Implementation of a Credit Risk Rating Framework
Main Features
In addition, there are a number of further challenges which are posed for the SME sector:
- Important information which is typically used for large corporates such as market price of issued credit derivatives, bonds, and equity is typically not available for SMEs.
- Country accounting conventions need to be taken under account
- Creative accounting can invalidate key model data
- Lack of history on new/ modified companies
- Limited default sample
At SYSTEMIC we have paid special attention to this sector which quite often comprises the largest portion of most banks assets portfolio, many of which are not entirely satisfied with the statistical performance of their existing SME rating models.
- Local analysis of actual obligor performance in the medium and long run. Use of best suited model from our own database, in the short run.
- Localized accounting templates
- Possibility to adjust financial information to address creative accounting
- Creation of interim statements as well as future projections to address potential lack of history or modified companies
- Use of macroeconomic risk drivers allowing to take under account the credit risk cycle and allowing to apply stress tests
- Accuracy enhancement by the use of qualitative assessments for each company
- Complete audit trail and application of “four-eye” principle allows to avoid potential mis-use of the model
The above results in a risk rating framework which is truly internal to each of our customers and delivers highly robust accuracy scores.