Overview
Success Stories
|  |
Applying Chordiant Solutions in Risk Management and Basel II Compliancy
How leading banks are meeting regulatory requirements, freeing up capital and building ROI.
A Dutch bank, leading in the retail lending
area, is successfully exploiting the facilities
that the Chordiant Decision Management
suite offers for risk management and Basel II
compliancy.
When executives at the bank decided they
needed to improve their credit risk
management, they knew that although their
priority was to deal with default risks in their
books, they wanted a solution that would
improve risk management across operations.
The bank chose Chordiant Decision
Management as the system best able to meet
those requirements. The bank has
implemented Chordiant Predictive Analytics
Director for credit risk model development,
and Chordiant Strategy Director for
implementing advanced risk weighted
calculations and sophisticated risk strategies.
The bank has since subsequently implemented
Chordiant Decision Monitor to provide
portfolio risk reporting across all business
lines, with the ability to analyze the risk levels
on an aggregated and detailed level as
required by the regulatory institutions.
Working with both risk management and
operations of the bank, Chordiant initiated a
project early in 2004 to prove the value of the
solutions. At the time, the bank was
managing the credit risk on its retail banking
book using ad-hoc analyses. These analyses
took a lot of time and resources. The required
follow-up, they stated, was hard to
implement. The project with Chordiant took
only a month to complete and resulted in
clear and quantifiable results. The key risk
drivers and their influences were identified so
that it was quite straightforward to uncover a
pool of elevated risk. This pool was then
supplied to risk mitigation and securitization
processes, which not only yielded direct cash
but also increased the profitability of the
portfolio by 17%.
Chordiant began implementing the Decision
Management suite mid-2004 and went live
for the retail banking books (consumer
lending and debit cards) later that year. The
solution covers the whole spectrum from
model development, model validation, rules
management, portfolio monitoring and risk
capital disclosures.
The rule management components of the
solution (tightly integrated with the predictive
modeling capability), delivered by Chordiant
Strategy Director and the Decisioning Server,
added significant flexibility and consistency in
carrying out the best measures for different
business situations. Chordiant Decision
Management brings measurable, real ROI to
the bank, not only by reducing risk, but also
by enabling greater business agility, easier
maintenance, and more clarity and control
over how important business decisions are
being made.
Figure 1: Return on Capital classes (red line shows the
profitability per rating class, blue bars are cumulative results)
The bank is currently configuring the Chordiant
Decisioning Server and setting up the policies and
models for the real-time processing of loan
applications, aiming not only to make more
accurate lending decisions (within any system or
process that requires such decisions), but also to
reduce the response times by a factor 5 to 10. This
will result in larger volumes and higher efficiency. It
also means a lot of 'operational risk' is taken out
of the process as it is fully integrated and
automatically documented.
A second international bank purchased the
Chordiant Decision Management suite to
implement the Basel II IRB (Internal Rating Based)
approach for their retail mortgages portfolio. Their
goal is to meet the capital requirements under the
new Basel II accord, so that further economic
capital is freed up as compared to the existing
Basel I regulations that were in place.
The project to achieve these goals started with a
methodical analysis of the data stored in
operational systems spread across the enterprise.
Chordiant worked closely with risk management
and IT to set up a Risk Datamart and Losses
Database. This resulted in a consolidated view of
the portfolio over time. The numerous data entities
that were stored in multiple silos within the data
infrastructure were analyzed through Chordiant
Predictive Analytics Director, so that the data
required to drive the risk calculations were
efficiently identified. The system proved its worth
in thoroughly assessing the data quality issues that
were present.
The Risk Datamart, now containing cleansed data
and providing a consistent and complete view, was
used for model development and validation.
Again, Chordiant Predictive Analytics Director was
used for this task and provided a safe and
streamlined process for the development of the
models and scorecards that generate the risk
ratings in the IRB approach. The models,
comprehensively documented by the system,
describe the relevant drivers for risk in the
mortgages portfolio.
Using Chordiant Strategy Director, the bank is now
able to supplement the models with further
economic capital calculations to generate figures
on LGD (Loss Given Default), RWA (Risk Weighted
Assets), EL (Expected Losses) and regulatory capital
measures. Using Chordiant Deployment Manager
these calculations are deployed inside the
Chordiant Decisioning environment (real-time or
batch), so that a robust and flexible environment is
created to execute the calculations and to
guarantee that authorizations, versioning and
audit trails are adequately implemented. Chordiant
Deployment Manager also facilitates performing
back-testing (testing/validating against history
data) and stress-testing (testing/validating against
macroeconomic fluctuations).
After executing all calculations using the Chordiant
Decisioning Server, the Chordiant Decision Monitor
database is automatically populated with details on
both the models and the calculations used, as well
as the underlying input and output value
distributions. The set of reports from Chordiant
Decision Monitor delivers the Basel II reporting
needs on each segment as well as more detailed
levels.
Besides the quality and completeness of the
process, the bank has also achieved a high
standard of documentation of, not only the
models, calculations and results, but also the
underlying data and the whole process itself. It
will allow them to re-run the whole process
anywhere in the future and confidently face any
audit of their risk management operation.
As this bank is playing in the field of retail
mortgages and has implemented the IRB approach
successfully, it can now plan for a large upcoming
capital release. The highest gains for IRB are in
retail, and especially for high quality mortgage
portfolios. As of yet, no actual numbers on the
resulting weighting of the regulatory capital are
known for this bank, but because of the high
quality of the models it can look forward to
reducing its capital weighting from 50% to as low
as 13%.
[ Return to top | Return to Success Stories ]
|  | |
