Economic Capital Allocator
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