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The impact of the CRD on the leasing industry in plain language. Dr. Mathias Schmit. 18 October 2007. Agenda. CRD: Impact on financial performance Business opportunities under the CRD Conclusions. FINANCIAL STABILITY. CAPITAL. SUPERVISION. DISCLOSURE.

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The impact of the CRD on the leasing industry in plain language

Dr. Mathias Schmit

18 October 2007

Managing Risk in Leasing BusinessAgenda
  • CRD: Impact on financial performance
  • Business opportunities under the CRD
  • Conclusions
basel ii a new framework





Managing Risk in Leasing Business

Basel II: A new framework

disclosure including the control of risks

capital requirements based on market, credit, and

operational risk

qualitative supervision internal process & risk control

basel ii or crd
Managing Risk in Leasing BusinessBasel II or CRD?
  • First draft of Basel II in 1999
  • EU Official Journal on 30/06/2006 Ref: L 177/201
  • How far along is the national transposition process?
basel ii credit risk and the balance sheet
Managing Risk in Leasing BusinessBasel II Credit Risk and the Balance Sheet

Balance sheet

credit spreads will change

new risk weights for capital requirements







ROE will be impacted



Off-balance instruments

credit spreads will change

regulatory capital for real estate investment
Managing Risk in Leasing BusinessRegulatory capital for real estate investment
  • Capital may differ from a ratio of 1 to 5 in respect to:
    • The approach adopted by the credit institution
      • STD: product vs. counterparty approach
      • IRB approaches (PD, LGD)
    • The type of product / Counterparty (STD)
      • CRE/ Lease/ Specialized lending
      • Retail / Corporate / PSE
      • What if a lease to a PSE?
    • Qualitative requirements are met or not
      • Independent valuation
      • Legal certainty
      • Insurance
regulatory capital for equipment lease

OK but…

Hiiiiiiiiiiiii !!!


Managing Risk in Leasing Business

Regulatory capital for equipment lease

Source: Schmit M., Journal of Banking and Finance, April 2004.

guaranteed residual value
Managing Risk in Leasing BusinessGuaranteed residual value

EU translation : IRB Guaranteed Residual Values or Bargain Option

lease exposures as the minimum lease payments under IAS 17




Guaranted residual value

Basel II

EU Directive










Guarantee: conditions on the guarantor and on the guarantee

evolving business environment
Managing Risk in Leasing BusinessEvolving business environment
  • Competition and pressures
    • Pressure to have higher RV (e.g. car manufacturers)
    • Business needs and opportunities are evolving
      • Product lifecycle decreases
      • Assess the value chain to define adequate actions
  • New regulations (IAS, Basel II, etc…)
    • Give new incentives and opportunities to leverage business benefits if:
      • All impacts of regulations are clearly understood by all parties (and thus to the bank partners and other stakeholders)
      • A clear vision of the business partners emerges to generate collaborative advantages
      • A wide buy-in by the different stakeholders
new opportunities
Managing Risk in Leasing BusinessNew opportunities


  • Fleet management
  • Leasing contract
  • Buy risk mitigants
  • Reduction in ‘excess capital requirement’
  • Response to change pricing dynamics



  • Portfolio management
  • Market and commercial knowledge
  • Ancillary services
  • Risk appraisal
    • Calibration and managing RV
    • Risk coverage (premium)
new opportunities1
Managing Risk in Leasing BusinessNew opportunities
  • Identify your potential partners given your strategic objectives
    • Multi or mono brand vendor
    • Proposed ancillary services
    • Re-marketing strengths
    • Etc…
  • Understand the benefit and risks of all parts of the business value chain
    • Customers: creditworthiness, volume, country
    • Structure of the transactions
    • Vendor characteristics and services
  • Build your win-win relationship
    • Adequate structure
    • Mitigate risk if needed: e.g. lower LGDs, PD, EAD
    • Adequate rewards: risk vs. volume
Managing Risk in Leasing BusinessConclusions
  • The better knowledge of risk is key to be compliant and/or in line with the best practices
    • Regulated vs. non-regulated
    • Lease specificities
  • Having an integrated risk management framework will allow to better identified and assessed business opportunities
  • Rethinking leasing business relationships will offer new opportunities under the EU implementation of the CRD
  • Examples of new business models already (being) achieved
some references
Managing Risk in Leasing BusinessSome references
  • Schmit M., “Credit risk in the leasing industry”, Journal of Banking and Finance, 2004, 28, pp. 811-833.
  • Schmit M.,“Is automotive leasing a risky business?”, Finance, forthcoming.
  • Schmit M., “The new Basel capital accord and the future of the European financial system”, Report of a CEPS (Centre for European Policy Studies) Task Force, pp. 47-50, 2004.
  • Laurent M- P and M. Schmit, “Estimating “distressed” LGD on defaulted exposures: A portfolio model applied to leasing contracts”, in Recovery risk: the next challenge in credit risk management, a RiskBooks publication edited by Altman E., A. Resti and A. Sironi, pp. 307-322, 2005.
  • Laurent M-P, “Asset return correlation in Basel II: Implications for credit risk management”, under review in Risk.
for more information
Managing Risk in Leasing BusinessFor More Information

Dr. Mathias Schmit


SAGORA, Lease and Risk Management

Avenue de Haveskercke, 28

B-1190 Brussels

Mobile: (32)-496.93.22.70



Thank you for your attention !

un guaranteed residual values

Initial text

Actual calculation of capital requirement for leasing:

Major commitment in terms of cost of opportunity

Inappropriate compared to the risk incurred


Major step forward

Managing Risk in Leasing Business

(Un)guaranteed Residual Values

100% * 8% * RV to be set aside over all the term of the lease

(100% /T) * 8% * RV

each year

Substantial gains of capital and opportunity cost