Default Risk and Limit System
Purpose
This component enables you to measure, analyze and control default risks. Default risk refers to the possible loss arising from a financial transaction should the business partner not fulfill his contractual obligations for specific economic or political reasons. Default risks are classified as follows:
Counterparty/issuer risk describes the danger of a loss in the value of a receivable due to a worsening of the creditworthiness of the business partner. Country risk is similar to counterparty/issuer risk but refers instead to a worsening of the creditworthiness of a country relevant for country risk. It is used to describe the country that influences the payment of a transaction. Counterparty/issuer risks are subdivided into credit risk and settlement risk (previously divided into third-party settlement risk and settlement risk). The existence of credit risk and settlement risk depends on when the transaction is analyzed. Credit risk exists over the whole term of the transaction. Settlement risk only exists during the settlement period. Credit risk can consist in just a counterparty risk, or an issuer risk, depending on the transaction category (for example, securities transactions).
The country risk functions are used in Banking only, and are not available in CFM. The relevant functions are referred to in the documentation.
Implementation considerations
Monitoring of the market price and default risks resulting from trading transactions by a system of risk-controlling limits is both a requirement of the German banks' supervisory board and a recommendation of the Basle Committee on Banking Supervision. Additionally, the German Federal Banking Supervisory Authority requires the overall risk situation of the bank to be compiled and represented daily, as well as up-to-date information from the respective traders concerning their utilization of the relevant limits.
Features
The system calculates attributable amounts for each single transaction entered, showing the risk content of the respective transaction. Credit and settlement risks from classic credit transactions and trading book transactions are taken into account when quantifying default risk. Determination is in relation to counterparties and issuers.
The level of the default risk arising from classic credit transactions is determined by the amount of the capital commitment of the contract and the current drawings.
In the case of trading transactions, the level of the default risk is governed by the potential covering cost that would arise in the case of default by a business partner. The possible additional loss from a potential positive market value change of an existing transaction can be covered by transaction-specific markup rates.
The calculated risks are assigned to all affected portfolio segments, for example, the counterparty, the industry sector, the product or a combination of these.
Different limits are stored in central limit management. These can relate to one or more criteria (Limit Characteristics). Limits reflect the allocation of the total limit within the entire bank.
When you are creating a transaction, you can check each single transaction in relation to risk and to the relevant limit by using the single transaction check. You update the limit utilizations from the transactions you have made when you run end-of-day processing, or by using the single transaction check. For risk control purposes, the relevant limit utilizations are shown in aggregated form.
You find the functions of the Default Risk and Limit System in the application by choosing Accounting ® Bank Applications ® Risk Analysis ® Default Risk and Limit System. All subsequent menu paths contained in the documentation for the Default Risk and Limit System start from this point.
You find the corresponding Customizing settings in the Implementation Guide by choosing SAP Banking ® Strategic Enterprise Management (SEM) ® Risk Analysis ® Default Risk and Limit System.