Isolated collateral-to-credit assignment
Calculable, but without scope for allocation
OCM offsets the collateral value against the credit, but there is no alternative allocation of values.
OCM · Optimized Credit Risk Mitigation
OCM optimizes the allocation of collateral values.
In large credit portfolios, exposures are frequently connected through multiple items of collateral, forming webs of cross-collateralized credit. Exposures include loans as well as off-balance-sheet items such as undrawn credit commitments.
Declarations of purpose specify which collateral values may be assigned to which exposures. These assignments determine the structure of the web and create different options for allocating collateral values.
What OCM doesOCM is a mathematical method that optimally allocates collateral values for cross-collateralized credit in order to minimize RWA.
How the optimization task arises OCM does not alter the bank's assignments. It optimizes the allocation of collateral values within each web of cross-collateralized credit.
Since 2002in production
More than €600 billiontotal credit volume processed by OCM on an ongoing basis
More than 15,000declarations of purpose in the largest webs of cross-collateralized credit
Cross-Collateralized Credit
Declarations of purpose form the web of cross-collateralized credit.
Limited and broad purpose agreements define the connections between exposures and collateral. OCM does not alter these assignments. It optimizes the allocation of collateral values within each web of cross-collateralized credit.
Heterogeneous entire web
Different allocations of collateral values
Several exposures of one borrower and multiple items of collateral are connected differently by limited and broad purpose agreements. Each offset of a collateral value affects credit risk mitigation across the entire web. OCM therefore optimizes credit risk mitigation across the entire web.
limited purpose agreementbroad purpose agreement
The structure of the entire web is decisive.
Many limited purpose agreements do not rule out optimization. OCM is particularly effective in heterogeneous webs with different connections. If all purpose agreements are broad, however, every exposure is connected to every item of collateral. In such a fully connected web, the sequence in which collateral values are offset is irrelevant in an unweighted analysis. For an RWA assessment, it is sufficient to offset the individual collateral values in descending order of the reduction of RWA they produce. Such a fully connected web does not require complex optimization of its connection structure.
What OCM calculates
From initial RWA to optimized RWA after credit risk mitigation.
OCM optimizes the relevant webs of cross-collateralized credit using either the regulatory risk parameters of the selected approach or internal risk parameters provided by the institution.
RWA before allocation
OCM calculates the initial RWA of all exposures included in the calculation using the relevant risk factors.
Optimal allocation across the entire web
OCM assesses the effect of eligible collateral values across the web and determines the allocation with the lowest RWA under CRR III rules or the institution's internal criteria.
RWA after credit risk mitigation
OCM reports the optimal offsetting, the collateralized and uncollateralized shares, and RWA before and after credit risk mitigation.
Which parameters affect the result?
OCM takes into account the risk factors and eligible collateral values relevant to each offset. These include volatility adjustments for securities used as collateral as well as adjustments for currency and maturity mismatches.
CRR III in OCM
The CRR III rules relevant to the allocation of collateral values are implemented in OCM for the Standardized Approach, the Foundation IRB Approach, and the Advanced IRB Approach. For CRR III calculations, OCM assesses and optimizes the relevant webs using the parameters of the selected regulatory approach.
The economic lever
The OCM effect begins with a comparison against the existing method.
OCM's additional effect can be measured directly. It is the difference between RWA after the allocation currently in use and RWA after OCM's mathematically optimal allocation.
Consistent basis for comparison
From a heuristic result to the measurable OCM effect
Starting value produced by the alternative method actually in use
Result for the same web and the same parameters
The additional reduction of RWA achieved by optimal allocation compared with the heuristic method
Calculated capital effectAdditional reduction of RWA × binding capital ratio
This result is not profit. Economic benefits arise only from the institution's use of the additional capital and balance-sheet capacity, for example for additional lending. Funding, liquidity, risk costs, operating costs, and the cost of OCM must also be included in a reliable economic assessment.
Parameter-driven flexibility
The same web. Different professional questions.
The mathematical method remains the same. Regulatory reporting uses the parameters of the selected regulatory approach. For controlling, credit applications, and other institution-specific analyses, the institution can provide its own risk factors.
For regulatory reporting, RWA is calculated under the selected regulatory approach.
For regulatory reporting, OCM uses the parameters of the Standardized Approach, the Foundation IRB Approach, or the Advanced IRB Approach and minimizes RWA in accordance with CRR III rules.
How does the institution assess the web using its own criteria?
Institution-defined or more conservative risk factors support an internal assessment that may deliberately differ from the regulatory view.
How does new business affect the entire web?
The risk effect of a new or expanded credit exposure can be assessed together with the borrower's existing exposures and the relevant portfolio. In the simulation run, OCM re-evaluates and optimizes the affected web of cross-collateralized credit.
Transparent results
The optimum remains fully traceable.
Demonstrating a low RWA is not sufficient. The institution must be able to see how the credit risk mitigation was achieved and at which levels it takes effect.
For each offsetCredit being offset, collateral, amount of collateral value offset against the credit, and RWA before and after credit risk mitigation
For each creditCollateralized and uncollateralized shares and remaining RWA
For each item of collateralUsed and unused portions of the collateral value available for offsetting
Depending on the approachEffective LGD and additional credit risk mitigation metrics
AggregatedResults for each web of cross-collateralized credit, counterparty, borrower unit, specific portfolio, and the entire credit population processed in the OCM run
The benefit
OCM turns the mathematical optimum into a verifiable calculation result. The information is available at the required levels for regulatory reporting, controlling, simulations, and downstream systems.
Professional exchange
Do you have questions about complex webs of cross-collateralized credit or OCM?
Email or call us. We will be pleased to discuss your specific requirements.