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RISK MANAGEMENT
(This section forms an integral part of OCBC’s audited financial statements)
testing, internal assessment of the capital
adequacy and impairment allowances.
Model risk is managed under our model
risk management framework and credit
rating model framework to govern the
development, validation, application
and performance monitoring of rating
models. Approval for adoption and
continued use of material models
rests with the BRMC. The models are
developed with the active participation
of credit experts from risk-taking and risk-
control units and subject to independent
validation before implementation to
ensure that all aspects of the model
development process have met the
internal standards.
The models are subject to annual
review (or more frequently, where
necessary) and independent validation
to ensure that they are performing as
expected and that the assumptions
used in model development remain
appropriate. In addition, Group Audit
conducts an annual independent review
of the ratings assignment process,
the effectiveness of the independent
validation and the accuracy of the rating
system operation. All rating models are
assessed against internal and regulatory
requirements and approved by regulators
for use in capital assessment.
Our internal risk grades are not explicitly
mapped to external credit ratings.
Nevertheless, our internal risk grades may
correlate with the external credit ratings
in terms of the probability of default
ranges as factors used to rate obligors
would be similar; an obligor rated poorly
by an external credit rating agency is
likely to have a weaker internal risk rating.
A-IRB for Major Consumer, Small
Business and Margin Lending Portfolios
We have adopted the A-IRB approach
for major consumer portfolios, including
residential mortgages, credit cards and
auto loans as well as small business
and margin lending. Internal rating
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OCBC ANNUAL REPORT 2017
models, developed from internal data,
are used to estimate PD, LGD, and EAD
parameters for each of these portfolios.
Application and Behaviour scores of
obligors are key inputs to the PD models.
Product, collateral and geographical
characteristics are major factors used in
the LGD and EAD models. The PD models
are calibrated to the expected long-term
average one-year default rate over an
economic cycle, while the LGD models are
calibrated to reflect the economic loss
under downturn conditions.
F-IRB for Major Wholesale Portfolios
Our major wholesale portfolios, namely
sovereign, bank, non-bank financial
institution, corporate real estate
(including income-producing real
estate specialised lending) and general
corporate, are on the F-IRB approach.
Under this approach, internal models
are used to estimate the PD for each
obligor, while LGD and EAD parameters
are prescribed in MAS Notice 637. These
PD models are statistical based or
expert judgement models that use both
quantitative and qualitative factors to
assess an obligor’s repayment capacity
and are calibrated to the expected long-
term average one-year default rate over
an economic cycle. Expert judgement
models are typically used for portfolios
with low defaults following inputs from
internal credit experts. The models also
comply with the regulatory criteria for
parameterisation. For other specialised
lending portfolios, namely Project Finance,
Object Finance and Commodities Finance,
risk grades derived from internal models
are mapped to the five supervisory slotting
categories prescribed in MAS Notice 637.
The risk weights prescribed for these
slotting categories are used to determine
the regulatory capital requirements.
IRB Approach for Securitisation Exposures
The credit risk-weighted assets for
securitisation exposures are computed
using the ratings-based method
prescribed by MAS Notice 637.
Standardised Approach for
Other Portfolios
Credit portfolios in OCBC Wing Hang
and Bank OCBC NISP are under the
Standardised approach. These portfolios
will be progressively migrated to the
internal ratings-based approaches for
which implementation initiatives are in
progress for OCBC Wing Hang. Regulatory
prescribed risk weights based on asset
class and external ratings from approved
credit rating agencies, where available,
are used to determine regulatory capital.
Approved external credit rating agencies
are Standard and Poor’s, Moody’s and
Fitch Ratings.
CREDIT RISK CONTROL
Credit Risk Mitigation
Credit risk assessments are based on
the credit worthiness of the borrower,
source of repayment and debt servicing
ability. To mitigate credit risk, we accept
collaterals and credit protection such as
cash, real estate, marketable securities,
inventories and trade receivables and
standby letters of credit. We have policies
that set out the criteria for collateral to
be recognised as eligible credit risk
mitigants including legal certainty,
priority, correlation, marketability,
liquidity and counterparty risk of
the protection provider. The value of
collaterals is prudently assessed on
a regular basis, and valuations are
performed by independent qualified
appraisers. Appropriate haircuts are
applied to the market value of the
collaterals, reflecting the underlying
nature, quality, liquidity and volatility of
the collateral. We also accept guarantees
from individuals, corporates and
institutions as a form of support.
To manage counterparty credit risk,
eligible financial collaterals may be taken
to partially or fully cover mark-to-market
exposures on outstanding positions,
with a haircut to cover potential
adverse market volatility. Collateral
arrangements, typically covered under
market standard documentation such