Desafios na Implantação dos Modelos Avançados para. 3º. Seminário Internacional Febraban Modelos Avançados para Risco Operacional

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1 Desafios na Implantação dos Modelos Avançados para Risco Operacional no Itaú Unibanco 3º. Seminário Internacional Febraban Modelos Avançados para Risco Operacional Itaú Unibanco Holding S.A.

2 The Merger The Merger

3 Itaú-Unibanco The Merger Main Efforts 2009 Integration of operations, several teams and areas Platform Migration: the big change will consist of the merger of the network comprising one thousand branches of Unibanco into the Itaú platform.

2010 Platform Migration: the big change will consist of the

4 Itaú-Unibanco 103,835 Employees 37,612 Points of Service 3,933 Branches

5 Itaú-Unibanco Overview Payroll credit portfolio totaled R$ 6,714 million Real estate credit portfolio amounted to R$ 9,368 million Itaucard, Unicard and Hipercard offer a wide range of products to 23.8 million customers In capital markets, Itaú BBA is the bank with the highest number of transactions, with a market share of 75% Insurance: Porto Seguro and Tempo Participações agreements.

6 Itaú-Unibanco Vision Being the leading bank in sustainable performance and client satisfaction

7 Itaú-Unibanco Organizational Structure Risk Management Responsibility: decentralized management and centralized control CENTRALIZED CONTROL DECENTRALIZED MANAGEMENT AROE ACRF Legal & Compliance Technology WMS Small/Middle Companies IBBA Operational Risk Management Internal Controls Efficiency Ombudsman & Quality Corporate Security Loss & Risk Data Financial Control Risk Control Capital Calculation Operational Risk Control Vehicle & Real State Credit Consumer Credit HR & External Units Insurance & Marketing Treasury Funding, Trading, & Research Treasury Banking, ALM, Products & Clients Retail Bank Comercial & Products Investment Bank

Corporate Security Loss & Risk Data Financial Control Risk Control Capital Calculation Operational Risk Control Vehicle & Real State Credit Consumer Credit HR

8 Basel The Merger 2 Project Basel II Project

9 Basel II Project Work Fronts Coaching Strategy Methodology Documentation and Reporting Management Tools Processes Risk DB Internal LDB External LDB Systems /IT

10 Basel II Project Work Fronts Coaching Strategy Methodology Documentation and Reporting Management Tools Culture Assimilation Processes Risk DB Internal LDB External LDB Systems /IT

11 Basel II Project Work Fronts Coaching Strategy Methodology Documentation and Reporting Management Tools Time Line Definition Defining the areas involved in the management and their responsibilities Organize the Committees Structure OpRisk concepts Development of operational risk management policies Processes Risk DB Internal LDB External LDB Systems /IT

their responsibilities Organize the Committees Structure OpRisk concepts Development of

12 Basel II Project Work Fronts Coaching Strategy Methodology Documentation and Reporting Management Tools Elaborating measurement models Self Assessment methodologies Developing methodologies of Capital Calculation Processes Risk DB Internal LDB External LDB Systems /IT

measurement models Self Assessment methodologies Developing

13 Basel II Project Work Fronts Coaching Strategy Methodology Documentation and Reporting Management Tools Defining requirements Collection and analysis Assess documentation process Elaborating reporting structure Processes Risk DB Internal LDB External LDB Systems /IT

Collection and analysis Assess documentation process Elaborating

14 Basel II Project Work Fronts Coaching Strategy Methodology Documentation and Reporting Management Tools Mapping management tool necessities and responsibilities Current tool functionality assessment and improved tool design Elaborating operational risk management policies Identifying the process of the bank Processes Defining i a methodology to indentify and categorize risks (risk dictionary, decision trees) Undertaking a mapping of the risks from the processes Defining criteria to categorize Risk risk DB and events Management and storage of risks, indicators and control data Data model Internal LDB Storage and processing of data Data quality Account Reconciliation Aligning with management vision ORX association External LDB External data processing Identification and Systems /IT documentation of systems that support OR management in the business areas Identification and documentation of systems that support the loss and risk DB Identification of the interfaces Assuring system s integrity and reliability

decision trees) Undertaking a mapping of the risks from the processes Defining criteria to categorize Risk risk DB and events Management and storage of risks, indicators and control data Data model

15 Basel II Project Work Fronts Coaching Strategy Methodology Documentation and Reporting Management Tools Processes Risk DB Internal LDB External LDB Systems /IT Identifying the bank processes Undertaking a mapping of the risks from the processes

DB Internal LDB External LDB Systems /IT Identifying the

16 Basel II Project Work Fronts Coaching Strategy Methodology Documentation and Reporting Management Tools Processes Risk DB Internal LDB External LDB Systems /IT Defining criteria to categorize risk and events Managing and storing data related to risk events and indicators BEICFs Data

Internal LDB External LDB Systems /IT Defining criteria to categorize

17 Basel II Project Work Fronts Coaching Strategy Methodology Documentation and Reporting Management Tools Processes Risk DB Internal LDB External LDB Systems /IT Data model Storage and processing of data Data quality Account Reconciliation Aligning with management vision

Internal LDB External LDB Systems /IT Data model Storage and

18 Basel II Project Work Fronts Coaching Strategy t Documentation and Methodology Management Tools Reporting Processes Risk DB Internal LDB External LDB Systems /IT Consortium association External data process

Reporting Processes Risk DB Internal LDB External

19 Basel II Project Work Fronts Coaching Strategy Methodology Documentation and Reporting Management Tools Processes Risk DB Internal LDB External LDB Systems /IT Business Areas Management: mapping and cataloguing supportive systems Risk and Loss DB: mapping and cataloguing supportive systems Identifying the interfaces Assuring system s integrity and reliability

Management: mapping and cataloguing supportive systems Risk and Loss DB: mapping and

20 The Merger Quantitative Methods

21 Quantitative Methods

22 Quantitative Methods Inputs Loss events per risk type

23 Quantitative Methods Inputs Frequency and Severity Model Loss events per risk type Best fit for frequency distribution (Poisson, Binomial Binomial Negative) Best fit for severity distribution (Weibull, Lognormal, Exponential,etc.)

24 Quantitative Methods Inputs Frequency and Severity Model Calculating VaR Loss events per risk type Best fit for frequency distribution (Poisson, Binomial Binomial Negative) Best fit for severity distribution (Weibull, Lognormal, Exponential,etc.) Monte Carlo simulation to access convoluted loss distribution and VaR (99,9% / 1 year) Obtaining expected and unexpected losses

25 Quantitative Methods Inputs Frequency and Severity Model Calculating VaR Loss events per risk type Best fit for frequency distribution (Poisson, Binomial Binomial Negative) Best fit for severity distribution (Weibull, Lognormal, Exponential,etc.) Monte Carlo simulation to access convoluted loss distribution and VaR (99,9% / 1 year) Obtaining expected and unexpected losses Aspects to consider: Wide range of distributions and adjustment techniques Mitigation techniques Possibility of incorporatingexternaldata Back Testing Capital calculation and distribution Probability of Loss Mitigation risk strategies Total Loss Severity Per Period

26 Quantitative Methods Heavy Tails A single geobservation o may dramatically da atca ychange gethe eestimation Number of events

27 Quantitative Methods Heavy Tails A single geobservation o may dramatically da atca ychange gethe eestimation Density 0e+00 1e e-04 3e e-04 4e-04 Density 0e+00 1e e-04 3e e-04 4e Losses Loses Losses Loses

28 Quantitative Methods Confidence Interval: Number of Observations matter Confidence Interval for 1000 observations Frequenc cy Losses Loses Confidence Interval for observations Frequency Losses Loses

29 Quantitative Methods Data Generation Process: IID assumption generally does not hold for a long period Freq quency De ensity Frequency

30 Alternative Approaches Alternative Approaches, such as Scenario Based Analysis, and the use of Business Environment and Internal Control Factors are useful tools. Implementation can potentially be a beleaguered task. However, the long term benefits from capital allocation and risk management will overcome short term difficulties and needed adjustments

31 Conclusion Itau Unibanco faces a challenge to meet Basel II regulatory requirements. However, Basel II Project Work Fronts increase efficiency in its processes, systems and risk management.

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