Enterprise Risk Management at ABN AMRO

Risk Governance contd..

Provisioning Policy

ABN AMRO had developed specific provisioning policies for its businesses. Credit officers continually monitored the quality of the bank's loan portfolios. A provision was made if deterioration of either the quality of a loan or the financial strength of a borrower gave rise to doubts about repayment. Provisioning for consumer loans was made on a portfolio basis, with specific allowances maintained at a level commensurate with the portfolio size and loss experience.

Consumer & Commercial Clients

C&CC's total provision for 2002 was EUR 881 million, representing an increase of 10% over total provisions in 2001. Provisions moved from 51 bps of average RWA in 2001 to 58bps in 2002. Of the total provisions in 2002, 37% related to consumer loans and 63% to commercial loans. In 2002, weaker economic conditions in the Netherlands were reflected in somewhat higher provisions.

Textiles and infrastructure accounted for much of the increase. Nevertheless, given the market environment, ABN Amro considered the results at 25 basis points (bps) of average RWA as acceptable. Difficult credit conditions continued in the US through 2002 and resulted in provision levels of 62 bps of average RWA. Most sectors, including the commercial and asset-based lending businesses were affected. The commercial real estate portfolio remained resilient because of conservative underwriting.

In Brazil, provisions of EUR 193 million (unchanged from 2001) were mainly on account of consumer lending and charges related to discontinued (1999) USD car leasing portfolios. Provisions moved from 250 bps of average RWA to 265 bps in 2002. Credit protection measures instituted by local risk committees and GRM enabled ABN AMRO to weather the market volatility and economic turmoil in the region. ABN Amro believed that the quality of the local C&CC portfolio remained satisfactory.

Wholesale Clients

Provisions increased to EUR 742 million from EUR 543 million in 2001, due to difficulties in the telecom, integrated energy sectors, as well as in Argentina. Provisions were also adversely affected by corporate governance and disclosure malpractices, which led to unexpected and specific corporate failures, notably in the US. Nevertheless, the bank considered current provision levels to be adequate.

Exhibit: X
ABN AMRO: Cross-border Exposures

	Total Cross-boarder exposure			After mitigation
Region	2002	2001	2000	2002	2001	2000
Brazil	3.7	4.1	2.9	0.9	1.2	0.9
Other Latin America (incl. Mexico)	3.7	4.3	3.9	2.5	2.8	2.5
Asia/Pacific	7.1	6.8	7.4	4.8	5	4.1
Eastern Europe	3	2.9	3.3	1.6	2	2.3
Middle East and Africa	2.7	3	3.7	1.9	1.9	1.9
Total	20.2	21.1	21.2	11.7	12.9	11.7

Note: Mitigated exposures commonly include transactions covered by credit derivative swaps, political risk insurance, cash deposits or securities placed offshore, specific guarantees, ring fenced funding or any other mitigation instruments available in the market.
Source: ABN AMRO Annual Report, 2002

Country Risk

ABN Amro managed emerging market country risk, on a portfolio basis. The cross-border exposure measurement covered all on- and off- balance sheet assets that were directly affected by transfer and convertibility restrictions. ABN AMRO had been monitoring cross-border exposure for many years by using a VAR model to determine the cross-border risk on the total portfolio.

In absolute terms, cross-border exposure in 2002 fell by 4.3% compared with 2001. This decline was mostly due to lower exposure to Latin America, mainly Brazil and Argentina. At end of 2002, cross-border exposure to Brazil accounted for 18.1% of the total cross-border risk exposure. Of this amount, 76% was mitigated since it was trade-related or insured.

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