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Risk Management

09:53 AM
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Credit-Risk Management is Ripe for Centralization

Meridien Research Sees the Future of Credit Risk Management in a component-based approach.

Streamlining processes and eliminating redundancies has become crucial for financial firms not only in moving toward automation but also as a cost saving measure during tough times. And as the drive toward enterprise-wide risk management continues, credit-risk management is one area that has historically been stuck in a silo'd world and could benefit from a unified approach.

"Credit is so pervasive in a financial institution," says Peter Keppler, senior analyst at Meridien. "There's fundamental analysis in an origination area, quantitative analysis in say a portfolio-management or economic-capital-allocation area, limits management more on the trading-book side and then even just through different asset classes you have different systems and different processes and models."

Meridien's latest report entitled, "Credit Risk Systems: Some Reassembly Required," examines how credit processes and applications exist today, as well as how they are evolving toward the future to streamline those processes and applications. "We wanted to figure out a way to look at the processes and applications the way they exist now with the idea that in the future there will be more of a single set of these processes, or a reduced number of places where these processes are taking place," says Keppler.

"We took a bunch of credit applications and smashed them into pieces and tried to organize those pieces in terms of commonality," he adds. "We wanted to step back and look at where credit stood in a little more of an aggregate view." In other words, where the credit risk processes took place and how they were similar, to gauge how and where processes could be brought together under the best methodology or system.

The future for credit-risk management systems? Keppler envisions a kind of object-oriented programming environment where components from various vendor systems for areas such as correlations or default probability models or limits management and portfolio management can be mixed and matched. "I really think that the vendors will have to un-bundle the functionality that is tied up in any one silo'd functional system in order to enable institutions to potentially buy just the components that they want and cobble them together into their system with various methodologies through the usage of standardized interfaces," says Keppler.

This mix and match unified approach will enable financial institutions to eliminate the redundancy of multiple methods for analyzing for example, customer and counter party creditworthiness. "There is overlapping functionality and when you get into that situation there are all sorts of reconciliation's between departments and things that burn up a lot of manual intervention time as well as setting yourself up for operational problems and possibly losses," he adds. The report also examines the marketplace for credit-risk-management systems and the major vendors providing solutions.

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