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Credit Risk Management – a BCR view
April 18th, !1"
Catalin CARAGEA
Executive DirectorStrategic Risk Management / Risk Controlling Division
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Intro
#n $! seconds please introduce yourself: %ame
&ni'ersity
About you
hat ould you ant to hear today*
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Agenda
$
1+ hat is redit -is. Management*
+ -is. Management / 0an.ing from a -egulatory and third party perspecti'e$+ redit -is. and its types
+ redit -is. Assessment
2+ redit -is. under apital ade3uacy
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Agenda
1+ hat is redit -is. Management*
+ -is. Management / 0an.ing from a -egulatory and third party perspecti'e$+ redit -is. and its types
+ redit -is. Assessment
2+ redit -is. under apital ade3uacy
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What is Credit Risk Management?
2
?
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What is Credit Risk Management?
"
-is. (source: 4E5) 6 the possibility of reaching a danger, to face a problem or
to suffer a damage
Risk management function ensures that all material ris.s are identified,
measured and properly reported+
7he risk management function is acti'ely in'ol'ed in elaborating the
institutions ris. strategy and in all material ris. management decisions and
that it can deli'er a complete 'ie of the hole range of ris.s of theinstitution+
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What is Credit Risk Management?
9
#nstitutions shall ha'e robust go'ernance arrangements, hich include a
clear organisational structure ith ell defined, transparent and consistentlines of responsibility, effecti'e processes to identify, manage, monitor and
report the risks they are or might be e;posed to, ade3uate internal control
mechanisms +++
7he types of
acti'ities tomanage ris.s
Credit risk is the ris. of a partial or complete default on contractually agreed
payment obligations+ #t refers to the negati'e conse3uences associated ith
defaults or the nonfulfillment of contracts due to deterioration in the
counterparty
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Agenda
8
1+ hat is redit -is. Management*
+ -is. Management / 0an.ing from a -egulatory and third party perspecti'e$+ redit -is. and its types
+ redit -is. Assessment
2+ redit -is. under apital ade3uacy
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Risk Management & Banking from a Regulatory and third arty
ersective
=
-egulation292>!1$
-egulation2>!1$
?&G==>!!"
Manyothers
Bankingmarket a
highlyregulatedindustry
0asel ###
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Risk Management & Banking from a Regulatory and third arty
ersective
1!
@rocesses
#7
inancial
Accounting
B-,@-,
Cegal
0usiness
RI!"
BA#"
!hareholders$Investors
Clients
Regulators%#BR 'CB
'BA(
'mloyees
hat
do
theyant*
hat
do
theyant*
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Risk Management & Banking from a Regulatory and third arty
ersective
Dhareholders #n'est money and ant acertain return on thesemoney
0an.
@roduce ris.s that should
be co'ered by the
shareholder
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Agenda
1
1+ hat is redit -is. Management*
+ -is. Management / 0an.ing from a -egulatory and third party perspecti'e$+ redit -is. and its types
+ redit -is. Assessment
2+ redit -is. under apital ade3uacy
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Credit Risk and its tyes
?)ow many credit risk su*+tyes do you think that e,ist in a
commercial *ank?
1$
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Credit Risk and its tyes
redit-is.
4efault ris.
Migration ris.
oncentration
ris.
-esidual ris.
4ilution ris.
Decuritiation
ris.
5 ris.
ounterpartycredit ris.
1
ountry ris.
Dettlement
ris.
E3uity ris.
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Credit Risk and its tyes
4efaultris.
Migrationris.
ountry ris. 4ilution ris.
G&EDD
+++ is the ris. of loss due to changes in
fair 'alue of credit e;posure, as a
result of changes in the rating of theclient+
F is the e;posure to a loss, caused by
e'ents in a particular country hich are
under the control of the go'ernment
but clearly not under the control of anindependent pri'ate enterprise or
indi'idual+
F is the ris. that an amount recei'able
is reduced through cash or noncash
credits to the obligor+
+++ is the ris. that issuers and obligors
fail to meet contractual obligations+
12
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Credit Risk and its tyes
Decuritiationris.
ounterpartycredit ris.
E3uity ris. 5 ris.
G&EDD
+++ is the ris. that the counterparty to a
deri'ati'e transaction could default
before the final settlement of thetransactions cash flos+
F is the credit ris. of nonconsolidated
e3uity in'estments+
F is a ris. associated ith foreign
currency lending to unhedged
borroers, hich arises due to
e;change rate fluctuations of the
respecti'e foreign currency+
+++ is the ris. arising from securitiation
transactions in hich the credit
institution acts as an originator or
sponsor, including reputational ris.s
due to comple; structures or products+
1"
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Credit Risk and its tyes
-esidual ris.oncentrationris.
Dettlementris.
G&EDD
+++ is the ris. that the recognied credit
ris. mitigation techni3ues (e+g+
collateral) employed by the ban. illbe less effecti'e than e;pected+
F is the ris. that a transaction ill fail
at the time of settlement+
+++ #s the ris. that arise from
interactions beteen similar and
different ris. factors, such as the ris.
arising from loans to the same client,
to a group of connected clients, to
clients from the same geographic
region or industry, or to clients hooffer the same goods and ser'ices, as
ell as the ris. arising from the use of
credit ris. mitigation techni3ues and in
particular from large indirect credit
e;posures+
19
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Agenda
18
1+ hat is redit -is. Management*
+ -is. Management / 0an.ing from a -egulatory and third party perspecti'e$+ redit -is. and its types
+ redit -is. Assessment
2+ redit -is. under apital ade3uacy
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Credit Risk Assessment
Credit Risk is the ris. of loss resulting from ad'erse changes in thecreditorthiness of counterparties+
&sually credit ris. contribution includes E;pected lossH (EC) and ≠pected lossH
(&C)+
• ',ected loss + loss e;pected to be ta.en once a client>e;posure is accepted in the
portfolio+ E;pected loss should be co'ered by pro'isions+
•
-ne,ected loss %'conomic Caital or Risk Weighted Assets ./0( + loss that can occur ifdefaults e;ceed e;pectations and de'iate from the a'erage (at a specified confidence
le'el)+ 7he most significant factor in'ol'ed in portfolio &C estimation is correlation+
≠pected Coss should be co'ered by ban.
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Credit Risk Assessment
!
-sually the average loss
that the *ank could suffer in
1 year eriod
2he fluctuation of actual losses
around average e,ected losses
creates additional risk of
une,ected losses %-3(4
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Credit Risk Assessment
A ractical e,amle5
1
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Credit Risk Assessment
Assessing the Credit Risk from an internal ersective
+ an e,amle +
6our individuals with
the same ersonal characteristics
each one wantingto *orrow 177 'uro from a *ank
Bank A Bank BBank A and
Bank B will lend
each 877 '-R
3 o
a n o f
1 7 7 ' -
R
3 o a n o f 1 7
7 ' - R
3 o
a n o
f 1 7 7 ' -
R
3 o a n
o f 1 7 7 '
- R
2wo comanies where the
individuals could work
Which Bank has taken a higher
risk?
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Agenda
$
1+ hat is redit -is. Management*
+ -is. Management / 0an.ing from a -egulatory and third party perspecti'e$+ redit -is. and its types
+ redit -is. Assessment
2+ redit -is. under apital ade3uacy
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Credit Risk under Caital ade9uacy
apitalade3uacy
apital apital -e3uirement
6
redit -is. is in general more than 8!I from total ris. for
a commercial ban.
alculated as 8I from -is.
eighted Assets under @illar #
capital re3uirement
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Credit Risk under Caital ade9uacy
2
D7A%4A-4#DE4 Approach (D74)
oundation #-0 Approach
Ad'anced #-0 Approach
?ne sie fits allNo incentive for
risk management
Approach based on institution
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Credit Risk under Caital ade9uacy
"
EA4 (e;posure
at default)?n 0D e;posure1 ?ff0D e;posure (credit
con'ersion factor)
-is. eight RWAEA4 (e;posure at default) @ro'isions
D7A%4A-4#DE4 Approach (D74)
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Credit Risk under Caital ade9uacy
9
@4 (probability of default)
EA4 (e;posure
at default)
CG4 (loss gi'en default)#-0 ormula
Risk weight1
?n0D e;posure ?ff0D e;posure (credit
con'ersion factor)
$ -is. eightEA4 (e;posure
at default)RWA
&
6oundation IRB Advanced IRB
@4
CG4
0an.
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8
Q&A
2hank you: