Risk balancing in leasing
After the leasing- and factoring-industry has been put under the supervision of BAFin in 2008, the first regulatory requirements have been already implemented. Especially the registration as a financial provider is done and the first loans exceeding one million Euro have been reported according to §14 KWG. The majority of leasing companies already started implementing §25a KWG, which concretizes in the minimum requirements for risk management (MaRisk). They are now dealing with the task of completing the implementation by end of 2010. However, the three pillars (risk management, configuration and flow organization, and internal revision) of MaRisk demand various requirements to be met, in a way leasing companies hadn’t to deal with yet. One of them is the representation of a financial provider’s risk balancing.
The concept of creating a risk balancing should give the management of a leasing company a structural overview over the current risk situation and balancing. And it also suits the legal supervision laws of risk balancing concepts.
Controlling concepts to risk balancing
In order to create a risk balancing concept every leasing company has to choose a controlling concept. It is based on the double proportional policy of MaRisk which takes into account the type, extent, complexity and risk level of a business model.
Process of risk balancing
The process of risk balancing orientates itself towards the Internal Capital Adequacy Assessment Process (ICAAP). It represents the operating of the pillar II from Basel II in the banking industry, which itself is the foundation for MaRisk in terms of qualitative risk management.
Process steps to create a risk balancing
Risk identification: In line with the creation of a risk strategy, every leasing company has to do a risk listing. It will list all essential risks.
Risk quantification: Risk types that are classified as quantifiable will be rated according to the controlling concept and represented as risky positions.
Aggregation: All calculated risk will be accumulated in the risk aggregation. Depending on the controlling concept, the correlations between the single types of risk will be considered.
Asset pools: In order to determine the risk balancing, risk asset pools are needed. Normally you will differentiate between short-term, mid-term and long-term asset pools. The regulations for the asset pools are orientated in line with the chosen controlling concepts of the company.
Risk balancing: To eventually determine the risk balancing, the risk asset pools will be contrasted with the quantified risk types. This will show whether a leasing company is capable of bearing the risks they are going to take on.
All above mentioned steps are to be seen as a whole process. During the fiscal year they have to be executed regularly to notify a possible change in the risk situation. It is also mandatory to do an annual check of the risk balancing process.
Practice of risk balancing in leasing
As we can see from our experience in consulting work for leasing companies, the choice of the controlling concept depends heavily on the size and data history of the company.
For small and middle-sized leasing companies it seems that the periodical (or GuV-oriented) perception as a controlling concept is the most pragmatic one. The needed data, like the plans of profit and costs are usually available to every company. For the consulting team of S&N AG this method is also the most reasonable for mid-sized leasing companies. Of special importance is the annual forward projection of the risk balancing analysis. This can be done easily with the forward projection of the GuV and the financial statement respectively.
S&N has been chosen as a project partner to the application of risk balancing by the Bundesverbandes Deutscher Leasingunternehmen (BDL). This project describes different controlling concepts and methods, and verifies them with case studies. The experience of S&N in the field of implementing MaRisk in mid-sized leasing companies played an important role for BDL’s choice. S&N has a lot of experience in implementing risk balancing in leasing companies and can therefore be seen as a market leader and trend setter in this area.
Contact person: Kai Braunert; firstname.lastname@example.org