Credit Risk Rating at Rand Merchant Bank, South Africa
RMB started with the most important ratings for the evaluation of credit risks: the probability of default (PD) and the loss given default (LGD). To represent these rating services, 6,000 rules had to be defined. The number of services runs to more than 20. Step by step, these services have been implemented. While at first this was done in cooperation with Bosch Software Innovations, the rating experts can now work with independently.
IRB-Approach to Calculate Credit Risk
The Internal Ratings Based (IRB) approach allows institutions to provide their own ‘risk inputs’ – probability of default, loss estimates, etc. – in the calculation of capital requirements. The calculation of these inputs is subject to a strict set of operational requirements to ensure that they are robust and reliable. The inputs are incorporated into a ‘capital- requirement formula’, which produces a capital charge for each loan or other exposure that the institution makes.
RMB’s Credit Rating Models Did Not Meet the Requirements of Up-To-Date Auditing
RMB intends implementing the IRB approach and therefore needs to meet these strict operational rules. Its head of wholesale credit ratings and portfolio analytics, Rautie Nel, considers his company to be very well positioned in this regard. RMB’s rating system can be described as a hybrid system which makes use of statistical models while incorporatinga qualitative overlay into the final credit risk metric. But despite the outstanding quality of RMB’s rating models, until recently the rating models did not meet the requirements of up-to-date auditing as far as processes were concerned. Rautie Nel states: "The models, which were implemented in Microsoft Excel, did not have the necessary controls in place and no history of the ratings that were generated was readily available. Moreover, it would be difficult for a bank applying for the IRB approach to meet the operational requirements of Basel II with an Excel-based solution for its rating models."
Search for a Solution to Transfer Rating Models into a Process-oriented Solution
RMB remained true to its corporate motto – Traditional values and Innovative ideas – in its search for a solution that would transfer the bank's rating models into a process-oriented solution. The bank found this solution with Bosch Software Innovations, a global company. Their Visual Rules Business Rules Management System makes it possible to integrate business analysts' know-how simply and flexibly into business processes.
Business Analysts can Define, Test and Document the Bank’s Credit Risk Rating Models Independently
RMB started with the most important ratings for the evaluation of credit risks: the probability of default (PD) and the loss given default (LGD). To represent these rating services, 6,000 rules had to be defined. The rating models for the divisions with the most significant impact on capital requirements have been implemented.
The number of possible services runs to more than 20. Step by step, these services have been implemented in Visual Rules. While at first this was done in close cooperation with Bosch Software Innovations's Visual Rules professional services, Rautie Nel can now work with these new services independently.
Rule Services as a Web-Based Environment for 80 Credit Analysts
A web-based work environment was created for the 80 Rand Merchant Bank analysts. The final credit risk metric includes hard facts such as the ratings of external rating agencies as well as soft facts, e.g. the evaluation of a company by the bank's analyst. Based on these metrics, the Model Platform displays the results.
Credit Risk Rating Models are Used as Encapsulated Services for Various Applications
The bank's results are SOA (Service-oriented Architecture) components, which are rule services building blocks that can be used by a variety of applications as encapsulated services. This feature is particularly useful for RMB: the ability to offer business logic as encapsulated services ensures that the rating models can be utilized extensively, offering investment protection and elegant solution for both operational and strategic requirements.
