PIN) of access to the SIMULATOR, email at: contact@riskosoft.com

1- Main Cause of the counterpart risk

The risk of counterpart is a consequence of the operational risk of parts:

• Operational risk directly affects operational objectives: objectives of margin (rate of profitability), preservation of the levels of profitability and growth of sales.

• "The reduction of requirement of stockholders' equity resulting from the consideration of the assurance can not exceed 20 % of the total requirement of stockholders' equity" (Directive CRD / AMA).

• The company and\or the counterparts have so to cover at least 80 % of the operational risk by stockholders' equity or by savings of costs which are distributed proportionally (Loss Distribution Approach or LDA) in various accounts to absorb losses expected every date from reporting.

At the sense of the directive CRD, the internal practices placing by the counterpart to administer the operational risks can or not constitute for his counterpart a valid alternative in the coverage of operational risks by stockholders' equity.

This choice of the mode of management of the operational risk by the counterpart directly affects the two inextricable elements of the balance coordinated by l " Asset and Liability Management (ALM):

• The asset (what entity possesses): the possessions in the ownership (immobilizations, financial investments, stocks, claims and liquid assets);

• Passive (what entity owes): own capital (authorized capital, premiums, reserves, minority interests and accumulated result) and the not common passive (provisions for risks, debts, etc.).

The union of banks has of this fact asked in SMALL AND MEDIUM-SIZED FIRM since 2005 to set the capacities which are necessary to improve the forward-looking documents passed on to their financial partners:

" He can be useful to throw(launch) a reflection by leaning on a company of external advice on means to be implemented to improve the perception that the bank makes of its risk (objectives of consolidation(strengthening) of certain ratios of balance, improvement of the forward-looking documents passed on to his financial partner)" Cf. Basel II and accounting(countable) Standards: which consequences for the relations of SMALL AND MEDIUM-SIZED FIRM with their banks, in June, 2005.

2-Coverage of the operational risk

The risk of counterpart entails two types of action of prevention:

• Evaluation of provisions for risk (IAS 37);

• Evaluation of the depreciation of asset relative to the future operational losses of the counterpart (IAS 36).

2-1/ Evaluation of provisions to be constituted

All the external obligations of the company, current certain or likely, filling the conditions of posting and evaluation, have to meet themselves in the passive of the balance (what the company owes).

• Besides, with the aim of enriching the information of the investors about risks incurred by the company, the IASB imposes to register in notes annex potential obligations under shape of contingent liabilities.

2-2/ Evaluation of the depreciation of assets(active persons) relative to the operational losses of the counterpart (IAS 37 § 63-65)

• Provisions must not be booked in conformance with future operational losses.

• The future operational losses do not answer either the definition of a passive according to the paragraph 10 and or the general criteria of posting expressed for provisions in the paragraph 14;

• The fact of expecting future operational losses is an indication that certain assets(active persons) of the activity were able to depreciate.

• The company makes tests of depreciation of these assets according to IAS 36 (Impairment of assets), Basel 2 and Solvency 2.

The coverage of the risk generated by the depreciation of assets relative to the operational losses of the counterpart is assured recoverable value or / and by an increase of the own capital of equal amount.

3-The normative bases of management of the risk of counterpart connected to the future operational losses of the counterpart

Calculation of the amount accumulated by the distances from the earnings report (Expected losses), unexpected losses and of their recoverable value:

• "The future cash flows must be estimated for an asset in the current state.

• The estimations of the future cash flows do not have to include entrances(entries) or future exits of finance considered susceptible to result:

a) Of a future reorganization in which the company did not yet undertake,

or

b) Of the improvement or the increase of the performance of the asset " (IAS36 § 44).

• "Since the company undertook in the reorganization, the estimations of entrances and exits of finance future, for the determination of the value in use, are reflected the savings of costs and the other advantages resulting from the reorganization (on the basis of the most recent financial budgets / forecasts having been approved by the direction") (IAS36 § 47A).

• " A resumption of a loss of value of a revalued asset is directly credited in own capital" (IAS 36 , §120).

4- PREVISUALISATION OF THE TESTS OF APPLICATION

The evaluation of the operational risk of the customer of a sector which interests you gives you an outline of the risk of counterpart when the trade agreement is corresponding to the stipulations of the paragraph 44 of the standard IAS36.

4-1/ Impact points of the risk of counterpart measured:

• Variation of the recoverable VAR of the counterpart;

• Variations of Risk Appetite's thresholds (immigration limits of risks);

• Variation of the Plan of Continuance of Activity (PCA) over 5 years;

• Variation of the turnover;

• Variation of the EBIT (operational result);

• Variation of the exits of finance financing the resumption of the loss of value notably in premiums of the staff;

• Variation of the net result

• Variation of own capital:

- Variation of stockholders' equity if standard method

- Variation of stockholders' equity if AMA / LDA.

4-2/ Impact points to be measured on the basis of this test

These measures are automated by the RISKOSOFT'S ERM-A3 software:

• Calculation of the Probability of defect ( PD), the Loss in case of defect ( LGD) and of the exhibition in case of defect ( EAD) on the term " M ";

• Measure thresholds of alert (Tail Value at Risk or TailVaR) in 1 year, 5 years, 10 years ...

• Modelling of your decision to conclude a commercial contract or to pursue your business connections with the counterpart

5- DOWNLOADING

Test of control of the Customers of the sector of Insurances

www.riskosoft.com/fr/demo/internal_insurance_operational_risk/Test-AMA-LDA-Risque_operationnel_pour_ALM_Assurances.php

Test of control of the Customers of the sector of Banks

www.riskosoft.com/fr/demo/internal_insurance_operational_risk/Test-AMA-LDA-Risque_operationnel_pour_ALM_Banques.php

Test of control of the Customers of the sector of Industries and Services (Corporates)

www.riskosoft.com/fr/demo/internal_insurance_operational_risk/Test-AMA-LDA-Risque_operationnel_pour_ALM_Corporates.php

Test of declension EEV life, saving, pension

www.riskosoft.com/fr/demo/internal_insurance_operational_risk/Test-AMA-LDA-Risque_operationnel_pour_EEV_vie_epargne_retraite.php

At the approach of January 1st, 2008 when the new solvency ratio will be effective and opposable in counterparts, this offer of free simulation is THE SOLUTION which will help make the necessary decisions which are:

• To pass through the transitional phase (data collection and cartography of risks), into the phase of AGGREGATION and MANAGEMENT of risks,

• To go from declarative reporting to the quarterly reporting mastery of risks in real time according to the Directive " transparency " of the EEC transposed with the S.E.C;

• To estimate the advantages of a method AMA with regard to the standard method.

Interest of the simulation / Use test

Historic and forward-looking analysis of data in LDA's perspective AMA (Loss Distribution Approach) to translate statutory constraints (Compliance) into competitive advantages strengthening the future cash flows by a resumption of the loss of value (Cost savings / VAR) significant for the employees, the shareholders and the equivalence of the own capital of your establishment.

Your choice

1- You wish a case study on a sector which interests you:

• Banks,
• Insurances,
• Corporates (Industries and Services).

To download, email at: contact@riskosoft.com

2- You wish to realize a study in a sector which interests you:

• Banks,
• Insurances,
• Corporates (Industries and Services).

To receive your personal identification numbers (PIN) of access to the SIMULATOR, email at: contact@riskosoft.com

As you know, as of January 1st, 2008, with the application of methods AMA in the management of the operational risk and the internal / external notation, the device of calculation of the new solvency ratio and the use in strategic decisions, will get into effect completely and will be opposable to third parties.

The requirement of a device of management of the operational risk requires listed companies to complete the financial MPAR (its market capitalization has the most reliable evaluation), by an accounting MPAR based on the improvement of the performance in real time (week, month, quarter, year) and of which operational result IFRS, or operating result, is the indicator of evaluation (MPAR: Measure of the performance adjusted for the risk).

• By its from the US office n°10 / 996598 and the associated rights of property, RiskoSoft Company possesses the exclusivity on the international market of the required process Intranet / Extranet ERM of Management Accounting.

• This unique system was awarded the label of the best innovation by the EEC attributed on capital FEDER in Aquitaine by Oseo / Anvar in December, 2005.

To give you the opportunity to assess the interest of this offer, we shall realize a simulation of type " Use test " from your historic data (2006-2004 ) and forward-looking (2007-2009) in a perspective AMA integrating data of external sources of benchmarking according to the rule, to translate statutory constraints into competitive advantages strengthening the future cash flows by a resumption of the loss of value (VaR) significant for the employees, the shareholders and for the equivalence of the own capital of your Group.

Key points of the simulation ERM (Enterprise Risk Management)

We draw your attention on the 4 essential points which supply you elements of appreciation of the margin of operation that brings you the ERM at the same time as financing.

1-The calculation of the cost of the immigration limit of risks (COSO 2 / ERM)

This calculation is necessary to measure the cost of habits accepted or tolerated up to now by the management ("Risk appetite"): "management defines solutions allowing to face risks: avoitment, acceptance, reduction or division (sharing). For this to make management elaborate a package of measures allowing to put in equivalence the level of risks with the immigration limit and the desire for the risk of the organization " (Reference frame, COSO ORG. 2002 / AMF in October 31, 2006).

Two thresholds are moderate:
• The historic threshold of tolerance of risks: this calculation is made on historic variations (N-1 to N-3) : Expected Losses, EL;
• The future tolerance margin of risks: this calculation is made on the VAR (EL + UL) to determine the margin of the future prevention of risks.

2-The calculation of the recoverable value (IAS 36)

The calculation of the recoverable value allows measuring the room for manoeuvre which management can arrange if it engages a strategy of reduction and prevention of risks.

• This calculation is made on your internal data of expected losses and the external data of unexpected losses, under reserve of consideration of your internal data of unexpected losses, (UL), stored in your dated warehouse in the passing phase.

3-The Measure of the impact of the method of expected cash flows (IAS 36)

The book-keeping system "dynamic accounting" is based not on the forward-looking data of the turnover, but on the logical separation between costs and benefits, to realize the implemented activity, to measure value created by the entity.

• The impact of economy of costs by the resumption of the loss of value is particularly significant on the net result, but its effects are important on:

- The turnover,
- Operational result (EBIT),
- Own capital: argumentation to recognize internal practices as a valid alternative in the coverage of the operational risk by statutory stockholders' equity.
- The payment for the staff: institution of a PMOR (Premium of mastery of the operational risk) variable in exits of finance, financed with the capacity of savings of costs of the risk of the staff.

4-The capacity of self-financing:

The VaR (Value in risk) becomes in the approach ERM of management accounting a deposit of potential translated into future cash flows.

The more this DEPOSIT is IMPORTANT and the more your group can hope for an improvement of its FUTURE RESULTS by the mobilization and the valuation of the RECOVERABLE MARGIN considering immigration limit (Risk appetite) accepted by all, without resorting to livings of CRD's supplementary capital.

• Provisions for risks in conformance with the IAS 37 are also better mastered when counterparts have a similar management reducing their probability of defect. RISKOSOFT ERM allows you to estimate and to administer this risk of counterpart towards all your professional customers.

5- Mutually Win-Win Partnership

The decision-making Intranet / Extranet proposed to you is associated to program of training the plaque of which is also attached; the partnership bases on an implanting, a configuration TO MEASURE and at your pace to relieve current actions on the basis of a pricing rate exactly price to agree with mutual advantages.

This offer is limited in time and limited to a small number of company representatives each sector.

To join us: contact@riskosoft.com

The principle of management of the risk is capital adjusted for the risk (Risk Adjusted Return On Capital, RAROC).

So usually the measure of the performance adjusted for the risk (MPAR) has for objective to maximize value for the shareholder.

The principle of management of the risk is capital adjusted for the risk (Risk Adjusted Return On Capital, RAROC). So usually in banks the measure of the performance adjusted for the risk (MPAR) has for objective to maximize value for the shareholder. The MPAR allows:

• To discover the activities which have a competitive advantage;

• To compare the performances of activities which have different risks to take into account not only profit margin loosened by an administrator but also of the risk which it(he) undergoes in the company;

• To calculate the necessary own capital to cover the set of risks (exchange, market rate, price, credit ...) set by the administrators;

• To determine the VARIABLE PAYMENT for the administrator: a system of variable payment on the MPAR is a means to become aware to the administrator of prudent constraints and risks of bankruptcy (VAR) which press on the bank.

The bankruptcy of Enron and the financial scandals of these last years showed the limits of a strategy limited to the variable payment for the administrator.

Accustomed or prisoners of stochastic methods, banks invested heavily to realize the cartography of risks, the collection of incidents and the quantification of the data of unexpected losses, in the point to forget that the fundamental requirement of Basel 2 rests on the implementation of a system of information of global management capable of articulating three pillars: pillar 1 (Quantification), pillar 2 (Control of the piloting or prudent surveillance and Corporate governance), pillar 3 (Reporting or discipline of the market).

• Most of the banks are still it in the pillar 1 while on June 30, 2007 all the banks should have set up COFINREP who articulates the pillar 2 in the pillar 3.

• COFINREP takes into account data necessary for the application of the solvency ratio (COREP: common reporting - Basel II) and standards IFRS (FINREP: financial reporting) and if necessary US GAAP for the banks who intervene on the American market.

IMPASSE OF STOCHASTIC METHODS

A situation of impasse of statistical methods and probability arises when the user neglect the requirements of application in the concerned activity and which he should have taken into account of characteristics (the existing and what it brings). Statistics and probability are used to strengthen the processes of quantification in numerous domains (mechanics, economy, sociology, sciences, games, etc.), but they are not self-sufficient to themselves, because it is only about "statistics and about applied probability ".

So stochastic calculations (study of unpredictable phenomena dependent on time) which meet their normal outcome in the mathematical finance and the financial engineering, the mathematical modelling in economy and the theory of games, the analysis of the risks of market, notably the optimization of the management of wallets meet quickly their limits when it is about the analysis of the operational risk in purposes of piloting of the organizations in which human factor occupies a dominating place. Integral and differential calculus bound to unpredictable processes is not enough any more:

• Fate is not an important factor of the operational risk and the risk of counterpart

• The one that knows the typology of Basel realizes although error (or fraud) of the trader which has just made lose 250 millions in the bank "Agricultural Credit" does not recover from the fate; and no more of the theory of the game.

With the same stochastic methods and the same theory financial scandals continue as before:

• In December, 2001, bankruptcy of Enron the broker in energy, 7-th groups deprived in the United States. Unexpected losses (U L): Five thousand six hundred dismissals, 68 billion market capitalization, capital of which pensions of 20 000 employees, automatically placed in actions of the group.

• In June, 2002, accused for having made pass in transit " hundred million dollars " towards companies(societies) belonging to the family CEO of Tyco resigns, (Tyco is one of the first 20 companies of the United States in terms of market capitalization). Unexpected losses (UL): twenty seven billion dollars of debts.

• Summer, 2002, Wordcom, the phone operator, employing 80 000 employees, hid 3,8 billion dollars of depenses or losses on his accounts. Unexpected losses (UL): 30 billion dollars of debt; seventeen thousand dismissals.

• In February, 2003, the title of the Dutch group Ahold, n ° 3 world of the distribution, collapses. Unexpected losses (UL): accounting embezzlements concerning 500 million euros.

• In December, 2003, bankruptcy of the farm-produce Italian group Parmalat, n ° 1 on the world market of the milk long conservation. Unexpected losses (UL): a debt of 14,5 billion euros and the ruin of more than 110 000 small savers who had bought actions or obligations of the group.

• In December, 2003, Credit Lyonnais: agreement between the American justice and the French part in the affair Executive Life, the continuation of numerous scandal of the Credit Lyonnais. Unexpected losses (UL): 770 million dollars, 470 of which for the French taxpayers (the State), 100 millions for the Credit Lyonnais, 185 millions for the group Pinault.

• In September 2007-London Stock Exchange, the action of Northern Rock loses 30 % of its value; his competitors do not who want any more to give to him of money, the Bank of England had to help him. Unexpected losses (UL):

- About a billion books(pounds) (1,5 billion euros) would have been removed from the establishment in the only day of Friday, or 4 or 5 % of the totality of deposits(warehouses) possessed in the bank by the million and half of customers;

- The Tokyo Stock Exchange fell of 2 % this night in Asia, fall mainly owed to the decline of banking and financial values.

- Pound sterling continues to be under pressure 1,9890 against the dollar, 2,3630 against the Swiss franc and 228,50 against the yen.

- The Spanish banks are shaken by the affair Northern Rock. Unexpected losses (UL): Banco Pastor 9,69 %, BankInter 5,66 %, Banesto 3,81 % and Banco Popular 3,32 %; more important bank BBVA and Santander gave up respectively 2,13 % and 1,64 %.

• In September 2007-Calyon, the investment bank of the undergone agricultural Credit an Unexpected losses (UL) of 250 million euros on the American market, because of the only one trader because of a trader (Only one!) installed in New York, which would have without control taken by positions risked on certain indications of the market of the credit through by-products: this loss will be taken into account in its entirety in the results of the summer term, that is added to expected losses (distances from earnings reports) to the detriment of the shareholders who will pay her on their dividends waited.

What is the risk in the base of these financial scandals: credit risk, market risk or operational risk?

Even though operational risk is known for a very long time, certain analysts discovered it only with Basel 2. Anything of amazing that they were able to think that it would represent only 15 % of the losses of banks.

• These percentages were published in spite of the evidence of the direct link between terms " operational risk "operational result ";

• In spite of the fact that decision-making system raises from the operational domain and that he concerns all the sectors of an establishment;

• In spite of the exercise of collection of losses realized in 2002 by the group Risk Management of the Committee of Basel revealed that 89 banks having participated in this exercise knew on the only fiscal year 2001 more than 47 000 events of unexpected losses (UL) for an amount accumulated by operational losses rising about 7,8 billion euros. (The New Basel Accord ", in April, 2003).

• In spite of study realized over 30 years on 1000 companies in 32 countries and on 5 continents by the ISEOR showed that for the set of sectors (of which banks), unexpected losses ( UL) bound to operational risk represent on average 42,5 % of the salary mass.

Basel 2 besides asked the banks to resolve first the problem of connections between the generative events of losses:

• Criteria for the classification of the generative events of losses bound to centralized functions (for example computer service) or concerning several business segments.

• The way of administering the successions of generative events of losses which are not independent some of the others must be adjusted.

• Losses due to operational risks arisen in the context of the risks of credit and considerations up to here as a risk of credit must be integrated into the internal data base relative to losses resulting from operational risks and took into account for the management of these last ones.

• When a loss due to an operational risk expresses itself also under the shape of a loss bound at the risk of market, corresponding event will be treated in the same way as the other generative events of losses and integrated into the specific approach in the establishment.

• If a bank uses a model of aggregation of risks to calculate its due stockholders' equity compared to the risk of market, positions ensuing from events bound(connected) to operational risks can not be exclude from the calculation of the amount exposed to risk (VaR), or of the control in posteriori (Backtesting).

What to do now?

To learn more about it,

• Use link below to download the plaque of solutions ERM (Enterprise Risk Management) for banking:

http://www.riskosoft.com/en/executive_education/internal_insurance/ERM/Riskosoft_ERM_BANKING_plaque_Operational_risk_&_Countepart.php

• To deepen methodological question and to see how stochastic methods have to be integrated into the processes of management accounting, download the Practical Guide (Handbook of 47 pages) totally free:

http://www.riskosoft.com/en/executive_education/internal_insurance/ERM/Pratical_guide_of_Management_Accounting_of_operational_risk_&_counterpart_risk.php

To join us: contact@riskosoft.com

Phone . 33 ( 0 ) 553 667 578

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