Annual Report 2006 - Rheinland Pfalz Bank

Statement of Financial Condition – Risk Report
LRP 2006
21
Risk Report
We apply conservative standards to our risk culture and our risk management. This
is in line with the risk policy of the LBBW Group. The framework for our business
activities is defined by our risk strategy, which is geared to our risk-bearing capacity.
The approval of our internal rating approach by the Federal Banking Supervisory
Office marked the successful completion of the Basle II project.
Risk-bearing Capacity as the Foundation
of Risk Management
Our risk management activities are based on a riskbearing
capacity concept which takes all material risk
categories into account. Counterparty risks (individual
and country risks), market and operational risks are
quantified based on the Value-at-Risk (VaR) approach
and compared with the Bank’s risk-bearing potential in
cash terms – indicating its long-term earning power
and asset base. Different scenarios (standard, stress
and worst-case scenarios) for the individual risk categories
and rules for the aggregation of the individual
risks to the overall risk assumed by the Bank have
been defined to count the risks against the Bank’s riskbearing
capacity. The orientation of the Bank’s lending
risk strategies, its positioning in the trading units as
well as the VaR limits and risk capital both for counterparty
and market risks are derived from these
approaches.
Limit allocation is adjusted annually based on the riskbearing
potential. These parameters are monitored on
an ongoing basis in the course of the year. The compliance
with and use of the limit, the risk-bearing capacity
and changes to the latter as well as compliance with the
strategy are mapped and analyzed. This is done to ensure
that the Bank only assumes risks which it can
bear without reducing its long-term earning power and
asset base.
IRB Approach Approved by the Federal Banking
Supervisory Office
In the year under review, our credit risk controlling
and management efforts were marked by the application
of the IRB Foundation Approach in the context of
the new capital adequacy requirements as of the defined
target date. The Federal Banking Supervisory Office
has approved our internal rating approach, which
means that starting 1 January 2007 our internal rating
approach based on our own estimates of the probability
of default will be used to determine the capital backing
for all relevant portfolios exposed to counterparty
risks.
The internal rating coverage for both the positions and
the risk-weighted positions as defined in the Solvency
Directive clearly exceeds 92 % both at LRP and at the
LRP Group. This means that LRP is the first bank within
the German savings banks organization and one of only
very few German banks to have reached the exit
threshold for the temporary partial use already as of
1 January 2007.
The counterparty risk management instruments used
by LRP are based on the definition of the counterparty
default risk. LRP defines this as the risk of business
partners failing to meet their obligations. These risks
range from defaults due to bankruptcy, issuer’s and
counterparty risks to country risks resulting from currency
transfer restrictions.