2011 Limit Setting and Risk Appetite

Transcription

1 2011 Limit Setting and Risk Appetite This survey has been designed to explore how financial institutions use Limit Setting and Risk Appetite to manage their credit risk portfolio. The questions focus on the scope of the Commercial Risk limits framework for credit risk, i.e., excluding retail lending. For this survey we will use the following definitions: Risk Appetite -- The amount and type of risk a firm is willing to accept in pursuit of its business objectives and desired financial performance. Industry Limit -- Limit by industry sectors as defined by one of the standard industry codes. Obligor Limit -- Limit by counterparty or single name. Geography Limit -- Limit by geographic area other than country. This can include a region smaller than a country or one that is defined by multiple countries. Product Limit -- Limit by individual product line. Rating Class Limit -- Limit by rating class. This could be internal or external ratings such as Fitch, Moody's or S&P. Maturity Limit -- Limit by exposure tenor. Business Type Limit -- Limit by individual business type, unit, internal division or line of business. 1. Does your institution have a limits framework for credit risk? Yes % No 0 0% % Section 1: Development and Governance of the Limits Framework 2. Is a formal Risk Appetite Statement distributed by the organization? Yes. A single Risk Appetite Statement including guidance on concentrations and other risk metrics is issued for the whole firm at the beginning of each planning cycle % Yes. A separate Risk Appetite Statement for each business unit (Global Banking, Middle Market, Private Banking, Retail, etc) including guidance on concentrations and other risk metrics is distributed to each business unit at the beginning of each planning cycle % I am not aware of any Risk Appetite Statement that has been issued as guidance to the business units 9 16% % 3. Which function establishes the limits framework? Limits are reviewed and approved by the Board as part of a formal Risk Appetite Process and provided to the lines of business and the risk teams for further implementation An independent risk function establishes the limits framework but not connected to a board approved Risk Appetite framework The line of business risk team develops its own limits framework but not connected to a board approved firm-wide Risk Appetite framework 43 74% 11 19% 0 0%, please explain % An independent risk function reviews the limit framework yearly and makes proposals for continuation/amendments. The limits are then approved by the Board on this basis. An independent risk function establishes the limits framework which is connected to a board approved Risk Appetite framework Note, our risk limits are contained in an investment policy statement that is Board approved. Additional limits are set below the board level limits. The Credit Risk Committee, a subcommittee of the board, develops, approves and then submits to the board for further approval our limits - separate from the Risk Appetite framework to date. Credit Risk appetite and Capacity is approved by the board. CPM design a limit framework to ensure we operate within this Capacity / Appetite. Largest Single name concentration limits are also approved by the board 1

2 Depending on risk appetite metric (some group wide, some per business unit) Risk establishes the risk appetite for board approval. Risk works with the LOBs to establish limits. 4. At what level in the organization is your limits framework set and monitored? Some combination of Top of the House monitoring as well as legal entity, region, business unit etc. Top of the House at the ultimate global parent level and set across all credit books 29 50% 27 47% Separately by Legal Entity 9 16% Separately by Business Unit (e.g., Global Banking, Middle Market, Private Banking, etc.) 8 14% Separately by Region 2 3%, please explain. 0 0% 5. At what level of the credit portfolio is your limits framework set and monitored? Separate limits for Loan s, Counterparty Credit Risk, Credit Trading, Investment Single Limits Framework monitored across all credit books, please specify 26 46% 25 44% 6 11% % Both General authorizations limit by asset sector, Senior management limits and other policies/limits at more granular level for each asset class Multiple Limits Framework monitored across all credit books Separate for loans/bonds and counterparty. We don't distinguish loans, investments and trading. Single limit framework mainly covering banking book Single limits framework 6. When developing the limits framework, what is the primary language of risk used to communicate your firm s risk appetite? Please select all that apply. Maximum loss threshold 34 60% Economic Capital limits 27 47% Targeted capital ratios 16 28% Risk Weighted Asset limits 12 21% Target debt rating 9 14%, please specify 9 16% Earnings at Risk Issuer limits were set by credit quality to allow comparable risk contribution. Max. loss threshold Maximum Earnings volatility on the credit portfolio and maximum single name loss Notional Limits (3 times) Profit volatility Nominal Exposure 2

3 7. In designing your limits framework, did you perform a peer analysis? Yes 24 42% No 31 58% % Comments Benchmarking of actual limits is conducted by independent 3rd party. Benchmarking to peers across a number of measures Compared peer notional and loss amounts via Fed reports Comparison of market share. More detailed "deep dives" are planned for various portfolios. Comparison with best practice standards (industry forum) and staff experience at other companies Engaged outside consultant to look at sector limit and single name limit structures, metrics, concentration limits Limited data for peers scaled by either Assets or Capital. Perceived economic capital, risk appetite and competitive position. Somewhat informal. Reviewed largest exposures relative to capital base. Surveyed practices with help of consulting firm We reviewed other insurance company largest exposures, industry exposures, and asset (and sub asset) class distributions. 8. In designing your limits framework, did you perform stress testing to analyze the impact of the limits against your current portfolio under different scenarios? Yes 34 62% No 20 38% % 9. In designing your limits framework, were board members and senior management interviewed to determine their level of risk appetite? Yes, through informal meetings and discussion but without formal documentation of responses 29 51% Yes, formally including documented responses 19 35% No 3 5% 5 9% % Executive management not Board and feedback incorporated into final formal version Formal risk appetite approved through governance structure including board and senior management. Informal meetings with senior management, but not with board members. Recommendations are tabled for deliberation and endorsement Yes, through informal meetings 10. How often are your Risk Appetite and Limits Framework reviewed? More than once per year 14 25% Annually 39 68% Less than once per year 4 7% % 3

4 # of firms that use category to set exposure limits Section 2: Structure of the Limits Framework 60 Categories at which Exposure Limits are set Obligor Industry Geography Product Rating Business Type Maturity 0 Core Line of Business Loan - Available For Sale (AFS) Counterparty Trading CPM Long Treasury Investment Please indicate the categories at which exposure limits are set. Please check all that apply. Top number is the count of respondents selecting the option. Bottom % is percent of the total respondents selecting the option. Core Line of Business Loan - Available For Sale (AFS) Counterparty Trading CPM Long Treasury Investment Obligor Industry Geography Product Rating Business Type Maturity N/A % 36% 76% 48% 43% 48% % 24% 21% 16% 17% 19% % 22% 33% 22% 21% 29% % 19% 29% 26% 17% 29% % 12% 31% 43% 28% 40% % 9% 16% 12% 10% 5% % 7% 19% 26% 10% 21% % 5% 5% 5% 5% 5%

5 - Core line of business Country (economic based, not incorporation); geography pertains to commercial mortgage loans, which have CMSA limits and also 1/2 mile radius (terrorism) limits; we also have "related entity" limits for commercial mortgage loans. Expected Loss Rate General authorization Limits are for each asset sector and then more granular limits (i.e., Industry, Obligor, Geography, Rating, Maturity) varies by each asset sectors - Loan - Available For Sale (AFS) Commitments Group-wide notional and economic capital limits by industry & geography are also applicable to this book. - Counterparty Group-wide notional and economic capital limits by industry & geography are also applicable to this book. No separate limits for counterparty. Included in aggregate limits for corp/fi exposures. VAR, Stressed Var - Trading Desk, Greeks Group-wide notional and economic capital limits by industry & geography are also applicable to this book. VaR, DV01, max. loss, notional - CPM Long Group-wide notional and economic capital limits by industry & geography are also applicable to this book. - Treasury Investment Desk, Greeks Group-wide notional and economic capital limits by industry & geography are also applicable to this book. No more than x% exposure in Treasuries & Agencies as a % of total portfolio 5

6 # of firms that set exposure limits for this metric Please indicate the exposure metrics for which exposure limits are set. Please check all that apply. 30 Exposure Metrics for which Exposure Limits are set Committed Exposure MtM plus max. PFE VaR, DV01, CV01, etc. Outstandings Committed Exposure Committed Exposure 5 0 Core Line of Business Loan Available For Sale (AFS) Counterparty Credit Trading CPM Long Committed Exposure Committed plus uncommitted Exposure Economic Capital ($) Risk Weighted Assets Treasury Investment Exposure at Default (EAD) Expected Loss (EAD * PD * LGD) MtM plus max. PFE LIED (EAD * LGD) Outstandings Percent of Exposure VaR, DV01, CV01, etc. Percent of Capital Economic Capital (%) CVaR MtM plus average PFE Top number is the count of respondents selecting the option. Bottom % is percent of the total respondents selecting the option. Committed Exposure Committed plus uncommitted Exposure Economic Capital ($) Risk Weighted Assets Exposure at Default (EAD) Expected Loss (EAD * PD * LGD) MtM plus max. PFE LIED (EAD * LGD) Outstandings Percent of Exposure VaR, DV01, CV01, etc. Percent of Capital Economic Capital (%) CVaR MtM plus average PFE N/A Core Line of Business Loan - Available For Sale (AFS) Counterparty Credit Trading CPM Long Treasury Investment % 21% 28% 14% 21% 10% % 17% 19% 10% 10% 9% % 10% 12% 9% 12% 10% % 9% 9% 5% 9% 7% % 12% 24% 19% 9% 12% % 9% 10% 9% 10% 7% % 9% 38% 19% 2% 10% % 9% 10% 7% 9% 7% % 17% 21% 14% 16% 31% % 7% 14% 10% 9% 14% % 7% 17% 34% 17% 19% % 3% 5% 3% 5% 7% % 5% 5% 3% 3% 5% % 2% 7% 9% 0% 2% % 0% 3% 2% 0% 0% % 3% 9% 5% 9% 3%

7 - Core line of business Value (Amortized Cost) Credit spread widening stress Earnings at Risk Percent of Earnings Percent of Risk Based Capital Ratios EL/EAD and Economic capital/ead Unexpected shortfall for industry limits - Loan - Available For Sale (AFS) Credit spread widening stress - Counterparty Credit spread widening stress MtM + add-on MTM plus internal add-on factor Regulator determined Credit Equivalent Amount (CEA) Percent of Risk Based Capital - Credit Trading Jump to default Mark-to-market limits for secondary loan trading are also in effect. MtM - CPM Long Credit spread widening MtM, Cost Percent of Earnings - Treasury Investment Duration and Convexity Percent of Risk Based Capital 23. Please list any other credit portfolios not mentioned above for which exposure limits are set in your firm and indicate the categories and exposure metrics used. Commercial Real Estate/Ag, Municipals Private Equity / Notional investment amount Alternative Investment / Notional investment amount Reinsurance exposure, credit insurance exposure We have firm-wide limits and sub limits for many legal entities and even insurance product lines, but not by AFS vs. hold to maturity vs. trading. 24. How many buckets or discrete groups do you use for the different limit types? Top number is the count of respondents selecting the option. Bottom % is percent of the total respondents selecting the option Limit Buckets Limit Buckets Limit Buckets Limit Buckets More than 40 Limit Buckets N/A Industry Limit Obligor Limit Geography Limit Maturity Limit Rating Limit Product Limit Business Type Limit % 36% 19% 13% 2% % 27% 10% 0% 6% % 15% 7% 10% 24% % 6% 0% 0% 0% % 35% 19% 3% 0% % 21% 7% 0% 4% % 15% 0% 0% 0% 7

8 25. If your framework includes obligor limits, what is the level of aggregation against which the limits apply? Please select all that apply. Global Group: Legal Entities within a Global Relationship Group Affiliated through Common Ownership 48 84% Borrower: Legal Entity Only 14 25% Regional Parent: Legal Entities within a Region Affiliated Through Common Ownership 3 5% Does not apply 1 2%, please specify 4 7% Global Risk Group via Legal Ownership and Economic Dependencies Group may include entities linked via economic substance rather than actual ownership Mostly to the global group but is assessed on a case-by-case basis WZ (Wirtschaftszweige-Systematik), based on NACE (Nomenclature statistique des activités économiques dans la Communauté européenne) 26. If your framework includes industry limits which standard industry code do you employ for industry sectors classification? SIC (Standard Industrial Classification) 13 27% NAICS (North American Industry Classification System) 9 18% Internally developed system 8 16% ANZSIC (Australian and New Zealand Standard Industrial Classification) 3 6% Moody's KMV 2 4% GIC (Global Industry Code) 2 4% Barclay Industry Classification 2 4% NACE 2 4% S&P/ Moody's or Fitch classifications 1 2%, please specify 7 14% % In house classification derived from SIC Barclays/Lehman and internal Bloomberg Combination of GIC and other internally developed sectors ICB Modified SSIC (Singapore Standard Industrial Classification) No industry limits, but aggregating exposures along a set of sectors (close to S&P, Moody's, Fitch) 27. Does your limits framework include limits around the following high risk segments? Commercial Real Estate 26 45% Loan Underwriting Portfolio 15 26% Leveraged Acquisition Finance 14 24% Structured Product Investments 12 21% Emerging Market Portfolio 7 12%, please specify. 2 3% Various portfolio limits are in place, i.e. weighted average credit rating, percent of portfolio B+ and below, Industry limits, sub-portfolio limits, underwriting limits, trading book limit We have limits for investments in total structured products and subsets such as non-agency RMBS, CMBS, cards, etc. Also for equity real estate and commercial mortgage loans. (The latter include agricultural loans.) Also for the combination of commercial mortgage loans and CMBS. Also for equity (public and private combined), for high yield bonds (public and private), and for total risk assets (high yield, equity real estate and equity). 8

9 Section 3: Enforcement of Limits Framework 28. At what level are breaches reported? All breaches are automatically reported to the board, regardless of size All breaches above a certain dollar amount are automatically reported to the board Breaches are reported to the board at the discretion of the CRO Breaches only reported to line of business risk team 15 26% 16 28% 13 22% 7 12%, please specify 6 12% % All breaches above board limits are reported to the Board, but we have many limits below board thresholds, and these are reported to the risk team, who may require sales or hedging. Breaches are reported in the portfolio report that gets distributed to the board Breaches reported within pre determined delegated authorities General Authorizations are reported to BOD and Credit Management limits are reported to Investment Risk Committee & Business (Asset sectors) Some to the board, some to management Two levels of limits with first level breach reviewed by Executives and second level breach to the Board 29. How is your firm s limits framework viewed? As formal credit policy (hard limits) for which mitigation or reduction plans are required As suggested guidelines (soft limits) for which discussion is required with the CRO upon a breach but not necessarily mitigation action (e.g., hard for obligor, soft for industry), please explain 32 56% 16 28% 9 16% % Board limits are considered hard; other limits are generally considered hard--discussion is encouraged BEFORE a breach occurs. Both hard and soft limits, depending on the portfolio and type of limit Generally hard for loan exposure limits, soft for market risk (e.g. DV01) limits Guidelines for obligor, hard for industry and country Hard for asset type (product), soft for industry Hard for obligor, soft for industry Hard limits for certain areas, guidelines for others Hard, but sustained breaches are possible Limits are hard guidelines that can only be exceeded with additional representation of group executives at the credit committee. Implications on portfolio need to be explained by CPM 9

10 30. What is the typical action following a limit breach? A mitigation plan is prepared and reviewed but execution is deferred pending further discussion with senior management Mitigation plan is prepared, reviewed, and executed The breach is typically waived but monitoring is elevated Discussion occurs but the breach is typically waived 24 42% 13 23% 6 11% 2 4% A request to raise the limit is initiated 0 0%, please specify 12 21% % Breaches without notice almost always require immediate mitigation. Expected breaches (e.g. we'd like to buy more of this, but can't b/c of limits) are discussed and sometimes limits are raised or waived, but not always, especially if it is a board limit, as it would require prior board approval. Our board limits for obligors are incurrence tests. Our "management" limits for obligors are incurrence for privates, and maintenance for publics. Certain limit breaches have pre-agreed remediation plans, others develop mitigation plans after review and discussion with management Contingency approach: waived or mitigated/hedged Depending on the portfolio and type of limit Depends on type of breach. Mitigation to be approved by Executive management and board for the most severe breach level. Mitigation plan will be in place except if specifically approved at higher level (2 times) Regularizing a breach may include raising a limit and/or a mitigating plan. Request to raise limit will be initiated depending on extent and cause of breach. Strongly depends on case and severeness of breach (2 times) Waived OR plan executed AND further growth halted 31. Development and implementation of remedy plans for exposures in excess of limits are the responsibility of which individuals or groups? Please select all that apply. Portfolio Management Group 31 55% Business unit Head of Origination 29 52% Business unit Chief Credit Officer 19 34% Chief Risk Officer or equivalent 15 27% ALCO, Risk Committee or other Board level committee 13 23%, please specify 9 16% A combination of portfolio management group, credit officers and business heads depending on the situation and business line Depending on excess amount Credit Committee, Head of Credit Dept. or Risk Department (3 times) Investment Risk Management (Chief Investment Risk Officer) and the appropriate Asset Management Group Joint CRO and Business/Portfolio Management Plans prepared and executed by business unit, overseen by Risk Management 10

11 32. The decision to execute the remedy plan for exposures in excess of limits rests with which individual or group? Please select all that apply. Portfolio Management Group 22 39% ALCO, Risk Committee or other Board level committee 22 39% Business unit Chief Credit Officer 18 32% Business unit Head of Origination 16 29% Chief Risk Officer or equivalent 13 23%, please specify 5 9% Credit Committee Depending on excess amount Investment Risk Management (Chief Investment Risk Officer) Management level Investment Risk Management Committee Senior management level committee 33. Please rank the following risk mitigation techniques in terms of preference for bringing exposures back within limits (1 being the most preferred and 6 being the least preferred). Top number is the count of respondents selecting the option. Bottom % is percent of the total respondents selecting the option. Exit the exposure at the next opportunity Sell all or a portion of the exposure Hedge all or a portion of the exposure Place the exposure into a securitization pool Request a change in limit Take no action Don't Know % 16% 14% 18% 6% 4% 2% % 25% 27% 16% 4% 0% 4% % 25% 25% 17% 9% 2% 6% % 4% 16% 14% 20% 25% 22% % 19% 16% 25% 21% 5% 4% % 8% 4% 0% 23% 56% 8% 34. What is the primary motivation for the majority of your hedging or other risk mitigation decisions? Exposure management due to concentration concerns Managing exposure to deteriorating credits or counterparties 35 60% 16 28% RWA or Regulatory Capital Management 5 9% Economic Capital Management 3 5%, please explain 0 0% 35. How would you characterize your activity in terms of employing risk mitigation techniques to manage your portfolio within exposure limits? We are not active 6 11% Minimal (sales and hedging volumes less than $1 billion) Moderate (sales and hedging volumes of $1 to $5 billion) Active (sales and hedging volumes of $5 to $10 billion) Sizeable (sales and hedging volumes greater than $10 billion) 22 39% 17 30% 6 11% 6 11% % 11

12 Section 4: Firm Demographics 36. Please identify the nature of your institution. Bank/ Investment bank 48 83% Insurance company 9 16% Fund 0 0%, please specify 1 2% % Export Credit Agency 37. Please identify your firm s region of domicile. North America 26 45% Europe 23 40% Asia 4 7% Australia/Oceania 3 5% Africa 2 3% South America 0 0% % 38. Please identify the region of domicile of the person completing this survey. North America 27 47% Europe 20 34% Asia 5 9% Australia/Oceania 4 7% Africa 2 3% South America 0 0% % 39. Please identify your firm s approximate total balance sheet assets. Less than $50 billion 5 9% $50 billion to $100 billion 6 10% $100 billion to $200 billion 8 14% $200 billion to $300 billion 8 14% $300 billion to $500 billion 7 12% Greater than $500 billion 24 41% % 12

13 40. In what part of your organization is the credit portfolio management group located? Risk management (including credit risk management) 31 54% Line of business 19 33% Finance/Treasury 0 0% Does not apply 2 4%, please specify 5 9% % General Management Hybrid risk and lob In our firm the activities that are discussed in this Independent Private side (Risk division) / Public side (Securities division) 41. What is your firm s corporate credit rating? For aggregation purposes we have used the Standard & Poor's nomenclature. Where ratings where split we have used the higher rating. AAA 2 AA 16 AA- 12 A+ 6 A 10 A- 5 BBB+ 1 BBB 2 BBB- 1 BB Please provide any additional comments you would like to make on your institution's limits framework or on the survey. Although domiciled in UK most of our activities are to Asia, Africa and the Middle East Continuously evolving Our main focus is to avoid origination that would exceed our limit framework. Our risk appetite framework is built out of 2 complementary frameworks, all connected to the global tolerance for change in the major capital ratios: - limits in volumes (EAD, RWA, ECAP, EL,...) per business lines - limits in sensitivity/concentration (event risk, systemic risk) across all business lines. Single name obligor limits are under review with the intention of increasing risk sensitivity and limit granularity by counterparty type. We are in the process of switching 'exposure based limit' to 'economic capital based limit' We do not have limits on maturity per se, but we do have limits on duration mismatches between assets and liabilities. 13

14 Appendix: Commercial Real Estate 43. If your institution has a limits framework for COMMERCIAL REAL ESTATE (CRE) credit risk, how does it relate to the Commercial Risk limits framework? Embedded in the Commercial Limits Framework 16 43% Issued independently from the Commercial Limits Framework Referenced in the Commercial Limits Framework but issued separately as a supplement to the Commercial Limits Framework 14 38% 6 16%, please explain 1 3% % CRE obligors are part or counterparty limit system; in addition limitations in context of strategic asset allocation 44. What exposure metric is used in measuring commercial real estate concentrations? Please select all that apply. Exposure 24 69% Outstanding 13 37% Economic Capital ($) 12 34% Risk Weighted Assets ($) 10 29% % of Economic Capital 6 17% % of Commercial Loan 6 17% % of Risk Weighted Assets 1 3% % of Capital 1 3%, please specify 2 6% LGD % of Risk Based Capital 45. For which of the following Categories do you set limits in your COMMERICAL REAL ESTATE LIMIT framework? Please select all that apply. Type of Real Estate (residential, commercial, strip mall, condos, warehouse, etc.) 25 76% Regional Concentrations 16 48% High Volatility Real Estate (Land Development, Construction, etc.) 15 45% Developer Concentrations 8 24% Loan Structure (e.g., fixed rate, floating rate) 2 6%, please specify 7 21% Also investment and Property trusts General CRE Limit No formal limits exist for these categories, although commercial bank will monitor/manage concentrations within a particular market / geography. Pooled mortgages have larger limits than individual loans Real Estate-related (Equity RE, Mortgages, CMBS) Sub sectors within CRE amount 46. Are COMMERCIAL REAL ESTATE limits specific to the business unit or aggregated across the institution? Specific to the business unit 14 39% Aggregated across the institution 26 72% Please comment 3 8% Limits are applied at group and operating entity level Specific to the geography Sub-portfolio limits are being implemented across the portfolio 14

15 Participating Institutions ABN AMRO Bank NV Absa Bank Allianz AG Ariel Reinsurance Company Ltd. Banco Santander S.A. Bank of America Bank of Tokyo-Mitsubishi UFJ, Ltd. Bank of the West Barclays Capital BBVA BNP Paribas BNP Paribas Fortis Capital One CIBC World Markets Citigroup Citizens Financial Group Commerzbank Commonwealth Bank of Australia Credit Agricole CIB Deutsche Bank Export Development Canada Fifth Third Bank FirstRand Ltd. Goldman Sachs HSBC ING Group KBC KeyCorp KfW Banking Group KfW IPEX LloydsTSB PLC Manulife Financial Metlife Mitsubishi UFJ Trust and Banking Corporation National Australia Bank National Bank Financial Nationwide Insurance Norddeutsche Landesbank Girozentrale NRW Bank OCBC Bank PNC Financial Services Prudential RBC Capital Markets Regions Bank Royal Bank of Scotland Scotiabank Standard Chartered Sumitomo Mitsui Banking Corp Sun Life Assurance Company of Canada SunTrust Swiss Re TIAA-CREF UniCredit Bank AG Union Bank Wells Fargo WestLB AG Westpac Zions Bancorporation 15