Basel 2 Pillar III Disclosure as at December 31, 2010

Transcription

1 Basel 2 Pillar III Disclosure as at December 31, 2010

2 BASEL 2 THIRD PILLAR AS AT 30 JUNE 2008

3 Contents Table 1 General requirements Table 2 Scope of application...29 Table 3 Supervisory capital structure.57 Table 4 Capital adequacy.61 Table 5 Credit risk: general disclosures for all banks..69 Table 6 Credit risk: disclosures for portfolios treated under the standardized approach and specialized lending and equity exposures treated under IRB approaches...81 Table 7 Credit risk: disclosures for portfolios treated under IRB approaches. 85 Table 8 Risk mitigation techniques (CRM)..137 Table 9 Counterparty risk Table 10 Securitization transactions 155 Table 11 Market risks: disclosures for banks using the internal models approach (IMA) for position risk, foreign exchange risk and commodity risk Table 12 Operational risk Table 13 Equity exposures: disclosures for banking book positions..179 Table 14 Interest rate risk on positions in the banking book Glossary / Abbreviations Declaration by the Senior Manager in charge of drawing up Company Accounts..188

4 Notes: 1. All the amounts, if not differently specified, are expressed in Euro thousands. 2. Data are referred to the prudential scope of consolidation. 3. Any discrepancies between data given in the document are due to the effect of rounding. 4. Both as regards the standardized approach and the IRB methodology, non-weighted amounts concerning guarantees given and commitments to disburse funds were considered based on the credit equivalent and not on the exposure s nominal amount as in previous reports. Non-weighted amounts as at December 31, 2009 were restated for comparative purposes. BASEL 2 THIRD PILLAR AS AT 30 JUNE 2008

5 Table 1 General requirements >> Basel 2 Third Pillar Table 1 Qualitative disclosure UniCredit Group monitors and manages its risks through rigorous methodologies and procedures proving to be effective through all phases of the economic cycle. The control and steering of the Group risks are exerted by the Holding Company Risk Management function (Group CRO), to which have been assigned the following tasks: optimizing asset quality and minimizing the cost of the relevant risks, in line with the risk / return targets assigned to each business area; determining, in concert with the CFO function, the Group s risk appetite and evaluating its capital adequacy, and cascading it to the Business Areas / Legal Entities, within the Internal Capital Adequacy (ICAAP), consistently with Basel II Pillar II requirements; defining - in compliance with Basel II standards and Bank of Italy requirements the Group rules, methodologies, guidelines, policies and strategies for risk management, and, in cooperation with the Organisation department, the relevant processes and their implementation; setting up a credit and concentration risk control system both of single counterpart / economic groups and significant clusters (e.g. as industrial areas / economic sectors), monitoring and reporting the limits beforehand defined; defining and providing to the Business Areas and to the Legal Entities the valuation, managerial, monitoring and reporting criteria of the risks and ensuring the consistency of systems and control procedures both at Group and Legal Entity level; supporting the Business Areas to achieve their targets, contributing to products and to business development; verifying, by means of the initial and ongoing validation process, the adequacy of the risk measurement systems adopted throughout the Group, steering the methodological choices towards higher and homogeneous qualitative standards and controlling the coherence of the usage of the above systems within the processes; setting up an adequate system of preventive risk analysis, in order to quantify the impacts of a quick worsening of the economic cycle or of other shock factors (i.e. Stress Test) on the Group s economic - financial structure. This holds for single risk types as well as their integration and comparison to available capital; creating a risk culture across the whole Group. Throughout most of 2010, operating performance of corporates staged an impressive rebound. However, monetary stimulus created by central banks, called Quantitative Easing, did not unfold to the same extent in all countries. In particular, European countries with excessive debt burden are still under intense pressure to take corrective measures and fiscal discipline which will ultimately slow down the economic recovery in their respective home markets. Consequently, hugely diverging economic trends have been witnessed with some countries like Germany exhibiting a strong upswing in industrial productivity whereas others observed only moderate increases. Credit quality of larger corporates, especially within cyclical industries, benefited from the surge in international demand, both domestic and foreign. Although the trend is clearly positive, it did only partly filter through to risk costs which typically lags the economic indicators. 5

6 In light of the still challenging macroeconomic environment, a sound and effective risk management has highest priority within the Group. Therefore the Group CRO has implemented a new risk governance model emphasizing this guiding principle and aimed to: strengthen the capacity of steering, coordination and control activities of some aggregated risks (so called Portfolio Risks ), through dedicated responsibility centres ( Portfolio Risk Managers ) totally focused and specialized on such risks, from a Group and cross divisional perspective; enhance coherence with the Group business model, ensuring clear specialization and focus from a purely transactional perspective - of specific centres of responsibility ( Transactional Risk Managers ) on risks originated by the Group risk taking functions (i.e. Business units, Treasury, Asset Management, CEE countries), keeping these centres of responsibility totally independent from the latter. Consistently with the Risk Management architecture, and in order to strengthen the capacity of independent steering, coordination and control of Group risks, to improve the efficiency and the flexibility on the risk decision process and to address the interaction between the relevant risk stakeholders, three distinct levels of Risk Committees are in place: the "Group Risk Committee" being responsible for the Group strategic risk decisions; the "Group Portfolio Risks Committees", tasked with addressing, controlling and managing the different portfolio risks; the "Group Transactional Committees" that will be in charge of evaluating the single counterparts / transactions impacting the overall portfolio risk profile. Credit risk Structure and Organization The Group Risk Management framework aims at ensuring the right balance between "risk type" and "risk origination area specialization" (e.g. F & SME, CIB & PB, Treasury, etc) by adopting a matrix approach. Group portfolios will be clustered by risk type ("credit and cross-border risks", "market risks" and "operational & reputational risks") and will intersect with transactions grouped on risk origination areas, so called Transactional Risk Managers o SBA Risk Functions. With reference to credit risk, the matrix approach entails two different responsibility centres. On the one side the "Credit Risks Portfolio Management department, which oversees and manages the overall credit and cross-border risk profile of the Group defining all the relevant strategies, methodologies and limits. On the other side, the "Transactional Risk Managers" are the responsibility centres for the credit risks originated by related "risk origination" areas. Besides the Portfolio Risk Managers and Transactional Risk Managers, the new Risk Management set-up comprises: the Risk Management Control department, responsible for, among the others, o the management of Basel II activities (including measurement of internal capital according to Pillar II, definition of the risk appetite and the "ICAAP" coordination), o the internal validation of risk measurement models o rating assignment to some relevant counterparts (Top Banking, Top Corporate), and rating override GRM Operating Office department responsible for, among the others, Group risk reporting "Special Credit department responsible for coordinating, addressing, supporting and with reference to relevant files - managing restructuring and workout activities. BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010 BASEL 2 THIRD PILLAR 6

7 >> Basel 2 Third Pillar Table 1 In order to ensure adequate development of risk management activities before managed by the commercial banks merged within One4C project, the organization structure has been partially reviewed extending the responsibilities of some functions or creating new structures. With particular reference to the management of credit activities, the following structures have been set-up: Credit Operations Italy department reporting directly to the Group CRO and organized by credit chains (i.e. F & SME, CIB, PB ) responsible for: o the management of underwriting activities for UniCredit S.p.A. Customers performing the evaluation of the Counterparties credit worthiness the decision - in accordance with the powers delegated of the credit line proposals, or the submit of same to the competent deliberative Bodies; o overseeing the post-decision phases of the credit process and monitoring the performance of positions; Individuals Credit Operations, under F & SME SBA Risk Transactional Risk Manager, responsible for the same activities assigned to Credit Operations Italy concerning Household Financing Business Unit credit products. In order to strengthen the capacity of independent steering, coordination and control of Group risks, to improve the efficiency and the flexibility on the risks decisional process and to address the interaction between the relevant risk stakeholders, dedicated Risk Committees have been set-up: the "Group Risk Committee" being responsible for the Group strategic risk decisions; the Group Credit Committee, in charge of discussing and approving credit proposals of any position, including restructuring and workout files, relevant strategies and corrective actions to be taken (including classification of status when applicable) for watchlist files, specific limits for transactions related to Debt Capital Markets, single issuer exposure limits on Trading book; the "Group Credit and Cross-Border Risk Committee, responsible for controlling and monitoring credit and cross-border risks, including approval of risk strategies, policies, methodologies and limits as well as regular reporting; the "Group Transactional Credit Committee", in charge of discussing and approving, within the delegated powers, credit proposals excluding restructuring and workout files override requests, relevant strategies and corrective actions to be taken (including classification of status when applicable) for watchlist files, specific limits for transactions related to Debt Capital Markets, single issuer exposure limits on Trading book; the Italian Transactional Credit Committee, in charge of discussing and approving, within the delegated powers, credit proposal related to the Business Unit CIB Italy Network, PB Italy Network and F&SME Italy Network ; the Group Special Credit Committee, in charge of evaluating restructuring or workout files and monitoring the overall restructuring and workout portfolio development. Within the Holding Company risk management model redesign, a further step has been taken with the introduction of the "Global Credit Portfolio Management (GPM)". Leveraging on the expertise of these credit portfolio managers, they carry a leading role in strategically important definition and implementation of industry credit risk strategies which includes the development of credit target portfolios consistent with strategic business and risk ambitions. Furthermore, GPM is responsible for the frequent and regular monitoring of the credit portfolio to ensure a forward looking approach of industry developments, providing an early identification of potential sector and customer problems while supporting revenue opportunities to maximize risk return. Beside the single name transactional point of view, the impact of any new transaction on the credit portfolio is thoroughly assessed and considered in the decision making process. Consequently, a purposeful management and active shaping of the Group credit portfolio in close cooperation with the loan origination activity is achieved. 7

8 With the objective of providing best in class service to large multinational clients, increasing value creation, defining an effective and consistent credit appetite at UniCredit Group level towards customers and/or economic groups, which have relationship with several Legal Entities, minimizing the cost of risk and implementing an efficient credit process, UniCredit Group redesigned the global approach to serve (both from a commercial and a credit point of view) the above mentioned segment of customers. The new service model (the GAM, Global Account Management ) provides for a global coordination of commercial strategy and definition of global credit risk appetite towards the managed counterparts. Dedicated relationship and risk managers have been identified as unique reference points for client group s global commercial and credit strategy coordination, for the global credit position evaluation and its risk profile monitoring. Governance and policies Relations between the Holding Company and Group Legal Entities carrying out credit business are defined by specific governance rules, assigning the role of guidance, support and control to the Holding Company, in the following areas: credit policies, credit strategies, models development, rating systems validation, credit concentration risk, issuance of credit products, monitoring and reporting portfolio credit risk. In particular, Group Legal Entities have to request the Risk Management function s opinion before granting or reviewing credit lines to individual borrowers or economic groups, whenever they exceed defined thresholds, also with reference to the obligation of compliance with the credit risk concentration limits that has to be measured with the supervisory capital. According to the role assigned to the Holding Company, specifically to the Risk Management function under Group governance, General Group Credit Policies define group-wide rules and principles to guide, govern and standardise the credit risk assessment and management, in line with Group principles, regulatory requirements and best practice. The general rules are supplemented by specific rules governing defined subjects (business areas, segment activities, type of counterpart / transaction, etc.). Hereunder some examples are provided. For Financial Institutions, Banks and Sovereign counterparts, the related Group credit policy was revised in February 2010 aiming at creating an efficient and comprehensive framework for the risk assessment, evaluation and management of credit business with such counterparties and with a specific focus on a strict Group-wide limit management system. Moreover a dedicated policy for the crisis management framework for Financial Institutions and Banks has been issued, while in order to ensure a uniform assessment and monitoring approach and to define group-wide rules and principles for the governance of country limits, the related policy has been revised. As far as credit risk mitigation is concerned, reinforcing the existing general credit guidelines, two special policies have been issued: i) "Collateral Management for OTC derivatives and Repo and securities lending business", aiming at defining an efficient and comprehensive framework for collateral management within UniCredit Group in order to safeguard the bank from avoidable risk-taking; ii) "Structured credit risk mitigation transactions approval process and activities", strengthening the rules to assess the economic risk transfer and to ensure risk mitigation of the underlying portfolio. BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010 BASEL 2 THIRD PILLAR 8

9 >> Basel 2 Third Pillar Table 1 Furthermore dedicated group policies have been issued on Project Finance, Acquisition and Leveraged Finance as well as on assessment, evaluation, monitoring and management of underwriting risk limits for the syndicated loan, in addition to the existing ones on Commercial Real Estate Financing and on Structured Trade and Export Finance (STEF). Finally the Group rules concerning the classification and management of risky positions and recovery process as well as the management of general provisions using the "Incurred But Not Reported Losses" (IBNR) method, aging of the counterpart / transaction rating), have been integrated with a policy on Debt / Equity swap transactions. Within the One4C project, an extensive review of the credit manuals of the Legal Entities included in the project perimeter has been started, aiming at providing the new bank with an up-to-date and coherent credit rules framework. Management and Measurements method Credit Risk generally represents the risk of losses of the value of a credit exposure arising from an unexpected worsening of the counterparty's credit quality. For the purpose of credit risk measurement, credit risk is defined as the risk of incurring losses arising from the possibility that a borrower, counterparty or an issuer of a financial obligation (bond, note, etc.) is not able to repay interest and/or principal or any other amount due (Default Risk). In a wider sense, credit risk can also be defined as potential losses arising either from a default of the borrower / issuer or a decrease of the market value of a financial obligation due to a deterioration in its credit quality (migration risk). The latter one includes not only the default risk but also the risk of rating migrations or credit spread change. For the time being for credit risk measurement the Group is focusing only on default risk; the market based approach to credit risk measurement might be applied in the future. Credit risk is measured by single borrower / transaction and for the whole portfolio. The tools and processes used for lending to single borrowers during both the approval and monitoring phases include a credit rating process, which is differentiated by customer segment / product to ensure maximum effectiveness. For companies, the assessment of a counterpart s creditworthiness, within the credit proposal evaluation, begins with an analysis of the financial statements and the qualitative data (competitive positioning, corporate and organisational structure, etc.), regional and industry factors and counterpart behaviour within the Legal Entity and the banking system (e.g., Centrale dei rischi ), and results in a rating, i.e. the counterpart s probability of default (PD) on a one-year time horizon. Regular monitoring focuses on the borrower s performance management, using all available internal and external information in order to arrive at a score representing a synthetic assessment of the risk associated. This score is obtained using a statistical function that summarizes available information using a set of proven significant variables that are predictors of an event of default within a 12 months horizon. When applicable, the internal rating, or risk level assigned to the customer / transaction, forms a part of the lending decision calculation. In other words, at a constant credit amount the approval powers granted to the competent Bodies are gradually reduced in proportion to an increased borrower-related risk level. The organizational model in use includes also a dedicated function, which is separated from loan approval and business functions and is responsible for the management of the so-called rating overrides, i.e. any changes to the automatic rating calculated by the model. 9

10 Each borrower s credit rating is reviewed at least annually on the basis of new information acquired. Each borrower is also assessed in the context of any economic group with which it is affiliated by, as a general rule, taking into account the theoretical maximum risk for the entire economic group. Besides the methodologies summarized in the rating systems, the risk management function uses portfolio models enabled to measure credit risk on an aggregated portfolio basis and at the same time to be able to identify sub-portfolio, or single obligor contributions to the overall risk position. There are three fundamental portfolio credit risk measures that are calculated and are evaluated on a one year time horizon and on a non discounted basis: Expected Loss (EL), Credit Value at Risk (Credit VaR) and Expected Shortfall (ES). In order to derive the Credit VaR of the portfolio, the portfolio loss distribution is specified; it is represented by the probabilities of getting different values of the portfolio loss on the given time horizon ( discrete loss case ). The specification of such a distribution is obtained combining single obligors default probabilities (PD), losses given default (LGD) and exposures at default (EAD) considering the correlations among the defaults. The Expected Loss (EL) represents the aggregated average expected loss of the portfolio due to potential defaults of the obligors. The EL of the portfolio is just the sum of the single obligor ones, which can be evaluated as the product of PD x LGD x EAD, and is independent from the default correlations in the portfolio. EL is typically charged as a cost component in the margin. Value at Risk represents the maximum amount by which, at a given probability, the expected loss might be exceeded (= Value at Risk at α confidence level which for UniCredit is defined at 99.97%). Such value, also named Economic Capital, is an input for the definition of the amount of the capital to cover the potential losses. VaR is a widely used measure of portfolio risk but it has some intrinsic limitations. In particular it does not provide information on potential losses in case the VaR limit is exceeded. Such information is provided by the Expected Shortfall (ES) that represents the expected value of losses that exceed the VaR threshold. Portfolio Credit VaR and ES strongly depend on default correlation and can be reduced by portfolio diversification. The credit portfolio models produce also measures of economic capital reallocated by individual borrowers within each portfolio and are the basis for risk-adjusted performance measures. The measures of economic capital (Credit VaR) are also a fundamental input for the design and application of credit strategies, the analysis of credit limits and risk concentration. The economic capital calculation engine is also used for the analysis of stress tests of the credit portfolio, starting from macroeconomic variables that affect the various customer segments, by Country, size, etc. All the above mentioned risk parameters are subject to an initial validation and a regular monitoring process for each rating system in all its components: models, processes, IT architecture and data quality. On an annual basis, a final validation report, which summarizes the outcomes of the validation activities performed by the Group CRO function, also focusing on the comparison of the different rating systems within the same segment, is brought to the Board of Directors attention. BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010 BASEL 2 THIRD PILLAR 10

11 >> Basel 2 Third Pillar Table 1 The aim is to give evidence of the systems compliance even though highlighting improvement areas as well as possible misalignments in the methodologies, which could limit the full comparability among the resulting risk measures. The internal Credit VaR model is also subject to assessment in the context of Basel 2 - Pillar 2 validation. Reporting and Monitoring The fundamental objective of the reporting and monitoring activities performed by the CRO function is the analysis of the main drivers and parameters of credit risk (exposure at default ( EAD ), expected loss ( EL ), migration, cost of risk etc.) in order to promptly initiate any counter-measures on portfolios, subportfolios or individual counterparts. Group CRO function performs the reporting for credit risk at portfolio and individual counterparty level, producing reports at Group level, both recurring and specific (on demand of Senior Management or external entities, e.g., regulators or rating agencies) with the objective of analyzing the main risk components and their development over time, and thus to detect any signals of deterioration at an early stage and, subsequently, to put in place the appropriate corrective initiatives. The performance of the credit portfolio is analyzed with reference to its main risk drivers such as growth and risk indicators - customer segments, industrial sectors, regions and the performance of credits in default and the relevant coverage. Portfolio reporting activities at Group level are carried out in close collaboration with the Divisional Risk Officer and the Credit Risk Portfolio Managers that, within their respective perimeters, implement their specific reporting activities. Starting from the second half of 2010, reporting activities are performed by two dedicated CRO functions, the Group Risk Reporting unit and the Group Credit Portfolio Reporting team. The Group Risk Reporting unit is in charge of risk reporting, by leveraging on and making use of the data and information supplied by other competent structures of the "Group Risk Management". The Credit Risk Portfolio Reporting team is ensuring, in collaboration with the competent functions of the "Group Risk Management Operating Office department, the reporting regarding the overall Group credit risk with detail of the geographical area and Business Units, directly producing the data related to the CIB&PB SBA and collecting and aggregating the data related to the Families & SME SBA and to the CEE countries provided by the F&SME Risks department and "CEE Risks Officer. Within 2010 overall reporting activities developed further thanks to the gradual improvement in the quality of data and processes supporting the consolidated reporting (i.e. development of a report on Enterprise Risk Management, the ERM Report ). The Group Risk Reporting function, at central level, also uses the Credit Tableau de Boards, a quarterly instrument which contains detailed information on the trends in the risks of the Strategic Business Area, to support the production of the aforementioned reports. The monitoring activity was enhanced in order to promptly capture signs of deterioration of the credit quality of customers. The timely identification and proper management of exposures with increased risk allow to intervene at a phase preceding potential default, when there is still the capability for repayment. Dedicated Group CRO reporting functions perform the reporting for credit risk at portfolio and individual counterparty level with the objective of analyzing the main risk components and their development over time, and thus to detect any signals of deterioration at an early stage and, subsequently, to put in place the appropriate corrective initiatives. 11

12 Credit Strategies According to Pillar II provisions, credit risk strategies for the Group s credit portfolio are an advanced credit risk management tool. Consistent both with the budget process and with Pillar II / Risk Appetite framework, they are aimed to provide the concrete deployment of risk appetite targets by Strategic Business Area and Legal Entity, considering the expected vulnerability of the Group credit portfolios to adverse economic downturns as well as the quantification of the sectorial concentration risk. Credit risk strategies aim to obtain a threefold goal: to define the optimal credit portfolio risk profile by minimizing the overall credit risk impact, starting from the risk appetite framework, in line with the Group s capital allocation and value creation criteria; to provide support to the responsible functions and Strategic Business Areas at Holding Company and Legal Entities level when the latter take measures to optimise the portfolio reshaping through strategic plans and business initiatives; to provide a set of guidelines and support when drafting business and credit risk budgets, in line with the Group s strategic vision. Credit risk strategies are defined by synthesizing the top-down risk analysis with the portfolio view of the business functions, through a strict cooperation among the centralized and divisional Risk Management Departments and the Group Credit Portfolio Managers specialized on industries and products. Credit risk strategies are implemented by using all available credit risk measures, especially the credit VaR model, which enables correct and prudent management of portfolio risk, using advanced methodologies and tools. In parallel a set of qualitative information, taking into account the different divisional / territorial characteristics, are incorporated and transformed in input variables for the credit portfolio optimization models. More generally, as part of credit risk strategy, vulnerability and Capital Adequacy support analysis are performed through the credit risk stress test (Pillar I and Pillar II). Portfolio risk management pays special attention to credit risk concentration in light of its importance within total assets. Such concentration risk, according to the Basel II definition, consists of a single exposure or of a group of correlated exposures with the potential to generate losses of such magnitude as to prejudice the Group s ability to carry on its normal business. In order to identify, manage, measure and monitor concentration risk, the Holding Company competent functions defines and monitors credit limits to cover two different types of concentration risk: significant amount credit exposures to a single counterpart or to a set of counterparts economically connected ( bulk risk for Multinationals, Financial Institutions and Banks); credit exposures to counterparts belonging to the same economic sector ( sectorial risk ). Stress test simulations are a comprehensive part of credit risk strategies definition. With stress test procedure it is possible to re-estimate some risk parameters like PD, Expected Loss, economic capital and RWA under the assumption of extreme but plausible macroeconomic and financial stressed scenario. Stressed parameters are used not only for regulatory purposes (Pillar I and Pillar II requirements), but also as managerial indicators about the portfolio vulnerability of single Legal Entities, business lines, industries / regional areas, customer groups and other relevant clusters, conditioned to a downturn of economic cycle. BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010 BASEL 2 THIRD PILLAR 12

13 >> Basel 2 Third Pillar Table 1 In compliance with regulatory requirements, stress tests are performed on an on-going basis on updated stressed scenarios and are communicated to the senior management as well as to the Supervisory Authority. In addition to the regular stress test, ad hoc stress test simulations are performed on specific request from the Supervisory Authority. Credit Risk Mitigation Techniques Unicredit Group, consistently with the Revised Framework of International Convergence of Capital Measures and Rules (Basel 2), is firmly committed to satisfy the requirements for recognition of Credit Risk Mitigation techniques for regulatory capital purposes, according to the different approaches adopted (Standardized, or A-IRB). In this regard specific projects have been completed and actions have been realized for embedding the CRM techniques in the Group internal regulations and for alignment of processes and supporting IT systems. Considering the international location of Unicredit Group, implementations have been realized in accordance with each Country s domestic legal system and all local supervisory requirements. With specific reference to Credit Risk Mitigation, general guidelines are in force, issued by the Holding Company, to lay down Group-wide rules and principles that should guide, govern and standardise the credit risk mitigation and management, in line with Group principles and best practice, as well as in accordance with the requirements of regulation of the New Capital Accord ( Basel 2 ). Following General Group Credit Risk Mitigation Guidelines all Legal Entities have adopted internal guidelines, specifying processes, strategies and procedures for collateral management in accordance with group principles. The internal guidelines represent also collateral eligibility, valuation and monitoring rules and ensure the soundness, legal enforceability and timely liquidation of valuable collateral according to each Country's local legal system. The Italian Legal Entities involved in credit activities have implemented the Group Guidelines by the Local Special Credit Policy-Credit Risk Mitigation-Guidelines for the Italian Legal Entities which intends to define a formal approach to CRM techniques for the Italian Legal Entities of Unicredit Group, also providing managerial and operational instructions with particular reference to the new regulations for the prudential supervision of Banks (Circular nr. 263 issued by the Bank of Italy on December 27th,2006). During the second half of 2010, within the One4C project, an extensive review of the internal credit rules of guarantees and collaterals of the Legal Entities included in the project perimeter has been started, aiming at providing the new bank with an up-to-date and coherent credit rules framework. Collateral management assessments and Credit Risk Mitigation compliance verifications are performed by the Legal Entities, specifically as part of Internal Rating System applications, in order to assess the presence of adequate documentation and formalized policies and procedure concerning the Credit Risk Mitigation instruments used for supervisory capital and their coherence with the basic framework of a comprehensive collateral management defined by Group Guidelines issued by Holding Company. In particular, general rules for eligibility, valuation, monitoring and management of collaterals and guarantees are defined. Special rules and requirements for certain types of collaterals are detailed as well. Collaterals or guarantees are accepted only to support loans and they cannot serve as a substitute for the borrower s ability to meet obligations. For this reason they have to be evaluated in the credit application along with the assessment of the creditworthiness and the repayment capacity of the borrower. 13

14 In the credit risk mitigation technique assessment, UniCredit Group emphasizes the importance of the legal certainty requirements for all the funded and unfunded credit protection techniques, as well as their suitability. Legal Entities put in place all necessary actions in order to: fulfil any contractual and legal requirements in respect of, and take all steps necessary to ensure the enforceability of the collateral/guarantee arrangements under the applicable law; conduct sufficient legal review confirming the enforceability of the collateral/guarantee arrangements on all parties and in all relevant jurisdictions. The collateral accepted in support of credit lines granted by the Group s Legal Entities, primarily includes real estate, both residential and commercial, financial collateral (including cash deposits, debt securities, equities, and units of Undertakings for Collective Investment in Transferable Securities (UCITS)). Other types of collateral (pledged goods or pledged loans and life insurance policies) are less common. Unicredit Group makes use of netting agreement. In general these are considered eligible if they are legally effective and enforceable in all relevant jurisdictions, including in the event of insolvency or bankruptcy of counterparty. Legal Entities can use netting agreement only if they are able at any time to determine the position netting value (assets and liabilities with the same counterparty that are subject to the netting), monitoring and controlling debts, credit and netting value. Personal guarantees can be accepted as elements complementary and accessory to the granting of loans, for which the risk mitigation element is the additional security for repayment. Before a personal guarantee is acquired, the protection provider (or the protection seller in case of credit default swap) has to be assessed in order to measure his/her solvency and risk profile. The hedging effect of guarantees / credit derivatives for the purpose of credit protection depends basically on the protector s creditworthiness and the protected amount must be reasonably proportionate to the economic performance capabilities of the protection provider. The Legal Entities have implemented a clear and robust system for managing the credit risk mitigation techniques, governing the entire process for evaluation, monitoring and management. They are required to set up controls to ensure that collaterals and guarantees are effective for the entire maturity of the underlying exposure. Collaterals and guarantees can be considered adequate if they are consistent with the underlying credit exposure and, for guarantees, when there are no relevant risks towards the protection provider. The control system of credit risk mitigation techniques is embedded in the credit approval process and in the credit risk monitoring process. Controls and related responsibilities are duly formalized and documented in internal rules and job descriptions. The credit procedures in origination and monitoring areas support widely the collateral management process for evaluation and data quality checks of guarantees and for the appropriate linking of collaterals and guarantees to the categories defined for CRM and LGD estimates purposes. Furthermore are implemented processes to control all the relevant information regarding the identification and evaluation of the credit protection are correctly input to the system. The Group has developed a collateral management system to ensure that the process of valuation, monitoring, and management of all types of security is clear and effective. Hedging of credit risks collateralized must be maintained over time. In this respect, collaterals need to be valued accurately and regularly and haircuts must be applied when accepting the collateral to ensure that, in case of liquidation, there are no unexpected losses. BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010 BASEL 2 THIRD PILLAR 14

15 >> Basel 2 Third Pillar Table 1 The collateral value is based on the current market price or the estimated amount which the underlying asset could reasonably be liquidated for (i.e. financial instrument or real estate Fair Value); market price of pledged securities are adjusted by applying haircuts for market price and foreign exchange volatility according to Basel 2 regulation requirements. In case of currency mismatch between the credit facility and the collateral, an additional haircut is applied. Possible mismatches between the maturity of the exposure and that of the collateral are also considered in the adjusted collateral value. The current models in place within the Group are mainly based on pre-defined prudential haircuts. Internally estimated haircuts, based on the Value at Risk methodology, are under adoption throughout the Group for the assessment of the riskiness concerning financial collaterals. They are already in use in some Legal Entities. The methodological approach provides that the hedging value has to be estimated for each financial instrument on the basis of its market value (s.c. mark-to-market) adjusted with an haircut that has to consider the intrinsic riskiness according to the different factors (price riskiness, time of ownership and liquidity risk). The main Legal Entities of the Group are also provided with tools for the automatic evaluation of the mark to market of the pledged securities, granting the constant monitoring of the financial collateral values. For the valuation of real estate collateral, specific processes and procedures ensure that the property is valuated by an independent expert at or less than the market value. For the Legal Entities operating in Austria, Germany and Italy, systems for the periodic monitoring and revaluation of the real estate serving as collateral, based on statistical methods and internal databases or provided by external info-providers, are in place. Market Risk Market risk derives from the effect that changes in market variables (interest rates, securities prices, exchange rates, etc.) can cause to the economic value of the Group s portfolio, including the assets held both in the trading book, as well as those posted in the banking book, or on the operations characteristically involved in commercial banking and in the choice of strategic investments. Market risk management within the UniCredit Group accordingly includes all activities related to cash transactions and capital structure management, both for the Parent company, as well as for the individual companies making up the group. Market Risk Trading Book Risk Management Strategies and Processes The Parent s Board of Directors lays down strategic guidelines for taking on market risks by calculating capital allocation for the Parent company and its subsidiaries, depending on propensity for risk and value creation objectives in proportion to risks assumed. The Parent s Risks Committee provides advice and recommendations in respect of decisions taken by the Chief Executive Officer and in drawing up proposals made by the Chief Executive Officer to the Board of Directors with regard to the following: the Group s risk appetite, including capitalization objectives, capital allocation criteria, risk-taking capacity, cost of equity and dividends policy, as well as internal capital limits; general strategies for the optimization of risks, general guidelines and general policies for Group risk management; internal models for measuring all types of risks to calculate regulatory capital; structure of limits by type of risk; strategic policies and funding plans. 15

16 Similarly, it decides on the following: the definition of guidelines relative to Group financial policies (asset and liability management strategies, including the Group-wide duration profile); the allocation of risk to the Business Units and to the Entities, specific risk-related guidelines and strategies and consequently setting of limits for achieving objectives in terms of risk appetite and limits by type of risk; methods for the measurement and control of the Group s aggregate risks (deriving from the aggregation of individual types of risk); guidelines, policies and strategies for real estate risk, financial investment risk and business risk; intervention plans in the event of critical aspects shown in the initial validation reports and over time; topics involving the implementation of Basel 2 standards, as well as the respective project and process activities. The Risk Committee comprises the following members: the Chief Executive (Chair of the Committee), the Deputy General Managers, the Chief Risk Officer (chairs the Committee in the absence of the Chief Executive) and the Chief Financial Officer, the Legal & Compliance Officer, the CEE Division Program Officer, and the Human Resources Officer. The Head of the Group Internal Audit Department also attends meetings of the Risk Committee, but is not entitled to vote. Structure and Organization of the Risk Management function In June 2009, the Board of Directors approved the Group Risk Management reorganization guidelines, with the following objectives: improvement of directing, coordinating and control activities for some aggregate risks (so-called Portfolio Risk ), through dedicated responsibility centers ( Portfolio Risk Managers ) focusing and specializing entirely on the abovementioned risks, from a Group and cross-divisional standpoint; maintaining consistency with the Group business model, ensuring clear specialization and focus from a purely transactional point of view of specific centers of responsibility on risks originating with the Group functions assigned to assume risk, at the same time keeping these centers of responsibility ( Transactional Risk Managers ) completely independent from the functions assigned to assume risk (e.g. Business Units, Cash Management functions, Asset Management, and CEE Countries). With reference to Market Risk in particular, the Markets & Balance Sheet Risks Portfolio Management department was created, responsible for supervising and managing the overall profile for market risk and Group balance sheet and cash management by setting all the respective strategies, methodologies and limits. The Market & Balance Sheet Risks department is responsible for managing trading book and banking book risks at the Group level and for ensuring the uniformity of market risk policies, methodologies and practices in all the divisions and legal entities. This monitoring is provided through an organizational structure that is broken into four units, with the following responsibilities: Market Risk: market risk from trading, or market risk deriving from the corresponding business lines within the Group that are authorized to manage trading positions (risk takers); Balance Sheet Risk: treasury risk, or market risk deriving from the corresponding specific banking books throughout the Group; Liquidity Risk: liquidity risk, or the risk that the bank will not be able to meet payment obligations for cash or for planned or unplanned delivery; Risk Architecture & Methodologies: responsible for technologies, methods (including Model Testing) and the New Products Process BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010 BASEL 2 THIRD PILLAR 16

17 >> Basel 2 Third Pillar Table 1 The aforesaid department interfaces in turn and cooperates for market risk monitoring purposes with the so-called Transactional level functions responsible for all risks (market, but also credit and operational risk) originating with the relevant Strategic Business Areas (SBAs)/Divisions (CIB&PB, Retail, Treasury, Asset Management and CEE). For market risk purposes, the predominant exposure is found in the CIB&PB (Corporate, Investment Bank & Private Bank) SBA, within which the Investment Banking business segment is included. Following the mentioned reorganization the market risk monitoring activity includes: the CIB (Corporate & Investment Banking) Market Risk unit, which forms part of the CIB&PB Risks Department, which in cooperation with the Market & Balance Sheet Risk Portfolio Management unit specifically provides oversight of the risks in question for group companies included in the business segment Investment Bank. the Treasury Risk Department which, in coordination with the Market & Balance Sheet Risk Portfolio Management unit, specifically provides oversight of the risks in question for the Holding Company and for group companies included in the Retail segment. As part of the market risk reorganization described above, the structure of the Committees responsible for market risk was reviewed. This structure has three levels: First-level Committees; o Group Risk Committee Second-level Committees; o Group Market Risk Committee o Group Asset & Liabilities Committee Third-level Committees; o Group Transactional Markets Committee In general, the Parent company proposes limits and investment policies for the Group and its entities in harmony with the capital allocation process when the annual budget is drawn up. In addition, the Parent s Asset and Liability Management unit, in coordination with other regional liquidity centers, manages strategic and operational ALM, with the objective of ensuring a balanced asset position and the operating and financial sustainability of the Group s growth policies on the loans market, optimizing the Group s exchange rate, interest rate and liquidity risk. The Parent company monitors the Group-wide risk positions. The individual companies comprising the Group have the specific responsibility of managing their own risk positions consistent with the Group s risk management policies and of reporting to the Parent company on the results of the monitoring activity carried out by them. The individual branches produce detailed daily reports on the progress of their business and the concomitant risk, sending documentation on market risk to the Parent company. The responsibility for gathering such information and producing informational documentation on overall market risk is the task of the Parent company s Market & Balance Sheet Risks Portfolio Management Department, which takes care of ensuring that the market risk measurement models of the branches are comparable and that their risk monitoring and management methods are uniform. This Parent company department also checks the Holding Company s positions and the aggregate positions of the branches, in order to ensure monitoring of overall exposure. Each company in the Group is therefore directly responsible for risk control in accordance with the guidelines provided by the Parent company. The responsibilities for carrying out the New Products Process ( NPP ) locally, creating infrastructure, P&L validation and Desk Control continue to be assigned to the individual legal entities and/or branches. 17

18 Scope of application and risk measurement and reporting systems In 2010, the Group continued to develop and expand existing models with the aim of achieving increasing accuracy in the representation of the Group s risk profiles for portfolios of complex financial products. The monitoring of these risk profiles was made even more efficient and rapid with the introduction of individual risk limits, in addition to VaR limits, in relation to primary investment banking operations. In the same way, and in an effort to achieve product/portfolio assessments based on more rigorous standards of prudence, methodologies for establishing valuation reserves for loan products were refined and made more specific with a special focus on structured loans. Within the organizational context described above, the policy implemented by the UniCredit Group within the scope of market risk management and so, specifically, in managing interest rate risk is aimed at the gradual adoption and use of common principles, rules and processes in terms of appetite for risk, ceiling calculations, model development, pricing and risk model scrutiny. Group Market & Balance Sheet Risks Portfolio Department is specifically required to ensure that principles, rules and processes are in line with industry best practice and consistent with standards and uses in the various countries in which they are applied. The main tool used by the UniCredit Group to measure market risk on trading positions is Value at Risk (VaR), calculated using the Historical simulation method. During this phase of convergence, however, some companies belonging to the Group still use a Monte Carlo-type simulation approach. In addition to VaR Limits, specific risk boundaries for CIB Division are set in terms of: 1. Loss Warning Levels that are defined as the 60 days rolling period Accumulated Economic P&L of a risk taker. They apply at Division and Legal Entity levels. 2. Stress Test Warning Levels that represent the maximum economic loss the Group is prepared to accept out of the pivot Stress Test Scenario: this being the scenario defined by Market Risk Portfolio Management as the most appropriate from time to time, according to expected market conditions and prevailing portfolio risk features. They apply at Division and Legal Entity levels. The purpose is to detect exposures which may threaten Group economic results and perhaps viability of the business model by gaining a specific focus on second order risks (non linearity) which normally are not captured by VaR but may turn into actual losses under certain conditions. 3. Granular Market Limits that are set for the most relevant business units/desks. They exist independently of, but act in concert with above Market Risk limitations and operate in a consolidated fashion across the Legal Entities if applicable. In order to control more effectively and more specifically different risk types, desks and products, these limits are generally granular sensitivity or stress-related limits. BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010 BASEL 2 THIRD PILLAR 18

19 >> Basel 2 Third Pillar Table 1 Hedging policies and risk mitigation Weekly meetings occur at CIB Division top management level to discuss the main risk drivers of portfolios performance. On a monthly basis a set of risk indicators is provided to the Group Risk Committee through the Enterprise Risk Management Report; these include VaR usages, Sensitivities and Stress Test results. At the same time limit breaches are reported both to the Group Market Risk Committee and to the Group Risk Committee, the escalation process being ruled by the Special Group Policy for Market Risk Limits Management of Trading Book activities which defines the nature of the various thresholds/limits applied as well as the relevant bodies to involve to establish the most appropriate course of action to restore exposure within the approved limits. If required focus is provided from time to time on the activity of a specific business line/desk in order to ensure the highest level of comprehension and discussion of the risks in certain areas which are deemed to deserve particular attention. Operational Risk Operational risk is the risk of loss due to errors, infringements, interruptions, damages caused by internal processes or personnel or systems or caused by external events. This definition includes legal and compliance risks, but excludes strategic and reputational risk. For example, losses arising from the following can be defined as operational: internal or external fraud, employment practices and workplace safety, client claims, products distribution, fines and penalties due to regulation breaches, damage to the company s physical assets, business disruption and system failures, process management. Group operational risk framework UniCredit Group sets the operational risk management framework as a combination of policies and procedures for controlling, measuring and mitigating the operational risk of the Group and controlled entities. The operational risk policies, applying to all Group entities, are common principles defining the roles of the company bodies, the operational risk management function as well as the relationship with other functions involved in operational risk monitoring and management. The Parent company coordinates the Group entities according to the internal regulation and the Group operational risk control rulebook. Specific risk committees (Risk Committee, ALCO, Operational Risk Committee) are set up to monitor risk exposure, mitigating actions and measurement and control methods. The methodology for data classification and completeness verification, scenario analysis, risk indicators, reporting and capital at risk measurement is set by the Holding company Operational & Reputational Risks Portfolio Management department and applies to all Group entities. A pivot element of the risk control framework is the operational risk management application, allowing the collection of the data required for operational risk control and capital measurement. The compliance of the Group Operational risk control and measurement system with external regulations and Group standards is assessed through an internal validation process under the responsibility of the Group Internal Validation department of the Holding company and independent from the Operational & Reputational Risks Portfolio Management department. 19

20 In March 2008, UniCredit Group received authorization to use the AMA model (Advanced Measurement Approach) for calculating operational risk capital. The use of this method will in time be rolled out to the main entities of the Group. Organisational structure Senior Management is responsible for approving all aspects relating to the Group operational risk framework and verifying the adequacy of the measurement and control system and is regularly updated on changes to the risk profile and operational risk exposure, with support from the appropriate risk committees if required. The Group Operational & Reputational Risk Committee, chaired by the Holding company's head of Group Risk Management Control is made up of permanent and guest members. The list of participants of the Committee has been updated in 2010, also in the light of the changes in the organizational structure of the Group. The mission of the Group Operational & Reputational Risk Committee relative to operational risk, is to define proposals and opinions for the Group Risk Committee, for: the Group risk appetite, including the goals and criteria of the operational risk capital allocation in the Group; the structure and definition of operational risk limits and their allocation to the Business Units, legal entities and portfolios; initial approval and fundamental modifications of risk control and measurement systems and applications for operational risk, including possible action plans, processes, IT and data quality requirements, supported by the related internal validations; overall strategies for operational risk optimization, Governance Guidelines and general Policies for the management of Group operational risk; action plans to address possible critical findings related to risk control and measurement system resulting from Group Internal Validation and Internal Audit activities, with regard to internal control system and risk measurement; status update of relevant Basel II project activities on operational risk topics; ICAAP topics for operational risks; yearly Regulatory Internal Validation Report on operational risk. The Group Operational & Reputational Risk Committee, relative to operational risk, meets with approval functions instead for the following topics: special operational and reputational risk Policies ; corrective actions for balancing the Group operational risk positions, including the planned mitigation actions, within the limits defined by the competent Bodies; Group insurance strategies, including renewals, limits and deductibles; initial approval and fundamental modifications of the methodologies for the measurement and control of operational risk, supported by the related internal validations. In the Holding company, the Operational & Reputational Risks Portfolio Management department reports to Group Risk Management (Group CRO) and supervises and manages the overall profile of the operational and reputational risks in the Group by defining the strategies, methodologies and limits. Regarding the operational risk management function, the department has three organizational units. The Operational Risk Methodologies and Control unit is responsible for the methodologies, the calculation model for the Group operational capital at risk and the guidelines for operational risk control activities; it is also supporting and controlling the legal entities Operational Risk Management functions, in order to verify that Group standards are met in the implementation of control processes and methodologies. The Operational Risk Strategies and Mitigation unit is responsible for the definition and monitoring of the risk limits and for the identification of strategies and mitigation actions and the monitoring of their implementation. BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010 BASEL 2 THIRD PILLAR 20

21 >> Basel 2 Third Pillar Table 1 The Operational Risk Management unit is responsible for the correct implementation and maintenance of the operational risk framework in the Parent company, UniCredit SpA. The Operational Risk Management functions of the controlled entities provide specific operational risk training to staff, also with the use of intranet training programs, and are responsible for the correct implementation of the Group framework elements. Internal validation process In compliance with regulations, an internal validation process for the operational risk control and measurement system has been set up at the Holding company and in the relevant Group entities in order to verify the conformity with regulations and Group standards. This process is responsibility of the Pillar II Risks and Operational Risk Validation unit, within the Group Internal Validation department. Group methodologies for measuring and allocating the capital at risk are validated at Holding company level by the abovementioned Unit, while the implementation of the operational risk control and management system within the relevant entities is validated by the local ORM functions following the Technical Instructions and policies issued by the Group Internal Validation Department. The results of the local assessments are annually verified by the Group Internal Validation department which also performs additional analysis on data and documentation. Detailed reports are then submitted to the Group CRO for the release of specific Non Binding Opinions to the relevant subsidiaries. The local validation report, together with the opinion of the Holding company and the Internal Audit report is submitted to the entities competent Governing Bodies for approval. All the validation outcomes on the operational risk control and measurement system, both at Holding Company and controlled entities level, are annually consolidated within the Group Validation report which, along with the annual Internal Audit report, is presented to the UniCredit Board of Directors. Periodical reporting on validation activities is submitted also to the Group Operational and Reputational Risk Committee. Reporting A reporting system has been developed to inform senior management and relevant control bodies on the Group operational risk exposure and the risk mitigation actions. In particular, quarterly updates are provided on operational losses, capital-at-risk estimates, the main initiatives undertaken to mitigate operational risk in the various business areas, operational losses suffered in the credit linked processes ( cross-credit losses). A summary of the trend of the most important risk indicators is distributed each month. The results of the main scenario analyses carried out at Group level and the relevant mitigation actions undertaken are also submitted to the attention of the Group Operational & Reputational Risk Committee. Operational risk management and mitigation Operational risk management exploits process reengineering to reduce the risk exposure and insurance policies management, defining proper deductibles and policies limits. Regularly tested business continuity plans assure sound operational risk management in case of interruption of main business services. 21

22 In the legal entities, the Risk Committee (or other bodies in accordance to local regulations) reviews risks tracked by the Operational Risk functions with the support of functions involved in daily operational risk control, and monitors the risk mitigation initiatives. Other Risks and Risk Aggregation The types of risk described above are the main ones, but there are others the Group considers significant. Using the process for internal capital calculation, individual risk types are combined by aggregation procedures and the resulting overall risk is measured. This process has two aims: the main one is to improve understanding of the value drivers for each business line, so that Risk Management can effectively support business decisions. The second aim is to refine the internal control system, in which Risk Management has a leading role. Defining significant risk types is accomplished in two stages, viz.: identification of the risk inherent in existing assets and liabilities and businesses followed by determination of measurement methods. The Group has identified the following risk types, in addition to those mentioned above: business risk real-estate risk financial investment risk strategic risk reputational risk. These risks are defined as follows. Business Risk Business Risk is that a contraction of margins may occur due to changes in the competitive environment or customer behavior, leading to serious losses, but is not due to credit, market or operational risk. Business Risk is measured both as a single risk type to determine the inherent variability of earnings and as an input of internal capital. The exposure data used to calculate Business Risk are taken from the income statements of each Group Legal Entities for which this risk is significant and income and expenses are defined so as not to overlap with credit, market and operational risk. Volatility and correlation are calculated by Division on the basis of a time series of monthly income statements for the large and medium Group entities. Business risk is measured by Earnings at Risk (EaR), defined as the maximum annual loss with a 99.97% confidence interval, with a one-year time horizon and assuming normal distribution. Business Risk is measured for the Group and by Division, Sub-Group and individual Entity, in terms of stand-alone and diversified risk capital. For the latter shared diversification benefit is allocated to each entity proportionately. Business Risk is calculated quarterly for monitoring purposes or whenever necessary following changes in the Group s structure or market. For budgeting purposes it is projected and input to internal capital to support the capital allocation process. BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010 BASEL 2 THIRD PILLAR 22

23 >> Basel 2 Third Pillar Table 1 Real-Estate Risk Real-Estate Risk consists of the potential losses resulting from fluctuations in the value of the Group s real-estate portfolio, whether owned by the Company, property trusts or special purpose vehicles, but not customers mortgaged property or leased assets. Real-Estate Risk is measured as a single risk type to determine its inherent risk and as an input to internal capital. Data are collected every six months, according to a set format provided by the Parent and each Group entity is required to provide general information on its property, including market and book values. For the purposes of real estate risk calculation, if market value cannot be supplied, book value is used as a proxy. All entities are also required to provide mapping to area or regional price indexes for each property to enable calculation of volatility and correlation in the model. Assessment of Real-Estate Risk is based on the maximum potential loss with a 99.97% confidence level and a one-year horizon, using a variance-covariance approach and assuming normal distribution. It is measured for the Group and by Division, Sub-Group and individual Entity, in terms of both stand-alone and diversified risk capital. For the latter, shared diversification benefit is allocated to each entity proportionately according to its contribution to the Group s diversified VaR. Real-Estate Risk is calculated for monitoring purposes every six months or whenever necessary following significant changes in the Group s structure or market. For budgeting purposes it is projected and input to internal capital to support the capital allocation process. Financial Investment Risk Financial Investment Risk originates in equity held in companies not included in the Group or held in the trading book. Financial Investment Risk is measured as a single risk type to determine the inherent risk of the equity interests and as an input to internal capital. The equity portfolio mainly includes listed and unlisted shares, derivatives with equity underlyings, private equity, units of mutual, hedge and private equity funds. For all Group equity position capital absorption may be calculated using PDs and LGDs or a marketbased approach. The PD/LGD approach is used for unlisted companies, including direct private equity holdings; the market-based approach is used for traded equities, equity hedges, and all mutual, hedge and private equity funds through the mapping of market indexes. Exposure data is mainly provided by Group Shareholding and Accounting departments and supplemented by Group entities, specifically data quality checks. Volatility and correlation for the market-based approach are derived from time series of regional and sectorial indexes or specific price indexes where the investment is in a listed company. Assessment of Financial Investment risk is based on the maximum loss, i.e. Value at Risk (VaR), with a 99.97% confidence level and a one-year horizon. It is measured for the Group and by Division, Sub- Group and individual Entity, both in terms of stand-alone and diversified risk capital; shared diversification benefit is allocated to each entity according to its contribution to the Group s diversified VaR intra-risk diversification benefit. Financial Investment Risk is calculated quarterly for monitoring purposes or whenever necessary following significant changes in the Group s structure or market. For budgeting purposes it is projected and input to internal capital to support the capital allocation process. 23

24 Strategic Risk This arises from unexpected changes in market conditions, failure to recognize trends in the banking sector, or inappropriate assessments of these trends. The risk is that divergent decisions as to how to achieve long-term objectives may be made and may be difficult to be reversed. UniCredit s Top Management constantly monitors management s performance by analyzing the information received from the competent bodies and regularly comparing results with targets. UniCredit has a corporate governance system which manages strategic risk for the Group. This system is compliant with local regulations and specifically the code issued by Borsa Italiana in March 2006 for listed companies. The corporate governance system ensures that strategic decisions are the sole responsibility of the Board of Directors. The matters under the Board s responsibility include issuance of guidelines and the approval and implementation of all Group strategic, business and financial plans. To mitigate its strategic risk, UniCredit is strengthening internal risk culture. To this end its Risk Academy was launched in 2010, with the aim of creating a centre of risk education excellence for the whole Group. Reputational Risk Reputational risk is the current or future risk of a decline in profits as a result of a negative perception of the bank s image by customers, counterparties, bank shareholders, investors or the regulators. In August 2010 the UniCredit Board of Directors approved the Group Reputational Risk Governance Guidelines, which set out a general set of principles and rules for measuring and controlling reputational risk. In the Parent Company the Reputational Risk Measurement and Control unit is part of the Operational and Reputational Risks Portfolio Management department, reporting to the Head of Group Risk Management. The Governance Guidelines were distributed to all UniCredit Group Entities for implementation, by a letter signed by the CEO and the Head of Group Risk Management. The main aims of Reputational Risk Measurement and Control are: to develop methodologies for the measurement and control of reputational risk (RRM), and facilitate the task of identifying, valuing and measuring it; to monitor the implementation in all Group Entities of methodologies of reputational risk (general guidelines for the management and control of reputational risk), specifying the tasks to be carried out on a regular basis; to propose mitigation actions to the competent functions and corporate bodies; to draw up the operational rules for the assessment of the reputational risk inherent in products. In addition, the Group Operational and Reputational Risk Committee, which reports to the Group Risk Committee, ensures consistency in Reputational Risk policies and practices across Business Divisions and Group Entities and controls and monitors Group reputational risk. The Group Transactional Credit Committee is also charged with assessing the reputational risk inherent in individual transactions as described by requests submitted by business, in line with reputational risk policies. BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010 BASEL 2 THIRD PILLAR 24

25 >> Basel 2 Third Pillar Table 1 Lastly, in December 2010 the Group Risk Committee approved the Non Co-operative Jurisdictions (NCJs) Reputational Risk Special Policy which defines the rules and principles for managing new business in NCJs in order to protect the UniCredit Group from tax and reputational risk. This policy is in addition to the already existing Defense/Weapons Industry and Nuclear Energy Reputational Risk Special Policies. Risk Measurement Methods Within the Internal Capital Adequacy Assessment Process (ICAAP) under Basel 2 Pillar 2, credit, market, operational, business, real estate and equity investment risks are measured quantitatively, using: economic capital and aggregation as an input for internal capital and stress tests. The risk profile of small plus, mid-size and large corporates is assessed on the basis of individual transactions, while for small firms a synthetic (top down) approach is used. The Group measures business, real estate and equity investment risk using a quantitative model, since the capital amount determined in this way is used to meet potential losses. The multi-dimensional nature of risk makes it necessary to accompany the measurement of economic capital with stress testing, not only in order to estimate losses in certain scenarios, but also to ascertain the impact of their determinants. Stress testing is carried out on both individual risk types and aggregated risk by simulating changes together with risk factors to provide consistent support for the calculation of aggregate economic capital. The combined stress test calculation covers the amount of individual risks and the reduced diversification benefit in crisis conditions. The adequacy of the risk measurement methodologies supporting the ICAAP, including stress testing and risk aggregation, is checked by internal validation. Aggregated Economic Capital and Internal Capital Aggregated Economic Capital is the capital set aside as a buffer against the potential losses inherent in the Group s business activities. Group aggregated economic capital takes into consideration all risk types identified by the Group as tangible and quantifiable risks for UniCredit Group in line with Pillar 2 requirements (credit, market, operational, business, financial investment and real estate risk including the effects of diversification between risk types ( interdiversification ) and within each portfolio type ( intradiversification ). It is calculated using a variance-covariance approach with a one-year time horizon and 99.97% confidence level in line with the Group rating target. The correlation matrix which includes interdependence of risk types is a mix of expert judgment (benchmarking analysis) and empirical calculations of the linear correlation of time series of specific risk factors. The aggregation model has been changed such that a Copula approach and a Bayesian estimate for correlations will be used in Internal Capital, in line with the Group s risk appetite, is calculated by adding a prudential cushion to Aggregate Economic Capital to take account of the business cycle impact and the uncertainty inherent in risk measurement. Internal Capital is a fundamental element when assessing the adequacy of the Group s capital through comparison with Available Financial Resources to arrive at a definition of the Group s Risk Taking Capacity. 25

26 Under the corporate governance system, the Parent is responsible for developing Economic Capital and Internal Capital measurement methodology for the Group and by division and designing and implementing the measurement processes. Each Group Entity is responsible for developing the processes needed to measure risk in line with the Parent s instructions. For control purposes, Economic Capital is calculated quarterly or whenever thought necessary following significant changes in the Group s market. For budgeting purposes it is projected to assist in the capital allocation process. In addition to the foregoing, stress testing exercises are performed on a regular basis to consider the effects of stressed macroeconomic scenarios, both in terms of losses caused and of stressed economic capital. Internal Capital Adequacy Assessment Process (ICAAP) Measuring the risk profile is a fundamental element of the Internal Capital Adequacy Assessment Process under Basel 2 Pillar 2. Assessment is in five stages: determination of risks and the Group companies to be assessed; risk measurement and management; capital planning and risk appetite setting; monitoring and reporting; risk governance. Risk profile measurement is carried out using internal capital, which is determined by aggregating the economic capital relating to the risks determined net of diversification benefits, plus a cushion that takes into account significant elements for determining the risk profile, such as the variability of the economic cycle and the risk model (with reference to data quality and the accuracy of the models). For large, medium-sized and small-plus Group companies the risk profile is defined using Internal Capital, while for small companies a synthetic approach is used to enable efficient measurement on consolidation. Consolidated Internal Capital is then broken down by division. Capital adequacy is the balance between capital and assumed risk, under both Pillar 1 and Pillar 2, where it is measured respectively by the Core Tier 1 Ratio, Total Capital Ratio and the Risk Taking Capacity. The latter is the ratio of available capital (Available Financial Resources, AFR) to internal capital. AFRs are resources that may be used to protect the bank from insolvency. These resources must be committed and defined on a contractual basis, so that they can be relied on in times of crisis. Since losses impact AFRs, they can also be defined as the amount of losses that can be absorbed by the bank before it becomes insolvent. Capital planning is the process that allocates capital to the divisions and Group entities in order to achieve value creation targets on the basis of risk appetite. Over the long run the Group aims to generate an income greater than is necessary to remunerate risk (cost of capital at risk) and thus create value so as to maximize the return for its shareholders. Risk appetite can be defined as the long- and short-term variability in results that Senior Management is willing to accept in support of a particular strategy. BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010 BASEL 2 THIRD PILLAR 26

27 >> Basel 2 Third Pillar Table 1 The risk appetite framework adopted by UniCredit comprises three areas: Capital adequacy; Profitability and risk Liquidity and funding. Risk appetite and the targets set are regularly monitored and reported. In addition, the Parent is required to submit a consolidated report on capital adequacy in accordance with Banca d Italia guidelines, at the same time providing an overview of the principal Group entities. Governance of the capital adequacy process is conducted internally and between Group entities, viz.: within each Group entity, including the Parent Bank and between the Parent Bank (under its guidance, support and oversight functions), the divisions, the sub-holding companies and Group entities. The capital adequacy process is of fundamental importance within the Group and therefore requires an adequate risk governance system ensuring the involvement of senior management and the appropriate assignment of ICAAP activities to competent functions. Ultimate responsibility rests with the Board of Directors, since the capital adequacy process requires setting the risk appetite and a strategic direction for the proper allocation of available capital resources. Senior Management decides the main corporate bodies or departments that take part in the process and reporting to the competent decision-making body (for example, the Group Risk Committee). Reporting The Group Risk Reporting Unit within the Group CRO Area provides financial and credit risk reports by means of regular and specific monthly and quarterly reports. Its principal purpose is to analyze the main drivers and parameters of credit risk (e.g. exposure at default (EAD), expected loss (EL), migrations, loan loss provisions, coverage ratio, cost of risk, etc.), primarily for the Group and the divisions, and to provide an overview of all the risks faced by the UniCredit Group. Reports produced aim to managerial decisionmaking and mitigation actions. The Group Risk Reporting Unit also has the mission of ensuring that definitions and risk metrics are fitting and that the whole set of reports produced within the CRO Competence Line, both for the Parent and for Group entities, is efficient and effective. In 2010 the Group Risk Reporting Unit continued to improve data quality and the reporting processes, reviewing existing reports and studying data analysis not least in view of the changed market environment. Portfolio and business segment reporting units also helped to monitor credit risk exposure within their areas of responsibility. 27

28 BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010 BASEL 2 THIRD PILLAR 28

29 >> Basel 2 Third Pillar Table 2 Table 2 Scope of application Qualitative disclosure In this section of the pillar 3 is disclosed the prudential scope of consolidation do the UniCredit group, in this scope, defined Banking Group have to be enclosed the subsidiaries with the following characteristics: Banks, financial companies and ancillary banking services companies directly or indirectly controlled to which the line-by-line consolidation method is applied; Banks, financial companies and ancillary banking services companies directly or indirectly participated for a share equal or more than the 20% when they are jointly controlled with other entities, to these subsidiaries has to be applied the proportional consolidation method The following entities are consolidated with equity method: - banks or financial companies directly or indirectly participated for a share equal or more than the 20% or anyway subjected to significant influence; - to companies, different from banks, financial companies and ancillary banking services companies directly or indirectly controlled exclusively or jointly or subjected to significant influence. In accordance with the mentioned regulations, equity interests over 10% in banking and financial companies are deducted from the capital for regulatory purposes; other equity investments are recognized as risk-weighted assets. It has to be underlined that the prudential scope of consolidation is set in order to comply with the solvency regulation, different from the IAS/IFRS rules applied to the scope of the Financial Statement, this situation could cause mismatches among similar set of information disclosed in this document and in the F/S 29

30 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost UNICREDIT SPA BANKS ROME ITALY AB IMMOBILIENVERWALTUNGS-GMBH MUNICH GERMANY ACTIVE ASSET MANAGEMENT GMBH AI BETEILIGUNG GMBH ALINT 458 GRUNDSTUCKVERWALTUNG GESELLSCHAFT M.B.H. ALLEGRO LEASING GESELLSCHAFT M.B.H. ALLIB LEASING S.R.O. ALLIB NEKRETNINE D.O.O. ZA POSLOVANJE NEKRETNINAMA ALLIB ROM S.R.L. ALMS LEASING GMBH. ALPINE CAYMAN ISLANDS LTD. ALV IMMOBILIEN LEASING GESELLSCHAFT M.B.H. ANI LEASING IFN S.A. ANTARES IMMOBILIEN LEASING GESELLSCHAFT M.B.H. ARANY PENZUGYI LIZING ZRT. ARNO GRUNDSTUCKSVERWALTUNGS GESELLSCHAFT M.B.H. ANCILLARY BANKING SERVICES GRUNWALD GERMANY BAD HOMBURG GERMANY PRAGUE CZECH REPUBLIC ZAGREB CROATIA BUCHAREST ROMANIA GEORGE TOWN CAYMAN ISLANDS BUCHAREST ROMANIA BUDAPEST HUNGARY AS UNICREDIT BANK BANKS RIGA LATVIA ASPRA FINANCE SPA MILAN ITALY ATF CAPITAL B.V. ATF FINANCE JSC ATF INKASSATSIYA LTD AUSTRIA LEASING GMBH AUTOGYOR INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG B.I. INTERNATIONAL LIMITED BA- ALPINE HOLDINGS, INC. BA BETRIEBSOBJEKTE GMBH BA BETRIEBSOBJEKTE GMBH & CO BETA VERMIETUNGS OG BA BETRIEBSOBJEKTE PRAHA SPOL.S.R.O. BA CA LEASING (DEUTSCHLAND) GMBH BA CA SECUND LEASING GMBH BA CREDITANSTALT BULUS EOOD BA EUROLEASE BETEILIGUNGSGESELLSCHAFT M.B.H. ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ROTTERDAM NETHERLANDS ALMATY CITY KAZAKHSTAN ALMATY CITY KAZAKHSTAN BUDAPEST HUNGARY GEORGE TOWN CAYMAN ISLANDS WILMINGTON U.S.A. PRAGUE BAD HOMBURG CZECH REPUBLIC X X X X GERMANY SOFIA BULGARIA X X X X BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

31 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost BA GVG-HOLDING GMBH BA PRIVATE EQUITY GMBH BA/CA-LEASING BETEILIGUNGEN GMBH BA/CA-LEASING FINANZIERUNG GMBH BAC FIDUCIARIA SPA BA-CA ANDANTE LEASING GMBH BACA CENA IMMOBILIEN LEASING GMBH BACA CHEOPS LEASING GMBH BA-CA CONSTRUCTION LEASING OOO BA-CA FINANCE (CAYMAN) II LIMITED BA-CA FINANCE (CAYMAN) LIMITED BACA HYDRA LEASING GESELLSCHAFT M.B.H. BACA KOMMUNALLEASING GMBH BACA LEASING ALFA S.R.O. BACA LEASING CARMEN GMBH BA-CA LEASING DREI GARAGEN GMBH BACA LEASING GAMA S.R.O. BA-CA LEASING MAR IMMOBILIEN LEASING GMBH BA-CA LEASING MODERATO D.O.O. BACA LEASING UND BETEILGUNGSMANAGEMENT GMBH BA-CA MARKETS & INVESTMENT BETEILIGUNG GMBH BACA MINOS LEASING GMBH BACA NEKRETNINE DOO BA-CA PRESTO LEASING GMBH BACA ROMUS IFN S.A. BACAL ALPHA DOO ZA POSLOVANJE NEKRETNINAMA BACAL BETA NEKRETNINE D.O.O. ZA POSLOVANJE NEKRETNINAMA BACA-LEASING AQUILA INGATLANHASNOSITO KORLATOLT FELELOSSEGU TARSASAG BACA-LEASING GEMINI INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG BACA-LEASING NERO INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG BACA-LEASING OMIKRON INGATLANHASZNOSTO KORLATOLT FELELOSSEGU TARSASAG ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES DOGANA SAN MARINO SAINT PETERSBURG GEORGE TOWN GEORGE TOWN RUSSIA CAYMAN ISLANDS CAYMAN ISLANDS X X X X PRAGUE CZECH REPUBLIC X X PRAGUE CZECH REPUBLIC X X LJUBLJANA SLOVENIA BANJA LUKA BOSNIA AND HERCEGOVINA X X BUCHAREST ROMANIA ZAGREB CROATIA ZAGREB CROATIA BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY 31

32 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost BACA-LEASING URSUS INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG BA-CREDITANSTALT LEASING ANGLA SP. Z O.O. BAL CARINA IMMOBILIEN LEASING GMBH BAL DEMETER IMMOBILIEN LEASING GMBH BAL HESTIA IMMOBILIEN LEASING GMBH BAL HORUS IMMOBILIEN LEASING GMBH BAL HYPNOS IMMOBILIEN LEASING GMBH BAL LETO IMMOBILIEN LEASING GMBH BAL OSIRIS IMMOBILIEN LEASING GESELLSCHAFT M.B.H. BAL PAN IMMOBILIEN LEASING GMBH BAL SOBEK IMMOBILIEN LEASING GMBH BALEA SOFT GMBH & CO. KG BALEA SOFT VERWALTUNGSGESELLSCHAFT MBH BANCA AGRICOLA COMMERCIALE DELLA R.S.M. S.p.A. BANK AUSTRIA CREDITANSTALT LEASING IMMOBILIENANLAGEN GMBH BANK AUSTRIA FINANZSERVICE GMBH BANK AUSTRIA GLOBAL INFORMATION SERVICES GMBH BANK AUSTRIA HUNGARIA BETA LEASING KORLATOLT FELELOSSEGU TSRSASAG BANK AUSTRIA LEASING ARGO IMMOBILIEN LEASING GMBH BANK AUSTRIA LEASING HERA IMMOBILIEN LEASING GMBH BANK AUSTRIA LEASING IKARUS IMMOBILIEN LEASING GESELLSCHAFT M.B.H. BANK AUSTRIA LEASING MEDEA IMMOBILIEN LEASING GMBH BANK AUSTRIA REAL INVEST CLIENT INVESTMENT GMBH ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES BANKS ANCILLARY BANKING SERVICES BUDAPEST HUNGARY WARSAW POLAND HAMBURG GERMANY HAMBURG GERMANY BORGO MAGGIORE SAN MARINO BUDAPEST HUNGARY BANK AUSTRIA REAL INVEST GMBH BANKS BANKS BANK AUSTRIA REAL INVEST IMMOBILIEN-KAPITALANLAGE GMBH BANK AUSTRIA WOHNBAUBANK AG BANKS BANK PEKAO SA BANKS WARSAW POLAND BANKHAUS NEELMEYER AG BANKS BREMEN GERMANY BARODA PIONEER ASSET MANAGEMENT COMPANY LTD BAULANDENTWICKLUNG GDST 1682/8 GMBH & CO OEG BDR ROMA PRIMA IRELAND LTD MUMBAI INDIA DUBLIN IRELAND BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

33 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost BETEILIGUNGSVERWALTUNGSGESELLS CHAFT DER BANK AUSTRIA CREDITANSTALT LEASING GMBH BIL LEASING-FONDS GMBH & CO VELUM KG BIL LEASING-FONDS VERWALTUNGS- GMBH BIL V & V VERMIETUNGS GMBH BLUE CAPITAL EQUITY GMBH BLUE CAPITAL FONDS GMBH BORDER LEASING GRUNDSTUCKSVERWALTUNGS- GESELLSCHAFTM.B.H. BREAKEVEN SRL BREWO GRUNDSTUCKSVERWALTUNGS- GESELLSCHAFT M.B.H. BULBANK AUTO LEASING EOOD BULBANK LEASING EAD BV GRUNDSTUCKSENTWICKLUNGS- GMBH CABET-HOLDING-AKTIENGESELLSCHAFT CABO BETEILIGUNGSGESELLSCHAFT M.B.H. CAC REAL ESTATE, S.R.O. CAC-IMMO SRO CAFU VERMOGENSVERWALTUNG GMBH & CO. OG CA-LEASING ALPHA INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG CA-LEASING BETA 2 INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG CA-LEASING DELTA INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG CA-LEASING EPSILON INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG CA-LEASING EURO, S.R.O. CA-LEASING KAPPA INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG CA-LEASING LAMBDA INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG CA-LEASING OMEGA INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG CA-LEASING OVUS S.R.O. CA-LEASING PRAHA S.R.O. CA-LEASING SENIOREN PARK GMBH CA-LEASING TERRA POSLOVANJE Z NEPREMICNINAMI D.O.O. ANCILLARY BANKING SERVICES MUNICH GERMANY MUNICH GERMANY MUNICH GERMANY HAMBURG GERMANY HAMBURG GERMANY VERONA ITALY SOFIA BULGARIA SOFIA BULGARIA MUNICH GERMANY PRAGUE CZECH REPUBLIC CESKE CZECH BUDEJOVICE REPUBLIC X X X X BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY PRAGUE CZECH REPUBLIC X X BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY PRAGUE CZECH REPUBLIC PRAGUE CZECH REPUBLIC X X X X LJUBLJANA SLOVENIA 33

34 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost CA-LEASING YPSILON INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG CA-LEASING ZETA INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG CALG 307 MOBILIEN LEASING GMBH CALG 443 GRUNDSTUCKVERWALTUNG GMBH CALG 451 GRUNDSTUCKVERWALTUNG GMBH CALG ALPHA GRUNDSTUCKVERWALTUNG GMBH CALG ANLAGEN LEASING GMBH CALG ANLAGEN LEASING GMBH & CO GRUNDSTUCKVERMIETUNG UND - VERWALTUNG KG CALG DELTA GRUNDSTUCKVERWALTUNG GMBH CALG GAMMA GRUNDSTUCKVERWALTUNG GMBH CALG GRUNDSTUCKVERWALTUNG GMBH CALG IMMOBILIEN LEASING GMBH CALG IMMOBILIEN LEASING GMBH & CO 1050 WIEN, SIEBENBRUNNENGASSE OG CALG IMMOBILIEN LEASING GMBH & CO 1120 WIEN, SCHONBRUNNER SCHLOSS- STRASSE OG CALG IMMOBILIEN LEASING GMBH & CO PROJEKT ACHT OG CALG IMMOBILIEN LEASING GMBH & CO PROJEKT FUNF OG CALG IMMOBILIEN LEASING GMBH & CO PROJEKT VIER OG CALG IMMOBILIEN LEASING GMBH & CO PROJEKT ZEHN OG CALG MINAL GRUNDSTUCKVERWALTUNG GMBH CAL-PAPIER INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG CAMERON GRANVILLE 2 ASSET MANAGEMENT INC CAMERON GRANVILLE 3 ASSET MANAGEMENT INC. CAMERON GRANVILLE ASSET MANAGEMENT (SPV-AMC), INC BUDAPEST HUNGARY BUDAPEST HUNGARY MUNICH GERMANY BUDAPEST HUNGARY TAGUIG PHILIPPINES TAGUIG PHILIPPINES TAGUIG PHILIPPINES CARD COMPLETE SERVICE BANK AG BANKS CARDS & SYSTEMS EDV- DIENSTLEISTUNGS GMBH CDM CENTRALNY DOM MAKLERSKI PEKAO SA CEAKSCH VERWALTUNGS GMBH CENTRUM KART SA CENTRUM BANKOWOSCI BEZPOSREDNIEJ SPOLKA Z OGRANICZONA ODPOWIEDZIALNOSC CHARADE LEASING GESELLSCHAFT M.B.H. CHEFREN LEASING GMBH ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES WARSAW POLAND WARSAW POLAND KRAKOW POLAND BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

35 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost CIVITAS IMMOBILIEN LEASING GESELLSCHAFT M.B.H. CJSC BANK SIBIR BANKS OMSK CITY RUSSIA MOSCOW RUSSIA CLOSED JOINT-STOCK COMPANY UNICREDIT SECURITIES CO.RI.T. S.p.A. IN LIQUIDAZIONE COFIRI S.p.A. IN LIQUIDAZIONE COMMUNA - LEASING GRUNDSTUCKSVERWALTUNGSGESELLS CHAFT M.B.H. CONTRA LEASING-GESELLSCHAFT M.B.H. CORDUSIO SOCIETA' FIDUCIARIA PER AZIONI ROME ITALY ROME ITALY MILAN ITALY DAB BANK AG BANKS MUNICH GERMANY DEBO LEASING IFN S.A. BUCHAREST ROMANIA DINERS CLUB CEE HOLDING AG DINERS CLUB POLSKA SP.Z.O.O. DINERS CLUB SLOVAKIA S.R.O. WARSAW POLAND BRATISLAVA SLOVAKIA DIREKTANLAGE.AT AG BANKS SALZBURG AUSTRIA DLV IMMOBILIEN LEASING GESELLSCHAFT M.B.H. DOMUS CLEAN REINIGUNGS GMBH DOMUS FACILITY MANAGEMENT GMBH DUODEC Z IMMOBILIEN LEASING GESELLSCHAFT M.B.H. EK MITTELSTANDSFINANZIERUNGS AG ENTASI SRL EPSSILON LIEGENSCHAFTSDEVELOPMENT GMBH EUROFINANCE 2000 SRL EUROLEASE AMUN IMMOBILIEN LEASING GESELLSCHAFT M.B.H. EUROLEASE ANUBIS IMMOBILIEN LEASING GESELLSCHAFT M.B.H. EUROLEASE ISIS IMMOBILIEN LEASING GESELLSCHAFT M.B.H. EUROLEASE MARDUK IMMOBILIEN LEASING GESELLSCHAFT M.B.H. EUROLEASE RA IMMOBILIEN LEASING GESELLSCHAFT M.B.H. EUROLEASE RAMSES IMMOBILIEN LEASING GESELLSCHAFT M.B.H. EUROPA FACILITY MANAGEMENT LTD. EUROPA FUND MANAGEMENT (EUROPA BEFEKTETESI ALAPKEZELO RT) EUROVENTURES-AUSTRIA-CA- MANAGEMENT GESMBH EXPANDA IMMOBILIEN LEASING GESELLSCHAFT M.B.H. ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ROME ITALY ROME ITALY BUDAPEST HUNGARY BUDAPEST HUNGARY 35

36 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost FACTORBANK AKTIENGESELLSCHAFT BANKS FAMILY CREDIT NETWORK SPA MILAN ITALY FINECO LEASING S.P.A. FINECO VERWALTUNG AG BRESCIA ITALY MUNICH GERMANY FINECOBANK SPA BANKS MILAN ITALY FMC LEASING INGATLANHASZNOSITO BUDAPEST HUNGARY KORLATOLT FELELOSSEGU TARSASAG FMZ SAVARIA SZOLGALTATO KFT FMZ SIGMA PROJEKTENTWICKLUNGS GMBH FOLIA LEASING GESELLSCHAFT M.B.H. BUDAPEST HUNGARY FONDO SIGMA BANKS ROME ITALY FOOD & MORE GMBH MUNICH GERMANY FUGATO LEASING GESELLSCHAFT M.B.H. G.N.E. GLOBAL GRUNDSTUCKSVERWERTUNG GESELLSCHAFT M.B.H. GALA GRUNDSTUCKVERWALTUNG GESELLSCHAFT M.B.H. GBS GRUNDSTUCKSVERWALTUNGSGESELLS CHAFT M.B.H. GEBAUDELEASING GRUNDSTUCKSVERWALTUNGSGESELLS CHAFT M.B.H. GEMEINDELEASING GRUNDSTUCKVERWALTUNG GESELLSCHAFT M.B.H. GRUNDSTUCKSGESELLSCHAFT SIMON BESCHRANKT HAFTENDE KOMMANDITGESELLSCHAF GRUNDSTUCKSVERWALTUNG LINZ- MITTE GMBH GUS CONSULTING GMBH GYOR BEVASARLOKOZPONT INGATLANBERUHAZO ES UZEMELTETO KORLATOLT FELELOSSEGU TAESASAG H.F.S. HYPO-FONDSBETEILIGUNGEN FUR SACHWERTE GMBH HERKU LEASING GESELLSCHAFT M.B.H. HOKA LEASING-GESELLSCHAFT M.B.H. HONEU LEASING GESELLSCHAFT M.B.H. HUMAN RESOURCES SERVICE AND DEVELOPMENT GMBH HVB - LEASING PLUTO KFT HVB ALTERNATIVE ADVISORS LLC HVB ASIA LIMITED HVB ASSET LEASING LIMITED HVB ASSET MANAGEMENT HOLDING GMBH ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES MUNICH GERMANY BUDAPEST HUNGARY MUNICH GERMANY BUDAPEST HUNGARY WILMINGTON U.S.A. SINGAPORE SINGAPORE LONDON UNITED KINGDOM MUNICH GERMANY X X BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

37 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost HVB AUTO LEASING EOOD HVB CAPITAL ASIA LIMITED HVB CAPITAL LLC HVB CAPITAL LLC II HVB CAPITAL LLC III HVB CAPITAL LLC VI HVB CAPITAL LLC VIII HVB CAPITAL PARTNERS AG HVB EXPORT LEASING GMBH HVB FIERO LEASING EOOD HVB FINANCE LONDON LIMITED HVB FUNDING TRUST I HVB FUNDING TRUST II HVB FUNDING TRUST III HVB FUNDING TRUST VIII HVB GESELLSCHAFT FUR GEBAUDE BETEILIGUNGS GMBH HVB GESELLSCHAFT FUR GEBAUDE MBH & CO KG HVB GLOBAL ASSETS COMPANY (GP), LLC HVB GLOBAL ASSETS COMPANY L.P. HVB HONG KONG LIMITED HVB IMMOBILIEN AG HVB INTERNATIONAL ASSET LEASING GMBH HVB INVESTMENTS (UK) LIMITED HVB LEASING CZECH REPUBLIC S.R.O. HVB LEASING MAX INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG HVB LEASING OOD HVB LEASING SLOVAKIA S.R.O. HVB LONDON INVESTMENTS (AVON) LIMITED HVB LONDON INVESTMENTS (CAM) LIMITED HVB PRINCIPAL EQUITY GMBH HVB PROJEKT GMBH HVB REALTY CAPITAL INC. HVB SECUR GMBH ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES SOFIA BULGARIA HONG KONG JAPAN WILMINGTON U.S.A. WILMINGTON U.S.A. WILMINGTON U.S.A. WILMINGTON U.S.A. WILMINGTON U.S.A. MUNICH GERMANY MUNICH GERMANY SOFIA BULGARIA LONDON UNITED KINGDOM X X WILMINGTON U.S.A. WILMINGTON U.S.A. WILMINGTON U.S.A. WILMINGTON U.S.A. MUNICH GERMANY MUNICH GERMANY NEW YORK U.S.A. NEW YORK U.S.A. HONG KONG CHINA MUNICH GERMANY MUNICH GERMANY CAYMAN ISLANDS PRAGUE CAYMAN ISLANDS CZECH REPUBLIC X X X X BUDAPEST HUNGARY SOFIA BULGARIA BRATISLAVA SLOVAKIA LONDON UNITED KINGDOM LONDON UNITED KINGDOM X X X X MUNICH GERMANY MUNICH GERMANY NEW YORK U.S.A. MUNICH GERMANY 37

38 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost HVB SUPER LEASING EOOD HVB TECTA GMBH HVB VERWA 1 GMBH HVB VERWA 4 GMBH HVB VERWA 4.4 GMBH HVBFF INTERNATIONAL GREECE GMBH HVBFF INTERNATIONALE LEASING GMBH HVBFF OBJEKT BETEILIGUNGS GMBH HVBFF PRODUKTIONSHALLE GMBH I.L. HVB-LEASING AIDA INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG HVB-LEASING ATLANTIS INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG HVB-LEASING DANTE INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG HVB-LEASING FIDELIO INGATLANHASNOSITO KORLATOLT FELELOSSEGU TARSASAG HVB-LEASING FORTE INGATLANHASNOSITO KORLATOLT FELELOSSEGU TARSASAG HVB-LEASING GARO KFT HVB-LEASING HAMLET INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG HVB-LEASING JUPITER KFT HVB-LEASING LAMOND INGATLANHASZNOSITO KFT. HVB-LEASING MAESTOSO INGATLANHASZNOSITO KFT. HVB-LEASING NANO KFT HVB-LEASING OTHELLO INGATLANHASNOSITO KORLATOLT FELELOSSEGU TARSASAG HVB-LEASING ROCCA INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG HVB-LEASING RUBIN KFT. HVB-LEASING SMARAGD KFT. HVB-LEASING SPORT INGATLANHASZNOSITO KOLATPOT FEOEOASSEGU TARSASAG HVB-LEASING ZAFIR KFT. HVZ GMBH & CO. OBJEKT KG HYPO-BANK VERWALTUNGSZENTRUM GMBH HYPOVEREINS IMMOBILIEN EOOD ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES SOFIA BULGARIA MUNICH GERMANY MUNICH GERMANY MUNICH GERMANY MUNICH GERMANY MUNICH GERMANY MUNICH GERMANY MUNICH GERMANY MUNICH GERMANY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY MUNICH GERMANY MUNICH GERMANY SOFIA BULGARIA BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

39 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost HYPOVEREINSFINANCE N.V. IMMOBILIEN RATING GMBH IMMOBILIENLEASING GRUNDSTUCKSVERWALTUNGS- GESELLSCHAFT M.B.H. INPROX CHOMUTOV, S.R.O. INPROX KARLOVY VARY, S.R.O. INPROX KLADNO, S.R.O. INPROX POPRAD, SPOL. S.R.O. INPROX SR I., SPOL. S R.O. INTERKONZUM DOO SARAJEVO INTERNATIONALES IMMOBILIEN- INSTITUT GMBH INTRO LEASING GESELLSCHAFT M.B.H. IRFIS - MEDIOCREDITO DELLA SICILIA S.p.A. JAUSERN-LEASING GESELLSCHAFT M.B.H. ANCILLARY BANKING SERVICES AMSTERDAM NETHERLANDS PRAGUE PRAGUE PRAGUE CZECH REPUBLIC CZECH REPUBLIC CZECH REPUBLIC BRATISLAVA SLOVAKIA BRATISLAVA SLOVAKIA SARAJEVO BOSNIA AND HERCEGOVINA MUNICH GERMANY BANKS PALERMO ITALY JSC ATF BANK BANKS ALMATY CITY KAZAKHSTAN KADMOS IMMOBILIEN LEASING GMBH KINABALU PRODUCTS LLP KINABALU SOLUTIONS LTD KLEA ZS-IMMOBILIENVERMIETUNG G.M.B.H. KLEA ZS-LIEGENSCHAFTSVERMIETUNG G.M.B.H. KUNSTHAUS LEASING GMBH KUTRA GRUNDSTUCKSVERWALTUNGS- GESELLSCHAFT M.B.H. LAGERMAX LEASING GMBH LAGEV IMMOBILIEN LEASING GESELLSCHAFT M.B.H. LARGO LEASING GESELLSCHAFT M.B.H. LASSALLESTRASSE BAU-, PLANUNGS-, ERRICHTUNGS- UND VERWERTUNGSGESELLSCHAFT M.B.H. ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES LONDON LONDON UNITED KINGDOM UNITED KINGDOM LEASFINANZ BANK GMBH BANKS LEASFINANZ GMBH LEGATO LEASING GESELLSCHAFT M.B.H. LELEV IMMOBILIEN LEASING GESELLSCHAFT M.B.H. LF BETEILIGUNGEN GMBH LIFE MANAGEMENT ERSTE GMBH LIFE MANAGEMENT ZWEITE GMBH LIMITED LIABILITY COMPANY B.A. REAL ESTATE ANCILLARY BANKING SERVICES MUNICH GERMANY GRUNWALD GERMANY MOSCOW RUSSIA X X X X X X X X X X X X 39

40 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost LINO HOTEL-LEASING GMBH LIPARK LEASING GESELLSCHAFT M.B.H. LIVA IMMOBILIEN LEASING GESELLSCHAFT M.B.H. LLC AI LINE LOCALMIND SPA LOCAT CROATIA DOO LOWES LIMITED LTD SI&C AMC UKRSOTS REAL ESTATE M. A. V. 7., BANK AUSTRIA LEASING BAUTRAGER GMBH & CO.OHG. M.A.I.L. FINANZBERATUNG GESELLSCHAFT M.B.H. MARKETING ZAGREBACKE BANKE DOO MBC IMMOBILIEN LEASING GESELLSCHAFT M.B.H. MENUETT GRUNDSTUCKSVERWALTUNGS- GESELLSCHAFT M.B.H. MERKURHOF GRUNDSTUCKSGESELLSCHAFT MIT BESCHRANKTER HAFTUNG ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES MOSCOW RUSSIA MILAN ITALY ZAGREB CROATIA NICOSIA CYPRUS KIEV UKRAINE ZAGREB CROATIA HAMBURG GERMANY MEZZANIN FINANZIERUNGS AG BANKS BUDAPEST HUNGARY MIK BETA INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG MIK INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG MM OMEGA PROJEKTENTWICKLUNGS GMBH MOBILITY CONCEPT GMBH MOGRA LEASING GESELLSCHAFT M.B.H. MOVIE MARKET BETEILIGUNGS GMBH NAGE LOKALVERMIETUNGSGESELLSCHAFT M.B.H. NATA IMMOBILIEN-LEASING GESELLSCHAFT M.B.H. NO. HYPO LEASING ASTRICTA GRUNDSTUCKVERMIETUNGS GESELLSCHAFT M.B.H. OCT Z IMMOBILIEN LEASING GESELLSCHAFT M.B.H OLG HANDELS- UND BETEILIGUNGSVERWALTUNGSGESELLS CHAFT M.B.H. OOO UNICREDIT LEASING OPEN JOINT STOCK COMPANY UNICREDIT BANK ORESTOS IMMOBILIEN-VERWALTUNGS GMBH PALAIS ROTHSCHILD VERMIETUNGS GMBH & CO OG BUDAPEST HUNGARY OBERHACHING GERMANY MUNICH GERMANY MOSCOW RUSSIA BANKS LUCK UKRAINE ANCILLARY BANKING SERVICES MUNICH GERMANY BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

41 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost PARZHOF-ERRICHTUNGS- UND VERWERTUNGSGESELLSCHAFT M.B.H. PAZONYI'98 INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG BUDAPEST HUNGARY PEKAO BANK HIPOTECZNY S.A. BANKS WARSAW POLAND PEKAO FAKTORING SP. ZOO LUBLIN POLAND PEKAO SERVICES SP. ZOO PEKAO FUNDUSZ KAPITALOWY SP. ZOO PEKAO LEASING HOLDING S.A. PEKAO LEASING SP ZO.O. PEKAO PIONEER P.T.E. SA PELOPS LEASING GESELLSCHAFT M.B.H. PESTSZENTIMREI SZAKORVOSI RENDELO KFT. PIANA LEASING GESELLSCHAFT M.B.H. PIONEER ALTERNATIVE INVESTMENT MANAGEMENT (BERMUDA) LIMITED PIONEER ALTERNATIVE INVESTMENT MANAGEMENT LTD PIONEER ALTERNATIVE INVESTMENT MANAGEMENT SGR PA PIONEER ALTERNATIVE INVESTMENTS (ISRAEL) LTD PIONEER ALTERNATIVE INVESTMENTS (NEW YORK) LTD PIONEER ASSET MANAGEMENT AS PIONEER ASSET MANAGEMENT S.A.I. S.A. PIONEER ASSET MANAGEMENT SA PIONEER FUNDS DISTRIBUTOR INC PIONEER GLOBAL ASSET MANAGEMENT SPA PIONEER GLOBAL FUNDS DISTRIBUTOR LTD PIONEER GLOBAL INVESTMENTS (AUSTRALIA) PTY LIMITED PIONEER GLOBAL INVESTMENTS (HK) LIMITED IN LIQUIDATION PIONEER GLOBAL INVESTMENTS (TAIWAN) LTD. WARSAW POLAND WARSAW POLAND WARSAW POLAND WARSAW POLAND WARSAW POLAND BUDAPEST HUNGARY HAMILTON BERMUDA DUBLIN IRELAND MILAN ITALY RAMAT GAN. ISRAEL DOVER U.S.A. PRAGUE CZECH REPUBLIC BUCHAREST ROMANIA LUXEMBOURG LUXEMBOURG BOSTON U.S.A. MILAN ITALY HAMILTON BERMUDA SYDNEY AUSTRALIA HONG KONG CHINA TAIPEI TAIWAN X X PIONEER GLOBAL INVESTMENTS LIMITED PIONEER INSTITUTIONAL ASSET MANAGEMENT INC PIONEER INVESTMENT COMPANY AS PIONEER INVESTMENT FUND MANAGEMENT LIMITED PIONEER INVESTMENT MANAGEMENT INC PIONEER INVESTMENT MANAGEMENT LIMITED PIONEER INVESTMENT MANAGEMENT LLC DUBLIN IRELAND WILMINGTON U.S.A. PRAGUE CZECH REPUBLIC X X BUDAPEST HUNGARY WILMINGTON U.S.A. DUBLIN IRELAND MOSCOW RUSSIA 41

42 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost PIONEER INVESTMENT MANAGEMENT SHAREHOLDER SERVICES INC. PIONEER INVESTMENT MANAGEMENT SOC. DI GESTIONE DEL RISPARMIO PER AZ PIONEER INVESTMENT MANAGEMENT USA INC. PIONEER INVESTMENTS AG BOSTON U.S.A. MILAN ITALY WILMINGTON U.S.A. BERNE SWITZERLAND PIONEER INVESTMENTS AUSTRIA GMBH BANKS MUNICH GERMANY PIONEER INVESTMENTS KAPITALANLAGEGESELLSCHAFT MBH PIONEER PEKAO INVESTMENT FUND COMPANY SA (POLISH NAME: PIONEER PEKAO TFI SA) PIONEER PEKAO INVESTMENT MANAGEMENT SA POMINVEST DD PORTIA GRUNDSTUCKS- VERWALTUNGSGESELLSCHAFT MBH & CO. OBJEKT KG PORTIA GRUNDSTUCKSVERWALTUNGS- GESELLSCHAFT MIT BESCHRANKTER HAFTUNG POSATO LEASING GESELLSCHAFT M.B.H. PRELUDE GRUNDSTUCKSVERWALTUNGS- GESELLSCHAFT M.B.H. PRIM Z IMMOBILIEN LEASING GESELLSCHAFT M.B.H. PRIVATE JOINT STOCK COMPANY FERROTRADE INTERNATIONAL PROJEKT-LEASE GRUNDSTUCKSVERWALTUNGS- GESELLSCHAFT M.B.H. PRVA STAMBENA STEDIONICA DD ZAGREB PUBLIC JOINT STOCK COMPANY UKRSOTSBANK QUADEC Z IMMOBILIEN LEASING GESELLSCHAFT M.B.H. QUART Z IMMOBILIEN LEASING GESELLSCHAFT M.B.H. QUERCIA FUNDING SRL QUERCIA SOFTWARE SPA QUINT Z IMMOBILIEN LEASING GESELLSCHAFT M.B.H RAMSES IMMOBILIEN LEASING GESELLSCHAFT M.B.H. & CO OG ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES WARSAW POLAND WARSAW POLAND SPLIT CROATIA MUNICH GERMANY MUNICH GERMANY KIEV UKRAINE BANKS ZAGREB CROATIA BANKS KIEV UKRAINE ANCILLARY BANKING SERVICES VERONA ITALY VERONA ITALY REAL ESTATE MANAGEMENT POLAND SP. Z O.O. REAL INVEST IMMOBILIEN GMBH REAL-LEASE GRUNDSTUCKSVERWALTUNGS- GESELLSCHAFT M.B.H. REAL-RENT LEASING GESELLSCHAFT M.B.H. REGEV REALITATENVERWERTUNGSGESELLSCH AFT M.B.H. WARSAW POLAND BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

43 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost RIGEL IMMOBILIEN GMBH RONDO LEASING GMBH RSB ANLAGENVERMIETUNG GESELLSCHAFT M.B.H. SALVATORPLATZ- GRUNDSTUCKSGESELLSCHAFT MBH SALVATORPLATZ- GRUNDSTUCKSGESELLSCHAFT MBH & CO. OHG SAARLAND SALVATORPLATZ- GRUNDSTUCKSGESELLSCHAFT MBH & CO. OHG VERWALTUNGSZENTRUM SAS-REAL KFT. SCHOELLERBANK AKTIENGESELLSCHAFT SCHOELLERBANK INVEST AG SECA-LEASING GESELLSCHAFT M.B.H. SEDEC Z IMMOBILIEN LEASING GESELLSCHAFT M.B.H. SEXT Z IMMOBILIEN LEASING GESELLSCHAFT M.B.H SHS LEASING GMBH SIA UNICREDIT LEASING SIGMA LEASING GMBH SIRIUS IMMOBILIEN GMBH SOCIETA' ITALIANA GESTIONE ED INCASSO CREDITI S.p.A. IN LIQUIDAZIONE SOFIGERE SOCIETE PAR ACTIONS SIMPLIFIEE SOFIPA SOCIETA' DI GESTIONE DEL RISPARMIO (SGR) S.p.A. SOLOS IMMOBILIEN- UND PROJEKTENTWICKLUNGS GMBH & CO. SIRIUS BETEILIGUNGS KG SONATA LEASING-GESELLSCHAFT M.B.H. SPECTRUM GRUNDSTUCKSVERWALTUNGS- GESELLSCHAFT M.B.H. SRQ FINANZPARTNER AG STATUS VERMOGENSVERWALTUNG GMBH STEWE GRUNDSTUCKSVERWALTUNGS- GESELLSCHAFT M.B.H. STRUCTURED INVEST SOCIETE ANONYME STRUCTURED LEASE GMBH TELEDATA CONSULTING UND SYSTEMMANAGEMENT GESELLSCHAFT M.B.H. TERRONDA DEVELOPMENT B.V. TERZ Z IMMOBILIEN LEASING GESELLSCHAFT M.B.H. ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES MUNICH GERMANY MUNICH GERMANY MUNICH GERMANY BUDAPEST HUNGARY BANKS ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES SALZBURG AUSTRIA RIGA LATVIA ROME ITALY PARIS FRANCE ROME ITALY MUNICH GERMANY BERLIN GERMANY SCHWERIN GERMANY LUXEMBOURG LUXEMBOURG HAMBURG GERMANY AMSTERDAM NETHERLANDS 43

44 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost TIVOLI GRUNDSTUCKS- AKTIENGESELLSCHAFT TREDEC Z IMMOBILIEN LEASING GESELLSCHAFT M.B.H. TREUCONSULT BETEILIGUNGSGESELLSCHAFT M.B.H. TREVI FINANCE N. 2 S.p.A. TREVI FINANCE N. 3 S.r.l. TREVI FINANCE S.p.A. TRINITRADE VERMOGENSVERWALTUNGS- GESELLSCHAFT MIT BESCHRANKTER HAFTUNG UCL NEKRETNINE D.O.O. ANCILLARY BANKING SERVICES MUNICH GERMANY CONEGLIANO (TREVISO) CONEGLIANO (TREVISO) CONEGLIANO (TREVISO) ITALY ITALY ITALY MUNICH GERMANY SARAJEVO BOSNIA AND HERCEGOVINA UFFICIUM IMMOBILIEN LEASING GESELLSCHAFT M.B.H. UNI IT SRL ANCILLARY BANKING SERVICES UNICOM IMMOBILIEN LEASING GESELLSCHAFT M.B.H. UNICREDIT (CHINA) ADVISORY LIMITED UNICREDIT AUDIT SOCIETA' ANCILLARY CONSORTILE PER AZIONI BANKING SERVICES UNICREDIT AURORA LEASING GMBH UNICREDIT AUTO LEASING E.O.O.D. UNICREDIT BANK AD BANJA LUKA BANKS BANJA LUKA BOSNIA AND HERCEGOVINA TRENTO ITALY BEIJING CHINA MILAN ITALY SOFIA BULGARIA UNICREDIT BANK AG BANKS MUNICH GERMANY UNICREDIT BANK AUSTRIA AG BANKS UNICREDIT BANK CZECH REPUBLIC A.S. BANKS PRAGUE CZECH X X REPUBLIC UNICREDIT BANK DD BANKS MOSTAR BOSNIA AND HERCEGOVINA UNICREDIT BANK HUNGARY ZRT. BANKS BUDAPEST HUNGARY UNICREDIT BANK IRELAND PLC BANKS DUBLIN IRELAND UNICREDIT BANK OJSC BANKS BISHKEK KIRGHIZISTAN UNICREDIT BANK SERBIA JSC BANKS BELGRADE SERBIA UNICREDIT BANK SLOVAKIA AS BANKS BRATISLAVA SLOVAKIA UNICREDIT BANKA SLOVENIJA D.D. BANKS LJUBLJANA SLOVENIA UNICREDIT BETEILIGUNGS GMBH UNICREDIT BPC MORTGAGE S.R.L. MUNICH GERMANY VERONA ITALY UNICREDIT BULBANK AD BANKS SOFIA BULGARIA UNICREDIT BUSINESS PARTNER GMBH UNICREDIT BUSINESS PARTNER S.R.O. UNICREDIT BUSINESS PARTNER SOCIETA' CONSORTILE PER AZIONI UNICREDIT CA IB ROMANIA SRL ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES PRAGUE COLOGNO MONZESE CZECH REPUBLIC X X X X ITALY BUCHAREST ROMANIA X X X X BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

45 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost UNICREDIT CA IB SECURITIES ROMANIA S.A. UNICREDIT CAIB CZECH REPUBLIC AS UNICREDIT CAIB HUNGARY LTD UNICREDIT CAIB POLAND S.A. UNICREDIT CAIB SECURITIES UK LTD. UNICREDIT CAIB SERBIA LTD BELGRADE UNICREDIT CAIB SLOVAKIA, A.S. UNICREDIT CAIB SLOVENIJA DOO UNICREDIT CAPITAL MARKETS LLC UNICREDIT CONSUMER FINANCING AD UNICREDIT CONSUMER FINANCING IFN S.A. UNICREDIT CREDIT MANAGEMENT BANK SPA UNICREDIT CREDIT MANAGEMENT IMMOBILIARE S.P.A. UNICREDIT DELAWARE INC UNICREDIT DIRECT SERVICES GMBH UNICREDIT FACTORING PENZUGYI SZOLGALTATO ZRT UNICREDIT FACTORING EAD UNICREDIT FACTORING SPA UNICREDIT FLEET MANAGEMENT S.R.O. UNICREDIT FLEET MANAGEMENT S.R.O. UNICREDIT GARAGEN ERRICHTUNG UND VERWERTUNG GMBH UNICREDIT GLOBAL INFORMATION SERVICES SOCIETA CONSORTILE PER AZIONI UNICREDIT GLOBAL LEASING EXPORT GMBH UNICREDIT GLOBAL LEASING PARTICIPATION MANAGEMENT GMBH UNICREDIT INGATLANLIZING ZRT UNICREDIT INTERNATIONAL BANK (LUXEMBOURG) SA BUCHAREST ROMANIA PRAGUE CZECH REPUBLIC BUDAPEST HUNGARY WARSAW POLAND LONDON UNITED KINGDOM BELGRADE SERBIA BRATISLAVA SLOVAKIA LJUBLJANA SLOVENIA NEW YORK U.S.A. SOFIA BULGARIA BUCHAREST ROMANIA BANKS VERONA ITALY ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES VERONA ITALY DOVER U.S.A. MUNICH GERMANY BUDAPEST HUNGARY SOFIA BULGARIA MILAN ITALY PRAGUE CZECH REPUBLIC BRATISLAVA SLOVAKIA MILAN ITALY BUDAPEST HUNGARY BANKS LUXEMBOURG LUXEMBOURG X X X X X X UNICREDIT JELZALOGBANK ZRT. BANKS BUDAPEST HUNGARY UNICREDIT KFZ LEASING GMBH UNICREDIT LEASING (AUSTRIA) GMBH UNICREDIT LEASING AD UNICREDIT LEASING AVIATION GMBH UNICREDIT LEASING BAUTRAGER GMBH UNICREDIT LEASING CORPORATION IFN S.A. SOFIA BULGARIA HAMBURG GERMANY BUCHAREST ROMANIA 45

46 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost UNICREDIT LEASING CROATIA D.O.O. ZA LEASING UNICREDIT LEASING CZ, A.S. UNICREDIT LEASING D.O.O. ZAGREB CROATIA PRAGUE SARAJEVO CZECH REPUBLIC BOSNIA AND HERCEGOVINA UNICREDIT LEASING FINANCE GMBH BANKS HAMBURG GERMANY UNICREDIT LEASING FLEET BUCHAREST ROMANIA MANAGEMENT S.R.L. UNICREDIT LEASING FUHRPARKMANAGEMENT GMBH UNICREDIT LEASING GMBH UNICREDIT LEASING HUNGARY ZRT UNICREDIT LEASING IMMOTRUCK ZRT. UNICREDIT LEASING KFT UNICREDIT LEASING LUNA KFT UNICREDIT LEASING MARS KFT UNICREDIT LEASING REAL ESTATE S.R.O. UNICREDIT LEASING ROMANIA S.A. UNICREDIT LEASING S.P.A. UNICREDIT LEASING SLOVAKIA A.S. UNICREDIT LEASING SRBIJA D.O.O. BEOGRAD UNICREDIT LEASING TOB UNICREDIT LEASING URANUS KFT UNICREDIT LEASING, LEASING, D.O.O. UNICREDIT LONDON INVESTMENTS LIMITED UNICREDIT LUNA LEASING GMBH UNICREDIT LUXEMBOURG FINANCE SA HAMBURG GERMANY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BRATISLAVA SLOVAKIA BUCHAREST ROMANIA BOLOGNA ITALY BRATISLAVA SLOVAKIA BELGRADE SERBIA KIEV UKRAINE BUDAPEST HUNGARY LJUBLJANA SLOVENIA LONDON UNITED KINGDOM LUXEMBOURG LUXEMBOURG UNICREDIT LUXEMBOURG S.A. BANKS LUXEMBOURG LUXEMBOURG UNICREDIT MEDIOCREDITO CENTRALE BANKS ROME ITALY S.p.A. UNICREDIT MERCHANT S.P.A. UNICREDIT MOBILIEN LEASING GMBH UNICREDIT PEGASUS LEASING GMBH UNICREDIT POLARIS LEASING GMBH UNICREDIT REAL ESTATE SOCIETA' CONSORTILE PER AZIONI UNICREDIT RENT D.O.O. BEOGRAD UNICREDIT SECURITIES INTERNATIONAL LIMITED UNICREDIT TECHRENT LEASING GMBH ANCILLARY BANKING SERVICES ROME ITALY GENOA ITALY BELGRADE SERBIA NICOSIA CYPRUS UNICREDIT TIRIAC BANK S.A. BANKS BUCHAREST ROMANIA UNICREDIT U.S. FINANCE LLC WILMINGTON U.S.A. X X X X X X BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

47 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost UNICREDIT ZEGA LEASING- GESELLSCHAFT M.B.H. UNICREDIT-LEASING HOMONNA INGATLNHASZNOSITO KFT UNICREDIT-LEASING HOSPES KFT UNICREDIT-LEASING MIDAS INGATLANHASZNOSITO KARLATOLT FELELOSSEGU TARSASAG UNICREDIT-LEASING NEPTUNUS KFT UNICREDIT-LEASING ORION INGATLANHASZNOSITO KORLATOLT FELELOSSEGU TARSASAG UNICREDIT-LEASING SATURNUS KFT UNICREDITO ITALIANO CAPITAL TRUST III UNICREDITO ITALIANO CAPITAL TRUST IV UNICREDITO ITALIANO FUNDING LLC III UNICREDITO ITALIANO FUNDING LLC IV UNIMANAGEMENT SRL UPI POSLOVNI SISTEM DOO US PROPERTY INVESTMENTS INC. VANDERBILT CAPITAL ADVISORS LLC VAPE COMMUNA LEASINGGESELLSCHAFT M.B.H. VERBA VERWALTUNGSGESELLSCHAFT MBH VERWALTUNGSGESELLSCHAFT KATHARINENHOF MBH WEALTH MANAGEMENT CAPITAL HOLDING GMBH WEALTHCAP INITIATOREN GMBH WEALTHCAP INVESTORENBETREUUNG GMBH WEALTHCAP PEIA KOMPLEMENTAR GMBH WEALTHCAP PEIA MANAGEMENT GMBH WEALTHCAP REAL ESTATE MANAGEMENT GMBH WEALTHCAP STIFTUNGSTREUHAND GMBH WOM GRUNDSTUCKSVERWALTUNGS- GESELLSCHAFT M.B.H. XELION DORADCY FINANSOWI SP. ZOO Z LEASING ALFA IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING ARKTUR IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING AURIGA IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING CORVUS IMMOBILIEN LEASING GESELLSCHAFT M.B.H. ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES ANCILLARY BANKING SERVICES BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY BUDAPEST HUNGARY NEWARK U.S.A. NEWARK U.S.A. DELAWARE U.S.A. DELAWARE U.S.A. TORINO ITALY SARAJEVO BOSNIA AND HERCEGOVINA DALLAS U.S.A. WILMINGTON U.S.A. MUNICH GERMANY HAMBURG GERMANY MUNICH GERMANY HAMBURG GERMANY MUNICH GERMANY MUNICH GERMANY MUNICH GERMANY MUNICH GERMANY HAMBURG GERMANY WARSAW POLAND X X 47

48 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost Z LEASING DORADO IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING DRACO IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING GAMA IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING GEMINI IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING HEBE IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING HERCULES IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING IPSILON IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING ITA IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING JANUS IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING KALLISTO IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING KAPA IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING LYRA IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING NEREIDE IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING OMEGA IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING PERSEUS IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING POLLUX IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING SCORPIUS IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING TAURUS IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING VENUS IMMOBILIEN LEASING GESELLSCHAFT M.B.H. Z LEASING VOLANS IMMOBILIEN LEASING GESELLSCHAFT M.B.H. ZAGREB NEKRETNINE DOO ANCILLARY BANKING SERVICES ZAGREB CROATIA ZAGREBACKA BANKA DD BANKS ZAGREB CROATIA ZANE BH DOO SARAJEVO X X ZAO IMB-LEASING ZAO LOCAT LEASING RUSSIA ANCILLARY BANKING SERVICES BOSNIA AND HERCEGOVINA MOSCOW RUSSIA MOSCOW RUSSIA ZAO UNICREDIT BANK BANKS MOSCOW RUSSIA ZB INVEST DOO ZAGREB CROATIA INFORMATIONS-TECHNOLOGIE AUSTRIA GMBH KOC FINANSAL HIZMETLER AS ORBIT ASSET MANAGEMENT LIMITED RCI SERVICES S.R.O. ANCILLARY BANKING SERVICES ISTANBUL TURKEY HAMILTON BERMUDA PRAGUE CZECH REPUBLIC X X BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

49 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost STICHTING CUSTODY SERVICES KBN UNICREDIT MENKUL DEGERLER AS YAPI KREDI B TIPI YATIRIM ORTAKLIGI AS YAPI KREDI BANK AZERBAIJAN CLOSED JOINT STOCK COMPANY AMSTERDAM NETHERLANDS ISTANBUL TURKEY ISTANBUL TURKEY BANKS BAKU AZERBAIJAN YAPI KREDI BANK NEDERLAND N.V. BANKS AMSTERDAM NETHERLANDS BANKS ISTANBUL TURKEY YAPI KREDI DIVERSIFIED PAYMENT RIGHTS FINANCE COMPANY YAPI KREDI FAKTORING AS YAPI KREDI FINANSAL KIRALAMA AO YAPI KREDI HOLDING BV ISTANBUL TURKEY ISTANBUL TURKEY AMSTERDAM NETHERLANDS YAPI KREDI MOSCOW BANKS MOSCOW RUSSIA YAPI KREDI PORTFOY YONETIMI AS BARBAROS TURKEY YAPI KREDI YATIRIM MENKUL DEGERLER AS ISTANBUL TURKEY YAPI VE KREDI BANKASI AS BANKS ISTANBUL TURKEY OTHER MUNICH GERMANY A&T-PROJEKTENTWICKLUNGS GMBH & CO. POTSDAMER PLATZ BERLIN KG ACIS IMMOBILIEN- UND PROJEKTENTWICKLUNGS GMBH & CO. OBERBAUM CITY KG ACIS IMMOBILIEN- UND PROJEKTENTWICKLUNGS GMBH & CO. PARKKOLONNADEN KG ACIS IMMOBILIEN- UND PROJEKTENTWICKLUNGS GMBH & CO. STUTTGART KRONPRINZSTRASSE KG OTHER MUNICH GERMANY OTHER MUNICH GERMANY OTHER MUNICH GERMANY AGROB IMMOBILIEN AG OTHER ISMANING GERMANY AIRPLUS AIR TRAVEL CARD VERTRIEBSGESELLSCHAFT M.B.H. ALLIANZ ZB D.O.O. DRUSTVO ZA UPRAVLJANJE DOBROVOLJNIM ALLIANZ ZB D.O.O. DRUSTVO ZA UPRAVLJANJIE OBVEZNIM BANKS ZAGREB CROATIA ZAGREB CROATIA ANGER MACHINING GMBH OTHER TRAUN AUSTRIA OTHER MUNICH GERMANY ARGENTAURUS IMMOBILIEN- VERMIETUNGS- UND VERWALTUNGS GMBH ARRONDA IMMOBILIENVERWALTUNGS GMBH ARTIST MARKETING ENTERTAINMENT GMBH ATLANTERRA IMMOBILIENVERWALTUNGS GMBH OTHER MUNICH GERMANY OTHER OTHER MUNICH GERMANY AUFBAU DRESDEN GMBH OTHER MUNICH GERMANY AVIVA SPA MILAN ITALY INSURANCE (deducted from regulatory capital) AWT HANDELS GESELLSCHAFT M.B.H. OTHER AWT INTERNATIONAL TRADE GMBH OTHER BA-CA INFRASTRUCTURE FINANCE OTHER ADVISORY GMBH BA-CA WIEN MITTE HOLDING GMBH OTHER 49

50 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost BANK AUSTRIA IMMOBILIENSERVICE GMBH BANK FUR TIROL UND VORARLBERG AKTIENGESELLSCHAFT BANQUE DE COMMERCE ET DE PLACEMENTS SA OTHER BANKS INNSBRUCK AUSTRIA BANKS GINEVRA SWITZERLAND BDK CONSULTING OTHER LUCK UKRAINE BKS BANK AG (EHEM.BANK FUR KARNTEN UND STEIERMARK AG) BANKS KLAGENFURT AUSTRIA BLUE CAPITAL EQUITY MANAGEMENT GMBH BLUE CAPITAL EUROPA IMMOBILIEN GMBH & CO. ACHTE OBJEKTE GROBRITANNIEN KG BLUE CAPITAL USA IMMOBILIEN VERWALTUNGS GMBH CA IMMOBILIEN ANLAGEN AKTIENGESELLSCHAFT OTHER HAMBURG GERMANY OTHER HAMBURG GERMANY OTHER HAMBURG GERMANY OTHER CBD INTERNATIONAL SP.ZO.O. OTHER WARSAW POLAND CENTAR KAPTOL DOO OTHER ZAGREB CROATIA OTHER AMSTERDAM NETHERLANDS CENTRAL EUROPEAN CONFECTIONERY HOLDINGS B.V. CENTRAL POLAND FUND LLC CHRISTOPH REISEGGER GESELLSCHAFT M.B.H. CNP UNICREDIT VITA S.p.A. DELAWARE U.S.A. OTHER INSURANCE (deducted from regulatory capital) MILAN ITALY COMPAGNIA ITALPETROLI S.p.A. OTHER ROME ITALY CONSORZIO SE.TEL. SERVIZI TELEMATICI IN LIQUIDAZIONE OTHER NAPOLI ITALY CREDANTI HOLDINGS LIMITED OTHER NICOSIA CYPRUS CREDITRAS ASSICURAZIONI SPA CREDITRAS VITA SPA INSURANCE (deducted from regulatory capital) INSURANCE (deducted from regulatory capital) MILAN ITALY MILAN ITALY CRIVELLI SRL OTHER MILAN ITALY DA VINCI S.r.l. OTHER ROME ITALY DBC SP. ZOO OTHER WARSAW POLAND DELPHA IMMOBILIEN- UND PROJEKTENTWICKLUNGS GMBH & CO. GROSSKUGEL BAUABSCHNITT ALPHA MANAGEMENT KG DELPHA IMMOBILIEN- UND PROJEKTENTWICKLUNGS GMBH & CO. GROSSKUGEL BAUABSCHNITT BETA MANAGEMENT KG DELPHA IMMOBILIEN- UND PROJEKTENTWICKLUNGS GMBH & CO. GROSSKUGEL BAUABSCHNITT GAMMA MANAGEMENT KG OTHER MUNICH GERMANY OTHER MUNICH GERMANY OTHER MUNICH GERMANY BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

51 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost DIRANA LIEGENSCHAFTSVERWERTUNGSGESELL SCHAFT MBH DRITTE UNIPRO IMMOBILIEN- PROJEKTIERUNGSGES.M.B.H. OTHER OTHER BERLIN GERMANY ENDERLEIN & CO. GMBH OTHER BIELEFELD GERMANY OTHER BERLIN GERMANY ERSTE UNIPRO IMMOBILIEN- PROJEKTIERUNGSGESELLSCHAFTM.B.H. EUROPROGETTI & FINANZA S.p.A. IN LIQUIDAZIONE FIDIA SGR SPA FORSTINGER HANDEL UND SERVICE GMBH G.B.S. - GENERAL BROKER SERVICE S.P.A. GIMMO IMMOBILIEN-VERMIETUNGS- UND VERWALTUNGS GMBH GOLF- UND COUNTRY CLUB SEDDINER SEE IMMOBILIEN GMBH GRAND CENTRAL RE LIMITED GRUNDSTUCKSAKTIENGESELLSCHAFT AM POTSDAMER PLATZ (HAUS VATERLAND) GRUWA GRUNDBAU UND WASSERBAU GMBH ROME ITALY MILAN ITALY OTHER ROME ITALY OTHER MUNICH GERMANY OTHER BERLIN GERMANY INSURANCE (deducted from regulatory capital) HAMILTON BERMUDA OTHER MUNICH GERMANY OTHER BERLIN GERMANY H.F.S. IMMOBILIENFONDS GMBH OTHER MUNICH GERMANY HOLDING SP. Z.O.O. (IN LIQUIDATION) OTHER WARSAW POLAND HYPO-BA LEASING SUD GMBH KLAGENFURT AUSTRIA HYPO-BANK VERWALTUNGSZENTRUM GMBH & CO. KG OBJEKT ARABELLASTRASSE OTHER MUNICH GERMANY I-FABER SPA OTHER MILAN ITALY IMMOBILIENFONDS UNIVERSALE 4 GBR OTHER BERLIN GERMANY IMMOBILIENFONDS UNIVERSALE OTHER BERLIN GERMANY WITTENBERGE GBR INCONTRA ASSICURAZIONI S.p.A. INTERRA GESELLSCHAFT FUR IMMOBILIENVERWALTUNG MBH INSURANCE (deducted from regulatory capital) MILAN ITALY OTHER MUNICH GERMANY IPG-INDUSTRIEPARK GYOR PROJEKTIERUNGSGESELLSCHAFT M.B.H. OTHER GERASDORF AUSTRIA IPSE 2000 S.p.A. (IN LIQUIDAZIONE) OTHER ROME ITALY ISB UNIVERSALE BAU GMBH OTHER BRANDENBUR GO GERMANY ISTRA D.M.C. DOO OTHER UMAG CROATIA ISTRATURIST UMAG, HOTELIJERSTVO TURIZAM I TURISTICKA AGENCIJA DD IVONA BETEILIGUNGSVERWALTUNG GMBH JOHA GEBAUDE-ERRICHTUNGS-UND VERMIETUNGSGESELLSCHAFT MBH OTHER UMAG CROATIA OTHER OTHER LEONDING AUSTRIA 51

52 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost KAISERWASSER ERRICHTUNGS- UND BETRIEBSGESELLSCHAFT MBH KRAJOWA IZBA ROZLICZENIOWA SA KSG KARTEN-VERRECHNUNGS- UND SERVICEGESELLSCHAFT M.B.H. OTHER WARSAW POLAND OTHER LLC UKROTSBUD OTHER KIEV UKRAINE OTHER M.A.I.L. BETEILIGUNGSMANAGEMENT GESELLSCHAFT M.B. H. & CO. MCL THETA K MC MARKETING GMBH OTHER MC RETAIL GMBH OTHER MEDIOBANCA BANCA DI CREDITO BANKS MILAN ITALY FINANZIARIO SPA METIS SPA OTHER MILAN ITALY MOC VERWALTUNGS GMBH & CO. OTHER MUNICH GERMANY IMMOBILIEN KG MOLL HOLDING GESELLSCHAFT MBH OTHER MUNICH GERMANY MULTIPLUS CARD DOO ZA PROMIDZBU I OTHER ZAGREB CROATIA USLUGE MY BETEILIGUNGS GMBH OTHER NF OBJEKT FFM GMBH OTHER MUNICH GERMANY NF OBJEKT MUNCHEN GMBH OTHER MUNICH GERMANY NF OBJEKTE BERLIN GMBH OTHER MUNICH GERMANY NOTARTREUHANDBANK AG BANKS NUOVA TEATRO ELISEO S.p.A. OTHER ROME ITALY NXP CO-INVESTMENT PARTNERS VIII L.P. OTHER LONDON UNITED OAK RIDGE INVESTMENT LLC KINGDOM WILMINGTON U.S.A. OBERBANK AG BANKS LINZ AUSTRIA OESTERREICHISCHE CLEARINGBANK AG BANKS OESTERREICHISCHE KONTROLLBANK AKTIENGESELLSCHAFT OSTERREICHISCHE HOTEL- UND TOURISMUSBANK GESELLSCHAFT M.B.H. OTHMARSCHEN PARK HAMBURG GMBH & CO. CENTERPARK KG OTHMARSCHEN PARK HAMBURG GMBH & CO. GEWERBEPARK KG BANKS BANKS OTHER MUNICH GERMANY OTHER MUNICH GERMANY PAPCEL AS OTHER LITOVEL CZECH REPUBLIC PAYLIFE BANK GMBH BANKS PEKAO TELECENTRUM SP. ZOO OTHER KRAKOW POLAND PIRELLI PEKAO REAL ESTATE SP. Z O.O. OTHER WARSAW POLAND X X PLANETHOME AG OTHER UNTERFOHRIN G GERMANY PLANETHOME GMBH OTHER MANNHEIM GERMANY PMG BAUPROJEKTMANAGEMENT OTHER GESELLSCHAFT M.B.H. & CO FINANZIERUNGS OEG RANA-LIEGENSCHAFTSVERWERTUNG GMBH OTHER BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

53 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost RCG HOLDINGS LLC RHOTERRA GESELLSCHAFT FUR IMMOBILIENVERWALTUNG MBH RONCASA IMMOBILIEN-VERWALTUNGS GMBH S.S.I.S. - SOCIETA SERVIZI INFORMATICI SAMMARINESE SPA NEW YORK U.S.A. OTHER MUNICH GERMANY OTHER MUNICH GERMANY OTHER BORGO MAGGIORE SAN MARINO SANITA' - S.R.L. IN LIQUIDAZIONE OTHER ROME ITALY SIA - SSB SPA OTHER MILAN ITALY SIRIUS IMMOBILIEN- UND PROJEKTENTWICKLUNGS GMBH SOCIETA' DI GESTIONI ESATTORIALI IN SICILIA SO.G.E.SI. S.P.A. IN LIQ. SOCIETA' GESTIONE PER IL REALIZZO SPA IN LIQUIDAZIONE OTHER MUNICH GERMANY OTHER PALERMO ITALY OTHER ROME ITALY SOLARIS VERWALTUNGSGESELLSCHAFT MBH & CO. VERMIETUNGS KG OTHER MUNICH GERMANY SVILUPPO GLOBALE GEIE OTHER ROME ITALY T & P FRANKFURT DEVELOPMENT B.V. OTHER AMSTERDAM NETHERLANDS T & P VASTGOED STUTTGART B.V. OTHER AMSTERDAM NETHERLANDS TERRENO GRUNDSTUCKSVERWALTUNG GMBH & CO. ENTWICKLUNGS- UND FINANZIERUNGSVERMITTLUNGS-KG TORRE SGR S.P.A. TRICASA GRUNDBESITZ GESELLSCHAFT MBH & CO. 1. VERMIETUNGS KG OTHER MUNICH GERMANY ROME ITALY OTHER MUNICH GERMANY TRICASA GRUNDBESITZGESELLSCHAFT DES BURGERLICHEN RECHTS NR. 1 OTHER MUNICH GERMANY UCTAM BALTICS SIA OTHER RIGA LATVIA UCTAM RU LIMITED LIABILITY COMPANY OTHER MOSCOW RUSSIA UCTAM UPRAVLJANJE DOO OTHER LJUBLJANA SLOVENIA UIB UNIVERSALE BAU HOLDING OTHER BRANDENBUR GERMANY GESELLSCHAFT M.B.H. UNICREDIT TURN-AROUND MANAGEMENT GMBH GO OTHER UNIVERSALE BUCHHOLZ GBR OTHER BERLIN GERMANY UNIVERSALE INTERNATIONAL OTHER GESELLSCHAFT M.B.H. UNIVERSALE INTERNATIONAL POLAND SP.ZO.O. UNIVERSALE INTERNATIONAL PROJEKTMANAGEMENT GMBH UNIVERSALE INTERNATIONAL PROJEKTSZERVEZESI KFT. UNIVERSALE INTERNATIONAL REALITATEN GMBH UNIVERSALE INTERNATIONAL SPOL S.R.O., PRAG V.M.G. VERMIETUNGSGESELLSCHAFT MBH OTHER WARSAW POLAND OTHER BERLIN GERMANY OTHER BUDAPEST HUNGARY OTHER OTHER PRAGUE CZECH REPUBLIC OTHER MUNICH GERMANY WED DONAU- CITY GMBH OTHER WED HOLDING GESELLSCHAFT M.B.H. OTHER X X 53

54 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost WED WIENER ENTWICKLUNGSGESELLSCHAFT FUR DEN DONAURAUM AKTIENGESELLSCHAFT OTHER WIEN MITTE IMMOBILIEN GMBH OTHER YAPI KREDI EMEKLILIK AS ISTANBUL TURKEY YAPI KREDI KORAY GAYRIMENKUL YATIRIM ORTAKLIGI AS YAPI KREDI SIGORTA AS INSURANCE (deducted from regulatory capital) INSURANCE (deducted from regulatory capital) ISTANBUL TURKEY ISTANBUL TURKEY ZAPADNI TRGOVACKI CENTAR D.O.O. OTHER RIJEKA CROATIA ZETA FUNF HANDELS GMBH OTHER OTHER BERLIN GERMANY ZWEITE UNIPRO IMMOBILIEN- PROJEKTIERUNGSGESELLSCHAFT M.B.H. ALTUS ALPHA OTHER DUBLIN IRELAND ARABELLA FINANCE LTD. DUBLIN IRELAND BA IMMO GEWINNSCHEIN FONDS OTHER BA-CA LEASING OTHER VERSICHERUNGSSERVICE GMBH BANDON LEASING LIMITED OTHER DUBLIN IRELAND BAVARIA UNIVERSAL FUNDING DELAWARE U.S.A. CORP.(BUFCO) BLACK FOREST FUNDING CORP. DELAWARE U.S.A. ELEKTRA PURCHASE No. 1 LTD OTHER ST. HELIER JERSEY ELEKTRA PURCHASE No. 18 LIMITED OTHER DUBLIN IRELAND EUROPE REAL-ESTATE INVESTMENT FUND EUROPEAN-OFFICE-FOND GELDILUX-TS-2005 S.A. GELDILUX-TS-2007 S.A. GELDILUX-TS-2008 S.A. GELDILUX-TS-2010 S.A. GEMMA VERWALTUNGSGESELLSCHAFT MBH & CO. VERMIETUNGS KG OTHER HUNGARY HUNGARY MUNICH GERMANY LUXEMBOURG LUXEMBOURG LUXEMBOURG LUXEMBOURG LUXEMBOURG LUXEMBOURG LUXEMBOURG LUXEMBOURG OTHER MUNICH GERMANY GRAND CENTRAL FUNDING OTHER NEW YORK U.S.A. H.F.S. LEASINGFONDS DEUTSCHLAND 7 GMBH & CO. KG H.F.S. LEASINGFONDS DEUTSCHLAND 1 GMBH & CO. KG (IMMOBILIENLEASING) MARTIANEZ COMERCIAL, SOCIEDAD ANONIMA OCEAN BREEZE ENERGY GMBH & CO. KG OCEAN BREEZE FINANCE S.A. OTHER MUNICH GERMANY OTHER MUNICH GERMANY OTHER PUERTO DE LA CRUZ SPAIN OTHER MUNICH GERMANY LUXEMBOURG LUXEMBOURG BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

55 >> Basel 2 Third Pillar Table 2 Headquarter Treatment in supervisory report Consolidation Treatment in Financial Statement Consolidation Company name Type Town Country Full Proportional At equity Cost Full Proportional At equity Cost PENSIONSKASSE DER HYPO VEREINSBANK VVAG REDSTONE MORTGAGES LIMITED ROSENKAVALIER 2008 GMBH SALOME FUNDING LTD. OTHER MUNICH GERMANY LONDON UNITED KINGDOM MUNICH GERMANY DUBLIN IRELAND SIA UNICREDIT INSURANCE BROKER OTHER RIGA LITHUANIA SOFIMMOCENTRALE S.A. OTHER BRUSSEL BELGIUM SVIF UKRSOTSBUD OTHER KIEV UKRAINE TENDER OPTION BONDS OTHER NEW YORK U.S.A. THE TRANS VALUE TRUST COMPANY, LTD - SFCG "REC Loan ABL" Trust UNICREDIT BROKER DOO SARAJEVO ZA BROKERSKE POSLOVE U OSIGURANJU OTHER TOKYO JAPAN OTHER SARAJEVO BOSNIA AND HERCEGOVINA UNICREDIT BROKER S.R.O. OTHER BRATISLAVA SLOVAKIA UNICREDIT FUGGETLEN OTHER BUDAPEST HUNGARY BIZTOSITASKOZVETITO KFT UNICREDIT GLOBAL LEASING VERSICHERUNGSSERVICE GMBH OTHER UNICREDIT INSURANCE BROKER EOOD OTHER SOFIA BULGARIA UNICREDIT INSURANCE BROKER SRL OTHER BUCHAREST ROMANIA OTHER UNICREDIT LEASING VERSICHERUNGSSERVICE GMBH & CO KG UNICREDIT PARTNER D.O.O OTHER ZAGREB CROATIA UNICREDIT PARTNER D.O.O BEOGRAD OTHER BELGRADE SERBIA UNICREDIT PARTNER LLC OTHER KIEV UKRAINE UNICREDIT POIJIST'OVACI MAKLERSKA OTHER PRAGUE CZECH SPOL. S R.O. UNICREDIT ZAVAROVALNO ZASTOPINSKA DRUZBA DOO REPUBLIC OTHER LJUBLJANA SLOVENIA X X X X 55

56 BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

57 >> Basel 2 Third Pillar Table 3 Table 3 Supervisory capital structure Qualitative disclosure Capital instruments included in Tier 1 Capital STARTING DATE OF PREPAYMEN T OPTION AMOUNT IN ORIGINAL CURRENCY AMOUNT INCLUDED IN REGULATORY EQUITY (euro '000) OPTION TO SUSPEND INTEREST PAYMENT ISSUED THROUGH A SPV SUBSIDIARY INTEREST RATE MATURITY (mln) STEP-UP 9.375% 31-dic-50 lug-20 EUR ,293 yes yes no 7.055% perpetual Mar-12 EUR ,380 yes yes yes 4.028% perpetual Oct-15 EUR ,747 yes yes yes 5.396% perpetual Oct-15 GBP ,930 yes yes yes 8.590% 31-dic-50 Jun-18 GBP ,961 yes yes no 8.125% 31-dic-50 dic-19 EUR ,000 yes yes no 12m E + 1,25% 07-Jun-11 ( ) EUR ,430 no yes no 12m E + 1,25% 07-Jun-11 ( ) EUR ,000 no yes no 8.741% 30-Jun-31 Jun-29 USD ,521 no yes yes 7.760% 13-Oct-36 Oct-34 GBP ,984 no yes yes 9.000% 22-Oct-31 Oct-29 USD ,320 no yes yes 3.500% 31-Dec-31 Dec-29 JPY 25, ,097 no yes yes 10y CMS ( ) +0,10%, cap 8,00 % perpetual Oct-11 EUR ,358 no yes no 10y CMS ( ) +0,15%, cap 8,00 % perpetual Mar-12 EUR ,041 no yes no TOTAL 4,340,062 ( ) Prepayment option is not available ( ) Constant Maturity Swap Innovative and non-innovative capital instruments include securities subject to grandfathering totaling 3,855,888 thousand, in compliance with the transitory system provided by Circular 263 dated December 27, 2006, Title I, Chapter 2, Section II, paragraph (fifth update of December 22, 2010) New Regulations for the Prudential Supervision of Banks. Savings shares in the amount of 12,120 thousand were reclassified from the item Capital to Non-innovative capital instruments. 57

58 Tier 2 Capital upper tier 2 instruments which account for more then 10% of the total issued amount STARTING DATE OF PREPAYMENT OPTION AMOUNT INCLUDED IN REGULATORY EQUITY (euro '000) OPTION TO SUSPEND INTEREST PAYMENT INTEREST RATE MATURITY CURRENCY (mln) STEP-UP 3.95% 01-Feb-16 not applicable EUR ,147 not applicable yes ( ) 5.00% 01-Feb-16 not applicable GBP ,611 not applicable yes ( ) 6.70% 05-Jun-18 not applicable EUR 1, ,789 not applicable yes ( ) 6.10% 28-Feb-12 not applicable EUR ,077 not applicable yes ( ) ( ) -- if dividend is not paid, payment of intertest is suspended (deferral of interest) -- if losses take share capital and reserves under the threshold set by Banca d'italia to authorize banking business, face value abd interestsare proportionally reduced Tier 3 There are no values to be disclosed. AMOUNT IN ORIGINAL BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

59 >> Basel 2 Third Pillar Table 3 Quantitative disclosure Regulatory Capital Breakdown ( '000) REGULATORY CAPITAL A. Tier 1 before prudential filters 46,646,150 42,234,352 A.1 Tier 1 positive items: 72,391,578 68,420,247 A Capital 9,974,637 8,735,405 A Share premium account 41,085,295 38,338,920 A Reserves 16,126,727 15,052,546 A Non-innovative capital instruments 1,326,871 1,491,175 A Innovative capital instruments 3,025,311 3,475,699 A Net income of the year/interim profit 852,737 1,326,502 A.2 Tier 1 negative items: (25,745,428) (26,185,895) A Treasury stocks (4,218) (6,019) A Goodwill (21,687,385) (22,029,201) A Other intangible assets (4,053,825) (4,150,675) A Loss of the year/interim loss - - A Other negative items: - - * Value adjustments calculated on the supervisory trading book - - * Others - - B. Tier 1 prudential filters (1,091,687) (875,106) B.1 Positive IAS/IFRS prudential filters (+) 55,632 - B.2 Negative IAS/IFRS prudential filters (-) (1,147,319) (875,106) C. Tier 1 capital gross of items to be deducted (A+B) 45,554,463 41,359,246 D. Items to be deducted 2,517,321 2,325,299 E. Total TIER 1 (C-D) 43,037,142 39,033,947 F. Tier 2 before prudential filters 18,317,190 18,922,347 F.1 Tier 2 positive items: 18,856,974 19,892,882 F Valuation reserves of tangible assets - - F Valuation reserves of available-for-sale securities 222, ,800 F Non-innovative capital instruments not eligible for inclusion in Tier 1 capital - - F Innovative capital instruments not eligible for inclusion in Tier 1 capital - - F Hybrid capital instruments 3,307,134 3,915,367 F Tier 2 subordinated liabilities 14,606,208 15,507,852 F Surplus of the overall value adjustments compared to the expected losses 443,434 - F Net gains on participating interests - - F Other positive items 277, ,863 F.2 Tier 2 negative items: (539,784) (970,535) F Net capital losses on participating interests - - F Loans - - F Other negative items (539,784) (970,535) G. Tier 2 prudential filters: (111,168) (95,900) G.1 Positive IAS/IFRS prudential filters (+) - - G.2 Negative IAS/IFRS prudential filters (-) (111,168) (95,900) H. Tier 2 capital gross of items to be deducted (F+G) 18,206,022 18,826,447 I. Items to be deducted 2,517,321 2,325,299 L. Total TIER 2 (H-I) 15,688,701 16,501,148 M. Deductions from Tier 1 and Tier 2 1,071,064 1,163,273 N. Capital for regulatory purposes (E+L-M) 57,654,779 54,371,822 O. Tier 3 Capital - - P. Capital for regulatory purposes included Tier 3 (N+O) 57,654,779 54,371,822 Innovative and non-innovative capital instruments include securities subject to grandfathering totaling 3,855,888 thousand, in compliance with the transitory system provided by Circular 263 dated December 27, 2006, Title I, Chapter 2, Section II, paragraph (fifth update of December 22, 2010) New Regulations for the Prudential Supervision of Banks. Savings shares in the amount of 12,120 thousand were reclassified from the item Capital to Non-innovative capital instruments. 59

60 Detail of Items to be decuted (50% TIER1-50% TIER2) ( '000) Shareholdings in banking and financial companies with a percentage higher than 10% 2,048,291 1,999,528 Shareholdings in insurance companies acquired after July 20th ,937 14,010 Deductions for securitizations exposures 604, ,488 Deductions for expected losses/provisions (IRB models) 2,153,568 1,826,572 Deductions for expected losses on capital instruments and O.I.C.R. 9,916 - Deductions related to settlement risk on non DVP transactions 101,580 - Total Deducted items (50% TIER1-50% TIER2) 5,034,642 4,650,598 Detail of Items to be deducted from TIER1 and TIER2 ( '000) Shareholdings in insurance companies acquired before July 20th ,071,064 1,163,273 Total Deducted items from TIER1 and TIER2 1,071,064 1,163,273 Starting from June 30, 2010 UniCredit exercised the option allowed by Banca d Italia in its document dated May 18, 2010 to deduct all capital gains or losses deriving from debt securities issued by EU Countries Central Administrations (which after December 31, 2009 were recognized in valuation reserves), instead of confirming the asymmetric approach used in the past. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

61 >> Basel 2 Third Pillar Table 4 Table 4 Capital adequacy Qualitative disclosure The UniCredit Group has made a priority of capital management and allocation (for both regulatory and internal capital) on the basis of the risk assumed in order to expand the Group s operations and create value. These activities are part of the Group planning and monitoring process and comprise: planning and budgeting processes: - proposals as to risk propensity and capitalization objectives; - analysis of risk associated with value drivers and allocation of capital to business areas and units; - assignment of risk-adjusted performance objectives; - analysis of the impact on the Group s value and the creation of value for shareholders; - preparation and proposal of the financial plan and dividend policy; monitoring processes - analysis of performance achieved at Group and business unit level and preparation of management reports for internal and external use; - analysis and monitoring of limits; - analysis and performance monitoring of the capital ratios of the Group and individual companies. The Group has set itself the goal of generating income in excess of that necessary to remunerate risk (cost of equity), and thus of creating value, so as to maximize the return for its shareholders in terms of dividends and capital gains (total shareholder return). This is achieved by allocating capital to various business areas and business units. Capital and its allocation are therefore extremely important for strategy, since capital is the object of the return expected by investors and because on it there are external limitations imposed by regulatory provisions. The definitions of capital used in the allocation process are as follows: Risk or employed capital: this is the equity component provided by shareholders (employed capital) for which a return that is greater than or equal to expectations (cost of equity) must be provided; Capital at risk: this is the portion of capital and reserves that is used (the budgeted amount or allocated capital) or was used to cover (at period-end - absorbed capital) risks assumed to pursue the objective of creating value. Capital at risk is dependant on the propensity for risk and is based on the target capitalization level which is also determined in accordance with the Group s credit rating. 61

62 If capital at risk is measured using risk management methods, it is defined as internal capital, if it is measured using regulatory provisions, it is defined as regulatory capital. In detail: Internal capital is the portion of equity that is actually at risk, which is measured using probability models over a specific confidence interval. Regulatory capital is the component of total capital represented by the portion of shareholders equity put at risk (Core Equity or Core Tier 1) that is measured using regulatory provisions. The relationship between the two different definitions of capital at risk can be obtained by relating the two measures to the Group s target credit rating (AA- by S&P) which corresponds to a probability of default of 0.03%. Thus, internal capital is set at a level that will cover adverse events with a probability of 99.97% (confidence interval), while regulatory capital is quantified on the basis of a Core Tier 1 target ratio. The purpose of the capital management function performed by the Capital Management unit of Planning, Strategy and Capital Management is to define the target level of capitalization for the Group and its companies in line with regulatory restrictions and the propensity for risk. Capital is managed dynamically: the Capital Management unit prepares the capital plan, monitors capital ratios for regulatory purposes and anticipates the appropriate steps required to achieve its goals. On the one hand, monitoring is carried out in relation to both shareholders equity and the composition of capital for regulatory purposes, and on the other hand, in relation to the planning and performance of risk-weighted assets (RWA). The dynamic management approach aims to identify the investment and capital-raising instruments and hybrid capital instruments that are most suitable for achieving the Group s goals. If there is a capital shortfall, the gaps to be filled and capital generation measures are indicated, and their cost and efficiency are measured using risk adjusted measures: Economic Value Added (EVA), equal to the difference between net operating profit after taxes and the cost of employed capital, and RARORAC, the ratio between EVA and employed capital. In this context, value analysis is enhanced by the joint role played by the Capital Management unit in the areas of regulatory, accounting, financial, tax-related, risk management and other aspects and the changing regulations affecting these aspects so that an assessment and all necessary instructions can be given to other Group HQ areas or the companies asked to perform these tasks. In 2010 the Tier 1 Ratio and Total Capital Ratio were 9.46% and 12.68% from 8.63% and 12.02% in 2009 respectively, mainly thanks to the capital strengthening completed in February 2010 while Risk Weighted Assets slightly increased (+0.5%), mainly due to operational risk. The capital requirement for operational risk increased during 2010, mainly due to the rollover in the time series. When capital at risk is calculated, a five years historical loss period is considered; this time window rolls over (is updated) with every new calculation. At the latest computation, the time series were updated with a less benign period. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

63 >> Basel 2 Third Pillar Table 4 Capital Strengthening On January 7, 2010 UniCredit s Board of Directors approved the final terms and conditions of the rights issue resolved on by the shareholders in EGM on November 16, The new ordinary shares were offered from January 11 to January 29, 2010 in Italy and Germany and from January 14 to January 29, 2010 in Poland % of the shares offered i.e. 2,472,338,679 new UniCredit ordinary shares were subscribed (and no subscriptions were revoked in the Polish and German public offerings). Rights not exercised during the offer period were 297,005,168 valid for the subscription of 44,550,771 UniCredit ordinary shares and were all sold in the Mercato Telematico Azionario (screen-based stock market) organized and managed by Borsa Italiana SpA pursuant to Article 2441 (3) Italian Civil Code, through UniCredit Bank AG, Milan Branch, on the trading days from February 8 to 12, On February 24, 2010 the capital increase resolved on by the mentioned EGM held on November 16, 2009 was thus completed, after which the number of ordinary shares issued was 2,516,889,453. On March 16, 2010, by virtue of the authorisation of the Shareholders Meeting held on May 12, 2006, the Board of Directors of UniCredit SpA approved the issue of 953,442 shares with a nominal value of to be assigned to senior managers of the Group for the purpose of accomplishing the overall objectives of the Group. This issue was entered to the Companies Register on March 31, This issue of shares approved on March 16, 2010 did not entail any form of capital strengthening. 63

64 Quantitative disclosure AMOUNTS AS AT AMOUNTS AS AT CREDIT AND COUNTERPARTY RISK NON-WEIGHTED AMOUNTS WEIGHTED AMOUNTS REQUIREMENT NON-WEIGHTED AMOUNTS WEIGHTED AMOUNTS REQUIREMENT A. CREDIT AND COUNTERPARTY RISK A.1 STANDARDIZED APPROACH - RISK ASSETS A.1.1. Exposures with or secured by central governments or central banks A.1.2. Exposures with or secured by regional administrations and local aut A.1.3. Exposures with or secured by administrative bodies and noncommercial undertakings A.1.4. Exposures with or secured by multilateral development banks A.1.5. Exposures with or secured by international organizations A.1.6. Exposures with or secured by supervised institutions A.1.7. Exposures with or secured by corporates A.1.8. Retail exposures A.1.9. Exposures secured by real estate property A Past due exposures A High risk exposures A Exposures in the form of guaranteed bank bonds (covered bond) A Short term exposures with corporates A Exposures in the form of Collective Investment Undertakings (CIU) A Other exposures A.2 IRB APPROACH - RISK ASSETS A.2.1. Exposures with or secured by central administration and central banks A.2.2. Exposures with or secured by supervised institutions, public and territorial entities and other entities A.2.3. Exposures with or secured by corporate A.2.4. Retail exposures secured by residential real estate property A.2.5. Qualified revolving retail exposures A.2.6. Other retail exposures A.2.7. Purchased receivables: diluition risk A.2.8. Other assets A.2.9. Specialized lending - slotting criteria A Alternative treatment of mortgages A Settlement risk: exposures connected to non DVP transactions with supervisory weighting factors A.3 IRB APPROACH - EXPOSURES IN EQUITY INSTRUMENTS A.3.1. PD/LGD approach: risk assets A.3.2. Simple risk weight approach: risk assets - Private equity exposures in sufficiently diversified portfolios Exchange-traded equity exposures Other equity exposures A.3.3. Internal models approach: risk assets BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

65 >> Basel 2 Third Pillar Table 4 Capital Adequacy ( '000) Non Weighted assets Weighted assets A. RISK ASSETS A.1 Credit and counterparty risk 875,576, ,883, ,636, ,365, Standardized approach407,916, ,061, ,239, ,614, IRB approaches 444,552, ,485, ,791, ,989, Foundation Advanced 444,552, ,485, ,791, ,989, Securitizations 23,107,339 28,336,474 5,605,023 5,760,929 B. CAPITAL REQUIREMENTS B.1 Credit and counterparty risk 31,650,901 32,189,262 B.2 Market Risk 716, , Standardized approach 302, , Internal models 413, , Concentration risk - - B.3 Operational risk 4,020,892 3,282, Basic indicator approach (BIA) 281, , Traditional standardized approach (TSA) 475,782 1,154, Advanced measurement approach (AMA) 3,263,435 1,874,899 B.4 Other capital requirements - - B.5 Other calculation elements - - B.6 Total capital requirements 36,387,972 36,191,067 C. RISK ASSETS AND CAPITAL RATIOS C.1 Weighted risk assets 454,849, ,388,342 C.2 TIER 1 capital/weighted risk assets (TIER 1 capital ratio) 9.46% 8.63% C.3 Capital for regulatory purposes (included TIER 3)/Weighted risk assets (Total capital ratio) 12.68% 12.02% Market Risk capital requirement ( '000) Position risk 683, ,354 Settlement risk for DVP transactions 3,057 7,997 Exchange risk 30,003 21,775 Market Risk capital requirement 716, ,126 65

66 Reclassification of Financial Assets The amendments to IAS 39 and to IFRS 7 Reclassification of financial assets approved by the IASB in 2008 make it possible to reclassify certain financial assets, after their initial recognition, out of the HfT and AfS portfolios. In particular, the following may be reclassified: those HfT or AfS financial assets that would have satisfied the definition specified by international accounting standards for the loan portfolio (if such assets were not classified as HfT or AfS respectively on initial recognition) if the entity intends, and is able, to hold them for the foreseeable future or until maturity; "only in rare circumstances" those HfT financial assets, which, at the time of their recording, did not satisfy the definition of loans. The following table (which are broken down by type of underlying asset and portfolio) provides the book value and fair value as at December 31, 2010 of assets which had been reclassified in H and H The income/expenses that would have been recognized if such reclassifications had not occurred, as well as those effectively recognized through profit or loss or at equity are also provided. These income/expenses before taxes are broken down into two categories: those arising from measurement (including any write-downs) and other (including interest and gains/losses on the disposal of the transferred assets. As a result the overall impact before taxes that would have been recognized in the income statement as of December 31, 2010, if these assets had not been reclassified, would have been a gain of 998,230 thousand, while the impact actually recognized was a gain of 591,306 thousand. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

67 >> Basel 2 Third Pillar Table 4 Reclassified financial assets: book value, fair value and effects on comprehensive income Instruments type (1) Accounting Portfolio before reclassification (2) Accounting Portfolio after reclassification (3) Carrying amount as at (4) Fair Value as at (5) Income/expenses absent reclassification (before taxes) From measurement (6) Other (7) Income/expense recognized during the period (before taxes) From measurement (8) Other (9) ( '000) A. Debt securities 13,284,262 12,415, , ,635 (26,941) 559,177 Held for trading Available for sale 18,497 18, , ,400 Held for trading Held to maturity 203, ,355 6,342 12,037-11,506 Held for trading Loans to Banks 4,675,721 4,694, ,678 (3,100) 202,940 Held for trading Loans to Customers 7,933,976 7,056, , ,811 (24,501) 318,396 Available for sale Loans to Banks 73,172 73, ,551-9,374 Available for sale Loans to Customers 379, ,001 6,443 17,309-15,561 B. Equity instruments Held for trading Available for sale C. Loans 625, ,879 21,680 60,733-59,070 Held for trading Available for sale Held for trading Held to maturity Held for trading Loans to Banks 278, ,287 15,899 28,609-26,596 Held for trading Loans to Customers 346, ,592 5,781 32,124-32,474 Available for sale Loans to Banks Available for sale Loans to Customers D.Units in investment funds Held for trading Available for sale Total 13,909,688 13,049, , ,368 (26,941) 618,247 Debt securities reclassified in the loan with customers portfolio include structured credit products (other than derivative contracts and financial instruments with incorporated derivatives) for an amount of 6,104,173 thousand at December 31,

68 BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

69 >> Basel 2 Third Pillar Table 5 Table 5 Credit risk: general disclosures for all banks Qualitative disclosure Definition of impaired and past-due exposures Impaired loans and receivables are divided into the following categories: Non-performing loans formally impaired loans, being exposure to insolvent borrowers, even if the insolvency has not been recognised in a court of law, or borrowers in a similar situation: measurement is on a loan-by-loan or portfolio basis; Doubtful loans exposure to borrowers experiencing temporary difficulties, which the Group believes may be overcome within a reasonable period of time. Doubtful loans also include loans not classified as non-performing granted to borrowers other than government entities where the following conditions are met: - They have fallen due and remained unpaid for more than 270 days (or for more than 150 or 180 days for consumer credit exposure with an original term of less than 36 months, or 36 months or over, respectively); - The amount of the above exposure to the same borrower and other defaulted payments that are less than 270 days overdue, is at least 10% of the total exposure to that borrower. Doubtful loans are valued analytically when special elements make this advisable or by applying analytically flat percentages on a historical or stochastic basis in the remaining cases. Restructured loans exposure to borrowers with whom a rescheduling agreement has been entered into including renegotiated pricing at interest rates below market, the conversion of part of a loan into shares and/or reduction of principal. Measurement is on a loan-by-loan basis, including discounted cost due to renegotiation of the interest rate at a rate lower than the original contractual rate. Past-due loans total exposure to any borrower not included in the other categories, who at the balance-sheet date has expired facilities or unauthorised overdrafts that are more than 90 days past due. Retail loans to public-sector entities and companies resident or established in Italy are considered impaired where there are overdue or unauthorized exposures for more than 180 instead of 90 days. Total exposure is recognised in this category if, at the balance-sheet date, either: - the expired or unauthorised borrowing; or: - the average daily amount of expired or unauthorised borrowings during the last preceding quarter, are equal to or exceed 5% of total exposure. Overdue exposures are valued at a flat rate on a historical or stochastic basis by applying where available the risk rating referred to LGD Loss given Default under Basel 2. Collective assessment is used for groups of loans for which individually there are no indicators of impairment, but to which latent impairment can be attributed, inter alia on the basis of the risk factors in use under Basel 2. 69

70 Description of methodology applied to determinate the writedowns Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are recognised on the date of contract signing, which normally coincides with the date of disbursement to the borrower. These items include debt instruments with the same characteristics or that are subject to portfolio reclassification in accordance with the rules of IAS 39 and the net value of finance leases of assets under construction or awaiting lease, provided the leases have the characteristics of contracts entailing the transfer of risk. After initial recognition at fair value, which usually is the price paid including transaction costs and income which are directly attributable to the acquisition or issuance of the financial asset (even if not paid), a loan or receivable is measured at amortised cost using the effective interest method, allowances or reversals of allowances being made where necessary on remeasuring. A gain or loss on loans and receivables that are not part of a hedging relationship is recognised in profit or loss: when a loan or receivable is derecognised: in item 100 (a) Gains (losses) on disposal ; or: when a loan or receivable is impaired: in item 130 (a) Impairment losses (a) loans and receivables. Interest on loans and receivables is recognised in profit or loss on an accrual basis under item 10 Interest income and similar revenue. Delay interest is taken to the income statement on collection or receipt. A loan or receivable is deemed impaired when it is considered that it will probably not be possible to recover all the amounts due according to the contractual terms, or equivalent value. Allowances for impairment of loans and receivables are based on the present value of expected net cash flows of principal and interest; in determining the present value of future cash flows, the basic requirement is the identification of estimated collections, the timing of payments and the rate used. The amount of the loss on impaired exposure classified as non-performing, doubtful or restructured according to the categories specified below, is the difference between the carrying value and the present value of estimated cash flows discounted at the original interest rate of the financial asset. In the first year of the transition to IAS/IFRS (2005) and subsequently, if the original interest rate of a financial asset being discounted cannot be found, or if finding it would be excessively onerous, the average rate was applied that was recorded for positions with similar characteristics, which had not deteriorated in the year in which the original deterioration of the asset concerned occurred. For all fixedrate positions, the rate determined in this manner was also held constant in future years. Recovery times are estimated on the basis of any repayment schedules agreed with the borrower or included in a business plan or reasonably predicted, based on historical recovery experience observed for similar classes of loans, taking into account the type of loan, the geographical location, the type of security and any other factors considered relevant. TERZO PILASTRO DI BASILEA 2 70 BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010

71 >> Basel 2 Third Pillar Table 5 Loans and receivables are reviewed to identify those that, following events occurring after initial recognition, display objective evidence of possible impairment. These problem loans are reviewed and analysed periodically at least once a year. Any subsequent change vis-à-vis initial expectations of the amount or timing of expected cash flows of principal and interest causes a change in allowances for impairment and is recognised in profit or loss in item 130(a) Impairment losses (a) loans and receivables. Write-downs of impaired loans are classified as specific in the relevant income statement item even when the calculation is flat-rate or statistical, as indicated in previous chapter. If the quality of the loan or receivable has improved and there is reasonable certainty that principal and interest will be recovered in a timely manner according to contractual terms, a reversal is made in the same profit or loss item, within the amount of the amortised cost that there would have been if there had been no impairments. Derecognition of a loan or receivable in its entirety is made when the loan or receivable is deemed to be irrecoverable or is written off. Write-offs are recognised directly in profit or loss under item 130(a) Impairment losses (a) loans and receivables and reduce the amount of the principal of the loan or receivable. Reversals of all or part of previous impairment losses are recognised in the same item. Loans under renegotiation involving a debt/equity swap are valued, pending swap finalization, on the basis of the conversion agreements entered into on the balance-sheet date. Any negative differences between the value of the loans and that of the shares are taken to profit and loss as write-downs. 71

72 Quantitative disclosure Credit Risk: on/off balance sheet information to banks Amounts as at Balance-sheet exposures Exposures/Portfolio Financial assets held for trading Financial assets at fair value through profit or loss Available for sale financial assets Held to maturity financial instruments Loans and receivables with banks Non-current assets and disposal groups classified as held for sale Off-Balance sheet exposures Gross exposure Average exposure Gross exposure Average exposure Gross exposure Average exposure Gross exposure Average exposure Gross exposure Average exposure Gross exposure Average exposure Gross exposure Average exposure A. Balance sheet exposures a) Non-performing loans ,721 4,658 4,174 2, , , b) Doubtful loans ,039 42, c) Restructured exposures , , d) Past due exposures , , e) Other assets 8,619,280 12,172,224 9,934,733 8,022,504 10,335,041 7,423,089 1,283,369 1,777,739 69,616,451 75,835,898 35,177 60,544 Total A 8,619,280 12,172,224 9,934,733 8,022,504 10,337,644 7,428,041 1,287,543 1,780,522 70,347,179 76,570,107 35,177 60,544 B. Off-balance sheet exposures a) Impaired 70,099 61,359 b) Others 93,589,783 98,970,016 Total B 93,659,882 99,031,375 TOTAL A+B ,619,280 12,172,224 9,934,733 8,022,504 10,337,644 7,428,041 1,287,543 1,780,522 70,347,179 76,570,107 35,177 60,544 93,659,882 99,031,375 TOTAL ,427,736 24,078,813 4,719,880 4,594,151 4,732,877 5,853,727 1,736,201 3,956,646 78,795,741 84,440, , ,795, ,405,684 TERZO PILASTRO DI BASILEA 2 72 BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010

73 >> Basel 2 Third Pillar Table 5 Credit Risk: on/off balance sheet information to customers Exposures/Portfolio Financial assets held for trading Gross exposure Average exposure Financial assets at fair value through profit or loss Gross exposure Average exposure Available for sale financial assets Gross exposure Balance-sheet exposures Average exposure Amounts as at Held to maturity financial instruments Non-current assets and disposal groups classified as held for sale Off-Balance sheet exposures A. Balance sheet exposures a) Non-performing loans ,524 20,345 51,174 74,345 35,145 45,248 38,591,141 36,005, ,936 b) Doubtful loans ,510 7, ,671,487 18,285, ,000 c) Restructured exposures ,175,564 4,562, d) Past due exposures ,898 6, ,758,678 3,857, ,396 e) Other assets 32,097,601 35,911,193 16,147,836 12,197,003 48,896,942 40,179,460 8,640,835 8,726, ,155, ,855, , ,943 Total A 32,097,601 35,911,311 16,165,360 12,217,348 48,983,547 40,268,308 8,675,980 8,772, ,352, ,566, , ,658 B. Off-balance sheet exposures a) Impaired 2,514,223 2,379,758 b) Others 202,953, ,118,751 Total B 205,467, ,498,509 TOTAL A+B ,097,601 35,911,311 16,165,360 12,217,348 48,983,547 40,268,308 8,675,980 8,772, ,352, ,566, , , ,467, ,498,509 TOTAL ,623,892 40,895,203 9,338,912 10,220,271 34,056,910 26,414,124 8,831,418 9,928, ,516, ,533, ,636 1,144, ,139, ,537,934 Gross exposure Average exposure Loans and receivables with customers Gross exposure Average exposure Gross exposure Average exposure Gross exposure Average exposure \ 73

74 Distribution of on-b/s and off-b/s exposures to banks by geographic area Amounts as at Exposures/Geographical areas Gross exposure Italy Other European countries America Net exposure Gross exposure Net exposure Gross exposure Net exposure Gross exposure Net exposure Gross exposure Net exposure A. Balance sheet exposures a) Non-performing loans ,739 77,311 86,295 10, ,469 58, b) Doubtful loans 1, ,663 8,662 2,001 2, ,533 4,790 c) Restructured exposures ,856 9, , d) Past due exposures 80,599 80, , , ,084 3,084 e) Other exposures 19,285,135 19,265,756 71,535,781 71,515,473 3,593,999 3,593,416 1,888,149 1,887,425 3,520,987 3,520,913 Total A 19,367,576 19,347,272 71,974,468 71,851,453 3,682,295 3,606,005 1,999,219 1,945,772 3,537,998 3,528,961 B. Off-Balance sheet exposures a) Non-performing loans ,840 3, b) Doubtful loans ,586 33,505 1,064 1, c) Other impaired assets 22,452 22, d) Other exposures 5,324,602 5,324,575 80,521,630 80,515,639 4,886,339 4,885,950 1,757,447 1,757,185 1,099,765 1,099,725 Total B 5,347,054 5,347,027 80,564,357 80,549,144 4,887,419 4,887,030 1,761,287 1,761,025 1,099,765 1,099,725 Total A+B ,714,630 24,694, ,538, ,400,597 8,569,714 8,493,035 3,760,506 3,706,797 4,637,763 4,628,686 Total ,129,084 17,119, ,549, ,353,353 11,566,043 11,486,946 4,355,126 4,306,884 5,608,242 5,599,516 Asia Rest of the world TERZO PILASTRO DI BASILEA 2 74 BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010

75 >> Basel 2 Third Pillar Table 5 Distribution of balance sheet and off-b/s exposures to costumers by geographic area Exposures/Geographical areas Gross exposure Net exposure Gross exposure Net exposure Amounts as at Italy Other European countries America Gross exposure Net exposure Gross exposure Net exposure Rest of the world Gross exposure Net exposure A. Balance sheet exposures a) Non-performing loans 22,832,794 9,320,205 13,665,306 6,068, , ,024 1,191, , , ,497 b) Doubtful loans 13,650,317 9,546,668 4,857,870 3,454,959 5,735 4,643 1,098, ,004 77,517 49,988 c) Restructured exposures 2,926,385 2,788,372 2,013,140 1,088, ,564 81,218 50,798 29,851 41,700 40,965 d) Past due exposures 2,950,162 2,666, , ,252 35,070 8,458 21,105 16,931 2,988 2,934 e) Other exposures 277,957, ,574, ,481, ,963,940 12,019,244 11,966,317 5,919,926 5,840,649 17,700,516 17,650,086 Total A 320,317, ,896, ,783, ,219,179 12,502,293 12,212,660 8,281,411 7,005,664 18,529,901 18,023,470 B. Off-Balance sheet exposures a) Non-performing loans 171, , , ,044 29,063 24,482 41,905 36, b) Doubtful loans 701, ,114 93,192 42,337 1, ,982 84, c) Other impaired assets 455, , ,406 93,746 41,238 36, ,274 17,966 d) Other exposures 49,824,952 49,190, ,033, ,985,647 8,061,578 8,060,114 2,492,137 2,489,256 9,541,212 9,519,214 Total B 51,152,251 50,434, ,933, ,557,774 8,133,299 8,121,024 2,620,042 2,610,326 9,628,488 9,537,182 Total A+B ,469, ,331, ,717, ,776,953 20,635,592 20,333,684 10,901,453 9,615,990 28,158,389 27,560,652 Total ,663, ,552, ,420, ,768,329 22,030,291 21,749,242 12,292,778 11,376,330 15,687,024 14,845,855 Asia 75

76 Distribution of on-b/s and off-b/s exposures to customers by business sector (1st part) Amounts as at Governments Exposures/Business sector A. Balance sheet exposures Gross exposure Total Writedowns Total Net Gross exposure exposure Writedowns Writedowns Net exposure Gross exposure Financial companiesother public entities Net exposure a) Non-performing loans 9,290 2,047 7,243 71,149 46,779 24,370 1,092, , ,236 b) Doubtful loans ,324 57,631 95, ,056 75, ,387 c) Restructured exposures , , ,648 55,952 63,696 d) Past due exposures ,130 2,739 48,391 85,921 12,897 73,024 e) Other exposures 72,638,107 98,851 72,539,256 26,919,799 49,009 26,870,790 66,356, ,089 65,989,447 Total A 72,648, ,321 72,546,937 27,198, ,120 27,040,910 67,951,043 1,256,253 66,694,790 B. Off-Balance sheet exposures a) Non-performing loans ,694 8,349 30,345 b) Doubtful loans , ,665 27,138 1,378 25,760 c) Other impaired assets , ,608 31,207 12,420 18,787 d) Other exposures 6,359,030 1,002 6,358,028 11,509, ,508,403 34,531, ,871 33,905,277 Totale B 6,359,404 1,240 6,358,164 11,534,034 1,060 11,532,974 34,628, ,018 33,980,169 TOTAL A+B ,007, ,561 78,905,101 38,732, ,180 38,573, ,579,230 1,904, ,674,959 TOTAL ,266, ,196,617 35,656, ,612 35,537, ,484,496 1,756, ,728,301 TERZO PILASTRO DI BASILEA 2 76 BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010

77 >> Basel 2 Third Pillar Table 5 Distribution of on-b/s and off-b/s exposures to customers by business sector (2st part) Amounts as at Insurance companies Non financial companies Other entities Exposures/Business sector Total Total Total Gross Gross Gross Net exposure Net exposure exposure exposure exposure Writedowns Writedowns Writedowns Net exposure A. Balance sheet exposures a) Non-performing loans 41,269 24,915 16,354 25,212,986 14,593,141 10,619,845 12,267,408 7,028,813 5,238,595 b) Doubtful loans 2, ,191 14,083,900 4,206,224 9,877,676 5,153,023 1,609,100 3,543,923 c) Restructured exposures ,999,309 1,072,186 3,927,123 53,830 17,715 36,115 d) Impaired past due exposures 1, ,864, ,307 2,593, , , ,147 e) Other exposures 1,548,463 4,737 1,543, ,137,103 1,503, ,633, ,478,481 1,059, ,418,646 Total A 1,594,362 31,213 1,563, ,297,757 21,645, ,651, ,725,183 9,864, ,860,426 B. Off-Balance sheet exposures a) Non-performing loans 1, , , , ,968 46,501 2,600 43,901 b) Doubtful loans ,319 72, ,457 8, ,624 c) Other impaired assets 1, , , , ,103 63,683 15,873 47,810 d) Other exposures 1,919, ,919, ,761,056 51, ,709,525 22,873,242 28,731 22,844,511 Totale B 1,922, ,921, ,031, , ,524,053 22,991,908 48,062 22,943,846 TOTAL A+B ,516,645 31,688 3,484, ,329,668 22,153, ,175, ,717,091 9,912, ,804,272 TOTAL ,507,574 28,614 4,478, ,309,110 19,857, ,451, ,870,008 8,970, ,899,239 77

78 Time breakdown by contractual residual maturity of financial assets Amounts as at Items/Maturities On demand 1 to 7 days 7 to 15 days 15 days to 1 month 1 to 3 months 3 to 6 months 6 months to 1 year 1 to 5 years over 5 years Unspecified maturity Balance sheet assets 94,754,949 22,739,622 13,648,907 39,005,121 60,974,760 43,373,329 52,805, ,387, ,120,011 26,724,298 A.1 Government securities 43,755 1,721,286 1,645,446 1,311,429 4,508,841 5,823,813 6,876,803 38,158,281 17,347, A.2 Other debt securities 7,519 4,253, ,378 2,359,977 5,498,860 2,353,036 5,485,484 36,833,882 40,368,430 9,260,985 A.3 Units in investment funds 182,645 4, , , , ,759 4,607,408 A.4 Loans 94,521,030 16,761,113 11,582,083 35,333,715 50,965,970 35,196,480 40,046, ,292, ,117,591 12,855,849 - Banks 21,910,307 5,157,743 4,920,916 10,844,199 10,637,707 3,772,926 1,768,410 2,831,596 2,729,530 90,258 - Customers 72,610,723 11,603,370 6,661,167 24,489,516 40,328,263 31,423,554 38,278, ,460, ,388,061 12,765,591 Balance sheet liabilities 277,063,547 47,836,437 24,228,837 45,269,420 65,874,454 34,466,918 32,367, ,184,441 89,322,513 7,727,123 B.1 Deposits and current accounts 239,644,381 22,884,904 11,818,243 22,246,256 34,247,350 14,086,588 12,690,193 17,016,629 5,868,698 48,648 - Banks 16,346,694 12,217,868 3,892,807 5,489,955 4,542,047 2,328,671 2,450,352 4,658,426 3,468, Customers 223,297,687 10,667,036 7,925,436 16,756,301 29,705,303 11,757,917 10,239,841 12,358,203 2,400,183 48,618 B.2 Debt securities 285,396 2,108,664 4,809,206 8,267,565 18,926,442 11,985,121 15,157,863 72,260,353 55,912, ,112 B.3 Other liabilities 37,133,770 22,842,869 7,601,388 14,755,599 12,700,662 8,395,209 4,519,492 24,907,459 27,540,846 7,451,363 Off-balance sheet transactions C.1 Physically settled fin. derivatives ,058, , ,371 1,922, , , , , Long positions 11,488 20,305,548 12,098,856 11,671,180 28,794,490 8,732,370 4,976,226 9,827,024 8,796,646 17,446 - Short positions 11,944 17,247,198 11,784,822 11,560,809 26,872,129 9,397,503 5,301,573 10,541,079 9,289,297 17,641 C.2 Cash settled Fin. derivatives 3,528,814-24,786 33,204 50, , , , ,864-1,641,406-29,899 - Long positions 69,384,795 2,950,497 1,986,115 5,038,975 10,159,220 7,579,586 8,963,884 29,740,066 16,840, ,256 - Short positions 65,855,981 2,975,283 1,952,911 4,988,599 10,287,109 7,697,322 9,115,283 28,912,202 18,481, ,155 C.3 Deposit to be received -5,160,516 6,081, , , , , Long positions 1,149,767 6,625, , Short positions 6,310, , , , , , C.4 Irrevocable commitments to -22,064, ,289 26, ,609 1,858,581 2,849,161 2,064,135 8,122,134 6,069, Long positions 10,071,810 3,528,861 1,058,392 1,969,079 3,741,892 6,068,231 15,666,667 31,104,642 11,429,204 3,346,078 - Short positions 32,135,837 2,856,572 1,031,734 1,551,470 1,883,311 3,219,070 13,602,532 22,982,508 5,360,026 3,346,078 C.5 Written guarantees 440, ,686 22,564 1,026, , , ,947 1,452,456 1,387,956 0 TERZO PILASTRO DI BASILEA 2 78 BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010

79 >> Basel 2 Third Pillar Table 5 Balance-sheet exposures: change in overall impairments Source/Categories Doubtful loans Exposures to banks Restructur ed exposures Past due exposures Amounts as at Total Nonperforming loans Nonperforming loans Doubtful loans Exposures to customers Restructured exposures Past due exposures A. Opening gross writedowns 252,265 12,269 33, ,333 20,251,920 4,890,736 1,130, ,096 26,703,061 B. Increases 199,009 9,508 14, ,265 8,741,588 4,750, , ,447 14,714,104 B.1 Writedowns 126, , ,564 5,939,239 3,297, , ,863 9,917,479 B.2 Transfers from other impaired exposur 14,798 4, ,576 2,342, , , ,618 3,328,161 B.3 Other increases 58,008 4,583 13, , , ,029 31, ,966 1,468,464 C. Reductions 234,721 12,108 34, ,573 6,553,167 3,691, , ,459 11,443,165 C.1 Write-backs from evaluation ,167, , ,987 41,276 1,632,906 C.2 Write-backs from recoveries 20,379 4, ,645 1,031, , ,588 50,905 1,705,998 C.3 Write-offs 206, , ,002 3,653, ,052 52,145 1,338 3,939,813 C.4 Transfers to other impaired exposures 4, , , ,749 2,519, , ,067 3,328,162 C.5 Other reductions 3,267 7, , , ,261 82, , ,286 D. Final gross writedowns 216,553 9,669 13, ,025 22,440,341 5,949,735 1,146, ,084 29,974,001 Total The overall amount of write-downs, Other exposures included, booked in 2010 are: - Loans to banks 110,678 - Loans to customers 6,597,590 79

80 TERZO PILASTRO DI BASILEA 2 80 BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010

81 >> Basel 2 Third Pillar Table 6 Table 6 Credit risk: disclosures for portfolios treated under the standardized approach and specialized lending and equity exposures treated under IRB approaches Qualitative disclosure Credit risk Standardized approach List of the ECAI (External Credit Assessment Institution) and ECA (Export Credit Agency) used in the standardized approach and of the credit portfolios on which the ratings supplied by these entities are applied. Credit risk Porfolios Exposures with central governments and central banks Exposures with international organizations Exposures with multilateral development banks Exposures with corporate and other entities Exposures with Collective Investments Undertakings (CIU) ECA / ECAI - Fitch Ratings; - Moody's Investor Services; - Standard and Poor's Rating Services Ratings characteristics (1) Solicited e unsolicited See Table 10 for the list regarding Securitizations. (1) solicited rating: shall mean a rating assigned for a fee following a request a request from the entity evaluated. Ratings assigned without such a request shall be treated as equivalent to solicited ratings if the entity had previously obtained a solicited rating from the same ECAII. unsolicited rating: shall mean a rating assigned without a request from the entity evaluated and without payment of a fee. 81

82 Quantitative disclosure Distribution of exposures: standardized method AMOUNTS AS AT AMOUNTS AS AT Asset classes Exposures with credit risk mitigation Exposures without credit risk mitigation Exposures with credit risk mitigation Exposures without credit risk mitigation 516,312, ,739, ,889, ,380,109 A.1.1. Exposures with or secured by central governments or central banks 93,056,954 94,726,496 87,008,339 87,779,186 A.1.2. Exposures with or secured by regional administrations and local authorities 51,832,046 51,927,579 38,983,966 39,191,542 A.1.3. Exposures with or secured by administrative bodies and non-commercial undertakings 12,733,383 12,888,794 12,939,542 13,306,420 A.1.4. Exposures with or secured by multilateral development banks 367, , , ,870 A.1.5. Exposures with or secured by international organizations A.1.6. Exposures with or secured by supervised institutions 46,516,184 81,035,995 30,735,764 52,376,866 A.1.7. Exposures with or secured by corporates 164,982, ,131, ,920, ,504,322 A.1.8. Retail exposures 65,697,720 71,197,756 64,838,623 75,346,485 A.1.9. Exposures secured by real estate property 32,027,219 32,046,072 32,473,736 32,507,667 A Past due exposures 11,202,587 11,434,027 8,826,874 9,591,404 A High risk exposures 1,513,751 1,514,061 1,688,822 1,688,922 A Exposures in the form of guaranteed bank bonds (covered bond) 1,363,374 1,363,374 1,893,095 1,953,321 A Short term exposures with corporates 1,230,954 1,230, , ,946 A Exposures in the form of Collective Investment Undertakings (CIU) 6,672,667 6,672,674 3,570,986 6,079,400 A Other exposures 27,115,678 27,160,069 27,843,177 27,888,758 In the table, Guarantees given and commitments to disburse funds are at nominal value. Specialized lendings Remaining maturity/assesment Exposure amounts as at Regulatory categories 1 - strong 2 - good 3 - satisfactory 4 - weak 5 - default Remaining maturity less than 2,5 years Remaining maturity equal to or more than 2,5 years Total Specialized Lendings at Total Specialized Lendings at At the end of 2009 UniCredit Bank AG enhanced the credit worthiness evaluation system for IPRE segment moving from a Slotting Criteria based to a cash-flow-based approach. The new model assigns internally estimated risk parameters to each IPRE transactions in UniCredit Bank AG portfolio. In 2010 a lot of transactions have been processed with this new model, moving out of the slotting criteria category Equity exposures - simple risk weight approach Cat eg ories W eig ht s Exp osure amounts as at Exposure amounts as at Private equity exposures in sufficiently diversified portfolios 190% 250, ,826 Exchange-traded equity exposures 290% Other equity exposures 370% 52,465 24,924 Total Equity Exposures 302, , BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010

83 >> Basel 2 Third Pillar Table 6 Standardized approach - risk assets Amounts as at Amounts as at Secured exposures Secured exposures Exposures classes Exposure amount Collaterals Guarantees and other similar contracts Credit derivatives Exposure amount Collaterals Guarantees and other similar contracts Credit derivatives Exposures with or secured by central governments and central banks 1,765,572 8,602, ,332 11,967, credit quality step 1 84,065,040 77,262,075 - credit quality step 2 608, ,072 - credit quality step 3 3,011,161 3,122,734 - credit quality step 4 and 5 3,088,264 2,888,010 - credit quality step Exposures with or secured by regional administrations and local authorities 84,296 3,417,362 77,584 35,496 5,116,674 50,300 - credit quality step 1 44,609,763 33,591,057 - credit quality step 2 519, ,361 - credit quality step credit quality step 4 and 5 274, ,393 - credit quality step Exposures with or secured by administrative bodies and non-commercial undertakings 182,398 1,595, ,938 1,469, credit quality step 1 6,861,715 7,330,735 - credit quality step 2 203, ,119 - credit quality step credit quality step 4 and 5 1,908,982 1,175,754 - credit quality step Exposures with or secured by multilateral development banks 1 1, credit quality step 1 347, ,403 - credit quality step credit quality step 3-2,408 - credit quality step 4 and credit quality step Exposures with or secured by international organizations Exposures with or secured by supervised institutions 34,726, , ,844 19,092, , ,506 - credit quality step 1 19,358,925 22,842,594 - credit quality step 2 1,746,095 2,599,783 - credit quality step credit quality step 4 and 5 1,151, ,872 - credit quality step 6 8, Exposures with or secured by corporates 6,569,141 3,790,829-10,927,190 3,572, credit quality step 1 2,953,682 3,717,528 - credit quality step 2 4,386,341 6,231,746 - credit quality step 3 and 4 113,820, ,776,082 - credit quality step 5 and 6 550,556 1,491,687 Retail exposures 39,126,371 3,399, ,006-42,363,669 12,033, ,400 - Exposures secured by real estate property 31,450,670 2,524, ,990,516 2,651, Past due exposures 10,804, ,322 18,706-8,373, ,074 12,570 - High risk exposures 1,512, ,688, Exposures in the form of guaranteed bank bonds 1,363, ,090-1,893, ,226 - Short-term exposures with corporates 91 11, credit quality step 1 416, ,052 - credit quality step 2 554, ,361 - credit quality step 3 252, ,106 - credit quality step form 4 to 6 7,239 - Exposures in the form of Collective Investment Undertakings (CIUs) credit quality step credit quality step 2 80,032 79,269 - credit quality step 3 and 4 3,445,308 3,424,954 - credit quality step 5 and 6 2,507, Other exposures 26,918, ,345-27,805, ,342 26,960 - Total on-balance-sheet risk assets 365,896,084 7,953,375 17,532, , ,927,683 7,947,023 21,146, ,973 Total guarantees given and committed lines 31,115, ,914 1,038, ,150 30,492,731 1,781,912 2,072, ,833 Total derivatives contracts 7,170, , ,832, , Total SFT transactions and long settlement transactions 3,584,579 40,383, ,696,135 36,689, Total from contractual cross product netting 149, ,611 Total 407,916,124 49,437,427 18,571, , ,061,072 46,729,004 23,219,317 1,012,806 83

84 84 BASEL 2 THIRD PILLAR AS AT DECEMBER 31, 2010

85 >> Basel 2 Third Pillar Table 7 Table 7 Credit Risk: disclosures for portfolios treated under IRB approaches Qualitative disclosure By its authorization no dated March 28, 2008 Banca d Italia authorized the UniCredit Group to use the advanced approach for calculating the capital requirement for credit and operational risks. In the first stage this approach has been adopted by the Parent Company and by some Italian subsidiaries, subsequently merged in UniCredit S.p.A. due to the ONE4C reorganization, by UniCredit Bank AG (UCB AG) and Bank Austria (BA AG). These methods have been extended recently to UniCredit Credit Management Bank S.p.A., UniCredit Bank Luxembourg SA, UniCredit Banka Slovenija dd, UniCredit Bulbank AD, UniCredit Bank Czech Republic a.s. and UniCredit Bank Ireland p.l.c. Subsequently it is expected that other Group entities will adopt it following the roll-out plan approved by the Group and shared with the Regulators. With reference to credit risk, the Group has been authorized to use internal PD, LGD and EAD calculations for Groupwide credit portfolios (Sovereign, Banks, Multinationals and Global Project Finance) and for credit portfolios of the relevant subsidiaries (mid-corporate and retail). With reference to the Italian mid-corporate and small business portfolios, the EAD foundation values are currently being used. In general, the following table summarizes the rating systems used by the Group with an indication of the entities where they are used and the related asset class. Rating system Legal entity Asset class Sovereign (PD, LGD,EAD) Banks (PD, LGD,EAD) Multinational corporate (PD, LGD,EAD) UCI, UCB AG, BA, UCB CZ* UCI, UCB AG, BA, UCB Lux, UCB Slo*, UCB IE*, UCB BG*, UCB CZ*, UCI, UCB AG, BA, UCB Lux, UCB Slo*, UCB BG*, UCB CZ* Central governments and central banks Institutions subjected to supervision Corporate Global Project Finance (PD, LGD, EAD) UCI, UCB AG, UCB CZ* Corporate * these Banks are currentlty authorized only to use the IRB Foaundation, so that thay use only PD internal estimations for capital calculation 85

86 Rating System Legal Entity Asset Class Rating Integrato Corporate RIC (PD, LGD) UCI, UCCMB Corporate Rating Integrato Small Business RISB (PD, LGD) UCI, UCCMB Retail exposures Rating Integrato Privati (RIP) Mutui Ipotecari (PD, LGD, EAD) UCI, UCCMB Retail exposures Scoperti di conto e Carte di Credito (PD, LGD, EAD) UCI, UCCMB Retail exposures Prestiti Personali (PD, LGD, EAD) UCI, UCCMB Retail exposures Mid Corporate (PD, LGD, EAD) UCB AG, UCB Lux Corporate Foreign Small and Mediumsized Enterprises (PD, LGD, EAD) UCB AG Corporate Income Producing Real Estate (IPRE) (PD, LGD, EAD) UCB AG Corporate Acquisition and Leverage Finance (PD, LGD, EAD) UCB AG, UCB Lux Corporate Global Shipping (PD, LGD, EAD) UCB AG Corporate Wind Project Finance (PD, LGD, EAD) UCB AG Corporate Commercial Real Estate Finance (PD, LGD, EAD) UCB AG, UCB Lux Corporate / Retail exposures Asset Backed Commercial Paper (PD, LGD, EAD) UCB AG Securitization Small Business (PD, LGD, EAD) UCB AG Retail exposures Private Individuals (PD, LGD, EAD) UCB AG Retail exposures Mid Corporate (PD, LGD, EAD) BA Corporate IPRE (PD, LGD, EAD) BA, UCB CZ* Corporate Non Profit (PD, LGD, EAD) BA Corporate Small Business (PD, LGD, EAD) BA Retail exposures Private Individuals (PD, LGD, EAD) BA Retail exposures Mid-Corporate (PD) UCB Slo* Corporate Mid-Corporate (PD) UCB CZ* Corporate Other minor rating systems (Public Sector Entities, Municipalities, Religious Companies, Leasing) (PD) UCB CZ* Banks / Corporate Mid-Corporate (PD) UCB BG* Corporate IPRE (slotting criteria) UCB BG Corporate keywords: UCI UniCredit Spa UCCMB UniCredit Credit Management Bank UCB AG UniCredit Bank AG BA UniCredit Bank Austria AG UCB IE UniCredit Bank Ireland p.l.c. UCB Lux UCB Slo UCB BG UCB CZ UniCredit Bank Luxembourg S.A. UniCredit Banka Slovenija d.d. UniCredit Bulbank AD UniCredit Bank Czech Republic, a.s. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

87 >> Basel 2 Third Pillar Table 7 During 2010, the progress of the IRB methods roll-out activities allowed the Group to apply for the authorization of the Foundation Internal Rating Based (F-IRB) approach adopted in UniCredit Bank Hungary, with reference to the following rating systems: Legal Entity Rating System Asset Class UniCredit Bank Hungary GW Banks (PD) GW Multinational (PD) Mid Corporate (PD) Banks Corporate These rating systems below are still not used in the current capital calculation under the Pillar 1 requirements: the assessment activities required for the authorization by the regulators are running and will be finalized in In order to be more closely aligned with regulatory requirements, a more sophisticated method of calculation for the benchmark on maturity (M) has been adopted in With reference to the advanced IRB approach for exposures towards central governments and central banks, banks and corporates, the maturity profile of transactions with fixed cash flows is now calculated as a volume-weighted average of the times until those fixed payment are received. For the other transactions (without fixed cash flows) M is set equal to the time until the settlement of the contract with the application, in any case, of the regulatory limits. All the internal rating systems adopted by UniCredit Group represent a fundamental component of decision-making and governance processes. Specifically, the areas where internal rating systems are most often used are as follows: Various phases of credit processes: - Approval/renewal. The assignment of internal ratings is a key moment in the credit assessment of the counterparty/transaction and is a preliminary phase in providing/renewing lines of credit. The rating, which is assigned before approval, is made available as a part of the approval process, which is largely integrated in the assessment and discussed in the credit proposal. Thus, along with loan exposure, the rating as a rule is a key factor for defining the appropriate body for the approval. - Monitoring. The loan monitoring process is aimed at identifying and quickly reacting to the initial symptoms of a potential deterioration in a customer s credit quality, and thus making it possible to intervene before an actual default occurs (i.e., when it is still possible to recover credit exposure). This activity mainly focuses on monitoring exposure movements leading to the point when it is necessary to completely disengage from the customer. In addition to determining the positive impact in terms of EAD, the monitoring process makes it possible to optimize conditions for the potential subsequent recovery phase through requests for additional security resulting in the reduction of LGD. - Loan recovery. The process of assessing the strategy to be used for loans classified as default positions, which is carried out at the customer/transaction level and aims to simulate the Net Present Value of the net amounts recovered and LGD, is based on the definition of LGD. If there are several alternative recovery strategies, the one with the lowest LGD is chosen. LGD is also the basis for pricing to be assigned to nonperforming loans transferred to Aspra Finance. - Provision policies. For performing loan customers, the incurred but not reported loss (IBNR) methodology has been adopted. This approach uses the amount of the projected loss by means of the Loss Confirmation Period (LCP) parameter for the calculation of provisions. For counterparties in the default category, loss provisions are based on the assessment of the exposure risk profile and LGD. 87

88 - Capital management and allocation. Ratings are also an essential element in the process of quantifying, managing and allocating capital. Specifically, the output of rating systems is integrated, at the level of the Parent Company of the overall Group, into the processes aimed at measuring and managing (regulatory and economic) capital, as well as into the processes aimed at determining risk adjusted performance" measures and the adjusted income statement for the purposes of strategic planning. - Strategic planning. Customer risk is a key determinant in the area of strategic planning, budgeting and provisions for quantifying RWA, impairment losses reported in the income statement, and loans reported in the balance sheet. - Reporting. Specific reports are produced for top management at the consolidated, divisional and regional levels and for individual entities. These reports show credit risk portfolio performance and provide information on default exposure, projected losses, PD and average LGDs for various customer segments in accordance with the internal rating systems implemented. Ratings are also used to determine pricing and MBOs to be assigned to account managers and to identify customers with negative EVA for which targeted strategies are adopted. The Unicredit Group, consistently with the Revised Framework of International Convergence of Capital Measures and Rules (Basel 2), is firmly committed to satisfying the requirements for recognition of Credit Risk Mitigation techniques for regulatory capital purposes, according to the different approaches adopted (Standardized, or A-IRB). In this regard, specific projects have been completed and actions have been carried out for implementing the Group s internal regulations and for bringing processes and IT systems into compliance. Considering the international location of Unicredit Group, implementations have been realized in accordance with each Country s domestic legal system and all local supervisory requirements.. Special policies, embedding the reference regulations on this topic (Guidelines for the Group and for the Italian Legal Entities), represent the Group s transposition, interpretation and internalization of the regulatory requirements concerning Credit Risk Mitigation. In particular, the requirements set out by the International Convergence of Capital Measurement and Capital Standards and Directive 2006/48/EC of the European Parliament and of the Council, the Bank of Italy circular letter No. 263/2006 and following updates, have been translated into internal guidelines, pursuing several objectives: 1. to encourage collateral and guarantees optimal management; 2. to maximize the credit protections mitigating effect on credit losses; 3. to attain positive effect on Group Capital Requirements, ensuring that Local CRM practices meet minimum Basel 2 requirements; 4. to define general rules for eligibility, valuation, monitoring and management of collateral (funded protection) and guarantees (unfunded protection) and to detail special rules and requirements for specific collateral/guarantees. In addition, based on the new regulatory structure, the development of advanced rating systems and their introduction in corporate processes have resulted in the need to establish at both the Parent Company and individual entities a process for validating rating systems and an increase in the activities that Internal Audit is required to audit with respect to such systems. The purpose of the validation process is to express an opinion concerning the proper operation, predictive ability and overall performance of the IRB systems adopted and their consistency with regulatory requirements specifically through: the assessment of the model development process with a particular emphasis on the underlying approach and the methodological criteria supporting the estimate of risk parameters; BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

89 >> Basel 2 Third Pillar Table 7 the assessment of the accuracy of estimates of all major risk components through system performance analysis, parameter calibration and benchmarking; verification that the rating system is actually used in various management areas; the analysis of operating processes, monitoring safeguards, documentation and IT facilities related to the rating systems. The validation process established within the Group first calls for a distinction to be made between the initial and ongoing validation. The purpose of the initial validation is to assess the positioning of the Group s rating systems in relation to minimum regulatory requirements and the Group s guidelines and standards concerning methodology, processes, data quality, quantitative and qualitative validation procedures, internal governance and technological environment by identifying any gaps or critical areas in relation to these requirements. On the other hand, the purpose of ongoing validation is to continuously assess the proper operation of all components of the rating system and to monitor its compliance with internal and regulatory requirements. Additionally, the process calls for the specific assignment of responsibilities for validating so-called Groupwide systems and local systems. For Group-wide systems, whose respective methodology is unified at the Group level, the responsibility is assigned to the Parent Company, while for local rating systems this responsibility is assigned, accordingly with the ONE4C new organization, only in case of systems used in UniCredit SpA. With reference to the other local rating systems, each Legal Entity is fully responsible for their own local systems. In this latter case, Parent Company is still responsible for the initial and ongoing monitoring of the proper performance of development and validation activities carried out locally and the proper operation of the rating system by also providing suggestions generated by internal and external benchmarking that are aimed at following best practices. Based on the revalidation process, the Parent Company issues a non-binding opinion on local rating systems during the initial phase before approval is given by the appropriate bodies, and later whenever significant changes are made. The department responsible for validation procedures is independent from the units responsible for developing models and from the internal audit area that audits the process and outcome of the validation. This department has established guidelines for validating rating systems aimed at a convergence towards standard validation procedures in terms of both content and tools, thereby ensuring that the criteria for assessing results are shared including through the introduction of standard trigger values and encouraging a comparison between the different systems. The use of triggers makes it possible to depict test results using a stop-light system whose colors are associated with various levels of severity of the phenomena reported. Special emphasis was placed on establishing a standard approach for validating models by identifying minimum test requirements and methods for reporting the related results. Tests are divided into qualitative and quantitative analyses: The qualitative section is used to assess the effectiveness of the methodology used to create the model, the inclusion of all significant factors and the ability to depict the data used during the development phase; The quantitative section assesses the performance, stability and calibration of the overall model as well as its specific components and individual factors. A hierarchy of the above analyses has been established that provides details as a function of the specific (initial or ongoing) validation or monitoring phase and the results obtained. In fact, the performance of certain tests is dependent on whether critical areas are identified in the performance of analyses at the next-highest level. 89

90 Additional areas of analysis, related to the organizational requirements stated in the Italian regulation, are: model design, internal use and reporting, IT and data quality and governance. The data and documents related to the validation procedures done to date are saved in special storage areas ensuring rapid access to, and security of, the information and the ability to reproduce all analyses performed. In addition, the Group has a validation tool that makes it possible to calculate both the indicators required by the Basel Committee in Working Paper 14, Studies on the Validation of Internal Rating Systems, and the statistics requested by the Group guidelines for validating credit risk models. This tool complies with the IT requirements of Banca d Italia and is fully integrated with the workplace environment. This tool is being rolled out in all the Legal Entities of the Group. The results of internal validation activities, that involve each component of the rating system (methods, process, IT and data quality), are summarized in a report, submitted to the attention of the top management and of the Regulators. The annual validation report has the aim to show the level of compliance of the IRB rating systems in the Group showing the main improvement areas. When auditing internal rating systems, Internal Audit s aim is to check the functionality of the entire system of controls over them. The activity consists in verifying: the compliance of IRB systems with regulations the effective use of rating systems for business purposes the adequacy and completeness of the rating validation process. In order to assist Group entities to ensure the quality (functionality and adequacy) of their Internal Control Systems and to modify their internal auditing methods in line with changes in their business scenarios, the Parent s Internal Audit (UC IA) has coordinated the development of a common set of internal auditing methods and manages on an ongoing basis the maintenance and improvement. These methods have been developed in order to assess the accuracy of the conclusions of the risk control functions as well as compliance with the regulatory requirements, particularly in respect of the internal validation process of internal rating and risk control systems. It should be noted that internal audit functions are not directly involved in the design or selection of the model. In accordance with its mission UC IA directly audits UniCredit SpA and, when needed, the Legal Entities of the Group, also managing the coordination of the activity of subsidiaries internal audit functions. The audits necessary to assess the functionality of the rating systems are given suitable space in the Group audit planning process, organized by UC IA, which agrees their conclusion in internal audit plans whit the Group entities. UC IA then monitors performance of these audits by a specific function and if necessary contacts the entity where there are deviations from plan. Moreover, UC IA periodically draws up an annually summary report which presents an assessment of the Internal Control System s overall functionality, describing, inter alia, audits outcomes and highlighting the main criticalities and short comings found, and recommending corrective measures. Finally, UC IA regularly reports on its activity and results to the Parent s Board of Statutory Auditors, the Internal Control & Risks Committee and the Board of Directors. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

91 >> Basel 2 Third Pillar Table 7 On the basis of validation activities and Internal Audit results, annually summed up in the Basel II Credit Risk Validation Function s and Internal Audit s Annual Reports above mentioned, and also on the basis of the activities plan relating to the areas requiring improvement pointed out by the Internal Control Functions, the Board of Statutory Auditors and the Board of Directors, during the first months of 2011, confirmed to the Regulator that the requirements provided for IRB systems use in UniCredit Group are still fulfilled. Group-wide models Foreword In connection with the approval by the Supervisory Authority, in 2010 UniCredit Group introduced the GW EAD model, which completes the set of methods developed for the Group-wide credit portfolios and allow to align to the group standards the credit risk measurement practices in UniCredit Bank AG, which were using its local EAD model even for the group-wide portfolios. A description of the already used models is reported hereafter. Sovereigns Rating model The approach used for the development of the country rating model is shadow rating whereby an attempt is made to duplicate the ranking capabilities of external (ECAI) ratings using macroeconomic and qualitative factors. The following steps were taken to arrive at the final model: Sample Selection: Determination of countries to be included in the sample; Univariate Analysis: Calculation of explanatory potential of each qualitative and quantitative factor; Multivariate Analysis: Determination of optimal subset of factors using stepwise techniques supported by the experience of analysts; Combination of quantitative and qualitative modules; Calibration: The score of the final model is calculated on the basis of parameters in order to reproduce the actual PDs; Model Testing: Mapping of model results with approved PDs. Two separate models were designed for emerging and developed countries. The quantitative module for the latter uses variables related to the balance of trade, interest rates, the importance of the banking system, per-capita GDP and the level of government debt. The qualitative module includes variables related to the development of the financial system, socio-political conditions and economic conditions. The quantitative module for emerging countries uses the following variables: exports as a percentage of gross domestic product (GDP); external debt; the amount of foreign currency reserves; the level of direct, foreign investments as a percentage of GDP; debt service compared to exports; the inflation rate and percapita GDP. The qualitative module includes variables concerning the stability of the financial system, the flexibility of the economic system, socio-political conditions, economic conditions and debt service. The validation unit checked on an ongoing basis the design of the model, the implicit default definition, the qualitative and quantitative characteristics of the model, override methods, calibration, segmentation into the two groups (developed and emerging countries) and the development sample and conducted the usual performance and stability tests. 91

92 Sovereigns LGD model This model, which was developed in November 2006, uses a regressive approach with the involvement of experts, starting with a large set of macroeconomic variables, of which six were included in the final version. The dependent variable (LGD) was calculated using internal and external data. The model, which was designed with the aim of calculating LGD for direct exposure to sovereign counterparties, provides LGD only for unsecured exposure. The explanatory variables selected are as follows: GDP as a percentage of total world GDP; external debt as a percentage of exports; indicator of debt position with respect to IMF; export volatility; average inflation rate in G7; and default timing (period preceding the default). In addition to performing the usual performance and stability tests, the validation unit checked the consistency of definitions of default, segmentation and override; the use of internal and external sources for recoveries; cost estimates and the methodology for discounting recoveries; and the need to introduce conservative adjustments for negative phases in the economic cycle. Besides the methodology, the assessment activity has involved the IT features and the data quality - both in the steps of model development and ongoing and the process features, with special focus on the correct implementation for the rating system for the countries and on the use for managerial purposes for the risk parameters internally estimated. Rating model for banks The approach used for developing bank ratings, which are defined as shadow ratings, attempts to duplicate the ranking capability of external ratings using a combination of quantitative and qualitative factors. It was decided to construct two different models one for banks resident in developed countries and one for banks in emerging markets since it is believed that there are different risk drivers for the two segments. Specific adjustments to be made to the PD resulting from the EM and DC model were introduced to take the following aspects into account: Environmental factor: The rating is improved for banks with high environmental standards; Government support and industry guarantee funds: Various corrections were introduced to take into account the support provided to banks by governments and by special industry-based guarantee funds; Transfer risk: The model takes into account the risk that the debtor is unable to obtain foreign currency to meet its obligations, even though it has the corresponding local currency. The final quantitative model for banks resident in developed countries covers several categories of factors: profitability, risk profile, size and funding. The situation is similar for banks in emerging countries with different weightings for factor categories: profitability, risk profile, size, capitalization and funding. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

93 >> Basel 2 Third Pillar Table 7 A specific rating model for Securities Industry (SI) 1 has been added in 2009 to the Bank Rating system framework, in order to measure and manage adequately credit risk, especially in the current market situation and for a client segment which was previously only partially covered by internal rating systems. The approach used for this internal estimation model is similar to that of the commercial banks with the addition of a specific module that takes into account the potential Group support, particularly important in the SI segment. Moreover, during 2009 a revision of the Bank rating system has been carried out, improving the performance of the PD model for commercial banks in the light of the introduction of the Securities Industry module. The model revision has been carried out mainly with the aim of improving its predictive power by integrating the feedbacks collected from the users in the last three years of rating systems use and removing the weaknesses reported by the internal control and internal audit functions. The main improvements made are related to the selection of the default rates implicit in the external ratings (the empirical default rates were filtered to include only those names pertaining to financial instiutions) and to the statistical estimation, within the calibration module, of the country risk factor. Additionally, the various types of support government, economic group, Institutional Protection Fund if present - are treated separately but consistently (only the strongest support is considered). Subsequent to the revision of the Bank PD model, the SI model has been recalibrated during the first quarter of 2010 in order to render the structure of this sub-model coherent with that of the Banks. The validation unit has examined the new version of the model, including its extension to the Securities Industry segment; the validation activities have been performed following the official Group validation guidelines covering model design aspects, performance, calibration and stability analyses both on final results and on single factors and components. Banks LGD model The model developed is based on an expert basis. The methodology is currently only applied to senior, unsecured performing loan exposure, which represents the majority of exposure to banks. The application of advanced methodologies to situations of default exposure or unsecured junior exposure is planned for The individual LGD value is calculated starting with an analysis of financial statements by simulating the break-up and sale of the bank s assets after repaying any creditors with a higher level of seniority. In order to obtain a realistic and conservative valuation of the bank s assets, haircuts have been established for each type of asset to take into account the likely deterioration that occurs before default, the differences between market and book value and between market value and sales proceeds. In addition, based on the fact that the success of the recovery phase largely depends on the applicable legal/institutional environment, specific haircuts have been introduced for each country to take into account the legal risk. Finally, haircuts reflecting the costs of the recovery process have been included based on the assessment of workout experts. Since the assets of the borrowing bank are stated in local currency, but the final recovery must be estimated in the currency of the creditor, an additional haircut is applied to assets in local currency that is tied to exchange rate volatility in order to take depreciation risk into account. 1 The SI segment is constituted by banks involved in broker/ dealer, merchant/ investment banking, corporate finance, M&A and Wealth Management activities and comprises both pure SI societies, that exercise mainly those kind of activities and for which there was no rating system in place, and hybrid banks, that are active in commercial banking also and for which the Groupwide A-IRB model for Banks has been used. 93

94 In 2009, as a part of the IRB System s improvement and maintenance process, a new version of the Banks LGD model has be released that cover both the commercial and the investment banks (Securities Industry). This new LGD model in particular, has maintained the structure of the previous model while improving the treatment of deposits (considering the different local legal frameworks) and increasing haircuts on mortgages counted in the Bank s assets. The validation unit has examined checked on an ongoing basis the design and scope for applying the model, the model s components, experience-based amendments and overrides. As much has it has been possible also external benchmarks have been examined; further, special attention to the analysis has been given to the assessment of the conservative haircuts related to the different assets categories. Besides the methodology, the assessment activity has covered the IT features and the data quality - both in the steps of model development and ongoing and the process features, with special focus on the correct implementation of the rating system for the countries and on the use for managerial purposes for the risk parameters internally estimated. Multinational Corporate Rating model This rating model applies to multinational companies defined as companies with consolidated turnover or operating revenues greater than 500 million for at least 2 consecutive years. Following the shadow rating methodology, the model is made up of a quantitative and qualitative component. The quantitative section is developed around a multivariate analysis of elements such as financial ratios for capital, profitability, interest coverage and size. This module produces a probability of default. The qualitative module consists of a set of questionnaires that analyze corporate aspects such as management quality, organizational structure, market share, etc. The qualitative module produces a value, expressed in terms of notches, that is used to modify the quantitative rating; the maximum variation with respect to the qualitative rating was set by experts. The result of the two modules is then upgraded or downgraded to reflect the company s inclusion in a group. The multivariate selection led to the inclusion of the following variables that have been appropriately altered: ordinary cash flows over value of production, earnings before taxes over value of production, EBITDA over interest expense, adjusted net worth over capital employed and value of production. A regression is done of these variables on the logarithm of the relative frequency of default furnished by Standard & Poor s. In 2008 the Multinational Rating System has been extended to Italian Large Corporate segment (ILC). This segment, in general, includes all enterprises with a turnover or operating revenues greater between 250 and 500 million. Considering the reduced portfolio default number and the high degree of analogy with Multinational Corporate (MNC), it has been decided to adapt the methodology already working for the MNC segment, developing the model on the basis of consistent standards and steps of process. The need of a model for internal estimation of the PD and LGD risk parameters for Italian Large Corporate (ILC) segment in UniCredit Corporate Banking (UCCB) has been justified on the one hand by the compliance with the Basel II advanced IRB approach requirements and, on the other hand by the need to improve the full and exact control of the measurement parameters of credit risk. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

95 >> Basel 2 Third Pillar Table 7 In the second half of 2009, as part of the rating systems on-going improving and validation process, the MNC rating system has been revised with the aim to overcome the issues raised by internal validation and audit functions and by the Regulators, including also the suggestion coming from the users after two years of model operation: a specific calibration module has been implemented (including, as for the Banks, a country risk factor) and the soft factors have been integrated in a statistically developed scorecard (thus abandoning the notch-up /-down approach). Moreover, the segment definition has been changed in order to reflect the decision to exclude both leasing and factoring companies from the scope of application of the MNC rating system. These two segment will be covered by specific rating models to be developed in the future. The validation unit has verified the new version of the model, following the official Group validation guidelines that cover not only model design but also performance, calibration and stability aspects both on final results and on single factors and components. Multinational Corporate LGD model Rating agencies have recently started to evaluate recovery levels for speculative grade companies. Given the lack of historical time series of internal recovery rates for multinational companies (since this is a portfolio with a low risk of default), the development function used the rating agencies evaluations and developed a model based on the shadow rating approach supplemented by experts opinions. The construction of the model consists of several phases: 1. Use of industry averages in which differences can be interpreted by experts (heuristically these represent the intersections in a regression model); 2. Determination of a list of factors provided by experts; 3. Elimination of outliers; 4. Projection of factors at the default level, defining the time from default as Log(100%) Log(PD). This makes it possible to compare companies with different ratings; 5. Selection of factors at the univariate level based on discriminating power; 6. Multivariate regression; verification of impact; 7. Calibration and downturn adjustment; 8. Haircuts for legal risk and recovery costs based on the counterparty s country of residence. The model designed in this manner represents LGD derived from a database for bond debt, and as such it has a negative impact since it does not take into account the probability and effects of debt restructuring that are typical of bank loans and similar products that make up the most representative portion of the UniCredit Group s portfolio. Thus, a cure rate was used that was defined by experts on the basis of results obtained with local models using corporations (Italy, Austria and Germany). This parameter makes it possible to go from a so-called LGD bond to an LGD loan. As well as the PD parameter, also the Loss Given Default of Multinational Corporate system has been extended to Italian large Corporate segment in In the second half of 2009, as part of the rating systems on-going improving and validation process, a new version of the LGD model has been released; the new version has been built on loss data observed for defaulted transactions integrating quantitative and qualitative factors; this latter aspect is particularly noteworthy considering also the difficulty to have sufficient robustness and granularity in the estimation using quantitative information alone. The validation unit checked on an ongoing basis the design of the model and the quality and conservative nature of estimates. It also conducted a benchmarking analysis of recoveries using external data and data from rating agencies regarding the growing literature on this subject,. Besides the methodology, the assessment activity has involved the IT features and the data quality - both in the steps of model development and ongoing and the process features, with special focus on the correct implementation for the rating system for the countries and on the use for managerial purposes for the risk parameters internally estimated. 95

96 Corporate Treasury and Funding Vehicles (CTFV) rating In the first half of 2009, the Group has chosen to extend the Bank and Multinational rating system frameworks to those subsidiaries that exercise corporate treasury functions (such as cash concentration, FX management, and funding) or must be a specialized funding vehicles whose creditworthiness is driven by the parent/group support in the form of an explicit guarantee for the counterparties or its issues or via some other support mechanism. Due to the fact that, in most cases, the default of a CTFV customer is caused by the default of the customer group it belongs to, the approach adopted, both for the PD and for the unsecured LGD, is to estimate the distance in notches to the PD and the LGD of the parent company (and not the absolute value itself) while for EAD it was anyhow decided to use the already existing model for the other Groupwide customer segments. The performance and calibration analyses performed (using the objective distances provided by the experts) by the validation unit showed positive results. Project Finance rating model The GPF rating model is an expert model. It is based on a set of 29 factors that form a questionnaire in which there are 5 possible levels of answers for each question. The 29 factors can be grouped into five key areas that cover project risks. The final score is a weighted average of scores obtained from the factors. The 5 combined areas are as follows: project sponsor risk, execution or completion risk, operating risk, exogenous risks (e.g., macroeconomic risks) and cash-flow-related risk. The development of the rating system was supported by experts in the origination area. The specific nature of project finance and partial independence from counterparties that support the project can only be addressed with a high degree of flexibility, which is made possible by the use of risk mitigation phenomena or by a change of weightings of individual factors, or from the standpoint of weak links. Portfolio segmentation is based on the following criteria: The project is developed by a legal entity separate from the sponsor; There is a separation (lack of recourse) between the special-purpose vehicle and sponsor. At times, for short periods, this separation may disappear. Credit decisions are mainly based on future cash flows produced by the project; The financial structure is based on the quality and quantity of project cash flows; Risks are shared by those participating in financing; Project assets and revenues are used to secure creditors; Only specialized departments at UCB AG and BA are involved; Project volume is over 20 million; Projects for which economic risk is limited to 15% (maximum of 30 million) through export insurance guarantees are specifically excluded from the portfolio. The model was calibrated by determining which score levels are assigned to rating levels. Thus, the associated PD values are not continuous but absolute; a single PD value is assigned to each rating. The validation unit has checked the design of the model as well as performance on a combined, group risk, and single factor basis. It also analyzed stability, adjustment mechanisms and overrides, and whether estimates are conservative, and it performed a benchmarking analysis, although the availability of external ratings is limited. All these activities have concerned the Group GPF portfolio, booked in: UniCredit S.p.A., UCB AG, BA. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

97 >> Basel 2 Third Pillar Table 7 Following the indications coming both from internal control functions and from the Supervisor, an overall re-development of the Global Project Finance rating started in 2010 in order to reduce the incidence of expert judgment on the final rating and to increase the predictive power of the whole system. In more detail the ongoing activities include the statistical optimization of the weights of single factors, currently defined on an expert bases, the concentration of manual intervention on the rating at the override stage, a more detailed description of risk factors to order to increase the objectivity in rating assessment and the incorporation of country risk with the approach of the Group. The end result will be finally calibrated to the long-term average default rates observed. These changes will be implemented in The LGD model for Project Finance operations (GPF) The GPF LGD model is based on estimates differentiated by the industry sector underlying the project. The final result, LGD as a percentage of EAD, is provided by the ones complement of the discounted recovery rate to which recovery costs are added as well as an adjustment for the timing of recoveries. For sectors in which sufficient internal information was available, external data were ignored, and for those in which there was insufficient internal data, analyses of recovery rates done by Standard & Poor s were used in the area project finance, at times directly, and at times in combination with internal data if allowed by the large size of the subset. Using Standard & Poor s data for December 2005, a downturn scenario was determined, taking the crisis period following the Enron situation between 2001 and 2002 as a reference, from which a specific downturn factor was obtained. During the 2008 and 2009, following the recommendations of the internal control functions, included also in the A-IRB follow-up assessment report of the Supervisory Authority (March, 13 th 2009), the model has been modified with the aim to overcome the weaknesses raised during the internal validation activities and including the Group s risk management practices in a more effective way. The amended LGD model is based on a methodological framework developed by Standard & Poor s that examines the tail of the project asset value distribution in the region where default has occurred and, thus, defines the LGD probability distribution as a distribution of debt minus asset value in this region. The original methodology has been then adapted to real practices and to the business standard procedures in place in the Group. The adaptations made mainly regards the calculation method of the asset value, the determination of the default region and the introduction of appropriate volatility scorecards calibrated by sector and based on a specific set of questions. This new LGD model was released in the second half of 2009 In light of recent results of back-testing, the Group decided to start, in parallel with the PD, the activities aimed to revise the LGD methodology in order to improve the model performance. The measures being implemented include, in the first place, the introduction of a second scenario "singular grave event", the probability of which is determined based on a specific set of qualitative questions: the expected LGD is then calculated as a probability-weighted average of the standard distressed asset scenario and the new singular grave event scenario. A second important change has been to abandon an explicit determination of the current asset value, moving to a direct estimation of the ratio of debt to the (maximum) distressed asset value (DMDA) in case of a default. This choice has the effect of removing the "volatility scorecard on the value of assets, thus contributing to the stabilization of the final estimate. Additionally downturn and recovery costs add-ons calculation are under revision. Finally, the new model will be assigned an LGD loans to specific persons. In this context, the validation function focused last year, in addition to the current model performance s monitoring activities, on the evaluation of the design of the new model, activity that is still on-going. 97

98 Group Wide segments EAD model The need of this new model come from, on the one hand, the target to comply with Basel II requirements of the advanced IRB approach and, on the other hand, from the need to measure the risk connected to any asset in order to manage it and to define its price in a proper way. The main driver of the EAD is the product type and the calculation is tied to three components. Firstly, according to supervisory requirements, it has been assumed that the current Balance Sheet exposure will continue to exist up till the default. To this value has to be added the expected value of a possible drawdown of the granted credit line, and third, the possibility of an overdraft over the amount of the current credit line is considered as percentage of the granted credit line. Furthermore it has to be considered, for the significant products, the probability of a request of refund by a third party, to which has been granted a guarantee in case of default. In order to make the default sample coherent with the model s scope of the application, it has been limited to the counterparts with at least a credit line greater than granted. The assessment activity carried out during the first half of 2010 has checked the model design with special care to the reasonableness of the underlying assumptions, the choice of the development sample included. The model estimates have been compared with the related value internally examined using an out-of-sample datatset containing defaults observed, during a downturn phase ( ), in the main Group s Legal Entities. Also the IT and the data quality features have been subjected to internal assessment. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

99 >> Basel 2 Third Pillar Table 7 Local models, Italy Here below are described the local authorized A-IRB models currently in use in Italy. Italian Corporate segment Rating model The Integrated Corporate Rating (ICR) provides a rating for the counterparties of UniCredit SpA in the mid-corporate segment, with revenues (or total assets if revenue information is not available) from 5 to 250 million, according to the new segmentation, effective since November 2010, decided within the One4C merge project, also given the results of a specific comparison between the performances of the different available models for the corporate segments in Italy. In its first version, the ICR, which was developed in several phases with the support of the company Centrale Bilanci, integrated various components at several levels. At the first level, the score generated by financial statement variables (the CE.BI score) was integrated with qualitative information from questionnaires completed by the account manager. At the second level, the previous rating is supplemented with geographic, industry and size information. At the third level, behavioural information was combined to arrive at an integrated corporate rating using a two different integration functions, depending on the behavioural score. Finally, 9 rating categories were identified through a Kernel analysis of the distribution of the ICR score over the application portfolio. The competent validation functions checked, during the Initial Validation fase, the design and the reliability, in terms of performance and stability, of the various modules and the model as a whole also for the significant sub-portfolios, analyzing also the calibration, the override rules and the coverage by transactions and exposure. In 2008 the following model s improvements, deployed in March 2009, were implemented and validated: Revision of the behavioural module: using the factors already included in the previous version as starting point, the weights have been revised and some factors not anymore explicative have been excluded, increasing the predictive power of the module; Full revision of the integration between behavioural (internal and external) modules and second level corporate score, removing the dual integration function approach, source of discontinuity in the final PD especially where the behavioural score is near the selected threshold ; Moreover, the model was revised using a development sample more representative of the application portfolio, incorporating also the Basel II default definition net of technical Past Due, and the adequacy of the revised system for the entire application portfolio was assessed, including the former Capitalia customers. In 2010 the model has been recalibrated in order to consider the extension of the default data historical series and the implications of the changes in the application portfolio due to the One 4C merger project. In addition, based on the recommendations suggested by the internal control functions and the Regulator, also a significant model revision has been performed, that will be deployed to production in 2011 and that will allow an increase of the representativeness, the performances and the stability of the PD estimates, through the redevelopment of the financial, qualitative and behavioral modules. In 2010 the validation activities, along with the monitoring of the reliability of the model currently in use, focused on the revisions of the model, to verify their adequacy and compliance to the regulatory requirements and to the Group standards. 99

100 Italian Small Business segment Rating model The Integrated Small Business Rating (ISBR) provides a rating for the counterparties of UniCredit SpA with revenues (or total assets if revenue information is not available) up to 5 million, according to the new segmentation decided within the One4C merge project and verified by the competent internal validation function in terms of the choices and the application of the rating models. The model has been structured in order to optimize the aggregation of the different informative sources, both internal (qualitative, financial, customer data and behavioural) and external (BoI Centrale dei Rischi data flow and other risk data providers) differentiating between disbursement to new customers or to already recorded customers and on the basis of a enterprises portfolio segmentation that reflects the size and the seniority of the enterprise in the market. The modules developed are the following: Customer data; External behavioural module (CE.RI./SIA); Financial module; Credit Bureau modules (Experian and Crif) Qualitative module; Internal behavioural module. The estimation process of the different modules has been shared in the steps here after described: univariate analysis, multivariate analysis, specification of the model and assessment. The method applied is the total stepwise logistic regression. The estimation is performed using the Weight of Evidence (Woe) technique. At the end of the estimation procedure of the logistic model, the same is scaled (homogenised) in a way that the scores of different models can be comparable. Identified the significant regressors, it has to be build the scorecard report that resume in a synthetic way the variables used in the model, the weight of each factor and the level of statistical significance. The homogenised score of each model contributes to the production of the PD and the counterparty Rating class on the basis of the weight connected to the same model, compared to that of the others and with the conditions connected to the seniority of the relationship with the bank, discriminating between those already customer and those new customer, and to the type of Small business customer under examination. The model was re-calibrated in 2009 also considering the integration of former Capitalia credit portfolio. In 2010 the calibration has been performed considering the extension of the perimeter of application of the ISBR model to up to 5 million revenues counterparties, as a consequence of the merger since November In 2010 the validation function has ongoing verified the reliability, in terms performance and stability, also in the significant sub-portfolios, of the model as a whole and of the different modules that compose it. Particular attention has been devoted to the evaluation of the model recalibration, which in general led to an improvement in terms of alignment between PD and observed default rates, thanks to the introduction of the most recent data in the target rates. Besides the methodology, the validation activity concerned also the IT and data quality aspects. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

101 >> Basel 2 Third Pillar Table 7 Rating model for private individuals in Italy: Mortgages The target portfolio of the Integrated Individual Rating (IIR) model, which is based on a pool approach, consists of the set of all categories of mortgages handled at UniCredit SpA which are used for the purchase, construction and re-modelling of residential properties by individual customers and for the purchase of properties for the purposes of business carried out by individuals included in the family firm sector. As regards the Group s instalment products, the incorporation of specific characteristics of an individual product for the purposes of determining its pool resulted in assigning a potentially different probability of default to each relationship of the same counterparty, although the customer s characteristics are among the fundamental drivers used to identify pools. Like all other rating systems for the Group s portfolio of individuals, the development of the IIR model was also broken down into two separate phases. The first phase consists of identifying pools related to the portfolio in the loan approval phase, and the second consists of identifying pools related to the existing portfolio. Using statistical techniques, pools covering the entire portfolio were identified. Following this process, tree structures were created in which the leaves correspond to the pools identified. The PD associated with each pool is then estimated using the default rate observed for the exposure attributed to it. The individual pools were then combined into rating categories using cluster analysis. In the process of assigning the probability of default, the assessment made during the initial approval process is maintained during the first six months of the relationship unless an excess of over a month is discovered, and starting in the seventh month, the transaction s allocation to the corresponding pool is recalculated using the tree established for the existing portfolio. Performance variables gain greater significance with the age of the mortgage. For the peculiarities connected the different origins of he exposures contributing to the risk portfolio coming from the former UniCredit Banca, UBCasa and Abbey National, the rating model has some personalizations, above all with reference to the portfolio acquired through the Abbey National channel. In the analysis of the whole portfolio of the former Banca per la Casa have been defined four segmentation trees The initial discriminating variable of which is the maturity of the mortgage (the number of months from disbursement greater of less than 6) and the place of origin for mortgages with a longer maturity. Specifically these include: a tree created for the portfolio in the loan approval or application phase, used for assigning the probability of default to all mortgages that are less than 6 months old (split, originally, in mortgages originated either by Banca per la Casa or by Unicredit Banca); a tree for the existing former ANBI portfolio to be used for mortgages from the former ANBI that are more than 6 months old; a tree for the existing former Adalya-Kiron (former Banca per la Casa) portfolio created in order to estimate PD for former Adalya mortgages that are more than 6 months old; a tree for the existing former UniCredit Banca portaolio portfolio to be used for mortgages from the former UniCredit Banca that are more than 6 months old. A feature common to the four segmentations is the assignment of greater risk to the pool of those credit files that have payment delays or delinquencies of over one month. During 2008 some changes were introduced to the Individual Rating integrated system (RIP) for mortgages, coming from the use of a definition of default more adherent to the supervisory regulation, (supervisory overdraft and/or 7 outstanding installments or doubtful or non-performing loan), from the need to homogenize the application score grids between former UniCredit Banca per la Casa and former UniCredit Banca, and from the enlargement of the time windows with the consequent calibration and redefinition of the rating classes. 101

102 In the same period also the development of a specific grid (statistical model with logistical function) for mortgages granted to immigrants was carried out: this segment is composed of transactions where at least one of the counterparties among the borrowers or guarantors is born out of Italy and has citizenships different from Italian. During 2008 the IRB advanced methods have been rolled out to the residential mortgages previously included in the former Capitalia portfolios, with a specifically developed behavioral module, based on representative data on those portfolios. In addition to the planned PD and LGD models calibration activities, new rating modules for mortgages granted to UniCredit Group employees was released in 2009, previously excluded by the IIR scope of application. In 2010 a significant revision of the IIR model for mortgages has begun, in order to introduce a more prudential default definition, also at the light of the recommendations suggested by the internal control functions and by the Regulator, and a higher alignment to the new credit processes and the organizational structure derived from the merger completed in November This revision will allow, through the redevelopment of the application and behavioral modules, an increase of the representativeness and the performances of the PD estimates, along with the solution of the findings identified by the control functions. The validation function checked during 2007 the design of the model and the underlying application score, their discriminating power and the stability of the population over time. In addition, special attention was devoted to analyzing sub-models identified based on the mortgage s age and its channel of origin. Finally, coverage, in terms of transactions and exposures, and calibration were analyzed on a combined and subportfolio basis. In the subsequent years the validation function verified the ongoing reliability of the IIR for mortgages model in terms of performance and calibration, evaluating specifically case by case the different above mentioned model changes (i.e. new immigrants grid, behavioral model for former Capitalia customers, rating model for mortgages to UniCredit employees). Rating model for private individuals in Italy: Overdraft and Credit Cards The Integrated Individual Rating (IIR) for Overdraft and Credit Cards is aimed to rate credit exposures towards private individuals implicit in Current Account facilities (overdraft, guarantee/endorsement loan, credit cards). It integrates several basic score modules that use internal information (customer related and behavioral) and external information (Centrale Rischi and CRIF credit bureau). The integration of the basic modules is different for each of the following cases: new clients applying for a credit facility; clients previously operating on an active bases, applying for a credit facility; old clients with loans already granted; old clients never granted; UniCredit Group Employees. The integration of the different modules produces an underwriting score, used to evaluate the credit worthiness both in granting and in renewal stage, and a monitoring score, used to evaluate the stock of this kind of exposures. In the scheme below there is a synthetic explanation of the rating model functioning: BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

103 >> Basel 2 Third Pillar Table 7 Underwriting Model for new clients Model for clients previously - operating on an active bases Customer info module CRIF Module Customer info module CRIF Module Behavioral module Monitoring Model for clients with granted loans Model for clients with Overdraft but never granted Models for UniCredit employees Customer info module CRIF Module Behavioral Module Behavioral Module Behavioral Module Model for clients previously operating on an active bases Behavioral Module Modules/models developed on underwriting data sample Modules/models developed on monitoring data sample The risk factors have been selected through univariate analysis, considering the percentage of missing values, their predictive power (Somers D) and the result of the Cluster analysis. On a multivariate level stepwise logistic regression, correlation analysis and experts judgment have been mixed. The integration of the different sub-modules were performed using a logistic regression on Weight of Evidence (WoE) of the score coming from each single modules. The information underlying the financial/customer score module collected during the underwriting process and rarely updated during the life-cycle of the loan are progressively underweighted in the model. On the contrary, the behavioral variables, potentially absent in the underwriting stage, are explicative and used during the monitoring stage. With reference to update frequency, the behavioral information coming from CRIF bureau are updated quarterly, while the ones coming from CeRi are update monthly. The model has been estimated exclusively on former UniCredit Banca customers data but has been calibrated considering the default rate of all the customers. The exposure distribution by rating classes shows, as expected, a concentration on the higher rating classes: 70% of the exposures are on rating classes lower than T08 (PD max of 3%). All the rating classes are populated enough with no concentration on specific classes. 103

104 The default definition adopted in the model development is a managerial definition while the one used to calibrate the model is fully compliant with Basel II requirements, considering as bad all the counterparts classified sofferenza, incaglio and past due (180 days). Regarding this aspect, in 2010, also at the light of the recommendations suggested by the internal control functions and by the Regulator, specific activities started in order to revise the default definition adopting a more prudential view and to consequently recalibrate the model (including LGD and EAD parameters). The validation function verified the model design, the usage of all the available information source, the performance of the model in terms of rank ordering, calibration and stability of the population over the time. Additionally they take particular care on the analysis of the identified sub-models. The rating model for the Private Individual segment in Italy: Personal Loans The rating system for personal loans is composed, for the estimation of the PD, by different models according to the purpose of use (underwriting or monitoring), the underwriting channel and the application portfolio, in order to identify the peculiarities of the different segments in terms of business management, risk and statistical properties. The developed models are the following: 1. underwriting canale banca strategic portfolio 2 ; 2. underwriting canale banca not strategic portfolio 3 ; 3. underwriting canale non banca 4 ; 4. behavioural; This structure is the one that optimizes the use of the main sources of information without introducing excessive complexity in the model. Concerning the underwriting models, which aim to assign a probability of default for each exposure at the moment a personal loan application is submitted, the development methodology used is the logistic regression and the development samples consist of all lended personal loans until July Concerning the behavioural module, developed through a logistic regression, the discriminant variables used refer to internal behavioural information and to information related to the customer personal data. The application and behavioural scores has been then standardized and 14 rating classes have been created, defining also 4 additional classes respectively for employees, for the unrated portfolio (for which underwriting score models are not used), for the loans lended with evidence of a refusal policy and the defaulted loans. The definition of default adopted during the score estimation is of a business typology, characterized by a 18-month performance period and by the identification of default based on a sofferenza status or on a number of past due installments greater or equal to 5 5. Subsequently, the three scores have been calibrated to the default definition provided by the Supervisory Regulation taking into account the lended amount during the period between September 2005 and January Also for Personal Loans, regarding this aspect, as highlighted for the other retail segments in Italy, in 2010 specific activities started in order to revise the default definition adopting a more prudential view and to consequently recalibrate the model (including LGD and EAD parameters). 2 Personal Loans lended by UCB agencies for which the applicant or the co-obligor (if any) were born, according to what derived from the tax code, in the following countries: Italy, Austria, Belgium, Denmark, Finland, France, Germany, UK and Northern Ireland, Greece, Ireland, Luxembourg, Norway, Netherlands, Portugal, Monaco, San Marino, Spain, Switzerland, Sweden, Città del Vaticano, UNITED States of America, Canada, Australia, New Zealand. 3 Personal Loans not belonging to the Strategic Portfolio. 4 Personal Loans not distributed by the UCB agencies. 5 The counterparty is considered good in case of past due installments less or equal to 2 and indeterminate with 3 or 4 past due installments. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

105 >> Basel 2 Third Pillar Table 7 The validation function verified the model design, the use of information sources and the model performances in terms of rank ordering and calibration. Moreover, a specific analysis was performed during the first quarter of 2010 in order to verify the possibility of extend the estimates to former Capitalia customers. Local Italian portfolios LGD The LGD models used in UniCredit SpA, that merged the portfolios former in charge of UCCB, RNI and UCFin, have been developed using a workout approach. In particular, the loss rate is calculated using the cash flows for the different defaulted position observed by their entrance into default until the end of the recovery process. With regard to LGD estimation, specific module has been developed for each default stage (incaglio, sofferenza and past due), adopting regressive estimates for incagli and sofferenze blocks and historical averages for past due exposure changes. This building block approach requires to define a way to integrate them in order to calculate the LGD overall. This integration you must define two types of parameters: the composition of the first entry in default (the probability that, given the default, it occurs in the form of past due, incaglio or sofferenza) and the transition probabilities between the different states of default (the so-called Danger Rates). While for the Corporate and Small Business portfolios, as well as for mortgages and overdraft/credit cards, these parameters are defined based on empirical observations (observed frequency of the development sample) for Personal Loans the danger rate is based on WOE (Weight of Evidence) associated with different attributes available during the application. The regressive models developed require the use of both customer and product/credit line information; additionally information on guarantees pledging exposures are relevant. In this regard, UniCredit SpA decided to incorporate the effect of different types of collateral in the LGD estimates, excepted for Corporate exposures granted by banks, where the substitution principle is adopted. Then, as general principle, the portion of the exposure guaranteed is not treated separately from the unsecured part; the Loss Given Default is calculated, at transaction level, according to the collateral provided and, if significant, their value. Concerning Corporate and Small Business, the group opted to use a jointly developed model for certain types of relationships (i.e. Advances). Limited to the non-performing loan phase, the highest level of detail possible, i.e., the relationship, was taken into account for the calculation of the value of LGD. With regard to the watchlist phase, the bank instead developed two models for each segment with a differentiation based on installment and non-installment exposure. During 2008 some changes to the LGD model for the Italian portfolios (excluding Personal Loans and Overdraft / Credit Cards models that have been authorized in 2010) were introduced. The first measure regarded the introduction of the risk free rate in the models on an ongoing basis rather than in a discrete form. Secondly a new approach for the estimation of downturn LGD was developed providing the calculation for the downturn effect as adjustment of LGD estimated by the models through two ratios obtained with a regression that interpolates the estimated LGD from the models and a new variable that identifies the presence or not of a recessive phase for the non-performing loan. The third measure was a review of the effect of the bankruptcy legal action, while the fourth concerned the correction of the defaulted asset LGD estimates to consider the possible partial write-downs. 105

106 All the models were recalibrated consistently with what had been done in the PD models; with specific reference to the LGD of the IIR system for mortgages, the method of aggregating the geographical areas was revised by eliminating the classes Lazio e Umbria and Marche e Toscana and creating the class Centro, with the aim of improving the economic understanding and to make this model uniform with the similar LGD models developed in Italy. During 2009 the LGD models for Italian portfolios were further improved with the enlargement of the historical data sample, that led to the exclusion of all the defaults before 1997 from the portfolios. This decision was taken to ensure that there was the greatest consistency between the processes underlying recoveries seen in the samples used and current processes. In addition, based on the recommendation of the internal control functions, also the methodology to determine the discount rates to calculate the observed LGD has been revised, with the use of a the risk free rate plus a risk premium based not only on the historical volatility of recoveries, but also on the asset correlation provided for the capital requirement calculation. Finally, the geographical areas in the LGD model for the Small Business segment has been redefined, with aggregation of the South and Islands classes, in order to be more adherent to former Capitalia portfolios and also homogeneous with the models for Corporate and Mortgages segments. The aforementioned modifications caused the change of the weights of the predictive variables of the models, not leading anyway to changes in the variable number and typology. In 2009 new models have been introduced to calculate LGD for overdrafts / credit cards and personal loans. The new models have a structure similar to that of other LGD models in place in Italy they are workout based and are structured in modules for different client status (sofferenza, incaglio and past-due 180 days). These blocks are then combined together using two different parameters: the composition of the first default entry date (the probability that given the default, it occurs as past due, incaglio or sofferenza), and the transition probabilities between different default status. The validation function, that during 2007 reviewed the structure of the originally approved model, its consistency with the definition of PD, the effect of the economic cycle, the methodology used for discounting recoveries, the cost allocation and the treatment of assets in default and made test aimed to verify the accuracy and of the calibration of the models, during the subsequent years focused both on the initial validation of the new models (overdrafts / credit cards, personal loans) and on the qualitative validation of all the revisions to the already authorized models, besides to monitor performances and calibration. Extension of the AIRB Approach (LGD) to UniCredit Credit Management Bank In the second half of 2010 the merger by incorporation of Aspra Finance S.p.A. into UniCredit Credit Management Bank S.p.A. was completed. In this context, the Unicredit Group extended to UniCredit Credit Management Bank S.p.A, contextually to the merger, the A-IRB approach to measure the capital requirements for credit risk, already in use in Aspra Finance S.p.A. since December The adoption of the A-IRB methods in the incorporating legal entity aims to ensure the neutrality throughout the Group in terms of expected loss and risk weighted asset calculation, regarding both the current credit portfolio in Aspra Finance S.p.A., for which the capital requirements are already calculated by an advanced approach, and the future selling of non-performing loans originated by already IRB authorized Group legal entities. Here it is recalled that the focus of Aspra Finance consisted in the purchase and the management of doubtful loans originated by the banks of financial companies of the Group. Therefore in this company the historical Non Performing Loans portfolios (NPLs) of the legal entities of the Group were progressively concentrated. To this purpose it has to be noted that for the IRB portfolio the basic criteria for the definition of the NPL portfolio price is represented, and will be represented in the future sales, by the LGD for the default exposures. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

107 >> Basel 2 Third Pillar Table 7 EAD models for Italian portfolios Together with the adoption of the new rating system for Overdraft / Credit Cards and Personal Loans also exposure at default (EAD) models have been developed. Moreover, in the first half of 2010 a new EAD internal model for Mortgages has been added to the rating systems for private individuals in Italy (RIP) and has been authorized by the Italian Regulator in December The approach used for EAD estimation consists of a methodology "within 12 months," that start from the analysis of all the exposures performing in a given date (ie 31/12/t) that are classified as defaulted over the next 12 months. With regard to overdraft and credit card, the EAD estimation is differentiated according to product types (overdraft, credit cards, receivable and endorsement loans) The EAD for overdraft differs if there s an unutilized portion of the credit line (margin) or not in the instant of observation; in particular, where this margin is present an equivalent credit (CCF) is calculated while in the absence of it only an indicator of the current usage (K) is calculated. Additionally, overdraft and credit card are managed jointly given the fact that the credit card payments are charged monthly on the current account without details on single movements. As for the endorsement loans, through which the bank accepts or guarantees a customer s obligation (transferring to itself the default risk of the customer) the EAD model assesses the endorsement loan value at the time of default which represent a potential risk for the bank (the actual risk, or the risk that the endorsement loan becomes cash exposures, is evaluated in the LGD model). Regarding the estimation of EAD on receivables, the development function decided to calculate only the coefficient K, given the low number of observations with margin in this context. With regards to personal loans, however, the analysis carried out showed that exposure at the time of default is always less than 100% of the exposure at the observation date for all the segments defined in all portfolios. For this reason it was decided not to implement the model developed and conservatively assign to each exposure an EAD equal to 100% for regulatory purposes. Finally, with regard to EAD model for mortgages, the approach is quite similar to that used for personal loans. In this case some sub-portfolios with an average EAD above 100% have been identified, particularly if an overdue was present at the time of observation. In these case a 100% EAD have been forced in line with the regulation. At the end of 2010, a model recalibration was performed in order to consider a more recent historical data series. The initial validation of these models was mainly focused on checking the methodology framework adopted with particular regard to their ability to catch the peculiarities of each product especially where the exposure generally increases reaching the default. The validation activities assessed then the completeness of the information used, the models performances and their calibration. 107

108 Local models, Germany Mid-corporate rating model The Mittelstandsrating model aims to provide ratings for exposure to the UCB AG category of companies headquartered in Germany with turnover of million. The target has been amended at the end of 2010 (previously the lower turnover boundary was 3 million) as a result of the ONE4C Group s initiative aimed to get more focus on the requirements of the customers and to be closer on the regional markets. The Mittelstandsrating model version currently in use has been released in 2009 and was developed with the aim both to simplify the previous model (the MAJA Values has been reduced from 12 to 4) and to perform the improvements suggested during the previous validation stage. The model is made up of two components: a quantitative and qualitative module. The score resulting from the analysis of financial statements results in the partial rating for operating conditions. The qualitative model instead provides the partial rating for the company s situation. The final rating is created from a combination of the two partial ratings. The quantitative module is made up of 4 statistical sub-modules called Maschinelle Analyse von Jahresabschlüssen (automated financial statement analyses) or MAJA. The area of application of each of these sub-modules is dependent upon the company s industry (Production, Trade, Construction, Services). In general, the risk factors included in the quantitative module (which were selected using a process including statistical analyses and discussions with experts) cover the following areas of analysis: Asset structure; Financial situation; Growth in production/margins. The qualitative module, also refined in 2009 with the aim to make simpler its structure optimizing at the same time the performaces, covers areas of analysis concerning: Financial Conditions Management Qualification Planning Controlling Market Products Special Risk Industry sector rating BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

109 >> Basel 2 Third Pillar Table 7 In case of worsening conditions of the debtor (warning signals) already included in a specific section of the qualitative module, the rating is automatically adjusted. Finally, the final rating can be adjusted manually (overridden) if the additional information indicate that the calculated rating is not appropriate. This practice is subject to specific restrictions and constraints and is closely monitored by the internal validation unit. During the model refinement made in 2009 the final rating has been calibrated considering a more updated historical dataset of defaults. The internal validation unit checked the design of the model, the reliability (performance and stability) of its various modules (the quantitative module with its related sub-modules, and the qualitative module) and its calibration. It also analyzed the process of assigning ratings, rules for attributing exposure to the model concerned and the override process. After the change in the target portfolio a specific analysis has been performed to verify the impact of the new segment definition on the performances of the rating system. Small business rating model The UCB AG smallcorp rating model covers small and medium-sized German companies and individuals with residence in Germany whose income is mainly from freelance activities, independent work or income from a small or medium-sized business in which they are major shareholders or owners. As mentioned for the Mid-corporate rating model, the target portfolio of application for the small business rating model has been amended at the end of 2010, in order to reflect the adjusted customer segmentation with One4C. Currently the upper boundary to German Middle Market is 5 million of net income both for companies based on simplified accounting and for business partnerships with unlimited personal liability (previously it was up to 3 million in net income based on simplified accounting while, specifically for business partnerships with unlimited personal liability, the net income was up to 15 million). The UCB AG smallcorp rating model is structured into three different scorecards, which are applied on the basis of the credit process phase and the approved limit amount (exposure): Scoring GK scorecard is applied during the application phase to customers with exposure greater than Euros and annually for partners with an approval limit greater than Euros 6 ; Behaviour Scoring (BKL) is used both as an automatic rating on a monthly bases for existing partner into the Small Business portfolio (for partners with an approval limit lower than ) and as an input factor of the Scoring GK; Small Credit Line scorecard is applied only during the loan booking phase and to clients with a limited approval limit (lower than Euros) and without available customer risk rating (BKL). The module Scoring GK is composed by two scorecards: GK1 for entity with full private liability and GK2 for entity without full private liability. In both cases, the same information is used: The so-called MAJA Values, which are financial statement scores developed statistically in a manner similar to what was used for mid-sized corporations; Internal industry scores; Behaviour scores. In the case of an individual, debt levels are used as an additional risk factor. The Small Credit Line model is used only as application score for limited exposures (lower than ) and not for annual re-rating. 6 This limit was raised from to during the last calibration activity of the Scoring GK performed in January 2010, in order to be coherent with the limit set for the monthly updating of the Behavior Scoring, put in place in November

110 The Behavior Scoring (BKL) is composed by three different scorecards, based on product segmentation: KG: applied in case the counterparty has only a current account; BKG: applied in case the customer has a current account and a mortgage; BG: applied in case the customer has only a mortgage; BDG: applied in case the partner have products not covered by the other scorecards The final behavior score is obtained aggregating all individual product scores within the same product group in a current accounts score and/or a mortgages score; there scores are then combined with specific partner level information to get to a counterparty score. The Bank loans and other products behaviour score is used stand alone when a behaviour needs to be calculated on a product different from current account and mortgage. The behaviour score is calculated automatically every month. Application phase Annual Review The rating might be adjusted upon the occurrence of a predefined event (a set of events are defined that require a downgrading or upgrading of the counterparty) on the basis of an expert assessment. Overrides are closely monitored by the internal validation function. The override process is only allowed for customer within the risk relevant business. Following the recommendation of the internal validation function, all the scorecards, with the exception of BDG, has been calibrated in the 2010 considering a more updated historical dataset of defaults. The internal validation function checked the design of the model, including through user audits. It also analyzed the performance and calibration of the overall model and the various modules (quantitative module with the related sub-modules, and qualitative module) and the stability of the underlying sample. Finally, it reviewed the process for assigning the rating and the override process. Additional analyses has been performed, after the change in the target portfolio, to verify the impact of the new segment definition on the performances of the rating system. BASEL 2 THIRD PILLAR AS AT DECEMBER 31,

111 >> Basel 2 Third Pillar Table 7 Rating model for foreign SME Foreign SME rating system, introduced in 2009, is aimed at the assessment of foreign companies or foreign consolidation groups. The rating is assigned to these counterparties based on an external country specific quantitative component, which is integrated with an internally developed qualitative module leveraging on the correspondent module defined for Mid Corporate segment. The Softfacts rating covers pure qualitative factors and consists of 14 single criteria from the following evaluation fields: Financial Situation Management Planning and Controlling Market/ Products Other risks The main aspects of the foreign SME rating model are summarized here below: Also in this specific case, the validation activites let the Group to certify the compliance of this rating model to the regulatory requirements, taking also into consideration the application perimeters modest sizes that is impeding an internal estimation of the financial modules. Individual rating model The UCB AG private individuals rating model covers all individuals excluding self-employed customers. Individuals with high property lease income are also excluded. They are considered as part of the Commercial Real Estate portfolio and assessed using the appropriate rating system. 111