6-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549



Form 6-K


REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

August 28, 2014
Commission File Number 001-15244
CREDIT SUISSE GROUP AG

(Translation of registrant’s name into English)
Paradeplatz 8, CH 8001 Zurich, Switzerland
(Address of principal executive office)



Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or
Form 40-F.


   Form 20-F      Form 40-F   
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

   Yes      No   
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-.











Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



 

 

CREDIT SUISSE GROUP AG

 (Registrant)

 

 

Date: August 28, 2014





By:

/s/ Joachim Oechslin

Joachim Oechslin

Chief Risk Officer





By:

/s/ David R. Mathers

David R. Mathers

Chief Financial Officer





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In various tables, use of “–” indicates not meaningful or not applicable.






Basel III




Pillar 3 – disclosures




6M14


List of abbreviations
Introduction
General
Additional regulatory disclosures
Scope of application
Principles of consolidation
Restrictions on transfer of funds or regulatory capital
Capital deficiencies
Remuneration
Risk management oversight
Capital
Capital structure under Basel III
Swiss Requirements
Description of regulatory approaches
BIS capital metrics
Swiss capital metrics
Credit risk
General
Credit risk by asset class
Securitization risk in the banking book
Equity type securities in the banking book
Central counterparties risk
Market risk
General
Securitization risk in the trading book
Valuation process
Interest rate risk in the banking book
Overview
Major sources of interest rate risk in the banking book
Governance of models and limits
Risk measurement
Monitoring and review
Risk profile
Reconciliation requirements
Balance sheet
Composition of BIS regulatory capital






List of abbreviations

 
ABS Asset-backed securities
ACVA Advanced credit valuation adjustment approach
A-IRB Advanced Internal Ratings-Based Approach
AMA Advanced Measurement Approach
 
BFI Banking, financial and insurance
BIS Bank for International Settlements
 
CARMC Capital Allocation Risk Management Committee
CCF Credit Conversion Factor
CCO Chief Credit Officer
CCP Central counterparties
CDO Collateralized Debt Obligation
CDS Credit Default Swap
CET1 Common equity tier 1
CLO Collateralized Loan Obligation
CMBS Commercial mortgage-backed securities
CMSC Credit Model Steering Committee
CRM Credit Risk Management
CVA Credit valuation adjustment
 
EAD Exposure at Default
EMIR European Market Infrastructure Regulation
ERC Economic Risk Capital
 
FINMA Swiss Financial Market Supervisory Authority FINMA
 
GRR Global Risk Review
G-SIB Global systemically important banks
 
IMA Internal Models Approach
IMM Internal Models Method
IRB Internal Ratings-Based Approach
IRC Incremental Risk Charge
 
LGD Loss Given Default
 
MDB Multilateral Development Banks
 
OTC Over-the-counter
 
PD Probability of Default
 
RBA Ratings-Based Approach
RMBS Residential mortgage-backed securities
RNIV Risks not in value-at-risk
RPSC Risk Processes and Standards Committee
 
SFA Supervisory Formula Approach
SFT Securities Financing Transactions
SMM Standardized Measurement Method
SPE Special purpose entity
SRW Supervisory Risk Weights Approach
 
US GAAP Accounting principles generally accepted in the US
 
VaR Value-at-Risk




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Introduction


General
The purpose of this Pillar 3 report is to provide updated information as of June 30, 2014 on our implementation of the Basel capital framework and risk assessment processes in accordance with the Pillar 3 requirements. This document should be read in conjunction with the Credit Suisse Annual Report 2013 and the Credit Suisse 1Q14 and 2Q14 Financial Report, which include important information on regulatory capital and risk management (specific references have been made herein to these documents).
Effective January 1, 2013, the Basel III framework was implemented in Switzerland along with the Swiss “Too Big to Fail” legislation and regulations thereunder (Swiss Requirements). Our related disclosures are in accordance with our current interpretation of such requirements, including relevant assumptions. Changes in the interpretation of these requirements in Switzerland or in any of our assumptions or estimates could result in different numbers from those shown in this report. Also, our capital metrics fluctuate during any reporting period in the ordinary course of business.
The Basel III framework includes higher minimum capital requirements and conservation and countercyclical buffers, revised risk-based capital measures, a leverage ratio and liquidity standards. The framework was designed to strengthen the resilience of the banking sector and requires banks to hold more capital, mainly in the form of common equity. The new capital standards are being phased in from 2013 through 2018 and are fully effective January 1, 2019 for those countries that have adopted Basel III.
> Refer to “Capital management” (pages 101 to 114) in III – Treasury, Risk, Balance sheet and Off-balance sheet in the Credit Suisse Annual Report 2013 for further information.

In addition to Pillar 3 disclosures we disclose the way we manage our risks for internal management purposes in the Annual Report.
> Refer to “Risk management” (pages 115 to 140) in III – Treasury, Risk, Balance sheet and Off-balance sheet in the Credit Suisse Annual Report 2013 for further information regarding the way we manage risk including economic capital as a Group-wide risk management tool.

Certain reclassifications may be made to prior periods to conform to the current period’s presentation.
The Pillar 3 report is produced and published semi-annually, in accordance with Swiss Financial Market Supervisory Authority FINMA (FINMA) requirements.
This report was verified and approved internally in line with our Pillar 3 disclosure policy. The Pillar 3 report has not been audited by the Group’s external auditors. However, it also includes information that is contained within the audited consolidated financial statements as reported in the Credit Suisse Annual Report 2013.


Additional regulatory disclosures
In addition to the Pillar 3 disclosures also refer to our website for further information on capital ratios of certain significant subsidiaries, quarterly reconciliation requirements and capital instruments disclosures (main features template and full terms and conditions).
> Refer to “Regulatory disclosures” under https://www.credit-suisse.com/investors/en/index.jsp


Scope of application
The highest consolidated entity in the Group to which the Basel III framework applies is Credit Suisse Group.
> Refer to “Regulation and supervision” (pages 24 to 34) in I – Information on the company and to “Capital management” (pages 101 to 114) in III – Treasury, Risk, Balance sheet and Off-balance sheet in the Credit Suisse Annual Report 2013 for further information on regulation.


Principles of consolidation
For financial reporting purposes, our consolidation principles comply with accounting principles generally accepted in the US (US GAAP). For capital adequacy reporting purposes, however, entities that are not active in banking and finance are not subject to consolidation (i.e. insurance, real estate and commercial companies). Also, FINMA does not require to consolidate private equity and other fund type vehicles for capital adequacy reporting. Further differences in consolidation principles between US GAAP and capital adequacy reporting relate to special purpose entities (SPEs) that are consolidated under a control-based approach for US GAAP but are assessed under a risk-based approach for capital adequacy reporting. The investments into such entities, which are not material to the Group, are treated in accordance with the regulatory rules and are either subject to a risk-weighted capital requirement or a deduction from regulatory capital.
All significant equity method investments represent investments in the capital of banking, financial and insurance (BFI) entities and are subject to a threshold calculation in accordance with the Basel framework.
> Refer to “Note 39 – Significant subsidiaries and equity method investments” (pages 337 to 339) in V – Consolidated financial statements – Credit Suisse Group in the Credit Suisse Annual Report 2013 for a list of significant subsidiaries and associated entities of Credit Suisse.
> Refer to “Note 3 – Business developments” (page 83) in III – Condensed consolidated financial statements – unaudited in the Credit Suisse 1Q14 Financial Report and “Note 3 – Business developments” (page 84) in III – Condensed consolidated financial statement – unaudited in the Credit Suisse 2Q14 Financial Report for additional information on business developments in 6M14.

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Restrictions on transfer of funds or regulatory capital
We do not believe that legal or regulatory restrictions constitute a material limitation on the ability of our subsidiaries to pay dividends or our ability to transfer funds or regulatory capital within the Group.
> Refer to “Liquidity and funding management” (pages 94 to 100) and “Capital management” (pages 101 to 114) in III – Treasury, Risk, Balance sheet and Off-balance sheet in the Credit Suisse Annual Report 2013 for information on our liquidity, funding and capital management and dividends and dividend policy.


Capital deficiencies
The Group’s subsidiaries which are not included in the regulatory consolidation did not report any capital deficiencies in 6M14.


Remuneration
> Refer to “Compensation” (pages 176 to 204) in IV – Corporate Governance and Compensation in the Credit Suisse Annual Report 2013 for further information on remuneration.


Risk management oversight
Fundamental to our business is the prudent taking of risk in line with our strategic priorities. The primary objectives of risk management are to protect our financial strength and reputation, while ensuring that capital is well deployed to support business activities and grow shareholder value. Our risk management framework is based on transparency, management accountability and independent oversight. Risk measurement models are reviewed by an independent validation function and regularly presented to and approved by the relevant oversight committee.
> Refer to “Risk management oversight” (pages 115 to 118) in III – Treasury, Risk, Balance sheet and Off-balance sheet – Risk management in the Credit Suisse Annual Report 2013 for information on risk management oversight including risk governance, risk organization, risk types and risk appetite and risk limits.

The Group is exposed to several key banking risks such as:

Credit risk (refer to section “Credit risk” on pages 15 to 35);
Market risk (refer to section “Market risk” on pages 36 to 42);
Interest rate risk in the banking book (refer to section “Interest rate risk in the banking book” on pages 43 to 44); and
Operational risk.

> Refer to “Operational risk” (pages 139 to 140) in III – Treasury, Risk, Balance sheet and Off-balance sheet – Risk management in the Credit Suisse Annual Report 2013 for information on operational risk.

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Capital


Capital structure under Basel III
The Basel Committee on Banking Supervision issued the Basel III framework, with higher minimum capital requirements and conservation and countercyclical buffers, revised risk-based capital measures, a leverage ratio and liquidity standards. The framework was designed to strengthen the resilience of the banking sector and requires banks to hold more capital, mainly in the form of common equity. The new capital standards are being phased in from 2013 through 2018 and are fully effective January 1, 2019 for those countries that have adopted Basel III.
> Refer to the table “Basel III phase-in requirements for Credit Suisse” (page 48) in II – Treasury, risk, balance sheet and off-balance sheet – Capital management – Regulatory capital framework in the Credit Suisse 2Q14 Financial Report for capital requirements and applicable effective dates during the phase-in period.

Under Basel III, the minimum common equity tier 1 (CET1) requirement is 4.5% of risk-weighted assets. In addition, a 2.5% CET1 capital conservation buffer is required to absorb losses in periods of financial and economic stress.
A progressive buffer between 1% and 2.5% (with a possible additional 1% surcharge) of CET1, depending on a bank’s systemic importance, is an additional capital requirement for global systemically important banks (G-SIB). The Financial Stability Board has identified us as a G-SIB and requires us to maintain a 1.5% progressive buffer.
In addition to the CET1 requirements, there is also a requirement for 1.5% additional tier 1 capital and 2% tier 2 capital. These requirements may also be met with CET1 capital. To qualify as additional tier 1 under Basel III, capital instruments must provide for principal loss absorption through a conversion into common equity or a write-down of principal feature. The trigger for such conversion or write-down must include a CET1 ratio of at least 5.125%.
Basel III further provides for a countercyclical buffer that could require banks to hold up to 2.5% of CET1 or other capital that would be available to fully absorb losses. This requirement is expected to be imposed by national regulators where credit growth is deemed to be excessive and leading to the build-up of system-wide risk.
Capital instruments that do not meet the strict criteria for inclusion in CET1 are excluded. Capital instruments that would no longer qualify as tier 1 or tier 2 capital will be phased out.


Swiss Requirements
The legislation implementing the Basel III framework in Switzerland in respect of capital requirements for systemically relevant banks goes beyond Basel III’s minimum standards, including requiring us, as a systemically relevant bank, to have the following minimum, buffer and progressive components.
> Refer to the chart “Swiss capital and leverage ratio phase-in requirements for Credit Suisse” (page 49) in II – Treasury, risk, balance sheet and off-balance sheet – Capital management – Regulatory capital framework in the Credit Suisse 2Q14 Financial Report for Swiss capital requirements and applicable effective dates during the phase-in period.

The minimum requirement of CET1 capital is 4.5% of risk-weighted assets.
The buffer requirement is 8.5% and can be met with additional CET1 capital of 5.5% of risk-weighted assets and a maximum of 3% of high-trigger capital instruments. High-trigger capital instruments must convert into common equity or be written off if the CET1 ratio falls below 7%.
The progressive component requirement is dependent on our size (leverage ratio exposure) and the market share of our domestic systemically relevant business. Effective in 2014, FINMA set our progressive component requirement at 3.66% for 2019. The progressive component requirement may be met with CET1 capital or low-trigger capital instruments. In order to qualify, low-trigger capital instruments must convert into common equity or be written off if the CET1 ratio falls below a specified percentage, the lowest of which may be 5%. In addition, until the end of 2017, the progressive component requirement may also be met with high-trigger capital instruments. Both high and low-trigger capital instruments must comply with the Basel III minimum requirements for tier 2 capital (including subordination, point-of-non-viability loss absorption and minimum maturity).
Similar to Basel III, the Swiss Requirements include a supplemental countercyclical buffer of up to 2.5% of risk-weighted assets that can be activated during periods of excess credit growth. Effective September 2013, the countercyclical capital buffer was activated and initially required banks to hold CET1 capital in the amount of 1% of their risk-weighted assets pertaining to mortgages that finance residential property in Switzerland. In January 2014, upon the request of the Swiss National Bank, the Swiss Federal Council further increased the countercyclical buffer from 1% to 2%, effective June 30, 2014. As of the end of 6M14, our countercyclical buffer was CHF 299 million, which is equivalent to an additional requirement of 0.10% of CET1 capital. The countercyclical buffer applies for purposes of both Bank for International Settlements (BIS) and FINMA requirements.
In 2013, FINMA introduced increased capital charges for mortgages that finance owner occupied residential property in Switzerland (mortgage multiplier) to be phased in through January 1, 2019. The mortgage multiplier applies for purposes of both BIS and FINMA requirements.

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In December 2013, FINMA issued a decree (FINMA Decree)specifying capital adequacy requirements for the Bank, on a stand-alone basis (Bank parent company), and the Bank and the Group, each on a consolidated basis, as systemically relevant institutions.
Beginning in 1Q14, we adjusted the presentation of our Swiss capital metrics and terminology and we now refer to Swiss Core Capital as Swiss CET1 capital and Swiss Total Capital as Swiss total eligible capital. Swiss Total Capital previously reflected the tier 1 participation securities, which were fully redeemed in 1Q14. Swiss CET1 capital consists of BIS CET1 capital and certain other Swiss adjustments. Swiss total eligible capital consists of Swiss CET1 capital, high-trigger capital instruments, low-trigger capital instruments and additional tier 1 instruments and tier 2 instruments subject to phase-out and phase-in deductions from CET1.
> Refer to “Capital management” (pages 101 to 114) in III – Treasury, Risk, Balance sheet and Off-balance sheet in the Credit Suisse Annual Report 2013 and “Capital management” (pages 47 to 58) in II – Treasury, risk, balance sheet and off-balance sheet in the Credit Suisse 2Q14 Financial Report for information on our capital structure, eligible capital and shareholders’ equity, capital adequacy and leverage ratio requirements under Basel III and Swiss Requirements.


Description of regulatory approaches
The Basel framework provides a range of options for determining the capital requirements in order to allow banks and supervisors the ability to select approaches that are most appropriate. In general, Credit Suisse has adopted the most advanced approaches, which align with the way risk is internally managed. The Basel framework focuses on credit risk, market risk, operational risk and interest rate risk in the banking book. The regulatory approaches for each of these risk exposures and the related disclosures under Pillar 3 are set forth below.

Credit risk
Credit risk by asset class
The Basel framework permits banks a choice between two broad methodologies in calculating their capital requirements for credit risk by asset class, the internal ratings-based (IRB) approach or the standardized approach. Off-balance-sheet items are converted into credit exposure equivalents through the use of credit conversion factors (CCF).
The majority of our credit risk by asset class is with institutional counterparties (sovereigns, other institutions, banks and corporates) and arises from lending and trading activity in the Investment Banking and Private Banking & Wealth Management divisions. The remaining credit risk by asset class is with retail counterparties and mostly arises in the Private Banking & Wealth Management division from residential mortgage loans and other secured lending, including loans collateralized by securities.
> Refer to “Credit risk by asset class” in section “Credit risk” on pages 15 to 29 for further information.

Advanced-internal ratings-based approach
Under the IRB approach, risk weights are determined by using internal risk parameters and applying an asset value correlation multiplier uplift where exposures are to financial institutions meeting regulatory defined criteria. We have received approval from FINMA to use, and have fully implemented, the advanced-internal ratings-based (A-IRB) approach whereby we provide our own estimates for probability of default (PD), loss given default (LGD) and exposure at default (EAD). We use the A-IRB approach to determine our institutional credit risk and most of our retail credit risk.
PD parameters capture the risk of a counterparty defaulting over a one-year time horizon. PD estimates are mainly derived from models tailored to the specific business of the respective obligor. The models are calibrated to the long run average of annual internal or external default rates where applicable. For portfolios with a small number of empirical defaults (less than 20), low default portfolio techniques are used.
LGD parameters consider seniority, collateral, counterparty industry and in certain cases fair value markdowns. LGD estimates are based on an empirical analysis of historical loss rates and are calibrated to reflect time and cost of recovery as well as economic downturn conditions. For much of the Private Banking & Wealth Management loan portfolio, the LGD is primarily dependent upon the type and amount of collateral pledged. For other retail credit risk, predominantly loans secured by financial collateral, pool LGDs differentiate between standard and higher risks, as well as domestic and foreign transactions. The credit approval and collateral monitoring process are based on loan-to-value limits. For mortgages (residential or commercial), recovery rates are differentiated by type of property.
EAD is either derived from balance sheet values or by using models. EAD for a non-defaulted facility is an estimate of the gross exposure upon default of the obligor. Estimates are derived based on a CCF approach using default-weighted averages of historical realized conversion factors on defaulted loans by facility type. Estimates are calibrated to capture negative operating environment effects.
We have received approval from FINMA to use the internal model method for measuring counterparty risk for the majority of our derivative and secured financing exposures.
Risk weights are calculated using either the PD/LGD approach or the supervisory risk weights (SRW) approach for certain types of specialized lending.

Standardized approach
Under the standardized approach, risk weights are determined either according to credit ratings provided by recognized external credit assessment institutions or, for unrated exposures, by using the applicable regulatory risk weights. Less than 10% of our credit risk by asset class is determined using this approach.

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Securitization risk in the banking book
For securitizations, the regulatory capital requirements are calculated using IRB approaches (the RBA and the SFA) and the standardized approach in accordance with the prescribed hierarchy of approaches in the Basel regulations. External ratings used in regulatory capital calculations for securitization risk exposures in the banking book are obtained from Fitch, Moody’s, Standard & Poor’s or Dominion Bond Rating Service.
> Refer to “Securitization risk in the banking book” in section “Credit risk” on pages 30 to 34 for further information on the IRB approaches and the standardized approach.

Equity type securities in the banking book
For equity type securities in the banking book except for significant investments in BFI entities, risk weights are determined using the IRB Simple approach based on the equity sub-asset type (listed equity and all other equity positions). Significant investments in BFI entities (i.e. investments in the capital of BFI entities that are outside the scope of regulatory consolidation, where the Group owns more than 10% of the issued common share capital of the entity) are subject to a threshold treatment as outlined below in the section “Exposures below 15% threshold”. Where equity type securities represent non-significant investments in BFI entities (i.e., investments in the capital of BFI entities that are outside the scope of regulatory consolidation, where the Group does not own more than 10% of the issued common share capital of the entity),

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a threshold approach is applied that compares the total amount of non-significant investments in BFI entities (considering both trading and banking book positions) to a 10% regulatory defined eligible capital amount. The amount above the threshold is phased-in as a capital deduction and the amount below the threshold continues to be risk-weighted according to the relevant trading book and banking book approaches.
> Refer to “Equity type securities in the banking book” in section “Credit risk” on pages 34 to 35 for further information.

Credit valuation adjustment risk
Basel III introduced a new regulatory capital charge, Credit Valuation Adjustment (CVA), designed to capture the risk associated with potential mark-to-market losses associated with the deterioration in the creditworthiness of a counterparty. 
Under Basel III, banks are required to calculate capital charges for CVA under either the Standardized CVA approach or the Advanced CVA approach (ACVA). The CVA rules stipulate that where banks have permission to use market risk Value-at-Risk (VaR) and counterparty risk Internal Models Method (IMM), they are to use the ACVA unless their regulator decides otherwise. FINMA has confirmed that the ACVA should be used for both IMM and non-IMM exposures.
The regulatory CVA capital charge applies to all counterparty exposures arising from over-the-counter (OTC) derivatives, excluding those with central counterparties (CCP). Exposures arising from Securities Financing Transactions (SFT) are not required to be included in the CVA charge unless they could give rise to a material loss. FINMA has confirmed that Credit Suisse can exclude these exposures from the regulatory capital charge.

Central counterparties risk
The Basel III framework provides specific requirements for exposures the Group has to CCP arising from OTC derivatives, exchange-traded derivative transactions and SFT. Exposures to CCPs which are considered to be qualifying CCPs by the regulator will receive a preferential capital treatment compared to exposures to non-qualifying CCPs.
The Group can incur exposures to CCPs as either a clearing member (house or client trades), or as a client of another clearing member. Where the Group acts as a clearing member of a CCP on behalf of its client (client trades), it incurs an exposure to its client as well as an exposure to the CCP. Since the exposure to the client is to be treated as a bilateral trade, the risk-weighted assets from these exposures are represented under “credit risk by asset class”. Where the Group acts as a client of another clearing member the risk-weighted assets from these exposures are also represented under “credit risk by asset class”.
The exposures to CCP (represented as “Central counterparties (CCP) risks”) consist of trade exposure, default fund exposure and contingent exposure based on trade replacement due to a clearing member default. While the trades exposure includes the current and potential future exposure of the clearing member (or a client) to a CCP arising from the underlying transaction and the initial margin posted to the CCP, the default fund exposure is arising from default fund contributions to the CCP.

Settlement risk
Regulatory fixed risk weights are applied to settlement exposures. Settlement exposures arise from unsettled or failed transactions where cash or securities are delivered without a corresponding receipt.

Exposures below 15% threshold
Significant investments in BFI entities, mortgage servicing rights and deferred tax assets that arise from temporary differences are subject to a threshold approach, whereby individual amounts are compared to a 10% threshold of regulatory defined eligible capital. In addition amounts below the individual 10% thresholds are aggregated and compared to a 15% threshold of regulatory defined eligible capital. The amount that is above the 10% threshold is phased-in as a CET1 deduction. The amount above the 15% threshold is phased-in as a CET1 deduction and the amount below is risk weighted at 250%.

Other items
Other items include risk-weighted assets related to immaterial portfolios for which we have received approval from FINMA to apply a simplified Institute Specific Direct Risk Weight as well as risk-weighted assets related to items that were risk-weighted under Basel II.5 and are phased in as capital deductions under Basel III.

Market risk
We use the advanced approach for calculating the capital requirements for market risk for the majority of our exposures. The following advanced approaches are used: the internal models approach (IMA) and the standardized measurement method (SMM).
We use the standardized approach to determine our market risk for a small population of positions which represent an immaterial proportion of our overall market risk exposure.
> Refer to section “Market risk” on pages 36 to 42 for further information on market risk.

Internal models approach
The market risk IMA framework includes regulatory Value-at-Risk (VaR), stressed VaR, risks not in VaR (RNIV), an Incremental Risk Charge (IRC), and Comprehensive Risk Measure.

Regulatory VaR, stressed VaR and risks not in VaR
We have received approval from FINMA, as well as from certain other regulators of our subsidiaries, to use our VaR model to calculate trading book market risk capital requirements under the IMA. We apply the IMA to the majority of the positions in our trading book. We continue to receive regulatory approval for ongoing enhancements to the VaR methodology, and the VaR model

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is subject to regular reviews by regulators. Stressed VaR replicates a VaR calculation on the Group’s current portfolio taking into account a one-year observation period relating to significant financial stress and helps to reduce the pro-cyclicality of the minimum capital requirements for market risk. The VaR model does not cover all identified market risk types and as such we have also adopted a RNIV category which was approved by FINMA in 2012.

Incremental Risk Charge
The IRC capitalizes issuer default and migration risk in the trading book, such as bonds or credit default swaps (CDS), but excludes securitizations and correlation trading. We have received approval from FINMA, as well as from certain other regulators of our subsidiaries, to use our IRC model. We continue to receive regulatory approval for ongoing enhancements to the IRC methodology, and the IRC model is subject to regular reviews by regulators.
The IRC model assesses risk at 99.9% confidence level over a one year time horizon assuming that positions are sold and replaced one or more times, depending on their liquidity which is modeled by the liquidity horizon. The portfolio loss distribution is estimated using an internally developed credit portfolio model designed to the regulatory requirements.
The liquidity horizon represents time required to sell the positions or hedge all material risk covered by the IRC model in a stressed market. Liquidity horizons are modelled according to the requirements imposed by Basel III guidelines.
The IRC model and liquidity horizon methodology have been validated by an independent team in accordance with the firms validation umbrella policy and Risk Model Validation Sub-Policy for IRC.

Comprehensive Risk Measure
Comprehensive Risk Measure is a market risk capital model designed to capture all the price risks of credit correlation positions in the trading book. Scope is developed markets corporate correlation trades, i.e. tranches and their associated hedges and Nth-to-Default baskets. Scope excludes corporate re-securitization positions, emerging market corporate securitization and associated hedges. The model is based on a Full Revaluation Monte Carlo Simulation, whereby all the relevant risk factors are jointly simulated in one year time horizon. The trading portfolio is then fully re-priced under each scenario. The model then calculates the loss at 99.9% percentile. Simulated risk factors are credit spreads, credit migration, credit default, recovery rate, credit correlation, basis between credit indices and their CDS constituents. The Comprehensive Risk Measure model has been internally approved by the relevant risk model approval committee and achieved regulatory approval by FINMA. The capital requirements calculated by the Comprehensive Risk Measure model is currently subject to a floor defined as a percentage of the standardized rules for corporate securitized products. The Comprehensive Risk Measure model has been validated by an independent team in accordance with the firms validation umbrella policy and the Risk Model Validation Sub-Policy for IRC and Comprehensive Risk Measure.

Standardized measurement method
We use the SMM which is based on the ratings-based approach (RBA) and the supervisory formula approach (SFA) for securitization purposes (see also Securitization risk in the banking book) and other supervisory approaches for trading book securitization positions covering the approach for nth-to-default products and portfolios covered by the weighted average risk weight approach.
> Refer to “Securitization risk in the trading book” in section “Market risk” on pages 37 to 42 for further information on the standardized measurement method and other supervisory approaches.

Operational risk
We have used an internal model to calculate the regulatory capital requirement for operational risk under the Advanced Measurement Approach (AMA) since 2008. In 2012, following discussions with FINMA, we initiated a project to enhance our internal model to reflect recent developments regarding operational risk measurement methodology and associated regulatory guidance. The revised model has been approved by FINMA for calculating the regulatory capital requirement for operational risk with effect from January 1, 2014. We view the revised model as a significant enhancement to our capability to measure and understand the operational risk profile of the Group that is also more conservative compared with the previous approach.
The model is based on a loss distribution approach that uses historical data on internal and relevant external losses of peers to generate frequency and severity distributions for a range of potential operational risk loss scenarios, such as an unauthorized trading incident or a material business disruption. Business experts and senior management review, and may adjust, the parameters of these scenarios to take account of business environment and internal control factors, such as risk and control self-assessment results and risk and control indicators, to provide a forward-looking assessment of each scenario. The AMA capital calculation approved by FINMA includes all litigation-related provisions and also an add-on component relating to the aggregate range of reasonably possible litigation losses that are disclosed in our financial statements but are not covered by existing provisions. In the fourth quarter of 2013, this new approach to litigation-related provisions and reasonably possible litigation losses has been applied to the previous AMA model used to calculate regulatory capital requirements as of December 31, 2013. Insurance mitigation is included in the regulatory capital requirement for operational risk where appropriate, by considering the level of insurance coverage for each scenario and incorporating haircuts as appropriate. The internal model then uses the adjusted parameters to generate an overall loss distribution for the Group over a one-year time horizon. The AMA capital requirement represents the 99.9th percentile of this overall loss distribution.
In 2Q14, a slight increase in capital required for operational risk primarily reflected the impact of incorporating into the AMA model the Federal Housing Finance Agency settlement in March 2014 and the settlement of all outstanding US cross-border matters in May 2014. The impact from these settlements was partially

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offset by the agreement with FINMA to remove the limitation it had set on the capital benefit for insurance-based risk transfer and a decrease in the add-on component of the capital related to the aggregate range of reasonably possible litigation losses due to the reduction in the maximum value of this range.

Non-counterparty-related risk
Regulatory fixed risk weights are applied to non-counterparty-related exposures. Non-counterparty-related exposures arise from holdings of premises and equipment, real estate and investments in real estate entities.


BIS capital metrics
Regulatory capital and ratios
Regulatory capital is calculated and managed according to Basel regulations and used to determine BIS ratios. BIS ratios compare eligible CET1 capital, tier 1 capital and total capital with BIS risk-weighted assets.
> Refer to “Risk-weighted assets” (pages 53 to 54) in II – Treasury, risk, balance sheet and off-balance sheet – Capital management – BIS capital metrics in the Credit Suisse 2Q14 Financial Report for information on risk-weighted assets movements in 6M14.

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Summary of BIS risk-weighted assets and capital requirements - Basel III 
  6M14 2013

end of
Risk-
weighted
assets
Capital
require-
ment
1 Risk-
weighted
assets
Capital
require-
ment
1
CHF million  
Credit risk 
   Advanced-IRB  125,802 10,064 116,772 9,342
   Standardized  3,659 293 3,640 291
Credit risk by asset class 129,461 10,357 120,412 9,633
   Advanced-IRB  11,444 916 14,935 1,195
   Standardized  0 0 0 0
Securitization risk in the banking book 11,444 916 14,935 1,195
   Advanced – IRB Simple  13,019 1,042 9,833 787
Equity type securities in the banking book 13,019 1,042 9,833 787
   Advanced CVA  13,867 1,109 10,650 852
   Standardized CVA  44 4 56 4
Credit valuation adjustment risk 13,911 1,113 10,706 856
   Standardized - Fixed risk weights  11,589 927 12,500 1,000
Exposures below 15% threshold 2 11,589 927 12,500 1,000
   Advanced  3,194 256 1,906 152
Central counterparties (CCP) risk 3,194 256 1,906 152
   Standardized - Fixed risk weights  1,026 82 512 41
Settlement risk 1,026 82 512 41
   Advanced  390 31 281 22
   Standardized  3,933 315 4,546 364
Other items 3 4,323 346 4,827 386
Total credit risk  187,967 15,037 175,631 14,050
Market risk 
   Advanced  32,132 2,571 38,719 3,098
   Standardized  572 46 414 33
Total market risk  32,704 2,616 39,133 3,131
Operational risk 
   Advanced measurement  59,050 4,724 53,075 4,246
Total operational risk  59,050 4,724 53,075 4,246
Non-counterparty-related risk 
   Standardized - Fixed risk weights  5,700 456 6,007 481
Total non-counterparty-related risk  5,700 456 6,007 481
Total BIS risk-weighted assets and capital requirements  285,421 22,834 273,846 21,908
   of which advanced  258,898 20,712 246,171 19,694
   of which standardized  26,523 2,122 27,675 2,214
1
Calculated as 8% of risk-weighted assets.
2
Exposures below 15% threshold are risk-weighted at 250%. Refer to table "Additional information" in section "Reconciliation requirements" for further information.
3
Includes risk-weighted assets of CHF 3,482 million and CHF 4,158 million as of the end of 6M14 and 2013, respectively, related to items that were risk-weighted under Basel II.5 and are phased in as capital deductions under Basel III. Refer to table "Additional information" in section "Reconciliation requirements" for further information.

11



BIS eligible capital - Basel III
  Group Bank
end of 6M14 2013 6M14 2013
Eligible capital (CHF million)  
CET1 capital 39,453 42,989 34,856 38,028
Total tier 1 capital 45,537 46,061 40,789 41,105
Total eligible capital  55,637 56,288 50,333 52,066


The following table presents the Basel III phase-in requirements for each of the relevant capital components and discloses the Group’s and the Bank’s current capital metrics against those requirements.

BIS capital ratios - Basel III - Group
  6M14 2013
end of Ratio Requirement 2 Excess Ratio Requirement 2 Excess
Capital ratios (%)  
Total CET1 1 13.8 4.0 9.8 15.7 3.5 12.2
Tier 1 16.0 5.5 10.5 16.8 4.5 12.3
Total capital 19.5 8.0 11.5 20.6 8.0 12.6
1
Capital conservation buffer and G-SIB buffer requirement will be phased in from January 1, 2016 through January 1, 2019.
2
Excludes countercyclical buffer that was required as of September 30, 2013. As of the end of 6M14 and 2013, our countercyclical buffer was CHF 299 million and CHF 144 million, which is equivalent to an additional requirement of 0.10% and 0.05% of CET1 capital, respectively.


BIS capital ratios - Basel III - Bank
  6M14 2013
end of Ratio Requirement 2 Excess Ratio Requirement 2 Excess
Capital ratios (%)  
Total CET1 1 12.6 4.0 8.6 14.4 3.5 10.9
Tier 1 14.8 5.5 9.3 15.6 4.5 11.1
Total capital 18.2 8.0 10.2 19.7 8.0 11.7
1
Capital conservation buffer and G-SIB buffer requirement will be phased in from January 1, 2016 through January 1, 2019.
2
Excludes countercyclical buffer that was required as of September 30, 2013. As of the end of 6M14 and 2013, our countercyclical buffer was CHF 248 million and CHF 121 million, which is equivalent to an additional requirement of 0.09% and 0.05% of CET1 capital, respectively.

12




Swiss capital metrics
Swiss regulatory capital and ratios
> Refer to “Swiss Requirements” for further information on Swiss regulatory requirements.

As of the end of 6M14, our Swiss CET1 capital and Swiss total capital ratios were 13.7% and 19.4%, respectively, compared to the Swiss capital ratio phase-in requirements of 6.75% and 10.18%, respectively.

Swiss risk-weighted assets - Group
  6M14 2013

end of
Ad-
vanced
Stan-
dardized

Total
Ad-
vanced
Stan-
dardized

Total
Risk-weighted assets (CHF million)  
Total BIS risk-weighted assets  258,898 26,523 285,421 246,171 27,675 273,846
Impact of differences in thresholds 1 1 (39) (38) (17) 415 398
Other multipliers 2 825 0 825 617 617
Total Swiss risk-weighted assets  259,724 26,484 286,208 246,771 28,090 274,861
1
Represents the impact on risk-weighted assets of differences in regulatory thresholds resulting from Swiss regulatory CET1 adjustments.
2
Primarily includes differences in credit risk multiplier.


Swiss statistics - Basel III
  Group Bank
end of 6M14 2013 6M14 2013
Capital development (CHF million)  
CET1 capital 39,453 42,989 34,856 38,028
Swiss regulatory adjustments 1 (161) 1,658 (96) 1,711
Swiss CET1 capital 2 39,292 44,647 34,760 39,739
High-trigger capital instruments 8,259 3 7,743 8,256 3 7,743
Low-trigger capital instruments 8,432 4 6,005 7,653 5 5,164
Additional tier 1 and tier 2 instruments subject to phase-out 6 6,082 5,507
Deductions from additional tier 1 and tier 2 capital 6 (6,589) (5,940)
Swiss total eligible capital 2 55,476 58,395 50,236 52,646
Capital ratios (%)  
Swiss CET1 ratio 13.7 16.2 12.5 15.0
Swiss total capital ratio 19.4 21.2 18.1 19.8
1
Includes adjustments for certain unrealized gains outside the trading book and, in 2013, also included tier 1 participation securities, which were redeemed in 1Q14.
2
Previously referred to as Swiss Core Capital and Swiss Total Capital, respectively.
3
Consists of CHF 5.8 billion additional tier 1 instruments and CHF 2.5 billion tier 2 instruments.
4
Consists of CHF 4.5 billion additional tier 1 instruments and CHF 3.9 billion tier 2 instruments.
5
Consists of CHF 3.7 billion additional tier 1 instruments and CHF 3.9 billion tier 2 instruments.
6
Reflects the FINMA Decree, which was effective in 1Q14.

13



The following table presents the Swiss Requirements for each of the relevant capital components and discloses our current capital metrics against those requirements.

Swiss capital requirements and coverage
  Group Bank
  Capital requirements Capital requirements

end of
Minimum
component
Buffer
component
Progressive
component

Excess

6M14
Minimum
component
Buffer
component
Progressive
component

Excess

6M14
Risk-weighted assets (CHF billion)  
Swiss risk-weighted assets  286.2 277.2
2014 Swiss capital requirements  1
Minimum Swiss total capital ratio 4.0% 4.5% 2 1.68% 10.18% 4.0% 4.5% 1.68% 10.18%
Minimum Swiss total eligible capital (CHF billion) 11.4 12.9 4.8 29.1 11.1 12.5 4.6 28.2
Swiss capital coverage (CHF billion)  
Swiss CET1 Capital 11.4 7.9 20.0 39.3 11.1 7.6 16.1 34.8
High-trigger capital instruments 5.0 3.3 8.3 4.9 3.4 8.3
Low-trigger capital instruments 4.8 3.6 8.4 4.6 3.0 7.7
Additional tier 1 and tier 2 instruments subject to phase-out 6.1 6.1 5.5 5.5
Deductions from additional tier 1 and tier 2 capital (6.6) (6.6) (5.9) (5.9)
Swiss total eligible capital  11.4 12.9 4.8 26.4 55.5 11.1 12.5 4.6 22.0 50.2
Capital ratios (%)  
Swiss total capital ratio 4.0% 4.5% 1.68% 9.2% 19.4% 4.0% 4.5% 1.68% 7.9% 18.1%
Rounding differences may occur.
1
The Swiss capital requirements are based on a percentage of risk-weighted assets.
2
Excludes countercyclical buffer that was required as of September 30, 2013.

14



Credit risk


General
Credit risk consists of the following categories:

Credit risk by asset class
Securitization risk in the banking book
Equity type securities in the banking book
CVA risk
Exposures below 15% threshold
CCP risk
Settlement risk
Other items

> Refer to “Credit risk” (pages 128 to 139) in III – Treasury, Risk, Balance sheet and Off-balance sheet – Risk management in the Credit Suisse Annual Report 2013 for information on our credit risk management approach, ratings and risk mitigation and impaired exposures and allowances.


Credit risk by asset class
General
For regulatory purposes, we categorize our exposures into asset classes with different underlying risk characteristics including type of counterparty, size of exposure and type of collateral. The asset class categorization is driven by regulatory rules from the Basel framework.
The following table presents the description of credit risk by asset class under the Basel framework (grouped as either institutional or retail) and the related regulatory approaches used.

Credit risk by asset class - Overview
Asset class Description Approaches
Institutional credit risk (mostly in the Investment Banking division)  
Sovereigns Exposures to central governments, central banks, BIS, the International
Monetary Fund, the European Central Bank and eligible Multilateral
Development Banks (MDB).
PD/LGD for most portfolios
Standardized for banking book treasury liquidity positions
and other assets
Other institutions Exposures to public bodies with the right to raise taxes or whose
liabilities are guaranteed by a public sector entity.
PD/LGD for most portfolios
Standardized for banking book treasury liquidity positions
and other assets
Banks Exposures to banks, securities firms, stock exchanges and those MDB
that do not qualify for sovereign treatment.

PD/LGD for most portfolios
SRW for unsettled trades
Standardized for banking book treasury liquidity positions
and other assets
Corporates Exposures to corporations (except small businesses) and public sector
entities with no right to raise taxes and whose liabilities are not
guaranteed by a public entity. The Corporate asset class also includes
specialized lending, in which the lender looks primarily to a single source
of revenues to cover the repayment obligations and where only the
financed asset serves as security for the exposure (e.g., income producing
real estate or commodities finance).
PD/LGD for most portfolios
SRW for Investment Banking specialized lending exposures
Standardized for banking book treasury liquidity positions
and other assets


Retail credit risk (mostly in the Private Banking & Wealth Management division)  
Residential mortgages Includes exposures secured by residential real estate collateral occupied
or let by the borrower.
PD/LGD
Qualifying revolving retail Includes credit card receivables and overdrafts. PD/LGD
Other retail Includes loans collateralized by securities, consumer loans,
leasing and small business exposures.
PD/LGD
Standardized for other assets
Other credit risk  
Other exposures Includes exposures with insufficient information to treat under the
A-IRB approach or to allocate under the Standardized approach into
any other asset class.
Standardized


15



Gross credit exposures, risk-weighted assets and capital requirement
The following table presents the derivation of risk-weighted assets from the gross credit exposures (pre- and post-substitution), broken down by regulatory approach and by the credit asset class under the Basel framework.

Gross credit exposures and risk-weighted assets by regulatory approach
  6M14 2013
     

Exposure
Risk-
weighted
assets
Capital
require-
ment
1

Exposure
Risk-
weighted
assets
Capital
require-
ment
1

end of
Pre-
substitution
2 Post-
substitution


Pre-
substitution
2 Post-
substitution


A-IRB (CHF million)  
PD/LGD 
   Sovereigns  67,405 63,068 4,001 320 71,220 68,539 3,567 285
   Other institutions  2,745 2,694 486 39 1,875 1,866 388 31
   Banks  43,922 52,190 13,180 1,054 32,676 38,398 10,510 841
   Corporates  190,457 186,577 83,856 6,708 174,997 171,965 79,912 6,393
   Total institutional  304,529 304,529 101,523 8,122 280,768 280,768 94,377 7,550
   Residential mortgage  100,108 100,108 11,271 902 98,800 98,800 10,525 842
   Qualifying revolving retail  698 698 251 20 699 699 246 20
   Other retail  69,393 69,393 11,993 959 63,056 63,056 11,100 888
   Total retail  170,199 170,199 23,515 1,881 162,555 162,555 21,871 1,750
Total PD/LGD  474,728 474,728 125,038 10,003 443,323 443,323 116,248 9,300
Supervisory risk weights (SRW) 
   Banks  30 30 6 0 27 27 6 1
   Corporates  1,052 1,052 758 61 998 998 518 41
   Total institutional  1,082 1,082 764 61 1,025 1,025 524 42
Total SRW  1,082 1,082 764 61 1,025 1,025 524 42
Total A-IRB  475,810 475,810 125,802 10,064 444,348 444,348 116,772 9,342
Standardized (CHF million)  
   Sovereigns  6,261 6,261 428 34 5,497 5,497 79 6
   Other institutions  226 226 51 4 245 245 55 5
   Banks  568 568 161 13 727 727 301 24
   Corporates  466 466 129 10 863 863 501 40
   Total institutional  7,521 7,521 769 62 7,332 7,332 936 75
   Other retail  83 83 34 3 47 47 21 2
   Total retail  83 83 34 3 47 47 21 2
   Other exposures  6,679 6,679 2,856 228 6,107 6,107 2,683 214
Total standardized  14,283 14,283 3,659 293 13,486 13,486 3,640 291
Total  490,093 490,093 129,461 10,357 457,834 457,834 120,412 9,633
   of which counterparty credit risk 3 99,848 99,848 30,596 2,448 75,629 75,629 25,282 2,023
1
Calculated as 8% of risk-weighted assets.
2
Gross credit exposures are shown pre- and post-substitution as, in certain circumstances, credit risk mitigation is reflected by shifting the counterparty exposure from the underlying obligor to the protection provider.
3
Includes derivatives and securities financing transactions.

16



Gross credit exposures and risk-weighted assets
  6M14 2013


End of

Monthly
average
Risk-
weighted
assets


End of

Monthly
average
Risk-
weighted
assets
Gross credit exposures (CHF million)  
Loans, deposits with banks and other assets 1 331,361 329,000 74,457 323,102 319,025 70,693
Guarantees and commitments 58,884 59,821 24,408 59,103 63,849 24,437
Securities financing transactions 37,605 34,363 7,583 30,521 36,949 7,204
Derivatives 62,243 62,056 23,013 45,108 53,307 18,078
Total  490,093 485,240 129,461 457,834 473,130 120,412
1
Includes interest bearing deposits with banks, banking book loans, available-for-sale debt securities and other receivables.


Geographic distribution of gross credit exposures

end of

Switzerland

EMEA

Americas
Asia
Pacific

Total
6M14 (CHF million)  
Loans, deposits with banks and other assets 1 156,135 84,351 63,308 27,567 331,361
Guarantees and commitments 11,816 15,017 30,145 1,906 58,884
Securities financing transactions 2,440 11,975 19,292 3,898 37,605
Derivatives 5,204 32,093 19,528 5,418 62,243
Total  175,595 143,436 132,273 38,789 490,093
2013 (CHF million)  
Loans, deposits with banks and other assets 1 155,868 77,044 63,758 26,432 323,102
Guarantees and commitments 13,304 16,786 27,089 1,924 59,103
Securities financing transactions 2,349 10,234 15,824 2,114 30,521
Derivatives 3,885 24,311 12,537 4,375 45,108
Total  175,406 128,375 119,208 34,845 457,834
The geographic distribution is based on the country of incorporation or the nationality of the counterparty, shown pre-substitution.
1
Includes interest bearing deposits with banks, banking book loans, available-for-sale debt securities and other receivables.


Industry distribution of gross credit exposures

end of
Financial
institutions

Commercial

Consumer
Public
authorities

Total
6M14 (CHF million)  
Loans, deposits with banks and other assets 1 15,322 128,329 126,292 61,418 331,361
Guarantees and commitments 3,024 51,629 2,074 2,157 58,884
Securities financing transactions 10,088 23,535 8 3,974 37,605
Derivatives 15,520 34,154 1,508 11,061 62,243
Total  43,954 237,647 129,882 78,610 490,093
2013 (CHF million)  
Loans, deposits with banks and other assets 1 11,872 123,330 120,955 66,945 323,102
Guarantees and commitments 3,387 51,501 2,538 1,677 59,103
Securities financing transactions 6,738 19,650 27 4,106 30,521
Derivatives 10,726 23,963 1,980 8,439 45,108
Total  32,723 218,444 125,500 81,167 457,834
Exposures are shown pre-substitution.
1
Includes interest bearing deposits with banks, banking book loans, available-for-sale debt securities and other receivables.

17



Remaining contractual maturity of gross credit exposures

end of
within
1 year
1 within
1-5 years

Thereafter

Total
6M14 (CHF million)  
Loans, deposits with banks and other assets 2 187,220 96,977 47,164 331,361
Guarantees and commitments 25,800 31,482 1,602 58,884
Securities financing transactions 36,987 520 98 37,605
Derivatives 18,562 19,999 23,682 62,243
Total  268,569 148,978 72,546 490,093
2013 (CHF million)  
Loans, deposits with banks and other assets 2 186,323 90,024 46,755 323,102
Guarantees and commitments 23,060 34,546 1,497 59,103
Securities financing transactions 30,170 336 15 30,521
Derivatives 15,239 17,003 12,866 45,108
Total  254,792 141,909 61,133 457,834
1
Includes positions without agreed residual contractual maturity.
2
Includes interest bearing deposits with banks, banking book loans, available-for-sale debt securities and other receivables.


Portfolios subject to PD/LGD approach
Rating models
The majority of the credit rating models used in Credit Suisse are developed internally by Credit Analytics, a specialized unit in Credit Risk Management (CRM). These models are independently validated by Model Risk Management prior to use in the Basel III regulatory capital calculation, and thereafter on a regular basis. Credit Suisse also use models purchased from recognized data and model providers (e.g. credit rating agencies). These models are owned by Credit Analytics and are validated internally and follow the same governance process as models developed internally.
All new or material changes to rating models are subject to a robust governance process. Post development and validation of a rating model or model change, the model is taken through a number of committees where model developers, validators and users of the models discuss the technical and regulatory aspects of the model. The relevant committees opine on the information provided and decide to either approve or reject the model or model change. The ultimate decision making committee is the Risk Processes and Standards Committee (RPSC). The responsible Executive Board Member for the RPSC is the Chief Risk Officer. The RPSC sub-group responsible for rating models is the Credit Model Steering Committee (CMSC). RPSC or CMSC also review and monitor the continued use of existing models on an annual basis.

Model development
The techniques to develop models are carefully selected by Credit Analytics to meet industry standards in the banking industry as well as regulatory requirements. The models are developed to exhibit “through-the-cycle” characteristics, reflecting a probability of default in a 12 month period across the credit cycle.
All models have clearly defined model owners who have primary responsibility for development, enhancement, review, maintenance and documentation. The models have to pass statistical performance tests, where feasible, followed by usability tests by designated CRM experts to proceed to formal approval and implementation. The development process of a new model is thoroughly documented and foresees a separate schedule for model updates.
The level of calibration of the models is based on a range of inputs, including internal and external benchmarks where available. Additionally, the calibration process ensures that the estimated calibration level accounts for variations of default rates through the economic cycle and that the underlying data contains a representative mix of economic states. Conservatism is incorporated in the model development process to compensate for any known or suspected limitations and uncertainties.

Model validation
Model validation within Credit Suisse is performed by an independent function subject to clear and objective internal standards as outlined in the Validation Policy. This ensures a consistent and meaningful approach for the validation of models across the bank and over time, allowing comparison of model performance over the years. All models whose outputs fall into the scope of the Basel internal model framework are in scope of the model validation governance framework. Externally developed models are subject to the same governance and validation standards as internal models.
The validation process requires each in scope model to be validated and approved before go-live; the same process is followed for model changes to an existing model. Existing models are part of a regular review process which requires each model to be periodically validated and the performance to be monitored annually. Each validation review is a comprehensive quantitative and qualitative assessment with the goal:

to confirm that the model remains conceptually sound and the model design is suitable for its intended purpose;
to verify that the assumptions are still valid and weaknesses and limitations are known and mitigated;
to determine that the model outputs are accurate compared to realized outcome;

18



to establish whether the model is accepted by the users and used as intended with appropriate data governance;
to check whether a model is implemented correctly;
to ensure that the model is fully transparent and sufficiently documented.

To meet these goals, models are validated against a series of quantitative and qualitative criteria  which have been approved by the model governing committees. Quantitative analyses include a review of model performance (comparison of model output against realized outcome), calibration accuracy against the longest time series available, assessment of a model’s ability to rank order risk and performance against available benchmarks. Qualitative assessment includes a review of the appropriateness of the key model assumptions, the identification of the model limitations and their mitigation, and model use. The modeling approach is re-assessed in light of developments in the academic literature and industry practice.
Results and conclusions are presented to senior risk management; shortcomings and required improvements identified by Validation must be remediated within an agreed deadline. Validation is independent and has the final say on the content of each validation report.

Stress testing of parameters
The potential biases in PD estimates in unusual market conditions are accounted for by the use of long run average estimates. Credit Suisse additionally uses stress-testing when back-testing PD models. When predefined thresholds are breached during back-testing, a review of the calibration level is undertaken. For LGD/CCF calibration stress testing is applied in defining Downturn LGD/CCF values, reflecting potentially increased losses during stressed periods.

Descriptions of the rating processes
All counterparties that Credit Suisse is exposed to are assigned an internal credit rating. The rating is assigned at the time of initial credit approval and subsequently reviewed and updated on an ongoing basis. Rating determination is based on relevant quantitative data (such as financial statements and financial projections) and qualitative factors relating to the counterparty which is used by CRM by employing a quantitative model which incorporates expert judgement through a well governed model override process in the assignment of a credit rating or PD, which measures the counterparty’s risk of default over a one-year period.

Counterparty and transaction rating process – Corporates (excluding corporates managed on the Swiss platform), banks and sovereigns (primarily in the Investment Banking division)
Where rating models are used, the models are an integral part of the rating process, and the outputs from the models are complemented with other relevant information by credit officers via a robust model-override framework where information not captured by the models is taken into account by experienced credit officers. In addition to the information captured by the rating models, credit officers make use of peer analysis, industry comparisons, external ratings and research and the judgment of credit experts to complement the model ratings. This analysis emphasizes a forward looking approach, concentrating on economic trends and financial fundamentals. Where rating models are not used the assignment of credit ratings is based on a well-established expert judgment based process which captures key factors specific to the type of counterparty.
For structured and asset finance deals, the approach is more quantitative. The focus is on the performance of the underlying assets, which represent the collateral of the deal. The ultimate rating is dependent upon the expected performance of the underlying assets and the level of credit enhancement of the specific transaction. Additionally, a review of the originator and/or servicer is performed. External ratings and research (rating agency and/or fixed income and equity), where available, are incorporated into the rating justification, as is any available market information (e.g., bond spreads, equity performance).
Transaction ratings are based on the analysis and evaluation of both quantitative and qualitative factors. The specific factors analyzed include seniority, industry and collateral. The analysis emphasizes a forward looking approach.

19



Counterparty and transaction rating process – Corporates managed on the Swiss platform, mortgages and other retail (primarily in the Private Banking & Wealth Management division)
For corporates managed on the Swiss platform and mortgage lending, the statistically derived rating models, which are based on internally compiled data comprising both quantitative factors (primarily loan-to-value ratio and the borrower’s income level for mortgage lending and balance sheet information for corporates) and qualitative factors (e.g., credit histories from credit reporting bureaus). Collateral loans, which form the largest part of “other retail”, are treated according to Basel III rules with pool PD and pool LGD based on historical loss experience. Most of the collateral loans are loans collateralized by securities.
The internal rating grades are mapped to the Credit Suisse Internal Masterscale. The PDs assigned to each rating grade are reflected in the following table.

Credit Suisse counterparty ratings
Ratings PD bands (%) Definition S&P Fitch Moody's Details
AAA 0.000 - 0.021
Substantially
risk free
AAA
AAA
Aaa
Extremely low risk, very high long-term
stability, still solvent under extreme conditions
AA+
AA
AA-
0.021 - 0.027
0.027 - 0.034
0.034 - 0.044
Minimal risk

AA+
AA
AA-
AA+
AA
AA-
Aa1
Aa2
Aa3
Very low risk, long-term stability, repayment
sources sufficient under lasting adverse
conditions, extremely high medium-term stability
A+
A
A-
0.044 - 0.056
0.056 - 0.068
0.068 - 0.097
Modest risk


A+
A
A-
A+
A
A-
A1
A2
A3
Low risk, short- and mid-term stability, small adverse
developments can be absorbed long term, short- and
mid-term solvency preserved in the event of serious
difficulties
BBB+
BBB
BBB-
0.097 - 0.167
0.167 - 0.285
0.285 - 0.487
Average risk

BBB+
BBB
BBB-
BBB+
BBB
BBB-
Baa1
Baa2
Baa3
Medium to low risk, high short-term stability, adequate
substance for medium-term survival, very stable short
term
BB+
BB
BB-
0.487 - 0.839
0.839 - 1.442
1.442 - 2.478
Acceptable risk


BB+
BB
BB-
BB+
BB
BB-
Ba1
Ba2
Ba3
Medium risk, only short-term stability, only capable of
absorbing minor adverse developments in the medium term,
stable in the short term, no increased credit risks expected
within the year
B+
B
B-
2.478 - 4.259
4.259 - 7.311
7.311 - 12.550
High risk

B+
B
B-
B+
B
B-
B1
B2
B3
Increasing risk, limited capability to absorb
further unexpected negative developments
CCC+
CCC
CCC-
CC
12.550 - 21.543
21.543 - 100.00
21.543 - 100.00
21.543 - 100.00
Very high
risk

CCC+
CCC
CCC-
CC
CCC+
CCC
CCC-
CC
Caa1
Caa2
Caa3
Ca
High risk, very limited capability to absorb
further unexpected negative developments

C
D1
D2
100
Risk of default
has materialized
Imminent or
actual loss

C
D

C
D

C


Substantial credit risk has materialized, i.e. counterparty
is distressed and/or non-performing. Adequate specific
provisions must be made as further adverse developments
will result directly in credit losses.
Transactions rated C are potential problem loans; those rated D1 are non-performing assets and those rated D2 are non-interest earning.


Use of internal ratings
Internal ratings play an essential role in the decision-making and the credit approval processes. The portfolio credit quality is set in terms of the proportion of investment and non-investment grade exposures. Investment/non-investment grade is determined by the internal rating assigned to a counterparty.
Internal counterparty ratings (and associated PDs), transaction ratings (and associated LGDs) and CCF for loan commitments are inputs to risk-weighted assets and Economic Risk Capital (ERC) calculations. Model outputs are the basis for risk-adjusted-pricing or assignment of credit competency levels.
The internal ratings are also integrated into the risk management reporting infrastructure and are reviewed in senior risk management committees. These committees include the Chief Executive Officer, Chief Credit Officer (CCO), Regional CCO, RPSC and Capital Allocation Risk Management Committee (CARMC).
To ensure ratings are assigned in a robust and consistent basis, the Global Risk Review Function (GRR) perform periodic portfolio reviews which cover, amongst other things:

accuracy and consistency of assigned counterparty/transaction ratings;
transparency of rating justifications (both the counterparty rating and transaction rating);
quality of the underlying credit analysis and credit process;
adherence to Credit Suisse policies, guidelines, procedures, and documentation checklists.

The GRR function is an independent control function within the CRM which reports to the head of Global Credit Control.

20



Institutional credit exposures by counterparty rating under PD/LGD approach

end of 6M14

Total
exposure
(CHF m)
Exposure-
weighted
average
LGD (%)
Exposure-
weighted
average risk
weight (%)
1 Undrawn
commit-
ments
(CHF m)
Sovereigns  
AAA 24,567 6.21 0.89 3
AA 30,373 8.57 2.18 132
A 1,662 40.67 11.08
BBB 5,151 43.85 25.04 1
BB 548 23.72 43.52
B or lower 767 38.23 154.01
Default (net of specific provisions)
Total credit exposure  63,068 136
Exposure-weighted average CCF (%) 2 99.82
Other institutions  
AAA
AA 1,878 42.37 9.61 904
A 222 41.18 17.27 45
BBB 484 43.04 37.00 102
BB 43 43.45 75.58 3
B or lower 67 13.18 41.17 3
Default (net of specific provisions)
Total credit exposure  2,694 1,057
Exposure-weighted average CCF (%) 2 67.41
Banks  
AAA
AA 12,362 53.16 12.09 868
A 27,999 46.80 15.59 2,196
BBB 7,388 44.40 39.67 232
BB 3,803 39.93 76.03 80
B or lower 553 36.90 120.26 31
Default (net of specific provisions) 85
Total credit exposure  52,190 3,407
Exposure-weighted average CCF (%) 2 95.82
Corporates  
AAA
AA 40,749 49.78 12.05 7,713
A 38,844 46.91 19.54 9,831
BBB 45,780 38.09 36.32 10,285
BB 43,954 34.11 68.92 5,964
B or lower 16,153 32.41 115.08 5,586
Default (net of specific provisions) 1,097 142
Total credit exposure  186,577 39,521
Exposure-weighted average CCF (%) 2 76.63
Total institutional credit exposure  304,529 44,121
1
The exposure-weighted average risk weights in percentage terms is the multiplier applied to regulatory exposures to derive risk-weighted assets, and may exceed 100%.
2
Calculated before credit risk mitigation.

21



Institutional credit exposures by counterparty rating under PD/LGD approach (continued)

end of 2013

Total
exposure
(CHF m)
Exposure-
weighted
average
LGD (%)
Exposure-
weighted
average risk
weight (%)
1 Undrawn
commit-
ments
(CHF m)
Sovereigns  
AAA 27,171 6.01 0.93 19
AA 33,173 6.41 1.79 79
A 925 43.53 13.25 30
BBB 6,431 46.95 24.86 1
BB 185 34.98 68.09 3
B or lower 376 29.24 104.84
Default (net of specific provisions) 278
Total credit exposure  68,539 132
Exposure-weighted average CCF (%) 2 99.77
Other institutions  
AAA
AA 1,084 41.30 10.12 448
A 147 44.16 14.58 63
BBB 499 41.08 28.96 134
BB 44 43.11 69.47 8
B or lower 92 18.33 64.35 1
Default (net of specific provisions)
Total credit exposure  1,866 654
Exposure-weighted average CCF (%) 2 57.40
Banks  
AAA
AA 6,883 48.74 11.10 894
A 20,843 48.72 17.32 2,010
BBB 6,458 40.23 35.46 294
BB 3,512 38.67 72.19 144
B or lower 553 34.23 102.64 16
Default (net of specific provisions) 149
Total credit exposure  38,398 3,358
Exposure-weighted average CCF (%) 2 93.63
Corporates  
AAA
AA 32,560 46.10 11.57 6,655
A 32,436 42.23 18.57 8,851
BBB 46,770 37.54 36.27 11,283
BB 43,171 35.82 66.58 5,056
B or lower 15,927 35.40 117.94 5,113
Default (net of specific provisions) 1,101 8
Total credit exposure  171,965 36,966
Exposure-weighted average CCF (%) 2 76.33
Total institutional credit exposure  280,768 41,110
1
The exposure-weighted average risk weights in percentage terms is the multiplier applied to regulatory exposures to derive risk-weighted assets, and may exceed 100%.
2
Calculated before credit risk mitigation.

22



Retail credit exposures by expected loss band under PD/LGD approach

end of 6M14

Total
exposure
(CHF m)
Exposure-
weighted
average
LGD (%)
Exposure-
weighted
average risk
weight (%)
1 Undrawn
commit-
ments
(CHF m)
Residential mortgages  
0.00%-0.15% 93,846 15.83 8.60 1,229
0.15%-0.30% 3,875 28.32 29.62 101
0.30%-1.00% 2,013 29.22 52.08 18
1.00% and above 148 25.26 97.27
Defaulted (net of specific provisions) 226 1
Total credit exposure  100,108 1,349
Exposure-weighted average CCF (%) 2 97.91
Qualifying revolving retail  
0.00%-0.15%
0.15%-0.30%
0.30%-1.00% 501 50.00 23.35
1.00% and above 196 20.00 60.59
Defaulted (net of specific provisions) 1
Total credit exposure  698
Exposure-weighted average CCF (%) 2 99.99
Other retail  
0.00%-0.15% 64,365 54.35 13.46 1,244
0.15%-0.30% 355 48.65 31.58 65
0.30%-1.00% 2,329 38.59 45.55 79
1.00% and above 2,112 40.96 58.93 47
Defaulted (net of specific provisions) 232 2
Total credit exposure  69,393 1,437
Exposure-weighted average CCF (%) 2 94.13
Total retail credit exposure  170,199 2,786
1
The exposure-weighted average risk weights in percentage terms is the multiplier applied to regulatory exposures to derive risk-weighted assets, and may exceed 100%.
2
Calculated before credit risk mitigation.

23



Retail credit exposures by expected loss band under PD/LGD approach (continued)

end of 2013

Total
exposure
(CHF m)
Exposure-
weighted
average
LGD (%)
Exposure-
weighted
average risk
weight (%)
1 Undrawn
commit-
ments
(CHF m)
Residential mortgages  
0.00%-0.15% 91,837 15.83 7.82 1,195
0.15%-0.30% 4,355 29.06 29.31 145
0.30%-1.00% 2,226 28.71 49.38 45
1.00% and above 162 23.87 91.49
Defaulted (net of specific provisions) 220 1
Total credit exposure  98,800 1,386
Exposure-weighted average CCF (%) 2 97.89
Qualifying revolving retail  
0.00%-0.15%
0.15%-0.30%
0.30%-1.00% 515 50.00 23.35
1.00% and above 183 20.00 60.59
Defaulted (net of specific provisions) 1
Total credit exposure  699
Exposure-weighted average CCF (%) 2 99.98
Other retail  
0.00%-0.15% 57,924 54.15 13.42 1,218
0.15%-0.30% 503 47.03 29.61 60
0.30%-1.00% 2,284 39.25 46.02 111
1.00% and above 2,143 40.79 60.44 41
Defaulted (net of specific provisions) 202 2
Total credit exposure  63,056 1,432
Exposure-weighted average CCF (%) 2 93.68
Total retail credit exposure  162,555 2,818
1
The exposure-weighted average risk weights in percentage terms is the multiplier applied to regulatory exposures to derive risk-weighted assets, and may exceed 100%.
2
Calculated before credit risk mitigation.


Portfolios subject to the standardized and supervisory risk weights approaches
Standardized approach
Under the standardized approach, risk weights are determined either according to credit ratings provided by recognized external credit assessment institutions or, for unrated exposures, by using the applicable regulatory risk weights. Less than 10% of our credit risk is determined using this approach. Balances include banking book treasury liquidity positions.

Supervisory risk weights approach
For specialized lending exposures, internal rating grades are mapped to one of five supervisory categories, associated with a specific risk weight under the SRW approach.

Equity IRB Simple approach
For equity type securities in the banking book, risk weights are determined using the IRB Simple approach, which differentiates by equity sub-asset types (listed equity and all other equity positions). From January 1, 2014, the risk weighting for private equity positions was increased to 400%, in line with the treatment applied to other equity positions.

24





Standardized and supervisory risk weighted exposures after risk mitigation by risk weighting bands

end of
Standardized
approach

SRW
Equity IRB
Simple

Total
6M14 (CHF million)  
0% 9,503 44 0 9,547
>0%-50% 1,574 607 0 2,181
>50%-100% 3,206 342 0 3,548
>100%-200% 0 0 0 0
>200%-400% 0 89 3,260 3,349
Total  14,283 1,082 3,260 18,625
2013 (CHF million)  
0% 8,699 131 0 8,830
>0%-50% 1,592 607 0 2,199
>50%-100% 3,195 287 0 3,482
>100%-200% 0 0 1,562 1,562
>200%-400% 0 0 1,871 1,871
Total  13,486 1,025 3,433 17,944


Credit risk mitigation used for A-IRB and standardized approaches
Credit risk mitigation processes used under the A-IRB and standardized approaches include on- and off-balance sheet netting and utilizing eligible collateral as defined under the IRB approach.

Netting
> Refer to “Derivative instruments” (pages 135 to 136) in III – Treasury, Risk, Balance sheet and Off-balance sheet – Risk management – Credit risk and to “Note 1 – Summary of significant accounting policies” (pages 217 to 218) in V – Consolidated financial statements – Credit Suisse Group in the Credit Suisse Annual Report 2013 for information on policies and procedures for on- and off-balance sheet netting.
> Refer to “Note 20 – Offsetting of financial assets and financial liabilities” (pages 105 to 108) in III – Condensed consolidated financial statements – unaudited in the Credit Suisse 2Q14 Financial Report for further information on the offsetting of derivatives, reverse repurchase and repurchase agreements, and securities lending and borrowing transactions.

Collateral valuation and management
The policies and processes for collateral valuation and management are driven by:

a legal document framework that is bilaterally agreed with our clients; and
a collateral management risk framework enforcing transparency through self-assessment and management reporting.

For collateralized portfolio by marketable securities, the valuation is performed daily. Exceptions are governed by the calculation frequency described in the legal documentation. The mark-to-market prices used for valuing collateral are a combination of firm and market prices sourced from trading platforms and service providers, where appropriate. The management of collateral is standardized and centralized to ensure complete coverage of traded products.
For the Private Banking & Wealth Management mortgage lending portfolio, real estate property is valued at the time of credit approval and periodically afterwards, according to our internal policies and controls, depending on the type of loan (e.g., residential, commercial) and loan-to-value ratio.

Primary types of collateral
The primary types of collateral are described below.



Collateral securing foreign exchange transactions and OTC trading activities primarily includes:

Cash and US Treasury instruments;
G-10 government securities; and
Corporate bonds.

Collateral securing loan transactions primarily includes:

Financial collateral pledged against loans collateralized by securities of Private Banking & Wealth Management clients (primarily cash and marketable securities);
Real estate property for mortgages, mainly residential, but also multi-family buildings, offices and commercial properties; and
Other types of lending collateral, such as accounts receivable, inventory, plant and equipment.

25



Concentrations within risk mitigation
Our Investment Banking division is an active participant in the credit derivatives market and trades with a variety of market participants, principally commercial banks and broker dealers. Credit derivatives are primarily used to mitigate investment grade counterparty exposures.
Concentrations in our Private Banking & Wealth Management lending portfolio arise due to a significant volume of mortgages in Switzerland. The financial collateral used to secure loans collateralized by securities worldwide is generally diversified and the portfolio is regularly analyzed to identify any underlying concentrations, which may result in lower loan-to-value ratios.
> Refer to “Credit risk” (pages 128 to 139) in III – Treasury, Risk, Balance sheet and Off-balance sheet – Risk management in the Credit Suisse Annual Report 2013 for further information on risk mitigation.

Credit risk mitigation used for A-IRB and standardized approaches

end of

Eligible
financial
collateral
Other
eligible
IRB
collateral
Eligible
guarantees/
credit
derivatives
6M14 (CHF million)  
Sovereigns 461 0 4,881
Other institutions 3 117 179
Banks 2,218 0 775
Corporates 5,270 31,871 17,227
Residential mortgages 3,696 80,781 47
Other retail 57,406 3,841 270
Total  69,054 116,610 23,379
2013 (CHF million)  
Sovereigns 345 0 3,100
Other institutions 10 136 97
Banks 2,611 0 994
Corporates 4,119 31,206 16,088
Residential mortgages 3,750 79,453 52
Other retail 51,816 3,436 233
Total  62,651 114,231 20,564
Excludes collateral used to adjust EAD (e.g. as applied under the internal models method).


Counterparty credit risk
Counterparty exposure
Counterparty credit risk arises from OTC and exchange-traded derivatives, repurchase agreements, securities lending and borrowing and other similar products and activities. The subsequent credit risk exposures depend on the value of underlying market factors (e.g., interest rates and foreign exchange rates), which can be volatile and uncertain in nature.
We have received approval from FINMA to use the internal model method for measuring counterparty risk for the majority of our derivative and secured financing exposures.

Credit limits
All credit exposure is approved, either by approval of an individual transaction/facility (e.g., lending facilities), or under a system of credit limits (e.g., OTC derivatives). Credit exposure is monitored daily to ensure it does not exceed the approved credit limit. These credit limits are set either on a potential exposure basis or on a notional exposure basis. Potential exposure means the possible future value that would be lost upon default of the counterparty on a particular future date, and is taken as a high percentile of a distribution of possible exposures computed by our internal exposure models. Secondary debt inventory positions are subject to separate limits that are set at the issuer level.
> Refer to “Credit risk” (pages 128 to 139) in III – Treasury, Risk, Balance sheet and Off-balance sheet – Risk management in the Credit Suisse Annual Report 2013 for further information on counterparty credit risk, including transaction rating, credit approval process and provisioning.

Wrong-way exposures
Correlation risk arises when we enter into a financial transaction where market rates are correlated to the financial health of the counterparty. In a wrong-way trading situation, our exposure to the counterparty increases while the counterparty’s financial health and its ability to pay on the transaction diminishes.
Capturing wrong-way risk requires the establishment of basic assumptions regarding correlations for a given trading product. We have multiple processes that allow us to capture and estimate wrong-way risk.

26



Credit approval and reviews
A primary responsibility of CRM is to monitor counterparty exposure and the creditworthiness of a counterparty, both at the initiation of the relationship and on an ongoing basis. Part of the review and approval process is an analysis and discussion to understand the motivation of the client and to identify the directional nature of the trading in which the client is engaged. Credit limits are agreed in line with the Group’s risk appetite framework taking into account the strategy of the counterparty, the level of disclosure of financial information and the amount of risk mitigation that is present in the trading relationship (e.g., level of collateral).

Exposure adjusted risk calculation
Material trades that feature specific wrong-way risk are applied a conservative treatment for the purpose of calculating exposure profiles. The wrong-way risk framework applies to OTC, securities financing transactions and centrally cleared trades.
Wrong-way risk arises if the exposure the Group has against a counterparty is expected to be high when the probability of default of that counterparty is also high. Wrong-way risk can affect the exposure against a counterparty in two ways:

The mark-to-market of a trade can be large if the counterparty’s PD is high.
The value of collateral pledged by that counterparty can be low if the counterparty’s PD is high.

Two main types of wrong-way risk are distinguished:

“General wrong-way risk” arises when the likelihood of default by counterparties is positively correlated with general market risk factors.
“Specific wrong-way risk” arises when potential exposure to a specific counterparty is positively correlated with the counterparty’ probability of default due to the nature of the transactions with the counterparty.

There are two variants of specific wrong-way risk:

If there is a legal connection between the counterparty and the exposure, e.g. the Group buying a put from a counterparty on shares of that counterparty or a parent/subsidiary of that counterparty or a counterparty pledging its own shares or bonds as collateral.
More general correlation driven specific wrong-way risk.

The presence of wrong-way risk is detected via automated checks for legal connection and via means of stress scenarios and historical time series analyses for correlation.
For those instances where a material wrong-way risk presence is detected, limit utilization and default capital are accordingly adjusted.
Regular reporting of wrong-way risk at both the individual trade and portfolio level allows wrong-way risk to be identified and corrective action taken in the case of heightened concern by CRM. Reporting occurs at various levels:

Country exposure reporting – Exposure is reported against country limits established for emerging market countries. Exposures that exhibit wrong-way characteristics are given higher risk weighting versus non-correlated transactions, resulting in a greater amount of country limit usage for these trades.
Counterparty exposure reporting – Transactions that contain wrong-way risk are risk-weighted as part of the daily exposure calculation process, as defined in the credit analytics exposure methodology document. This ensures that correlated transactions utilize more credit limit.
Correlated repurchase and foreign exchange reports – Monthly reports produced by CRM capturing correlated repurchase and foreign exchange transactions. This information is reviewed by relevant CRM credit officers.
Scenario risk reporting – In order to identify areas of potential wrong-way risk within the portfolio, a set of defined scenarios are run monthly by Risk Analytics and Reporting. The scenarios are determined by CRM and involve combining existing scenario drivers with specific industries to determine where portfolios are sensitive to these stressed parameters, e.g. construction companies / rising interest rates.
Scenario analysis is also produced for hedge funds which are exposed to particular risk sensitivities and also may have collateral concentrations due to a specific direction and strategy.
In addition, and where required, CRM may prepare periodic trade level scenario analysis, in order to review the risk drivers and directionality of the exposure to a counterparty.

The Front Office is responsible for identifying and escalating trades that could potentially give rise to wrong-way risk.
Any material wrong-way risk at portfolio or trade level should be escalated to senior CRM executives and risk committees.

Effect of a credit rating downgrade
On a daily basis, we monitor the level of incremental collateral that would be required by derivative counterparties in the event of a Credit Suisse ratings downgrade. Collateral triggers are maintained by our collateral management department and vary by counterparty.
> Refer to “Credit ratings” (page 46) in II – Treasury, risk, balance sheet and off-balance sheet – Liquidity and funding management in the Credit Suisse 2Q14 Financial Report for further information on the effect of a one, two or three notch downgrade as of June 30, 2014.

The impact of downgrades in the Bank’s long-term debt ratings are considered in the stress assumptions used to determine the conservative funding profile of our balance sheet and would not be material to our liquidity and funding needs.
> Refer to “Liquidity and funding management” (pages 94 to 100) in III – Treasury, Risk, Balance sheet and Off-balance sheet in the Credit Suisse Annual Report 2013 for further information on liquidity and funding management.

27



Credit exposures on derivative instruments
We enter into derivative contracts in the normal course of business for market making, positioning and arbitrage purposes, as well as for our own risk management needs, including mitigation of interest rate, foreign currency and credit risk. Derivative exposure also includes economic hedges, where the Group enters into derivative contracts for its own risk management purposes but where the contracts do not qualify for hedge accounting under US GAAP. Derivative exposures are calculated according to regulatory methods, using either the current exposures method or approved internal models method. These regulatory methods take into account potential future movements and as a result generate risk exposures that are greater than the net replacement values disclosed for US GAAP.
As of the end of 6M14, no credit derivatives were utilized that qualify for hedge accounting under US GAAP.
> Refer to “Derivative instruments” (pages 135 to 136) in III – Treasury, Risk, Balance sheet and Off-balance sheet – Risk management – Credit risk in the Credit Suisse Annual Report 2013 for further information on derivative instruments, including counterparties and their creditworthiness.
> Refer to “Note 24 – Derivative and hedging activities” (pages 113 to 117) in III – Condensed consolidated financial statements – unaudited in the Credit Suisse 2Q14 Financial Report for further information on the fair value of derivative instruments and the distribution of current credit exposures by types of credit exposures.
> Refer to “Note 20 – Offsetting of financial assets and financial liabilities” (pages 105 to 108) in III – Condensed consolidated financial statements – unaudited in the Credit Suisse 2Q14 Financial Report for further information on netting benefits, netted current credit exposures, collateral held and net derivatives credit exposure.

Derivative exposure at default after netting
end of 6M14 2013
Derivative exposure at default (CHF million)  
Internal models method 54,734 37,755
Current exposure method 7,509 7,353
Total derivative exposure  62,243 45,108


Collateral used for risk mitigation
end of 6M14 2013
Collateral used for risk mitigation for the internal models method (CHF million)  
Financial collateral - cash / securities 26,399 24,911
Other eligible IRB collateral 771 407
Total collateral used for the internal models method  27,170 25,318
Collateral used for risk mitigation for the current exposure method (CHF million)  
Financial collateral - cash / securities 2,357 2,489
Other eligible IRB collateral 396 277
Total collateral used for the current exposure method  2,753 2,766


Credit derivatives that create exposures to counterparty credit risk (notional value) 
  6M14 2013

end of
Protection
bought
Protection
sold
Protection
bought
Protection
sold
Credit derivatives that create exposures to counterparty credit risk (CHF billion)  
Credit default swaps 664.2 616.9 717.4 675.6
Total return swaps 9.8 0.1 7.3 0.1
Other credit derivatives 44.1 21.4 60.7 22.2
Total  718.1 638.4 785.4 697.9

28



Allowances and impaired loans
The following tables provide additional information on allowances and impaired loans by geographic distribution and changes in the allowances for impaired loans.
Geographic distribution of allowances and impaired loans 

end of
Allowances
individually
evaluated
for
impairment
Allowances
collectively
evaluated
for
impairment



Total
allowances

Impaired
loans with
specific
allowances
Impaired
loans
without
specific
allowances


Total
impaired
loans
6M14 (CHF million)  
Switzerland 494 171 665 1,047 109 1,156
EMEA 9 12 21 56 4 60
Americas 55 19 74 161 15 176
Asia Pacific 55 6 61 56 24 80
Total  613 208 821 1,320 152 1,472
2013 (CHF million)  
Switzerland 531 174 705 1,142 68 1,210
EMEA 21 15 36 39 1 40
Americas 56 20 76 180 8 188
Asia Pacific 46 6 52 51 0 51
Total  654 215 869 1,412 77 1,489
The geographic distribution of impaired loans is based on the location of the office recording the transaction. This presentation does not reflect the way the Group is managed.


Changes in the allowances for impaired loans 
  6M14 6M13

in
Allowances
individually
evaluated
for
impairment
Allowances
collectively
evaluated
for
impairment




Total
Allowances
individually
evaluated
for
impairment
Allowances
collectively
evaluated
for
impairment




Total
Changes in the allowances for impaired loans (CHF million)  
Balance at beginning of period  654 215 869 696 226 922
Net additions/(releases) charged to income statement 58 (6) 52 72 (3) 69
   Gross write-offs  (138) 0 (138) (153) 0 (153)
   Recoveries  29 0 29 36 0 36
Net write-offs (109) 0 (109) (117) 0 (117)
Provisions for interest 8 0 8 13 0 13
Foreign currency translation impact and other adjustments, net 2 (1) 1 12 1 13