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www.volksbank.com
Credit Risk Losses | Real Losses Are they inconsistent?
Oliver Fiala
Head Group Credit Risk Control
Volksbank Wien-Baden 11th September 2015
Seite 1
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, …
Seite 2
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
Seite 3
Riskmanager
Risk of a loan
Account Manager
Seite 4
Risk of the portfolio
EL = PD x LGD x EAD
Complex mathematical
simulation Model
Risk appetite
99,9%
Real Loss
Redistribute the
portfolioresults
?
Seite 5
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
Seite 6
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
Seite 7
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
Seite 8
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
Seite 9
Neccessary Loss estimation circle
Loss and default
collection
Separation
Estimation of PD, LGD, …
Accounting Application
Loss monitoring
Loss – Calculation
Comparision
Seite 10
Riskmanagement stake holder today
Risk
Management Account
Manager
Controlling
Board
Operative
Riskmanagement
Rating
Agencies
Big
counterparties
Regulator
Seite 11
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
Seite 12
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
© T
atjana L
ackner
