Understanding Deutsche Bank Credit Risk Management

This afternoon, after receiving a most-generous invitation, I attended an in-house workshop titled, Credit Risk Management - Foundations of Risk Management. Along with 6 other young Deutsche Bank trainees/employees, I made myself comfortable in the plush black leather chairs of a small conference room on the top floor of the historic Deutsche Bank building located on the famous boulevard in Berlin: Unter den Linden.

After introducing ourselves, we brainstormed about what factors should be considered when compiling a credit rating for an organization. There were categorized by "hard" and "soft" factors. Hard factors were the quantifyable and objective measures such as financial data, ratios, historic data, forecasts, and account information. These constitute the core of ratings. Also of importance were the soft factors such as management, legal forms, market position, peer benchmarking, industry branch, and information from customers and suppliers.

Deutsche Bank, like other financial institutions, have their own credit rating system similar to the big credit rating agencies such as Fitch, Moody's, and S&P. These are comparable in that they are in part derived from the statistical likelihood of the organization's default within the year. After learning what offices use these ratings and for what they are used for, we looked at how the EBITDA (earnings before interest, taxes, depreciation, and amortization) is a key number for creditors because it represents the earnings that need to doled out to creditors, the tax authorities, and depreciation and amortization expenses. The question is, "is there sufficient cash flow to finance working capital (especially for high-growth or high-investment orgs) AND have enough left over for the creditor banks?" Further, we discussed the main drivers of income statement forecasting. (Thankfully, my Financial Statement Analysis class at GWU with Professor Kang was still more or less fresh in my mind. Thanks Prof. Kang!) Then we delved into the types of collateral and security can be negotiated to protect against the very sad and devastating consequences of forced liquidation at bankruptcy. Finally, we learned about the communication and cooperation between the risk management team and the corporate relationship managers as well as how the ratings are updated.

To do: learn more about the following topics:
- Asset trading clause
- Hedging credit risk using capital markets
- Disputing credit ratings
- Financing working capital

Along with the deeper understanding of credit risk management, I was excited about learning in this kind of format. Even though we stayed in the conference room until 8:30 pm, I felt like this interaction was so stimulating that I could have gone on for another 3 hours. I feel really lucky to be able to be looped into this great organization and get all this training in transaction banking, cash management, trade finance, mid-cap corporate relationship management, and special debt finance. Thank you Deutsche Bank and the whole Corporate and Investment Banking team in Berlin!