Risk management

Goal

The primary goal of our risk management is to ensure competitive risk/reward opportunities for our investors. To sustain a stable balance of these rates even under stressed market conditions, we on the one hand conduct an in-depth risk analysis, and on the other hand elaborate financing structures that comprise loan collateral, legal guarantees and other measures that mitigate risk.

Credit risk

The key risk we have to deal with is credit risk. Technically, the description of a default event can be broken down into two parameters: the probability of default (PD) and the loss given default (LGD). While PD is the probability that the borrower becomes insolvent during a given period of time, LGD is an estimate of the loss to be expected in the event of a default. Accordingly, the primary focus of our quantitative credit risk analysis lies in assessing these parameters using mathematical models. This process goes hand in hand with an in-depth screening of the borrower, which consists of an independent financial analysis, an appraisal of the business profile, a breakdown of collateral and a final synthesis of all these factors.

The estimation of the probability of default and loss given default, combined with the assessment of a market correlation coefficient, allows for the determination of a probability distribution over the relative loss of a credit portfolio. This distribution then provides the basis for calculating risk measures such as value-at-risk or expected loss. Based on this and additional qualitative factors, pricing is then carried out to ensure a good risk/return ratio.

Probability of default

One of the two key parameters underlying credit risk is the probability of a borrower defaulting within a certain period of time. We have developed a data-driven model that produces PD-estimates based on balance-sheet inputs. To ensure generalizability and guarantee a high level of significance, a suitable combination of optimization methods and back tests have been applied. The final prediction quality of the model lies in the benchmark range of comparable approaches.

Loss given default

If the underlying collateral of an exposure is publicly traded and liquid, we can estimate loss given default based on a worst-case volatility vs. traded volume evaluation. The basic idea is to analyze the asset in terms of realization time and rate of return variance. These two figures are then combined to make a first LGD estimate. For non-listed and/or illiquid collateral, an in-depth analysis of historical loss data is conducted.