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Financial statements 2011
3.5.1 Credit risk
Credit risk is the risk that another party will cause a finan-
cial loss to EIF by failing to discharge an obligation.
Credit risk concerns the EIF’s G&S activity and, to a lesser
extent, treasury instruments such as fixed income securities
and floating rate notes held in the AFS portfolio, commer-
cial paper and deposits. There is no credit exposure for
EIF own risk PE portfolio as investments in PE funds rep-
resent equity investments and related financing structures
and are always made through an equity-like participation.
The Fund uses the following instruments, policies, and pro-
cesses to manage the credit risk.
3.5.1.A. Portfolio Guarantees & Securitisation
Credit risk arises mainly from EIF’s G&S transactions fund-
ed by own resources.
This risk is managed by risk management policies covered
by the statutes and Credit Risk Policy Guidelines.
The statutes of the Fund limit own- risk guarantees to
three times the subscribed capital, which amounted to
EUR 3 000.0m at end 2011. Hence, the EUR 2 879.8m
exposure at risk at end 2011 was well below the statutory
limit of EUR 9 000.0m.
EIF Credit Risk Policy Guidelines ensure that EIF con
tinues to develop a diversified G&S portfolio in terms of
product range, counterparty exposure, obligor exposure,
geographic coverage, and industry concentration.
In the context of EIF’s own risk G&S operations, the credit
risk is tracked from the outset on a deal -by-deal basis
whilst adopting a dif ferent model analysis approach
depending on the granularity and homogeneity of the
underlying portfolios.
Concentration risk is limited because of the granular na-
ture of EIF’s transactions; typically the underlying port-
folios are highly diversified in terms of single obligor
concentration, sectors, and also with regard to regional
diversification.
To cover concentration risk, EIF has internal limits (based
on capital allocation) on individual transactions and origi-
nator level (maximum aggregate exposures for originators
and originator groups).
The industry sector exposures are analysed on a deal-by-
deal basis through their impact on the ratings assigned by
EIF to each transaction/tranche. For instance, depending
on the financial model used to analyse the transaction,
industry exposures can be reflected in implicit correlation
or can be indirectly captured based on assumption of
default rate volatility, as a key model input variable.
As of 31 December 2011, EIF’s overall own risk G&S port-
folio was spread over 14 countries. The largest nominal
individual country net exposures were Germany, Italy and
the United Kingdom, which jointly accounted for 50.3 %
of total guarantee commitments.
Consideration of sector exposures also forms part of EIF’s
overall portfolio analysis.
Counterparty risk in the own resources portfolio is miti -
gated by the quality of EIF counterparties, which are usu-
ally major market players, and by rating triggers on the
counterparty which require, in case of breach, actions
such as substitution of the counterparty or collateralisation
of its obligation. EIF performs additional on-site monitoring
visits to ensure compliance with procedures and process-
es during the transaction life. Stress-test scenarios for the
portfolio of G&S, including extreme case assumptions, are
regularly carried out to determine the ability of the capital
base to sustain adverse shocks.
The maximum principal exposure to credit risk (not in-
cluding possible guarantee calls on interest short falls
nor foreign currencies fluctuations) in G&S corresponds
to the nominal exposure at r isk of EUR 2 879.8m
(2010: EUR 2 580.2m).
3.5.1.B. Treasury
The Fund is exposed to credit risk relating to its assets
held in the Treasury portfolio. However, the EIF adheres
to conservative credit investment guidelines and internal
limits. For each portfolio, the eligibility criteria for counter-