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Credit risk controlling

In turbulent economies, credit risk controlling is crucial for the successful management of a bank. The core functions of credit risk controlling include regulatory equity backing, economic risk-bearing capacity, balance sheet risk provisioning, non-performing loan and forbearance management, and the comprehensive asset allocation and limitation. These functions must be integrated into the overall bank management to provide a complete picture of credit risk. Currently, external influences are necessitating adjustments to Conditional Value at Risk (CVaR) management within banking institutions.

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credit risk controlling

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CVaR management: A success factor in the banking industry in the light of current developments

With a recession looming, the issue of insolvency is increasingly becoming the focus of risk management and supervision. In turbulent economies, credit risk controlling is crucial for the successful management of a bank. The core functions of credit risk controlling include regulatory equity backing, economic risk-bearing capacity, balance sheet risk provisioning, non-performing loan and forbearance management, and comprehensive asset allocation and limitation. These functions must be integrated into the overall bank management to provide a complete picture of credit risk. Currently, external influences are necessitating adjustments to Conditional Value at Risk (CVaR) management within banking institutions.

In addition to the current economic developments, three key aspects necessitate the need for adjustment:

To provide flexible analysis using slice and dice logic, it is essential to calculate key figures on a single transaction basis for exposures, collateral values, creditworthiness premiums, expected losses, lifetime expected losses and CVaR risk contributions. These transaction-based key figures can be applied in economic asset allocation and limitation. Segment-based limitation, in accordance with MaRisk (BTR 1.1 and BTR 1.6) should be based on marginal, segment-based risk contributions and integrated into the risk report.

In asset allocation or business division management, identifying current and future attractive business segments from a risk/return perspective is crucial.  Return on Risk-Adjusted Capital (RORAC), a central business parameter, depends on credit risk indicators, particularly in forecasting economic capital requirements.  For present value RORAC, where the numerator reflects a contribution margin III after deducting liquidity costs, standard risk costs, standard unit costs, fixed costs, and equity costs, the denominator for the present value equity should show the progression of the share of unexpected loss. The challenge lies in calculation of the trend, as new business planning must also be taken into account for segment based RORAC forecasts.

In addition to traditional customer and proprietary transactions, derivatives, guarantees, ABS, and other items exposed to credit risk must also be taken into account when calculating key figures based on single transactions.

Conclusion

Due to the current regulatory developments regarding the abolition of the going-concern approach and the ongoing changes in overall bank management and economic processes, precise analysis of credit risk is essential. The flexible ORRP credit risk solution, with its future-proof, cloud-ready technology, supports institutions in creating the necessary evaluations and analysis in a technically sound and regulatory-compliant manner.  It enables them to react to new regulatory requirements, (such as climate stress tests) with flexible stress scenarios, and to focus on the longer-term, forward-looking management of the portfolio.

Susanne Hagner

Susanne Hagner

betreut bei msg for banking den Einsatz und die Weiterentwicklung der Adressrisiko- und IFRS-Themen in der Produktsuite THINC. Darüber hinaus begleitet sie Kundenprojekte, konzipiert Softwareerweiterungen, publiziert Fachartikel und referiert zu den Themen Adressrisiko und IFRS.

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