Enterprise Risk Management at ABN AMRO

Operational Risk

ABN Amro defined operational risk as the risk of loss resulting from inadequate or failed internal processes, human behavior and systems or from external events. This definition captured events such as IT problems, shortcomings in the organizational structure, lapses in internal controls, human error, fraud, and external threats.

ABN Amro had established a dedicated Operational Risk Management (ORM) discipline in 2000 to manage operational risks. ORM was similar to the credit and market risk functions. ABN had launched several initiatives to ensure compliance with the regulatory criteria of the New Capital Accord and the requirements of the Dutch central bank.

ABN Amro's Group Operational Risk Policy and Group Risk Framework outlined the tasks and responsibilities at each organizational level. The Group Operational Risk Committee was the highest approval authority for operational risk policy and consisted of members from GRM and the relevant business lines. ORM managers were assigned throughout the bank to assist line management in fulfilling this responsibility. The bank used various tools to support business management.

• Risk Self-Assessment
This was a structured approach, which assisted line management in identifying and assessing risks and to take corrective actions. The risks were assessed with the assistance of ORM personnel.

• Corporate Loss Database
This was a database that allowed for the systematic registration of operational risk-related losses. This tool assisted in the analysis of operational risks for senior management, and provided a basis for capital allocation computations.

• Risk Approval Process
A comprehensive approval process that included an explicit assessment of the operational, legal and reputational risks was inherent in all new business proposals. The process included sign-offs by relevant parties and approval by an appropriate committee.

• Key Risk Indicators
Key risk indicators were used for trend analysis over time and to trigger off escalation procedures.

• Key Operational Risk Control
This reference guide provided clear descriptions of the typical key risks and required controls for a given process. These descriptions contributed to improved risk awareness and provided inputs for Risk Self-Assessment.

An internal methodology for allocating capital for Operational Risks was introduced in 2001, under the supervision of Group ORM. Committee chaired by the CFO. In 2002, more advanced approaches consistent with current regulatory proposals were being evaluated. The bank continued to monitor regulatory and methodology developments through participation in industry working groups.

Exhibit: XII
ABN AMRO: Financial Highlights (Euro)

Income statement (in millions)	2002	2002 (USD)	2001	2000	1999	1998	1997	1996	1995	1994	1993
Net interest revenue	9.845	9.355	10,090	9,404	8,687	7,198	6,294	5,230	4,646	4,442	4,013
Total non-interest revenue	8.435	8.015	8,744	9,065	6,840	5,340	4,491	3,433	2,708	2,353	2,405
Total revenue	18.28	17.371	18,834	18,469	15,527	12,538	10,785	8,663	7,354	6,795	6,418
Operating expenses	12.823	12.185	13,771	13,202	10,609	8,704	7,450	5,867	4,962	4,595	4,256
Provision for loan losses	1.695	1.611	1,426	617	653	941	547	569	328	681	681
Fund for general banking risks (movements)	-	-	-	-32	-20	-101	179	66	308	-	-
Pre-tax profit	3.713	3.528	3,613	4,725	4,250	2,897	2,626	2,175	1,743	1,526	1,437
Group profit	2.62	2.49	2,615	3,401	2,930	1,989	1,872	1,563	1,233	1,081	955
Net profit	2.207	2.097	3,230	2,498	2,570	1,828	1,748	1,499	1,187	1,037	918
Net profit attributable to ordinary shareholders	2.161	2.053	3,184	2,419	2,490	1,747	1,666	1,414	1,075	925	835
Dividends	1.462	1.389	1,421	1,424	1,250	906	844	733	623	550	486
Balance sheet (in billions)
Shareholders' equity	10,8	11.3	11.8	12.5	12	10.7	11.7	11.3	9.2	8.8	8.7
Group capital	30.1	31.6	34	32.5	28.9	24.4	24.1	20.1	15.2	14.2	13.8
Total client accounts and debt securities	360.7	378.5	384.9	339.8	284.2	243.5	221.1	159.3	147.3	138.5	136.3
Loans	310.9	326.2	345.3	319.3	259.7	220.5	201.1	150.5	132.8	122.8	121.7
Total assets	556	583.4	597.4	543.2	457.9	432.1	379.5	272	248	229	222.8
Contingent liabilities and committed facilities	180.3	189.2	193.4	187.5	159	124	102.8	80.9	63.8	51	45.3
Risk-weighted total assets	229.6	240.9	273.4	263.9	246.4	215.8	208.7	176.7	149.6	136.9	130.5
Ordinary share figures¹
Number of shares outstanding (in millions)	1.585.6	-	1,535.50	1,500.40	1,465.50	1,438.10	1,405.60	1,364.50	1,255.60	1,213.30	1,173.70
Average number of shares outstanding (in millions!	1.559.3	-	1,515.20	1,482.60	1,451.60	1,422.10	1,388.70	13,463	1,232.50	1,193.30	1,141.30
Net earnings per share (in euros! ^2,6	1.52	1.44	1.53	2.04	1.72	1.23	1.2	1.05	0.87	0.78	0.73
Fully diluted net earnings per share (in euros)^2,6	1.51	1.43	1.52	2.02	1.71	1.22	1.19	1.03	0.83	0.74	0.71
Dividend per share (in euros, rounded)³	0.9	0.93	0.9	0.9	0.8	0.58	0.54	0.48	0.41	0.36	0.34
Payout ratio (dividend/net profit)⁷	59.2	-	58.8	44.1	46.5	46.9	45.5	45.5	46.9	46.9	47.4
Net asset value per share (year-end, in euros)^3,4	6.28	6.59	7.13	7.78	7.59	6.85	7.71	7.62	6.21	6.08	6.21
Ratios (in %)
Return on equity	22.6	-	20.5	26.5	23.7	16.9	15.7	16.4	13.9	12.4	12
BIS tier 1 ratio⁴	7.48	-	7.03	7.2	7.2	6.94	6.96	7.21	6.51	6.74	6.85
BIS total capital ratio⁴	11.54	-	10.91	10.39	10.86	10.48	10.65	10.89	10.8	11.02	11.2
Efficiency ratio	70.1	-	73.1	71.5	68.3	69.4	69.1	67.7	67.5	67.6	66.3
Number of employees (headcount)
Netherlands	32.693	-	36,984	38,958	37,138	36,716	34,071	32,531	34,587	35,677	37,393
Other countries	73.745	-	74,726	76,140	72,800	71,014	42,678	33,641	29,107	26,504	23,058
Number of branches and offices
Netherlands	627	-	736	905	921	943	967	1,011	1,050	1,102	1,330
Other countries	2.819	-	2,836	2,774	2,668	2,640	921	706	620	601	503
Number of countries and territories Where present	66	-	67	74	76	74	71	70	67	64	60

Source: ABN AMRO Annual Report, 2002.

Prior year figures have been restated for comparison purposes.
1 Adjusted for shares repurchased to cover staff options granted.
2 Based on the average number of ordinary shares outstanding and adjusted for increases in share capital.
3 Where necessary, adjusted for increases in share capital.
4 Including reclassification of the provision for general contingencies at 1st January 1997.
5 Income Statement figures have been translated at the average dollar rate and balance sheet figures at the year-end dollar rate.
6 Including extraordinary result, 2002 net earnings per share amounted to EUR 1.39 and fully diluted 2002 net earnings per share amounted to EUR 1.38.
7 Payout ratio is excluding ordinary results; including extraordinary result for 2002 is 64.7%.