.credit-suisse Annual Report Part 4 Risk management

ANNUAL REPORT 2000/2001 PART IV CREDIT SUISSE GROUP RISK MANAGEMENT

PART I 2 Financial highlights 2000 4 To our shareholders PART II 6 An overview of Credit Suisse Group 6 Organisation 8 Financial review 11 Strategic review PART III 13 Review of business units 16 Credit Suisse Financial Services 23 Credit Suisse Private Banking 25 Credit Suisse Asset Management 27 Credit Suisse First Boston PART IV 30 Credit Suisse Group Risk Management PART V 50 Consolidated financial statements PART VI 107 Parent company financial statements 118 Five-year summary of selected financial data 120 Management 126 Main offices 127 Information for investors

CREDIT SUISSE GROUP RISK MANAGEMENT Introduction rather their diligent implementation: Financial services – put in a simplified implementation is what makes a com- framework – consist of four basic pany stand out and determines its elements: information, transactions, success or failure. While risk manage- capital and risk. ment will never be “finished” in a com- Nowadays, information is instantly plex and evolving financial environ- Hans-Ulrich Doerig available, ubiquitous and increasingly ment, we aim to institutionalise learn- Vice-Chairman of the cheap. Simply owning information is ing and stay at the edge of “best Executive Board and not enough – only by packaging and practice”. Group Chief Risk Officer interpreting it intelligently and provid- At Credit Suisse Group, we differ- ing value-enhancing advice and deci- entiate between eight tiers of risk tak- sion-making support can a company ing, approval and control: Credit Suisse Group, including its differentiate itself from the competi- business units, pursues a disciplined, tion. Tier 1: Business unit front line with comprehensive and integrated The volume of transactions has prime responsibility for taking and approach to risk management. Signifi- grown dramatically in recent years managing risks. cant personnel and technological around the globe. New technologies resources are focused on ensuring are expanding rapidly, making it even Tier 2: Independent business unit that Credit Suisse Group remains a more important that in-house and support and approval functions includ- leader in risk management. By means out-sourced processes are cost ing product control, strategic risk man- of a proactive risk management effective. agement, counterparty analysis and culture and the appropriate qualitative On today’s open, deregulated cap- approval, legal and compliance with and quantitative tools, the Group aims ital markets, basic access to capital is focus on specific risk areas – all inde- to minimise the potential for unde- no longer an issue for well-run estab- pendent from front line. sired risk exposures and to optimise lished companies. The challenge is to the allocation of capital throughout allocate capital optimally to the differ- Tier 3: Group functions such as over- the Group to the benefit of share- ent activities within the organisation. all risk management, control and chal- holders and other stakeholders. Risk is uncertainty about a future lenging the business units. outcome. It is the essence of financial institutions’ activities. Risk is multifac- Tier 4: Senior management at busi- eted, complex, often interlinked and/or ness unit and group level as well as context-driven. While not avoidable, supervisory boards with focus on the risk is to be managed, not feared. overall risk profile. Intelligent, informed risk taking is the key. Risk is not only about “downside” Tier 5: Independent internal and ex- and threats, but also about chances ternal audit with focus on assessments and opportunities. Taking no risks is and deficiencies. potentially the approach which pres- ents the highest risk. Tier 6: Rating agencies – comparison Good risk management has with competitors. become a decisive competitive advan- tage. It helps to maintain stability and Tier 7: Regulators – supervisors with continuity and supports revenue and the role of an “external referee”. earnings growth. Disciplined and intelligent risk taking is an “attitude” Tier 8: Shareholders and other stake- towards stakeholders. holders as ultimate overall and daily Our research and observations in judges. the financial services industry have led to the “12 organisational principles in risk management” which serve as our general framework in risk management (see chart on page 32). To apply these primarily organisational principles, consistently and globally is our continuous aim. The basis is not the intellectual level of the principles, but 30

Risk management framework come of the mix of doing the right plined culture by promoting integrity The Group has established a frame- thing and doing things right over an and high ethical standards, clear lines work allowing comprehensive and extended period. Strategy and of responsibility and accountability, effective risk control. The chart below reputation/brand risks can be made segregation of duties, appropriate entitled “Risk Management Frame- transparent with methods like relative supervision by senior management, work” illustrates the three main ele- stock performance, relative stock price and strong control systems. ments of Credit Suisse Group’s frame- over book value, relative price earnings The Group’s monitoring systems work. The underlying external and ratio, return on equity, net increase are based on a comprehensive set of internal factors shaping the risk dispo- of number of clients or assets internal controls, with activities such sition of the firm are shown on the left under management, attracting and as approvals, authorisations, compli- of the graph. Then – based on the 12 keeping good staff and rankings of ance checks, and follow-ups on non- core principles of good management – all sorts. compliance clearly defined at every shown in the middle of the graph – the level of business. Internal and exter- risk management organisation and risk Risk culture nal auditors are recognised by the culture were established. Maintaining a Risk management is a multi-faceted Board as critically important agents, firmwide risk management process process that extends well beyond an providing an independent check on providing effective control over the organisation’s formal risk management the information received from line major risks must be the ultimate goal. structure, its standards, processes, management. The chief auditor Given its strategy, Credit Suisse methodologies and tools. The reports directly to the Chairman and Group differentiates among seven mathematical/statistical quantification regularly communicates to the Board priority risk categories as shown on the of risks and consequent setting of of Directors’ Audit Committee. Issues right of the graph: market, credit, appropriate, common sense limits raised by the internal and external insurance underwriting, commission represents only part of the integrated auditors are tracked systematically and fee income and some operational approach to risk management. While and addressed comprehensively. risks are already quantifiable or are Credit Suisse Group aims to stay in Group risk management represents increasingly becoming so. the forefront of any relevant, credible an additional layer of risk manage- Strategy risk deals with the exist- and cost-effective quantification of ment and control, challenging the ing base of an institution and its risk, successful risk management is approach of the business units where options, based on a what-if analysis. much more than producing a “risk or appropriate and relevant in the overall Strategy is doing the right thing at the model figure”. The development and context. As an example, the Group right time, and must be properly imple- maintenance of an appropriate risk and control system requires the follow-up mented. This is an issue for all other control culture is at least as important on serious deficiencies not only by the S's of an organisation, especially their as the most sophisticated quantitative business unit, but also by Group man- synchronisation. Reputation risk is the risk models. agement. aggregation of the outcome of all risks A key factor in risk management If a financial services group is plus other internal and external factors is discipline, including discipline as to to achieve sustained success, confi- based on facts, perceptions and compliance requirements. Credit dence and trust built over the years expectations. Reputation is the out- Suisse Group encourages a disci- are vital. An excellent reputation is Credit Suisse Group’s risk management framework Major factors shaping the risk Scope and challenge of an Effective risk management disposition of an individual and integrated firmwide provides focus on and control an organisation risk management over 7 major risks Values, society Inn & politics Building on the organisation’s 12 S: ov a · Strategy · Stakeholders ion Fa cts Strategy risk tion E xp · Structure · Shared values etit ion e & te · System/s · Skills mp ct a pt chn · Simplicity · Symbols e Co tion Market risk Perc Action and · Safety · Sustainability o Credit risk log s reaction by · Speed · Synchronisation y Insurance underwriting risk management Pol Commission & fee income risk Beha ce and staff Ensuring a risk culture with: icie Operational risk rien · modern methods/limits vi o s& nts pe r · proactive risk management Ex u Cli e reg Know ledge · constructive control attitude Reputation/brand risk ulat · continuous training ion · discipline as to corrective actions s Markets & economy www.credit-suisse.com 31

CREDIT SUISSE GROUP RISK MANAGEMENT hard to gain, but easy to lose. Knowl- edge, expertise, experience, integrity, intellectual honesty and the daily con- The 12 organisational principles in risk management duct of each employee, are crucial elements that contribute to an institu- • No conflicts of interest: While principles should hold firm tion’s reputation. Thus, management independent reporting as to line over time, the dynamics of financial has to lead by example. versus back office/models/price markets command a continuous ex- amination of the principles based on checking/credit decisions/ Internal Code of Conduct experience, observation and re- limits/etc. One of the strengths of Credit Suisse search. The issue is not the intellec- • Integration of risk, insurance, risk Group is the competence and diverse tual level of the 12 principles but mitigation and financial manage- skills of its staff. Despite global diversi- rather their diligent implementation. ment. ty, our corporate culture has to be The identification, measurement, based on common denominators and management and control of risks is shared values. This has led to the 4. Rigorous disciplinary measures in not a programme but a continuous introduction of our internal group-wide case of non-compliance/ process. Code of Conduct, approved by both breaches. the Board of Directors and the Group • Know and play by the rules: A. Executing the fundamentals Executive Board at the beginning of everybody is aware of the conse- 2000. Especially in fast-changing 1. Risk is uncertainty about future results. quences. times, common values help to give the • Risks must be respected, not • Responsibility for adequate individual a sense of focus; they create feared: symmetry between as- control environment not only with identity and a sense of belonging. pired gains and potential losses. immediate heads: Spelling out our six ethical and six it is a management issue at large. performance core values and guiding • Risk=Opportunity: principles on page 34, the Code of intelligent, informed risk taking Conduct extends and supplements with corresponding risk/return. 5. Completeness, integrity and existing compliance manuals, • Convergence of market directions relevance of data/information/ directives, guidelines and policies. much higher in turbulent times: systems as a base. The complete Code of Conduct watch liquidity/flexibility aspects. • Management of risks is impossi- applies to over 80,000 employees, ble without information about and is available in 19 different them: also know what you do not languages. 2. The guiding 6 S’s for the know. systematic mental discipline of an organisation. • What is measured, observed and rewarded gets attention. • Strategy →structure→system(s), simplicity→safety→speed. • Serious data show the following characteristics: complete, objective, consistent, 3. Discipline, clear structure, transparent, comparable across allocation of responsibility the institution, interpretable, and accountability are basic auditable, replicable, teachable preconditions. and, above all, relevant and credi- • Transparency as to policies, ble as to facts and perceptions. procedures and manuals. • The data collection must be in a • Discipline regarding strategy, reasonable cost/benefit or tactics, control and compliance: cost/risk mitigation relationship. “ownership” of issues and risks. • Credibly quantified and relevant • Clear and communicated respon- risks represent an opportunity in sibility and accountability for legal, an overall context: incentive and implicit contracts. without credibility and relevance of data/quantification, scepticism and cynicism abound. 32

• Sourcing, sharing and storing of • “Reductio ad absurdum” may lead 11. Responsible control/risk culture vertical and horizontal information to a “model figure” but most are as important as the most is especially important in times of probably produces the wrong sophisticated risk management staff turnover, restructurings and conclusions for the really relevant tools. mergers. issue. • Only the mastering of all major • Comparison of absolute model risk types contributes to a B. Retaining perspective figures with those of third parties sustained excellent reputation. is questionable; prime value • Mistakes or misjudgements are 6. Newness and/or complexity added of a good model is the in- unavoidable: of a project – combined with ternal trend over time, assuming the ways of correcting them are uncertainty – can add risks. model consistency. part of culture. • Simplicity for average human beings. Complex structures, com- • Risk-return culture for everybody. plex restructurings and systems 9. Risk management is a continuous • Ongoing motivation of staff and require: process, not a programme. communication with all major – break-up of problems; • Best practice and integrated ap- stakeholders. – additional, continuous proach as targets. • Risk culture at large is the final assessment; • Proper risk awareness for every- responsibility of top management – anticipation and ability to one within holistic framework. and board of directors. react. • Regular checks on strategy, structure, system(s), simplicity, 12. Human element is THE critical 7. Risk management is part art, part safety, speed. Continuous factor for success. science. adjustments to new paradigms: • Good mix of professional, open- • Facts, perceptions, expectations updated, major risks inventory. minded and honest people with are all important; quantitative and • Focus on long-term initiatives ver- educational, professional and life qualitative judgements are crucial. sus short-term ones: experience and integrity. • Common sense: not minutiae, focus on integrated approach with • Professionalism includes “feel, but relevance and credibility are emphasis on promotion rather intuition and inspiration for risk the key. than on monitoring. and market direction”. 8. Limitation of models. C. Emphasising the human aspect • Not all risks are relevant and/or 10. A financial institution is a quantifiable, but risks which can- knowledge company. not be measured directly often • Source, share, synthesise and have indirect consequences for save knowledge: avoid brain share price, growth, clients etc. drain. • Models are always only part of an • Knowledge alone is not enough: overall risk management the added value is generated by approach. its implementation. • Models are as good as underlying • Learn from mistakes, both assumptions and information personally and institutionally. input: • Culture of open communication “garbage in – garbage out effect”. on “experience” and know-how, • Be able to “read” the model: both horizontally and vertically. never forget common sense. • Continuous learning as part of evaluation/incentive process. www.credit-suisse.com 33

CREDIT SUISSE GROUP RISK MANAGEMENT 12 core values for employees of Credit Suisse Group Core ethical values Core performance values Integrity Service We realise that our global franchise is based on our core We are committed to providing superior service to our ethical values and our long standing reputation for in- clients. We believe that knowing our clients and offering tegrity, trust, confidentiality, fairness and professional- them value by combining good judgment, in-depth ism. We respect the interests of our stakeholders knowledge and prompt and courteous service leads to (clients, employees, shareholders, service providers, success. government authorities, financial regulators, competitors, media) and of society as a whole. Excellence We are committed to excellence through continuous Responsibility improvement of our management practices and know- We honour our commitments and take personal respon- how. Problems or mistakes are viewed as a chance to sibility for our actions. We promise only what we can improve. deliver. We do not mislead our stakeholders. Teamwork Fairness We believe in achieving more for our stakeholders by We believe in courteous and respectful treatment of our working together to draw upon our individual and collec- stakeholders. We support equal opportunities and a tive strengths and abilities worldwide and across busi- work environment free of discrimination and harassment ness lines. of any sort. Commitment Compliance We recognise individual contribution to the current and We acknowledge the importance of all relevant laws, future success of our firm and reward it objectively, tak- regulations, policies and standards, both internal and ing into account the personal contribution to targets, external, and comply with them. We are committed to governance and teamwork. Every employee contributes exemplary management discipline and a first class her/his best to reach our common goals, by maintaining control and compliance environment. focus and intensity of effort. Transparency Risk culture We seek constructive, transparent and open dialogue We base our business operations on conscious, disci- with our stakeholders based on fairness, mutual respect plined and intelligent risk taking. We believe in inde- and professionalism. pendent risk management, compliance and audit processes with proper management accountability for Confidentiality the interests and concerns of our stakeholders. We treat confidential as such and do not disclose non- public information concerning the Credit Suisse Group Profitability companies, their clients and employees, unless required We are committed to sustained profitability which by law. enables us to carry out our strategies, make long-term investments, fairly compensate our staff and achieve an attractive return for our shareholders. Legality, compliance and our core ethical values, however, come before profit. 34

Risk management governance and specialise on specific risks with legal entity Credit Suisse First Boston The structuring of Credit Suisse Group the help of tailor-made management including investment banking and insti- as a series of distinct business units – tools where appropriate and relevant. tutional asset management, and legal introduced in 1996/97 – is designed Group-wide risk management ap- entity Credit Suisse Group as the hold- to increase transparency, discipline and proaches are unified and thus applied. ing company of the aforementioned accountability. Although the Group as It is our ambition to establish the global three legal entities. The same mem- a whole is large, the new structure benchmark of a large, multifaceted bers of the Boards of the latter three helps to make it less complex. Flexibili- financial organisation in regard to risk legal entities also serve as Members of ty, the ability to focus and to react, as management structures, processes the Board of Directors of Credit Suisse well as specialisation and closeness to and methods. This is not a programme Group as of April 2001. the market are heightened. Thus, the but an ongoing process. At Credit Suisse Group, the risk different business units can be meas- management governance structure ured against the best of their respec- Group risk management governance begins with the Boards of Directors, tive class. This aspect concerns four major legal including their Audit Committees More importantly with a view to entities within Credit Suisse Group: le- which are – among other duties – re- risk, the business unit set-up allows gal entity Winterthur for the insurance sponsible for determining the general the Group to align risk types, focus on business, legal entity Credit Suisse for risk policy, proper checks and bal- major risk categories and concentrate retail banking and private banking, ances, the strategic risk management Credit Suisse Group risk management – general organisation Credit Suisse Group Internal/External Audit Board of Directors Group Chief Executive Officer Group Executive Board Group Chief Risk Officer Group Chief Financial Officer Group Risk Processes & Risk Management Provisions Committee Legal & Compliance IT Executive Board Standards Committee Committee Group level Board of Directors/Audit Committee Board of Directors/Audit Committee Board of Directors/Audit Committee Winterthur Credit Suisse Credit Suisse First Boston Legal level Credit Suisse Financial Services Winterthur Winterthur Credit Suisse Credit Suisse Credit Suisse Credit Suisse Insurance Life & Pensions Banking 1) Private Banking Asset Management First Boston Chief Executive Officer Chief Executive Officer Chief Executive Officer Chief Executive Officer Chief Executive Officer Chief Executive Officer & Vice-Chairman Executive Board Executive Board Executive Board Executive Board Executive Board Executive Board Chief Investment Chief Investment Risk Risk Investment Risk Officer Officer Committees Committees Committees Committee Investment Committee Investment Committee Chief Credit Officer Chief Risk Officer Chief Risk Officer Chief Credit Officer Chief Credit Officer Risk Strategic Risk Officer Risk Managers Risk Managers Risk Managers Risk Managers Managers Risk Managers Legal & Legal & Legal & Legal & Legal & Legal & Compliance Compliance Compliance Compliance Compliance Compliance 1) Credit Suisse Personal Finance and Credit Suisse e-Business have an analogous structure. Business unit level www.credit-suisse.com 35

CREDIT SUISSE GROUP RISK MANAGEMENT organisation and the Group’s overall strategy together with the risk subject to constant reassessment and appetite for risk. They are also respon- management units at the individual improvement to ensure that implicit sible for reviewing major risk expo- business units. risks in the evolving financial markets are sures on a regular basis. The simplified The Group Chief Financial Offi- captured and appropriately managed. organisational set-up is presented in cer deals with Group-wide IT issues – the chart “Risk management – general including risk related IT access, and Market risk – overview organisation” on page 35. security issues – and chairs the regular The term market risk refers to the risk The daily risk management respon- meetings of the IT Executive Board. of potential loss arising from adverse sibilities on Group or Corporate Center effects on interest rates, foreign-cur- level are set up as an additional layer Business unit risk management rency exchange rates, equity prices, of risk management and control, har- governance and other relevant market rates and monising relevant risk management is- While the business units are exposed prices, such as commodity prices and sues which can and should be brought to all risk types in one way or another, volatilities. A typical transaction may be to a common denominator. The prime their relative significance varies sub- exposed to a number of different mar- value added is the challenging of busi- stantially by design. Trading book market risks. Credit Suisse Group defines ness units and the overall control and ket risks are concentrated at Credit its market risk as potential changes of overview, while duplication of efforts is Suisse First Boston, while credit risks fair values of financial instruments in avoided. are most important at Credit Suisse response to market movements. The Group’s Executive Board Banking and at Credit Suisse First At Credit Suisse Group, the Risk Management Committee Boston. Insurance underwriting risks consolidated primary market risk expo- includes all Executive Board Members are exclusively found at Winterthur, sures in the trading portfolios at and is chaired by the Group Chief while commission income risks domi- end-2000 were interest rates, equity Risk Officer (GCRO). It prepares risk nate at Credit Suisse Private Banking prices, and foreign exchange rates. issues for approval by the Boards of and Credit Suisse Asset Management. Exposure to the Swiss franc exchange Directors. It also reviews the Group’s All business units are exposed to rate of the US dollar and the euro as exposure to different categories of operational, reputation/brand and well as to equity price levels in West- risk, assesses potential opportunities strategy risks. ern Europe and North America consti- and risks, initiates corrective actions to The strategies of each business tuted major elements of Credit Suisse mitigate undesired risk exposures and unit and of the Group are discussed on Group’s market risks embedded in the reviews the allocation of capital. The the highest levels at least once a year. non-trading portfolios or banking Group Risk Processes & Standards The business units of Credit Suisse books. Committee (GRIPS), chaired by the Group are – by design – substantially The most important tools used to GCRO, also meets four times a year autonomous, and are thus responsible measure and manage market risk to define the overall Group risk and for the implementation of their own exposures include the following: capital policies and to approve general risk management. To exercise this instructions, processes, standards, authority responsibly, each of the busi- • The Value-at-Risk (VaR) method methods and tools concerning risk ness units has its own consistent risk to estimate the potential loss aris- management at business unit level, or management framework subject to ing from a given portfolio for a pre- to unify these where Group-wide regular checks and challenges by determined probability and holding appropriate and relevant. The GCRO Group management. period, using market movements chairs the quarterly Provisions Meet- Each business unit has its own based on historical data. ing, where the status and develop- specialised risk management structure • The scenario analysis to estimate ment of credit allowances at business and systems in place – including risk the potential immediate loss after unit level are discussed and chal- committees, appropriate tools, sys- stressing market parameters. lenged. In addition, the GCRO is tems, procedures and controls – spe- These changes are modelled on responsible for the development, cially tailored to cope with the risks past extreme events and hypotheti- implementation, monitoring and taken in its particular line of business. cal scenarios. managing of risk Iimits as well as for At every level of the risk management • Other models measure interest strategy, standards, procedures and process – especially in regard to mar- rate sensitivity risk, default risk risk reporting. Group Risk Manage- ket and credit risk – measurement and and economic risk capital for cer- ment supports the GCRO in fostering monitoring functions are independent tain complex activities. Regular as- general risk awareness throughout the of the respective front-line office being sessments of mark-to-market Group and in harmonising approaches monitored. revaluations of all balance sheet to manage risk types across business At Credit Suisse Group, risk man- positions and interest rate rotation units. It also monitors the implementa- agement organisation and systems as scenarios are the basis for these tion of the Group’s risk management well as policies and techniques are analyses. 36

The major modelling techniques are ucts, including derivatives such as The estimates provided below are described in more detail at the end of swaps, futures, options and structured shown in Swiss francs, the base cur- this disclosure section, on page 46. products (customised transactions rency in the VaR calculations of two of using combinations of derivatives are the three business units using VaR; Market risk exposures of Credit executed to meet specific client or Credit Suisse First Boston manages Suisse Group business units and the proprietary needs). With such a broad market risk utilizing VaR calculated on corporate center – trading portfolios spread of products and markets, the US dollar as the base currency. In The distribution of trading portfolio Credit Suisse First Boston’s trading the table below the spot exchange related market risks reflects the distri- strategies are diverse and variable, and rates of 31 December 2000 and bution of activities among the different exposure at any given time will gener- 31 December 1999 were applied. The business units. Trading activities and ally be spread across a wide range of table provides an overview of the VaR the associated market risks are risk factors and locations. estimates in the material trading port- focused primarily within Credit Suisse The business units with trading folios as of 31 December 2000 and First Boston. Credit Suisse Private book activity perform a daily VaR 31 December 1999. Banking and Credit Suisse Banking calculation to assess the market risk. Credit Suisse First Boston’s VaR also conduct trading activities – albeit The calculations are based on a ten- declined by 48% in Swiss franc terms on a much smaller scale – primarily day holding period with a 99 percent over the course of the year. Much of driven by the need to offer a complete confidence level and risk movements that decline was due to the introduc- product mix to their customers. Credit that are generally determined by two tion of a new historical simulation mod- Suisse Asset Management and years of historical data. For many el which was approved for use in cal- Winterthur – comprising Winterthur purposes, such as backtesting, the culating the regulatory capital for Insurance and Winterthur Life & resulting VaR figures are usually scaled market risks by the Swiss Federal Pensions – do not engage in trading down and presented as one-day hold- Banking Commission in the second activities. ing period values, including those pro- quarter of the year. The estimates for At Credit Suisse First Boston, the vided in this disclosure. Credit Suisse 1999 are restated to provide a basis market risk exposures in trading and First Boston’s Risk Measurement & for comparison. The methodology – non-trading portfolios are broadly Management (RMM) unit is responsi- adjusted VaR figures show that the diversified as the company is active ble for updating and distributing the “real” market risk would be approxi- in most of the principal traded markets risk parameters used in the calculation mately down 25% in US dollar terms of the world. It is using almost all of risk exposures to the other business (Credit Suisse First Boston’s functional common trading and hedging prod- units on a quarterly basis. currency) or down 23% in Swiss franc terms. Credit Suisse Group uses backtesting to assess the accuracy of the VaR model. Backtesting – the comparison of daily revenue fluctuations with Market risk exposures in trading portfolios: the daily VaR estimate – is the primary Credit Suisse Group method used to test the accuracy of a VaR model. Backtesting is performed at various levels, from business unit 99%, one-day VaR; in CHF m Credit Credit level down to more specific trading Market risk Suisse Suisse areas. While VaR models tend to gen- Group 1) Group 1) Exposure type 31 Dec. 2000 31 Dec. 1999 erate two to three outliers a year (days when the trading loss exceeds the Interest rate 235.7 284.5 respective VaR), Credit Suisse First Foreign exchange 22.7 70.9 Equity 98.5 102.6 Boston had no outliers in four years of Commodity 6.8 4.8 using the model for the calculation of regulatory capital for market risks. VaR Sub-total 363.7 462.8 figures should therefore be read with Diversification benefit 204.7 257.5 an understanding of the conservative Total 159.0 205.3 nature of the model. 1) Two points are particularly note- Credit Suisse Group does not manage its trading portfolios on a consolidated basis. The amounts provided in this column represent arithmetic sums of the respective VaR estimates of the business units plus the expo- worthy in the development of Credit sure of the Corporate Center. Management believes that this is a conservative representation of the overall Suisse First Boston’s market risk over risk since possible diversification benefits between business units are not considered. However – as trading portfolio-related market risks of some 85% of total VaR are concentrated at Credit Suisse First Boston – the the course of the year 2000. First, overstatement implied by this aggregation method is limited. Credit Suisse First Boston maintained www.credit-suisse.com 37

CREDIT SUISSE GROUP RISK MANAGEMENT Backtesting for Credit Suisse First Boston important to help understand risks during periods of severe disruption. Credit in USD m Suisse Group performs scenario test- 50 ing to ensure that – even in good environments – its exposure to particular 0 events remains well controlled. –50 Non-trading portfolios All Credit Suisse Group entities man- –100 age the market risks in their non-trading portfolios (also known as “banking –150 books” or “other than trading portfolios”) through procedures and tools –200 such as risk limits, independent moni- –250 toring of risk from risk taking func- 1st quarter 2000 2nd quarter 2000 3rd quarter 2000 4th quarter 2000 tions, and limit excess resolution steps. Sensitivity analysis is used to produce Daily revenue the risk quantification shown on the One-day VaR (99%) left. In non-trading portfolios, comprising all non-trading books of the bank- a disciplined approach and held the change reduced the degree of ex- ing business units – including private level of market risks stable over the treme model conservatism, although equity investments – and the financial year, even while absorbing the impact the model still remains conservative in investments of the insurance business of Donaldson, Lufkin & Jenrette activi- nature – i.e. Credit Suisse First units, the major elements of market ties in the fourth quarter. Second, Boston’s actual trading results are well risk during 2000 were exposures to effective 31 May 2000, the Swiss within the VaR band even after the changes in the Swiss franc to US dollar Federal Banking Commission adoption of the revised model. and euro exchange rates as well as approved the revised VaR model for The VaR methodology is most equity instrument price levels in use in the calculation of market risk useful for day-to-day risk monitoring Western Europe and North America. capital. As illustrated by the Backtest- of trading books in the context of The table summarises the market risk ing chart above, the methodology “normal” markets. Scenario analysis is exposures in non-trading portfolios as of 31 December 2000 and 31 December 1999. Credit Suisse Group’s business Market risk exposures in non-trading portfolios: includes a substantial volume of non- Credit Suisse Group trading-related banking activity both in providing products and services to its Potential change in fair value/market value; in CHF m clients and as proprietary investments. These activities include equity instru- Credit Credit Suisse Suisse ment participations, investments in Market risk Group 1) Group 1) bonds and other money market instru- Exposure type 31 Dec. 2000 31 Dec. 1999 ments, lending money and securities Interest rates 2) (15.2) 24.8 and deposit-taking. The instruments Foreign exchange 3) (62.5) (55.4) used for balance sheet management Equity 4) (1,049.8) (627.8) include derivative instruments such as Commodity 5) 0.0 0.0 swaps, interest rate swaps, forward Total banking business units (1,127.5) (658.4) rate agreements and options. Total insurance business units (2,514.1) (2,635.3) The financial investments of the insurance business are held to ensure 1) For each exposure type, the given figures refer to the particular sensitivity generating the largest potential coverage for future obligations arising loss for Credit Suisse Group as a whole. The Credit Suisse Group amount equals the sum of the respective business unit amounts plus Corporate Center. from policies. The quality of these 2) Assuming an adverse parallel yield curve shift for Credit Suisse Group of between 1.00% and 2.00%, assets is generally high – holdings are depending upon both the level and volatility of the particular country’s interest rates. 3) Assuming an adverse change for Credit Suisse Group of the CHF against all currencies of between 10% and primarily bonds with AA and higher 20%, depending upon the volatility of the particular country’s exchange rate. ratings, with an A rating being the mini- 4) Assuming an adverse change for Credit Suisse Group in all equity instrument prices of between 10% and 20%, depending upon the volatility of the particular stock market. mum requirement for new additions to 5) Assuming an adverse change in all commodity prices of 10%. the portfolio. The Notes 22 and 23 38

“Financial investments from the banking also described at the end of this dis- 2000 ACP and credit provisions and insurance business” of the consoli- closure section on page 49. Credit CHF m dated financial statements on pages 80 Suisse Group implemented such a 900 and 81 provide an overview of book credit risk management framework for and market values of these assets. the banking business units in Decem- 800 ber 1996. As this framework is used 700 Liquity and funding risk for management information purposes 600 Liquidity and funding risk is the risk only, it is not reflected in the consoli- Credit Suisse Group or its business dated financial statements. Annual 500 units being unable to fund assets or credit provisions (ACP) equal expected 400 meet obligations at a reasonable or, in credit losses derived from actual his- case of extreme market disruptions, torical average losses. The chart enti- 300 any, price. This risk is managed at the tled “2000 ACP and credit provisions” 200 business unit level, in line with our shows the ACP of the banking units in general governance principles, which 2000 with the respective, actual credit 100 allows us to specifically tailor the provisions. Actual losses which occur 0 CSB CSPB CSFB CSAM* CSG approach to the individual cash flow in any one year may be higher or lower structure within the business units. The than these provisions, depending on 2000 ACP Group Corporate Center monitors the the economic environment, interest 2000 Actual credit provisions identification and measurement of this rates and counterparties’ performance. * Both ACP and credit provisions are well below risk and works in partnership with all In addition to the expected loss, an in- CHF 1 m for 2000. business units to foster sound liquidity dicative worst-case default loss, management practices worldwide. shown in the chart on the right, is calculated using CREDITRISK+, the Credit risk – overview credit risk measurement and manage- Credit risk is the risk that a borrower ment tool developed by Credit Suisse (or counterparty) is unable to meet its First Boston. The 99th percentile worst- financial obligations. In the event of a case default loss shown in the chart on default, a bank generally incurs a loss the right is based on the 99th percentile equal to the amount owed by the of the full credit default loss distribution. debtor, less a recovery amount result- The difference between the worst-case ing from foreclosure, liquidation of col- default loss and the ACP reflects the lateral or restructuring of the company. unexpected loss level. The fourth as- The majority of Credit Suisse Group’s pect of the credit risk management credit risk is concentrated in the Credit framework is the pricing and optimisa- 99th percentile worst-case Suisse Banking and Credit Suisse First tion of the portfolio and the considera- default loss as of end-2000 Boston business units. The credit risks tion of risk and reward. taken on by Credit Suisse Private Credit Suisse Group’s credit risk CHF m Banking are mostly collateralised and management framework allows us to primarily of an operational risk nature. price transactions involving credit risk 2000 Credit exposures exist in the banking more correctly by performing a risk/ business units within lending products, return calculation. The current imple- commitments and letters of credit, as mentation of the credit risk manage- 1500 well as counterparty risk from deriva- ment framework covers virtually all of tives, foreign exchange and other Credit Suisse Banking, Credit Suisse transactions. Private Banking and Credit Suisse 1000 A system of individual credit limits Asset Management, as well as the is the traditional means of managing majority of Credit Suisse First Boston’s credit risk and preventing risk concen- credit-related exposures. The remain- 500 trations. A comprehensive set of ing portion of Credit Suisse First country and regional limits is in place Boston’s credit-related exposures is to address concentration issues in the covered by either VaR methodology – 0 CSB CSPB CSFB CSAM* CSG** portfolio (see country risk). The third such as mark-to-market valuated real 1997 1998 1999 2000 aspect of the credit risk management estate portfolios, the majority of which framework is an appropriate credit risk are earmarked for securitisation – or * Worst case loss for 2000 below CHF 2 m. provisioning methodology, which is by applying credit risk adjustments. ** Based on combined portfolio. www.credit-suisse.com 39

CREDIT SUISSE GROUP RISK MANAGEMENT Credit Suisse Group banking units The business units of Credit Suisse fication of counterparties where counterparty exposure by rating Gross total of CHF 405 bn, as of end-2000 Group manage credit risks through a changes in creditworthiness could credit request and approval process, occur due to events such as an- CHF bn Investment Grade 80% ongoing credit and counterparty moni- nounced mergers, earnings weakness, 140 Non Investment Grade 20% toring and a credit quality reviewing lawsuits, etc. Possible recovery meas- process. Credit requests are prepared ures are evaluated even before potential 120 by experienced credit officers, based credit losses might be incurred. In addi- on analysis and evaluation of debtor tion, Credit Suisse Group and its busi- 100 creditworthiness and the type of credit ness units regularly analyse their industry transaction. Credit decisions are taken diversification and concentration in 80 on a transaction-by-transaction basis selected segments. Credit protection 60 by credit committees and senior credit such as credit derivatives are used to a managers at levels appropriate to the limited degree, in particular to mitigate 40 amount and complexity of the transac- some exposures with multinational tions, as well as to overall exposures to companies. 20 counterparties and their related entities. These authority levels are set out Loans and loan equivalent portfolio – 0 counterparty exposure R1 R2 R3 R4 non- R5 R6 R7 R8* Pro- within the governing principles of the AAA AA A BBB ra- BB B CCC/ <C visi- ted CC ons legal entities. Transactions of a signifi- Credit Suisse Group defines counter- Internal ratings R1– R8 are approximately cant and unusual nature are discussed party exposure as all positions, expo- equivalent to the respective external ratings. with and/or ratified by the GCRO. sures and facilities that potentially gen- * Potential problem and non-performing loans, Credit exposures to individual erate a credit risk for the Group. This including accrued interest. counterparties or segments thereof includes loans and loan equivalents and adherence to the related limits are representing drawn exposures as well monitored continuously by credit offi- as committed but undrawn facilities. It cers, industry analysts and further spe- also includes market-driven exposures cialists. In addition, credit risks are also like off-balance sheet transactions, regularly reviewed by credit and risk such as derivatives and foreign- management committees, by taking exchange transactions, as well as current market conditions and trend letters of credit and guarantees. All Credit Suisse Group banking units analysis into consideration. these instruments are converted by counterparty exposure by industry The credit review process is using internal loan equivalent factors, Gross total of CHF 405 bn, as of end-2000 designed to result in an early identifi- which are related to regulatory risk- CHF bn cation of possible changes of the weightings. This approach represents 140 creditworthiness of our clients. These a more comprehensive definition of procedures include regular asset and counterparty exposure, especially in 120 collateral quality reviews, business and comparison with other financial institu- financial statement analysis of individ- tions which often emphasise lending 100 ual clients and economic and industry exposure only. The total gross counter- studies. Other key factors considered party exposure amounted to CHF 405 80 include business and economic condi- billion as of 31 December 2000 tions, our historical experience, regula- (31.12.1999: CHF 373 billion). 60 tory requirements, and concentration A counterparty credit risk class 40 of credit volume by industry, country, system has been implemented by product and counterparty rating. The Credit Suisse Group to define a frame- 20 process results in a quarterly determi- work that supports consistent credit nation of the appropriateness of our risk analysis (statistical and otherwise), 0 allowances for credit losses and leads credit risk monitoring, risk-adjusted Banks and brokers/financial services to the decision whether allowances performance measurement, economic Individual clients Real estate/construction should be released or increased. The capital/usage allocation, and certain Telecom credit committees of the business financial accounting purposes. The Electricity units and the Group are responsible for establishment of a credit risk rating for Public & defence Retail trade such decisions. each counterparty is the first step in Wholesale trade Another tool in use – particularly at evaluating the possible risk of credit Oil & gas Electronic equipment Credit Suisse First Boston – is regu- losses. The counterparty credit rating Others larly updated watch-lists for the identi- is used – in combination with credit (or 40

credit equivalent) exposures and re- In summary, Credit Suisse Group’s Credit Suisse Group banking units exposure to selected emerging covery rates – to quantify potential credit risk management framework markets by region and largest credit losses. Each counterparty that comprises five core components: an individual country exposure of region as of end-2000 generates potential or actual credit risk individual credit limit system; country exposure for Credit Suisse Group is and regional concentration limits; a CHF m rated and assigned a risk class. For credit risk provisioning methodology; a 9000 those counterparties identified as hav- pricing methodology; and an individual 8000 ing at least one impaired transaction, counterparty and country rating sys- the counterparty is rated as either (I) a tem. The credit risk management 7000 potential problem loan, (II) a non- framework is refined constantly and si- 6000 performing loan or (III) a non-interest multaneously covers all business areas earning loan. exposed to credit risk. 5000 The tables on page 40 show the 4000 breakdown of Credit Suisse Group’s Country risk counterparty exposure by internal Country risk is the risk of a substan- 3000 rating classes and major industry tial, systemic loss of value in the finan- 2000 segments. cial assets of a country or group of 1000 The non-rated exposure amounting countries which may be caused by the to some CHF 13 billion – 3.3% of inability or unwillingness of a sovereign 0 Africa/ Asia/ Latin Eastern gross counterparty exposure – relates to meet contractual obligations and/or South China America/ Europe/ Africa Hongkong Brazil Russia primarily to mark-to-market valued the imposition of controls on capital residential and commercial real estate flows. Given the international character Net exposure/region. whole loans of the former Donaldson, of their activities, all business units of Net exposure/largest country exposure of region. Lufkin & Jenrette portfolios destined Credit Suisse Group are exposed to Exposure of insurance business below either for securitisation or sale. The country risk, although the largest por- CHF 300 m. chart also reflects the revised and tion by far is held at Credit Suisse First refined Credit Suisse Group risk Boston. ratings which entered into effect as of Country ratings and country limits 31 December 2000. are the two primary instruments used The scale of Credit Suisse First by the Group to manage country risk. Boston’s securitisation activities – Country ratings provide an assessment where loans are housed temporarily of the risk of sovereign default. The in- prior to securitisation or sale – independent credit risk management de- creased after the merger with Donald- partment (CRM) of Credit Suisse First son, Lufkin & Jenrette. During the Boston – in cooperation with Economic year, Credit Suisse First Boston also Research – periodically updates these continued to improve liquidity and rating assessments. The ratings are reduce risk in its existing commercial approved by the GCRO. Country limits real estate lending portfolio by cap Credit Suisse Group’s exposure to decreasing the size of less-liquid individual countries. They are supple- elements in the portfolio by roughly mented by regional limits, which restrict 50% during the year, and also by the maximum exposure to a specific substantially strengthening provisions region in order to limit the impact of for this activity. contagion. Regional limits are lower The maturity structure – on page than the numerical addition of all the 95, Note 38 of the consolidated finan- country limits of the respective regions. cial statements – shows that 90% of The Board of Directors approves coun- total current assets are due within try, regional and global limits. Within 12 months while only 4% are due after Credit Suisse First Boston, the Credit five years or show no maturity. In addi- Policy Committee and Capital Alloca- tion, approximately 60% of the total tion and Risk Management Committee counterparty exposure is collateralised – in cooperation with the GCRO – peri- by a variety of collateral types, including odically reviews these limits. In addition, pledged deposits and securities portfo- the independent Risk Measurement & lios, mortgages, standby letters of Management department (RMM) credit, and guarantees. assesses exposures versus country www.credit-suisse.com 41

CREDIT SUISSE GROUP RISK MANAGEMENT Credit Credit Credit Insurance risk Suisse Suisse Suisse Credit Financial Private First Suisse Protecting Winterthur Insurance and Asset quality & Services Banking Boston Group Winterthur Life & Pensions from undue 31 Dec. 2000 31 Dec. 2000 31 Dec. 2000 31 Dec. 2000 risk accumulation is a core risk man- provision development in CHF m in CHF m in CHF m in CHF m agement activity. In order to understand Non-performing loans (NPLs) 1) 8,236 111 1,479 9,826 the risk universe of an insurance com- Capital provisions against NPLs 2) 5,142 60 989 6,191 pany, the flow of business and the ac- Counterparty exposure 1) 127,310 38,265 239,640 405,215 companying flow of risks are analysed. Coverage ratio of NPLs Premiums earned by selling insurance 31.12.2000 62% 54% 67% 63% policies are invested to cover claims 31.12.1999 60% 75% 84% 63% occurring at a future date – sometimes NPLs as percentage of counterparty many years later. Therefore, the com- exposure of business units pany has to manage and limit insur- 31.12.2000 6.50% 0.30% 0.60% 2.40% 31.12.1999 8.70% 0.30% 0.90% 3.40% ance risk – e.g. through reinsurance contracts, financial market risks (see 1) Includes loans and loan equivalents. market risk section) associated with its 2) Excludes total interest of CHF 1,906 m (fully provided). assets and liabilities (reserves), and risks associated with its assets and re- limits. RMM and CRM provide inde- In determining the amounts of the insurance contracts. pendent supervision to ensure that the allowances, loans and loan equivalents Asset accumulation by insurance com- divisions operate within their limits. are assessed on a case-by-case basis, panies results predominantly from pre- CRM also assumes responsibility for taking the following factors into con- miums paid earlier than claims are set- actively managing these limits to reflect sideration: tled. The resulting time differences of changing credit fundamentals. • The financial standing of the up to or even exceeding 50 years have A gross counterparty exposure customer, including a realistic implications for risk management. First, analysis by country rating category – assessment based on financial funds have to be invested in assets in excluding exposures to supranationals and business information of the like- such a way that they generate cash and diversified portfolios without de- lihood of repayment of the loan flows in line with the cash outflows em- fined country risk assignment – shows within an acceptable period of time; bedded in the liability structure. Sec- that approximately 87% are with inter- • The extent of Credit Suisse ond, product-specific characteristics – nally N1-rated countries (equivalent to Group’s other commitments to the such as maturity, profit-participation AAA) and 8% with N2-rated countries same customer; bonuses, or inflation-dependent insur- (equivalent to AA) respectively, leaving • The fair value of any security for ance claims – have to be treated ap- a balance of only 5% to lower-rated the loans; propriately. countries. • The costs associated with obtain- The two Winterthur business units The table on page 41 shows the ing repayment and realization of follow stringent guidelines, especially Group’s cross-border exposure out- any such security. with a view to assuming insurance risk, standing to selected emerging market the selection of risks and the sums countries. Credit Suisse First Boston’s Driven by the Group’s selectivity insured. Winterthur operates two main targeted exposure reduction in Russia regarding counterparties, the overall insurance businesses – non-life and is largely completed; the remaining asset quality of Credit Suisse Group life – and faces several risk types exposure has conservative provisions. remains solid – with approximately stemming from its underwriting activity. 80% of exposures rated investment Loan loss experience grade or equivalent and with the Non-life An allowance for losses for banking largest exposure to a single non-in- In non-life business, insurance risk re- operations is maintained at a level vestment grade rated counterparty lates to claims that might be more fre- considered adequate to absorb losses (BB+) of some CHF 700 million. quent or larger than forecast, and/or arising from the existing portfolios of Concentration risks are strictly limited. might have to be paid earlier than ex- loans and loan equivalents. The For instance, exposures to the telecom pected (expected pay-outs are priced allowance for such losses is made in sector amounted to 3.5% of total into the premiums paid). Better-diversi- accordance with Swiss banking laws. credit exposures at end-2000, fied insurance portfolios tend to imply Each business unit creates provisions including the integration of Donaldson, smaller differences between expected for bad and doubtful debts based on Lufkin & Jenrette. Furthermore, and actual claims. Winterthur therefore Credit Suisse Group guidelines. The provisioning levels are kept stable as holds a well-diversified insurance port- allowances are reviewed on a quarterly presented in the asset quality table folio, in terms of both geographical basis by senior management. above. diversification and industry structure. 42

The risk structure in the insurance business Operational risk Operational risk is the risk of adverse Underwriting impact to the business as a conse- quence of conducting it in an improper or inadequate manner and may result Premium Insurance risk (gross) from external factors. Five major operational risk categories have been dis- tinguished for systematic approach reasons: organisation, policy/process, Assets Reinsurance Reserves Retention technology, human, external. Good operational management Market risk equates to good management and oversight as presented on page 31. Credit risk It often runs parallel to quality and/or knowledge management, all of which contribute to client satisfaction, a Insurance risk strong brand and shareholder value. The primary aim lies in early identification, prevention and mitigation of Nevertheless, a well-diversified in- architecture of this reinsurance protec- operational risks, as well as in timely surance portfolio with many business tion is such that on all levels of the and meaningful management report- lines spread over many policyholders organisation, local businesses, market ing. Regular, Group-wide meetings might be vulnerable to natural hazards. units and business unit levels take place to achieve this common un- In such circumstances, the portfolios a set of internal and external reinsur- derstanding of priorities and to foster can be exposed to a large accumula- ance contracts absorbs all risks that the dialogue between the Corporate tion of risk. If adequate reinsurance exceed a prudent retention level. Center and the business units. Knowl- protection were not in place, substan- Reinsurance protection follows the edge and experience is shared tial losses could be triggered by a organisational structure, based on the throughout the Group to ensure a co- single natural disaster. Winterthur uniform principle that each organisa- ordinated approach. All business lines therefore uses reinsurance to limit the tional entity manages insurance risk take responsibility for their own opera- loss triggered by a single event – for in accordance with its portfolio and tional risks. example, a winter storm in Europe – capital base. Defining and striving to achieve to a worst-case amount of CHF 100 best practice in operational risk man- million. Commission and fee income risk agement methodology and techniques Commission and fee income risk, were a major focus during most of Life as defined by Credit Suisse Group, 2000. For this purpose, Credit Suisse In life insurance the basic underwriting relates to those businesses that Group has informally teamed up with a risk characteristics are similar to those receive commission or fee income for number of major European banks in an in non-life business. The insurance risk services provided, rather than where attempt to learn from each other’s ex- universe of life business is represented proprietary risk in financial or insurance perience and proven operational risk by deviations from expected mortality, markets is taken. Commission and fee management processes. morbidity and longevity, and expected income risk can best be defined as a Development of specific opera- surrender rates. Savings elements are quantification of earnings at risk due tional risk management tools began quite often embedded in life insurance to significant contraction in market with the common definition of risk indi- products. The associated financial activity. cators at all business units. Statistical risks can be substantial and must be While there are other scenarios and qualitative analyses show the rele- managed accordingly. The asset that could lead to significant loss of fee vance and usefulness of individual indi- management units are responsible for income either for a geographic location cators as early warning signals. The managing these risk elements and for or for a specific product or asset class, analysis of internal and external audit producing the kind of cash flows that it is a widespread drop in market levels reports indicates that an estimated policyholders are likely to claim. that would constitute the largest com- 90–95% of all audit points are of mission and fee income risk for Credit operational nature. The Group is there- Reinsurance Suisse Group. Commission and fee fore working on improving this Winterthur runs a reinsurance structure income risk calculations are primarily indicator, allowing for judgment on the to protect its local businesses, its used in the context of our internal Eco- respective business units’ progress in divisions and its capital at large. The nomic Risk Capital model. the operational area. In addition, audit www.credit-suisse.com 43

CREDIT SUISSE GROUP RISK MANAGEMENT deficiencies which are serious and Breaks, Failed Trades, Depot Breaks, repetitive are escalated to the Global Outstanding Outgoing Confir- compensation process. mations and Outstanding Incoming While each business unit has its Acceptances – versus volume stayed own self-sufficient and specialised at least about the same in many areas; Legal and Compliance set-up, Credit in some areas it improved substantially. Suisse Group is emphasising an in- This is one more indication that the creased role of the Corporate Center’s correlation between operational risk legal and compliance staff. Common losses and size is highly doubtful. denominators throughout the Group The new BIS regulatory initiative and additional control functions will be calling for capital requirement for oper- the added value. ational risks will be a major challenge Credit Suisse Group and its busi- for all banks and regulators over the ness units mitigate certain operational coming years. To come up with a fair, risks with insurance contracts with credible, relevant and efficient regula- third parties. These contracts are tory solution will be very difficult, partic- generally structured in such a way that ularly taking the following into account: the first loss portions are for the the protection through insurance; account of the business unit. Thus, double counting of risks; the “hit-ab- potential “moral hazard” problems sorption-capacity” based on earnings should be mitigated. power as well as scale and scope; and During 2000, no material opera- a level playing field for all financial tional loss was observed. The absence services organisations. Operational risk of a material operational loss does not management is not so much an is- imply that there have not been oppor- sue of regulatory capital requirements tunity costs incurred or that there is no but good management, and it is close room for improvement in the opera- to quality management. Close to tional risk management area. The 100% of the benefit of operational risk weekly average of trades at Credit management is derived from the fact Suisse First Boston increased by over of doing it responsibly, and not by 40% in 2000 compared to 1999 and assigning a regulatory capital number amounted to over one million trades to it. per week. In spite of this very consid- erable increase in volume, the percentage of non-perfect handlings – Nostro Key quantitative methods in risk control 1980s 1990s 2000+ Strategy risk What-if analysis, relative performance of stock price Position and Scenario Portfolio VaR Market risk sensitivity limits analysis Economic Risk Capital Integrates quantifiable risks into Position and Limits based on Credit risk consistent and comprehensive Credit risk concentration limits potential exposure models risk measure Underwriting Scientific threat Portfolio Complements specific Insurance underwriting risk guidelines scenario analysis VaR risk measures Provides increased transparency Scenario analysis & on the firm’s overall risk level Commission & fee income risk earnings-at-risk models Provides basis for risk-adjusted Scenario analysis, key risk indicators, performance measures Operational risk business continuity planning, impact scoring Reputation/brand risk Compliance, internal audit 44

Economic Risk Capital – optimisation measurement using an economic risk of capital allocation capital framework, with economic risk Although the conscious management capital usage as the common denomi- of risks is not new, the adoption of nator for all major risks. Together with mathematical-statistical methods has a proactive risk management culture transformed the way financial institu- and the appropriate qualitative and tions have managed and controlled quantitative tools, the economic risk risks over the last twenty years. As capital framework will support the illustrated by the graph entitled “Key decision-making by senior manage- quantitative methods in risk control” on ment at Credit Suisse Group, thus page 44, quantitative methods have linking risk management to the become especially important in the Group’s shareholder value strategy. area of market, credit and insurance Further initiatives focus on refining the underwriting risks. While those specific common credit rating definitions tools – together with the all important among the business units, including qualitative controls – remain important the full introduction of transaction rat- elements of the risk management ings, and on further development of process, Credit Suisse Group has operational risk matters at large, in- established a tool to integrate all quan- cluding compliance aspects. tifiable risks into one consistent and comprehensive risk measure. This measure – Economic Risk Capital (ERC) – is defined as the equity cush- ion needed to ensure that the Group remains solvent and in business even under extreme conditions. Unlike regulatory capital – currently confined to market and credit risk – ERC is designed to reflect all significant quantifiable risks associated with the Group’s business activities. Apart from providing increased transparency on the Group’s risk profile, ERC provides the basis for more comprehensive risk limits, a more risk-sensitive allocation of capital to the business units, risk- adjusted performance measures and the assessment of the Group’s capital needs given its level of risk. Outlook Part of Credit Suisse Group’s strategy and of all the business units is to be a leader in risk management. Significant personnel and technological resources are focused on ensuring that Credit Suisse Group continues to enhance its risk management capabilities, thereby remaining at the forefront of the industry. To achieve this goal, Credit Suisse Group has developed an integrated framework of best-practice risk management, risk policies, methodologies and infrastructure. Credit Suisse Group is also in the process of linking risk management and performance www.credit-suisse.com 45

CREDIT SUISSE GROUP RISK MANAGEMENT Market risk measurement methodologies Introduction 1. Value-at-Risk Each business unit of Credit Suisse Value-at-Risk measures the potential Group uses market risk measurement loss in terms of fair value changes over and management methodologies a given time interval under normal that meet industry standards. These market conditions at a given confi- include both general tools capable dence level. Value-at-Risk as a con- of calculating exposures comparable cept is applicable to all financial risk across the many activities of Credit types with valid, regular price histories. Suisse Group, as well as focused Positions are aggregated by risk type tools that can specifically model rather than by product: for example, unique characteristics of the functions interest rate risk includes risk arising of certain units. The tools are used from money market and swap trans- for internal market risk management, actions, bonds, interest rate options, market risk aggregation, and for foreign exchange, equity instrument internal market risk reporting and and commodity options. The use of disclosure purposes. The two prin- VaR allows the comparison of risk in cipal measurement methodologies different businesses, such as the com- are Value at Risk (VaR) and Sensi- parison of fixed income and equities, tivity Analysis, and are used to and also provides a means of aggre- manage risk relative to typical market gating and netting a variety of posi- shifts. A third technique, called tions within a portfolio to reflect actual Scenario Analysis, is used addition- correlations and offsets between ally to model atypically large or other- different assets. wise abnormal market changes. The history of financial market These and related methodologies prices serves as a basis for the are described in the following para- statistical VaR model underlying the graphs. potential loss estimation. All Group The US Securities and Exchange business units modelling their trading Commission encourages registrants to portfolios with VaR use a 10-day hold- provide robust descriptions of their ing period and a confidence level of market risk strategies and measure- 99% calculated on a two-year history ments. The details in this disclosure, of market data. These assumptions are including the numerical expressions in agreement with the “Amendment to of risk, are “forward-looking state- the Capital Accord to Incorporate Mar- ments”. These disclosures are not ket Risks” published by the Basel intended to be precise indicators of Committee on Banking Supervision in expected near term reported losses. 1996, and other related international Rather, the values given are estimates standards for market risk management. of reasonably possible losses in case The Credit Suisse First Boston of adverse conditions occurred. VaR model was originally approved by Please note that changing market the Swiss Federal Banking Commis- conditions affecting one or more of sion for use in the calculation of Credit the primary market risk types could Suisse Group market risk capital effec- produce results that may differ materi- tive 30 June 1998. This approval was ally from those described in this based on extensive reviews in 1997 document. In addition, the risk mea- undertaken by Credit Suisse First surements provided are based on Boston and the Group’s external audi- portfolios at the reporting dates. The tors of the previous variance-covari- significant turnover in portfolio holdings ance model and the related processes over the normal course of business and controls. With the introduction of will also cause future measurement the historical simulation model, the of risk and the actual outcomes Swiss Federal Banking Commission to vary. examined and reapproved the VaR 46

model for this purpose effective 2. Sensitivity analysis 31 May 2000. Sensitivity analysis models are used Assumptions The Group’s busi- to quantify the market risk the individ- ness units with trading portfolios used ual units incur by holding the financial a combination of a variance-covariance instruments in their other-than-trading and historical simulation model for portfolios. Sensitivity analysis is gen- 1999. By the second quarter of 2000, erally defined as a measure of a pure historical simulation model was potential changes in a portfolio’s fair introduced, which is used for all risk value created by changes in one or types and businesses and does not multiple financial markets’ rates or use any distribution assumption. It is prices, including interest rates, foreign based on the profit and loss distribu- exchange rates, and equity and tion resulting from historical changes commodity prices. The results can be of market rates applied to today’s port- focused to show the impact of a nega- folio, using a two-year history. The tive or adverse shift in a single interest documented fat-tail effect of financial rate or may be calculated to show the time series, which means that large effects of many simultaneous moves are more frequent than expect- changes. ed under a normal distribution as- Assumptions The market rates are sumption, is thereby taken into assumed to change at the end of the account. This methodology also avoids respective business day, instanta- the assumption of linear correlation neously and without rearranging between risk factors. positions, for all risk types. Across all Limitations VaR as a risk measure business units, positions are revalued quantifies the potential loss on a port- under hypothetically changed market folio under normal market conditions conditions. Financial instruments, only. It is not intended to cover losses financial derivatives and commodity associated with unusually severe mar- derivatives of the other-than-trading ket moves; these are covered by sce- book are included in the sensitivity nario analysis. VaR also assumes that analysis modelling. Non-maturing past data can be used to predict future accounts, such as savings deposit events. accounts, are represented by means Backtesting Credit Suisse First of replicating portfolios, which use Boston and other business units with sophisticated statistical methodologies trading portfolios use “backtesting” to combined with historical experience. assess the accuracy of the VaR model. The standardised Group-wide Daily profit and loss can be directly parameters use the shifts below. compared to a VaR with a one-day The G21 currencies are those of holding period. The one-day VaR esti- the world’s leading industrialised na- mate is compared to the actual daily tions. For these disclosures, all other trading revenue. The VaR measure is currencies are considered as belong- intended to be larger than all but a cer- ing to emerging market nations. The tain fraction – as determined by the Swiss franc is the Group’s base cur- confidence level – of trading out- rency; therefore, all changes are trans- comes. Backtesting can be performed lated to Swiss francs. When applied on at both the overall business unit level an individual market rates basis, a and at a disaggregated level. measure of the sensitivity of the port- Interest rates * Equity prices Currency rates G21 nations 100 basis points adverse change 10% adverse change 10% adverse change Non-G21 nations 200 basis points adverse change 20% adverse change 20% adverse change * For low interest rate environments (e.g. Japan), Credit Suisse Group uses a smaller interest rate move and extrapolates results. www.credit-suisse.com 47

CREDIT SUISSE GROUP RISK MANAGEMENT folio to this market rate results. Taken Global scenarios aim to capture the together, these shifts represent a sce- risk of severe disruption of all major nario of simultaneously large, al- markets and are related to historic though not unreasonable, shifts in all events, such as the 1994 bond mar- markets. An “adverse” change is de- ket crisis, the 1998 credit crisis, the fined as one that produces a negative 1987 equity market crash and the result on a business unit level. 1990 US real estate crash. Business Limitations Changes in portfolio level scenarios aim to capture portfolio composition as they would occur in specific risks by employing scenarios large moves over an extended period based on non-parallel yield curve of time are accounted for in the sensi- shifts, changes in correlations and oth- tivity analysis. Also, the direct effect er pricing assumptions and those in- large moves in market rates will have corporating hedging assumptions on the credit quality of creditors (which through time. Reports are produced in turn will have an impact on portfolio for senior management and traders for profit and loss) is not considered within a range of scenarios at least monthly. this Group-wide model. The analysis is designed to show outright risk per risk Assumptions Market data is type. Spread risk within risk types but changed according to a predefined set across markets or macro-hedged posi- of scenarios which are designed to: tions will not appear in the results. • Consider extreme events to provide “worst case” information. 3. Scenario analysis • Have an immediate “surprising” VaR is designed to measure market effect without rearranging risk in normal market environments. It positions. is important to complement this with a • Reflect macro-economic reality. scenario-based risk measure, which • Be relevant to the portfolio being aims at estimating the losses – based modelled. on current positions – that could be • Be responsive to changing market experienced under extraordinary conditions. market conditions. Scenario analysis • Meet regulatory requirements. is, therefore, an essential component of Credit Suisse Group business units’ Limitations Scenario analysis pro- market risk measurement framework vides an approximation of the impact for both trading and other-than-trading on profits and losses in case of specif- portfolio instruments. ic events in the financial markets. Scenario analysis examines the po- Seldom do past events repeat them- tential effects of changes in market selves in exactly the same way. As a conditions – corresponding to excep- result, it is necessary to use business tional but plausible events – on the fi- experience to come up with a set of nancial condition of the firm. The re- meaningful scenarios and to appropri- sults of the analysis are used to man- ately assess the scenario results. age exposures on a firm-wide basis, as well as at portfolio level. Scenario analysis involves the revaluation of the firm’s major portfolios to arrive at a measure of the profit or loss the firm may suffer under a particular scenario. Scenarios are applied to all major markets in which Credit Suisse Group par- ticipates. 48

Credit risk measurement methodologies Annual Credit Provision (ACP) The ACP is an internal manage- Credit loss percentile The credit The annual credit provision is the ment tool and is calculated for man- loss percentile for each portfolio is cal- average expected credit loss over one agement information purposes only. As culated as the worst-case credit loss year. For an individual entity the ACP a result, it is not reflected in the con- from the portfolio over one year for a is calculated using the following solidated financial statements. The given percentile (99.0%). The credit formula: methodology is regularly analysed by loss percentile is calculated at a port- ACP = Exposure * (1– Recovery comparing the ACP estimates with the folio level by using the CREDITRISK+ Rate) * Expected Default Frequency related actual incurred losses. model. From September 1997 to reporting date, the 99.0 percentile was Where the expected default frequency CREDITRISK+ parameter assumptions reported for all business units. is determined by the credit rating of Recovery rate The recovery rate has Parameter assumptions The the entity, the ACP for each banking remained unchanged at 60% for all table below provides an overview of business unit is calculated as the sum business units between December the internal counterparty ratings used of the ACPs for exposures in that 1996 and the reporting date. by the banking business units of Credit company’s portfolio. Suisse Group. Probability of default (EDF: Expected Default Frequency) from 31 Dec. 2000 Credit Suisse Group internal counterparty rating classes Rating Expected Default Frequency band AAA 0.00% < EDF ≤ 0.02% AA+ 0.02% < EDF ≤ 0.03% AA 0.03% < EDF ≤ 0.04% AA– 0.04% < EDF ≤ 0.05% A+ 0.05% < EDF ≤ 0.06% A 0.06% < EDF ≤ 0.07% 0.07% < EDF ≤ Non-impaired grades A– 0.11% BBB+ 0.11% < EDF ≤ 0.20% BBB 0.20% < EDF ≤ 0.30% BBB – 0.30% < EDF ≤ 0.60% BB+ 0.60% < EDF ≤ 0.90% BB 0.90% < EDF ≤ 1.25% BB – 1.25% < EDF ≤ 2.50% B+ 2.50% < EDF ≤ 4.00% B 4.00% < EDF ≤ 6.50% B– 6.50% < EDF ≤ 10.50% CCC+ 10.50% < EDF ≤ 16.00% CCC to CC – 16.00% < EDF ≤ 100.00% 16.00% < EDF ≤ 100.00% Impaired C grades D–I Risk of default has D–II materialised www.credit-suisse.com 49

.credit-suisse Annual Report Part 4 Risk management

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