Page 37 - Banking Finance September 2020

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followed by a financial restructuring of the bank as per the institutional protection scheme includes the following three
advice of the BVR, which aims at protecting the bank from steps.
becoming insolvent and avoiding a situation in which O Institutional Classification Process - Automated
depositors are to be compensated. The protection scheme Procedure
run by the BVR aims to protect all individuals and non-bank
O Prevention Management - Standard Procedure
clients of the affiliated institutions. The BVR protection
scheme is regulated and monitored by the BaFin , the O Support Mechanism - Individualized Standard Procedure
German Federal Financial Supervisory Authority.
A brief description of these processes is presented in the
following paragraphs.

Y Institutional Classification Process
The BVR protection scheme has well-designed systems for
identifying, classifying, and monitoring the risks of all its
member institution as also risks to the institutional
protection scheme as a whole. Risks are assessed by way of
assigning of rating on the basis of the BVR protection
scheme's classification system. The rating process, based on
the respective member institution's annual financial
statements assigns one of the nine credit rating categories,
which range from A++ to D. Rating a member bank in
accordance with the classification system forms the basis of
the risk-adjusted guarantee fund contributions for the
BaFin has the right to obtain information from, and audit protection scheme and also helps in the preventive
the protection scheme. The BVR prepares its annual management.
financial statements and an annual report on the activities
and financial position of the protection scheme and puts in For the institutions that are also members of BVR-ISG, the
place a risk management framework for the cooperative 2017 rate for contributions to the guarantee fund of the
financial network. These statements and reports are audited protection scheme was set at 0.036% of the assessment basis
by the independent auditors from outside the Cooperative (2016: 0.04%), along with individual discounts or surcharges
Financial Network. Audit reports are shared with the BaFin, depending upon the classification. For the other member
Deutsche Bundesbank, the cooperative auditors' institutions, the contribution rate was fixed at 0.083% of the
associations, and the administrative board of the BVR.

Risk Management under Institutional
Protection Scheme

The Cooperative Financial Network in Germany is a
decentralized structure in which the individual banks
operate independently with a central bank (DZ Bank AG)
and an umbrella organization (BVR). In this system, the risk
management primarily involves finding the risk-carrier
institutions, which could be the weakest link in the network.
The BVR puts in place a system whereby the individual
cooperative bank's financial position along with the risk
position is ascertained with a view to ensure that the entire
cooperative financial network as a unit can be considered
as financially sound. BVR's risk management process for the

BANKING FINANCE | SEPTEMBER | 2020 | 37