ANNUAL REPORT 2006 - DG Hyp

II) Counterparty risk
Counterparty risk denotes the risk that a business
partner has defaulted on a major liability for more than
90 days, or can only partially repay liabilities, or not at all,
without activities having to be implemented such as
exploiting collateral. Due to the particular relevance of real
estate lending as DG HYP’s core business, credit risk is at
the forefront of our observations. The management of
credit risk is conducted largely as follows:
• rating and portfolio-oriented management of new business
and loan extensions;
• credit pricing that is in line with the associated risks;
• active portfolio management (constant portfolio monitoring
and management);
• active management of problem loans (early warning
process, intensified handling, restructuring and settlement).
• annual review of credit risk strategy.
a) Lending process
The lending process for high-volume/smaller-sized retail
business is based on a largely standardised application
scoring system that corresponds to the requirements of
MaRisk as well as to the Basel II regulations. Processing for
this lending business is outsourced to VR Kreditwerk,
observing the provisions of Section 25a of the KWG.
Depending on the relevant score, incoming loan applications
up to € 400,000 are either approved automatically,
approved or rejected on the basis of a separate manual
review within DG HYP, or are automatically rejected. In the
retail lending business, lending decisions for loans exceeding
€ 400,000 are always based on a manual review, as
well as on a scoring model. DG HYP carries out the entire
loan processing for retail loans of between € 500,000 and
€ 1,000,000.
The loan application process for high-volume retail
lending business was fundamentally reworked and modified
during the 2006 financial year, in cooperation with
VR Kreditwerk. The changes made are geared to reducing
processing time, increasing the quality of decisions and
significantly improving service.
36 Deutsche Genossenschafts-Hypothekenbank AG | Annual Report 2006
Management Report
The front and back offices for commercial real estate
finance are located in DG HYP’s Real Estate Centres. Key
workflow stages include the credit rating, which is identified
using rating systems that comply with Basel II, and also
property and project assessments. In the latter case,
DG HYP benefits from the proximity of its Real Estate
Centres and surveyors – who are also decentralized – to its
customers. Each lending decision requires a separate vote
by the market unit as well as by the back-office unit. The
loan application is authorised on the basis of lending volume
and risk classification. The corresponding parameters
are laid down in the credit and portfolio strategies.
The credit workflow for Credit Treasury includes processing
new commitments and portfolios, including analysis,
credit decisions, portfolio monitoring and regular
reporting on real estate lending portfolios for RMBS, CMBS
as well as true buy and synthetic transactions. In addition,
structured credit financing is also processed, to the extent
that the item financed is large real estate financing.
b) Limit system
DG HYP has a limit system in place to manage and
monitor counterparty and country risks. This system calculates
the utilisation of external limits (country risk limits in
the DZ BANK Group, and default risks in accordance with
section 13 of the KWG), setting internal limits for country
and default risks simultaneously and independently of one
another. The respective limits must be upheld and can be
viewed at any time via an online system.
During the back-office monitoring processes, the
utilisation of the individual limits is monitored daily, and
these are escalated if the limits are exceeded. As part of
this escalation, support is provided to ensure that the limit
is returned to, and that suitable measures are implemented.
Internal individual risk limits are identified depending
on the individual counterparty risk of the business partner.
Limits are issued for banks and states, based on the
corresponding VR rating method established within the
cooperative banking sector.