PART FOUR CAPITAL ADEQUACY HEADING I THE CALCULATION OF CAPITAL ADEQUACY. Capital adequacy on an individual basis. Article 37. Article 38.

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1 PART FOUR CAPITAL ADEQUACY [Re Article 12a, 8 and Article 12b, 8 of the Act on Banks, Article 8, 9 of the Act on Credit Unions and Article 199, 2, a) and b) of the Act on Business Activities on the Capital Market] HEADING I THE CALCULATION OF CAPITAL ADEQUACY Capital adequacy on an individual basis Article 37 The liable entity shall fulfil capital adequacy on an individual basis if it continually maintains capital on an individual basis (III, 1) in an amount, which at least corresponds to the sum of the capital requirements for credit, market and operational risks (IV, 2 to 4) stipulated on an individual basis; the provisions of Articles 38 and 39 are not affected hereby. Article 38 An investment firm that is not authorised to provide any of the investment services stated in Article 4, 2, c) and g) of the Act on Business Activities on the Capital Market (hereinafter the investment firm with a limited scope of investment services ) shall fulfil capital adequacy on an individual basis if it continually maintains capital on an individual basis (III, 1) in an amount, which at least corresponds to the higher of the following amounts: a) the sum of the capital requirements for credit and market risks (IV, 2 and 3) stipulated on an individual basis, or b) the capital requirement based on fixed overheads (IV, 5) stipulated on an individual basis. Article 39 An investment firm that trades on its own account exclusively in order to follow or carry out the customer s instructions, or so that it can become a participant of a settlement system or a member of a recognised stock exchange, if in so doing it only carries out the customer s instructions (hereinafter the investment firm with limited trading on own account ), shall fulfil capital adequacy on an individual basis if it continually maintains capital on an individual basis (III, 1) in an amount, which at least corresponds to the sum of a) the capital requirements for credit and market risks (IV, 2 and 3) stipulated on an individual basis, and b) the capital requirement based on fixed overheads (IV, 5) stipulated on an individual basis.

2 Capital adequacy on a consolidated basis Article 40 (1) A liable entity which, when stipulating capital requirements on a consolidated basis, does not use the aggregation plus method (Article 51, 2), shall fulfil capital adequacy on a consolidated basis if it continually maintains capital on a consolidated basis (III, 2) in an amount, which at least corresponds to the sum of the capital requirements for credit, market and operational risks (IV, 2 to 4) stipulated on a consolidated basis; the provisions of Articles 41 and 42 are not affected hereby. (2) A liable entity which, when stipulating capital requirements on a consolidated basis, uses the aggregation plus method shall fulfil capital adequacy on a consolidated basis if it continually maintains capital on a consolidated basis (III, 2) in an amount, which is at least equivalent to the sum of a) the capital requirements for the credit risk of the investment portfolio and for operational risk stipulated on a consolidated basis (IV, 2 and 4) and b) the capital requirements of the persons in the regulated consolidated group stipulated on an individual basis for the interest rate, equity and credit risks in the trading portfolio and for the foreign exchange and commodity risks in the investment and trading portfolios (IV, 3); the provisions of Articles 41 and 42 are not affected hereby. Article 41 (1) An investment firm that forms a regulated consolidated group, part of which comprises exclusively investment firms with a limited scope of investment services, and which does not include a credit institution, and the investment firm when stipulating capital requirements on a consolidated basis does not use the aggregation plus method, shall fulfil capital adequacy on a consolidated basis if it continually maintains capital on a consolidated basis (III, 2) in an amount, which at least corresponds to the higher of the following amounts: a) the sum of the capital requirements for credit and market risks (IV, 2 and 3) stipulated on a consolidated basis, or b) the capital requirement based on fixed overheads (IV, 5) stipulated on a consolidated basis. (2) An investment firm that forms a regulated consolidated group, part of which comprises exclusively investment firms with a limited scope of investment services, and which does not include a credit institution, and the investment firm when stipulating capital requirements on a consolidated basis uses the aggregation plus method (Article 51, 2), shall fulfil capital adequacy on a consolidated basis if it continually maintains capital on a consolidated basis (III, 2) in an amount, which at least corresponds to the higher of the following amounts: a) the sum of the capital requirements for the credit risk of the investment portfolio ( IV, 2) stipulated on a consolidated basis, and the capital requirements of the persons in the regulated consolidated group stipulated on an individual basis for the interest rate,

3 equity and credit risks in the trading portfolio and for the foreign exchange and commodity risks in the investment and trading portfolios (IV, 3); or b) the capital requirement based on fixed overheads (IV, 5) and stipulated on a consolidated basis. Article 42 (1) An investment firm that forms a regulated consolidated group, part of which comprises exclusively investment firms with limited trading on their own account or investment firms with a limited scope of investment services, and which does not include a credit institution, and the investment firm when stipulating capital requirements on a consolidated basis does not use the aggregation plus method, shall fulfil capital adequacy on a consolidated basis if it continually maintains capital on a consolidated basis (III, 2) in an amount, which at least corresponds to the sum of a) the capital requirements for credit and market risks (IV, 2 and 3) stipulated on a consolidated basis, and b) the capital requirement based on fixed overheads (IV, 5) and stipulated on a consolidated basis. (2) An investment firm that forms a regulated consolidated group, part of which comprises exclusively investment firms with limited trading on their own account or investment firms with a limited scope of investment services, and which does not include a credit institution, and the investment firm when stipulating capital requirements on a consolidated basis uses the aggregation plus method (Article 51, 2), shall fulfil capital adequacy on a consolidated basis if it continually maintains capital on a consolidated basis (III, 2) in an amount, which at least corresponds to the sum of a) the capital requirements for the credit risk of the investment portfolio (IV, 2) stipulated on a consolidated basis and the capital requirements of the persons in the regulated consolidated group stipulated on an individual basis for the interest rate, equity and credit risks in the trading portfolio and for the foreign exchange and commodity risks in the investment and trading portfolios (IV, 3), and b) the capital requirement based on fixed overheads (IV, 5) and stipulated on a consolidated basis. Article 43 Capital adequacy indicator A capital adequacy indicator shall be employed to express capital adequacy pursuant to Articles 37 to 42 in percentage terms. This shall equal 8% of the quotient, in which the numerator equals the capital and the denominator equals the capital requirements.

4 HEADING II PROCEDURES USED TO CALCULATE CAPITAL ADEQUACY Article 44 Assigning instruments and positions to portfolios (1) The liable entity shall assign its assets, liabilities and off-balance sheet items (hereinafter the instruments ) to a trading portfolio or an investment portfolio in accordance with its strategy. In doing so, it uses its accounting or other demonstrable records as a basis, and takes into account all transactions conducted by midnight Central European time on the relevant day. If the liable entity uses accounting methods that do not comply with the international accounting standards regulated by European Union law 9) (hereinafter the accounting standards ) it shall record the instruments according to these accounting standards. (2) Transfers of instruments from the investment to the trading portfolio and vice-versa are possible on condition that accounting methods are observed and such transfers are in compliance with the strategy and procedures for assigning instruments to the trading portfolio. (3) The assignment of instruments to the trading and investment portfolios shall be the subject of regular screening as part of internal audit. (4) Instruments are broken down into positions. Depending on the type of instrument, these may be interest rate, foreign exchange, equity or commodity positions. The liable entity shall have stipulated procedures for breaking down the instruments into positions. The Czech National Bank may demand these procedures and their arrangements to be submitted, especially if this is necessitated by the nature of the risks undertaken. Article 45 Trading portfolio (1) Instruments are assigned to the trading portfolio which are held in order to be traded or with the aim of hedging other trading portfolio instruments. These are instruments with no limit on their trading or which can be hedged. (2) Instruments held with the intention of trading are instruments held deliberately for short-term resale or instruments held to exploit actual or anticipated short-term price differences between the purchase and the sale price or other price or interest rate fluctuations. 9) Article 2 of European Parliament and Council (EC) Order No. 1606/2002 of 19 July 2002 on the application of international accounting standards.

5 (3) Instruments held with the intention of trading are assigned to the trading portfolio upon fulfilment of the following requirements: a) a clearly documented trading strategy exists for positions, instruments or portfolios of instruments or positions; this strategy shall have been approved by the liable entity s board of directors and shall also state the expected period for which they are to be held, b) there shall be clearly stipulated procedures for the active management of positions, according to which 1) positions are opened in the department responsible for trading, 2) there are stipulated limits curbing the risk undertaken and their appropriateness is monitored, 3) employees in the department responsible for trading are authorised to open and manage a position within the approved limits and in accordance with the approved trading strategy, 4) positions are reported to senior management as an integral part of the risk management process, 5) positions are actively monitored with regard to market information sources. The marketability or hedge-ability of a position or its risk components are evaluated, as well as the quality and accessibility of market data, the turnover and size of positions traded on the market; c) there are clearly stated procedures to monitor positions with regard to the trading strategy, including the monitoring of turnover and static positions in the trading portfolio. (4) The liable entity shall have a clearly stipulated strategy and procedures for the assignment of instruments in the trading portfolio and for its overall management; these shall a) contain a list of activities that the liable entity regards as trading and which, in its view, influence the trading portfolio, b) stipulate the principles according to which the positions of instruments are daily revaluated using market values sourced from an active and liquid market, c) in case the positions of instruments are marked to model, stipulate the scope in which it is possible to 1) identify all fundamental risks associated with the relevant position, 2) hedge all major risks associated with the relevant position by means of instruments for which there exists an active and liquid market, 3) reliably estimate the main parameters and assumptions used by the relevant model, d) stipulate the scope in which it is possible to perform a full external check on the evaluation of the positions, e) define the legal limitations or other operational requirements that may affect the ability to liquidate or hedge a position in the short term, f) stipulate the method for managing risks associated with the relevant position within its trading operations, and g) stipulate the principles and criteria for the transfer of instruments between the portfolios. Article 46 Small trading portfolio

6 (1) The trading portfolio is deemed to be small if it meets the following criteria: a) the proportion of transactions assigned to the trading portfolio as a rule does not exceed 5% of all transactions, b) the total amount of positions assigned to the trading portfolio as a rule does not exceed an amount equivalent to EUR , and c) the proportion of transactions assigned to the trading portfolio never exceeds 6% of all transactions and the total amount of positions assigned to the trading portfolio never exceeds an amount equivalent to EUR (2) When calculating the proportion of the transactions included in the trading portfolio to the overall transactions the liable entity may refer to either the balance sheet and the offbalance sheet or the income statement. When assessing the size of the balance sheet transactions and the off-balance sheet transactions it uses the book value of the instruments; in the case of derivatives the values of their underlying instruments are used. The absolute values of long and short positions shall be aggregated. (3) The liable entity may stipulate capital requirements for instruments assigned to the small trading portfolio in the same way as capital requirements for instruments assigned to the investment portfolio are calculated. If the liable entity exercises this option it shall use the investment portfolio exposure rules for these instruments (Part Five, I). (4) If the limit of 6%, or an amount equivalent to EUR , is exceeded, or if the limit of 5%, or an amount equivalent to EUR , is exceeded over a long period, the liable entity shall begin to stipulate capital requirements in accordance with the provisions for instruments in the trading portfolio and apply the trading portfolio rules of the exposure. It shall notify the Czech National Bank of such change without needless delay. (5) In the period from 31 December to 30 December of the following calendar year the amount in euros is converted into an amount in Czech Koruna using the foreign exchange rate announced by the Czech National Bank as the last in October of the year in which the period starts. Article 47 Investment portfolio (1) Instruments not assigned to the trading portfolio are assigned to the investment portfolio. (2) The liable entity that forms a regulated consolidated group may assign to the investment portfolio all the instruments of a person included in the regulated consolidated group, if that person is not obliged on an individual basis to divide up its portfolio of instruments for the purpose of assigning the instruments to the investment portfolio and the trading portfolio and stipulate for them capital requirements pursuant to special legislation or a foreign regulation equivalent to the relevant European Union law. The liable entity that forms the regulated consolidated group shall be able to document this procedure at the request of the Czech National Bank.

7 Article 48 Internal hedging (1) Positions can be assigned to the trading portfolio which stem from transactions that represent internal hedging because these fully or materially offset the risk elements of a position or group of positions in the investment portfolio (hereinafter internal hedging positions ). (2) Internal hedging positions shall be used to calculate the capital requirements for instruments in the trading portfolio, if a) they are held in order to be traded, b) requirements are met for the instruments to be assigned to the trading portfolio and for prudential valuation, and c) the following requirements are met for internal hedging: 1) internal hedging is not realised in order to avoid or reduce capital requirements, 2) internal hedging is duly documented and audited, 3) internal hedging is realised under market conditions, 4) the substantial part of the market risk covered by internal hedging is dynamically managed in the trading portfolio within the approved limits, 5) internal hedging is carefully monitored. (3) If an exposure in the investment portfolio is protected by a credit derivative assigned to the trading portfolio as part of an internal hedge, such credit derivative may be considered an eligible hedge for the exposure in the investment portfolio if a) the liable entity is protected by a credit derivative and b) the counterparty in the case of this credit derivative is an eligible provider of protection pursuant to the provisions regarding credit risk mitigation techniques (IV, 2, 3). (4) Under the conditions stipulated in paragraph 3, neither the internal hedge nor the credit derivative concluded with a third party shall be included in the trading portfolio. An institution may however, when complying with the conditions pursuant to paragraph 3, consistently include in the calculation of the counterparty credit risk capital requirement all credit derivatives that have been assigned to the trading portfolio and which form part of the internal hedge. Article 49 Obligor default (1) The liable entity shall evaluate investment portfolio exposures with regard to obligor default. Obligor default means a situation where at least one of the following conditions is met: a) it may be assumed that the obligor will not fulfil its obligations in a proper and timely manner without the creditor seeking to collect its outstanding receivable through credit protection,

8 b) at least one payment of the principal or interest and fees of any obligation of the obligor towards the creditor is more than 90 days past the due date; the liable entity shall not take this condition into account if the amount past the due date is insignificant; the liable entity defines significance with regard to the amount it does not collect in writing off a receivable. (2) If the obligor s obligations stem from a) overdraft accounts and similar instruments, the days past the due date commence as of the time when the obligor exceeds the limit allocated to it, or when it is allocated a limit lower than the current drawdown, or it draws large volumes of credit without authorisation, if this concerns a significant amount, b) credit cards, the days past the due date commence as of the time when the obligor should have paid the minimum instalment. (3) A particular indicator that the obligor will probably not repay its obligation towards the creditor in a proper and timely manner without the creditor seeking to collect its outstanding receivable through credit protection is a) the failure to apply the accrual principle to the exposure, or if the interest and fees of the exposure are not recognised at the period to which they relate both materially and in terms of time, b) an adjustment to the exposure s valuation due to a significant fall in the credit quality recorded after the origin of the exposure, c) the expectation that the exposure will be sold at a significant economic loss relating to the credit quality, d) the creditor s consent to the compulsory restructuring of the exposure; compulsory restructuring becomes effective if the obligor is provided a dispensation because the creditor judges that a failure to do so would probably result in it incurring a loss. It thus granted the dispensation, which it would not otherwise have provided, on economic or legal grounds relating to the obligor s financial situation. This chiefly involves revising the repayment schedule, reducing the interest rate, waiving default interest, deferring payments of the principal or interest and fees; e) the fact that a petition for bankruptcy proceedings has been filed against the obligor, f) the fact that the obligor is, or will probably become, a person in bankruptcy, and this fact or expectation could threaten or delay the repayment of the obligor s obligation towards the liable entity or a person in the regulated consolidated group, or g) the fact that other relevant and important factors exist, including the financial and economic situation of the obligor. (4) If the liable entity uses external data which do not comply with the definition of obligor default it must be able to demonstrate that it has made adjustments in order to achieve broad equivalence with the definition of default. (5) If the liable entity believes that an exposure which previously defaulted is now no longer affected by any circumstances that could cause an obligor default it may consider it an exposure without default. If circumstances subsequently arise which could cause an obligor default it shall regard this as the occurrence of another default.

9 (6) For retail exposures the definition of obligor default may be applied at the transaction level. Data consolidation Article 50 (1) For the data consolidation of persons in a regulated consolidated group the full method or the proportional method of consolidation shall be used according to accounting standards; the provisions of Article 51 shall not be affected hereby. (2) The full method for consolidation is used for the data consolidation of a) a bank and its subsidiaries which are not jointly managed ventures, b) an investment firm and its subsidiaries which are not jointly managed ventures, c) a financial holding entity and its subsidiaries which are not jointly managed ventures, or d) a foreign parent bank and its subsidiaries which are not jointly managed ventures. (3) The proportional method for consolidation is used for the data consolidation of a) a bank and jointly managed ventures, b) an investment firm and jointly managed ventures, c) a financial holding entity and jointly managed ventures, or d) a foreign parent bank and jointly managed ventures. Article 51 (1) If the liable entity forms a regulated consolidated group it may, in order to consolidate the interest rate and equity positions of its trading portfolio instruments and the foreign exchange and commodity positions of its trading portfolio instruments and investment portfolio instruments, use the full method or the proportional method of consolidation, if the following criteria are met concurrently: a) risks shall be managed on a consolidated basis, b) persons included in the regulated consolidated group shall observe the rules of capital adequacy on an individual basis pursuant to this Decree or foreign regulation equivalent to the relevant European Union law 10), and they shall abide by these rules, c) no legal impediments shall exist to the transfer of individual capital components within the regulated consolidated group. (2) In cases not stated in paragraph 1 the aggregation plus method shall be used instead of the full or the proportional method for the consolidation of interest rate and equity positions of the trading portfolio instruments and the foreign exchange and commodities positions of the trading portfolio instruments and the investment portfolio instruments. This method shall be used to stipulate capital requirements for the interest rate, equity and credit 10) For example, Directive of the European Parliament and Council 2006/49/EC.

10 risks in the trading portfolio, or for the foreign exchange and commodity risks in the investment portfolio and the trading portfolio of the regulated consolidated group. This method means that the capital requirements of persons included in the regulated consolidated group which are stipulated on an individual basis pursuant to this Decree, or foreign regulation equivalent to the relevant European Union law shall be aggregated. The offsetting of long and short positions is not permitted. (3) If the liable entity is authorised to combine the approaches for calculating the capital requirement for operational risk (Articles 173, 175 and 177) it shall, instead of the full or the proportional method of consolidating the data necessary for this calculation, calculate the partial capital requirements for operational risk pursuant to the individual approaches, which it combines and then aggregates. Article 52 Valuation of instruments and positions (1) With the exception of commodity instruments, the liable entity shall value its investment portfolio instruments in accordance with the valuation methods used in its accounting. If these valuation methods do not comply with accounting standards it shall value its investment portfolio instruments, with the exception of commodity instruments, in accordance with these accounting standards. (2) The liable entity shall, on at least a daily basis, value at fair value the a) trading portfolio instruments and the interest rate, foreign exchange, equity and commodity positions of these instruments, b) investment portfolio commodity instruments and the commodity positions of these instruments. (3) The liable entity may value at fair value the foreign exchange positions of its investment portfolio instruments denominated in foreign currencies. The liable entity shall proceed prudently when valuing instruments and positions. If possible, it shall use marking to market; in other cases it shall use marking to model. (4) Marking to market commonly uses the current purchase price for assets and liabilities which are intended to be issued, and the current sale price for liabilities and assets which are intended to be purchased. If the institution has assets and liabilities with offsetting interest rate, equity, foreign exchange and commodity risks it may use the midmarket valuation as the basis for establishing the fair value of the offsetting risk positions and use the purchase or the sale price for the net open position. (5) Marking to model is a valuation by extrapolation from a benchmark, or is otherwise calculated from market inputs. A mark-to-model valuation must meet the following requirements: a) senior management shall be notified which instruments or portfolios of instruments are valued using the model, and shall be aware of the possible impact on reported risk and trading results,

11 b) where possible, inputs to the model shall be derived from market inputs; the appropriateness of the market inputs and the model s parameters shall be regularly reviewed, c) where possible, valuation procedures shall be used which are commonly adopted by the market for the relevant instrument, d) if the model is developed by the liable entity it shall be based on the appropriate criteria, which are assessed and critically reviewed by qualified persons independent of the model s development. The model must be developed or approved independently of the trading departments, and it must be independently tested, with regard to both the mathematical part and the software implementation; e) relevant procedures shall be stipulated to supervise changes, and a back-up copy of the model shall be maintained which is regularly used to test valuations, f) the risk management department shall be aware of the weaknesses of the model and shall know how best to reflect these weaknesses in outputs from the model, g) the model shall be regularly tested in order to determine its quality and accuracy; in particular, reviews shall be performed of the ongoing suitability of the initial criteria, an analysis shall be made of profits and losses against risk factors, and a comparison shall be made between actual closing prices and the model s outputs. (6) The accuracy and independence of available prices or inputs to the model shall be regularly reviewed by a department which is independent of the trading departments. The reviews are conducted at least once a month, or more frequently depending on the nature of the trading activities. If the mark-to-market sources are not independent, or they are notably subjective, the valuation may be adjusted. In duly justified cases, the Czech National Bank may permit the use of alternative valuation methods, which differ from marking to market or marking to model, on condition that they are sufficiently prudent. (7) A liable entity shall have stipulated procedures regarding how prudently to adjust mark-to-market or mark-to-model valuations, where necessary. When determining the amount of the above prudential adjustments for marking to market or marking to model the liable entity shall take into account a) unrecorded credit spreads, costs for closing a position, operational risk, early termination, costs for financing, future administrative costs and, if relevant, also the risk of the model, b) less liquid positions. In this case, it shall consider the time that would be needed to hedge the position or risks related to the position, the volatility and the average of the bid/offer spread, the accessibility of market quotations (the number and identity of the market makers) and the volatility and the average of the transaction volumes, concentration in the market, the aging of positions, the extent to which the valuation depends on models, and the impact of other model risks. (8) Material prudential adjustments in marking to market or marking to model are a deductible item from the sum of Tier 1 capital and Tier 2 capital (Part Four III). Other than material prudential adjustments reduce the capital for the coverage of market risk (Part Four, III); if they exceed subordinated debt B (Part Four, III) the amount corresponding to this excess is deducted from the sum of Tier 1 and Tier 2 capital.

12 Article 53 Conversion of values in foreign currencies Unless this Decree stipulates otherwise, in order to convert values in foreign currencies into Czech Koruna the liable entity shall use either the exchange rate in accordance with a special act 11), or the exchange rate set by the European Central Bank; the exchange rate valid on the date of conversion shall apply. The choice of the exchange rate can only be altered in exceptional and justified cases. HEADING III CAPITAL Section 1 Capital on an individual basis Article 54 Stipulation of capital on an individual basis (1) Capital on an individual basis is stipulated, pursuant to compliance with the limits stated in Article 63, as the sum of Tier 1 capital on an individual basis and Tier 2 capital on an individual basis, less the deductible items on an individual basis and increased by capital on an individual basis to cover market risk (Tier 3). (2) Capital on an individual basis is derived from the liable entity s balance sheet. If the liable entity uses accounting methods that do not comply with accounting standards it shall use these accounting standards to record the equity and liabilities. Items included in capital on an individual basis may not be used more than once and must be stated in their amount after deducting liabilities arising from tax obligations, if relevant. (3) Tier 1 capital on an individual basis must be immediately available to the liable entity, without limitation, in order to cover losses from risks to which it is exposed. (4) Capital on an individual basis shall not include any profit or loss stemming from a valuation of the liable entity s liabilities at fair value in connection with changes to the liable entity s credit risk, i.e. profits or losses that are part of profit brought forward, aftertax profit, profit for the current year as per the interim financial statement, losses brought forward, including the loss for the previous year, and losses for the current year. Capital on an individual basis does not include valuation differences from hedging derivatives as part of the cash flow hedge. 11) Act No. 563/1991 Coll., on accounting, as amended.

13 Tier 1 capital on an individual basis Article 55 Tier 1 capital on an individual basis is broken down into common equity and additional (hybrid) Tier 1capital. Article 55a Common equity Tier 1 capital comprises paid-up capital stock entered in the Companies Register and in the case of credit unions also paid-up capital stock not entered in the Companies Register, while the condition of compliance with accounting standards does not need to be met, a) minus own shares (this item also includes items from transactions with own shares, in particular from forwards and options on own shares, reducing equity), b) plus the share premium; this item includes the 1) paid-up share premium relating to the paid-up capital stock entered in the Companies Register, and 2) share premium arising from operations with own shares, c) plus reserve funds and profit brought forward as the sum of the items in points 1 to 4, less the item in point 5: 1) statutory reserve and risk funds, 2) other funds created from distributed profit and which can only be used to cover the loss recorded in the liable entity s financial statement, 3) profit brought forward recorded in the liable entity s financial statement confirmed by an auditor and approved by its supreme body, where the supreme body has not decided on its distribution and it was not included in settlement interests, 4) after-tax profit recorded in the liable entity s financial statement confirmed by an auditor less the estimated share in profit to be paid out and other estimated payments arising from the distribution of the profit, 5) losses brought forward, including the loss for the previous year, d) plus profit for the current year as per the liable entity s interim financial statement confirmed by an auditor, less the estimated share in profit and other estimated payments arising from the distribution of profit, provided that the liable entity, pursuant to Article 221b, notifies the Czech National Bank of its intention approved by the auditor to include this profit in Tier 1 capital, justifies the plan and discusses it with the Czech National Bank, e) plus or minus the exchange rate differences from the data consolidation of a foreign organisational unit, f) minus loss for the current year,

14 g) minus goodwill, h) minus intangible assets, excluding goodwill, i) minus the valuation difference, if negative, from changes in the fair values of equity instruments assigned to the available for sale portfolio for accounting purposes, j) minus net profit from the capitalisation of future income from securitisation, if it is part of item pursuant to letters c) or d), and k) in the case of a bank, minus the participating securities issued by a person with a qualifying holding in the bank, acquired for the purpose of market making and assigned to the trading portfolio. Article 55b (1) Additional Tier 1 capital can include an instrument that fulfils the following conditions: a) It does not have a specific maturity date or is due at the earliest in 30 years time, unless stipulated otherwise further in this Decree, b) It is not secured, is due on a one-off basis and bound by the condition of subordination pursuant to a different piece of legislation 12, while the highest possible degree of subordination is exercised, c) It enables the coverage of losses from the activities of the liable entity and does not hinder the replenishment of capital to the required level through appropriate mechanisms, d) The payout of accessories or the share in profit or similar payments are conditional upon the systematic fulfilment of the requirements for the liable entity s capital adequacy, e) It includes the right of the liable entity to not pay, taking into account its financial situation or payment ability pursuant to letter d); in the event the payment in question is not made, this fact cannot be compensated in future relevant periods, f) It contains the right of the liable entity to replace a payment pursuant to letter d) by an acquisition of participating securities and/or a membership interest in the liable entity, in a corresponding amount and under the assumption that its financial resources remain intact, g) The contract or the conditions of issue or a piece of legislation stipulate that the instrument or payment pursuant to letter d) is replaced by an acquisition of participating securities of the liable entity, and/or membership interest in the liable entity in a corresponding amount, if the liable entity does not comply with the capital adequacy or payment ability requirements. 12 Article 34 of Act No. 190/2004 Coll., on bonds

15 (2) The liable entity shall notify, pursuant to Article 221b, justify and discuss with the Czech National Bank, the intention to include the instrument pursuant to paragraph 1 into capital; together with this notification it shall also submit a description of the fulfilment of the conditions pursuant to paragraph 1. (3) The right of the liable entity to repay the instrument before the stipulated maturity date, but at the earliest 5 years after its origin, may be connected with the instrument. (4) An instrument without stipulated maturity may include a list of facts, in particular an increase in the interest rate (step-up) that permits the repayment of the instrument, but at the earliest 10 years after its origin. An instrument with a stipulated maturity date may also include such a list, however such facts may only occur before the maturity date. (5) An instrument may also be repaid if a change to tax legislation or the evaluation of the instrument from the prudential rules perspective that was not foreseeable at the time the instrument originated occurs. (6) Irrespective of the time and reason for the repayment pursuant to paragraphs 3 to 5, it is possible to repay the instrument only if the liable entity provides notification pursuant to Article 221b of this intention, justifies and discusses it with the Czech National Bank; together with this notification it shall also submit a description of the impacts on capital and its own ability to pay. Article 56 Tier 2 capital on an individual basis (1) Tier 2 capital on an individual basis is broken down into dominant Tier 2 and additional Tier 2 capital. (2) Dominant Tier 2 capital can include a) the excess in the coverage of expected credit losses on an individual basis, and b) instruments included in additional Tier 1 capital on an individual basis in an amount exceeding the limits pursuant to Article 63 (6). (3) Additional Tier 2 capital can include 1) subordinated debt A and 2) the valuation difference from changes in the fair values of equity instruments, for which an active market exists and which are assigned to the available for sale portfolio for accounting purposes, if this is positive, while the valuation difference is calculated after reducing it by any liabilities arising from deferred tax; Article 57 Excess in the coverage of expected credit losses on an individual basis

16 (1) An excess in the coverage of expected credit losses arises if the liable entity uses the IRB Approach to calculate capital requirements for credit risk, and the aggregate of the value adjustments for the exposures, which are assets, and the provisions for the exposures, which are off-balance sheet items, is greater than the aggregate of the expected credit losses on these exposures (Part Four, IV). An excess in the coverage of expected credit losses according to the first sentence is not adjusted by the expected credit losses on equity exposures and their value adjustments; the expected credit losses on equity exposures which are not reduced by value adjustments for these exposures are a deductible item pursuant to Article 62. (2) Value adjustments and provisions may be considered in a comparison with expected credit losses, irrespective of which exposures they relate to. Article 58 Subordinate debt A in capital on an individual basis (1) Subordinated debt A may be in the form of a granted credit, loan or deposit, and in the case of a bank or investment firm, also in the form of an issued subordinated debt instrument. (2) Subordinated debt A can be included in Tier 2 capital on an individual basis if the following criteria are met: a) the contract on subordinated debt A or the conditions of issue of the subordinated debt instrument contain a subordination clause pursuant to a special act 13) ; b) the full sum of subordinated debt A has been transferred to the account of the liable entity. Subordinated debt A does not comprise own subordinated debt instruments acquired by the liable entity before their maturity. Subordinated debt A is not directly or indirectly financed by the liable entity; c) subordinated debt A is unsecured, d) subordinated debt A has a fixed maturity of not less than five years after the date of its transfer to the account of the liable entity. The principal of subordinated debt A is payable in one lump sum. If the contract on subordinated debt A or the conditions of issue of the subordinated debt instrument contain a provision under which such debt may be repaid before the agreed maturity date, this right may be exercised no sooner than five years after the date of the transfer of the subordinated debt to the account of the liable entity; e) subordinated debt A may be repaid before the maturity date specified in letter d) provided that the intention to repay subordinated debt A has been communicated, with a documentation of its impacts on the liable entity s capital, to the Czech National Bank, f) the contract on subordinated debt A or the conditions of issue of the subordinated debt instrument contain an agreement by the counterparties that it shall not be permitted to offset the creditor s receivables resulting from the subordinated debt against his obligations to the liable entity, g) receivables by virtue of subordinated debt A may not be accepted by the liable entity as collateral, and 13) Article 34 of Act No. 190/2004 Coll., on Bonds.

17 h) the liable entity, pursuant to Article 221b, notifies the Czech National Bank of its intention to include subordinated debt A in additional Tier 2 capital, justifies the intention and discusses it with the Czech National Bank; together with this notification is shall also submit a description of the fulfilment of the conditions pursuant to letters a) to g). (3) The conditions of the contract on subordinated debt or the conditions of the issue of the subordinated debt instrument relating to the criteria stated in paragraph 2 may only be changed if the liable entity, pursuant to Article 221b, notifies the Czech National Bank of this intention to introduce changes, justifies the intention and discusses it with the Czech National Bank; together with the notification it shall also submit all the applicable information about the intended changes. If a change is made to the contract on subordinated debt or the conditions of issue of the subordinated debt instrument which is at variance with the first sentence, the subordinated debt may not be included in capital. (4) Subordinated debt A included in Tier 2 capital shall be decreased by 20% annually over the last five years prior to its maturity, unless stipulated otherwise. It shall start decreasing on the day following the end of the fifth year prior to its maturity, which means that in the last year prior to its maturity date, 20% of the total debt shall be included. The part of subordinated debt A not included in Tier 2 capital may not be included in capital for the coverage of market risk. (5) If the contract on subordinated debt A or the conditions of issue of the subordinated debt instrument contain a provision permitting the repayment of the debt before the agreed maturity date, the subordinated debt A included in Tier 2 capital shall be decreased over the last five years prior to the agreed maturity date only where the step-up rate of the subordinated debt A, if a call-option is not exercised, is not more than 1.5% p.a. If a step-up rate higher than 1.5% p.a. has been agreed, the subordinated debt A included in Tier 2 capital shall be decreased over the last five years prior to the date on which the call-option may first be exercised. In both such cases the subordinated debt A shall be decreased pursuant to paragraph 4. Article 59 Capital on an individual basis for the coverage of market risk (1) Capital on an individual basis for the coverage of market risk shall consist of subordinated debt B reduced a) by other than significant prudential adjustments as part of marking to market or marking to model (Part Four, II), and b) in the case of an investment firm further reduced by tangible assets, stock, capital investments in other persons which are not deductible items and which cannot be immediately sold on the market, and receivables with a residual maturity of more than 90 days, except for deposits used as collateral for transactions with derivatives traded on recognised stock exchanges.

18 (2) If the amount of the items under paragraph 1, a) and b) exceeds subordinated debt B, the amount of the corresponding excess shall be deducted from the sum of Tier 1 capital and Tier 2 capital. (3) Capital on an individual basis for the coverage of market risk shall only be used to cover foreign exchange, commodity and position risk, or exposure risk in the trading portfolio (Article 75). Article 60 Subordinated debt B in capital on an individual basis (1) Subordinated debt B may be in the form of a granted credit, loan or deposit, and in the case of a bank or investment firm, also in the form of an issued subordinated debt instrument. (2) Subordinated debt B is deemed to be capital for the coverage of market risk, if the following criteria are met: a) subordinated debt B must have a fixed maturity of not less than two years after the date of its transfer to the account of the liable entity. The principal of subordinated debt B shall be payable in one lump sum; b) the principal, fees and interest of subordinated debt B may not be repaid, even within the maturity term, if such a payment would reduce capital adequacy or such a payment would mean a further decrease in capital on an individual basis, if capital adequacy is below the minimum level, and also if the criteria are met pursuant to Article 58, 2, a) to c) and e) to h) and Article 58, 3 for subordinated debt A. Article 61 Deductible items on an individual basis Deductible items on an individual basis consist of a) the amount of the investment portfolio capital investments in 1) institutions, 2) insurance companies, reinsurance undertakings, insurance holding companies or mixed-activity insurance holding companies, or 3) other financial institutions, if they exceed 10% of the capital stock of persons in which they are invested. However, the liable entity shall not assign such capital investments to deductible items if it maintains capital adequacy on a consolidated basis and it includes the persons in which it has a capital investment in the regulated consolidated group by the full or proportional method; b) the sum of the amounts of the investment portfolio capital investments in 1) institutions, 2) insurance companies, reinsurance undertakings, insurance holding companies or mixed-activity insurance holding companies, or 3) other financial institutions,

19 in an amount that exceeds 10% of capital on an individual basis before the deduction of items pursuant to letter a) and points 1 to 3, if the individual capital investments represent a participation of up to 10%, including the capital stock of the persons in which the investment is made. The liable entity shall not assign such capital investments to deductible items if it maintains capital adequacy on a consolidated basis and it includes the persons in which it has a capital investment in the regulated consolidated group by the full or proportional method; c) the value of exposures from securitisation with a risk weight of 1250%, unless this is included in the calculation of the capital requirement for credit risk according to the provision for securitisation (Part Four, IV) and the value of exposures from securitisation that would be assigned a risk weight of 1250% if they were included in the investment portfolio. For the purposes of the rules of the exposure and the limitation of qualifying holdings, this item is not deemed a deductible item; d) a shortfall in the coverage of expected credit losses. For the purposes of the rules of the exposure and the limitation of qualifying holdings, this item is not deemed a deductible item; e) significant prudential adjustments as part of a marking to market or marking to model (Part Four, II), f) items under Article 59, 1, a) and b) exceeding subordinated debt B, g) deduction for free deliveries, from five business days past the due date of the second contractual payment or delivery until the termination of the transaction, in the amount of the sum of the transferred value and the difference between the agreed settlement price and the current market value, if this is positive. Article 62 Shortfall in the coverage of expected credit losses on an individual basis (1) A shortfall in the coverage of expected credit losses arises if the liable entity uses the IRB Approach to calculate capital requirements for credit risk, and the aggregate of the value adjustments for the exposures, which are assets, and the provisions for the exposures, which are off-balance sheet items, is less than the aggregate of the expected credit losses on these exposures (Part Four, IV). The expected credit losses on equity exposures which are not reduced by value adjustments for these exposures always form part of this deductible item (Part Four, IV). (2) Value adjustments and provisions may be considered in a comparison with expected credit losses, irrespective of which exposures they relate to. Article 63 Limits of capital items on an individual basis

20 (1) The sum of Tier 2 capital on an individual basis and capital on an individual basis to cover market risk shall not be considered where this exceeds Tier 1 capital on an individual basis. (2) Additional Tier 2 capital on an individual basis shall not be considered where this exceeds 50% of Tier 1 capital on an individual basis. (3) 50% of the value of deductible items is deducted from Tier 1 capital on an individual basis, and 50% of their value is deducted from Tier 2 capital on an individual basis; the provisions of paragraphs 1 and 2 are not affected hereby. If 50% of the value of deductible items exceed Tier 2 capital on an individual basis the amount equivalent to this excess shall be deducted from Tier 1 capital on an individual basis. (4) Capital on an individual basis for the coverage of market risk shall not be considered in an amount of more than 150% of the sum of Tier 1 capital on an individual basis and Tier 2 capital on an individual basis reduced by deductible items on an individual basis and reduced by the sum of the capital requirements for credit risk in the investment portfolio, dilution risk in the investment portfolio and operational risk. (5) An excess in the coverage of expected credit losses can be included in Tier 2 capital on an individual basis in an amount which is not greater than 0.6% of the sum of riskweighted exposure amounts. For the purposes of calculating the limit for the excess in the coverage of expected credit losses, exposures from securitisation with a risk weight of 1250% shall not be included in the values of risk-weighted exposures. (6) Additional Tier 1 capital on an individual basis cannot be considered in an amount higher than the common equity Tier 1 capital on an individual basis, while: a) instruments which are replaced, if the liable entity does not comply with the requirements for capital adequacy, or could be replaced, taking account of the financial situation or the payment ability of the liable entity, by its participating securities, and/or membership interest in the liable entity, can be considered up to the amount of the common equity Tier 1 capital, b) instruments other than an instrument pursuant to letters a) and c) can be considered up to an amount equal to 35% of Tier 1 capital, and c) instruments that have a stipulated maturity or include a list of facts that enable a repayment of the instrument, can be considered up to an amount equal to 15% of Tier 1 capital.