BMW 2008 Annual Report Download - page 64

65 Group Management Report
ratio for lease vehicles is also computed. The resulting re-
valuation of the portfolio of vehicles exposed to residual
value risks and the losses incurred when selling preowned
cars has an additional negative impact on earnings of
the
Financial Services and Automobiles segments. Expected
risks are covered in the balance sheet either by provisions
or by write-downs on the lease vehicles concerned.
The BMW Group strives to mitigate declining residual values
by actively managing the life cycle of current models, opti-
mising reselling processes on international markets and
implementing targeted price and volume measures. Re-
sidual values in the leasing business are reviewed regularly
and adjusted to take account of the latest market condi-
tions and expected future developments.
Operational risks relating to financial services business in-
clude the risk of damage caused by inappropriate or failed
internal procedures and systems, human error or external
factors. The scope of procedures applied in each country
to manage operational risks is set out in a Group manual
which, amongst other things, addresses the requirements
of the Basle II accord. The manual stipulates the rules for
identifying and measuring potential risk scenarios and for
computing key risk indicators on an ongoing basis. It also
sets out the Group’s systematic approach to recording
losses and the nature of any agreed risk-mitigation meas-
ures. Both qualitative and quantitative aspects need to be
taken into account in the decision process. The latter is
backed up by various system-based solutions, all of which
follow the principles of operational risk management,
such
as separation of duties, dual control and the docu-
mentation of system changes. In addition, the effectiveness
and efficiency of the internal control system are tested
regularly.
Credit risks affecting the retail customer business (leasing,
financing) on the one hand and the commercial customer
financing business (dealers, fleet customers, importers) on
the other, are continually monitored, assessed and meas-
ured. Risk-mitigating measures are put into place where
necessary. In line with the Group’s own mandatory guide-
lines on risk mitigation and the stringent requirements
imposed by Basle II, the main risk measurement methods
used are customer scoring (retail customer business) and
credit rating (commercial customer business). Close con-
tacts with borrowers, a good understanding of the leased
or financed vehicles involved, prudent measurement of
collateral and the use of local credit audits all help to pre-
vent losses. For risk management purposes, the BMW
Group reverts to normal good banking practices, such as
the use of maximum unsecured risks for each rating cate-
gory. Risk criteria such as arrears and bad debt ratios are
analysed quarterly and used to actively manage the credit
portfolio and improve portfolio quality. Measures imple-
mented during  helped in part to scale back the in-
creased credit risk. The credit decision process comprises
up to three phases. Depending on the credit volume applied
for and the credit risk rating of the party involved, financing
applications for international dealers, importers and fleet
customers are presented to the local, regional or global
credit committees for approval. The dual control and seg-
regation of duties principles apply worldwide and are rig-
orously implemented. In order to minimise risk further, the
BMW Group is continuously making efforts to standardise
its credit-decision processes and the quality of credit ap-
plications and to ensure that uniform and transparent rating
systems are in place worldwide. Allowances are recog-
nised
in the balance sheet to cover identified risks.
Within the financial services business, the negative impact
on the credit risk portfolio was reflected in a higher level
of payment arrears and bad debts with retail customers. In
addition, the drastic fall in sales caused by changes in cus-
tomer purchasing behaviour is having an adverse impact
on the financial situation of the dealer network and in-
creases
the risk of insolvency within the dealer organisa-
tion. Developments in  necessitated higher risk pro-
visions in the areas of retail customer and dealer financing
business.
Legal risks
The BMW Group is not currently involved in any court or
arbitration proceedings which could have a significant im-
pact on its financial condition.
Compliance with the law is a basic prerequisite for the suc-
cess of the BMW Group. Current law provides the binding
framework for the BMW Group’s various business activities
around the world. The growing international scale of busi-
ness and the huge number of complex legal regulations
increase the risk of laws being broken simply because they
are not known or fully understood. The BMW Group takes
all necessary measures to ensure that its management
bodies, managers and staff act lawfully. It is essential for all
employees to know and to comply with current legal regu-
lations. The extent of those regulations is set out in
cor-
porate guidelines and in the BMW Group’s stated set of
core principles. However, wrongdoing by individuals can
never be entirely ruled out. It is the BMW Group’s objective
to keep such risks to a minimum and to systematically un-
cover any cases of corruption, bribery or blackmail. Further
information on compliance in the BMW Group is included
in the Compliance Report on pages  – .