050914 Hartmann final - Commerzbank AG€¦ · Basel II Corporate-Retail (max. loans €1m) 2,766.1...
Transcript of 050914 Hartmann final - Commerzbank AG€¦ · Basel II Corporate-Retail (max. loans €1m) 2,766.1...
Investors‘ DayRisk Management: Minimizing risks – Optimizing profits?
Wolfgang HartmannMember of the Board of Managing Directors
Frankfurt, 14.09.2005
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Agenda
Market Regulator
Customers Bank
Commerzbank
Risk Management
Risk Controlling
I.
Risk Management and Control at Commerzbank
I. II. III.Dynamics in the financial industry
What are the drivers of change?• Globalisation• Trading orientation• Regulations• Technology / IT• Market Focus / CompetitionIs minimizing risk a good measure to optimising profits?
II.
III.Risk Management as a major value driver in overall bank management: Current trends
Dynamics in the Financial Industry
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Regulation
• MaH• MaK• MaRisk• Basel II• IAS
Globalisation
Dynamic changes in the financial industry are being caused by the following drivers:
Increasing pressure for change with higher complexity and volatility in banking businessleads to higher demands for Risk Management and Control in the monitoring of
• Closer integration of financial markets
• Concentration process in banking sector
• EU-enlargement• Corporate clients:
winners and losers(insolvencies, relocation of business abroad)
Trading orientation
• ABS• Credit Trading• Structured
products• Credit Default
Swaps (CDS)• Hedge funds/
Private equity
Competition
• Change management
• Cost pressure• Risk-taking
capability• Management of
complex processes• Market shares for
target groups/products
Technicalfeatures
• Value creation,sequence chain
• Vertical integration, outsourcing
• IT infrastructure• Technological
advance (communication systems, IT)
1. Credit Risk 2. Market Risk 3. Operational Risk
I. II. III.Dynamics in the financial industry
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Trend since 2001in $ bn
Source: ISDA Market Survey
• Modern trading products (e.g CDS, CDO, ABS, (distressed) loan trading) make risks tradeable and enable banks to optimise theirportfolios (e.g. bulk risk limitation, diversification).
• Trading-oriented business makes possible timely valuation of market prices for risk positions instead of internal valuation.
• Hedge funds and private-equity funds have established themselves as important partners for portfolio diversification.
More trading-oriented business: notional amount of credit default swaps grew from $3,800bn to $8,400bn in `04 (annual growth rate of 123%)
919
2,192
3,779
8,422
5,442
2,688
632
1,563
06/01 12/01 06/02 12/02 06/03 12/03 06/04 12/04
I. II. III.Dynamics in the financial industry
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Risk-adjusted pricing in the financial industry is supported by relevant risk parameters (e.g. PD, LGD) for banks which are using the Advanced Approaches.
• The capital requirements under the new Basel II regulatory framework are more risk-sensitive than the current Grundsatz I.
• Main capital drivers are the asset classes Corporates, Trading Book and Operational Risk (new under Basel II).
• Rationale for specific asset classes:
• Banks/sovereigns: real PD’s instead of low risk weights, due to OECD status
• Trading book: no 50% cap anymore
• Equity and ABS: new rules are very negative
• Retail/SME as retail: low risk weights compared to current Grundsatz I
+ = higher capital requirements- = lower capital requirements
Quite different development of minimum capital requirement afterimplementation of Basel IIAsset classes Changes MRC AIRB
Corporates +Banks +Sovereigns +SME treated as Corporate -SME treated as Retail -Other Retail +Residential Mortgages -Qualifying Revolving Retail -Specialised Lending +Trading Book +Equity +Securitisation +Market Risk 0Operational Risk +
I. II. III.Dynamics in the financial industry
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Almost 40% of all IT costs are internal and external personnel costs
- illustrative -
IT Organisation/IT Processes
Development tools
Staff know-how in IT and business units
Application environment (isolated applications vs.data warehouse)
IT Infrastructure
Governance/User involvement
Standards/Documentation
Insourcing / Outsourcing/Offshoring
• According to a Boston Consulting survey, 15% of all bank costs are IT costs• No clear indication that higher IT spending pays off in terms of higher efficiency and of higher effectiveness• A flexible and efficient IT environment is essential for an advanced risk architecture
Other materialsNetworkSoftwareHardwareOutsourcingExternal employeesPersonnel
A future-oriented IT system is essential for efficient bank processes
Structure and dynamics of the IT environment is determined by …
25%
15%
6% 18%
17%
9%
10%
I. II. III.Dynamics in the financial industry
Source: BCG
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CB estimate, ZKV
28
41
15
26 2832 33
3027
3238 39
27.8332.39
8.4510.92
15.1518.82
22.3425.53
27.47 26.6227.93
37.6239.47 39.60 38.00-
40.002
`91 `92 `93 `94 `95 `96 `97 `98 `99 `00 `01 `02 `03 `04 `05
2.89 2.98 3.01 3.04 3.15 3.41
0.92 0.94 1.08 1.24 1.25 1.16
?
1 2 Creditreform estimate 3 Gross Domestic Product (real), change on previous year in %
2.2 -1.1 2.3 1.7 0.8 1.4 2.0 2.0 2.9 0.8 -0.15.1 0.1GDP3 1.6 0.81
Corporate insolvency losses, in € bn
Source: Creditreform
Germany is a risky environment under reconstruction with 400,000–600,000 job losses p.a.
Number in `000
Number of corporates in bn
Insolvencies in %≥ 1.5
< 1.5
≥ 3.0
Main reasons: globalisation, weak economy, low capital base and insufficient management skills
86
I. II. III.Dynamics in the financial industry
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Turnover 2002in € m
Number of corporates (in `000)
33
29
4
2.4
1.6
91
< 2
< 5
< 10
< 50
< 100
< 250
> 250 ←←←← Large caps, multinationals
mid-caps
Basel II SMEs
Basel II normal corporates
SMEs are essential for the growth and the necessary reorganizationof Germany as a service-orientedeconomy with:• more than 2/3 of all employees• 4/5 of all trainees• 50% Gross value added• 50% Turnover subject to tax• 50% Gross investments
2,766.1Basel II Corporate-Retail (max. loans €1m)
• Repositioning of banks within the SME sector in context of Basel II is under way
• Commerzbank’s strategic target is to play the major role in mid-cap, SME and corporate retail business
• Good risk management is essential for being on top in segments with high insolvency and restructuring rates
But restructuring of mid-caps and SMEs could be a good basis for professional financial advice
99.7% of all corporates have nodirect capital market access
I. II. III.Dynamics in the financial industry
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in %
Source: Annual Reports
CitigroupDresdner Bank
HSBCBank of America
HVBDeutsche BankCommerzbank
JP Morgan ChaseLloyds TSB
San Paolo-IMIBarclays
Société GénéraleABN Amro
BNP ParibasING Groep
Credit SuisseUBS
Does minimizing risk mean that the net LLP ratio2 is reduced as much as possible?
High LLP ratios could be...... an indication of weak points in some banks,
banking groups or economies OR
... the result of a successful banking strategy� targeted (risk-return oriented)steering of portfolio into attractive portfoliosegments (e.g. consumer lending, mid-capand emerging markets financing)
1 Average lending ² net provisioning relative to total lending
0.98 (1.80)
1.59 (2.00)
0.05 (0.08)
0.24 (0.92)
0.31 (0.43)
0.35 (0.40)
0.43 (0.55)
0.94 (0.31)
0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6
0.47 (0.54)
0.64
0.49 (0.36)
0.67
2003
0.68 (0.88)
0.76 (0.91)
2002
0.63 (0.65)
1 (0.911)
(1.64)
0.66 (0.77)
0.45 (0.53)
Ø 0.61 Ø 0.80
I. II. III.Dynamics in the financial industry
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Low LLPs don’t automatically mean high profitability:Germany is bottom of the class
Source: Moody‘s, January 2003
Net interest income (without risk costs) of average interest-bearing assetsin %
Risk costs
I. II. III.Dynamics in the financial industry
HVB
0 0,5 1 1,5 2 2,5 3 3,5 4 4,5 5
West LBCommerzbank
Dresdner Bank
Intesa
HSBC
BBVASantander
Bank of AmericaBank One
HVB
0 0,5 1 1,5 2 2,5 3 3,5 4 4,5 5
West LBCommerzbank
Dresdner Bank
Intesa
HSBC
BBVASantanderCH
Bank of AmericaBank One
HVB
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
HelabaBayerische LB
West LBCommerzbank
Dresdner Bank
Deutsche Bank
Societe GeneraleCredit LyonnaisCredit Agricole
Bank AustriaErste Bank
ABN Amro
IntesaUnicredito
HSBCLloyds TSB
BBVASantander
Banco Popular
Bank of AmericaBank One
Citigroup
Conclusion: Major German banks might have weaknesses in …• … credit risk management• … risk-adjusted pricing• … business focus
Essential for the assessment of business success is the net margin of interest (interest income minus risk costs/risk-weighted assets)
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Critical factors for success in risk management, e.g.:• Clear risk strategy• Timely monitoring, reporting and good corporate governance• Limiting bulk risk• Good knowledge of own portfolio in all risk and return dimensions• Efficient instruments/infrastructure for identifying, assessing and monitoring risks and returns,
advanced risk-adjusted pricing systems • Clear focus on markets/sectors with a high return • A keen sense of the market • Highly qualified staff• Shared risk culture
“Great deeds are usually wrought at great risks.”
Does minimizing risk really lead to an optimisation of profits?
Herodotus, The Histories of Herodotus, Greek historian & traveller (484 BC - 430 BC)
NO: Minimizing risk can mean the loss of shares in highly profitable markets and possibly failure to achieve high earnings in these markets (e.g. mid-caps, SME’s, retail business)
NO: Risky market segments usually generate a higher returnBUT: Sound risk management and control (based on advanced techniques) is essential for realising this
potential, otherwise failure is inevitable
Risk Management is the key to sustainable future income
I. II. III.Dynamics in the financial industry
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Agenda
Market Regulator
Customers Bank
Commerzbank
Risk Management
Risk Controlling
I.
Risk Management and Control at Commerzbank
Mission statement “being the benchmark“Responsibilities/OrganisationRisk reportingEconomic capital conceptBasel II projectExamples credit:• Rating/Scoring • Pricing• LLP• Bulk risks
II.
III.Risk Management as a major value driver in overall bank management: Current trends
Dynamics in the Financial Industry
I. II. III.Risk Management and Control at Commerzbank
• Master scale• Credit process• Problem loans• Credit risk strategy
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“Stages of Excellence” risk/capital management
Shar
ehol
der v
alue
Risk management sophistication
Riskidentification
Consistent riskquantification
Stage 1:Risk controlprevention
Linking riskand return
Stage 2:Continuous and
integrated improvement
Capitalallocation
Portfoliomanagement
Strategic valueenhancement
Stage 3:Group-widecapital mgt.
The Bank believes that substantial value leverage still exists for boosting the Bank’s earnings performance on a sustained basis in the claim to “being the benchmark in risk control and management”.(see Annual Report 2004, page 87)
Evolution in risk management
RoRaC
Economic capital
I. II. III.Risk Management and Control at Commerzbank
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ReputationalRisk
StrategicRisk
CreditRisk
MarketRisk
LiquidityRisk
ComplianceRisk
OperationalRisk
Quantification
BusinessRisk
…while other non-quantifiable risks like Reputational Risk, Sustainability and Compliance Risk are not covered by the risk departments ZRC (Global Risk Control), ZCO (Global Credit Operations) and ZCP (Credit Operations Private Customers).
The Chief Risk Officer is responsible for all quantifiable risks…
I. II. III.Risk Management and Control at Commerzbank
quantifiable
Risk
quantifiable
Risk
Non-quantifiable Risk
Quantifiable Risk
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As a result of the end-to-end implementation of new systems and processes, the organisation of credit line functions will significantly change within the next few years.
Head of Risk Control
Market RiskControl
Credit RiskControl
Functions• DevelopmentRating methods
• DevelopmentScoring methods
• Validation methods
• Implementationmethods
• SecuringData quality
Section 1
Rating- /Scoring-Methods
Block
Functions• DevelopmentRating methods
• DevelopmentScoring methods
• Validation methods
• Implementationmethods
• SecuringData quality
Section 1
Rating- /ScoringMethods
Section 2
QuantitativeCredit Risk
Dr. Giese
Functions• LGD / EADestimation
• EL (SRK) /UL (CVaR)
• Risk adjust.Pricing
• Validation SRK,CVaR, Pricing
Section 2
QuantitativeCredit Risk
Functions• LGD / EADestimation
• EL (SRK) /UL (CVaR)
• Risk adjust.Pricing
• Validation SRK,CVaR, Pricing
Section 3
CreditRisk Strategy /
Portfolio
Functions• Credit Riskstrategy
• Portfolio - / CreditRisk Control
• Group wide loan loss provision plan
• worldwide group exposures/Foreign Country Liabilities
• KWG registration
Section 3
CreditRisk Strategy
/PortfolioControlling
Functions• Credit Riskstrategy
• Portfolio - / CreditRisk Control
• Group wide loan loss provision plan
• worldwide group exposures/Foreign Country Liabilities
• KWG registration
Section 4
Market RiskControl
Treasury/Methods
Dr. Schwarz
Functions• Market riskmonitoring/analysis ZGT/Others
• Liquidity Risk
• Internal Model
• Model Validation
• Market Conformity Check / Client Valuation
• Market data
Section 4
Market RiskControl
Treasury/Methods
Functions• Market riskmonitoring/analysis ZGT/Others
• Liquidity Risk
• Internal Model
• Model Validation
• Market Conformity Check / Client Valuation
• Market data
Market riskcontrol
Credit riskcontrol
Section 6
OperationalRisk Control /
BusinessManagement
Functions• Project Basel II
• Internal /externalloss data
• Self Assessment
• Key RiskIndicators
• OpRisk Value -atRisk (EL and UL)
• Project HOC –Processes
Section 6
OperationalRisk Control
/ BusinessManagement
Functions• Project Basel II
• Internal /externalloss data
• Self Assessment
• Key RiskIndicators
• OpRisk Value -atRisk (EL and UL)
• Project HOC –Processes
Section 7
IntegratedRisk
Functions
TBA
Functions• Overall risk monitoring /Economic Capital
• New Products(Coordination
Of the processes /Overall risk
assessment)
• Complexaktivities
Integrated Functions
Section 7
IntegratedRisk
Functions
Functions• Overall risk monitoring /Economic Capital
• New Products(Coordination
Of the processes /Overall risk
assessment)
• Regulationsactivities
Integrated functions
• Complex
“Brains trust” Risk Control department is driving the development
Section 5
MarketRisk Control
Functions• Market risk monitoring/analysis ZGS
• Intensive Support ZGS / providing reports on portfolio level
• Illiquid markets
• New Products(Analysis)
Section 5
MarketRisk Control
Functions• Market risk monitoring/analysis ZCM
• Intensive Support ZCM / providing reports on portfolio level
• Illiquid markets
• New Products(Analysis)
ZCM
I. II. III.Risk Management and Control at Commerzbank
Operational risk control
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ZENTRALER STAB RISIKOCONTROLLINGZENTRALER STAB RISIKOCONTROLLINGRISK REPORT AS OF 06/2005RISK REPORT AS OF 06/2005
Strictly ConfidentialStrictly Confidential
0. ExecutiveSummary
I. Risk Taking Capability (Economic and Regulatory Capital)
II. Credit Risk (incl. Credit Risk StrategyDeviation Analysis)
III. Market andLiquidityRisk (Trading/Banking BookandParticipations)
IV. Operational Risk (incl. Legal Risk)
V. Regulations and Other Risks
Table of Contents
Quarterly Risk ReportCommerzbank Group
ZENTRALER STAB RISIKOCONTROLLINGZENTRALER STAB RISIKOCONTROLLINGReportingReporting period Juneperiod June 20052005
Strictly ConfidentialStrictly Confidential
2
Reporting period June 2005
4.1 Interest Rates4.1 Interest Rates4.1 Interest Rates
ContentContent
4.1.1 ZCM IR Trading4.1.2 ZGT4.1.3 Essen Hyp4.1.4 EEPK4.1.5 BRE Bank S.A.
4.4 Credit Markets4.4 Credit Markets4.4 Credit Markets
4.2 Equities4.2 Equities4.2 Equities
4.3 Foreign Exchange – ZCM FX Trading 4.3 Foreign Exchange 4.3 Foreign Exchange –– ZCM FX Trading ZCM FX Trading
4.2.1 ZCM Special Situations4.2.2 ZCM Risk Management4.2.3 ZCM Equity Derivatives
4.4.1 ZCM Credit Trading4.4.2 Credit Derivatives Investment Book
3. Stresstest and Scenario Analysis - CB Group3. Stresstest and Scenario Analysis 3. Stresstest and Scenario Analysis -- CB GroupCB Group
3.1 Global Stress3.2 Scenario Analysis
5 Liquidity Risk5 Liquidity Risk5 Liquidity Risk
1. Executive Summary – Market Risk and P&L1. Executive Summary 1. Executive Summary –– Market Risk and P&LMarket Risk and P&L
2. Market Overview – Interest Rates, Credit Spreads, Foreign Exchange, Equities2. Market Overview 2. Market Overview –– Interest Rates, Credit Spreads, Foreign Exchange, EquitiesInterest Rates, Credit Spreads, Foreign Exchange, Equities
4. Key Portfolios4. Key Portfolios4. Key Portfolios
1.1 Profit and Loss1.2 Market Risk1.3 Risk Limit Approvals and Decisions1.4 Historical Overview of P&L and Risk
2.1 Market Overview 2.2 Market Views of Business Units and ZKV
6 Clean-P&L Backtesting6 Clean6 Clean--P&L BacktestingP&L Backtesting
Monthly presentation for Board ofDirectors and Risk Committee• Economic Capital Report• Risk-taking capability
Monthly presentation for Boardof Directors and Risk/Credit Committee• Bulk risks• Largest problem loans• Largest substandard loans
ZENTRALER STAB RISIKOCONTROLLINGZENTRALER STAB RISIKOCONTROLLINGOperational RISK REPORT Q2 2005Operational RISK REPORT Q2 2005
2
OpRiskOpRisk Report Report CommerzbankCommerzbank GroupGroup
2. OpRisk Losses 2. 2. OpRiskOpRisk Losses Losses
1. OpRisk Capital1. 1. OpRiskOpRisk CapitalCapital
0.1. OpRisk Highlights Q2 2005
1.1. Group Capital Requirement
0. Executive Summary0. Executive Summary0. Executive Summary
2.1. Internal Losses2.2. External Losses
3. OpRisk Process Analysis3. 3. OpRiskOpRisk Process AnalysisProcess Analysis
3.1. Quality-Self-Assessment (QSA) –Results and Key Risk Drivers3.2. Business ContinuityManagement (BCM) –Assessment Results3.3. Key Risk Indicators (KRI)3.4. Risk & Control Inventory(RCI) / Scenarios: Fat-Tail Potential
4. Significant OpRisk Audit Findings And Mitigation Actions4. Significant 4. Significant OpRiskOpRisk Audit Findings And Mitigation ActionsAudit Findings And Mitigation Actions
5. OpRisk Provisions And Insurance5. 5. OpRiskOpRisk Provisions And InsuranceProvisions And Insurance
5.1. Provisions for pending legal risk5.2. Insurance
1.2. OpRisk Capital by business unit
AttachmentsAttachmentsAttachments
I. Significant internal loss dataII. a) QSA b) BCM Analysis
III. Significant Audit Findings
Quarterly Operational Risk Report for Board of Directors and OpRiskCommittee
in addition
Quarterly presentation for Board of Directors and Risk Committee of
the Supervisory Board
The quarterly Risk Report is CB’s central risk information medium
Monthly Market and Liquidity Risk Report for Board of Directors and Risk Committee
in additionin addition
in addition
I. II. III.Risk Management and Control at Commerzbank
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Economic Capital(Unexpected loss)
approx. €10bn
CreditRisk55%
MarketRisk27%
OperationalRisk13%
BusinessRisk
5%
• All components of economic capital are calculated using the same time horizon (1 year) and confidence level (99.95%, corresponding to the Commerzbank target rating of A1).
• Main objective is the optimisation of the RoRaC on the total economic capital, limited by the available capital for risk coverage ( = equity capital + budgeted operating profit + revaluation reserves).
Commerzbank’s economic capital and risk-taking capability
RoRaC=
Operating pre-tax profitEcon. capital
Capital for risk coverage
Actual risk buffer35%
(minimumbuffer = 20%)
Economic capital incl.
diversificationof approx. 25%
Available capital for risk coverage
(incl. Trading/bankingbook and participations)
I. II. III.Risk Management and Control at Commerzbank
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Risk Type Basel I Basel II Best Practice Commerzbank
Commerzbank came first in an economic capital benchmarking study of German BdB banks which showed that its approach is on best practice level
Differences between regulatory and internal calculation of risk capital requirements
Yes, but not risk-sensitive
Integrated modelling of Credit VaR
Significant improvements
Transfer risk
Interest rate risk
Trading book
Correlation matrix/ factor model
Earnings volatility (EaR) /
Scenario-approach
Internal model
Business risk
Operational risk
Integrated modelling of VaR
Total risk= MR + CR + OR
No
allowed
Significant improvements
No
Internal VaR model
No
Cre
dit R
isk
No
Internal VaR model
No
Yes, but risk underestimated
No
No
Total risk= MR + CRRisk aggregation
Settlement risk Yes, but risk underestimated
Liquidity risk Internal monitoringMonitoring acc. 2
Pillar II
Yes, but not risk-sensitive
Internal modelReal estate risk No No
Yes, but not risk-sensitive
Counterparty Risk,Concentration/Bulk risks
Integrated modelling of Credit VaR
Significant improvements
Transfer risk
Interest rate riskin the banking book
Trading book
Correlation matrix/ factor model
Earnings volatility (EaR)/Scenario-approach
Internal model
Business risk
Operational risk
Integrated modelling Of VaR
Participations in bankingbook
Total risk= MR + CR + OR
No
Yes, internal models allowed
Significant improvements
No
Internal VaR model
No
Cre
dit R
isk
No
Internal VaR model
No
Yes, but risk underestimated
No
No
Total risk= MR + CRRisk aggregation
Ris
k
Settlement risk Yes, but risk underestimated
Liquidity risk Internal monitoringMonitoring acc.
Grundsatz IIPillar II
internal monitoring
Yes, but not risk-sensitive
Internal modelReal estate risk No
Improved CreditRisk+ model
Internal model based on correlation matrix
Fee income and cost forecast model
Internal model
Internal market risk model
Historical simulation
Internal monitoring/ scenario analysis
Not relevant
Improved CreditRisk + model
Internal model based on correlation matrix
Fee income and cost forecast model
Internal model
Internal market risk model
Historical simulation
Internal monitoring/ scenario analysis
Not relevantNo
I. II. III.Risk Management and Control at CommerzbankM
arke
t
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Private andBusiness Customers
AssetManagement Mittelstand
InternationalCorporateBanking
Corporates & Markets
MortgageBanks
Others andConsolidation
Jun- 05 Credit Risk
Jun- 05 Other Risks
ECAP Credit risk
ECAP Other risks
RegCap Credit risk
RegCap Market risk
There is almost no difference between overall regulatory and economic capitalbut the risk structure differs significantly for activities and risk types
Regulatory and economic capital for Commerzbank’s various segments
I. II. III.Risk Management and Control at Commerzbank
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-I = Current Grundsatz I SA = Standardized approachFIRB = Basic IRB Approach AIRB = Advanced IRB approach
GS-I
100%
SA
124%* AIRB(QIS 4)
103%*
Econ
omic
alEq
uity
cha
rge
* Compared with Grundsatz I (Basis: QIS 4 figures, Dec `04)
FIRB
105%*
90% floor in 2008 �
80% floor in 2009 �
Withconservativeassumptionsfor LGD, EaD
AssumingAIRB
as from1/2008
approx. 95%
with own futureLGD and EaDvalues
AIRB advantages Depending on:• internal LGD• internal EaD• necessaryrecalibration by the regulator
GS
There are additional significant value drivers in the Advanced IRB Approach: • Higher discriminatory power -> improved risk selection• Avoidance of defaults• Provision of PD and LGD figures for internal controlling • Greater efficiency -> further optimisation• Adequate allocation of economic capital• Higher reputation
I. II. III.Risk Management and Control at Commerzbank
Significant advantages for AIRB Approach
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CBK is in close and regular/continuous contact with the regulators with regard to home/host issues and AIRB/AMA application process...
Home/Host issues• Commerzbank has been chosen as the national, case study bank by German regulators
• During 2004 several meetings/presentations with the regulators took place in this context as well as meeting with the ad-hoc working group of the IIF
• The case study initiative was followed by the college of supervisors in March 2005 where CB presented the state of Basel II implementation to 17 international banking supervisory authorities from countries where CB has business units
AIRB/AMA application• Following the meeting in March, the process of AIRB application has been started on the basis of
the BaFin circular of December 2004
• 19.7.05 the formal AIRB application was sent to BaFin/Bundesbank
• Beginning of August, a first working meeting with BaFin/Bundesbank took place to evaluate the further deliverables
• The formal AMA application process will start once BaFin/Bundesbank has published the relevant paper
I. II. III.Risk Management and Control at Commerzbank
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2.
4.
5.
% o
f tot
al G
roup
cre
dit e
xpos
ure
(EAD
)
1.1.05 1.1.06 1.1.08 1.1.10 1.1.12
100
50
1.1.07 1.1.09 1.1.11 1.1.13
Beginningof AIRB
Regulatory reference point Permanent partial use
92%
80%
50%
Core non-retail segments (banks, corporates)
Core Germanretail segments
Material subsidiaries using Group-wide ratings
Other subsidiaries, remainingratings
Permanent partial use (e.g. small retail portfolios, immaterial subsidiaries)
Focus of each proposed audit “wave”:
Commerzbankcumulative AIRBcoverage (EAD)
Ratings inthe “1st wave”:
RC-GERRC-LACRC-INT
Banks (incl. EssenHyp)Specialized Finance
Commerzbank is well positioned with respect to portfolio coverage in AIRB Approach
1. 3.2. 4. 5.
Status:• AIRB application sent to BaFin on 19.7.05• Expected begin of on-site AIRB examination
end of Q2 `06
1.
3.
Proposed audit “waves”
I. II. III.Risk Management and Control at Commerzbank
Minimum requirement
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Basel II project overview
I. II. III.Risk Management and Control at Commerzbank
Proj
ect m
aste
rpla
n (IT
and
Spe
cial
ised
Dep
artm
ent)
Rating
non-retailRatingretail
LGD projects
Basel II calculation engine
EL/UL
Ongoing coordination with the regulators / AIRB/AMA application/certification
Futu
re B
II re
gist
ratio
n/
Impl
emen
tatio
nSA
MB
A
Trading book (new Project;Basel II paper 18.07.)
Stress test/Backtesting
Proj
ect e
nd a
nd tr
ansf
er t
o lin
e fu
nctio
ns
Risk mitigation
ORS: OpRiskimplementation
Reporting/KRS(depends on DWH Rel 1)
Calculation engine / EC calculator - Simulation -/ QIS 5
Calculation engine /Capital calculator - Production -
• AIRB approach• (Standardized approach)• (FIRB approach)
ORE: OpRisk• AMA approach• (Standardized approach)• (Basis indicator approach)
Pricing(methodology)
ABS
Impl
emen
tatio
nPi
llar
III
qual
itativ
e re
quire
men
ts
PII +
MaR
isk
Dat
aw
areh
ouse
Subs
idia
ries
inte
rfac
e
Balance-sheetanalysis,new
Data quality
Inte
rest
rate
ris
kin
ban
k bo
okEC
ap
Decision machine (etec)
BRE
CCR
Essen-hyp
Rel 1
Rel 2
Balancesheetintegr.
Stra
tegi
cim
pact
sLi
quid
ityris
k
Proj
ect m
aste
rpla
n (IT
and
Spe
cial
ised
Dep
artm
ent)
Ratingnon-retail
Ratingretail
LGD projects
Basel II calculation engine
EL/UL
Futu
re B
II re
gist
ratio
n/
Impl
emen
tatio
nSA
MB
A
Trading book (New Project; Basel II paper 18.07.)
Stress test/ Backtesting
Proj
ect e
nd a
nd tr
ansf
er t
o lin
e fu
nctio
ns
Risk mitigation
ORS: OpRiskimplementation
Reporting/KRS(depends on DWH Rel1)
Calculation engine / EC calculator - Simulation -/ QIS 5
Calculation engine /Capital calculator - Production -
• AIRB approach• (Standardized approach)• (FIRB approach)
ORE: OpRisk• AMA approach• (Standardized approach)• (Basis indicator approach)
Pricing(methodology)
ABS
Impl
emen
tatio
nPi
llar
III
Qua
litat
ive
requ
irem
ents
PI
I + M
aRis
k
Dat
aw
areh
ouse
Subs
idia
ries
inte
rfac
e
Balance sheetanalysis news
Data quality
Inte
rest
rate
ris
kin
ban
k-in
gbo
okEC
ap
Decision machine (etec)
BRE
CCR
Essen-hyp
Rel 1
Rel 2
Balancesheetintegr.
Stra
tegi
c im
pact
sLi
quid
ity
risk
24/48
Development of market default rate (probability of default, PD)Mid-cap corporates with turnover between €2.5m and €750min %
On average, German Mittelstand firms fall into the “non-investment grade” category,i.e. into the risk segment (<<<< BBB- according to S&P) – similar to the United States!
B+
BB-
BB
BB+
ComparableS&P ratings
CB’s German Mittelstand target group: Market default rates in Germany, by turnover class
1.96
2.42 2.47
2.29
1.54 1,46
2.03
1.711.65
1.12
1.451.34
1.01
0.62
0.920.68
0.60
1.22
1.50
1.22
1.05
1.29
1.711.55
1.39
1.751.56
1.87
2.072.13
1.86
1.511.75
1.64
1.151.26
1.34
1.01
0.770.81
1.11.02
0.49
0.78
0.54
0.39 0.410.37
0.98
1.32
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Non-weighted average€50m - €750m€25m - €50m€7.5m - €25m€2.5m - €7.5m
I. II. III.Risk Management and Control at Commerzbank
25/48
AAA
AA
A
BBB
BB
B
CCC
C, D - I, D- II
1.01.21.41.61.82.02.22.42.62.83.03.23.43.63.84.04.24.44.64.85.05.25.45.65.8
6.1 - 6.5
Rating levels
0,010,020,040,070,11
0,260,390,570,811,141.562,102,743,504,355,426,748,3910,4312,9816,1520,09
S&P
- IIDefault
0
0.17
25.00< 100
Average probability of default, in %
AAA
AA+, AA, AA-
A+, A, A-
BB
B
CCC+
BBB+
BBB-
BB+
BB-
B+
B-
CCC to CC
DEFAULT
IFD
I
II
III
IV
V
VI
by way of comparison:
Typical Mittelstand customer(SMEs/mid-caps)
BBB
Little significance for Mittelstand,significance for large caps andcapital market-using multinationalsas well as banks and sovereigns
Weaker SMEs and mid-capswith the need to reposition orrestructure
Larger mid-caps with above-averagequality
Mittelstand customers in crisis:turnaround by management orneed for recapitalisation
Rating Master Scale and PD/EL values compared with S&P and IFD classes, structured by relevant target groups for detailed migration analysis
I. II. III.Risk Management and Control at Commerzbank
26/48
*) KfW direct loans only
Commerzbank has the most detailed rating differentiation for mid-caps
IFD rating scale – Mapping of top German banks
PDs
0.7 – 1.5%
1.5 - 3%
3 - 8%
> 8%
IFDrating
III
IV
V
VI
3.0 – 3.4
3.6 – 3.8
4.0 – 4.8
5.0
8
9 (or 10)
(10)11
12 -14
III
IV
V
VI
3.0 – 3.4
3.6 – 3.8
4.0 – 4.8
> 5.0
M10 – M11
M12 – M13
M14 – M15
M16 – M20
*)
4 – 5
5 – 6
6 – 7
> 7
< 0.3% - 5I 1.0 – 2.4 1 I 1.0 – 2.4 M1 – M71+ –3 -
0.3 – 0.7%II 2.6 – 2.8 6, 7II 2.6 – 2.8 M8 – M93 – 4- -
- -
-
iAAA – iBBB
iBBB – iBB+
iBB
iBB- – iB+
iB – iB-
> iCCC
Num
berof rating
levels
43 665
Rating levelsrelevant
for mid-cap
financing
Relevant
for mid-cap
financing
10
146 20212330
PDs
0.7 – 1.5%
1.5 - 3%
3 - 8%
> 8%
IFDrating
III
IV
V
VI
3.0 – 3.4
3.6 – 3.8
4.0 – 4.8
5.0
8
9 (or 10)
(10)11
12 -14
III
IV
V
VI
3.0 – 3.4
3.6 – 3.8
4.0 – 4.8
> 5.0
M10 – M11
M12 – M13
M14 – M15
M16 – M20
*)
4 – 5
5 – 6
6 – 7
> 7
< 0.3% - 5I 1.0 – 2.4 1 I 1.0 – 2.4 M1 – M71+ –3 -< 0.3% - 5I 1.0 – 2.4 1 I 1.0 – 2.4 M1 – M71+ –3 -
0.3 – 0.7%II 2.6 – 2.8 6, 7II 2.6 – 2.8 M8 – M93 – 4- -0.3 – 0.7%II 2.6 – 2.8 6, 7II 2.6 – 2.8 M8 – M93 – 4- -
- -
-
iAAA – iBBB
iBBB – iBB+
iBB
iBB- – iB+
iB – iB-
> iCCC
Num
berof rating
levels
43 665
Rating levelsrelevant
for mid-cap
financing
Relevant
for mid-cap
financing
10
146 20212330
I. II. III.Risk Management and Control at Commerzbank
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What distinguishes good from bad rating systems – αααα−−−− and ββββ−−−−errors
Rating classes Bad
Measure: GINI coefficient (increase from 70% to 75%) means sustainable reduction of loan loss provisions by approx. 1/6
Business which was unfortunately done
Business, which weshould have done
Borderline score/rating categorywhere no more business is carried out
Rating methods with high discriminatory power are characterized by a small overlapping sector of “good” and “bad” companies and provide clear guidelines for business.
Intensive competition between the banks for state-of-the-art rating systems strengthens the economy and provides significant competitive advantages for the leading banks.
Good
“Bad”companies
“Good”companies
�-error =
β-error =
Error types
Frequency
I. II. III.Risk Management and Control at Commerzbank
28/48
Annual turnover in € m
Commerzbank’s new PD rating systems for different types of corporate clients with high discriminatory power (GINI coefficient)
Commerzbank is on state-of-the-art level in banking sector
Head office in
0.0
750.0
Germany Other countries
Rating CorporatesLarge Companies (RC-LAC)For multinationals and larger companiesbank-wide, annualturnover > €750m
Rating corporatesGermany (RC-GER)For German medium-sizedbusinesses, annual turnover€2.5m to 750m
Rating CorporatesInternational (RC-INT)For international medium-sized businesses, annualturnover up to €750m
GINI = 75%
GINI = 70%
GINI = 75%
0.0
750.0
Germany Other countries
Rating CorporatesLarge Companies (RC-LAC)For multinationals and larger companiesbank-wide, annualturnover > €750m
Rating corporatesGermany (RC-GER)For German medium-sizedbusinesses, annual turnover€2.5m to 750m
Rating CorporatesInternational (RC-INT)For international medium-sized businesses, annualturnover up to €750m
Segment private Customers
GINI = 75%
GINI = 70%
GINI = 75%
Head office in
0.0
750.0
Germany Other countries
Rating CorporatesLarge Companies (RC-LAC)For multinationals and larger companiesbank-wide, annualturnover > €750m
Rating corporatesGermany (RC-GER)For German medium-sizedbusinesses, annual turnover€2.5m to 750m
Rating CorporatesInternational (RC-INT)For international medium-sized businesses, annualturnover up to €750m
GINI = 75%
GINI = 70%
GINI = 75%
0.0
2.5
750.0
Germany Other countries
Rating CorporatesLarge Companies (RC-LAC)For multinationals and larger companies bank-wide, annualturnover > €750m
Rating corporatesGermany (RC-GER)For German medium-sizedbusinesses, annual turnover€2.5m to 750m
Rating CorporatesInternational (RC-INT)For international medium-sized businesses, annualturnover up to €750m
Segment private Customers
GINI = 75%
GINI = 70%
GINI = 75%
I. II. III.Risk Management and Control at Commerzbank
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Financial analysis of annual fin. statemtents
Statistical evaluation of annualfinancial statement data
Financial analysis of current results
Trend evaluation by user PD is set higher for older data, on moving scale
Qualitativerisk analysis
70 -120 questions, depending on case
Warning indicators
Group integration
Override/manual change
Override is transparent, possible only as final step of rating, by max. of one notch, i.e. +/ -0.2
Analysis New rating methodsEvaluation of annual fin. statementscompared with benchmark data
34 questions
Evaluation of customer’s (credit)account behaviour and ext.payments
Simple substitution of rating classes
Overrides possible in individual partsof rating process
previously
Specific evaluation of 24 factors
Substitution of PDs weighting depends on relationship between PDs of parent and subsidiary
PD/borrower rating Borrower rating class mapped to PDPD mapped to rating class
Evaluation of current resultscompared with benchmark data
The new rating methods for German SME’s differ from the existing rating system
Rating Corporates Germany (RC-GER)Rating migration
Intensive treatment
51%
52%
5%
10%
5%
7%
39%
31%
Intensive treatment
New ratings (RC-GER)
Old ratings (CODEX/RB-
1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0 5,5 6,0
1,0 1,4 1,8 2,2 2,6 3,0 3,4 3,8 4,2 4,6 5,0 5,4 5,8
Intensive treatment
51%
52%
5%
10%
5%
7%
39%
31%
Intensive treatment
New ratings (RC-GER)
- FK)
1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0 5,5 6,0
1,0 1,4 1,8 2,2 2,6 3,0 3,4 3,8 4,2 4,6 5,0 5,4 5,8
I. II. III.Risk Management and Control at Commerzbank
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Credit margin
Cross-subsidisation due to standard margin
Standardmargin
Offers to good customers are too expensive ���� good new business is lost to banks with risk-oriented pricing
Offers to bad customers are too cheap ���� risk in portfolio increases via inflow of customers with weak solvency from banks with risk-sensitive pricing.
rating classes
In case of lower creditworthiness and in weaker economies, the willingness to grant loans ends much earlier if standard margins are used.
Too expensive
Too cheapfor risk
coverage
• Standard margins and weakly calibrated spread curve: Bank grows in sectors with weaker ratings and would be well advised to stop the granting of loans at an early stage.
• Only banks with good rating systems and risk-adjusted pricing do not suffer from this effect.
I. II. III.Risk Management and Control at Commerzbank
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“From customer solvency to actual credit risk”= from PD (probability of default) to EL (expected loss)
Einflussfaktoren
InanspruchnahmeLimit
KreditartSicherheitenetc.
PD (in %)Expected defaultof transactions ortotal exposureof a customer
• Recovery rates foruncollateralized part and physical collateral
• Reason for default e.g. restructuring, formal insolvency
• Customer group• Legal framework
(country)• etc.
EaD (in €)X LGD (in %)
EL in relation to EaD= risk premium
in % or = standard
risk costs
X = EL (in €)
EL / EaD
Quantitativefactors
FaktorenQualitativefactors
• credit volume(drawings)
• financial collateral
• Limit credit type• etc.
Influencing factors
EaD = Exposure at defaultLGD = Loss given default
Rating
Commitment rating
Influencing factors
A good knowledge of all relevant Basel II parameters is essential for risk-adjusted pricing. Within Commerzbank’s Basel II project, we evaluate all the necessary parameters for all target groups.
I. II. III.Risk Management and Control at Commerzbank
32/48
EL
Low ECB prime rate (substantially lower inflation), good fundingbasis of the bank (a favourable external bank rating is essential)
Good rating ���� less effort required for creditworthiness check large portfolio ���� economies of scale,standardised products/processes ���� lower costs for individual cases,large single loans, less and simplified collateral processing
Good rating ���� less documents/information for creditworthiness check ���� focus on sales
Internet bank ���� no personal support, standardised/ target-oriented support and advice, many customers per relationship manager
Good solvency ���� good rating ���� low PD,high degree of collateral ���� low EL
Refinancing/purchase costs
Costs for relationship management
Costs for credit process
Standard risk costs
Reg. equity capital costs according to Basel II
(IRB Advanced Approach)
Good rating ���� low PD ���� low equity charge High collateral ���� low EaD/LGD, lower equity costsfavourable portfolio class (e.g. Retail-SME) ���� low capital costsAllocation of business with no equity charges = cross selling (e.g. payment services, international banking, asset management)
Proc
ess
man
agem
ent
Reasons for a bank’s favourable interest rates
Efficient banking systems are able to offer a stable credit supply for all customer segments with differentiated but competitiveconditions. Customer and bank contribute jointly to favourable lending rates.The rating is an essential factor for the margin in all price components.
I. II. III.Risk Management and Control at Commerzbank
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Commerzbank’s etec project (end-to-end credit) for corporate customers has redesigned the whole credit process for mid-cap business using modern instruments
Mitt
elst
and
Externally and internally committed facilities
individual “light”process
up to €0.75m
Special processes in centres of competence (e.g. Commercial Real Estate, Public Finance, Specialised Lending, Renewable Energy)
I. II. III.Risk Management and Control at Commerzbank
Large customers,
MNCs
>€0.75m - €5m > €5m
Mid-caps(=€750m)
SME’s(=€50m)
individual process
standard process
individual“light”
process
34/48
Decision process
Standard process for German SMEs up to €50m
Green: Decision by account managerYellow: Escalation processRed: No credit
Pricing decision4.2
Additional initialtests with regard to• Maximum
amount of credits with given enterprise size
• Portfolio limits
Risk decision0
Collateral quota (in %)
34
7
5
2
0 10 20 30 40 50 60 70 80 90 100*
1
6
PD(in
%)
98
10
100Gross margin (in bp)
1.0
Com
mitm
ent r
atin
g
600300200100 400 500
1.41.82.22.63.03.43.8
0
Green: Decision by account managerYellow: Decision in one single credit centreRed: No credit
Yes/no decision by machine based on EL and additional pricing requirements for improved decisions
I. II. III.Risk Management and Control at Commerzbank
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Coverage ratio for non-performing loansin €m
Loan-loss provisions in bpsLoan-loss provisions in €m
1,498
1,683
1,158
1,322
1,614
1,822
1,629
792
1.084
1,358
589
873
537
724
555 545 522
909
810 621
598
822
1.267
836688
1997 1998 1999 2000 2001 2002 2003 2004 2005
Non-performing loans
Loan-loss provision
CountryLLP+General provision
Collateral
110
90
106
44
6774
66
52
111
99
85
7074
57
33
4044
32 33 33
4453 38
33
46
1997 1998 1999 2000 2001 2002 2003 2004 2005
Releases
Net LLP
Gross LLP
Averagenet LLP 1997-2004
CB - Gross/net loan-loss provisions and releases 1997–2005 (August top-down forecast)
I. II. III.Risk Management and Control at Commerzbank
Dec `04
6,924326
1,831
5,352
119.3%
7,509
Mar `05
116.0%
6,393
334
1,723
5,402
7,459
Jun `05
117.5%
6,202
341
1,539
5,407
7,2871,066 1,215 1,085In excess:
36/48
in € m
40517-7
195
3345
Currentforecast
Mittelstand
International Corporate Banking
Corporates and Markets
Mortgage Banks
Others and Consolidation
601
14-10
208
52-29
2004
682
212
55
167
27-59
2003
1,084
846
70
197
188
32-12
2002
1,321
688
Private and Business Customers
Group loan-loss provisions: Net LLP 2002 – 2004, 2005 budget and `05 estimates
I. II. III.Risk Management and Control at Commerzbank
Budget2005
760
836
37/48
69.062.160.4
55.954.0
66.762.4
48.4
92.790.282.783.3
Total lending
non-performing loans 6.8 7.1 6.3 6.2total LLPs 5.7 5.9 5.7 5.7npl in % total lending 4.0% 4.3% 3.9% 3.9%
8.9 5.3 3.5 3.34.3 3.3 2.3 2.3
0.4% 0.3% 2.4% 2.3%
n.a. 10,7 7,3 4,7n.a. 5,6 4,4 2,9n.a. 10,4% 7,7% 4,6%
2002 2003 2004 2002 20032002 2003 2004200406/05
171 165 161 158
06/05
229 166 144 145
06/05
123 102 95 102
Total loan-loss provisions as percentage of total non-performing loans (incl. collateral)
…while coverage ratios of other top German banks are still at a significantly lower level
in €
bn
CB’s strong ratio of loan-loss provisions to non-performing loans – already at a high level – increased again in the first half of 2005 …
I. II. III.Risk Management and Control at Commerzbank
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Development of uncovered risk for the top 20 problem loans (performing/non-performing)in € bn
Domestic corporates and foreign units (defined by CR 6.0-6.5/ER 6.1-6.5)
Overall coverage ratiofor top 20 problem loans:
12/03: 48%12/04: 48%
3/05: 56%6/05: 62%
12/03 3/05 6/0512/04
1.5
2.0
0.5
1.0
20 biggest problem loans have been significantly reduced since 2003
I. II. III.Risk Management and Control at Commerzbank
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• Target for single bulk risk limitation according to the Credit Risk Strategy is to keep the economic capital for single customers below €20m for all ratings of less than 4.5 and below €5m for ratings worse than 4.5.
• Monitoring of compliance with the target is based on a traffic-lights system and regular monthly reporting to Risk/Credit Committee and Board of Directors.
• The traffic-light colour is determined according to the economic capital (Credit VaR) of the single customer. For customers above the limit of €20m, risk reduction (not the same as exposure reduction) is required.
• Within Commerzbank’s Credit Risk Strategy, an overall reduction target for economic capital for credit has been set for 2005/2006
• As of today, only a few customers of the Commerzbank Group are over the limit.
The ECap traffic light derives from the amount of economic capital
which is assigned to the bulk.
since 03/05
1
10
1
€20m
€20m
€20m
3.5€326m
2.0
2.0€1,170m
ECap (CVaR)
year
years€334m
year
MaturityRatingRisk volumeImportant factors influencing economic capital (CVaR) are rating and maturity. The example to the left shows different constellations, all of which lead to the same ECap (CVaR) of €20m.
Bulk risk limitation by economic capital
I. II. III.Risk Management and Control at Commerzbank
Economic capital traffic lights systemTrafficlight Economic capital Measures
> € 20m All R > 4.4: > €5m
Risk reduction required
Monitoring on single-customer
basis
Bulk-risk entry zone
All R < 4.4: > €10m and< €20m
All R < 4.4: > €5m and< €10m
40/48
Volatility
EC / CVaR (Economic capital / Credit value-at-risk)
PD (Probability of default)
LGD (Loss given default)
EaD(Exposure at default)
Totalrevenues Total cost
RoRaC1)
(Return on risk-adjusted capital)
Contributionmargin III
EL/RP (Expected loss / risk provisioning)
Basel II projects:• Master Scale • Rating/scoring• methods (validated
with high GINI)
Bulk risk managementReduction of bulk risk
Internal CB Credit Riskmodel (external bench marked):• Maturity-adjusted CVaR• Element of risk-taking
capability calculation(according to MaRisk)
Projects:• Move to the Top(i.e. “value-driven management”) • Grow to Win
Basel II: LGD Loss collection/estimates• Collateral valuation• Work-out policy
- -
:
Efficiency projects Commerzbank Group
• Risk-adjusted pricing• Performance measurement• Risk management
• Collateral management
• Reduction/ limitation of large free credit lines
• etec project
• Determination of hurdle rate• Alternative: m-t-m evaluation of risk
assets and management as trading position
1) RoRaC is defined as the ratio of operating profit to economic capital (Credit, Operational, Market and Business Risk)
Commerzbank’s hierarchy of targets – Value levers of credit risk strategy
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Retail
Essenhyp
Corporates Germany
Corporates E. Europe
Corporates USA
Financial institutions
Corporates & Markets (incl. trading book)
BRE
Participations
Workout/ intensive treatment
Bulks
Corporates W. Europe
Corporates Asia
Focus growth Focus risk limitationOverall strategyPortfolio
Clear credit risk strategy
for single portfolios
growth no/low growth reduction
Clear credit risk strategy for segments with potential for growth and risk limitation
I. II. III.Risk Management and Control at Commerzbank
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Agenda
Market Regulator
Customers Bank
Commerzbank
Risk Management
Risk Controlling
I.
Risk Management and Control at Commerzbank
Risk management as a bank’s core competencyGerman Banking InitiativeActivities and outlook
II.
III.Risk Management as a major value driver in overall bank management: Current trends
Dynamics in the Financial Industry
I. II. III.Risk Management as a major value driver in overall bank management
43/48
Risk management is our core competenceRisk management brings benefits for…
…ourcustomers
…ourshareholders
…ourexternal ratings
…ourstaff
• Low beta-errors and the readiness to give loans also to weaker customers • Risk-adjusted, fair market conditions by modern pricing tools and efficient processes• Steady supply with innovative credit and capital-market products• Intensive treatment based on early warning systems focused on restructuring
• Stable earnings through low volatility and professional early warning systems based on an advanced RoRaC concept increase profitability
• Risk transparency and forecasting capability with regard to portfolioquality are essential for external rating agencies
• Clear and consistent steering concepts for asset allocation
• To work for a top risk management institution creates confidenceand higher motivation
Our strategic goal: ‘Being the benchmark’ in risk management and risk control
CB seeks distinction through professional risk management!
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Commerzbank’s CRO is sitting in the driver’s seat in the German Banking Initiative (IFD) as lead Sherpa for mid-cap financing
Direct capital-market access
Financing of SMEs and mid-caps in normal and growth
periods
Medium-sized corporates in crisis and measures of the
banks
Financing of start-ups and young companies
Rating as an added value for medium-sized corporates
Equity capital provision and mezzanine financing
Efficient collateral management
Sound knowledge of risk management helps to find market solutions in a more volatile environment: e.g. IFD mid-cap financing activities
I. II. III.Risk Management as a major value driver in overall bank management
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����
Internal rating in accordance with Basel II strengthens Germany as a financial centre and therefore “Standort Deutschland”
Rating functions
Banks will be distinguished in future by the quality of their rating and scoring systems, as well as by their use in production, sales and communication.
Instrument of communication
Diagnosis:early detection of adverse trends at
the company
Ensures SME financing
Basis for alternative forms of financing
(e.g. mezzanine)
Enhance banks’ willingness to
grant loans
Risk-adjustedpricing
I. II. III.Risk Management as a major value driver in overall bank management
46/48
Besides front office and back office (operative credit functions), an active portfolio management unit has been set up, which takes loans at market-oriented calculative prices and steers these portfolios for own account. Loans shifted from banking book to trading book.
A2 Development ofcredit portfolio-managementfunction
More rigid framework within Basel II: differences between EL calculation and loan-loss provisions (LLP) will be reduced. Stronger market focus on adequate LLP for disclosure-relevant portfolios within the context of Basel II. Implementation of LLP requirements according to IAS.
A3 Loan-loss provisions (LLP)
Reorganisation based on the results of the end-to-end credit project. Increasing use of risk engines for standardized, granular portfolios. Achieving a leaner credit administration using all possibilities, incl. outsourcing.
A5 Credit linefunctions
Enhanced use of secondary markets in line with proactive management (e.g. syndication, securitisation, hedging by CDSs). Limitation through allocated economic capital. At single-deal and portfolio levels, development and establishment of active credit trading.
A1 Active trading on secondarycredit markets
A Credit Risk
In the course of Basel II, banks are focusing on core portfolios in keeping with clear credit-risk strategies. Market-entry barriers for smaller institutions, as certain deals cannot be adequately handled (e.g. specialized lending).
A4 Credit portfoliostructure
Market outlook and Commerzbank activities
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Risk control is well positioned for further enhancements with three sections responsible for credit risk. Build-up of a solid data history, definition of a salary framework for employees, scaling of the parameters PD, LGD, EaD according to Basel II for all relevant market portfolios; evidence of a consistent use-test, establishment of a standard “default” definition via Basel II (substantial liabilities of a debtor more than 90 days overdue).
A7 Credit risk control
Enhancement of the job description of a bank risk manager for single customers in difficult financial conditions (= intensive treatment) with knowledge of secondary markets and credit-administrator expertise. Clear measurement of the success of theportfolios. Optimisation of work-out, using all available modern instruments. Clear orientation to transfer prices for the optimisation of the portfolio. Enhancement of early-warning capability in “white area” [higher rating brackets]. Creation of centres of competence for renewable energy and shipping, Service Centre Inkasso and CORECD.
A8 Intensivetreatment
Credit risk strategy refined to reflect MaK in coordination with the Bank’s supervisory authorities. Strategic limitation based on unexpected loss and steering of all relevant portfolios via RoRaC. Concentration on mid-caps, private-customer lending andliquid trading-oriented products for large caps.
A6 Credit risk strategy
Enhancement of rating- and scoring-systems (analysis of discriminance, concentration measures, rating migrations, Gini coefficient, etc.). Advanced use of secondary-market databases (KMV, credit spreads).
A9 Credit riskanalysis
Market outlook and Commerzbank activities
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Stronger cash-flow orientation through use of forward-looking scenario analyses. Limit-setting for base and stress scenarios.
D LiquidityRisk
Regulatory support for “New Product Processes”. Development of product- and target-group analysis (risk-)cost/revenue calculations and enhanced integration of economic capital concepts into all sub-areas of overall bank management. Implementation of MaRisk at Commerzbank and relevant Group entities. Ensure full MaRisk compliance within the external deadline (Dec. 2006).
E Overall bankmanagement/regulations
More scenario analysis (focusing on event risk, stress testing and economic cycles). Shorter holding period for participations (reduced long positions). Enhanced liquidity valuation of trading positions. Inclusion of hedge fund investments.
B Market Risk
Build-up of data histories, alternative modelling in line with Basel II. Great and increasing significance of outsourcing projects and enhanced risk mitigation (e.g. via insurance).
C Operational Risk
Market outlook and Commerzbank activities
I. II. III.Risk Management as a major value driver in overall bank management
For more information, please contact:Commerzbank Investor Relations
Jürgen Ackermann Head of Investor RelationsP: +49 69 136 22338M: [email protected]
Sandra BüschkenP: +49 69 136 23617M: [email protected]
Ute Heiserer-JäckelP: +49 69 136 41874M: [email protected]
Simone NuxollP: +49 69 136 45660M: [email protected]/ir
Disclaimer
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This presentation has been prepared and issued by Commerzbank AG. This publication is intended for professional and institutional customers./Any information in this presentation is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Commerzbank Group with regard to the accuracy of the data. The opinions and estimates contained herein constitute our best judgement at this date and time, and are subject to change without notice. This presentation is for information purposes, it is not intended to be and should not be construed as an offer or solicitation to acquire, or dispose of any of the securities or issues mentioned in this report./Commerzbank AG and/or its subsidiaries and/or affiliates (herein described as Commerzbank Group) may use the information in this presentation prior to its publication to its customers. Commerzbank Group or its employees may also own or build positions or trade in any such securities, issues, and derivatives thereon and may also sell them whenever considered appropriate. Commerzbank Group may also provide banking or other advisory services to interested parties./Commerzbank Group accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this presentation./Copies of this document are available upon request or can be downloaded from www.commerzbank.com/aktionaere/index.html