team: December 2008
The World after Lehman Brothers
Financial Crisis: Experiences from Credit Risk Management at RWE Supply & Trading and how the Back Office in Essen dealt with it
If traders at RWE Supply & Trading want to trade with a new business partner, then there is one department that they cannot get around. Before the first deal takes place, RWE Supply & Trading’s Credit Risk Team takes a careful look at the potential partner.
“We are here to check the risks that our business partners bring“, explains Goran Milivojevic, Head of Credit Risk (CE). The processes and systems for the analysis have also proven themselves in the financial crisis: “From June onward our measures on Lehman increased from week to week. Two weeks before Lehman went bust we did not support a risk increasing power delivery contract with Lehman, although they were still rated A/A2 by SAP/ Moody’s.”, says Goran. However, the extent and the timing of the crisis was a bit of a surprise. “But we have the current situation under control and have no larger losses to report,” says Goran. Still, the “world after Lehman Brothers” is different for those in Credit Risk than it was before. For one, the reporting demands have increased. “Now we report so-called CDS quotes as an indicator for the default probability and our exposures against banks as well as the credit sensitive names to RWE Supply & Trading management daily, but also to the Risk and Finance departments of RWE AG“, says Michael Jost, who is heading the Credit Exposure Analysis team.
Business partners are checked more intensively
Another change is that currently more analyses are being carried out. “E.g. we look to see which counterparties have a very high level of debt that could limit their ability to get loans from a bank”, explains Michael. Credit Risk then correspondingly adjusts the rating for the individual counterparties.
The financial crisis has hit the real economy
The lower the rating the more likely it is that the counterparty could default and the larger the reserves that RWE Supply & Trading puts back for this counterparty. The banking market has calmed down somewhat thanks to state intervention. None the less, the financial crisis has hit the real economy. “We are observing sinking freight rates which means that some counterparties who run ships are facing difficulties“, confirms Goran. “When our business partners make less profit, then those who were already operating in a difficult market could start having serious problems.” This is an additional aspect that Credit Risk will continue to monitor closely.
