Economic Capital Allocator

In many cases, the minimum regulatory capital does not represent an accurate enough risk measure. This is particularly true for Banks following the Standardized approach, especially in economies with many unrated exposures, mostly to small and medium-sized enterprises (SMEs). Furthermore, the current regulatory framework does not account for risk reductions due to portfolio diversification. This is why Basel III recommends under Pillar 2 to implement an “Internal Capital Assessment Process” to account for all risks not adequately captured under the minimum regulatory capital.

Main Features

This module addresses all above issues and allows answering the following questions:

  • Which are the most profitable relationships in risk-adjusted terms?
    • Which relationships do I need to safeguard?
    • Which of the less profitable relationships can I work on?
  • To which market segments and/or to which relationships am I most exposed to?
    • Do I have room to lend to this sector, geography, relationship?
    • Where do I have unused capacity?
  • Which businesses are generating / destroying shareholder value?
    • Where should the bank increase / decrease its focus?
    • Which departments should get the highest bonuses?

Furthermore, the Marginal Economic Capital is an excellent tool to identify unwanted concentrations, since it takes under account all risk components:

  • Industry correlations
  • Concentration risk
  • Credit ratings
  • Anticipated usage of credit lines
  • Collateral & guarantees
  • Tenor of Exposures

Extended functionality

  • Risk and Capital Usage indicators, such as Diversified vs. Stand-alone Economic Capital, Economic Capital over Exposure at Default (EAD)
  • Profitability indicators such as Economic Profit & Loss, Risk-adjusted return on Capital (RAROC), Economic Value Added (EVA), Expected Loss
  • Grouping and Drill-down capabilities per Industry, Geography, Business Unit, Risk Rating, Relationship, Maturity, Size bucket and Currency
  • Management of concentration limits on the above subtotals
  • Calculations are based on Multi-factor credit risk models using Monte Carlo simulation