NATIONAL BANK OF GREECE S - ΕΤΕ - Αρχική Σελίδα · PDF filep’s commitment to pursue ... oG Governor’s Acts ... National Bank of Greece (Cyprus) Ltd Financial Institution

Pillar III Disclosures

on a Consolidated Basis

31st December 2010

NATIONAL BANK OF GREECE S.A.

National Bank of Greece

Consolidated Pillar III Report

2

TABLE OF CONTENTS

1. INTRODUCTION – GENERAL INFORMATION ........................................................................................................................................... 3

1.1. Capital Adequacy Regulatory Framework in NBG Group .............................................................................................................. 3

1.2. Amendments in the Basel II Regulatory Framework ..................................................................................................................... 4

1.3. Regulatory vs. accounting consolidation ....................................................................................................................................... 4

2. REGULATORY OWN FUNDS AND CAPITAL ADEQUACY ........................................................................................................................... 7

2.1. Structure of own funds ................................................................................................................................................................. 7

2.2. Capital Adequacy ........................................................................................................................................................................... 9

2.2.1. Capital requirements under Pillar I .................................................................................................................................................................. 9

2.2.2. Internal Capital Adequacy Assessment Process (ICAAP) ................................................................................................................................ 10

2.2.3. EU – wide Stress Testing Exercises ................................................................................................................................................................. 11

3. RISK MANAGEMENT FRAMEWORK ...................................................................................................................................................... 12

3.1. Credit Risk ................................................................................................................................................................................... 12

3.1.1. Credit Policy for the Corporate Portfolio ....................................................................................................................................................... 12

3.1.2. Credit Policy for Retail Banking ...................................................................................................................................................................... 13

3.2. Market Risk ................................................................................................................................................................................. 13

3.3. Operational Risk .......................................................................................................................................................................... 14

3.4. Regulatory Reporting and Capital Adequacy Analysis ................................................................................................................. 14

4. CREDIT RISK .......................................................................................................................................................................................... 15

4.1. Definitions and general information ........................................................................................................................................... 15

4.2. Impairment loss calculation methodology .................................................................................................................................. 15

4.3. Provision movement ................................................................................................................................................................... 17

4.4. Portfolios under the Standardized Approach .............................................................................................................................. 17

4.5. Portfolios under the Internal Ratings Based Approach ............................................................................................................... 18

4.5.1. Structure and use of internal ratings systems ................................................................................................................................................ 18

4.5.2. Credit Risk Mitigation .................................................................................................................................................................................... 18

4.5.3. Control and revision mechanisms of Internal Rating Systems ....................................................................................................................... 18

4.5.4. Models and Internal Rating process of the Corporate Portfolio .................................................................................................................... 19

4.5.5. Models and Internal Rating process of the Mortgage Portfolio ..................................................................................................................... 21

4.6. Credit Risk Mitigation techniques ............................................................................................................................................... 23

5. COUNTERPARTY CREDIT RISK ............................................................................................................................................................... 25

6. SECURITIZATION ................................................................................................................................................................................... 26

7. MARKET RISK ........................................................................................................................................................................................ 27

7.1. Stress Testing .............................................................................................................................................................................. 28

7.2. Back testing ................................................................................................................................................................................. 29

8. EQUITY EXPOSURES NOT INCLUDED IN THE TRADING BOOK ............................................................................................................... 30

9. INTEREST RATE RISK IN THE BANKING BOOK........................................................................................................................................ 31



3

1. INTRODUCTION – GENERAL INFORMATION

National Bank of Greece (the “Bank”, or “NBG”) is a financial institution legally operating subject to the Greek and the EU banking legislation, specifically the provisions, as currently applicable, of Law 2076/92 whereby the second EU banking Directive 89/646/EEC was incorporated into Greek law. Founded in 1841 as a commercial bank, NBG enjoyed the right to issue banknotes until the establishment of the Bank of Greece (“BoG”) in 1928. It has been listed on the Athens Stock Exchange since the latter's foundation in 1880. Since October 1999, the Bank has been listed on the New York Stock Exchange.

The Bank focuses on full compliance with the requirements of the regulatory framework, and ensures that they are strictly and consistently met in all countries where the NBG Group (the “Group”) operates. Following listing on the New York Stock Exchange, the Bank has been further required to comply with the provisions of the US securities market legislation and the respective decisions of the Securities and Exchange Commission.

The NBG Group offers a wide range of financial services, including retail and corporate banking, asset management, real estate management and development, financial, investment and insurance services. The Group operates in Greece, Turkey, UK, South Eastern Europe, Cyprus, Malta, Egypt and South Africa.

The Bank, as an international organization operating in a rapidly growing and changing environment, acknowledges its Group’s exposure to banking risks and the need for these risks to be addressed effectively. Risk management forms an integral part of the Group’s commitment to pursue consistently high returns for its shareholders, maintaining the right balance between risks and performance both in its day-to-day operations and the strategic management of its balance sheet and the Group’s own funds.

1.1. Capital Adequacy Regulatory Framework in NBG Group

In 2010, NBG Group continued to apply the capital adequacy framework according to Basel II rules for the third consecutive year following the relevant regulatory governance, which has derived from the following:

Greek law 3601/1.8.2007 was promulgated on the “taking up and pursuit of the business of credit institutions, capital adequacy of credit institutions and investment firms and other provisions” and incorporates the provisions of the EU Directives 2006/48/EC and 2006/49/EC regarding the “taking up and pursuit of the business of credit institutions and the capital adequacy of investment firms and credit institutions” into Greek law.

BoG Governor’s Acts (“GA/BoG”), which determine the specifics of the implementation of the law 3601/1.8.2007 and define the three Pillars of Basel II framework:

o Pillar I is related to credit institutions minimum capital adequacy, following GA/BoG 2587/20.8.2007, 2588/20.8.2007, 2589/20.8.2007, 2590/20.8.2007, 2591/20.8.2007, 2593/20.8.2007 and 2594/20.8.2007 (and the recently amendments or enhancements GA/BoG 2630/29.10.2010, 2631/29.10.2010, 2633/29.10.2010 and 2634/29.10.2010). During 2010, NBG Group reported to BoG all the required capital adequacy regulatory reports at both solo and group level following GA/BoG 2606/21.2.2008 (which has been currently replaced by GA/BoG 2640/18.1.2011).

o Pillar II, which is related to credit institution’s Internal Capital Adequacy Assessment Process (ICAAP) and evaluation of all significant risk types (over and above Pillar I risks), according to GA/BoG 2595/20.8.2007 and BoG’s Circular No.18/26.8.2008. For 31.12. 2010, NBG Group has carried out its internal capital calculations for Pillar II purposes, as it has been doing since 2008.

o Pillar III is related to disclosure requirements for credit institutions using the Basel II framework. Information to be disclosed comprises capital adequacy, risk exposures and risk management procedures according to GA/BoG 2592/20.8.2007 (and its complement GA/BoG 2632/29.10.2010).

The Basel II capital adequacy framework for credit institutions and investment firms has been effective since 1.1.2008.

NBG Group uses:

the Foundation Internal Ratings-Based (FIRB) Approach with respect to its exposures to corporate customers, including Specialized Lending exposures, and

the Internal Ratings Based (IRB) Approach with respect to its Mortgage Portfolio (i.e. “receivables from individual customers, fully covered by real estate”, as defined in BoG Governor’s Act 2589/2007, Section Β, §9a).

NBG has developed a comprehensive and well-documented roll-out plan that should enable the Group to gradually implement the Internal Ratings-Based Approach with respect to the aggregate loan exposures included in the banking book, except those permanently exempted. In the first year of application of roll-out plan a more than 50% of loan exposures was included in the IRB approach and the percentage amount keeps rising in the following years.



4

1.2. Amendments in the Basel II Regulatory Framework

Recent global economic and financial crisis revealed certain gaps and deficiencies in the functioning and regulation of the banking system and capital markets. Reforms of the current regulatory framework deemed necessary in order to reduce system-wide shocks and strengthen the financial system from possible future crisis.

The most significant changes, enhancements or amendments during 2010 at BoG (in addition to what was stated above), EU Directives and BIS banking supervision level are presented below:

GA/BoG 2635 for Large Exposures regime (entering into force on 31st December 2010)

Directive 2010/76/ΕΕ of the European Parliament and of the Council (entering into force on 31st December 2011), which amends Directives 2006/48/EC and 2006/49/EC “as regards capital requirements for the trading book and for re-securitizations, and the supervisory review of remuneration policies”

Bank for International Settlements (BIS) proposals regarding the new regulatory framework (“Basel 3”) as they are described in the following relevant documents:

o “Basel III: A global regulatory framework for more resilient banks and banking systems”, Dec. 2010

o “Basel III: International framework for liquidity risk measurement, standards and monitoring”, Dec.2010

o “Guidance for national authorities operating the countercyclical capital buffer”, Dec.2010

Basel 3 new regulation framework will be implementing gradually beginning on 1 January 2013 with full implementation as of 1 January 2019. Basel 3 most significant amendments are presented briefly below:

Regulatory Capital: change in components, elements, adjustments and limits of regulatory capital with the introduction of two additional buffers, the “capital conservation buffer” and the “countercyclical capital buffer”.

Counterparty credit risk: new more conservative requirements, which will possibly increase total capital requirements.

Leverage Ratio: the new risk-insensitive leverage ratio will work as complement to risk sensitive capital adequacy ratios with limit of 3%.

Liquidity ratios: introduction of two new regulatory ratios, the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) with limit of 100% for both ratios.

1.3. Regulatory vs. accounting consolidation

All Group subsidiaries (companies which the Bank controls either directly or indirectly, regardless of their line of business) are consolidated in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) while for regulatory purposes, only Group subsidiaries that are classified as banks, financial institutions or supplementary service providers are consolidated.

The NBG Group subsidiaries that are fully consolidated for regulatory purposes are:

Company Line of Business

National Bank of Greece (Parent Company) Financial Institution

National Securities S.A. Capital Markets & Investment Services

Ethniki Kefalaiou S.A. Asset and Liability Management

NBG Asset Management Mutual Funds S.A. Mutual Funds Management

Ethniki Leasing S.A. Financial Leasing

NBG Property Sevices S.A. Real Estate Services

Pronomiouchos S.A. Genikon Apothikon Hellados Warehouse activities

NBG Greek Fund Ltd Fund Management

NBG Bancassurance S.A. Insurance Brokerage and Other Services

The South African Bank of Athens Ltd (S.A.B.A.) Financial Institution

National Bank of Greece (Cyprus) Ltd Financial Institution

National Securities Co (Cyprus) Ltd Capital Markets Services



5

NBG Management Services Ltd Management Services

Stopanska Banka A.D.-Skopje Financial Institution

United Bulgarian Bank A.D. - Sofia (UBB) Financial Institution

UBB Asset Management Inc. Capital Markets & Investment Services

UBB Insurance Broker A.D. Insurance Brokerage and Other Services

UBB Factoring E.O.O.D. Factoring Company

NBG International Ltd Financial Services

NBGI Private Equity Ltd Private Equity

NBGΙ Private Equity S.A.S. Private Equity

NBG Finance Plc. Financial Services

Interlease E.A.D., Sofia Financial Leasing

Interlease Auto E.A.D. Financial Leasing

ETEBA Bulgaria A.D., Sofia Financial Services

NBG Securities Romania S.A. Financial Services

NBG Asset Management Luxembourg S.A. Holding Company

Innovative Ventures S.A. (I-Ven) Sundry services

NBG Funding Ltd Financial Services

Banca Romaneasca S.A. Financial Institution

NBG Factoring Romania IFN S.A. Factoring Company

Ethnodata S.A. IT Services

KADMOS S.A. Real Estate Services

DIONYSOS S.A. Real Estate Services

EKTENEPOL Construction Company S.A. Construction Company

Mortgage Touristic PROTYPOS S.A. Real Estate Services

Hellenic Touristic Constructions S.A. Real Estate Services

Ethnoplan S.A. Services Company

Ethniki Ktimatikis Ekmetalefsis S.A. Real Estate Services

SEE Real Estate fund Real Estate Investment Company

NBG International Holdings B.V. Holding Company

NBG Leasing IFN S.A. Financial Leasing

NBG Malta Holdings Ltd Holding Company

NBG Bank Malta Ltd Financial Institution

FinansBank A.S. Financial Institution

Finans Finansal Kiralama A.S. (Finans Leasing) Financial Leasing

Finans Yatirim Menkul Degerler A.S. (Finans Invest) Investment Company

Finans Portfoy Yonetimi A.S. (Finans Portfolio Management) Mutual Funds Management

Finans Yatirim Ortakligi A.S. (Finans Investment Trust) Investment Company

IBTech Uluslararasi Bilisim Ve Iletisim Teknolojileri A.S. (IB Tech) IT Services

Finans Tuketici Finansmani A.S. (Finans Consumer Finance) Consumer Finance

Finans Faktoring Hizmetleri A.S. (Finans Factoring) Factoring Company



6

Vojvodjanska Banka a.d. Novi Sad Financial Institution

NBG Leasing d.o.o. - Belgrade Financial Leasing

NBG Services d.o.o. – Belgrade Financial Services

CPT Investments Ltd Investment Company

NBG Finance (Dollar) Plc Financial Services

NBG Finance (Sterling) Plc Financial Services

Ethniki Factors S.A. Factoring Company

Revolver APC Limited Special Purpose Entity (Securitization of credit cards & loans)

Revolver 2008 – 1 Plc Special Purpose Entity (Securitization of credit cards & loans)

Titlos Plc Special Purpose Entity (Securitization of bond loans)

NBG Pangaea Reic Real Estate Investment Company

The subsidiaries that are not fully consolidated for regulatory purposes, since their line of business is other than that required, are:

Company Line of Business

Ethniki Hellenic General Insurance S.A. Insurance Services

Ethniki General Insurance (Cyprus) Ltd Insurance Services

Ethniki Insurance (Cyprus) Ltd Insurance Services

S.C. Garanta Asigurari S.A. Insurance – Reinsurance Services

Audatex Hellas S.A. Vehicle damages assessment

National Insurance Brokers S.A. Insurance Brokerage

ASTIR Palace Vouliagmenis S.A. Hotel

Grand Hotel Summer Palace S.A. Hotel

NBG Training Centre S.A. Training Services

NBGI Private Equity Funds (except SEE Real Estate Fund) Private Equity Fund

Finans Emeklilik ve Hayat A.S. (Finans Pensyon) Insurance Services

For regulatory purposes, upon consolidation, the companies listed above are accounted for by applying the equity method of accounting.

Associate companies, upon consolidation, are accounted for by applying the same method both for accounting and regulatory purposes. No NBG Group subsidiary or associate is proportionately consolidated for regulatory or accounting purposes.

The following subsidiaries are deducted from equity:

PLANET S.A.

Insurance Funds MMFSA

Participations exceeding 20% in the share capital or voting rights in insurance and reinsurance companies are not deducted from equity pursuant to the application of the “Deduction and aggregation” method, referenced as method 2, in article 25, chapter V of Law 3455/2006 (Bank of Greece Governor’s Act 2630/29.10.2010). These companies are:

Ethniki Hellenic General Insurance S.A. (Group)

Finans Emeklilik ve Hayat A.S. (Finans Pensyon)

UBB Chartis Insurance Company AD (associate)

UBB AIG Life Insurance Company (associate)

The remaining companies that are not consolidated for regulatory purposes (hotels, training providers and private equity funds investing in companies whose line of business is not included in consolidation for regulatory purposes) are not deducted from equity.

Based on current regulatory framework there is no substantial, practical or legal incapacity in capital transfers or payment of obligations between parent Bank and its subsidiaries. The time of full repayment of the subordinated loans, which have already been granted by the parent Bank to its subsidiaries, has been notified to the appropriate Supervisory Authorities and abides by the relative regulations of each country. Potential prepayment of the above mentioned loans requires prior permission from appropriate Regulatory Authorities.



7

2. REGULATORY OWN FUNDS AND CAPITAL ADEQUACY

2.1. Structure of own funds

Regulatory capital is classified under two main categories, according to Bank of Greece rules: Tier I and Tier II capital. Each category comprises Core and Supplementary capital.

Upper Tier I capital includes the Bank’s shareholders equity and minority interest.

The following are deducted from the above: preference shares, fixed assets revaluation reserve (as at first time adoption of IFRS), positive revaluation of Available for Sale equity securities, positive or negative revaluation of Available for Sale bonds and other debt instruments, positive or negative adjustments in the fair value of financial derivatives used for cash flow hedging, proposed dividends, gain or loss from the fair value change of a liability due to update in the financial institutions credit-rating and the 10% of the deficit for the defined benefits obligations, as it was recorded upon first time adoption of IFRS.

In accordance with Bank of Greece Governor’s Act 2617/2.7.09, minority interests in subsidiaries where the regulatory capital of the entity significantly exceeds the capital requirements arising upon the consolidation of its assets are deducted from regulatory capital.

Supplementary Tier I capital includes preference shares and preferred securities up to the amount that does not exceed the limits set by the Bank of Greece.

General information and the main characteristics of preference shares and preferred securities are given below:

Preference Shares

On June 6th

, 2008, the Bank issued 25,000,000 non-cumulative, non-voting, redeemable preference shares, of a nominal value of €0.30 each. The shares were offered at a price of USD 25 per preference share in the form of American Depositary Shares in the United States and are evidenced by American Depositary Receipts and listed on the New York Stock Exchange. The annual dividend is set to USD 2.25 per preference share.

On May 21st

, 2009, following the Extraordinary General Meeting of the Bank’s Shareholders held on January 22nd

, 2009, the Bank issued 70,000,000 Redeemable Preference Shares at a nominal value of €5.0 each with the cancellation of the pre-emptive rights of the existing shareholders in favour of the Greek State, in accordance with the Law 3723/2008. In accordance with Law 3844/2010, the preference shares are not mandatorily redeemable. If, however, they are not redeemed after five years following their issuance, the coupon rate (i.e. 10%) is increased by 2% per annum cumulatively.

On November 26th

, 2010 the Extraordinary General Meeting of the Bank’s Shareholders approved the repurchase by the Bank of the Law 3723/2008 preference shares of a nominal value of €350 million through payment in cash, subject to obtaining Bank of Greece and other statutory approvals. The approval by the Bank of Greece for the repurchase of the preference shares is still pending.

Preferred securities

NBG Funding Ltd (“NBG Funding”), a wholly owned subsidiary of the Bank, has issued the following Non – Cumulative Non Voting Preferred Securities (the “preferred securities”) guaranteed on a subordinated basis by the Bank. All preferred securities are perpetual. However, the preferred securities may be redeemed at par by NBG Funding, in whole but not in part, ten years after their issue or on any dividend payment date falling thereafter subject to the consent of the Bank of Greece.

Innovative preferred securities:

€350 million Series A Floating Rate securities issued on July 11th

, 2003 carrying a preferred dividend rate of three-month Euribor plus 175 bps until July 11, 2013 and three-month Euribor plus 275 bps thereafter, which is paid quarterly.

GBP 375 million Series E Fixed/Floating Rate securities issued on November 8th

, 2006 carrying a preferred dividend rate of 6.2889% fixed per annum until November 8, 2016 and thereafter floating of three month Libor plus 2.08%. The dividends are payable annually in arrears until November 8, 2016 and thereafter quarterly in arrears.

Non – innovative preferred securities:

€350 million Series B Constant Maturity Swap (“CMS”) Linked securities issued on November 3rd

, 2004 carrying a preferred dividend rate of 6.25% the first year and thereafter of the 10 year EUR CMS mid swap rate plus 12.5 bps reset every six months and capped at 8% paid semi-annually.

USD 180 million Series C Constant Maturity Swap (“CMS”) Linked securities issued on November 3rd

, 2004 carrying a preferred dividend rate of 6.75% the first year and thereafter of the 10 year USD CMS mid swap rate plus 12.5 bps reset every six months and capped at 8.5% paid semi-annually.

€230 million Series D Constant Maturity Swap (“CMS”) Linked securities issued on February 16th

, 2005 carrying a preferred dividend rate of 6% until February 16, 2010 and thereafter of the difference of the 10-year EUR CMS mid swap rate minus the 2-year mid swap rate multiplied by four subject to a minimum rate of 3.25% and capped at 10% paid annually.



8

During 2009 and 2010, the Bank acquired a significant amount of the preferred securities. On December 31st

, 2010, the outstanding amount of preferred securities was €415.8 million and they were included in Supplementary Tier I capital, since they are within the limits imposed by Bank of Greece.

Deductions from Tier I capital include Goodwill, intangible fixed assets and the participation in The Athens Stock Exchange Member’s Guarantee Fund.

Upper Tier II capital includes fixed assets revaluation reserve (as at first time adoption of IFRS), 45% of positive revaluation of available for sale equity securities, subordinated loans of indefinite duration and the amount of preferred securities that exceeds the limits imposed by the Bank of Greece and are not included in Tier I capital. Upper Tier II capital is reduced by the 10% of the deficit for the defined benefits obligations to employees, as recorded upon first time adoption of IFRS.

Supplementary Tier II capital includes fixed term subordinated loans issued by the Group.

Elements deducted at 50% from Tier I and at 50% from Tier II capital respectively, are the participation in the shareholders equity of other banks or financial institutions, where the Group has an investment greater than 10% or the amount that these participations in total exceed the 10% of the Bank’s shareholders’ equity, the amount related to the application of method 2 for insurance and reinsurance companies acquired after 31.12.2006, as well as the provision shortfall between the accounting impairment losses on financial assets and the expected losses as calculated by the Internal Ratings Based approach.

If the amount to be deducted from Tier II capital (i.e., 50% of these elements) exceeds total Tier II capital, the difference is deducted from Tier I capital.

The amount resulting from the application of method 2 for insurance and reinsurance companies acquired before 31.12.2006 is deducted from total regulatory capital.

Group Regulatory Capital Structure € million

Upper Tier I Capital 10,386

Supplementary Tier I Capital, of which: 1,156

-Preferred shares 740

-Preferred securities (grandfathered instruments) 416

Less: Goodwill (1,977)

Less: Other intangible assets (454)

Less: Other items (153)

Total Tier I Capital 8,958

Tier II Capital 353

Total Regulatory Capital 9,311

Analysis of the amounts deducted at 50% from Tier I and Tier II capital respectively € million

Participations in banks and other financial institutions of >10% 3

Amount resulting from the application of method 2 for insurance and reinsurance companies acquired after 31.12.2006

9

Provision shortfall between the accounting impairment losses on financial assets and the expected losses as calculated by the Internal Ratings Based approach

293

Total 305

Amount that is currently deducted from total regulatory capital and will be deducted at 50% from Tier I and Tier II capital respectively after the transitional period (31.12.2012)

Amount resulting from the application of method 2 for insurance companies acquired before 31.12.2006 47

Total own funds remain the same after the application of the limits of Chapter IV of GA/BoG 2630/29.10.2010.



9

2.2. Capital Adequacy

2.2.1. Capital requirements under Pillar I

The table below presents the capital requirements at Group level under Pillar I as at 31.12.2010. Capital requirements under Pillar I are equal to 8% of Risk Weighted Assets.

Capital Requirements

€ ‘000s

Credit Risk & Counterparty Risk (Standardized Approach)

Asset Class

Central Governments and Central Banks 128,750

Regional Governments, Local Authorities, Administrative Bodies & Public Sector Entities 20,449

Financial Institutions 256,963

Retail exposures 894,392

Secured by Real Estate Property 222,939

Corporates 612,673

Past Due Items* 239,002

Collective Investment Undertakings (CIUs) 22,381

Equities, Participations and Other Items** 283,201

Regulatory High Risk category 50,223

Multilateral Development Banks 0

Total Credit Risk & Counterparty Risk (Standardized Approach) 2,730,973

*Past due items are defined according to the Bank of Greece Governor’s Act 2588/20.08.2007.

**Includes €18,553 thousands which regards Equity and Participation exposures weighted according to the Standardized Approach, as per §3, section G of the Bank of Greece Governor’s Act 2589/20.08.2007.

Credit Risk (Internal Ratings Based Approach)

Asset Class

Residential Mortgages 249,663

Large Corporates 1,118,298

Small and Medium sized Entities (SMEs) 553,350

Securitization positions 34

Total Credit Risk (Internal Ratings Based Approach) 1,921,545

Total Credit & Counterparty Risk (Standardized and IRB Approaches) 4,652,518

Market Risk

Standardized Approach

Traded Debt Instruments 33,868

Equities 6,282

Foreign Exchange 56,983

Other items 12,389

Internal Model Approach (Value at Risk) 129,624

Total Market Risk 239,146

Operational Risk 564,214

Total Capital Requirements 5,455,878



10

Capital Adequacy Ratios

€ ‘000s

Tier I Capital 8,958,703

Tier II Capital 352,711

Total Regulatory Capital 9,311,414

Total Risk Weighted Assets 68,198,475

Tier I Capital Adequacy Ratio 13.1%

Total Capital Adequacy Ratio 13.7%

2.2.2. Internal Capital Adequacy Assessment Process (ICAAP)

According to Basel II Capital Adequacy Framework, Pillar I sets the ways of measuring risks, especially credit, market and operational risks and aims to the alignment of the capital requirements with the risks undertaken.

The above rules are complemented by Pillar II, which sets the requirements for monitoring, assessing and controlling all material risks to which credit institutions are exposed.

Those requirements are associated with the Internal Capital Adequacy Assessment Process (ICAAP) (as per GA/BoG 2595/20.8.2007 and BoG’s Circular No.18/26.8.2008) applied by credit institutions. The development and implementation of ICAAP, aims at ensuring the adequacy of the credit institutions’ own funds for covering the various types of material risks.

The ICAAP objectives are:

the proper identification, measurement, control and overall assessment of all material risks;

the development of the appropriate systems for the measurement and management of those risks;

the internal evaluation of the capital required for the mitigation of risks (“internal capital”).

The term “internal capital” refers to the amount of own funds adequate to cover losses at a specified confidence level set in accordance with the risk-appetite strategy within a certain time horizon.

NBG Group has completed the ICAAP design, by creating an analytical ICAAP framework process. The ICAAP framework is documented and describes all detailed components of ICAAP at both NBG solo and Group level. The ICAAP design briefly contains the following:

Group risk profile assessment

Risk measurement and internal capital adequacy assessment

Stress testing development, analysis and evaluation

ICAAP reporting framework

ICAAP documentation

Peer Group Review

ICAAP assumes the active participation and support of both the Board of Directors (and the respective Risk Management Committee) and the Executive Committee. In the ICAAP, a respectful amount of Committees (i.e. ALCO, Operational Risk Management Committee) and Divisions of the Group (i.e. both Group Risk Management Divisions, Financial & Management Accounting, Strategic Planning & Research, Group Treasury, Group Internal Audit-Inspection, International division and relevant Subsidiaries divisions) are involved also. Their main roles and responsibilities are explicitly described in the relevant ICAAP Framework document.

ICAAP design and application framework considers all material risks throughout NBG Group. The following parameters are taken into account for ICAAP implementation:

Size of the relevant business unit/subsidiary,

Exposure per risk type, and

Risk methodology and measurement approach for each risk type.

Risk identification, evaluation and mapping to the relevant business Units/Group subsidiaries comprise one of the most important parts of ICAAP. The risks’ materiality assessment is performed on the basis of certain quantitative (e.g. exposure as percentage of the Group RWAs) and qualitative criteria (e.g. established framework of risk management policies, procedures and systems, governance framework and specific roles and responsibilities of relevant units, limits setting and evaluation).

NBG Group has recognised the following risk types as the most significant in the ICAAP:

Credit

Market

Operational



11

Interest Rate Risk in the Banking Book (IRRBB)

Concentration

Country

Liquidity

Business

Strategic

Model

Residual risk from credit risk mitigation

Capital access

Reputation and

Real estate risk

The approach for the calculation of the NBG Group total internal capital includes two stages.

In the first stage, the internal capital per risk type is calculated on a Group basis. NBG Group has already developed methodologies allowing for the calculation of the required internal capital for the quantifiable risks. Those methodologies are intended to be assessed on a regular time basis and to be upgraded in accordance with the global best practices.

In the second stage, internal capital (per risk type) is summed up in order to calculate the Group total internal capital.

Internal capital allocation to the Group business units and subsidiaries is another important point of reference aiming at associating ICAAP with the business decisions and the performance of the Group Units and subsidiaries.

The Group Risk Control and Architecture Division proceeded to the implementation of ICAAP for the year 2010 by estimating the relevant internal capital for all major risk types at Group level. Calculations were based on the methodologies that have already been developed in the ICAAP Framework. Results showed the impact on the Group’s capital adequacy ratios as calculated under Pillar I was immaterial. Finally, the Group’s “internal capital” margin was considered adequate by the BoG during the Supervisory Review and Evaluation Process (SREP).

Our main objective for the near future is to improve ICAAP methodologies further in order to achieve maximum efficiency and credibility in estimating Group’s internal capital and to enhance the contribution of ICAAP results in Group’s business decisions processes.

2.2.3. EU – wide Stress Testing Exercises

In July 2010, NBG Group participated successfully in the stress testing exercise coordinated by the Committee of European Banking Supervisors (CEBS, currently EBA) in cooperation with the ECB.

Even under the stress test’s adverse scenario with regard to loan book quality (i.e. zero growth exposure to all loan books across the Group, NPL/PD ratios agreed centrally using ECB’s methodology, accounting provisions set equally to expected losses per portfolio and country) which resulted in estimated cumulative impairment losses of €5.1 billion for the Group over the two years (2010-2011) – compared to €1.3 billion for 2009 – , the Group’s profit before tax and provisions for the same period was sufficient to absorb the shock.

According to the results of the stress test, under the adverse scenario the estimated Tier I capital adequacy ratio would be in the order of 9.6% in 2011, compared to 11.3% at the end of 2009. After taking into consideration additional impairments totalling €2 billion arising from sovereign risk, the ratio stands at 7.4% at the end of 2011, which is comfortably above the minimum 6% required by the ECB exclusively for the purposes of this exercise.

NBG Group’s performance in the CEBS EU-wide stress testing exercise reflects its robust capital adequacy, which cushions it against even in the most adverse scenarios, both with regard to possible further deterioration in loan impairments and the macro fiscal situation in Greece.



12

3. RISK MANAGEMENT FRAMEWORK

The Bank acknowledges the need for enhanced risk management and has established two specialized units, the NBG Group Risk Control and Architecture Division (GRCA) and the NBG Group Market and Operational Risk Management Division (GMORM), to properly measure, analyze and manage the risks entailed in all its business activities. All risk management units of the Group adequately report to the two aforementioned Divisions.

Based on its charter, the mission of Group Risk Control and Architecture Division is to:

Specify and implement credit risk policies emphasizing rating systems, risk assessment models and risk parameters, according to the guidelines set by the Bank’s Board of Directors;

Plan, specify, implement and introduce capital management policies, under the guidelines of the Bank’s Board of Directors;

Assess the adequacy of methods and systems that aim to analyze, measure, monitor, control and report credit risk undertaken by the Bank and other financial institutions of the Group and periodically validate them;

Estimate Regulatory and Economic Capital required in respect to all banking risks and prepare relevant regulatory and MIS reports.

On the other hand, the mission of Group Market and Operational Risk Management Division is to:

Plan, specify, implement and introduce market, operational and liquidity risk policies, under the guidelines of the Bank’s Board of Directors;

Assess the adequacy of methods and systems that aim to analyze, measure, monitor, control and report the aforementioned risks undertaken by the Bank and other financial institutions of the Group and periodically validate them;

Independently evaluate financial products, assets and liabilities of the bank and the Group;

Regularly handle matters relevant to market, operational and liquidity risks, under the guidelines and specific decisions of the Board Risk Committee and the Asset Liability Committee (ALCO).

Each Division has distinct responsibilities and covers specific types of risk. The NBG GRCA Division consists of

the Credit Risk Control Subdivision,

the Analysis and Risk MIS Subdivision,

the Capital Reporting Subdivision, and

the Model Validation Unit,

whereas the NBG GMORM Division consists of

the Market Risk Management Subdivision,

the Counterparty Risk Management Subdivision, and

the Operational Risk Management Subdivision.

Both Divisions report to the Group’s General Risk Manager.

3.1. Credit Risk

3.1.1. Credit Policy for the Corporate Portfolio

The Credit Policy for the Corporate portfolio aims to provide the Group’s personnel with the fundamental policies for the control (identification, measurement, approval, monitoring and reporting) of the credit risk related to the Corporate Portfolio, both domestically and internationally. The Credit Policy has been designed to meet the organizational requirements and the regulatory framework in the best possible way, as well as to allow the Group to maintain and enhance its leading position in the market.

Credit risk control should always be performed according to the policies described in this document, to be implemented taking into consideration Credit Procedures, Product Credit Programs and all relevant circulars.

All procedures that need to be followed so that credit risk control is performed in accordance with the Credit Policy are set out in the Credit Procedures charter. These procedures are subject to amendments, due to changes in the business environment, in order to facilitate the Bank’s adjustment to the said changes.

The Credit Policy is approved and can be amended or revised only by the Board Risk Committee following the joint proposal of the Group’s Chief Credit Risk Officer and the Group’s General Risk Manager, and is subject to periodical revision.

Any exception from the Credit Policy should be approved by the Chief Credit Risk Officer or by the General Risk Manager, for matters of his responsibility. All exceptions (and their rationale) should be recorded and have either an expiry date or a review date.



13

3.1.2. Credit Policy for Retail Banking

The Credit Policy for the Retail Banking Portfolio – both domestically and internationally – sets the credit criteria, the policies & procedures as well as the directives, which determine the framework for managing and minimizing the credit risks undertaken by the Retail Banking Division. Its main scope is to enhance, guide and regulate the effective and adequate management of credit risk, thus achieving a viable balance between risk and reward. The Policy is orientated to serve three basic objectives:

Set the framework for the re-establishment of the basic credit criteria, policies and procedures.

Consolidate the Retail Credit policies of the Group.

Establish a common approach for managing Retail Banking risks.

NBG Group Retail Credit Division is responsible for developing and submitting for approval to the Board Risk Committee, the Credit Policy for the Retail Banking Portfolio. The Division reports to the Chief Credit Risk Officer and its main task is to evaluate, design and approve the credit policy that governs the retail banking products, both locally and abroad.

Through the application of the Credit Policy, the evaluation and estimation of the credit risk, of new as well as existing products, is effectively facilitated. Top-level Management is informed on a regular basis on all aspects regarding the Credit Policy and as a direct result, remedial action plans are constructed that operate within the risk appetite and strategic orientation of the Bank. The Credit Policy for the Retail Banking Portfolio is subject to an annual review. During the review, all of the approved policy changes that occurred since the last review are incorporated in the Policy Manual. Any deviation from the approved policies requires prior approval from the NBG Group Retail Credit Division.

The establishment of the credit policy, regarding retail banking products, offers a clear and universal understanding of all the risks involved and aids in the achievement of optimal monitoring and evaluation regarding the effectiveness of the applied measures.

3.2. Market Risk

The NBG Group Market and Operational Risk Management Division, in order to ensure the correct estimation and the efficient management and monitoring of the Market Risk that derives from the Bank’s activities in the international and domestic financial markets, calculates on a daily basis the Value - at - Risk (VaR) of the Bank’s Trading and Available - for - Sale (“AFS”) portfolios. The system used is RiskWatch and was created by Algorithmics. The VaR estimates of the Trading Book are also used for the calculation of the respective capital charges, according to the prevailing regulatory framework. The VaR estimates refer to a 1-day holding period (or 10-days for regulatory purposes) and a 99% confidence interval.

The most significant types of Market Risk to which the Bank is exposed are the following:

Interest Rate Risk

Equity Risk

Foreign Exchange (FX) Risk

Interest Rate Risk stems from the Bank’s Trading and AFS bond portfolios as well as from the transactions on interest rate derivatives, exchange traded and Over-The-Counter (“OTC”).

Equity Risk derives from the Bank’s holdings in stocks and equity derivatives.

Foreign Exchange Risk arises from the Bank’s Open Currency Position (OCP). OCP is distinguished between trading and structural. The structural OCP takes into account all of the Bank’s assets and liabilities (on- and off-balance sheet) in foreign currency, whereas the trading OCP derives strictly from the trading FX transactions performed by the Treasury Division.

Market Risk is mitigated through hedging either on a portfolio level, or is linked to a specific transaction or position that the Bank holds. As a means of hedging – based on the type of risk – the Bank uses the appropriate OTC and exchange traded derivatives.

At a Group level, the most significant source of market risk, after NBG itself, is related to FinansBank’s Trading and AFS portfolios. The market risk undertaken by the rest of Subsidiaries is insignificant. For the measurement of market risk, FinansBank calculates on a daily basis the VaR of both its Trading and AFS portfolios through the same system that the Bank uses. For the calculation of the regulatory capital requirements of FinansBank’s trading exposures, the Group applies the Standardized Approach.

The most important type of risk which FinansBank has to manage is the interest rate risk that derives from the positions it retains in Turkish government bonds.

The Bank has established a framework of VaR limits in order to control and manage more efficiently the risks to which it is exposed. These limits refer not only to specific types of market risk, such as interest rate, foreign exchange and equity risk, but also to the overall Market Risk of the Bank’s trading and AFS portfolios. The same limit structure is also in place in FinansBank.

Furthermore, the NBG Group Market and Operational Risk Management Division prepares on a daily basis a set of VaR reports in order to inform the senior management about the level of Market Risk and the sustainability of the respective limits.



14

By the end of 2009, the Bank calculates on a daily basis the Group VaR, taking into account both its own portfolios and the respective portfolios of FinansBank.

All key principles that govern the Bank’s activities in the financial markets, along with the framework for the estimation, monitoring and management of Market Risk are incorporated in the Bank’s Market Risk policy. The Policy has been approved by the Board Risk Committee and is periodically revised.

In the same context, FinansBank has also developed a Market Risk Policy to cover its trading activities.

3.3. Operational Risk

NBG has established a robust Operational Risk Management (ORM) Framework, as approved by the Board Risk Committee, in order to address operational risks effectively and meet the requirements of regulatory compliance with the Revised Capital Adequacy Framework (Basel II), the respective EU Capital Requirements Directive (CRD) and Bank of Greece Governor’s Act 2577/2006.

In order to enhance operational risk management standards as well as integrate the management of operational risks throughout its activities in Greece and in Southeastern Europe, NBG developed and implemented Algorithmic’s OpVar software application.

The basic elements of the Bank’s ORM Framework, supported by OpVar are:

The Risks and Controls Self-Assessment (RCSA) process, alongside the assessment of the relevant control environment;

The loss collection process as well as the maintenance of a sound and consistent loss database;

The determination, update and monitoring of Action Plans;

The definition and monitoring of Key Risk Indicators.

For the calculation of Operational Risk Capital requirements, NBG has adopted the Standardized Approach (SA). Besides, targeting the adoption of an Advanced Measurement Approach for calculating its operational risk capital charges on a solo as well as on a consolidated basis, the Bank has developed an internal model for the assessment of its operational risk.

The GMORM is in charge of managing and coordinating the implementation of the ORM Framework, setting appropriate standards, methodologies and procedures for operational risk assessment, monitoring and control as well as for the collection of loss data. Furthermore, it regularly reviews and ensures consistent implementation of the ORM Framework across the Group.

The GMORM also reviews and monitors NBG’s operational risk profile on an ongoing basis, focusing on the development, implementation and follow-up of appropriate Action Plans with a view to ensuring that all the steps and measures are in place that are necessary to mitigate operational risks. NBG’s Action Plans consist in mitigation measures, including insurance policies, designed to reduce the impact and losses generated by the occurrence of risk events, or in proactive measures designed to prevent or reduce the probability of occurrence of risk events by improving the control environment or any other aspect of the business environment.

Lastly, GMORM has set up an operational risk reporting framework with a view to ensuring regular dissemination of operational risk-specific information at all levels across NBG. The main purposes of the operational risk reporting process are to provide all major stakeholders (including Regulatory Authorities and other external bodies) with a clear view of the status and effectiveness of operational risk management across the Bank, support risk sensitive decision-making and enhance the overall effectiveness of NBG’s operational risk policies.

3.4. Regulatory Reporting and Capital Adequacy Analysis

In order to ensure the Group’s compliance with the regulatory framework as well as to provide the Bank’s Management with consistent risk management information as the basis for sound decision-making and oversight, Group Risk Control and Architecture Division measures, analyzes and reports among others:

Capital requirements and capital adequacy

Large exposures and large debtors

Cross border and interbank exposures

For the calculation of capital adequacy, a specialised software application is used which collects relevant data kept at Bank’s and Group’s core systems (loans and credit limits systems, trading position-keeping systems, collateral management system etc). The aforementioned software is fully configured in order to calculate expected loss and risk-weighted assets according to the Group’s applied approach on each relevant portfolio, in accordance with the current “Basel II” framework. GRCA submits regularly and consistently all the required reports to the Bank of Greece pursuant to the respective BoG Governor’s Acts.

Capital adequacy management takes place centrally at Group level. In case that financial support to a subsidiary is necessary, this takes place under a formalized procedure in accordance with the Group corporate governance framework, always taking into account all relevant supervisory and legal provisions.



15

4. CREDIT RISK

4.1. Definitions and general information

For accounting purposes, “past due” exposures are those exposures which are past due for at least 1 day.

For accounting purposes, “impaired” exposures are defined as follows

Loans that are individually impaired (specific provisions).

Loans for which legal action has been initiated.

Loans for which the borrower’s credit rating corresponds to a probability of default equal to 100%.

Loans for which interest, principal, or other amount relating to the loan is past due for more than:

o 90 days for all loans other than mortgages, and

o 180 days for mortgage loans.

Loans for which Management believes there is objective evidence of impairment due to other factors.

4.2. Impairment loss calculation methodology

A financial asset (or a group of financial assets) is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (“loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset (or group of financial assets) that can be reliably estimated. It may not be possible to identify a single, discrete event that caused the impairment. Rather, the combined effect of several events may have caused the impairment. Losses expected as a result of future events, no matter how likely, are not recognized.

Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Bank about the following loss events [IAS 39.59]:

Significant financial difficulty of the issuer or obligor.

A breach of contract, such as a default or delinquency in interest or principal payments.

The Bank, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the Bank would not otherwise consider

It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation.

The disappearance of an active market for that financial asset because of financial difficulties.

Observable data indicating that, since the initial recognition of a group of financial assets, there is a measurable decrease in the estimated future cash flows from those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including:

o Adverse changes in the payment status of borrowers in the group;

o National or local economic conditions that correlate with defaults on the assets in the group.

The disappearance of an active market because an entity’s financial instruments are no longer publicly traded is not evidence of impairment [IAS 39.60].

A downgrade of an entity’s credit rating is not, of itself, evidence of impairment, although it may be evidence of impairment when considered with other available information [IAS 39.60].

A decline in the fair value of a financial asset below its cost or amortised cost is not necessarily evidence of impairment (for example, a decline in the fair value of an investment in a debt instrument that results from an increase in the risk-free interest rate) [IAS 39.60].

An impairment test encompassing all relevant classes should be performed at least semi-annually, and at any interim reporting period if management believes that changes of circumstances merit the review.

If there is objective evidence of impairment loss, the amount of loss is measured as the difference between the asset’s carrying amount (the amortized cost) and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at either [IAS 39.AG84]:

The financial asset’s original effective interest rate, if the loan’s interest rate is fixed;

The current effective interest rate determined under the contract, if the loan’s interest rate is variable; and



16

The original effective interest rate before the modification of terms, if the terms of a loan are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer.

The following tables present the analysis of the NBG Group loans per portfolio, by geographical region, by economic sector and by remaining maturity.

Net loans and advances per portfolio before credit enhancements at Group level

€ ‘000s Average for 2010 31.12.2010

Mortgages 25,159,970 25,565,711

Consumer Loans 7,968,615 7,948,451

Credit Cards 4,919,143 5,394,477

Small Business Lending 6,718,230 6,420,508

Retail lending 44,765,958 45,329,147

Corporate and Public Sector lending 34,935,123 35,494,342

Total before allowance for impairment on loans & advances to customers 79,701,081 80,823,489

Less: Allowance for impairment on loans & advances to customers (3,033,902) (3,561,619)

Total 76,667,179 77,261,870

Geographical concentration of net loans and advances at Group level

€ ‘000s 31.12.2010 %

Greece 52,707,655 68

Turkey 14,625,301 19

SE Europe 8,320,087 11

Western European countries 1,379,007 2

Africa 229,820 -

Total 77,261,870 100

Net loans and advances by economic sector at Group level

€ ‘000s 31.12.2010 %

Private individuals 37,770,917 49

Trade and Services (excl. tourism) 9,877,541 13

Professionals 2,489,313 3

Industry & Mining 5,478,672 7

Small scale industry 2,767,023 4

Government & Public Agencies 9,936,318 13

Construction & Real Estate Development 3,039,759 4

Shipping 1,872,067 2

Transportation & Telecommunications (excl. shipping) 1,223,239 2

Energy 1,049,754 1

Tourism 791,620 1

Other 965,647 1

Total 77,261,870 100

Net loans and advances by remaining maturity at Group level

€ ‘000s 31.12.2010

Up to 1m 1m to 3m 3m to 12m 1yr to 5yrs Over 5yrs Total

Loans & Advances to Customers (net of provisions) 8,626,062 5,044,121 11,452,490 22,470,180 29,669,017 77,261,870



17

4.3. Provision movement

The movement in the allowance for impairment for loans and advances, including recoveries, for the year 2010 is as follows:

€ ‘000s 2010

Balance on January 1st

2,459,171

Impairment charge for credit loss 1,365,030

Loans written off (300,248)

Amounts recovered 23,249

Foreign exchange differences 14,417

Balance on December 31st

3,561,619

4.4. Portfolios under the Standardized Approach

The following External Credit Rating Institutions (ECAI) are used to risk weight exposures under the Standardized Approach:

Standard & Poor's

Moody's Investors Service Ltd

Fitch Ratings Ltd

The asset classes for which ECAI ratings are used are the following:

Exposures to Financial Institutions

Exposures to Central Governments and Central Banks

Corporates Exposures (under the Standardized Approach)

Exposures to Regional Governments, Local Authorities and Public Sector Entities (PSEs)

Exposures to Multilateral Development Banks

The table below presents the Exposures (net of accounting provisions), before and after credit risk mitigation, as of 31.12.10, according to the supervisory risk weights of GA/BoG 2588/20.08.2007 (all amounts are in € thousands):

Risk Weight Exposure amount before Credit Risk Mitigation Exposure amount after Credit Risk Mitigation

Exposures to Financial Institutions

0% 848,815 848,815 20% 4,301,439 2,912,823

50% 3,051,314 2,249,431

100% 1,547,382 1,546,280

150% 4,056 4,056

Total 9,753,006 7,561,405 Exposures to Central Governments and Central Banks

0% 28,126,171 27,758,619 50% 28,011 28,011

100% 1,637,721 1,595,354

Total 29,791,903 29,381,984 Corporate Exposures

20% 37,242 16,727 50% 80,415 80,415

100% 11,663,271 10,718,067

150% 2,589 2,589

Total 11,783,517 10,817,798 Exposures to Regional Governments, Local Authorities and Public Sector Entities (PSEs)

0% 553,204 58,876 20% 6,257 6,257

50% 8 7

100% 1,463,704 347,228

Total 2,023,173 412,368 Exposures to Multilateral Development Banks

0% 14,345 14,345

Total 14,345 14,345



18

Exposures to Collective Investment Undertakings (CIUs) 100% 279,762 279,762

Total 279,762 279,762 Exposures secured by Real Estate property

35% 3,981,343 3,981,343 50% 2,898,791 2,898,791

Total 6,880,134 6,880,134 Regulatory High Risk Exposures

50% 10,394 10,394 100% 258,148 258,148

150% 302,926 302,911

Total 571,468 571,453 Retail Exposures

75% 33,772,339 31,123,130

Total 33,772,339 31,123,130 Past Due Items

50% 69,005 69,005 100% 2,383,559 2,381,338

150% 560,464 390,847

Total 3,013,028 2,841,190

Other items 0% 996,215 996,215

20% 39,184 39,184

100% 3,532,173 3,532,173

Total 4,567,572 4,567,572

4.5. Portfolios under the Internal Ratings Based Approach

4.5.1. Structure and use of internal ratings systems

The Bank has developed Internal Rating Systems for Corporate Exposures (including Specialized Lending Exposures), as well as for Individual Exposures being fully collateralized by residential real estate (Housing Loans).

For corporate exposures, the Corporate Rating System considers the individual risk characteristics of the obligor separately from the facility itself, and subsequently rates and classifies the obligors. The rating process of the Obligors is described explicitly in the Credit Policy for the Corporate Portfolio. Based on this Rating System, the Bank deduces a Probability of Default (PD) for each obligor with a Corporate Exposure. In case an ECAI rating of the obligor exists, it is not taken into account for the final rating grade of the obligor.

Project Finance and Object Finance, which fall under Specialized Lending Exposures, are rated by using a simplified Slotting Criteria model, with given specific risk-weighted factors, outlined in GA/BoG 2589/2007.

For Housing Loans, the Bank uses two rating systems that reflect both obligor and facility risk. These systems provide a PD estimate, as well as a Loss Given Default (LGD) estimate. Both rating systems group loans in pools with common risk characteristics, in order to avoid concentration risk. For the formation of pools, both rating systems use risk criteria for both the obligor and the facility, as well as delinquency at the time of rating. The rating procedure is consistent with the Retail Credit Policy and takes all current information into account.

Internal ratings, LGDs and PDs are taken into consideration in the approval process, the estimation of provisions, and the management of risks in general.

4.5.2. Credit Risk Mitigation

The Bank has created a Collateral Management System, in which all risk mitigation instruments are recorded, monitored and evaluated. Exposures can either be secured by collateral (via pledging) or contractually guaranteed (by individuals, corporate entities, financial institutions, public entities, the Government, or the Small and Medium Enterprises Subsidy Fund – TEMPME). The guarantees accepted by the Bank and the way these mitigate the underlying credit risk are described in the Credit Policy documents of both Corporate and Retail Portfolios.

Some Credit Risk mitigation techniques are eligible for regulatory Credit protection, as per GA/BoG 2589/2007, and are intentionally marked in a specific field within the System in order to correctly assess their impact on capital requirements.

4.5.3. Control and revision mechanisms of Internal Rating Systems

NBG Group’s Credit Risk Models’ Development and Validation Policy applies specific rules regarding the control and revision of rating system and all relevant models. This is done in order to ensure transparency across the Group regarding model development, validation



19

and calibration. All risk systems and models used by the Bank and its Subsidiaries are under the GRCA Division’s competence, which has access to all data and models across the Group.

The monitoring, validation and revision of models is enforced by a specific Model Validation Unit within the GRCA, which reports to the top management and the Board Risk Committee regularly, and coordinates the actions and procedures of all analysis teams across the Group.

4.5.4. Models and Internal Rating process of the Corporate Portfolio

The Obligor Risk Rating methodology is presented in full detail in the Corporate Credit Policy. The Obligors’ Risk Rating (ORR) Scale consists of 22 grades, 19 of which concern obligors who have not defaulted and the remainder three regard defaulted obligors (“default” being defined as per Basel II rules and the relevant Credit Policy). Every ORR grade is mapped to a single PD.

The rating of an Obligor is conducted by the relevant Business Division and approved either by the responsible Credit Approving Body through the relevant credit approval process or by the Head of the Credit Division in the event a Credit Framework has not been approved. Different credit exposures against the same obligor receive the same rating grade (unless the exposure belongs to the Specialized Lending category), irrespective of any differences between the corresponding facilities (e.g. in collateral pledged, type of credit line, etc.). This process is conducted at least annually, as well as upon any release of new information or financial statements regarding the Obligor.

The Bank uses four models for rating corporate obligors, all of them being developed by GRCA. More specifically:

1. All firms with full financial disclosure are rated using the Corporate Rating Model (CRM); any existing rating by an ECAI is not taken into consideration.

2. Special case obligors, like venture companies with no financial statements yet, conglomerates of construction companies, insurance companies, or not-for-profit organizations (amateur sport clubs, etc.) are rated by an Expert Judgment Model.

3. Project finance and object finance (ocean shipping) exposures, the Bank uses two (2) simplified Slotting Criteria models, structured like simple scorecard questionnaires.

4. Smaller firms which belong to the Corporate portfolio but do not disclose full financial statements (i.e. they keep 2nd

level Greek GAAP General Ledger accounts) are rated using the Limited Financial Scorecard.

The distribution of IRB exposures per rating model is given below. For Specialized Lending exposures, rating is done per exposure whereas, for the rest of corporate exposures, rating is done per obligor. Please note that defaulted obligors and/or exposures are not included in the table’s account and balance percentages.

Rating Model Number % number Amt to be weighted (€ mio) % total

Per obligor

CRM 4,257 75.0% 13,324,697 87.4%

Limited Financials Scorecard 122 2.1% 42,322 0.3%

Expert Judgment Model 686 12.1% 1,544,643 10.1%

Unrated 611 10.8% 334,129 2.2%

In default 2,209 - 1,193,612 -

Partial Sum 7,885 100.0% 16,439,403 100.0%

Per exposure

Project Finance 313 60.9% 931,612 39.2%

Object Finance 201 39.1% 1,447,661 60.8%

In default 7 - 20,077 -

Partial Sum 521 2,399,351

General Sum 8,406 100.0% 18,838,753 100.0%

A further analysis of each rating model used in the Corporate Portfolio is provided below:

I. Corporate Rating Model (CRM) CRM is a mixed rating model, combining both the statistical analysis and the accumulated experience of the Bank. The structure of this model satisfies the minimum requirements put forward by GA/BoG 2589/2007, Section C1. It combines objective quantitative data with qualitative criteria, which enhance critical analysis and aim to further refine the counterparty’s rating.



20

CRM is carried out via the Risk Analyst platform (an upgraded version of Moody’s Risk Advisor) which has been used by the Bank since early 2004. It includes two separate analytical tools: the Financial Component and the Expert Component. In the former, the company’s financial data (balance-sheets, financial statements, operating results) are uploaded and various levels of analysis are performed, for example, short-term and long-term projections, comparison with peer companies, and financial ratio calculations. In the Expert Component, qualitative data, supported by sound, experienced underwriter opinion, are imported.

The first level of analysis includes the study of several financial variables as calculated by CRM. These variables are examined in terms of (a) their absolute values, (b) their historical trend and volatility, and, finally, (c) at a peer group analysis. In the second part of CRM, the Relationship Manager answers qualitative questions about the company in order to assess the obligor’s sector, its quality of management, its business environment etc. All these criteria are weighted into the final obligor assessment.

The model controls the consistency of answers given and flags any errors, such as outlier ratios or inconsistencies between disclosed data and qualitative assessment by the RM. It also produces evaluation reports (both of the obligor in general, and of its profitability, capital structure and operations). The model also allows the user to examine thoroughly the company’s cash flow management and debt coverage. The latter are crucial factors in estimating the obligor’s creditworthiness.

Although CRM is a mixed model, its design was based on standard statistical techniques. These included univariate analysis for predictive power of each criterion, multivariate analysis for discovering possible multicollinearity problems, etc. The final mix of qualitative and quantitative variables was done empirically, in order to emphasize, and hence weigh accordingly, the more reliable quantitative criteria. The final model produces a Borrower Rating on a scale of 100.

The model was quantitatively validated by measuring its discriminatory power between “good” and “bad” obligors, using standard statistical metrics (e.g. accuracy ratios, power curves), benchmarking, stress testing and back testing.

CRM’s final calibration aimed to ensure that the average model-based PD (given the grade assigned to each obligor) was close enough to a long term empirical default frequency for Greek corporates (given the historical databases of the Bank). So initially, the Financial Index produced by the quantitative part of the model was mapped to a PD and then, with the addition of the qualitative assessment, the Index was mapped to a Borrower Rating. This scale is then mapped to the 19-grade NBG Obligor Risk Rating.

II. Expert Judgment Model The Expert Judgment Model is used for special cases that cannot be rated by the CRM. They are either not-for-profit organizations (e.g. cooperatives, clubs, etc.) or do not possess financial statements or their activities are based outside Greece and, hence, financial information is received on an ad hoc basis.

Consequently, their rating focuses towards qualitative criteria, supplied by Underwriters and Relationship Managers. Examples of such criteria include:

Sector Risk

Competition

Years in Business

Management stability

Risk Alerts

Credit history of owners and/or affiliates

Customer base concentration

Frequency of financing requests

Credit history of the company

Financial status of owners

The model classifies performing obligors in four risk classes (High, Important, Medium and Low). Its development was based on a rating tool used for liberal professions, personal companies and other small firms that are assessed mainly through qualitative variables like those above.

III. Specialized Lending Slotting Criteria Models According to regulatory directives and the structure of slotting models outlined in the BIS Basle II documents, the Bank has developed two simplified Slotting Criteria models which it uses to rate project and object finance exposures. The families of criteria used do not differ much between the two models and include:

Financial Strength

Political and Legal environment

Transaction characteristics

Strength of sponsor

Asset characteristics

Security package

Environmental issues

The Project Finance model is currently hosted on the Risk Analyst platform, as with other corporate rating models, while the bank is aiming to do the same in the near future with the similar Object Finance model.



21

Both models require the completion of a questionnaire by the relevant authorized Credit Underwriter. Each one of the seven criteria groups receives a score, based on the answers given to each criteria subclass. The weighted sum of all scores, as determined by the Bank, classifies performing exposures into four categories (Strong, Good, Satisfactory and Weak). Infrastructure financing is usually re-rated, if a State Guarantee or a Bank’s Letter of Guarantee has been provided by an Export Credit Agency. The quality of both models has been validated according to the cumulative experience of the Bank in these sectors.

IV. Limited Financials Scorecard The model was initially developed based on historical financial data after 2003 and the Bank started using it in mid 2008. During the first quarter of 2009, it was successfully validated and calibrated. The Bank uses it for “start-ups” with some financial data and for smaller firms that follow simpler Greek GAAP A’ and B’ category General Ledger books and cannot be examined through the more complex CRM.

The predicting power of the model was measured using a series of accuracy ratios, both “in-” and “out of sample”. Its default prediction accuracy was judged to be highly satisfactory.

The evaluation criteria of the model are presented below:

Sector Risk

Competition

Years in Business

Management Stability

Credit History

3 years’ Detrimentals (Credit Bureau score) / Turnover

Signs of credibility deterioration

Financial status of owners

Turnover volatility

Total Debt / Turnover

Net Profit / Total Debt

Behavioural Scoring (if it exists)

The use, whenever possible, of a behavioural score as an independent variable in the model enhances significantly its efficiency on a portfolio level and guarantees a most objective use of all qualitative information stored in the customer databases of the Bank.

4.5.5. Models and Internal Rating process of the Mortgage Portfolio

All mortgages (expect those holding a full and unconditional Hellenic State Guarantee) are rated both at initiation and on a monthly basis thereafter, and classified into peer groups for risk estimation purposes. PD and LGD models are based on the Bank’s historical data and their development sample included the total number of active mortgage loans as of December 2006. Therefore, they are consistent with the Bank’s long term experience in mortgage lending, and have also taken into account the Greek legal framework as well as the Bank’s policies regarding foreclosure of real estate collateral during the past 5 years.

In order to classify the performing mortgage loans (namely, those that are not materially delinquent over 180 days), the following procedure is followed:

1. First, the existence or not of an explicit and unconditional Greek Government Guarantee for both capital and interest (special categories, loans after natural disasters, etc) is examined. Claims that fall under this category are being treated separately.

2. The classification date of the loan is being compared to its granting date. For loans that have not yet reached the first year of their life, step 3 is followed. Otherwise, step 4 is followed.

3. Loans with less than 12MoB are examined according to their application score and are grouped into 4 pools, in ascending order of score and descending PD.

4. For “mature” loans, first the worst delinquency in the last 6 months is calculated. If the account is absolutely current (0 days past due for all six months), step 5 is followed. Otherwise, the loan is grouped into one of 5 pools, accordingly to its maximum delinquency in the preceding 6 months.

5. For totally current facilities, other variables are considered, like the existence or not of a rate subsidy by the State and the percentage of total loan life that has already matured. Depending on those, current loans are then classified into four pools according to these risk characteristics.

The Bank’s application scorecard is used in the assessment of every mortgage application (except those guaranteed by the Greek Government or granted using Third Parties funding – OEK Loans) and examines variables such as family status, profession and income of the applicant, the existence or not of a Guarantor or / and of a Co-applicant, the purpose and the period of the loan and finally the sum of overdue debts and their origin (vintage). The development of this scorecard was based upon accepted mortgage applications between July 2003 and June 2004, whose performance was observed until December 2005. Loans were classified as “good”, if there was no delinquency of more than two instalments at any time during this period (60 dpd), while loans with delinquency greater or equal to four instalments (120 dpd) during this same period were classified as “bads”. The scorecard was recently validated using data from December 2006 to May 2009 and its high discriminating power was confirmed.



22

On the contrary, for loans over 12 months on book, it was deemed that their application score alone didn’t represent satisfactorily the risk undertaken. Therefore, more data were collected, some of them regarding the obligor (sex, occupation, number of children, education, etc), some regarding the specific loan product (product code, instalments, duration of the loan, etc) and finally, most importantly, recent delinquency data for the account. The purpose of this analysis was to investigate the ability of these independent variables to predict default, one year later. The estimated PD for each such group was then based on the long-term average of such observations.

For LGD classification, the procedure followed for all mortgage loans, including the defaulted ones (according to the above-mentioned definition) in a pool with a common LGD, is conducted as follows:

1. First, all facilities are classified into “performing” and “in default”, depending on the delinquency they present during the classification date. Step number 2 is followed for the first group and step number 3 for the second group.

2. Performing loans are further divided into two groups, depending on the existence or not, of a Greek Government interest rate subsidy.

3. The time non-performing loans have spent in default status is being calculated and they are being classified according to it.

Loss Given Default (LGD) is then calculated as the difference between 100% and the average recovery rate over the exposure at default. Recovery rates are calculated cumulatively for different time horizons, starting from the default date itself. Namely, the Bank calculates the percentage that can be recovered in 1, 2 or more years after default until the Collection Division of the Bank exhausts its legal actions and therefore nothing more can be collected.

To develop the LGD model, all loans that presented material delinquency above 180 days from 1990 till today and had completed at least one year in default status were used. This increased significantly the robustness and power of the results. all relevant cash flows (revenues and costs) that arose after default and until their final settlement, were taken into account in recovery estimates. Given the long time period that intervenes between default and future cash flows, the time value of money is definitely of importance. Hence, all cash flows were discounted back to the original default date, and their present value compared to the outstanding debt at the time of default, for the recovery rate to be calculated. These calculations were performed on an account basis and not on a counterparty level.

The following table presents information regarding the IRB portfolios as per 31.12.2010 (in € thousands):

Exposures to Corporates (Foundation IRB)

Risk Rating* Amount to be weighted** Weighted Average Risk Weight

A 482,085 45.4%

B 2,225,108 82.5%

C 8,643,574 121.0%

D 3,537,367 166.3%

E 357,657 196.5%

F*** 1,193,612 0.0%

Total 16,439,403 116.2%

* Rating A regards obligors with low credit risk. Rating F regards obligors in default.

** Amount to be weighted is the exposure amount after taking into account the credit risk mitigation and the credit conversion factors according to the GA/BoG 2589/20.08.2007 *** Under the IRB Approach the risk weight for assets in default is zero.

The Corporate Rating System operates since the beginning of 2007 and its results are monitored quarterly. Its last validation was completed using September 2009 data and its predictive / discriminating power is still satisfactory. Observed corporate default rates during the last year are relatively stable and fall within the expected confidence intervals of PDs for each rating class.

Specialized Lending Exposures (Slotting Criteria) (€ ‘000s)

Risk Rating Amount to be weighted* Weighted Average Risk Weight

Strong 1,616,811 68.1%

Good 645,718 87.8%

Satisfactory 116,240 115.0%

Weak 505 250.0%

In Default** 20,077 0.0%

Total 2,399,351 75.1%

* Amount to be weighted is the exposure amount after taking into account the credit risk mitigation and the credit conversion factors according to the GA/BoG 2589/20.08.2007 ** Under the IRB Approach the risk weight for assets in default is zero.



23

Mortgage Portfolio (Advanced IRB) (€ ‘000s)

Risk Rating Pool (according to PD) Amount to be weighted* Weighted Average Risk Weight Avg. LGD

Very Low 9,829,685 2.0% 12.8%

Low 1,177,124 11.0% 12.2%

Average 3,232,105 19.7% 12.8%

Medium 1,160,380 43.0% 12.9%

High 2,217,312 74.6% 13.1%

In Default** 1,296,046 0.0% 22.3%

Total 18,912,652 16.5% 13.4%

* Amount to be weighted is the exposure amount after taking into account the credit risk mitigation and the credit conversion factors according to the GA/BoG 2589/20.08.2007 ** Under the IRB Approach the risk weight for assets in default is zero.

Since PD and LGD estimates for mortgage loans are based on Bank’s proprietary data covering a very long time period (over 15 years), no need for recalibration of these risk parameters has arisen till now, on a pool or grade level.

4.6. Credit Risk Mitigation techniques

Since 2007, NBG uses a specialized Collateral management system, for both corporate and retail exposures. The systems aims to:

Record the Bank’s collaterals

Establish a contract - collateral connection

Monitor collaterals’ market value and estimate their coverage ratio

Assess in a qualitative manner all collaterals

Provide information to the Branch, the Approval Authority and the Bank in general, regarding the obligor’s collaterals

Retrieve necessary data for the estimation of capital requirements per facility

Monitor the obligor’s position automatically, based on clear specifications

Collateral Management includes registering, searching, altering and deleting information regarding collaterals. Additionally, the system not only provides a large number of control elements, reducing operational risk, but also keeps track of all securities offered to the Bank, both currently active and matured. As far as collateral valuation is concerned, the system calculates and/or keeps the following values per collateral:

Value as of input day;

Current market value (for traded securities, etc.)

Security / Guarantee value, lower than the current value by fixed proportions, based on ease of collateral liquidation, if need arises;

Market value, Tax value, Forced Sale value, Land and Buildings value and Construction Cost for all real estate.

NBG mainly accepts the following instruments (funded and unfunded) for mitigation of credit risk :

Guarantees from: o Physical and Legal entities, both from the Private and Public Sector o Central governments, Local authorities and Public Sector entities o Financial institutions o Greek Government and Public Fund for Very Small Enterprises (TEMPME)

Pledges of o Securities (cheques and bills of exchange) o Deposits o Shares of stock, Mutual fund shares and Non-tangible securities (bonds, etc.) o Claims against the Central Government, Public and Private Sector Entities o Goods, Exported claims and Leases o Letters of Guarantees and Trademarks o Claims on Insurance Contracts o Claims from Credit Cards’ sales

Liens o On Real Estate and Ships

Other o Discounting of Bills of Exchange o Cash coverage o Withholding of ownership



24

Credit and Counterparty Risk exposures secured by eligible credit risk mitigation instruments (collateral and guarantees) as of 31.12.2010 (in € thousands) were as follows:

Exposures to Eligible financial collateral

Other eligible collateral

Guarantees Secured by Real Estate

Central governments and Central banks 453,576 - - -

Regional governments, local authorities and PSEs 720,008 - 949,220 -

Financial institutions 2,462,591 - 9,363 -

Retail banking 443,573 - 2,205,636 -

Secured by real estate property - - - 6,880,134

Residential Mortgages (Advanced IRB) - - - 18,972,052

Corporates (Standardized Approach) 940,174 - 25,545 -

Corporate (Foundation IRB) 287,484 645,211 1,586,546 2,054,326

Past due items 5,865 - 165,973 681,799

Equities, participations & other items 15 - - -

Total 5,313,286 645,211 4,942,283 28,588,311



25

5. COUNTERPARTY CREDIT RISK

For the efficient management of counterparty risk, the Bank has established a framework of counterparty limits. The GMORM is responsible for the setting and monitoring of the limits.

Counterparty limits are set based on the credit rating of the financial institutions. Credit ratings are provided by well-known ECAIs and more specifically by Moody’s and Standard & Poor’s. According to the Bank’s policy, if there is a disagreement about the creditworthiness of a financial institution, only the lowest one is taken into consideration.

The counterparty limits apply to all financial Instruments in which the Treasury Division is active in the interbank market.

The limits framework is revised according to the business needs of the bank and the prevailing conditions in the international financial markets.

A similar limit structure for the management of counterparty risk is enforced across all of the Group’s subsidiaries.

For capital requirements calculation purposes the Group calculates the exposure amount by applying the Mark-to-Market (MtM) methodology.

The process followed includes:

1. Data gathering from the Risk Management systems

2. Performance of quantitative and qualitative checks

3. Application of the MTM methodology according to BoG Governor’s Act 2594/20.8.2007 Section B taking into account master netting agreements

In order to mitigate counterparty risk, the Bank signs standardised agreements, such as ISDA and GMRA, with its counterparties in OTC transactions which include all the necessary netting and margining clauses. Additionally, for the most active counterparties in OTC derivatives, Credit Support Annexes (CSAs) have been put in effect so that on the basis of daily valuations, net current exposures are being managed through margin accounts where cash or debt collaterals can be reciprocally posted.

The following table presents the OTC derivatives exposures of the Bank subject to counterparty credit risk (€ `000):

Pre-Netting Exposure*

Netting effect** Post-Netting Exposure

Collateral Received (Paid)

Total exposure after netting

and CSA application

Derivative contracts under ISDA and CSA

1,125,870 935,186 190,684 (427,947) 618,631

Other derivative contracts 436,626 66,655 369,971 - 369,971

Total 1,562,496 1,001,841 560,655 (427,947) 988,602

*The sum of exposures with positive value for the Bank.

**The netting effect is calculated separately for each counterparty.



26

6. SECURITIZATION

During 2008 and 2009, the Bank securitized part of its Greek State loans and receivables, and consumer loans and credit cards portfolio in order to derive liquidity from the European Central Bank (ECB) and the Bank of Greece (BoG). Furthermore, the Bank had securitized part of its corporate loans, but the transaction was unwound in 2010 and the related notes were cancelled.

The balances of assets securitized by the Bank (under traditional securitization) are presented below:

€ ‘000s Consumer Loans 1,161,510

Credit Cards 1,244,399

Receivables from Public Sector 5,718,671

Total 8,124,580 The Bank has not proceeded with any synthetic securitization.

Securitized assets (Greek State loans and receivables, and consumer loans and credit cards portfolio) as well as the associated credit risk have been transferred to Special Purpose Entities (SPE) namely “Titlos Plc” and “Revolver APC Limited”. The transfer of assets by the Bank was performed at book value and therefore there was no P&L effect. The Bank apart from taking the Servicer and Custodian role within the securitisation process has further purchased all notes issued by the SPEs and therefore the securities issued by the SPEs are not included in the Bank’s liabilities. In case investors purchase these securities, their asset will be against the original obligors, meaning those whose obligations have been transferred to the SPEs. T he Bank uses the securities issued by the SPEs as collateral for its borrowing from the ECB and the BoG. By purchasing the notes from the SPEs the Bank retains the related credit risk and hence continues to present them on the Balance sheet as “Loans and advances to Customers (net)”. Due to the aforementioned treatment there are no interests relating to the securitisation.

The role of the Bank within the securitization process is summarized below:

Seller

Servicer and custodian

Swap provider

The Bank is also involved in the securitization process as the:

Subordinated loan provider

Owner of the securitization notes

The securitization portfolios have been rated by the following rating agencies :

1. Receivables from Public Sector: Moody’s Investors Service Ltd

2. Credit Cards and Consumer Loans: Fitch Ratings Ltd

The whole securitised portfolio has been retained and there have been no redemptions. Since there has been no material transfer of credit risk, risk weights were not calculated pursuant to BoG Governor’s Act 2593/20.8.2007 but pursuant to BoG Governor’s Act 2588/20.8.2007 and BoG Governor’s Act 2589/20.8.2007 respectively.

The total balance of the securitised revolving assets amounts to €2.405.909 thousand and can be categorized as follows:

€1.768.900 thousand relates to investor’s interests

€637.009 thousand relates to the transferor’s interests of the Bank (Seller)

In cases where the Bank is an investor to securitization positions, the Ratings Based Approach is applied for the calculation of the weighted exposure. In those cases, the ratings of the following rating agencies are used:

Standard & Poor's

Moody's Investors Service Ltd

Fitch Ratings Ltd

In cases where the Bank is investing in securitization positions, the Ratings Method of GA/BoG 2593/20.08.2007 is used for the calculation of the risk weighted amount.



27

7. MARKET RISK

The regulatory framework in Greece permits the use of internal models for the calculation of the capital charges against the Market Risk of the Trading Book. In this context, the Bank received the initial approval for the use of an internal model by the Bank of Greece in July 2003, after a thorough examination of both the model and the results it produced. In 2005, the Bank of Greece re-evaluated the model, due to the replacement of the former risk system by RiskWatch created by Algorithmics. The second approval was received in October 2005. Additionally, the Internal Audit Division conducts reassessments of the model on a regular basis. The calculation of the subsidiaries’ capital requirements is performed with the Standardized Approach.

The table below presents the market risk capital requirements as of 31.12.2009 (€ thousands).

Market Risk Capital Requirements

Issuer specific risk on traded debt instruments 13,914

General risk on traded debt instruments in relation with maturity 19,954

Duration based approach for general risk on traded debt instruments -

General risk on equity instruments 2,684

Issuer specific risk on equity instruments 3,598

Position risk in CIUs, hedge funds, structured products, Gamma & Vega risks and margin requirements on derivatives 12,389

Settlement / delivery risk for free delivery exposures -

Settlement / delivery risk for debt securities, equities, foreign currencies and commodities -

Foreign exchange risk 56,983

Commodity risk - maturity ladder approach -

Commodity risk - extended maturity ladder approach -

Commodity risk - simplified approach -

Large exposure excesses -

General and specific risk, foreign exchange risk and commodity risk calculated with the Internal Model (Value at Risk) 129,624

Total capital requirements for market risk 239,146

Since 22.9.05, as the Board of Directors decided, RiskWatch is the official system for the calculation of the Bank’s capital requirements against the Market Risk of the Trading Book.

More specifically, the Bank has adopted the variance-covariance methodology with a 99% confidence interval and a 1-day holding period. The VaR estimates are used internally as a risk management tool, as well as for regulatory purposes. For internal use, the Group Market and Operational Risk Management Division calculates on a daily basis the VaR of the Bank’s Trading and AFS portfolios, using 75 exponentially weighted observations and taking into account the specific risk of equities.

For regulatory purposes, the VaR estimates refer only to the Bank’s Trading portfolio - excluding the specific risk – and the calculations are based on 252 equally weighted observations. In the Table below are presented the regulatory VaR estimates (99%, 1-day) for 2010 in € thousands:

Daily values Total VaR Interest Rate Risk VaR Equity Risk VaR Foreign Exchange Risk VaR

31st

December 2010 12,766 10,882 3,369 767

Average 10,326 8,054 4,093 1,236

Maximum 14,981 12,431 5,751 2,341

Minimum 6,754 5,152 2,929 767

Capital charges for specific risk are calculated with the Standardized Approach.

The variance-covariance methodology could be summarized as follows:

1. Collection of transactional data per type of product;



28

2. Identification of the risk factors the price changes of which could affect the value of the portfolio. As risk factors the interest rates, the prices of the equity indices and the foreign exchange rates are recognized;

3. Collection of market data for the instruments/positions valuation;

4. Specification of the confidence interval and the holding period for the VaR calculations; confidence interval: 99% and holding period: 1-day;

5. Estimation of the model’s parameters, which are the following:

a. the variance of each risk factor, from which the respective volatility derives;

b. the covariance of the risk factors, from which the respective correlation derives;

c. the beta factor of stocks;

d. the volatility for the estimation of specific equity risk.

6. Estimation of the VaR per type of risk (interest rate risk, equity risk, foreign exchange risk);

7. Estimation of the Total VaR, taking into consideration the correlation matrix among all risk factors.

The calculation of the model’s parameters relies on the following statistical assumptions:

1. The returns on individual risk factors follow a normal distribution.

2. The payout of investments is considered to be linear.

According to the guidelines set by the Bank of Greece, the capital charges for Market Risk are calculated on a quarterly basis and equal the highest of the following figures: a) the VaR of the previous day, with a 10-days holding period, b) the average VaR of the last 60-days, using a 10-days holding period and multiplied by factor k, which is determined by the Bank of Greece and may vary between three (3) and four (4).

Additionally, the GMORMD also calculates the VaR of the Bank’s portfolios by applying the Historical Simulation approach, for comparative purposes.

7.1. Stress Testing

The daily VaR estimations refer to “normal” market conditions. However, supplementary analysis is necessary for capturing the potential loss that might incur under extreme and unusual circumstances in the financial markets. Thus, the Group Market and Operational Risk Management Division conducts stress testing on a weekly basis, through the application of different scenarios depending on the type of risk factor (interest rates, stock index prices, exchange rates). Stress testing is performed on both the Trading and the AFS portfolios, as well as separately on the positions of the Trading Book.

The scenarios used are in compliance with the IMF guidelines and capture the three basic types of market risk, as shown in the following table.

Scenario Description

Interest Rate Risk

0 – 3 months 3 months – 5 years Over 5 years

1 Parallel Curve shift +200 bps +200 bps +200 bps

2 Parallel Curve shift -200 bps -200 bps -200 bps

3 Steepening of the curve 0 bps +100 bps +200 bps

4 Flattening of the curve +200 bps +100 bps 0 bps

Equity Risk

1 -30% for all indices

Foreign Exchange Risk

1 EUR depreciation by 30%

Moreover, stress test analysis is also performed by FinansBank on a monthly basis, on its Trading and Available for Sale portfolios. The scenarios refer to extreme movements of interest rates and foreign exchange prices and are based on the latest financial crises which have taken place in Turkey.



29

7.2. Back testing

In order to verify the predictive power of the VaR model which is used for the calculation of the capital requirements for Market Risk, the Bank conducts back testing on a daily basis. The aim of back testing is to examine whether the hypothetical change in the value of the portfolio, due to the actual movements in the prices of the underlying risk factors, is captured by the VaR estimate of that day.

In accordance with the guidelines set by the BoG, the calculations refer only to the Bank’s Trading portfolio and are based on 252 equally-weighted observations.

The procedure of back testing is summarised as follows:

1. Calculation of the hypothetical gains/losses on the Bank’s Trading portfolio between days t and t+1

2. Comparison of the hypothetical gains/losses with the Total VaR estimate, as it was calculated by RiskWatch

In the case where the back testing result exceeds the VaR estimate, the model has underestimated the potential loss and is deemed to have failed. Any excess is immediately reported to the Bank of Greece, within five (5) business days. Back testing is applied on the Bank’s end-of-day positions and does not take into account the intra-day transactions.

Back testing showed that, during the year 2010, the P/L amount (loss) exceeded the VaR estimate only twice in a total of 253 trading days. Namely, on August 23

rd and on September 21

st, the end-of-day loss of the Bank amounted to €14.5 mio and to €13.6 mio,

respectively, when the VaR estimates for the same days equaled €12.3mio and €12.6 mio, respectively. Both excesses were attributed to the decrease of the EUR interest rates in a greater extent than the one predicted by respective volatilities used by the internal model.

FinansBank also performs back testing on a daily basis, on its Trading and Available for Sale portfolios.



30

8. EQUITY EXPOSURES NOT INCLUDED IN THE TRADING BOOK

Investments in shares that are not included in the trading portfolio are included in the available for sale portfolio. These investments are held with the intention of achieving capital gains. The available for sale investments in shares are initially recognized and subsequently measured at fair value. Initial measurement includes transaction costs. The fair value of available for sale investments in shares that are quoted in active markets is determined on the basis of the quoted prices. For the shares that are not quoted in an active market the fair value is determined, where possible, using valuation techniques, taking into consideration the particular facts and circumstances of the issuers of the shares. The carrying amount of available for sale equity instruments that are listed on an exchange equals the market value. The carrying amount is analyzed between listed and not listed securities as follows:

€’000s

Listed 292,984

Not Listed 89,085

Total 382,069

The total amount of realized gains from the disposal of available for sale equity instruments for the year 2010 is €1,310 thousand. The net amount of unrealized losses in the Group’s equity as at 31 December 2010 is €89,846 thousands after tax.



31

9. INTEREST RATE RISK IN THE BANKING BOOK

The Bank uses the IPS-Sendero SVAL system to calculate the interest rate risk in the banking book for the Bank’s activities in Greece and London, on a quarterly basis. The system takes into account all assets, liabilities and applies a sensitivity analysis. The interest rate risk is calculated on the basis of the contractual repricing terms i.e. the next repricing date if the instrument is floating rate or the maturity if the instrument is fixed rate.

The main assumptions made for the calculation of the interest rate risk in the banking book are:

No prepayment assumptions are in place -even if the model supports them- since the historical data show that the prepayment risk is not significant;

Accounts with ambiguous maturity reprice in the first gap period i.e. 1 month;

Net Interest Income (NII) from teaser mortgage loans categories is calculated taking into account the effective interest rate, so they are considered as adjustable in the first gap period i.e. 1 month;

All bank-determined rates reprice in the first gap point.

The Bank calculates the sensitivity of interest rate risk by applying various shocks and changes on interest rate curves –for Euro and other currencies- and calculates the Net Interest Income and the Economic Value of Equity effects.

The sensitivity analysis of the Net Interest Income as of 31.12.2010 is presented below:

Change in interest rates

(€ market rates, ECB refin. rate)

Net Interest Income Sensitivity

(change from basic scenario)

± € mio %

+50 bps +8 +0,4%

-50 bps -7 -0,4%

Documents

NATIONAL BANK OF GREECE S - ΕΤΕ - Αρχική Σελίδα · PDF filep’s commitment to pursue ... oG Governor’s Acts ... National Bank of Greece (Cyprus) Ltd Financial Institution