Trends in credit risk management

Tradability of risks provides scope for new expansion

The rapid developments in the past decades – the “booms and busts” of the 1980s and 1990s with their global crises in specific industries and currencies (New Economy, real estate, Russia, Latin America) spurred innovation in banks’ credit risk management. These innovations in the banking sector were instrumental in the emergence of derivative credit markets. Based on these developments, credit portfolio strategy in many areas has changed from the traditional “buy and hold” to an “originate and sell” approach. This involves making risks tradable and thereby creating room for our customer business. Bank Austria Creditanstalt is committed to this approach.

Credit portfolio management

BA-CA started to actively develop and use credit risk instruments several years ago. With the establishment of the ACPM (Active Credit Portfolio Management) unit, the bank also took an organisational step in response to new developments. In close cooperation with other UniCredit Group units we have created an excellent base on which we will build over the next one or two years.

It is especially in the Retail and Corporates business segments, and increasingly also for our CEE portfolio that we will pursue the following policy using modern portfolio risk management methods:

• Reduction of risk-weighted assets (RWA): reducing risk-weighted assets is an important element of our portfolio management activities. The bank is no longer assessed on the basis of balance sheet assets but by reference to earnings on assets weighted by risk class and collateral. Our Promise transaction in the final quarter of 2006 shows very clearly that such transactions can enhance the company’s value.
• Optimum employment of capital: Legal rules (Basel II) require banks to hold capital against assets depending on the risk involved (rating class). The portfolio approach aims to optimise the employment of capital by “smoothing” large individual exposures and sector concentrations.
• Return on equity (ROE): In addition to the reduction of RWA and optimum employment of capital, the third task is to increase the return on equity. By using hedges or purchasing risks in the market we increase the bank’s overall return, thereby making a contribution to enhancing the company’s value.

Details of risk management principles, organisational structures and of risk measurement and risk monitoring processes can be found in the “Risk report” contained in the notes to the consolidated financial statements.