ABCP - Asset-Backed Commercial Paper

ADC - Acquisition, Development and Construction

Aggregation Policy - Our Bank policy is designed to ensure that credit exposures - where
ownership, management, operational or security links have the potential to create a common
risk of default - are identified and aggregated for the purposes of credit risk management.

AMA - Advanced Measurement Approaches

ANZSIC - Australian and New Zealand Standard Industry Classification.

APRA - Australian Prudential Regulation Authority. The National Supervisor of all Australian
financial institutions.

ASA - Alternative Standardised Approach

Basel Committee - A committee that meets at the town of Basel in Switzerland to define the
best practice for behaviour and processes of all financial institutions world-wide. The Basel
Committee sets recommendations (accords) that are designed to make the risk and capital
positions of financial institutions consistent and more transparent.

Bilateral Netting - An agreement between two parties under which they exchange only the
net difference between what each other owes. The objective is to reduce exposure to credit
and settlement risk.

Borrower Grade - A Basel term for the assessment of borrower risk on the basis of a
specified and defined set of rating criteria, from which Probability of Default (PD) estimates
are derived. The Bank uses the term 'CQC'.

CCF - Credit Conversion Factor

CDR - Cumulative Default Rate

CF - Commodities Finance

Cherrypicking - Refers to the practice of selecting items favourable to the circumstance

whilst renouncing less favourable obligations. Netting and offset agreements used in swaps
have been structured to prevent cherrypicking.

Close-out Netting - The ability to net a portfolio of contracts with a given counterparty in
the event of default. See also Bilateral Netting.

Collaterisation - A means of securing credit exposure to a counterparty. Under a

collateralisation agreement, a party who owes an obligation to another party posts collateral -
typically consisting of cash or securities - to secure obligations. Such arrangements commonly
differ from conventional secured credit facilities in that title to the collateral passes at the
time of lodgment. Collateral is sometimes referred to as margin.

Commercial Property Exposure - APRA definition: exists when a facility has been provided
for the development, acquisition or improvement of landed property (real estate), and the
servicing and repayment of the facility is dependent on the cash flows generated by the
property itself through sale or rental income, and/or from cash flows generated from other
properties owned by the borrower.

Committed Facility - A facility where the Bank has given a formal commitment to the client
to provide credit, subject to the terms of approval being adhered to (ie. the facility cannot be
withdrawn without mutual agreement between the client and the bank or unless default has
occurred). Most Bank lending is committed.

Correlation - A measure of the degree to which changes in two variables are related,
normally expressed as a coefficient between positive one - which means variables are
perfectly correlated in that they move in the same direction to the same degree - and
negative one - which means they are perfectly negatively correlated in that they move in
opposite directions to the same degree.

Correlation Risk - The risk that the price of something will change because of a change in
the correlation. This can be offset by correlation hedging.

Counterparty - A counterparty is an entity - individual or organisation - with which one

transacts business. Used interchangeably with 'client' and 'debtor'.
CQC - Client Quality Classification, a Bank term that represents the client's Probability of
Default (PD) using an alphabetic system. For instance, a CQC of 'A' indicates a low probability
of default, whilst a CQC of 'G' may indicate a 30% probability of default.

Credit Default Swap - Also known as credit default puts, since they share characteristics of
both swaps and options. Irrespective of their exact pedigree, they pay out if a credit event
occurs. The credit event might be a downgrade or default of a reference credit asset.

Credit Derivative - Credit derivatives are off-balance sheet arrangements that allow one
party (the 'beneficiary') to transfer the credit risk of a 'reference asset', which it may or may
not own, to another party (the 'guarantor'). This arrangement allows the guarantor to assume
the credit risk associated with the reference asset without directly purchasing it. Credit
derivatives include instruments such as Credit Default Swaps, Credit Linked Notes and Total
Rate of Return Swaps.

Credit Equivalent Amount - In relation to an uncommitted facility, it refers to the amount

applied to a principal amount (or notional principal amount) in order to quantify the maximum
likely amount or replacement cost for which the bank would be exposed if the client
(counterparty) failed to meet its obligations at any time during the remaining term of the
contract.

Credit Mitigant/Enhancement - A credit enhancement is a provision that is added to a deal

in order to protect parties to the deal from a possible default by another of the parties. Credit
enhancements are often incorporated in OTC derivatives, Bonds, Asset Backed Securities and
other instruments. Many exchange traded instruments such as futures and standardised
options incorporate margining requirements or position limits that enhance credit protection.
Examples of credit enhancements include collateral, Third Party Guarantees, Netting
Agreements etc.

Credit Risk - The risk that an obligation will not be paid and a loss will result.

Credit Underwriting Standard - Sets out the standards applicable to credit risk assessment
throughout the Bank. The underwriting standards set specific tests relevant to the class of
business they address, covering portfolio suitability, income/repayment capacity,. acceptable
repayment terms, and collateral security cover/protective facility covenants.

CRM - Credit Risk Mitigation

CRR - Clients in the non-retail portfolio of the Bank are subject to risk assessment, which
assesses the probability of default (“CQC”) and security provided (“SEC/C”). Each
combination of CQC and SEC/C has a CRR score of 1 to 9 and gives an indication of the
Expected Loss for the credit.

Default - A default is considered to have occurred when a particular obligor/borrower has

both or either events take place: (i) the Bank considers the obligor is unlikely to pay its credit
obligations in full, without recourse by the Bank to actions such as realising security (if held);
and/or (ii) the obligor is past due more than 90 days an any material credit obligation. For
retail exposures, default can apply at the level of a particular facility. For non-retail
exposures, default by the borrower on one obligation requires the Bank to treat all other
obligations as defaulted (refer Aggregation Policy).

Derivative Facility - A derivative instrument or product is one whose value changes with
changes in one or more underlying market variables, such as equity or commodity prices,
interest rates or foreign exchange rates. In mathematical models of financial markets,
derivatives are known as contingent claims.

EAD - Exposure At Default, the expected gross exposure of a facility upon default of the
obligor. The calculation of EAD differs for on-balance sheet and off-balance sheet exposures.
For on-balance sheet items such as commercial loans, the EAD estimate generally equates to
the current drawn amount. For off-balance sheet exposures, such as unused loan
commitments, banks are required to apply credit conversion factors to the unused exposure
amount in order to generate an EAD.

ECA - Export Credit Agency

ECAI - External Credit Assessment Institution

Economic Capital/ Equity - Relates typical variations (taking into account rates and prices
changes) to extreme loss levels to measure the amount of equity required within the Bank.
EDF - Expected Default Frequency is the probability of default over a given horizon (usually
one-year). There is a relationship between EDF and Bank’s CQC - a unique
numerical/percentage EDF is applied to each alphabetic CQC. The Basel Accord term is
“Probability of Default (PD)”.

EL - Expected Loss, the average loss the Bank would expect to incur over time and is a
measure of the loss that is likely for the current Risk Rating of a credit facility. The Expected
Loss is the product of the EDF and LGD. Eg. If clients in a portfolio segment have a 30% EDF
(Probability of Default) and 45% Loss Given Default (see “Security Classification”) then the
Expected Loss is 13.5%. These numbers form the basis for provisioning.

Exposure - A measure of total risk, the maximum possible loss.

Facility - Any financial instrument.

FMI - Future Margin Income

Haircut - (1) In determining whether assets meet capital requirements, a ‘haircut’ is the
percentage reduction in the stated value of the assets; (2) In computing the worth of the
assets deposited as collateral or margin, a ‘haircut’ is any reduction from market value.

Hedge - To hedge is to reduce risk by making transactions that reduce exposure to market
fluctuations; for example, an investor with a long equity position might compensate by buying
put options to protect against a fall in equity prices. A hedge is also the term for the
transactions made to effect this reduction.

HVCRE - High Volatility Commercial Real Estate

Industry Risk - Risks associated with the maturity of an industry, dependence on other
industries, vulnerability to substitute products, and vulnerability to the economic cycle.

Interest Rate Risk - The risk that interest rates fluctuate effecting funding costs and
investment returns.

IPRE - Income Producing Real Estate

IRB - Internal Ratings-Based approach

Large Credit Exposure Policy - LCEP forms part of the Bank’s approach to the portfolio
management of its credit assets. LCEP places an upper limit on the amount of loss that can be
sustained from any single customer group. This limits the origination level, able to be
approved by management for an individual customer group at any time. The policy
discriminates by term, EDF and LGD.

LGD - Loss Given Default. Refers to the net amount that the lending counterparty should
expect to lose in the event of default. There is a relationship between LGD and the Bank’s
SEC/C. eg. SEC/C ‘A’ may equate to an LGD of 5%, which means in the event of default 5%
of the exposure is not recoverable.

Liquidity Risk - The ability to readily turn an investment into available cash.

Liquid Portfolio - The portion of a portfolio available for optimisation.

Loss - Usually refers to the economic loss of an obligation. This includes discount effects and
direct and indirect costs associated with collecting on the exposure.

LVR - Loan to Value Ratio. Amount of the loan as a ratio compared to the value of the
security. E.g. A home may be worth $500k compared to the loan given of $100k.

M - Effective Maturity. The date on which the life of a financial instrument is expected to end
(i.e. have no value) through cash or physical settlement or expiration. As opposed to
contractual maturity, the date the financial instrument is due to end.

MDB - Multilateral Development Bank

Netting - A process by which all outstanding transactions between two or more

counterparties are combined and reduced to a single (net) total for one party to pay or
receive. This process is formalised in a netting agreement whereby a single legal obligation is
identified. Netting is used to reduce counterparty credit exposure.

NIF - Note Issuance Facility

OF - Object Finance

Operational Risk - The risk run by a firm that its internal practices, policies and systems are
not rigorous or sophisticated enough to cope with adverse market conditions or human or
technological errors. Although operational risk is not as easy to identify or quantify as market
or credit risk, it has been implicated as a major factor in many of the highly publicised
derivatives losses of recent years. Sources of operational risk include: failure to correctly
measure or report risk; lack of controls to prevent unauthorised or inappropriate transactions
being made (the so-called “rogue trader” syndrome); and lack of understanding among key
staff.

PD - Probability of Default. The Basel Accord term equivalent of Expected Default Frequency
(EDF).

PF - Project Finance

Portfolio Management - Involves active management of credit risk in the Bank’s loan
portfolio; analysis of risk return profiles; monitoring of industry concentrations and ensuring
diversification of the portfolio.

Presettlement Risk - This is a form of credit risk in that a counterparty will default on an
OTC (Over The Counter) derivative contract prior to the contracts settlement at expiration.
For example, a counterparty might default on an interest rate swap by failing to make a due
interest payment.

Provision - Specific provision: A specific provision is raised against a loan or advance where
full recovery of the principle and interest is considered doubtful. The specific provision
generally must equal the debt plus costs of recovery, less any reserved interest and expected
recovery from security. Interest on these loans cease to be taken to profit unless paid in cash.
General provision: A general provision is made to cover non-identified losses and latent risks
inherent in the credit portfolio.

PSE - Public Sector Entity

QRE - Qualifying Revolving Exposures. A Basel Accord term for a sub-portfolio of exposures
that are to individuals and are revolving (balances fluctuate based on a customer’s decision to
borrow and repay), unsecured, and uncommitted (both contractually and in practice). Credit
Cards is the only Bank product that falls into this sub-portfolio.

RAROC - Risk-Adjusted Return on Capital. Is a risk-adjusted profitability measurement and

management framework for measuring risk-adjusted financial performance and for providing
a consistent view of profitability across businesses (strategic business units/ divisions).
RAROC is defined as the ratio of risk-adjusted return to economic capital.

Rating System - A Basel Accord term comprising all of the methods, processes, controls,
and data collection and IT systems that support the assessment of credit risk, the assignment
of internal risk ratings, and the quantification of default and loss estimates.

RBA - Ratings-Based Approach

Re-aging - The Bank may choose to re-age a facility in terms of granting extensions,
deferrals, renewals and rewrites to existing accounts.

Reverse (Repo) - Is a term used to describe the opposite side of a Repurchase Agreement
(Repo) transaction. The party who sells and later purchases a security is said to perform a
repo. The other party who purchases and later resells the security is said to perform a reverse
repo.

- Return On Group Target Equity. The return gained from the assets of the Bank Group. This
rate is used as a “hurdle rate”, in that if the ROTE for a business unit is less than the ROGTE,
then the business unit is under-performing.

ROGTE - Return On Group Target Equity. The return gained from the assets of the Bank
Group. This rate is used as a “hurdle rate”, in that if the ROTE for a business unit is less than
the ROGTE, then the business unit is under-performing.

ROTE - Return on Target Equity. A tool which can be used in the Bank as a business unit or
Bank measure of equity.

RWA - Risk Weighted Assets. Facilities that are weighted according to the type of borrower,
type of product and term of the loan.
RUF - Revolving Underwriting Facility

Secondary Exposure - Exposures of a counterparty (such as a guarantee) used to support

loans and advances (exposures) to a second counterparty with the Bank. In some cases, the
counting of both the prime and secondary exposures will constitute double counting of the
underlying exposure position of the Bank.

Security - Typically when the Bank lends money, it takes security. This is the Bank's
backstop in case the borrower cannot or will not repay the loan (the Bank may then have to
sell the security to obtain repayment of the loan).The Bank lends on both a secured and
unsecured basis.

SEC/C - Security Classification is a measure of the level of support for a credit facility
provided by the security held. For each rating there is an associated Loss Given Default
percentage assigned (eg. with a client rated SEC/C of “E” the loss expected may be 45% of
the amount outstanding). It is a component of the Bank’s CRR system.

Set-Off - A credit facility(ies) where there is a legal arrangement to use client’s credit funds
to off-set the obligations of the counterparty to the Bank.

SF - Supervisory Formula

Sharpe Ratio - A measure of return per unit of risk, where return is defined as the average
return, and risk is measured by the standard deviation of the returns (Risk Contribution).
Named after William P. Sharpe.

SL - Specialised Lending

SME - Small- and Medium-sized Enterprise

SPE - Special Purpose Entity

Tier 1 Capital - Each Australian bank is currently expected to maintain a minimum ratio of
8% of total capital to risk weighted assets. 4% of this total capital should be Tier 1 capital
consisting of the following items:- paid-up ordinary shares, non-repayable share premium
account, general reserves, retained earnings, non-cumulative irredeemable preference
shares, minority interests in subsidiaries with these components, and may also include
innovative capital instruments.

Tier 2 Capital - Each Australian bank is currently expected to maintain a minimum ratio of
8% of total capital to risk weighted assets. 4% of this total capital should be Tier 1 capital.
Tier 2 capital consists of the following items:- cumulative irredeemable preference shares,
asset revaluation reserve, general provision for doubtful debts, hybrid capital instruments
such as convertible notes and floating rate notes, term subordinated debt, and deductions
from capital.

UCITS - Undertakings for Collective Instruments in Transferable Securities

UL - Unexpected Loss. It represents the volatility, or is the standard deviation of, the
expected loss value. Note: two facilities can have the same expected loss but different
unexpected loss, or vice versa because of volatility. Usually calculated at transaction or
portfolio level.

Ultimate Risk - An ultimate risk is where ownership, management, operational or security

links have the potential to create a common risk of default. An ultimate risk relationship is
subject to the Bank’s Aggregation Policy.

VaR - Daily measure of risk value, used as a basis of deriving Economic Equity.

Vega - Measures the rate at which the price of an option changes in relation to a small
change in the volatility of the underlying asset or instrument.

Volatility - A synonym for standard deviation (the measure of dispersion of the expected
value). Volatility typically refers to an annualized percentage value.