Progress update report. 6 June 2014

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1 Progress update report 6 June 2014

2 Important notice This report has been prepared for the Minister for Finance following consultation with the Department of Finance and in response to a request for a detailed update report made under Section 17 (c) of the Ministerial Instructions issued on 7 February Our work on Irish Bank Resolution Corporation Limited (In Special Liquidation) ( IBRC in SL ) commenced on 7 February 2013 on the appointment of the Special Liquidators. This report covers the period 7 February 2013 to 31 March We have not undertaken to update our report for events or circumstances arising after that date. This Report is for the benefit of the Minister for Finance and has been released on the basis that it shall not be copied, referred to or disclosed, in whole or in part, without our prior written consent. This Report is not suitable to be relied on by any party wishing to acquire rights against KPMG for any purpose or in any context. Any other party that obtains access to this Report or a copy and chooses to rely on this Report (or any part of it) does so at its own risk. To the fullest extent permitted by law, KPMG does not assume any responsibility and will not accept any liability in respect of this Report to any party other than the Minister for Finance. This engagement is not an assurance engagement conducted in accordance with any generally accepted assurance standards and consequently no assurance opinion is expressed. 2

3 Glossary of terms a/c Account FCA Financial Conduct Authority ALCO Asset and Liability Committee FX Foreign Exchange ALG A&L Goodbody GCC Group Credit Committee AIB Allied Irish Bank plc HR Human Resources BAU Business As Usual IBRC Irish Bank Resolution Corporation Limited BNPP BNP Paribas BTL Buy To Let c. circa CBI Slide CRE Title Central Bank of Ireland CCMA Code of Conduct on Mortgage Arrears 2013 CRO DD DGS DOF ECB EFTs ELA ELG FAQ Commercial Real Estate Chief Risk Officer Direct Debit Deposit Guarantee Scheme Department of Finance European Central Bank Electronic Fund Transfers Exceptional Liquidity Assistance Eligible Liability Guarantee Frequently Asked Questions IBRC in SL Irish Bank Resolution Corporation Limited (in Special Liquidation) IBRC Act/The Act Irish Bank Resolution Corporation Act 2013 INBS ID IT KPIs LCC LPT LSA MARS NAMA NARL NDA NTMA PAYE Irish Nationwide Building Society Invoice Discounting Information Technology Key Performance Indicators Local Credit Committee Local Property Tax Loan Sale Agreement Mortgages Arrears Resolution Strategies National Asset Management Agency National Asset Resolution Limited Non Disclosure Agreement National Treasury Management Agency Pay As You Earn 3

4 Glossary of terms (continued) PDH Personal Dwelling House TUPE Transfer Of Undertakings PI Participating Institution VA Vendor Assistance PW Private Wealth VAT Value Added Tax ODCE Office of the Director of Corporate Enforcement VDR Virtual Data Room RMCC Residential Mortgages Credit Committee RE Real Estate REV Real Estate Value RFP Slide RMI Title ROI Q&A Request For Proposal Recovery Management Ireland Republic Of Ireland Questions and Answers SAM Specialised Asset Management SL Special Liquidation SLA Service Level Agreement SLs Special Liquidators SME Small and Medium Enterprise SPV Special Purpose Vehicle SO Standing Order TSA Transitional Service Agreement 4

5 Contents Page The contacts at KPMG in connection with this report are: Kieran Wallace Restructuring Partner, Dublin Tel: Fax: Eamonn Richardson Restructuring Partner, Dublin Tel: Fax: Executive Summary 6 Introduction/overview of the Special Liquidation 15 Deal workstream 22 Loan management workstream 34 Finance workstream 39 Legal workstream 43 Regulatory and compliance workstream 46 Operations workstream 52 Loan migration workstream 56 HR workstream 61 IT workstream 64 Facilities workstream 67 Deposits workstream 70 Tax workstream 75 Costs and fees 79 5

6 Executive Summary

7 IBRC Liquidation overview Spreading the cost of the Promissory Notes from a weighted average life of c. 7 to 8 years to c. 34 to 35 years at a lower funding cost. Significant annual interest savings for the State (estimated at c. 2.3 billion in the first year and c. 20 billion over the next 10 years if costs of the transaction are excluded). A reduction in the underlying deficit of c. 1 billion per annum in the coming years (before transaction costs). Unprecedented liquidation in Irish corporate history. To date the biggest loan sale globally in 2013/ % loans sold to third party purchasers. Governance of liquidation, value maximization and cost control were key priorities for the Special Liquidators ( SLs ) billion National Asset Resolution Limited ( NARL ) facility will be repaid in full by Q New legislation underpinned the entire liquidation. Complex and challenging assignment which required a multi disciplinary team. Significant support of IBRC employees and contractors provided to SLs. 7

8 Executive summary: Scale of the task IBRC sales process by numbers 21,700,000,000 OF LOANS PREPARED AND BROUGHT TO MARKET LOAN SALES PROCESSES CONDUCTED COLLATERAL WAS BASED IN 22 DIFFERENT JURISDICTIONS 145 NON DISCLOSURE AGREEMENTS ( NDAS ) SIGNED WITH INTERESTED PARTIES LOANS CONSISTED OF OVER 52 15,000 27, LETTERS ISSUED TO BORROWERS AND GUARANTORS DIFFERENT BORROWER GROUPS INTERESTED PARTIES ACROSS 13 COUNTRIES 80,000 DOCUMENTS WERE REVIEWED AND UPLOADED TO VIRTUAL DATA ROOMS ( VDRS ) The IBRC loan portfolio was supported by collateral based in 22 different jurisdictions worldwide. Project Pebble ( 0.8bn) US CRE, UK hotels and UK & Ireland Shopping Centres Ireland/UK (84%) US (15%) World: other (1%) Project Rock ( 5.5bn) UK originated Commercial Real Estate ( CRE ) Loans UK (89%) US (7%) Germany (3%) Europe: Other (1%) Project Sand ( 1.8bn) Irish originated Residential Mortgages Ireland (100%) Total Indicative and Binding Bids (across multiple tranches per portfolio) Project Evergreen ( 2.5bn) Irish originated Corporate Loans Ireland (93%) UK (7%) Project Salt ( 1.8bn) UK originated CRE Loans Germany (60%) UK (30%) Poland (7%) Europe: other (3%) Project Stone ( 9.3bn) Irish originated CRE Loans Ireland (46%) United Kingdom (33%) Continental Europe (18%) Other (3%) We saw strong interest from a variety of financial and strategic buyers and funders, with US private equity houses and hedge funds being key participants across each of the 6 portfolios. 3, % PROPERTY VALUATIONS WERE OBTAINED INDIVIDUAL BIDS WERE RECEIVED ACROSS 6 PORTFOLIOS OF THE LOAN BOOK TRANSACTED Bids Indicative Binding Evergreen Rock Salt Sand Stone Pebble

9 Establishing full control and management of IBRC Oversight of the HR function with responsibility for 971 employees across 10 offices, including 135 based in London and 34 based in Belfast at date of Special Liquidation ( SL ), including the processing of payroll. Over the period 80 people obtained educational support for additional training. Created a stable staffing platform of 80 full time employees supporting a full service proposition for residential borrowers. Considered 3,173 applications at 208 commercial credit committees. Considered 2,915 applications at 122 residential credit committees. Credit committee activity for IBRC in SL can be summarised as follows: Number of Credit Committees 07 Feb 13 to 19 May 2014 Number of credit committees Number of applications considered Commercial Credit Committee 208 3,173 Residential Credit Committee 122 2,915 Residential Credit Committee Appeals Board Managed the advancement and collection of in excess of 1 billion through the Invoice Discounting ( ID ) function for Specialised Asset Management ( SAM ) borrowers. Contact with residential borrowers up 28% from rates achieved in February Full suite of Mortgages Arrears Resolution Strategies ( MARS ) solutions launched in May Completed the migration of National Asset Management Agency ( NAMA ) Case Management and operations to Capita relating to the original NAMA Participating Institution ( PI ) book: Phase 1: August 2013; Phase 2: Dec 2013; and Phase 3: June Management of over 1,100 legal cases. Management of over 20 legacy and public interest cases. Dealt with over 240 data access requests. 9

10 Governance Regular engagement with the Central Bank of Ireland ( CBI ), with monthly reporting and formal meetings held as requested by the CBI. Regular engagement with the Department of Finance ( DOF ) as required. This has included: Weekly liquidation update meetings; Weekly sales update meetings; Other ad hoc meetings as requested; Monthly liquidation and sales update reports; Fee reports as requested; and Meetings with the Minister for Finance as requested. Regular engagement with NAMA in respect of: Management of IBRC NAMA PI unit; Transfer of IBRC NAMA PI unit to Capita; and Planning for potential acquisition of loan assets. 10

11 Outcome to date 10.9 billion repaid to NARL following conclusion of loan sales. Balance of the NARL facility to be repaid by Q Very little residual risks remain given the lack of warranties, representations and indemnities provided on loan sales to date. Current status of the various IBRC loan portfolios Loan portfolio Project Evergreen Project Rock Current status Contracted and completed Contracted and completed Project Salt Contracted and completed Project Sand Contracted. Completion 6 June Project Stone Contracted. Completions in May-July Project Pebble Contracted and completed GRAND TOTAL 11

12 Costs summary Cost reduction achieved at IBRC was greater than liquidation specific fees (excluding loan sales) m Note: (a) Represents the period following the commencement of SL of 7 February 2013 to 31 March 2014; (b) The above is exclusive of value added tax ( VAT ) and disbursements; SLs reviewed and monitored all third party advisor Slide costs. Title 14 month period to 31 March 14 (a) SL related professional and legal fees to 31 March Rebate obtained (7.6) Fee relevant to the sale of 21.7 billion of loans (70.0) Liquidation specific 41.6 On-going cost reduction in IBRC during same period 56.2 Certain legal advisors signed up to NAMA rate card and/or fixed cost pieces of work. Certain other advisors signed up to NAMA rate card. Certain other advisors were engaged following a competitive tender process with fixed fee quotes. Minister negotiated the agreement of various further rebates on the already reduced rates with KPMG, A&L Goodbody ( ALG ) and Linklaters. In summary: It should be noted that had the Bank continued with its planned wind-down the operating costs were anticipated to be 1.1bn to the end of While the cost of liquidation is significant we anticipate the total cost of the wind-down will be considerably less than previously estimated while at the same time eliminating many of the risks associated with the long term wind-down plan. Net of sales related costs liquidation costs are currently 42 million which should be considered in the context of operational cost savings of 56.2 million over the same period. Sales costs to date of 70 million for successfully disposing of c. 20 billion of loans, or 0.35% of the value of loans sold. 12

13 Other matters As of 7 February 2013, there were 2,442 deposit accounts with a total value of million to be either paid out through the Deposit Guarantee Scheme ( DGS )/Eligible Liability Guarantee ( ELG ) schemes or set-off against loan balances. We have reviewed and approved 1,797 deposit accounts with a total value of million for payment through the DGS/ELG Schemes. To date, payments of 28.6 million and million through DGS and ELG schemes respectively have been paid out. The remainder will be repaid as claim forms are submitted for the ELG scheme. To date, we have obtained approval for and processed 527 deposit accounts for set-off with a total value of 98.6 million. Recovery of outstanding refunds with included a UK tax refund Stg 23 million and US federal tax refund US$3.5 million. Prepared and filed Local Property Tax ( LPT ) returns and payments for over 200 properties. Tax review of over 250 mortgagee in possession transactions. Provision of extensive tax support to the Deal (loan sale) workstream, including tax implications of the loan sales in each of the relevant jurisdictions and cash repatriation from overseas subsidiaries. Successfully surrendered/disclaimed 11 onerous leases in Republic of Ireland ( ROI ) and 3 in the UK. Dealt with 22 landlords in relation to lease negotiations/surrenders and 59 tenants in relation to rent collection and recovery of rent arrears. Manage the sale of surplus properties including 33 former INBS Branches and 14 apartments which were owned by IBRC. 13

14 Next steps Currently planning sales process for residual assets of c. 2.5 billion. Management of on-going litigation and any new litigation which may arise. Planning structure for legacy loans following conclusion of sales process for residual assets. Liquidation or sale of remaining subsidiary interests. Repayment of NARL facility. Complete all statutory liquidation matters. Management and unwind of hedging position following loan sales. Further work to complete in order to support Transitional Service Agreements ( TSA ) post completion and further completions scheduled in June and July. 14

15 Introduction/ overview of the Special Liquidation

16 Introduction/overview of the Special Liquidation Overview On 7 February 2013, the Oireachtas passed legislation (the Irish Bank Resolution Corporation Act 2013) (the Act ), appointing joint Special Liquidators (the SLs ) to Irish Bank Resolution Corporation Limited ( IBRC ) with immediate effect to wind up its business and operations. The purposes of the Act are to: help address the continuing serious disturbance in the economy of the State; provide for the winding up of IBRC in an orderly and efficient manner in the public interest; end the exposure of the State and the CBI to IBRC; help to restore the financial position of the State; help enable the State to re-establish normalised access to the international debt markets; assist, to the extend achievable, in recovering the financial assistance provided by the State to IBRC as fully and efficiently as possible; resolve the debt of IBRC to the CBI; protect the interests of the taxpayers; restore confidence in the banking sector by furthering the reorganisation of the Irish banking system in the public interest; and underpin Government support measures in relation to the banking sector. At the date of the appointment of the SLs, the CBI had provided funding of approximately 40 billion in the form of an Exceptional Liquidity Assistance ( ELA ) Facility Deed to IBRC. The appointment of the SLs caused this funding arrangement to unwind. Overview (continued) As a result, the CBI became the economic owner of the Promissory Notes and the floating charge assets. The Government replaced the Promissory Notes with a series of longer term, non-amortising floating rate Government bonds. The CBI assigned the rights and entitlements (including the floating charge over IBRC s assets) under the ELA Facility Deed to a newly established NAMA Special Purpose Vehicle ( SPV ), National Asset Resolution Limited ( NARL ). NARL issued Government Guaranteed NAMA Bonds to the CBI in an amount equal to the amount outstanding under the ELA Facility Deed. NARL became entitled to the repayment of the entire amount owed by IBRC under the ELA Facility Deed together with the right to enforce its security over the assets of IBRC under the floating charge. 16

17 Introduction/overview of the Special Liquidation (continued) Overview (continued) It was envisaged that an independent asset valuation and sales process for the charged assets would be undertaken by the SLs, with NARL acquiring the assets (at the independent valuation price) that were not purchased by third parties as part of that process; Following this sales process it was envisaged that the Minister would make good any shortfall to NARL if the valuation of the assets acquired by NARL was less than the value of the NARL Bonds issued; Excess assets available following the repayment of NARL would be for the pool of unsecured creditors (including the State as a result of the Eligible Liabilities Guarantee ( ELG ) payments). Benefits of the transaction The benefits of these actions i.e. the replacement of the Promissory Notes for the Government Bonds and the assignment of the CBI s interest in the IBRC assets to a NARL include: The provision of a longer term non-amortising (up to 40 years) portfolio of Government bonds to replace the amortising Promissory Notes ensured the liability to repay is beyond most credit investors time horizon; Spreading the cost of the Promissory Notes from a weighted average life of c. 7 to 8 years to c. 34 to 35 years at a lower funding cost will result in significant annual interest savings for the State; We understand there will be a substantial annual cash flow benefit to the State by replacing the Promissory Notes with non-amortising Government bonds (estimated at c. 2.3 billion in the first year and c. 20 billion over the next 10 years if costs of the transaction are excluded); A reduction in the underlying deficit of c. 1 billion per annum in the coming years (before transaction costs); A reduction in General Government debt over time; and The wind down of IBRC. Ministerial Instructions On 7 February 2013, the Minister for Finance, Michael Noonan issued Ministerial Instructions to the SLs (on foot of the Special Liquidation Order) which set out the details in respect of the manner in which the winding up of IBRC was to proceed. These instructions included: To assist with and provide information to the CBI in the termination of the repurchase agreement dated 24 May 2012 between IBRC and the Bank of Ireland in relation to certain Government bonds (the 2025 Irish Government Bond held as collateral by the CBI was funded through an agreement with Bank of Ireland); To assist with the assignment of debts owing to the CBI including the purchase by NARL of the rights and entitlements of the CBI (including the floating charge over IBRC s assets) under the ELA Facility Deed; To engage professional advisors to: provide independent valuations by employing standard valuation methodologies appropriate to each class of asset of IBRC; and assist and support the SLs with devising and implementing a strategy for the sale of the assets of IBRC. To assist the CBI with respect to the operation of the Deposit Guarantee Scheme ( DGS ); and To assist with and provide information to the National Treasury Management Agency ( NTMA ) in respect to the operation of the Eligible Liabilities Guarantee Scheme ( ELG Scheme ). 17

18 Introduction/overview of the Special Liquidation (continued) Ministerial Instructions (continued) On 10 May 2013, a second set of Ministerial Instructions were issued to the SLs, setting out the valuation methodology to be adopted for the IBRC assets. They also required that the sale of assets should be completed by 31 December 2013 or as soon as practicable thereafter. Further Ministerial Instructions were issued on 20 July 2013 primarily to clarify the definition of IBRC assets in the context of the SL. They also provide that the valuation of the IBRC assets should be completed as expeditiously as possible by not later than 30 November A fourth Ministerial Instruction was issued on 24 April 2014 which removed NARL as a bidder for the assets at the valuation price. Request This report has been prepared for the Minister for Finance following consultation with the Department of Finance and in response to a request for a detailed update report made under Section 17 (c) of the Ministerial Instructions issued on 7 February This report sets out an update on the progress to date in SL for the period 7 February 2013 to 31 March It also details the liquidation fees during this period. Role of the SLs The SLs generally have the same duties, powers and responsibilities as are usually conferred on a Court appointed liquidator, however there are some key differences including that the Minister (and not the Courts) have the principal role in overseeing the winding-up. The SLs replaced the Board and management in IBRC and are winding up its business and operations in the interests of its creditors. As a key part of their appointment, the SLs are overseeing a valuation and sales process for the assets of IBRC. The SLs are winding down IBRC under the supervision of the CBI. The SLs put in place governance structures to ensure effective and efficient delivery of the liquidation across various workstreams. 18

19 Introduction/overview of the Special Liquidation (continued) Restricted preparation period in order to keep planning of the liquidation confidential. Operating new legislation specific to this liquidation. B A C K G R O U N D Unique assignment given the scale of the assets to be realised. The need to deploy significant KPMG resources immediately. Tight deadline to deliver results. Clear message from the Minister for Finance to deliver best outcome for creditors, which includes the Irish taxpayer. Multi-jurisdictional issues given location of operations of IBRC and location of underlying collateral supporting the loan book. Unprecedented scale and complexity of legal issues critical to the process. 19

20 Introduction/overview of the Special Liquidation (continued) Ability to fill key outstanding roles in IBRC. Potential non cooperation of employees and/or contractors. Union issues given termination of employee contracts. Communication strategy both internally Slide and Title externally with key stakeholders. Key issues Multi-jurisdictional issues to deal with. Reaction of critical suppliers/ creditors. Appointment of appropriate advisors. Setting up of new bank accounts/payment mechanisms. Ensuring borrowers continue to pay. 20

21 Introduction/overview of the Special Liquidation (continued) Key work streams Deal A summary of the key work streams are presented below. Each of the work streams set out below necessitated careful management of the relevant legal processes and risks. ALG and Linklaters have been lead legal advisors to the SLs throughout this process. Design, implement and oversee the data preparation, independent valuation and sale process for each of the underlying loan portfolios. Manage the borrower representation process and related legal matters. Loan management Management of existing loan portfolios and lending operations for the commercial and residential portfolios. The workstream deals with borrowers to ensure business as normal continues. Finance/Treasury Preparation of internal and external financial and regulatory reporting. Liquidity and Foreign Exchange risk management. Effective unwind of balance sheet assets not included in the Deal workstream and development of a value realisation strategy for the subsidiaries and joint ventures interests. Regulatory and compliance Liaising with relevant regulatory bodies and ensuring IBRC in SL is compliant with all regulatory and compliance requirements whilst supporting KPMG UK with UK regulatory and compliance issues. Ensuring appropriate governance structures are in place in accordance with CBI/Financial Conduct Authority ( FCA ) guidelines. Key work streams (continued) Operations Oversight of operational functions in IBRC including (1) Lending services; (2) Treasury operations and (3) Supporting UK operations. Loan migration Responsible for oversight and planning for migration of the NAMA PI loan book management to Capita and non NAMA loan portfolio management to respective purchasers and their service providers. Legal and litigation Management of over 1,100 legal cases. Deals with legal issues arising in the course of the SL of IBRC including legacy issues. Recognition issues. Section 56 report and investigation. HR/IT/Facilities Management of all HR and employee matters. This workstream is also responsible for IT, Property and Facilities. Deposits Administration and oversight of the DGS and ELG scheme. Taxation Oversight of IBRC tax affairs to ensure that: - Tax obligations are met on a timely basis; - Tax assets are realised; and - Legacy tax issues are addressed. 21

22 Deal workstream

23 IBRC sales process by numbers 21,700,000, , , billion of loans prepared and brought to market 52 loan sales processes conducted Loans consisted of over 15,000 different borrower groups Collateral was based in 22 different jurisdictions Over 27,000 letters issued to borrowers and guarantors 345 interested parties across 13 countries Non Disclosure Agreements ( NDAs ) signed with interested parties 80,000 3, % Over 80,000 documents were reviewed and uploaded to virtual data rooms ( VDRs ) Over 3,500 property valuations were obtained 201 individual bids were received across 6 portfolios 90% of the loan book transacted 23

24 Transaction background and timeline On 7 February 2013, under the terms of the Irish Bank Resolution Corporation Act 2013, Ireland s Minister for Finance appointed Kieran Wallace and Eamonn Richardson of KPMG as its joint Special Liquidators with a mandate for the orderly winding up of IBRC Irish Nationwide Building Society founded August 2010 Irish Nationwide receives government bailout and is effectively State-owned February 2013 Kieran Wallace and Eamonn Richardson of KPMG appointed as joint Special Liquidators to IBRC November 2013 Valuation of all 21.7 billion of IBRC s assets is completed February 2014 Project Rock, Salt and Pebble trade to the market in their entirety Jan 2013 Jun 2013 Jan 2014 Jun Anglo Irish Bank established January 2009 Anglo Irish Bank is nationalised July 2011 Irish Nationwide and Anglo Irish Bank are merged to create Irish Bank Resolution Corporation Limited December 2013 Significant portion of the Project Evergreen portfolio trades to the market March/April 2013 Significant portions of the Project Sand and Stone trade to the market Key duties included:- Engage and oversee independent professional valuation advisors to obtain a valuation of each loan asset to be used as its benchmark sales price; Organise and mobilise Vendor Assistance and Vendor Preparation teams to source and remediate data, documentation and coordinate legal advisors; Develop a sales strategy and conduct detailed market sounding; Implement and close portfolio and single credit sales processes with market bidders; and Deliver best value for all creditors, including the Irish tax payer. 24

25 An overview of the IBRC loan portfolio The total par value of IBRC s assets which have been brought to the market in the last 6 months has exceeded 21 billion with approximately 90% of this total being sold to third-party investors. No. of Borrower Groups No. of Sales Tranches Gross Loan Balance ( bn) Project Evergreen Corporate loan portfolio; originated in Ireland Project Rock Commercial real estate loan portfolio; originated in the UK secured by primarily UK properties Project Salt Commercial real estate loan portfolio; originated in the UK by subsidiaries of IBRC Project Sand Residential mortgage loan portfolio originated in Ireland 74% Personal Dwelling House ( PDH ) and 26% Buy to Let ( BTL ) mortgages including 28 million leasing book Project Stone 12, Commercial real estate loan portfolio; originated in Ireland secured by primarily Irish and UK properties 1, Project Pebble Portfolio of mixed commercial real estate comprising a mixture of commercial real estate and hotel assets and equity interests TOTAL 15,

26 An overview of the geographical spread of assets The IBRC loan portfolio was supported by collateral based in 22 different jurisdictions worldwide. Project Pebble ( 0.8bn) US CRE, UK hotels and UK and Ireland Shopping Centres Ireland/UK (84%) US (15%) World: other (1%) Project Sand ( 1.8bn) Irish originated Residential Mortgages Ireland (100%) Project Rock ( 5.5bn) UK originated Commercial Real Estate ( CRE ) Loans UK (89%) US (7%) Germany (3%) Europe: Other (1%) Project Evergreen ( 2.5bn) Irish originated Corporate Loans Project Salt ( 1.8bn) UK originated CRE Loans Ireland (93%) Germany (60%) UK (7%) UK (30%) Poland (7%) Europe: other (3%) Project Stone ( 9.3bn) Irish originated CRE Loans Ireland (46%) United Kingdom (33%) Continental Europe (18%) Other (3%) 26

27 Portfolio sale timeline The Ministerial Instructions required that all valuations be complete by 30 November 2013 and the sale of all loans to be agreed or completed by 31 December 2013, or as soon as practically thereafter. Portfolio timeline Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 14 Evergreen (Corporate) 2.5bn Vendor assistance/ valuation preparation Valuation Sales Phase I Sales Phase II Closing Phase 3 Rock Rock (UK CRE) (UK CRE) 5.6bn 5.5bn Salt Salt (UK CRE) 1.7bn (UK CRE) 1.8bn Vendor assistance/ valuation preparation Vendor assistance/ valuation preparation Valuation Valuation Sales Phase I Sales Phase I Sales Phase II Sales Phase II Closing Phase 3 Closing Phase 3 Sand Sand (Irish Resi) 1.9bn (Irish Resi) 1.8bn Vendor assistance/ valuation preparation Valuation Sales Phase I Sales Phase II Closing Phase 3 Stone (Irish CRE) Stone 10.4bn (Irish CRE) 9.3bn Pebble (HNWI) Pebble 0.8bn (Mixed CRE) 0.8bn Vendor assistance/ valuation preparation Vendor assistance/ valuation preparation Valuation Valuation Sales Phase I Sales Phase I Sales Phase II Sales Phase II Closing Phase 3 Closing Phase 3 27

28 Vendor assistance and valuation preparation: overview Vendor assistance and valuation preparation Month Activity Portfolio review and segmentation Assessment of IBRC s 21.7 billion portfolio by origination and across asset classes/geography. Deliverable and output Segmented IBRC s 21.7 billion of loan portfolios including: A B C D E F Activity Activity Activity Activity Activity Performing/Non Performing; CRE, Small and Medium Enterprise ( SME ), Corporate, Residential mortgages and Leasing loans; and Assets spanning mainly Ireland, UK, Europe and the US. Sourcing Key Data, Validation and Gap analysis Identifying reliable sources of data, efficiency of collation and gap analysis. Deliverable and output A combination of desk top review, management discussions and detailed due diligence identified data deficiencies. Focused on key data fields that impact value e.g.: Collateral values; Tenancy data; Payment history; and Security. Created a Valuation VDR. Appointment of advisors including Independent Valuers, legal advisors, real estate valuers and data room provider. Deliverable and output KPMG drafted the Request for Proposal ( RFP ) requirements, evaluated, selected and instructed the Independent Valuers. Instructed Savills as Master Valuer to manage a panel of 12 real estate valuers conducting over 3,500 valuations of properties located in 22 jurisdictions. Managed a panel of 10 key law firms to deal with incumbent firms to review security, title, facility, transfer etc. Commenced data remediation Efficient remediation of data gaps; data integrity and verification. Deliverable and output Commissioned Independent Business Reviews for corporate borrowers. Extensive datatape remediation work. Instructed security reviews for over 90% of the portfolio by value. Updated Real Estate ( RE ) valuations for all connections > 3 million (3,500 CRE and Residential properties). Contacted borrowers for latest tenancy schedules. Borrower Engagement and sales strategy Borrower representations and market interaction informed the sales strategy. Deliverable and output KPMG wrote to each of the borrowers and guarantors. (approximately 27,000) informing them their loans were to be sold. KPMG reviewed each Borrower response and assessed impact on sales strategy. Combining input from Independent Valuers & Sales Strategy Advisors, KPMG finalised the sales strategy. Data and documentation redaction, final review and upload Deliverable and output Liaising with legal advisors, reviewed 80,000 documents, and redacted where necessary, for Confidentiality, Data Protection and Competition issues. Finalised the structure, upload of data and documents for each portfolio VDR. Managed the physical and VDR datarooms for the Independent Valuers and Bidders including Bidder Question and Answers ( Q&A ). 28

29 Valuations and sales process: overview Valuation Sales process: Indicative bids Sales process: Binding bids Sales process: Closing Month A B C D E F Activity Oversight of Independent Valuation process Deliverable and output Discuss Valuation Methodology with Independent Valuers in accordance with Ministerial Instruction. Oversight and challenge of loan and RE valuers. Review of individual connections. Review and challenge of Independent Valuation. Activity Market Sounding Deliverable and output Drafting and implementation of Qualified Bidder criteria to select Phase I bidders Market Soundings with over 340 potential Bidders including strategic investors (for portfolios and single names), Private Equity, pension debt funds, insurers etc Market Soundings conducted in 13 countries including Ireland, UK and USA. Review and sign off of Phase I bidder list. Activity Sales preparation: Design sales strategy and sales process Deliverable and output Lead weekly allparty meetings with KPMG, legal advisors and real estate advisors. Combined input from the Independent Valuers and the market sounding process designed the sales strategy. Developed a TSA. Activity Indicative Bid Phase Deliverable and output Execution of NDAs and Process letters with over 140 parties across six key portfolios. Drafting of bid documents including Loan Sale Deed, Transfer Mechanics and TSA. Management of Bidders. Indicative Bid evaluation versus benchmark price; sign off with the SLs. Finalise listing of parties proceeding to Phase II. Activity Binding Bid Phase Deliverable and output Finalising the Phase II data and documentation. Management of bidder interaction including Q&A and relationship manager meetings. Agree the Loan Sale Deed with the bidders. Provision of additional information including updated cash flow information. Invite, receive and review final binding bids from bidders. Activity Signing and closing Deliverable and output The SLs have signed Loan Sale Deeds for 90% of the 6 portfolios with market bidders within two weeks of receiving bids. Closing procedures including preparing a final portfolio cut-off datatape and a summary of any post binding bid date portfolio movements. IBRC will provide TSA services as agreed with bidders pre-signing. 29

30 Binding Bids Indicative Bids Market sounding and buyer profile We saw strong interest from a variety of financial and strategic buyers and funders, with US private equity houses and hedge funds being key participants across each of the 6 portfolios. Market sounding 345 expressions of interest KPMG conducted an in depth market sounding exercise with expressions of interest received from 345 parties across 13 countries including Ireland, UK and USA, including private equity houses, hedge funds, pension debt funds and insurers. Non-disclosure Agreements Signed 145 NDAs signed Following a comprehensive market sounding exercise, parties were assessed against a pre-defined bidder criteria (Qualifying Bidder Criteria) prior to their selection for participation in the sales process. Total Indicative and Binding Bids (across multiple tranches per portfolio) Project Evergreen Project Rock Project Salt Project Sand Project Stone Project Pebble

31 An overview of Vendor Assistance ( VA ) and Valuation preparation The early organisation and mobilisation of a comprehensive and suitably experienced vendor assistance team was key to the success of this transaction. KPMG finalised the structure and upload of data and documents for each tranche to the VDR. KPMG managed the physical datarooms and VDR for the Independent Valuers and Bidders including the entire Bidder Q&A process. 80,000 documents were uploaded to the VDR with responses provided to 3,000 Q&As in total Liaising with legal advisors, reviewing all documents, and redacting where necessary, for Confidentiality, Data Protection and Competition issues. Data Protection Slide and Title Competition restrictions need to be clearly understood in order to redact sufficient information to be compliant whilst preserving value to the SLs. 80,000 documents were reviewed and redacted for confidential information KPMG wrote to each borrower informing them their loans were to be sold and reviewed each borrower response and assessed impact on sales strategy. Combining input from Independent Valuers and market sounding process, KPMG finalised the sales strategy and wrote back to each borrower to inform them of the outcome. KPMG wrote to approximately 27,000 borrowers and guarantors and reviewed each response received Data and document redaction Final review and uploading Borrower engagement and sales strategy VA and Valuation Preparation Data remediation Portfolio review and segmentation Sourcing key data, validation and gap analysis Appointment of advisors Extensive data collection exercise undertaken and data tape remediation work required. Contacted borrowers for tenancy schedules. KPMG sourced, validated and remediated every datatape and document where possible Segmented IBRC s 21.7 billion of loan portfolios including: CRE, SME, Corporate, Residential mortgages and Leasing loans; Assets spanning Ireland, UK, Europe and the US; and Single names versus Portfolios of loans Total number of tranches offered for sale was 52 comprising over 25,000 individual loans A combination of desk top review and detailed due diligence with a focus on key data fields that impact value:- Loan/borrower level data; Property collateral and tenancy information; Other collateral/security information; and Borrower payment history data. Each datatape comprised over 200 data fields per loan with one datatape prepared for each of the 52 tranches KPMG ran tender processes, evaluated and instructed:- Savills as Master Valuer to manage a panel of 12 real estate valuers in 22 jurisdictions; A panel of 10 key law firms to deal with incumbent firms to review security, title, facility, transfer etc.; and PwC, Valuer A, Deloitte and Eastdil appointed as Independent Valuers. Instructed over 3,500 property appraisals (92% of Real Estate Value ( REV )) and security reviews for over 90% of the loan portfolio value 31

32 Outcome of the sales process 14 months after the SLs appointment, KPMG transacted 90% of the marketed IBRC s loan portfolios to market buyers. Portfolio Type Gross Loan Balance ( bn) % of Total book sold to the Market Date of Sale Current Status Project Evergreen Corporate loans % Dec 2013 Project Rock UK CRE % Feb 2014 Project Salt UK CRE % Feb 2014 Project Sand Irish residential % Mar 2014 Project Stone Irish CRE % Mar 2014 Project Pebble Mixed CRE % Feb 2014 Contracted and completed Contracted and completed Contracted and completed Contracted. Completion 6 June Contracted. Completions in May- July Contracted and completed GRAND TOTAL % The success of the sales process will ensure that there is no residual claim on the Minister for Finance s guarantee in respect of the floating charge held by NARL. 32

33 Successfully mitigating key loan sales risks We successfully managed a transaction of unprecedented scale and complexity in Ireland delivered using a common sense and sleeves rolled up approach Segmentation to maximise interest Strong stakeholder relations Clear and transparent pricing Strict timetables Transparent bid evaluation process Pre-negotiated transaction documents No representations and warranties We listened to understand the market s appetite and its preference in relation to portfolio sizes and composition Segmentation ensured that a maximum number of bidders participated and maximised competitive tension We ensured the Department of Finance was updated on the process by holding weekly and monthly meetings We ensured all information in relation to the sales process remained confidential and any communications were clear We ensured bidders understood the benchmark price mechanism and its key drivers for maximising value We understand bidders approach to pricing these asset classes and ensured relevant information was provided We maintained a strict timetable for each portfolio to minimise delays and provide bidders comfort on deal costs We communicated deadlines to all bidders providing sufficient notice of any changes to prevent them from walking away We ensured all bidders understood the bid evaluation process by issuing clear and concise communications We made it clear that all bids submitted were on a best and final basis to prevent delays and maintain full transparency We ensured all transaction documents were negotiated before the final bid date to provide execution certainty We maintained strong communication lines between legal teams on both sides to ensure issues were resolved immediately We provided loan statements to give bidders comfort on the legality of the underlying claims against borrowers We obtained security reviews and real estate valuations to provide comfort on legal title and views on collateral values 33

34 Loan Management workstream

35 Loan Management workstream: key highlights Managed a team of 384 IBRC Loan Management employees across seven locations in Ireland and the UK. Managed deleveraging of the loan book through the normal course of business in tandem with the loan sales process. Reconstituted commercial and residential credit committees put in place. Considered 3,173 applications at 208 commercial credit committees. Considered 2,915 applications at 122 residential credit committees. Corresponded with all borrowers outlining the implications of the SL for them. Aligned with and supported the delivery timelines of the Deal workstream. Full suite of MARS solutions launched in May Average monthly hours worked by KPMG staff on this workstream: 3,640 hours. 35

36 Loan Management workstream: overview Core liquidation strategy The Ministerial Instruction issued on 7 February 2013 set out the basis on which lending operations could continue in IBRC in SL: SLs can lend funds to any existing customer of IBRC in SL where the SLs consider such lending to be necessary to maintain or preserve the value of the loan asset of IBRC in SL; and The core aim was to preserve and maintain value in the loan book pending sale. Workstream overview The IBRC loan book is split/managed as follows: Specialised Asset Management ( SAM ); Recovery Management Ireland ( RMI ); Residential mortgages (INBS loans); UK loan book; and Residual US loan book (managed through the UK). The gross value of the loan book as of 7 February 2013 is broken down as follows: Gross value of loan book m 07-Feb-13 SAM 7,052 RMI 9,413 UK 7,215 Residential 1,856 US 411 Gross IBRC loan book 25,947 Workstream overview (continued) The Loan Management workstream is responsible for the following principal areas: Stabilising and ensuring effective operation of loan management activities for the loan portfolio; Continue to manage borrower relationships as normal; Restoring and ensuring effective operation of Loan Governance Frameworks and associated operating processes e.g. governance and risk management, loan portfolio management; Establishing what new facilities can be advanced under the remit of the SLs current operating mandate; Ensuring sufficient resourcing is in place to manage the loan book throughout the SL process; Deleveraging of the loan book (other than through loan sales) in an appropriate manner and in line with SL Guidelines; Managed the advancement and collection of in excess of 1 billion through the Invoice Discounting function for SAM borrowers; Developing an appropriate plan to wind down the Loan Management function in a controlled manner as deleveraging is completed; and Attendance of the SLs at the Joint Committee on Finance, Public Expenditure and reform. 36

37 Loan Management workstream (continued) Key actions/achievements Issuing of correspondence informing borrowers of the SLs appointment and details of the DD/EFT/SO process going forward. Reconstituted credit committee put in place made up of a joint Special Liquidator representative, group risk, and IBRC senior management. Credit committee activity for IBRC in SL can be summarised as follows: Guidance provided to lending teams on revised criteria for credit applications. Guidance issued to staff detailing SL operational and control processes put in place in order for IBRC to proceed with: Contractually bound sales; Receivership sales and appointments; Consensual sales; and Release of funds for essential costs. Full suite of MARS solutions launched in May Number of Credit Committees 07 Feb 13 to 19 May 2014 Number of credit committees Panel of valuers appointed to value repossessed properties. Number of applications considered Commercial Credit Committee 208 3,173 Residential Credit Committee 122 2,915 Residential Credit Committee Appeals Board Key actions/achievements (continued) Stratification of Residential Mortgages loan book to target collections and arrears restructuring efforts. Code of Conduct on Mortgage Arrears ( CCMA ) compliance project implemented. Created a stable staffing platform of 80 full time employees supporting a full service proposition for residential borrowers. Contact with residential borrowers up 28% from rates achieved in February Introduced the capacity to measure underlying performance in arrears cases where rate of improvement (cases improving their arrears position) has increased. Letters issued to borrowers inviting them to make representations to the SL. A dedicated KPMG team was established to deal with borrower queries. Agreed a process in order to allow for the continuation of residential sales with specific safeguards in place. Ensured that all on going litigation cases continued to be managed. Engaged with relationship managers to manually collect sterling direct debits which had been halted following the SL. Supported the loan sale process including key customer communications for pre completion as well as developing full operating protocols for post completion period. 37

38 Loan Management workstream (continued) Key issues arising/risks/challenges Previous arrangements for the collection of DD/EFT/SO were inoperable. Risk that borrowers would become un-cooperative following the appointment of the SLs, which would have an adverse impact on cash collection, loan performance and loan value. Case knowledge, borrower relationships and experience diminished following staff departures. Ensuring that sufficient staff and resources at both a loan management and group level were in place to manage and maintain the loan portfolio. Ensuring that the high volumes of cases requiring action were brought to and reviewed by credit committee. Ensuring that the high volume of decisions taken at credit committee were acted on by case managers in accordance with the policies and procedures outlined by the SLs. Ensuring that any deleveraging of the loan book through asset sales was completed in line with the SLs valuation policy. Work remaining/key future actions Ensure that all loan sales are correctly recorded and reflected in the loan management files. Ensure successful management of the staggered loan sale completion process. Ensure loan service agreements entered into with purchasers are delivered by the loan management teams including management of purchasers meetings and queries. Closure of the regional offices. Continue to manage the remaining loan book and develop a plan to meet the loan management requirements throughout the final sales process. Maintaining compliance with regulatory requirements. Replace head of RMI in June 2014 and ensure that the remaining management team is sufficient to continue effective management of the remaining loan book. Continue to manage remaining 185 IBRC Loan Management staff throughout the remainder of the SL and ensure that sufficient skilled staff are retained to manage the remaining loan book. Manage the archiving of files and data to assist with the ultimate winding down of the SL. 38

39 Finance workstream

40 Finance workstream: key highlights Repayment of 10.9 billion to NARL. Managed IBRC finance team of 77 employees across Ireland and the UK on appointment. Management of 1 billion loan facility provided by NAMA. Production of winding up plan for CBI. Preparation and submission of monthly updates and other ad hoc reports to DOF. Oversight of group rationalisation of 293 subsidiaries in 16 jurisdictions. Management of a further 24 financial interests in 24 companies in 6 jurisdictions. Manage hedging of up to Stg 4.7 billion and US$1.5 billion. 40

41 Finance workstream: overview Workstream overview The Finance workstream is responsible for the following principal areas: Ensuring finance function supports operations; Preparation of monthly financial information; Preparation and submission of regulatory results to the CBI and FCA; Preparation and submission of monthly update and other ad hoc reports to DOF; Ensuring the control environment around cash management and accounts payable continues to operate; Deleveraging balance sheet items (other than loan assets) in an appropriate controlled manner; Managing a controlled orderly wind up or divestiture of various subsidiary entities; Managing the cash flow of IBRC; Managing the 1 billion facility provided by NAMA; Developing appropriate plan to wind down finance function in a controlled manner as deleverage is completed; and Supporting the treasury operations of IBRC from an on-going business and liquidation perspective. Key actions/achievements Old pre SL bank accounts were closed with new post SL accounts opened in the required currencies. This allowed collections from borrowers to continue. New processes for the collection of Euro and Sterling DDs were established and implemented. Accounting structure put in place to protect against the risk of IBRC in SL accepting deposits as this was prohibited by the CBI following the SL. Key actions/achievements (continued) Cash flow forecasting process re-established. Operational and control processes put in place for the payment of funds to third parties in respect of loan drawdowns, invoice discounting, accounts payable and NAMA payments/sweeps. Liaised with internal audit to ensure that adequate processes and procedures in place for cash collections and payment approvals. A dedicated cross functional IBRC in SL project team was mobilised to address the volume of reconciling items following the SL. Liquidity and statistical returns completed on a monthly/quarterly basis for submission to the CBI. Reviewing other assets on the balance sheet and determining a strategy in respect of each asset completed. Independent valuations were arranged where appropriate. Cash management process following loan portfolio sales established. Disposal of remaining senior bond portfolio. Managed the derivative valuation and settlement process of terminated trades with a gross notional of approximately 8.3 billion across 30 counterparties. Settlements involved closing out valuation differences, rights of set-off and guarantee claims. These derivatives were terminated by inter-bank counterparties following IBRC entering SL. Entered into replacement hedging derivative transactions with the NTMA. Valuation and technical support to credit teams on corporate derivative transactional activity. Repayment of 10.9 billion to NARL. Agreement and payment of 11.9 million of preferential creditors. 41

42 Finance workstream (continued) Key actions/achievements (continued) Regular engagement with the Department of Finance ( DOF ) as required. This has included: Monthly liquidation and sales update reports; Fee reports as requested; and Meetings with the Minister for Finance as requested. Key issues arising/risks/challenges Following the appointment of the SLs, IBRC was no longer part of the clearing system and the transaction capability of IBRC was impacted as follows: IBRC Nostro accounts (155 accounts) with other banks were ruled ; IBRC s authorisation for DD effectively revoked; No longer permitted to accept deposits. Funds received were required to be applied directly to loan accounts; and Inability to service NAMA borrowers in accordance to SLA requirements. Changes to the existing IBRC information flows required following implementation of controls around credit approval and loan drawdown processes by the SLs. The appropriate regulatory reporting requirements were discussed with the CBI as the SL progressed. Ensuring that the segregation of duties around inputting and authorising of payments continues to be adhered to and that the process is monitored. Work remaining/key future actions Review the monthly accounts for completeness and ensure that loan sales are correctly recorded. Review and potentially reassess the scope of financial reporting requirements as the loan sales progress and the scale and complexity of the remaining business reduces. Review the bank accounts on a regular basis and sweep all available cash into the main SL bank accounts. Close bank accounts as the loan sale process concludes and accounts are no longer required. Monitor the DD processes to ensure no issues. Continue to meet with the reconciliations team to ensure that outstanding items are cleared in a timely manner. Continue the approvals for payments via the various channels and amend processes as appropriate as the loans are sold. Review the finance staffing requirement and backfill where necessary for critical roles. Monitor the cash flows and ensure that excess monies are either paid to NARL or are placed on deposit to maximise returns. Review the liquidity and statistical returns with the CBI as the assets reduce and assess the necessity to continue to produce some/all of the returns. Continued management of other treasury activities. 42

43 Legal workstream

44 Legal workstream: key highlights Management of over 1,100 legal cases. Management of over 20 legacy and public interest cases. Dealt with over 240 data access requests. Obtained recognition of the SL in two jurisdictions. Retrieved title and security documentation pertaining to over 3,000 facilities. Investigation on conduct of directors and will report to the Office of the Director of Corporate Enforcement ( ODCE ). Average monthly hours worked by KPMG staff on this workstream: 392 hours. 44

45 Legal workstream: overview The legal workstream review and mange current litigation/legal cases taken by or against IBRC (in SL) The legislation under which the SLs were appointed contained provision for a stay on all legal proceedings being taken against IBRC in SL. We dealt with litigation matters to ensure that the asset positions of IBRC in SL were not prejudiced and to avoid risk to the assets and to asset recovery. IBRC in SL is a party to over 1,100 legal cases Litigation Legacy Issues There are over 20 legacy and public interest cases which the SLs are continuing to pursue. The SLs assess the merits of litigation cases being pursued and develop appropriate strategies taking into account the commercial benefit, legal costs, public interest in continuing/discontinuing proceedings. The SLs are managing over 20 legacy and public interest cases The legal workstream deals with general letters of litigation and borrowers correspondence. On appointment, we put a protocol in place for dealing Slide with new and Title ongoing instructions, preliquidation fees, solicitors liens being exercised and ensuring appropriate controls are in place. We have dealt with over 240 data access requests since appointment. The SLs have dealt with over 240 data access requests Data Access Requests Recognition of the SL Legal Independent Review Collateral Retrieval Conduct of Directors The Collateral Retrieval Team is tasked with the following: Identifying the location of security/title documentation and documents schedules for circa 2,666 properties; Identifying security documentation for circa 945 nonproperty collateral items; and Managing legal firms to review security, title, facility, transfer etc. Retrieved The SLs title have and dealt security with over documentation 350 law firms. pertaining to over 3,000 facilities Chapter 15 recognition of SL was obtained in the US on 18 December The SLs have also obtained legal recognition of the Special Liquidation in Switzerland. This has enabled the SLs to file a formal claim in the Lehman Brothers liquidation. The SLs have instructed Eugene F. Collins Solicitors to independently review legal advice previously provided regarding proceedings against former Directors of INBS. The SLs have carried out an investigation into the conduct of each of those persons who acted as directors of IBRC within the twelve months preceding 7 February The SLs will submit a report on the conduct of the directors of IBRC to the ODCE. Recognition of the SL has been obtained in two foreign jurisdictions Independent review of legal advice. The SLs have investigated the conduct of the directors of IBRC and will report to ODCE 45

46 Regulatory and Compliance workstream

47 Regulatory and Compliance workstream: Key highlights Managed IBRC Group compliance team of 17 employees across Ireland and the UK on appointment. Oversight of IBRC s compliance with CBI and FCA regulations and codes of conduct. Managing the ongoing relationship with the CBI with regular meetings. Revising IBRC s Corporate Governance structures, including delegated authorities. Worked with the FCA to stand down their Section 166 review into the mis-selling of interest rate hedges. Supervision of ongoing reporting obligation to the CBI. Acting as administrators to the Investor Compensation Scheme for IBRC. Average monthly hours worked by KPMG staff on this workstream: 719 hours. 47

48 Regulatory and Compliance workstream: Overview The SL of IBRC resulted in the CBI revoking its banking license. IBRC continues to operate with the consent, and under the supervision of the CBI. Workstream overview The Regulatory and Compliance workstream is responsible for ensuring that IBRC adheres to a broad range of legislation, regulation and regulatory guidance. The workstream acts as a point of contact between the SLs and IBRC s Compliance function. The workstream also provide advice to other workstreams in the course of their activities. Areas of regulation that IBRC has to comply with are as follows: CCMA; The Consumer Protection Code; Code of Conduct on Lending to Small and Medium Sized Enterprises; The Minimum Competency Code; Fitness and Probity; Anti Money Laundering legislation and guidelines; and Data Protection. Key issues arising/risks/challenges Establishing collection arrangements for customers without breaching the CBI requirement that IBRC in SL could not take deposits. The FCA Section 166 investigation into the mis-selling of interest rate hedging products. Working with IBRC Compliance to close gaps identified in IBRC s Code of Conduct on Lending to Small and Medium Sized Enterprises. Key actions/achievements Established and managed lines of communication between the CBI and the SLs. Worked with the FCA to stand down their Section 166 investigation of IBRC with regards to the mis-selling of interest rate hedging products. Revised the corporate governance and delegated authority frameworks. Revisions were required to support the operations of a bank in an orderly wind-down. Provided regulatory advice and support across other workstreams, in particular with regard to establishing banking arrangements to deal with cashflows and also with regard to customer communications. Reached agreement with the CBI to reduce the regulatory reporting requirements of IBRC, thereby freeing up resources to work on other finance initiatives. Worked with Finance, IT and Treasury operations to deliver European Market Infrastructure Regulation ( EMIR ) reporting on time. Work remaining/key future actions Ensuring IBRC maintains its regulatory obligations until all assets have been sold. Applying to the CBI for permission to carry on with certain excluded activities to 31 December Concluding activities as administrator to the Investor Compensation Scheme for IBRC. Conflicts of interest Conflicts of interest have been raised by a number of parties during the course of the SL. The SLs adopt policies and procedures which are utilised by KPMG in assessing and managing conflicts of interest. The SLs are confident that any conflicts of interest that have arisen have been appropriately managed and do not pose a threat to independence issues. This has been confirmed to DOF. 48

49 Regulatory and Compliance workstream: Corporate governance structure of IBRC (in SL) Governance structures The liquidation of IBRC resulted in the immediate dissolution of its governance structures, including the Board of Directors, Risk and Audit Committees and other Board sub-committees such as the Asset and Liability Committee ( ALCO ). Delegated authorities appropriate to an entity in liquidation were also drawn up with immediate effect. The regulatory and compliance workstream worked with ALG and IBRC to re-constitute governance arrangements that provide structures to assist with the orderly wind-up of a credit institution that remains subject to the supervision of the CBI. Following re-constitution, the first key action of the governance forums was to validate or modify IBRC s pre-liquidation policies and procedures, including delegated authorities. A diagram setting out the governance structure is provided on page 51. The terms of reference for the committees are summarised in the table below: In addition, there was also significant reporting to various stakeholders as outlined in the Finance section. Committee Supervisory Committee Credit Sanctioning Authorities Senior Management Meeting Summary The Supervisory Committee is responsible for: oversight of IBRC in SL; overseeing the risk profile and implementation of the strategy for the liquidation/winding Up Plan in adherence to Ministerial Instructions as well as management of legacy matters; and monitoring the system of internal controls. Members of the Supervisory Committee are Kieran Wallace (Chairman), Eamonn Richardson and John Hansen (KPMG partner). Members of IBRC s senior management and other KPMG partners also attend. Decision rights reside solely with the SLs, save for any delegated authorities confirmed in writing. The role of credit sanctioning authorities is to approve, monitor and control credit risk (including banking and treasury credit risk). Credit sanctioning committees were originally divided up into the Group Credit Committee ( GCC ) (for commercial loans in excess of 20 million) and all UK credits, the Local Credit Committee ( LCC ) (for commercial loans up to 20 million) and the Residential Mortgage Credit Committee ( RMCC ). Credit committees for GCC and LCC are held weekly. RMCC is held up to three times per week. The GCC and LCC were merged in March The GCC was chaired by the Chief Risk Officer ( CRO ) and the LCC by a member of IBRC Credit Risk. Members included representatives from Group Credit Risk and one of the Supervisory Committee (Kieran Wallace (Chairman), Eamonn Richardson or John Hansen). IBRC staff were invited to attend for the purposes of presenting to the committees. The credit committees can approve group credit exposures within Commercial and Residential Credit and Recovery policies as well as approving individual credit applications within delegated authority from SLs. Credit was sanctioned in limited circumstances where necessary to protect underlying loan value. The Senior Management Meeting has been delegated authority from the SLs to manage IBRC s day-to-day affairs. Its role is to: propose the policies, processes and standards under which IBRC will execute the wind up strategy; assist in developing the work-out plan for submission to the SLs; and oversee implementation of the agreed work-out plan in support of the SL. The Meeting is chaired by Declan Keane (KPMG partner) and its members include IBRC senior management and KPMG workstream leaders. 49

50 Regulatory and Compliance workstream: Corporate governance structure of IBRC (in SL) (continued) Committee Summary ALCO The ALCO has no decision making authority. The ALCO proposes and makes recommendations to the Supervisory Committee for their approval in relation to the risk control framework, hedging strategies and transactions and asset, liability and liquidity management. The role of the ALCO is defined as: The identification, management and monitoring of foreign exchange, interest rate risks, liquidity, funding and regulatory reporting; reviewing hedging and funding requirements of the balance sheet and IBRC s risk profile; and proposing and recommending hedging strategies and transactions to the Supervisory Committee for their approval. The ALCO is chaired by Declan Keane (KPMG partner) and its members include Eamonn Richardson and IBRC senior management across treasury, risk and finance as well as other KPMG staff. Equity Investment Committee Internal Audit Asset Quality Forum Residential Mortgages Risk Management Committee The Equity Investments Committee ( EIC ) has no decision making authority but will make recommendations to Supervisory Committee as the sanctioning authority. The Committee is charged with dealing with requests from the subsidiaries in which IBRC holds equity shares. The Committee is chaired by a KPMG workstream leader and its members include Eamonn Richardson and the CRO. The role of Internal Audit is to manage a continuous auditing platform in order to provide assurance on the day to day operation of IBRC s internal control, risk management, and governance procedures during the liquidation process to all stakeholders as key processes change due to the liquidation status. Internal Audit focus is on those areas with heightened risk or regulatory requirements. Slide Title Internal Audit carry out investigative work on specific control weaknesses or incidents and independently investigate staff as required by IBRC s disciplinary procedures. Internal Audit continue to act as protected disclosure officer and owner of IBRC s whistle blower policy. Internal Audit are also charged with the completion of various legacy related internal audit requests in relation to both INBS and IBRC. Other Internal Audit activity includes: on-going participation in risk and control committees as observer; following up and validation of relevant audit recommendations, including a continuation of reporting to CBI on progress with outstanding audit recommendations; and mandatory audit assignments and coverage which is still deemed relevant for CBI and the European Banking Authority ( EBA ). Slide Title The Asset Quality Forum formed part of IBRC s management of commercial credit risk and was chaired by the CRO and met on a monthly basis. Its purpose was to: review of the circumstances and assumptions underlying an estimated movement in provision; ensure consistency of approach on provisioning across ROI and UK; and endorse the assumptions and resulting move in the provision. The Asset Quality Forum ceased in November 2013 and alternative monitoring arrangements put in place via Group Risk on provision movements, with all movements > 10 million reported to GCC. The RMRMC formed part of IBRC s management of retail credit risk (primary dwelling and residential investment property). Its purpose was to oversee at a portfolio level arrears management, impairment levels and make recommendations on policy related matters. The RMCC has no decision making authority and recommendations are made to Supervisory Committee. The RMRMC is chaired by the CRO and its members include senior management across residential mortgage business, as well as risk and finance 50

51 Regulatory and Compliance workstream: Corporate governance structure of IBRC (in SL) (continued) Supervisory Committee * (sole authority is vested in the SLs) Internal Audit Asset & Liability Committee Credit Sanctioning Authorities (GCC/LCC/RMCC) Senior Management Meeting Equity Investment Committee Note: Has decision making authority (delegated by SLs). No Decision Making Authority.. 51

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