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.'