SAS helps banks reduce capital reserves to cover bad debt, in accordance with Basel II

SAS, the market leader in business intelligence, last week announced new solutions for credit risk management. The new solutions provide an end-to-end environment for accurately estimating retail and corporate credit risk exposure in compliance with Basel II regulations currently in development by the Basel Committee on Banking Supervision (BCBS), under the wings of the Bank for International Settlements (BIS).

SAS is the only vendor to provide Basel II-compliant retail, corporate and portfolio credit risk analysis and reporting within one software suite.

The credit risk management solutions are part of SAS Risk Management for Banking, a new suite of solutions for enterprise-wide risk management.

The Basel II accord places far more stringent requirements on the way in which banks manage their exposure to bad debt, by making them calculate and put aside a Capital Adequacy Reserve -- an amount of money needed to cover potential losses to customers defaulting on credit repayments. Banks that can accurately estimate their credit risk exposure are expected to be able to reduce their Capital Adequacy Reserve by up to 3%. This reduction in reserve gives them more working capital to grow and increase profitability.

Among the different methods of calculating an adequate capital reserve for credit risk, the advanced internal-ratings-based approach is preferred by most banks as it is the most risk-sensitive method and hence the method most likely to result in a lower capital reserve requirement.

SAS Risk Management for Banking provides the most complete credit risk-modelling environment to support an advanced internal-ratings-based approach. SAS is the only provider that has a proven track record in both the assessment of creditworthiness of various types of counter-parties (retail, corporate, etc), as well as credit risk on a portfolio level. SAS is the only vendor that offers a flexible environment for credit risk management where different approaches (CreditMetrics, Creditplus, RAROC and RAPM, regulatory requirements as laid down in the New Capital Accord, etc) can be implemented and simultaneously evaluated. Competitive products focus on only one of the many different approaches.

While most banks today perform some level of credit risk management, few are currently aggregating their credit risks as required by the Basel II regulations to calculate the bank's risk-weighted assets, which are then used to calculate the capital reserve requirement. With the new solutions for credit risk management from SAS, financial services institutions can aggregate credit risk in order to satisfy regulatory and internal disclosure requirements.

In addition to providing the broadest range of risk-modelling tools, SAS is the only vendor to provide a complete environment for credit risk management, which includes data collection and storage, advanced credit risk analytics for the internal ratings approach, as well as a reporting environment that enables banks to provide reports documenting their risk exposure as per Basel II requirements.

"Using SAS software we've achieved 80% accuracy in predicting non-performing and sub-standard loans," says Giovanni Parrillo, Head of Credit Policy at BNL, one of Italy's leading banking groups that is among the top 100 banks worldwide. "This has enabled us to set our branches a 2002 target of reducing lending to clients with higher (riskier) ratings, which, if achieved, will reduce new potential non-performing loans by 10%."