BMW 2009 Annual Report Download - page 69

67 Group Management Report
problems as early as possible and find appropriate solu-
tions. Despite
the fact that a number of suppliers filed for
insolvency, this did not result in any significant loss of pro-
duction for us.
Risks relating to the provision of financial services
As a result of the worldwide recession, the risk profile has
also changed in the important area of financial services.
Risks are identified, measured, monitored, evaluated and
managed on the basis of recognised standards and regu-
lations that generally apply worldwide in this line of busi-
ness.
A global Risk Committee, which serves as the highest
decision-making body within the Financial Services seg-
ment, is in place to decide upon the overall strategy. It also
approves internal guidelines and process descriptions that
are required to be followed internationally.
The main categories of risk relating to the provision of
finan cial services are credit risk, residual value risk, interest
rate risk, liquidity risk and operating risks. Internal method-
ologies and techniques that comply with national and in-
ternational standards and regulatory requirements such as
Basel II have been developed to measure credit, residual
value and interest rate risks on the one hand and operational
risks on the other. Internal guidelines are also in place to
manage liquidity risk and ensure compliance with regulatory
requirements.
Credit risks on the retail (leasing, credit financing) and
com-
mercial lines of business (dealers, fleet customers, im-
porters)
are monitored continuously on the basis of projec-
tions and stress tests and measured and evaluated using
a value-at-risk approach. Further measures are taken to
minimise risk when considered appropriate, including the
requirement for customers to provide additional collateral
or make higher up-front payments. Various risk methods
are used to measure risk, ranging from scoring techniques
in the area of retail customer business and the use of credit
rating or prudent measurement of collateral in the area of
commercial financing business. These methods are
docu-
mented in guidelines that are required to be applied across
the Group.
Close contact with borrowers, a good understanding of
the leased or financed vehicles involved and prudent
measurement of collateral all help to minimise risk. Local
and centralised credit audits are also regularly performed
to test compliance with prescribed rules and to check
the effectiveness of processes and IT systems. For risk
management purposes, the BMW Group reverts to normal
good banking practices, such as the use of maximum
unsecured risks for each rating category or risk-based up-
front payments. Risk criteria such as arrears and bad debt
ratios are analysed regularly. The results of these analyses
are used as the basis for the proactive management of
the credit portfolio, ultimately aimed at improving portfolio
quality. The information provided to management along
with appropriate recommendations for action serve as the
basis for decision-making. Measures implemented in this
vein in 2009 therefore partially countered increased credit
risk exposures. The credit decision process comprises
three phases. Depending on the credit volume applied
for
and the credit risk rating of the party involved, financing
applications for international dealers, importers and fleet
customers are presented to the local, regional or global
credit committees for approval. The principles of dual con-
trol and segregation of duties apply worldwide and are rigor-
ously
implemented. In order to minimise risk further, the
BMW Group is continuously making efforts to standardise
its credit-decision processes and the quality of credit appli-
cations as well as to ensure that uniform and transparent
rating systems are in place worldwide. Allowances are rec-
ognised in the balance sheet to cover identified risks. Any
negative impact on the credit risk portfolio is generally re-
flected in higher payment arrears and bad debts with retail
customers or dealers. The drop in sales caused by the in-
ternational economic crisis has had an adverse impact on
the financial situation of the dealer network and increased
the risk of insolvency within the dealer organisation. These
developments in 2009 necessitated higher risk provisions
in the areas of retail customer and dealer financing busi-
ness.
In the case of vehicles which remain with the Group at the
end of a lease (leases and credit financing arrangements
with option of return), there is a risk that the originally calcu-
lated
residual value may not be recovered when the ve-
hicle is sold (residual value risk). The volatility of pre-owned
car prices on the major sales markets has intensified as a
consequence of the financial crisis, thus increasing the re-
sidual value risk. Residual values are calculated uniformly
throughout the BMW Group in accordance with mandatory
guidelines. The residual values of our vehicles on used car
markets are continuously monitored over long periods and
future developments projected. External market observa-
tions are also used in this context. The overall risk position
is measured by comparing forecasted market values and
contractual values by model and market. The return ratio
for lease vehicles is also computed. The risk of unexpected
loss is measured using a value-at-risk approach. The