Credit Risk has always been at the core of the banking business. The major cause of serious banking problems continues to be strongly associated with insufficient credit standards and poor risk management practices. Banks should identify, measure, monitor and control Credit Risk in order to hold adequate capital reserves against future losses.
Synectics has considerable experience building models to assess the Credit Risk of borrowers, in relation to mortgages, consumer loans, and other financing facilities. Our assessment occurs both at origination of the facility i.e. prior to extending credit, but also during the life of the facility where the client’s repayment behaviour is proactively monitored and assessed.
Apart from traditional credit risk models, we have also developed predictive models for Loss Given Default (LGD), which is also a vital input in calculating capital requirements. An error in predicting LGD is as damaging as an equivalent error in predicting Probability of Default, and its importance should therefore not be underestimated.
Our Credit Risk Infrastructure is a supporting software tool capable of handling and managing all these risk models. In addition, the Infrastructure is used for data collection and transformations, statistical calculations, visualisations, parameterisation, and reporting.
By utilising your data, Synectics can build bespoke credit risk models for your institution to predict the likelihood of a counterparty failing to meet its obligations in accordance with the agreed terms. Bespoke credit risk models will enable your institution to more accurately assess credit risk and as a result will better evaluate capital requirements and optimise capital allocation. Apart from an initial Probability of Default and Credit Score, each portfolio of open accounts will be evaluated on an on-going basis so as to proactively capture irregularities and identify the early stages of an account becoming delinquent. Early identification of such cases is vital in order to provide enough time to take the necessary mitigating steps to prevent an exposure from becoming non-performing.
Corporate clients are further analysed using various aspects of submitted financial statements. Using several well-known, best practice, and proprietary financial ratios, officers can visualise, on an on-going basis, the health of the organisation and take corrective actions as soon as possible.
Synectics strongly believes in the importance of accurately predicting the actual loss a financial institution will incur from a defaulted credit facility, i.e. predicting LGD. Better prediction of LGD means better estimation of expected losses and, hence, better provisioning on behalf of financial institutions. LGD can also be used as a tool to provide improved pricing during loan origination. Most importantly, LGD is an important input in calculating capital requirements.
Synectics has developed predictive models for LGD for financing facilities. In doing so, a series of innovative ideas and solutions have been implemented to address important issues such as high degree of cross-collateralisation, many-to-many relationships between borrowers, facilities, collaterals, underlying assets etc., outdated collateral and asset valuations and so on.