credit risk losses | real losses are they inconsistent?

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Credit Risk Losses | Real Losses Are they inconsistent?

Oliver Fiala

Head Group Credit Risk Control

Volksbank Wien-Baden 11th September 2015

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Granting a loan

Account Manager

Focusing on:

• Contracting a new deal

• Good and properous customer relationship

• To have nice conversation

• Learn all the needs of his client

• Write a loan application

• Fill in the forms of the system

• Cope with all the compliance „handicaps“

• Analyse the business plan, the forecast, …

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Riskmanager

Focusing on:

• The rating of the customer

• The pledged collaterals

• The creditworthiness of the guarantor

• The segment for the LGD class

• The industry

• The exposure of the loan

Granting a loan – second opinion

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Riskmanager

Risk of a loan

Account Manager

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Risk of the portfolio

EL = PD x LGD x EAD

Complex mathematical

simulation Model

Risk appetite

99,9%

Real Loss

Redistribute the

portfolioresults

?

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Real Losses

24 potential

Sources of loss

Fraud

Credit Event

Stock Market

Losses

Liquidity Problems

Rating Migrations

Interest rate

decline

Equity Corrections

FX Changes

P r o f i t L o s s

Assets Liabilities

loans

cash

provisions

bonds

deposits

equity

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Local GAAP

bookvalues

provisions

basis of consolidiation

built

release

write off

LaR, HtM, AfS

NPL Portfolio

IFRS

marketvalues

impairments

Basis of consolidiation

built

release

write off

LaR, HtM, AfS

PL & NPL

caution principle „expectation principle“

nominalvalues

rest of the group

Tradingbook

Rest

forecast principle

Real Losses

P r o f i t L o s s

Assets Liabilities

loans

cash

provisions

bonds

deposits

equity

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Real Losses vs. Model Losses

Loss

according to

the academic

theory

Discount because

of the time-value of

the money

The client defaults

according to his PD

Migrations risk, FX

risk, makroeconomic

risk, …

The collateral

will be liquidated

Paramters are

estimated unbiased

Default and Loss

are independent

All parameters for a

customer are available

The realization process

is independent of the

restructuring manager

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Real Losses

What do we learn from the accounting department?

• Unexpected Loss is a minor topic when we talk about loss.

• Expected Loss as expression is missleading, because you expect your

forecast.

• Only consolidated exposures cause losses.

• Provisions are those facts, which contain real credit losses.

• The profit center calculation is closely connected to the accounting.

• The bonus often is balance sheet oriented.

• For a Risk-Return calculation Risk has to adopt the Return basis.

EL = PD x LGD x EAD

IFRS vs. Local GAAP

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Neccessary Loss estimation circle

Loss and default

collection

Separation

Estimation of PD, LGD, …

Accounting Application

Loss monitoring

Loss – Calculation

Comparision

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Riskmanagement stake holder today

Risk

Management Account

Manager

Controlling

Board

Operative

Riskmanagement

Rating

Agencies

Big

counterparties

Regulator

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But what about tomorrow?

How can these things come together?

• Nerds dominate the strategic risk management

• Develop a common laguage with the finance division

• The riskmanagement need accountants and accounting know how

• Combine your data in a SPOT

• Accept the understanding of yourself as a service unit

• Only proofs let the risk management results be accepted

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Oliver Fiala is heading the Group Credit Risk Control

department of the Association of Austrian Volksbanks since

2007. Besides the ongoing mentoring of many new

colleagues, he had to lead several project. Among others

they are: developing a Credit Risk Portfolio Model, Credit

Risk Reporting, RWA Management, Economic Credit Capital

Calculation, Credit Risk Stresstesting and calculating Credit

Risk Premia. During his mathematic studies he started his

professional life at Bank Austria followed by Erste Bank,

where he was responsible for various quantitative topics

from Default- und Loss Risk to Portfolio Credit Risk. Since

2005 he headed an international Basel II project team for

parameter estimation.

Oliver Fiala

Head Group Credit Risk Control

oliver.fiala@volksbank.com

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atjana L

ackner