Credit Risk

Client type

Wholesale division of European banking group

Location

UK

Client need

The client was in the early stages of considering upgrading its credit risk systems and the methodologies used in the calculation of exposure for its derivatives portfolio. The client wished to have its practices benchmarked against its peers and to have an independent assessment of the strategic direction it should take.

Our deliverables

We conducted a market intelligence study of the bank’s peers covering the methodologies used to calculate credit exposure and the risk systems used.

We benchmarked the client’s methodologies and systems against the market and recommended a strategic direction the bank should follow. This analysis included a comprehensive assessment of the various alternative methodologies, and sample portfolios were analysed under the alternative methodologies.

Client

Financial markets division of major retail and commercial bank

Region

UK

Client need

The client wished to upgrade its credit risk management system for its dealing room business. The client needed advice in respect of the required functionality and whether it should buy a vendor solution or build in-house.

Our deliverables

We initially produced a high level functional requirements document and a roadmap for how this would be delivered over the coming years. This involved helping the client to clarify its policy and methodology in a number of areas.

We produced a business case for the system which included an analysis of the build or buy options.

We identified a shortlist of potential vendors that would meet the client’s requirements and, in conjunction with the client, produced the questionnaire for the Request for Proposal and scored the responses submitted by the vendor.

We performed business analysis in relation to the implementation of the first phase of the system and wrote the functional requirements specification.

We also provided systems development and business analysis for a number of tactical systems initiatives.

Client

Private bank/asset manager

Location

Switzerland

Client need

The client acted as investment manager for a number of portfolios containing hedge fund and private equity investments. Gearing was provided against the security of these investments at conservative advance ratios. The client wished to develop a quantitative model to assess the risk in this lending activity and also be able to adjust its lending policy to be more in line with the risk undertaken.

Our deliverables

We developed a model to stress test the portfolio to confirm the adequacy of margins. The model also calculated the advance ratios taking into account the diversification and correlation between assets in the portfolio.

Client

Major retail and commercial bank

Region

UK

Client need

The client was planning to establish a function to actively manage its counterparty risk exposure by entering into hedging transactions. The bank needed advice on the target operating model for this function and wanted to know how equivalent functions are organised within its peers.

Our deliverables

The review was split into a number of areas:

• The role and mandate of the credit portfolio management function
• Quantitative issues relating to the calculation of the Credit Valuation Adjustment and how this can be hedged
• The infrastructure used to calculate CVA
• Relative responsibilities of the front office and risk management

In each area, we discussed requirements with the client, provided our own advice and ascertained the practices within peer organisations.

The final deliverable was a detailed presentation specifying the recommended target operating model.

Client type

Investment bank and prime broker

Location

UK, US and Germany

Client need

The client had an active business with hedge funds in derivatives, securities financing and prime brokerage. It wanted to satisfy itself that its margin terms were in line with market practice. It was also planning to offer margining on a more sophisticated basis (for example VaR based margining) and wanted to know the practices adopted by its peers in this area and the changes it would need to make to implement a more sophisticated margining approach.

Our deliverables

We conducted a market intelligence survey to ascertain practices within competitor firms. We also surveyed the client’s hedge fund clients to ascertain their views on its margining levels and other aspects of its risk policy and service level.

We benchmarked the client’s current approach against its peers and recommended changes to its policies and methodologies to bring it into line with market practice. We also set out a roadmap for the implementation of more sophisticated margining methodologies.