A QUESTION OF RISK AIcm/sI 6 info exchange WHAT'S NewS Issue 10 October 1996 This vear'sTriDle-A A With the challenges of banking, as in human affairs, there are never altogether perfect solutions.The best we can seek are less imperfect ones. When it comes to efficiënt credit risk management, one of the bank's paramount tasks amid the fast-changing ecologies of commercial competition, it pays to embrace this reality. smoothing the way for non-balance sheet based deals such as lease, object, and trade financing. WORKABLE COMPROMISE The recommendations, adopted by the management board in July, were thrashed out by a six-strong committee that was headed by Alfons de Weerdt of the international credit department, and which included Jeffrey Vollack of New York, Jim Cunningham of London, Jos Albers of Utrecht, Lok Poh Lam of Singapore, and Philip Lam of Hong Kong. 'We could see from the start that we had an intractable problem and that the best we could aim for was a workable compromise,' says De Weerdt. MAKING SENSE This was especially clear in the case of the statistical anomalies. Earlier, because of the ratios used for calculation, candidates for clean financing that showed a slight deterioration in their financials could be confronted with a freefall of their CRS, and the system thus gave an inaccurate snapshot of actual risk. 'This clearly made no sense,' remarks De Weerdt. 'In a case of clean financing, where no collateral has been agreed, then the financial risk score alone should be the ultimate benchmark.' BEHEERSING VAN KREDIETRISICO'S Een contradictio in terminis, want een kredietrisico is nooit helemaal te beheersen. Toch proberen wij de risico's die wij als bank lopen steeds verder in te perken. Het nieuwe kredietrisco systeem is een combinatie van het financiële risico en de verwachte opbrengst van de gestelde zekerheden bij liquidatie, waarbij deze laatste factor zwaarder meetelt dan voorheen. Bij financieringen waarvoor geen zekerheden zijn gesteld vindt alleen beoordeling plaats op basis van de cijfers. Op deze wijze krijgen wij een duidelijker inzicht. Alfons de Weerdt - looking for workable solutions with colleagues in the network As many account managers are aware, a refined methodology for scoring and measuring credit risk is presently being implemented throughout the network. Such measures are by definition subjective. The methodology represents a compromise between competing interests. A single goal lies at its core, however: to generate a realistic approximation of the risks that are actually being run. DOUBLÉ AIM With the new system, as before, each cliënt is scored on a sliding scale from one (which is unacceptable) to six (at the height of excellence.) However, the credit risk score (CRS) is now, more accurately than before, expressed as a combination of financial risk and the estimated yield of collateral in the event of liquidation. This deceptively simple change has a two-fold aim. First, it seeks to address several persistent statistical aberrations that clouded the picture under the old regime. Second, it is aimed at This year'sTriple-A Award was won by Chile, Atlanta, Mexico and Utrecht working in combination - we'll be coming back to the deal in the December issue. HOTTEST ISSUE For companies which could offer extensive collateral, but were of low financial standing, the formerly low weighting given to collateral yielded an excessively modest CRS that overstated our risk in terms of costs in case of default. It was feit that the mitigating effect of collateral protection deserved more emphasis. 'The way to do this was the hottest issue in the project group discussion,' says De Weerdt. 'The revised calculation method, admittedly a subjective compromise, now forces us to consider the collateral in relation to total exposure on worst-case liquidation value.' SCORING BASE Moreover, the financial risk score previously included a measure of management quality as one of four weighted elements - and this was the source of the second anomaly. This score is now being based on solely three weighted elements - profitability, liquidity/cash flow, and solvency - in which the weighting of liquidity has been increased, in order to express the growing importance of cash flow. Needless to say, all of these benchmarks are subjective. But an assessment of management quality is more subjective than most. CLEAR REASONING The new regime eliminates the temptation to inflate otherwise unimpressive results. While management quality remains a consideration, it will only be taken into account if its adjudged value, in the eyes of the account manager, deviates from the financial risk score based on the other quantitative elements mentioned above. Where it is included, a clear reasoning is expected, in accordance with the application procedures laid out in the latest Cl credit manual. 'Every system is subjective,' De Weerdt says with a philosophical shrug. 'The new system is the best compromise we've been able to organize to date. Perhaps one day we'U be able to bring in a more sophisticated system based on sliding probabilities - who knows? We're always exploring new^ ideas.'

Rabobank Bronnenarchief

blad 'What's news' (EN) | 1996 | | pagina 6