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 CRR 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 table below shows the advanced IRBA exposures before credit risk mitigation in conjunction with the proportional amounts for eligible advanced IRBA collateral as well as guarantees and credit derivatives.

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

 

Dec 31, 2014

Dec 31, 2013

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 € 1.43 billion per end 2014 and € 1.16 billion per year end 2013.

Central governments and central banks

85,182

1,004

2,129

3,133

85,815

2,716

2,042

4,758

Institutions

61,785

12,036

2,456

14,492

60,373

13,751

2,255

16,005

Corporates

311,7912

67,424

25,091

92,515

273,9552

66,369

21,540

87,908

Retail

192,891

135,969

968

136,937

190,588

133,104

1,009

134,113

Total

651,649

216,433

30,644

247,077

610,731

215,940

26,845

242,785

The increase in EAD and respective collateralized EAD is mainly driven by model changes, foreign exchange movements and specific growth in CB&S and GTB in the corporates exposure. An additional contribution resulted from the switch of Postbank Large Cap Corporates/Financial from Foundation to Advanced IRBA.

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.

The table below shows the Foundation IRBA exposures before credit risk mitigation in conjunction with the proportional amounts for financial and other collateral as well as guarantees and credit derivatives.

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

 

Dec 31, 2014

in € m.

Total EAD

Financial collateral

Other collateral

Guarantees and credit derivatives

Total EAD collateralized

Central governments and central banks

0

0

0

0

0

Institutions

1

0

0

0

0

Corporates

6,039

0

0

567

567

Total

6,040

0

0

567

567

 

Dec 31, 2013

in € m.

Total EAD

Financial collateral

Other collateral

Guarantees and credit derivatives

Total EAD collateralized

Central governments and central banks

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

The decrease in EAD is mainly driven by the switch of Postbank Large Cap Corporates/Financial from Foundation IRBA to Advanced IRBA and thus reflects part of the effects described above.

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.

The table below shows the standard approach exposures, financial collateral and guarantees and credit derivatives by exposure class. The exposure classes are according to CRR/CRD 4, which are in general comparable to the exposure classes according to the Basel 2.5 framework.

Exposure values in the standardized approach by exposure class

 

Dec 31, 2014

Dec 31, 2013

in € m.

Total EAD

Financial collateral

Guarantees and credit derivatives

Total EAD collateralized

Total EAD

Financial collateral

Guarantees and credit derivatives

Total EAD collateralized

Central governments or central banks

40,445

29

431

460

49,961

2

891

893

Regional governments and local authorities

18,322

4

33

37

19,744

3

1

3

Public sector entities

10,182

1

474

475

4,180

1

587

588

Multilateral development banks

4,931

0

0

0

921

0

2

2

International organizations

2,357

0

0

0

550

0

0

0

Institutions

32,449

169

42

211

4,796

339

97

435

Corporates

16,381

4,268

20

4,288

23,763

7,985

115

8,100

Retail

8,613

385

0

385

9,656

618

0

618

Secured by mortgages on immovable property

3,956

0

0

0

5,173

11

0

11

Exposures in default

3,423

138

0

138

1,304

16

0

16

Items associated with particular high risk

161

2

0

2

0

0

0

0

Covered bonds

22

0

0

0

34

0

0

0

Claims on institutions and corporates with a short-term credit assessment

0

0

0

0

0

0

0

0

Collective investment undertakings (CIU)

25,262

0

0

0

1,920

0

0

0

Equity

2,707

0

0

0

3,023

0

0

0

Other items

419

0

0

0

17,575

0

0

0

Total

169,630

4,996

1,001

5,996

142,600

8,975

1,693

10,667

The increase in EAD is predominantly driven by the implementation of the CRR/CRD 4 framework regarding our trade exposure against central counterparties which is now reported under exposure class institutions. Defined benefit pension fund assets exposure, that had been reported under the exposure class “Other items” in 2013, is shown under the exposure class “Collective investment undertakings (CIU)”. Here the calculation at a phase-in rate of 20 % in 2014 also contributed to the exposure increase. The increase in EAD in the exposure class “Exposures in default” is primarily attributable to the adjusted default definition under the CRR/CRD 4 framework.


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