Annual Report 2006 - Rheinland Pfalz Bank

22 LRP 2006
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
A.0 A.1 A.2 A.3 A.4 A.5 B.1 B.2 B.3 B.4 B.5 C.1 C.2 C.3 C.4 C.5 D.1 D.2 D.3 D.4 D.5
Distribution of individual risks into rating categories (LRP Group)
Commitments in 1 billion (total: 1 84.2 billion)
The classification of individual borrowers, groups or,
possibly, transactions is performed using LRP’s internal
rating systems. Ratings are determined on the basis
of a number of historical and forward-looking factors.
Apart from the probabilities of default, expected loss
ratios and recovery ratios are derived from the rating
systems with the help of additional information on the
structure of the exposure.
The weighting of the individual rating factors in the rating
process is based on historical data and expert
knowledge. For all internal rating procedures we use
the same master scale with 21 non-default classes and
one default class which distinguishes between different
default reasons. The definitions of default and recovery
of debtors have been harmonized with those of
LBBW; a process ensuring an efficient Group-wide exchange
of information between LRP and LBBW, especially
with regard to default information and a harmonized
risk management approach, has been implemented.
Internal ratings serve to support decisions on the extension
of loans and serve as the basis for numerous
controlling tools. By taking exposure-specific components
into account in the rating process, we pursue
several objectives: a rating-oriented competence hierarchy,
a consistent basis for the definition of upper
credit limits, a pricing policy geared to collateral and
portfolio risks as well as transaction-specific pre/postcalculation.
Moreover, the ratings serve as yardsticks
for the specific processes in intensive monitoring, reorganization
and liquidation cases.
Limits for individual customers, groups and country
limits are dependent on the respective ratings. The use
of these limits as well as the use of the individual lines
is determined automatically on a daily basis by aggregating
the individual exposures from the different operational
systems.
Risk classification of individual borrowers is reviewed
at least once per year and updated whenever there are
indications of material changes at the borrower or in
his immediate environment which affect the borrower’s
credit standing. Internal Auditing regularly reviews
the proper allocation and monitoring of ratings.
Any change in the rating will have a direct effect on the
volume of new business as well as on margins.
All essential rating information taken into account in
the rating algorithm is electronically stored so that we
can draw on a sufficiently long historical observation
period in case of future modifications to the rating procedures.
We pool our data with other banks with a view
to putting the ongoing validation and updating of the
rating procedures on a broader basis.