Credit Risk Analysis

riskpro™ covers current and potential future exposure - both on a “what if” basis or using Monte Carlo techniques, Credit Loss, Credit VaR, including the full Basel ll functionality. The expected loss module simulates and calculates the effects of rating evolution, defaults and recovery dynamically. The riskpro™ credit risk analysis solution can be used independently standalone with corresponding interfaces (for example collateral valuation from other systems) or in combination with the other riskpro™ analysis methods. An overview of the implemented analysis methods is described below.

Current Exposure

Static view of credit exposure. It is calculated taking into account risk mitigation: close- out netting, collateral, guarantees. Exposure base can be nominal value, NPV or book value. A full counterparty structure allows drilling down to the individual subsidiaries. The reporting is done on MS Excel.

Advanced Current exposure

Same as above but with reporting on BusinessObjects (OLAP tool) on the riskpro™ global analysis database (GADB), which allows a more powerful handling of the reports than MS Excel.

Potential Exposure with Add-ons

Add-ons provide a quick and regulatory-approved view of potential exposure. A safety margin (the add-on) is added to the current exposure to reflect future fluctuations of the exposure due to market price volatility. It is possible to enhance the use of regulatory add-ons by taking into account extra dimensions such as currency, or by specifying finer buckets for each of the dimensions.

Potential Exposure

Simulates the evolution of the current exposure over time based upon a particular user-defined interest and exchange rate scenario. Credit risk mitigation is taken into account: collateral, guarantees, close-out netting can be modeled specifically or summarized in a recovery rate.

Potential Exposure Monte Carlo

Allows a dynamic Monte Carlo simulation. The yield curve evolution and the changes in exposure are simulated ‘along the path’. Recovery data are taken into account. Summary exposure results are shown in a specific report and include average of maximum exposure per path and maximum of average exposure.

Expected Loss

Provides a scenario simulation that result in the expected credit loss. Migration matrices model the migration and default probability per rating. An option is provided to enter reduced migration matrices. These require entering per rating only the default probabilities. During the simulation a revaluation of the contracts is calculated, taking into account the influence of default and rating transition.

Credit VaR reduced form

Credit at Risk is obtained through an analytical solution based on a representative (skewed) distribution.

Dynamic credit VaR Monte Carlo

The full credit loss distribution is obtained through a Monte Carlo simulation. The Monte Carlo simulation generates different paths based on migration matrices, sensitivities to risk factors and correlations between the risk factors. Several rating systems, including in-house ratings, are supported.

Instrument coverage

All above methods are applied consistently for any type of financial product/instruments from deposits to exotic options.

For more information about riskpro™ Financial Instruments and Product Coverage.

Special riskpro™ strengths

• Integration of Market Risk and Credit Risk at contract level
  • one data set
  • one set of basic standard algorithms
• consistency between regulatory reporting, credit exposure and credit loss
• high user controlled flexibility: expression editor, several instances of parameters (LGD, migration matrix). This is important
  • for stress testing, e.g. link migration matrices with economic cycle
  • small regulatory changes can be immediately implemented and tested without new software installation
• dynamic simulation of loss and recovery (not only static view)