"Rating systems are one area where banks can set themselves apart from the competition."

Florian Grasshoff, Risk Management

Volkswagen Financial Services uses Credit Risk Management Platform to reduce its credit risks

Corporate Rating at Volkswagen Financial Services – Credit rating can be a competitive advantage

Financial services are offered through Volkswagen subsidiary Volkswagen Financial Services, the largest automobile financial services corporation in Europe, and by other subsidiaries, such as Volkswagen Bank GmbH and its branches, Volkswagen Leasing GmbH, the insurance provider Volkswagen Versicherungsdienst, and other German and international subsidiaries.

Volkswagen Financial Services decided to replace its Basel II standard approach with the basic IRB approach, which means it will be able to put its vast specialized know-how to better use in this area. For the evaluation of creditworthiness in the corporate area, Volkswagen Financial Services has replaced its old MS Access-based application with ACTICO's Credit Rating Module. The new System is called CARAT (Corporate Assessment and Rating Model Administration Tool), and has been used successfully for multiple years.

Rating Corporate Clients

Creditworthiness evaluation of the client is made through a complex rating procedure. It entails both annual report figures as well as qualitative factors, such as future business prospects, assessment of management quality, and market and industry environments, as well as payment practices – all are drawn into the evaluation.

CARAT employs data from a variety of sources. This meant that the various suppliers of data had to be connected, and they included some who use SAP applications. Joint use of data also required comparing data from different sources with each other for redundancy – data sets had to be assigned to each other, duplicates had to be detected and corrected. The result is a permanent improvement in data quality that serves all users well.

Calculation of Credit Risk Ratings, Historization & Documentation

The analysts at Volkswagen Financial Services do the research, evaluate corporate data and calculate a rating with the aid of CARAT. Every rating event is archived in the corporate Business Warehouse, including all input and output data. Every analyst has personal work lists he uses to manage his rating events. The status of a rating can vary. In the simplest case, the analyst changes the status of the rating after it is finished from "draft" to "confirmed", which means that the newly calculated rating is valid as of that date. But complex work flows with graduated status transitions also are possible, such as the release of completed ratings by an authorized superior. In addition to automatic archival and documentation within the system, a rating report also can be generated for a completed and released rating. This report will list the most important key figures, sub-scores and rating classes. As a rule, a rating retains its validity for twelve months. When a default event occurs, such as the client applies for insolvency, CARAT automatically recalculates and re-categorizes a default class.

Maintenance & development of new credit risk rating models

In corporate business, corporate structures have a direct impact on default risk – often subsidiaries are secured through the parent corporation. These corporate linkages also will influence ratings. An individual rating is generated for every borrower and lease client, regardless of inheritance or corporate structure. If the borrower is part of a larger corporate structure, the individual rating will then be adjusted depending upon the degree of linkage. Business changes, such as adapting a rating model, are implemented with ACTICO's business rules management system (BRMS), ACTICO Rules. The completely graphical approach of ACTICO Rules simplifies the handling of models to such an extent that the business unit at Volkswagen Financial Services with responsibility for developing and enhancing rating models, can maintain and continuously develop new risk models on its own. Changes in factors that influence the model (such as expanding it to include additional rating factors) are automatically reflected in the application interface. The result? Maximum flexibility in both the model and the interface. The business unit retains full responsibility and generally needs no assistance from IT in normal operation.

Rainer Faller, ACTICO project manager, explains the advantages this offers in terms of time. "The ACTICO Rules architecture offers the advantage that responsibility for the entire life cycle of a rating model, from modeling and documentation, through testing up to production, is all in the hands of the business unit. That makes it quick as well as simple."

Audit-proof credit risk ratings according to Basel II

In addition to this flexibility that allows for easy modification of new key figures or factors, the rating application pursuant to Basel II also remains audit-proof. Not only are the ratings archived, but the transparent versioning of rating models allows you to trace how every credit rating was developed.

International deployment

After their successful introduction at Volkswagen Financial Services in Germany, the risk models at the branch in the United Kingdom were brought in as well. Connecting the branches in Italy, Spain and France have been realized in early 2009.

"There was nothing available off the rack. In the end, rating systems are one area where banks can set themselves apart from the competition."

Florian Grasshoff, Risk Management at Volkswagen Financial Services