‚ 1 The New Capital Adequacy Framework for Credit Risk Possible Impact on the Austrian Banking Sector and Banking Supervision Franz Partsch Credit Division Oesterreichische Nationalbank Vienna, 1 February, 2001

‚ 2 Overview  Empirical analysis: sample 37 larger Austrian banks  Magnitude and variability of credit risk Data sources: annual bank supervision audit report, monthly statistical returns  Portfolio structure Data sources: central credit register, rating data, sector default data  Conclusions  "Road map" for the implementation of the new Accord  based on empirical evidence and judgement Disclaimer:available data do not come from credit risk management sources and can only serve as more or less suitable proxies for credit risk

‚ 3 Watch loans  Extreme values  Outliers  Median BoxInterquartile Range  Highest Non-Outlier Lowest Non-Outlier

‚ 4 Doubtful loans

‚ 5 Loss loans

‚ 6 Value adjustments to operating result Value adjustments of claims and allocations to provisions for contingent claims and for credit risks

‚ 7 Value adjustments to loans

‚ 8 Value adjustments to assets

‚ 9 Conclusions (I)  Credit risk  is by no means immaterial for the average large Austrian bank  has been, on average, fairly stable over the last years  shows significant and increasing differences between banks

‚ 10 Austrian Central Credit Register  Description  Register of all borrowers from financial institutions (banks, leasing companies, insurance companies) with more than ATS 5m in total loans outstanding or credit lines  Purpose  service for reporting institutions  source of information for supervisory authorities  Content  structural data on borrowers (name, address, legal form etc.)  monthly reporting by types of loans  quality check and aggregation  regular and ad-hoc information on total indebtedness of borrowers

‚ 11 Loans by borrower type (I)

‚ 12 Loans by borrower type (II)

‚ 13 Loans by country type

‚ 14 Country Risk Weights (Rating agency)

‚ 15 Country Risk Weights (Export Credit Agency)

‚ 16 Hypothetical default rates (corporate sector risk) Payment incidence: reported non-payment of commercial or financial debt

‚ 17 Corporate sector risk distributions Payment incidence

‚ 18 Corporate sector risk distributions Bankruptcy

‚ 19 Borrower number by borrower type

‚ 20 Effective number of loans

‚ 21 Hypothetical Granularity Scaling Factor

‚ 22 Conclusions (II)  Credit risk  is by no means immaterial for the average Austrian large bank  has been, on average, fairly stable over the last years  shows significant and increasing differences between banks  Portfolio structure  large banks have significant domestic and foreign lending in all exposure classes (corporates, public, financial)  country risk is concentrated in highly rated areas, but lending to countries with low ratings is material for some banks  corporate exposures are concentrated in medium risk sectors, but lending to corporates in high risk sectors is material for some banks  the number of borrowers in some exposure classes (public, financial) is fairly small and (lack of) granularity will be an issue for some banks

‚ 23 "Road map" for Basel II  Data  own time series on ratings, defaults, losses  data pooling  mapping to external data  check against other data sources  Estimation of risk parameters  robust methods using relatively few data  transparency for tests by risk managers, supervisors and market participants First: sound rating system and risk management framework Then: