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2. Who we are
3. Gross Credit Exposure by Business Group Global Wealth Management & Business Banking Investment Bank Other TOTAL UBS 4. Impaired loans and loan loss provisions Problem loans are low in the Investment Bank ... and UBS reduced its recovery portfolio in Business Banking 5.
Credit Risk Quantificationwhere we came from
(from a 1997 presentation to the BIS [FSI]) 6.
What we concentrated on Rapid implementation of behavioral change ...through pragmatic use of modeling techniques 7. What we have achieved Profitable lending activities, ... and very low credit loss expenses New business originated in 4Q99 Rating Real Estate Loans
1 2 3 4 5 6 7 8 9 10 11 12 Real Estate Loans Rating Corporate Loans Credit Loss Expenses in CHF million 1997 1998 1999 2000 2001 2002 2003 2004 Q3-05 -1,278 -951 -956 130 - 498 -115 -72 241 243 8. What has changed in the industry
Degree of Specialization Degree of Sophistication
Paradigm shift in credit risk management 9. Credit Risk ControlThe key factors to success Credit Risk Culture "One strategy - one goal" Risk Organization "Checks and balances" Risk Quantification "Transparent risk assessment" Risk Limitation "Focus on risk diversification" 10. Credit Risk Culture Risk policy must be aligned with corporate objectives ... and be adopted "top down" by the Bank's origination and risk management functions 11. Corporate Governance and responsibilities Board of Directors Chairman's Office Group Internal Audit Group Executive Board GEB Risk Sub-Committee Group Chief Risk Officer Market RiskControl Credit Risk Control Wealth Management & Business Banking Global Asset Management Investment Bank Corporate Center Risk Policy Risk Management Independent Risk Control Wealth Management USA Group Chief Credit Officer Group Head Operational Risk OperationalRisk Control Functional Leadership for Credit Risk Control Units within each Business Group 12. Credit risk control at UBS ... is functionally independent from the business line, ... but an integrated partner of the business groups Group Chief Credit Officer CCO WM&BB CCO Global WM&BB CCO Investment Bank CCO Investment Bank Corporate Center Business groups 102 417 321 Risk methods Risk reporting Risk systems Risk review Risk education Credit authority Functional mgmt 13. Business Management and Risk Control Clients / Market Risk Management Risk Control "Separation of power" is key to successful ...optimization of risk and reward Operations Origination Client Management Business Origination Loan Book Management Risk/return Optimization Transaction Execution Loan Disbursement Model Certification Risk Limits and Control 14. Statistical Loss: "Value-at-risk"Credit Risk Market Risk ... Convention of measurement SignificantLoss Events Availability of data
Characteristics of the distribution Market risk and credit risk measures are different 15. Expected Loss Three key variables determine the outcome but their estimation is often difficultPD x LGD x EXP = Expected Loss Terminology: PD = Probability of Default LGD = Loss Severity (given default) EXP (or EAD) = Exposure (at default) 16. Rating methods are key Risk quantification begins with a "correct" stratification of clients by means of high quality rating methods 17. Risk concentrations drive portfolio risk single loan no default default several loans commondefault no default single default theindividualUnexpected Loss ofeach loan = Concentration risk thecommon default behaviourof several loans = Loss Correlation 18. Credit Risk Modeling
and produces a distribution of possible portfolio losses 19. Extreme events and stress testing Stress testing and limit setting are based on several analytical methods Loss Frequency Earnings capacity
20. Credit exposure hedging 21. Credit risk control measures Credit events have many causes, are difficult to predict ... and can create substantial losses 22. Credit risk mitigation
Risk taking capacity with many clients would be limited, ... if risk mitigation could not be effectively used 23. Active credit portfolio management
Active portfolio management is not equally available ... for all customer and product classes 24. Contact Information