Risk Management Corporate Governance World Bank/IFC Financial and Private Sector Development Forum Washington DC, April 25, 2007
Summary 1. SANTANDER. Who are we? 2. Risk Management in Santander 3. Risk Management and Corporate Governance: Critical Relationship 4. Annexes 2
1 SANTANDER - Who are we? Size and Positioning Santander is one of the largest financial groups worldwide Attributable income (2006): EUR 7,596 million More than 68 million customers 10,852 branches 129,749 employees 2.31 million shareholders. EUR 1,000,996 million under management 3
1 SANTANDER - Who are we? Size and Positioning Santander is one of the largest financial groups worldwide Stock market capitalizacion* Billion euros 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Citigroup ICBChina BoA HSBC JPMorgan Chase Bank of China China Const. Bk, Mitsubishi - UFJ UBS RBS Wells Fargo Santander Wachovia BNP Paribas ING 108 101 97 94 91 88 82 77 74 127 125 159 182 190 208 (*) 12.29.2006 4
1 SANTANDER - Who are we? Present in over 40 Countries International profile Europe Santander has a notable presence in: Spain UK Portugal Italy Germany Netherlands Poland Czech Republic Austria Hungary Norway Sweden Latin America Santander has operations in: USA New York Branch Drive Financial (Santander Consumer) Sovereign (25%) Private Banking (Miami, NY, Houston, Seattle, San Francisco, others) Brazil Mexico Chile Argentina Venezuela Puerto Rico Colombia Uruguay 5
Summary 1. SANTANDER. Who are we? 2. Risk Management in Santander 3. Risk Management and Corporate Governance: Critical Relationship 4. Annexes 6
2 Risk Management of Santander Concept and Vision Concept Possibility that an event occurs that may cause an economic loss to an entity Is it always negative? Vision of the future Understanding, measuring and determining the consequences of risk allows us to optimize the management of the available resources Opportunity Effective risk management is a necessary condition for generating value sustainably over time 7
2 Risk Management of Santander Risk Management for Capital Optimization Risk Management Risk is assumed as a trade-off with an economic interest and efficient management of risk is achieved by optimising capital (maximizing profitability for a given appetite for risk) Maximizing income Economic and strategic risks Market Risk Liquidity Risk Credit Risk Operational Risk Reputational Risk Active risk management: Identification of risks Measuring and pricing risks Advising on acceptance of such risks Mitigation of risk Control of risk Legal Risk Environmental Risk 8
2 Risk Management of Santander Mission of the Risk Function in Santander Mission The mission of the Risk Function is to serve as a support to the management of the Group Optimising Risk Management Optimizing Risk Management: Assuming risks according to the Group s appetite for risk Analyzing risk in different ways according to its typology Generating shareholder value Protecting capital Preserving the group s reputation Stimulating and supporting Management of the Business Evaluation of business risk Providing an independent point of view Facilitating decision making by identifying opportunities to create value Providing input for dynamic risk management Mark to Market 9
2 Risk Management of Santander Components of Risk Management Information Availability of information on clients, transactions, guarantees, market data and its standardization between the various units/areas/segments Tools Specialized calculating tools adapted to management capacity Connectivity between the different systems Internal and external information sources Human Resources Qualified human resources for the specification development and installation of the calculating models, analysis and subsequent decision making Importance of qualitative aspects/judgment/presence Dynamic Risk Management Mark to Market 10
Summary 1. SANTANDER. Who are we? 2. Risk Management in Santander 3. Risk Management and Corporate Governace: Critical Relationship 4. Annexes 11
3 Risk Management of Santander and Corporate Governance: Critical Relationship Regulatory Framework Santander is highly influenced by the regulatory environment Supervisory Bodies BIS II European Legislation Bank of Spain (BE) CNMV SEC National Supervisory Bodies Applicable Rules BE Circular 5/93 BE Circular 4/2004 Sarbanes-Oxley Act 2002 of the SEC CNMV Circular 1/2004 Spanish money laundering act 19/1993 Legal Requirements Determination of provisions and statutory capital Defined Internal Control Model Legality and Transparency 12
3 Risk Management and Corporate Governance: Critical Relationship Risk Governance Chairman 2nd Vice-Chairman Chief Executive Officer Alfredo Sáenz Abad 3rd Vice-Chairman Matías Rodríguez Inciarte Executive Managing Director Javier Peralta de las Heras Deputy General Manager Juan Andrés Yanes Luciani Planning and Projects Clients Risk Management Wholesale Banking and Companies Risks Area Standardized Risks Area Recoveries Area Control, Analysis and Consolidation Credit Investment Area Financial Risks Area Methodology, Processes and Infrastructure 13
3 Risk Management and Corporate Governance: Critical Relationship Risk Governance At Board Level Risk Division Principles Independence Global/Local: Mix Decisions by Committee Medium-low profile of risks Wide range of analytical tools: Internal ratings Economic capital RORAC VaR Stress testing Scenario analysis Judgement Risk Management Structure Independent Division reports to 3rd Vice-Chairman of Grupo Santander. The Vice-Chairman chairs the Risk Committee of the Board of Directors: Sets the Group s risk policies Sets the risk limits and the level of of authority delegated Ensures units meet the risk targets Resolves operations beyond powers delegated Supervises targets, tools, initiatives to to improve risk control 14
3 Risk Management and Corporate Governance: Critical Relationship Risk Governance Local Offices Risk Committee Board Risk Committee Executive Commission From $ 10 MM to 70 MM 50 MM 150 MM Legal Lending Limit Board Risk Committee (meets twice a week) Executive Commission (meets weekly) Regular Risk reporting to the Board Frequent review of portfolio and major exposures review by Senior Management Advanced risk training for Board members 15
3 Risk Management and Corporate Governance: Critical Relationship Dynamic Management Balance Required Between Regulation and Active Management Policies and procedures are the core structural element Culture is critical Much of Risk Management and Governance relationship is via informal information flows Informality allows for timeliness efficiency and agility Some aspects cannot be converted to polices and procedures with documentation and regularity Time spent on compliance, audits and documentation vs. active risk management, oversight and governance 16
Summary 1. SANTANDER. Who are we? 2. Risk Management in Santander 3. Risk Management and Corporate Governance: Critical Relationship 4. Annexes 17
4 Annexes Unexpected loss Capital at Risk (CeR) Resources necessary to protect the Bank from insolvency for losses of any kind. It represents the maximum possible loss for a given confidence level directly related to the level of solvency of the entity (rating) and for a pre-fixed time horizon, generally one year. Its calculation includes the expected loss, already incorporated in the results through the relevant provisions. Definition of Market Risk Regulatory capital: The capital required by the supervisor to cover the price risk of the business portfolio, commodity positions and exchange risk and the gold position. We distinguish the following concepts of capital in terms of risk, in accordance with the definitions of market and credit risk : Risk-based capital or economic capital: This is the amount of capital required, based on the Group s own methodology developed through each of the internal market risk models, to cover the price risk of the business portfolio, commodity positions and exchange risk and the gold position. 18
4 Annexes Exposure Credit equivalent risk (REC) or Exposure at default (EAD) Value that may be achieved in transactions with a client in the case of the client s bankruptcy. To measure the transaction credit risk in the Balance Sheet, the concept of Investment (accounting balance) is normally used. It can be defined as the credit risk position maintained by clients. It is the risk assumed by the Group in face of the possibility that the counterparty, at any moment during the life of the contract, is unable to meet his contractual financial obligations, by the term date of the transaction. These positions concern those recorded by the Group both on and off- Balance Sheet: In balance sheet transactions, the risk exposure, meaning the market value of the transaction, is the same as, or at least very close to, its accounting value. In off-balance sheet transactions, the exposure will be a percentage (CCF) of the off-balance sheet amount. In the case of derivative products, the exposure is variable, since changes in the market factors throughout the life of the transaction may cause considerable variations in their market value, and thus the amount exposed to risk. There are two basic methods of calculating it, one based on MonteCarlo simulation techniques and the other where it corresponds to the market value of the transaction plus an additional potential risk for the possible variation in the value that may occur up to the term of the transaction (add on). 19
4 Annexes Unexpected loss Value at Risk (VaR) Maximum probable loss for a given confidence level over a specified time horizon. It is traditionally used as a fundamental measure of Market Risk with a short-term time horizon and taking market factors as risk factors. It is the standard used by the market, using statistical techniques, to measure the maximum potential loss of market value which, in normal conditions, can be generated by a given position or portfolio for a given degree of statistical certainty (confidence level) and a defined time horizon. The methodology adopted by Santander to calculate the Risk Value is historic simulation (two-year series), the time horizon is one day and the daily VaR is calculated to a confidence level of 99%. Maximum probable loss for a given confidence level over a specified time horizon. 20