Risk Models between Demands and Realities

For banks, risk management means finding the right balance between utilizing the latest information and insights, while complying with statutory requirements that must be implemented quickly to meet regulatory responsibilities.  Visual Rules software from Innovations Software Technology helps financial institutions successfully manage that balancing act, as illustrated in a case study from Forrester Research, a US business and technology research company.

This Forrester study looked at the introduction of Visual Rules at Deutsche Pfandbriefbank (PPB), the Munich-based real estate banking specialist, currently in the headlines in the context of an extraordinary government bailout.  However, this project, which began in April 2008, relates to the assessment of credit risks of direct individual bank loans and not the “devilishly complex risk models of the investment credit risk modelers,” as the authors of the study emphasized.

Meet Regulatory Requirements Without Neglecting Speed

Prior to this project, PPB was familiar with two approaches to applying new risk models or revising existing ones: its own and that of the Irish HRE-subsidiary. At PPB risk managers developed and tested their models in Excel and then had them programmed as Web-based Java applications, to be able to use them on that platform. While this method met regulatory requirements, it was often time consuming, first in briefing the programmers to explain what were often complex models, then the programming itself, and last but not least the necessary testing of the finished application.

In contrast, the Irish subsidiary skipped the programming and applied its models directly in Excel, a method that was not acceptable to German regulators.  The advantage, however, was that new models could be applied much more quickly.  Since the launch of Visual Rules, PPB enjoys the advantages of both approaches: agile implementation that is also in compliance with regulations.  Visual Rules is a Business Rules software that empowers risk managers not only to create new models directly and in regulatory compliance; it also provides the environment for their implementation and application.

IT comes out well with this solution, since they are often the ones blamed for bottlenecks in the introduction of new developments. Risk modelers themselves are happy because of the time and independence they gain. What is more, sales personnel enjoy the security of being able to access up-to-date, correct risk models adapted to each specific deal.

Risk Modelers between the Best and Worst of Times

Risk modelers find themselves in “the best of times and the worst of times,” in the view of the authors of this study. These are their best times because credit risk management is now more widely appreciated than ever before. And these are the worst of times because pressure is building to implement new requirements more quickly than ever before.  Solutions like Visual Rules help to live up to these demands and the new value placed on risk modeling.