Risk Management

One of the roles of capital is to act as a buffer against unexpected losses, and to minimize the likelihood of an institution's failure. Institutions typically create provisions against identified losses (loss reserves); and they allocate capital to absorb any unidentified losses. Risk-Weighted Capital (RWC) enables you to systematically assess your risk exposure, calculate your capital allocation needs, and your normalized loss (loss reserve) requirements. Normalized loss distributes your expected losses across periods and levels the income/loss streams to reduce earnings volatility. You can perform your risk analysis for your ledger accounts, products or instrument pools, and treasury positions. You can assign risk weights corresponding to different risk types that you define for your organization; or you can define functions that the system uses to calculate the risk weights. In some cases, the institution may choose to allocate excess capital, for example to support superior credit ratings, or to satisfy depositors' requirements. Risk-Weighted Capital allows you to define a set of formulas for your risk weights corresponding to your targeted capital requirements. You can use RWC to compare book capital against your risk-weighted capital in order to determine whether your organization is over or under capitalized.

With RWC, you can manage earnings volatility in the following ways:

• Link risk and return by allocating capital to the business unit or activity responsible for the creation—and ongoing ownership—of the risk.

• Apply the same risk-based discipline to business units within the organization that the capital markets force upon the whole organization.

• Provide a standard for calculating and reporting risk-adjusted performance.

• Focus on risk control and improvement opportunities.

• Level out the earnings stream by reporting a normalized loss amount instead of the actual loss events.

• Provide equity protection in the event of catastrophic losses.

• Provide a specialized form of risk and capital management for banking institutions interested in credit risk assessment in compliance with the Basel II capital accord.

  Data structures for credit facilities, risk mitigation instruments, portfolio detail and risk ratings are available for customers to store key attributes required by the accord. The delivered credit risk application engine supports processing these inputs all the way to a final value for Risk-Weighted Assets (RWA) and required Regulatory Capital (RC).