Regulatory Application of Credit Risk Mitigation Techniques

Risk-weighted assets and regulatory capital requirements can be managed actively by credit risk mitigation techniques. As a prerequisite for recognition in regulatory calculations, we must adhere to certain minimum requirements as stipulated in the SolvV regarding collateral management, monitoring processes and legal enforceability.

The range of collateral being eligible for regulatory recognition is dependent predominantly on the regulatory capital calculation method used for a specific risk position. The principle is that a higher degree of sophistication with regard to the underlying methodology generally leads to a wider range of admissible collateral and options to recognize protection via guarantees and credit derivatives. However, also the minimum requirements to be adhered to and the mechanism available to reflect the risk mitigation benefits are predominantly a function of the regulatory calculation method applied.

The advanced IRBA generally accepts all types of financial collateral, as well as real estate, collateral assignments and other physical collateral. In our application of the advanced IRBA, there is basically no limitation to the range of accepted collateral as long as we can demonstrate to the competent authorities that reliable estimates of the collateral values can be generated and that basic requirements are fulfilled.

The same principle holds true for taking benefits from guarantee and credit derivative arrangements. Within the advanced IRBA, again there are generally no limitations with regard to the range of eligible collateral providers as long as some basic minimum requirements are met. However, collateral providers’ credit quality and other relevant factors are incorporated through our internal models.

In our advanced IRBA calculations financial and other collateral is generally considered through an adjustment to the applicable LGD as the input parameter for determining the risk weight. For recognizing protection from guarantees and credit derivatives, generally a PD substitution approach is applied, i.e., within the advanced IRBA risk-weight calculation the PD of the borrower is replaced by the protection seller’s or guarantor’s PD. However, for certain guaranteed exposures and certain protection providers the so-called double default treatment is applicable. The double default effect implies that for a guaranteed exposure a loss only occurs if the originator and the guarantor fail to meet their obligations at the same time.

The decreases in EAD are mainly driven by a reduction in derivatives and securities financing transactions in the corporate and institution segments as well as central bank related exposures. This is partly offset by the switch of certain corporate and institution exposures at Postbank from foundation IRBA to advanced IRBA as well as growth in the corporate and retail segments.

Advanced IRBA exposure values before and after credit risk mitigation

 

Dec 31, 2013

Dec 31, 2012

in € m.

Total EAD

Eligible advanced IRBA collateral

Guarantees and credit derivatives

Total EAD collateralized1

Total EAD

Eligible advanced IRBA collateral

Guarantees and credit derivatives

Total EAD collateralized1

1

Excludes collateralization which is reflected in the EPE measure.

2

Includes exposure subject to dilution risk of € 1.16 billion per end 2013 and € 793 million per year end 2012.

Central governments

85,815

2,716

2,042

4,758

95,662

1,742

2,037

3,779

Institutions

60,373

13,751

2,255

16,005

66,368

21,677

3,639

25,316

Corporates

273,9552

66,369

21,540

87,908

294,4632

79,870

31,045

110,915

Retail

190,588

133,104

1,009

134,113

182,940

128,839

709

129,548

Total

610,731

215,940

26,845

242,785

639,433

232,128

37,431

269,558

The foundation IRBA sets stricter limitations with regard to the eligibility of credit risk mitigation compared to the advanced IRBA but allows for consideration of financial collateral, guarantees and credit derivates as well as other foundation IRBA-eligible collateral like mortgages and security assignments.

The financial collateral recognized in the foundation IRBA essentially comprises cash, bonds and other securities related to repo lending.

Collateralized counterparty credit risk exposure in the Foundation IRBA by exposure class

 

Dec 31, 2013

in € m.

Total EAD

Financial collateral

Other collateral

Guarantees and credit derivatives

Total EAD collateralized

Central governments

8

0

0

0

0

Institutions

5,592

0

0

0

0

Corporates

7,521

0

0

643

643

Total

13,121

0

0

643

643

 

Dec 31, 2012

in € m.

Total EAD

Financial collateral

Other collateral

Guarantees and credit derivatives

Total EAD collateralized

Central governments

101

0

0

0

0

Institutions

22,594

6,919

0

62

6,981

Corporates

12,242

0

0

511

511

Total

34,937

6,919

0

573

7,492

In the standardized approach, collateral recognition is limited to eligible financial collateral, such as cash, gold bullion, certain debt securities, equities and CIUs, in many cases only with their volatility-adjusted collateral value. In its general structure, the standardized approach provides a preferred (lower) risk-weight for “claims secured by real estate property”. Given this preferred risk-weight real estate is not considered a collateral item under the standardized approach. Further limitations must be considered with regard to eligible guarantee and credit derivative providers.

In order to reflect risk mitigation techniques in the calculation of capital requirements we apply the financial collateral comprehensive method since the higher sophistication of that method allows a broader range of eligible collateral. Within this approach, financial collateral is reflected through a reduction in the exposure value of the respective risk position, while protection taken in the form of guarantees and credit derivatives is considered by means of a substitution, i.e., the borrower’s risk weight is replaced by the risk weight of the protection provider.

Exposure values in the standardized approach by exposure class

 

Dec 31, 2013

Dec 31, 2012

in € m.

Total EAD

Financial collateral

Guarantees and credit derivatives

Total EAD collateralized

Total EAD

Financial collateral

Guarantees and credit derivatives

Total EAD collateralized

1

Includes Postbank’s CIU exposures assigned to the standardized approach.

Central governments

49,961

2

891

893

75,051

55

1,811

1,866

Regional governments and local authorities

19,744

3

1

3

19,253

0

122

122

Other public sector entities

4,180

1

587

588

3,219

4

565

569

Multilateral development banks

921

0

2

2

578

0

0

0

International organizations

550

0

0

0

411

0

0

0

Institutions

4,796

339

97

435

4,480

123

104

227

Covered bonds issued by credit institutions

34

0

0

0

52

0

0

0

Corporates

23,763

7,985

115

8,100

27,454

7,770

134

7,904

Retail

9,656

618

0

618

12,341

1,852

0

1,852

Claims secured by real estate property

5,173

11

0

11

6,253

15

0

15

Collective investment undertakings1

1,920

0

0

0

2,599

0

0

0

Equity investments

3,023

0

0

0

3,517

0

0

0

Other items

17,575

0

0

0

19,390

0

0

0

Past due items

1,304

16

0

16

1,325

15

0

15

Total

142,600

8,975

1,693

10,667

175,923

9,834

2,736

12,570

The decreases in EAD are primarily driven by exposure reductions in money market loans in the segment central governments as well as reductions in loans and securities financing transactions in the segments corporate and retail.


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