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Anita Bunk
Head of Communications

Rapidly Changing Markets Require Flexible Risk Management Solutions

Immenstaad (Germany), 06/09/2009 -

The current financial crisis has revealed just how quickly banks’ lending practices need to respond to changing market conditions. Experts at Innovations Software Technology GmbH, a leading provider of Business Rules Management platforms and solutions for the finance industry, now advises in this environment: In the future, banks and financial services providers must adapt their individual internal and regulatory valuation procedures more often to current conditions to successfully minimize lending risks. They can meet the challenge of increased rating expenditure with flexible and innovative solutions.

Thomas Cotic, a member of Innovations Software Technology management, explains, “The past year has made it clear that banks will have to adapt their rating models more often to market dynamics going forward. One good example is the importance of risk assessment fundamentals in the real estate market.” Cotic continues, “The challenge is simply beyond the capabilities of traditional risk management solutions. By the time the business department explains to the IT team what changes need to be made, which sometimes entails highly complex mathematical issues, much too much time has been lost and risk limitations are put in place too late. What banks need now are flexible, rule-based solutions that can be directly managed by the business department, quickly and with auditability.”

Innovations has compiled six capabilities that illustrate the advantages offered by ruled-based risk management systems.

1. Rules created by the business department: Ideally, risk management platforms have a user interface that can be intuitively managed. That allows rating experts to enter all valuation rules themselves, rather than have changes made indirectly through the IT department. And that in turn makes adjustments more flexible, saving time and expense.

2. Graphical representation: Rating logic is graphically represented, so it is clearly structured and readily comprehensible. This transparent representation not only simplifies rating logic; it can also be used for external presentation and clarification, such as for financial market supervisory authorities.

3. Quality assurance using stress tests: As prescribed by Basel II, rating models must undergo extensive stress tests prior to implementation. That means that target and actual results are compared, and deviations are recognized in time.

4. Documentation at the click of a mouse: Rating models can be summarized automatically with complete documentation, including the base data and computational and decision logic. And documentation always reflects the operative rating models.

5. Interfaces with third-party systems: Platforms should readily connect with third-party systems so that data on borrowers, loans, properties, defaults and other information can be integrated automatically.

6. Auditability: To comply with regulatory requirements and ensure auditability, a risk monitoring and management solution must provide functionality that logs every revision made.