RISK GUARD

RISK GUARD
Market data-based early warning system for credit risks
RISK GUARD
Market data-based early warning system for credit risks

 

Risk Guard generates warning signals that indicate increased credit risk for companies, industry sectors or countries up to one year in advance.
Using an early warning system is not only reasonable to prevent losses, but is also one of the minimum requirements for risk management defined by German bank regulators.

 

Scope of application

Internal and external ratings, as used for fundamental risk assessment, cannot immediately reflect abrupt changes in macroeconomic conditions or in a company’s business situation. For this reason it is sensible to use additional instruments that are designed to identify credit risks at a very early stage. The solution proposed by RSU is Risk Guard, a market data-based early warning system.

Risk Guard is typically used in credit risk management, proprietary trading, and portfolio management. It enables decision-makers to take timely action, instead of reacting to abrupt changes in the risk situation, for example by allocating additional resources for further analysis, reviewing ratings or adjusting the portfolio or investment strategy.

Methodology

Risk Guard analyses market data on a daily basis, relying on the capital market’s capacity to swiftly consolidate all available information and expectations in the pricing process. In addition, the system takes into account internal and external ratings as well as industry-specific and country-specific information. The models are complemented by peer group analyses.

Each underlying model is designed to reflect the empirical relationship between market data observed at a given point in time and future events that affect credit quality.
The multi-factor models used in Risk Guard have been statistically optimized, which is why they are considerably more accurate than individual criteria such as CDS spreads or share prices. RSU regularly validates and improves these models.

Technology

Risk Guard can be used both as a stand-alone solution and to complement existing systems.
The Risk Guard user interface allows analysts to monitor and administer their portfolios. An entity is marked as conspicuous if any of the assigned models has produced a warning signal. Conspicuous entities must be assigned to individually defined evaluation categories. These usually correspond to (subsequent) internal processes. Both the changes in risk scores and the corresponding evaluations remain transparent over time.

Risk Guard is a web-based application available with both German and English text; it only requires a VPN (or CredNet) connection. Like all applications provided by RSU, it is operated under the strict security standards customary in the banking industry. Protected transmission channels and secure data storage at a level 3-certified data processing centre ensure a high degree of data security.

Since Risk Guard can also process signals from other, internal sources, it can even serve as a central early warning platform. Data produced by Risk Guard can be shared with other systems to facilitate comprehensive process integration.