RISK ANALYZER

RISK ANALYZER
Market data-based credit assessment
RISK ANALYZER
Market data-based credit assessment

 

Using both capital market and financial reporting data Risk Analyzer provides monthly credit assessments on more than 30,000 listed companies and financial institutions worldwide. These may serve as separate evaluations in their own right or to complement existing risk assessment systems.
Other than individual counterparties Risk Analyzer also allows to assess entire industries or sectors and can be used in portfolio modelling.

 

Scope of application

Reliable risk assessments on corporate counterparties are important for lenders and investors. These analyses need to be updated more and more often: not only should they be permanently available, they are also expected to appropriately reflect current developments.

Risk Analyzer may be used on a stand-alone basis when evaluating transactions that do not warrant or require comprehensive assessment (which usually involves expert judgement) or where there is little capacity for in-depth analysis.

It may also be used in support of existing risk assessment systems, for example as a tool for monitoring markets (to visualize developments in specific industries or sectors) or for the preliminary assessment of prospective customers.

In portfolio management Risk Analyzer allows to consistently assess the development of a company’s creditworthiness beyond the current risk situation based on historical time series. This information is particularly useful for calculating asset correlations or configuring customer-specific (credit) portfolio models. Another area of application for the time series is the creation of models for stress testing.

Methodology

Following Merton’s approach (1974), option pricing theory is used to determine the probability of default, assuming that a company becomes insolvent if its enterprise value drops below a specific limit, which is determined by the amount of its liabilities.
By interpreting the enterprise value in terms of market values, the analyst adopts a forward-looking rather than retrospective and accounting-focused perspective: what is the market’s assessment of a company’s prospects and business model and, consequently, of the company’s creditworthiness?

Based on the relevant inputs to the RSU Merton Model – market capitalization, share price, and liabilities – the RSU Merton model PD (a one-year probability of default) is determined separately for companies and financial institutions using regional calibration functions. Thus, the credit assessment is based on the current collective evaluation of the company’s prospects by the global stock markets as well as on the company’s debt structure.

Technology

The application uses interactive charts to visualize the past development of the RSU Merton model PD, the underlying values (market value of company’s assets (enterprise value) and asset volatility), and all inputs for a period of up to ten years.

The RSU Merton model PD of a company can be viewed and analyzed in comparison to regional, sector-specific, and individually definable peer groups. Alternative PD scenarios can be explored by varying the input values. In addition, users can create monitoring lists, including optional email alerts, with customizable warning thresholds for each obligor to identify significant changes of risk. Extensive functionalities for exporting graphics and data allow to perform additional analyses and include results in reports outside Risk Analyzer.

Risk Analyzer may be used as a stand-alone solution, but can also effectively complement existing systems.
The application is available both in German and in English and is web-based, requiring only a VPN (or Crednet) connection. Like all RSU applications, Risk Analyzer is operated under the strict security standards customary in the banking industry. Protected transmission lines and secure data storage at a level 3-certified data processing center ensure a high degree of data security.