EBA欧洲银行-LE_IMI_10页_308kb

CEBS Questionnaire Summary on Concentration Risk

Core Content Overview

This document outlines the Bank's internal approach to concentration risk measurement and management, emphasizing both regulatory compliance and internal methodologies. It covers the definition of concentration risk, the nature of single-name and other concentration risks, the treatment of counterparties, the measurement of exposures, risk mitigation techniques, and the integration of concentration risk into the overall credit risk framework. The Bank also discusses its governance and reporting practices, and its views on the current regulatory regime for large exposures.

Main Points and Key Information

1. General Approach to Concentration Risk

• The Bank’s approach is closely linked to the national regulatory regime, particularly the Large Exposure rules.
• Internal methodologies are used to complement regulatory requirements.
• The approach is applied ex post (for regulatory reporting) and ex ante (in credit approval processes).

2. Nature of Concentration Risk

• Concentration risk is defined as the risk of large losses due to:
  • Default of a single large exposure (single name concentration).
  • Simultaneous default of multiple exposures due to shared risk factors (sectoral, geographic, etc.).
• Diversification is the opposite of concentration, implying a spread across different risk factors.
• Correlation estimates are crucial for measuring non-single name concentration risks.
• Time horizon is fixed at one year, aligning with default probability and financial reporting frequencies.
• Single name concentration is simulated using a Bernoulli distribution and diversity score.
• Perfect diversification is modeled by simulating Expected Loss instead of Actual Loss.

3. Counterparties and Connectedness

• Legal group is defined by control relationships and Italian law.
• Economic connectedness considers implicit links between counterparties.
• Connectedness is assessed to avoid contagion effects in case of financial distress.

4. Exposure to Entities and Products

• Special Purpose Entities (SPEs) are treated as single name entities.
• Look through approach is used for structured products, but currently negligible in the portfolio.
• Credit Conversion Factors (CCFs) are used to convert off-balance sheet exposures into cash equivalents.
• The Bank is migrating to the Standardised Approach under Basel II and may use Expected Positive Exposure (EPE) in the future.

5. Measurement of Exposures

• The Bank uses Monte Carlo simulations to model clustered exposures.
• Single name concentration is measured using diversity scores and asset value correlations.
• Sectoral and geographic concentration is managed through correlation matrices and geographical differentiation.
• Benchmark diversified portfolios are used to test the impact of concentration.

Risk Management and Governance

6. Integration into Business Decision-Making

• The Bank’s credit risk management system has been in place since 1999.
• Expected Loss (EL) and Risk Capital are used in loan approval, pricing, risk-adjusted performance measurement, and limit setting.
• Capital allocation is used to manage concentration risk indirectly, influencing RORAC and incentive schemes.

7. Stress Testing

• The Bank does not have a regular stress testing program.
• Stress tests are conducted ad hoc in response to material events.
• Examples include:
  • Impact of a large customer default on suppliers, households, and local economy.
  • Real estate crisis effects on construction, correlated industries, and collateral values.

8. Single Entity vs. Group Level

• Risk management is at the Group level, not individual entities.
• Limits and capital allocation are based on Group risk, not organizational structure.
• Intra-group exposures are managed through internal guarantees and risk transfers.
• No limit setting is applied to intra-group exposures due to Group-level management.

Credit Risk Mitigation

9. Mitigation Techniques

• Collateral and guarantees are used to reduce exposure.
• Financial collateral and residential mortgages are the strongest mitigants.
• Non-residential mortgages and pledges on marketable assets are also used.
• Self-liquidating finance is considered a mitigation tool.
• Unfunded protection (e.g. credit derivatives) is treated similarly to funded protection.
• Guarantors are subject to the same credit approval process as direct exposures.
• Legal risk is considered in the context of credit risk mitigants.

10. Indirect Concentration Risk

• Indirect exposures (e.g. to collateral issuers or protection providers) are considered in risk measurement.
• Financial collateral is treated as guarantees, not as direct exposure.
• The Bank is moving to a look-through approach for Repo-style transactions to assess substitution risk.
• Indirect risk is not expected to significantly increase concentration levels.

Governance and Reporting

11. Internal Governance and Reporting

• Regulatory limits are monitored ex ante in the credit approval process.
• Large Exposures are reported quarterly to Audit Committee and Board of Directors.
• Banks, financial institutions, and country risk limits are daily monitored and monthly reported.
• Stress test results are reported to Audit Committee or Financial and Market Risk Committee based on the nature of the risk.
• Reports include portfolio credit risk analysis and economic capital.

Regulatory Environment

12. Views on Large Exposures Regulatory Regime

• The Bank considers the current regime effective in addressing concentration risk.
• It believes the trade-off between costs and benefits is favorable, especially regarding prudential soundness and simplicity.
• The current limits are seen as satisfactory from both prudential and competitive fairness perspectives.
• The Bank feels the limits are adequate for all institutions, though further harmonisation could be beneficial.

Summary of Key Concepts

• Concentration Risk: Risk from overexposure to a single entity or shared risk factors.
• Single Name vs. Other Concentration: Distinguished in terms of default events and correlation-based effects.
• Regulatory Alignment: Internal approach is closely aligned with regulatory limits and reporting requirements.
• Risk Mitigation: Focuses on collateral, guarantees, and structured products.
• Stress Testing: Used ad hoc for material events, not as a regular practice.
• Governance: Structured around Group-level risk management, with different reporting frequencies depending on risk type.

Conclusion

The Bank employs a comprehensive and integrated approach to concentration risk, combining regulatory compliance with internal risk models. It uses Monte Carlo simulations, diversity scores, and correlation matrices to measure and manage concentration risk. Stress testing is conducted as needed, and credit risk mitigation is based on collateral and guarantees. The governance structure ensures consistent monitoring and reporting to senior management and regulatory bodies. The Bank believes the current regulatory regime is effective and adequate, though it remains open to improvements in harmonisation and transparency.