BancWare ERisk Research Center

BancWare ERisk’s Research & Development team continually evolves the methodologies and concepts that underpin our software and consulting solutions. On this page we share research papers published by BancWare ERisk's risk and capital management researchers so you can stay in touch with today's cutting-edge developments.

Enterprise Risk Management and Profitability

Risk, Capital and Value Management in Financial Institutions
Part I: The Debtholder’s Perspective
John Drzik, Peter Nakada and Til Schuermann
The first of two articles that set out the basic mechanisms for attributing capital to risky activities, and for assessing whether those activities contribute sufficient return to compensate for their risk and capital profiles. This paper examines risk from the perspective of a debt-holder in a company, leading to the concept of economic capital.

Risk, Capital and Value Measurement in Financial Institutions
Part II: The Shareholder’s Perspective
John Drzik, Peter Nakada and Til Schuermann
This second article addresses the shareholder’s view of risk, and its connection to value creation. It outlines the elements of a conceptual approach for deriving risk-based value metrics, and highlights some of the implementation issues. It argues that methodologies for identifying shareholder value must be carefully applied if banks are not to mislead themselves or others.

Enterprise-Wide Risk Management and the Role of the Chief Risk Officer
James Lam
This seminal article outlines the key components of an enterprise-wide risk management program. It argues that the “silo-based” approach to risk management is ineffective and inefficient, and suggests that a better approach is to integrate risk all functions under the direction a Chief Risk Officer

Credit Risk Management

ConvergentCredit Model
Andrew Hickman & Joel Wollman
ERisk has developed this new portfolio credit risk model from first principles to be a practical and efficient way to measure bank portfolio risk. Based on a well-established theoretical framework, it offers a way to evaluate the threats to value in a realistic banking portfolio comprehensively and quickly.

The Eternal Challenge of Understanding Imperfections
Ugur Koyluoglu, Tom Wilson, Miguel Yague
Recent advances in default risk modelling for corporate lending offer many choices to model key credit risk measures such as forward looking cycle average default probability for different rating classes, dependence among defaults, and future variation of default probability over the credit cycle. However, limitations in data quality and quantity are creating serious challenges in implementation. This article illustrates these eternal challenges with practical examples, and suggests that practitioners should analyse the sensitivity of the results and credit risk management decisions with respect to imperfect assumptions.

Credit Portfolio Management
Thomas Garside, Henry Stott, Anthony Stevens
Active credit portfolio optimization has enormous potential to enhance an institution's profitability, and even simple techniques can reduce the amount of economic capital consumed by 25-30%. This paper offers an introduction to the basic theory of credit portfolio models, and describes how these models can be employed to improve management decisions.

Devil in the Parameters
Ugur Koyluoglu, Anil Bangia, Thomas Garside
This technical paper examines the effects of parameter inconsistency in credit portfolio models by looking at three commercially-available software packages. Under these conditions, the packages produce significantly different results for identical portfolios, suggesting that, when selecting a model, the user should focus more on the quality of the model's parameter estimates than on the nature of the calculations.

Active Credit Portfolio Management
Andrew Kuritzkes
One of the most significant changes to affect wholesale banking in recent years is the shift from the traditional "buy and hold" origination model to active credit portfolio management. This article examines the forces driving this change – including the adoption of economic capital concepts – and looks at the organizational implications all this will have.

Energy

New Framework For Risk (Part I): A Consistent Framework for Market & Credit Risk Management
Andrew Hickman, Jim Rich, and Curtis Tange
In a paper originally published in The Risk Desk, ERisk's energy industry experts, Andrew Hickman, Jim Rich, and Curtis Tange, explore market and credit risk measurement within the context of an economic capital framework.

New Framework For Risk (Part II): Filling in the Details - The Importance of Choosing the Right Tools For the Job
Andrew Hickman, Jim Rich, and Curtis Tange
A look at two particularly challenging issues: How to employ VaR to measure the market risk of long-term structural transactions, and how to extend the VaR metric directly to an economic capital framework.

Credit Risk Measurement - A Portfolio View
Jim Rich and Curtis Tange
This paper explores how economic capital provides an effective credit risk quantification framework that can support both a portfolio perspective and long time horizons.

Potential Exposure - How to Get a Handle on Your Credit Risk
Jim Rich and Curtis Tange
Learn the concepts of potential exposure and how they can provide a consistent measurement framework capable of enhancing your firm’s ability to forecast, control and respond to crisis events.

Insurance

P&C RAROC: A Catalyst for Improved Capital Management in the Property and Casualty Insurance Industry
Peter Nakada, Hemant Shah, Ugur Koyluoglu, Olivier Collignon
The Economic Capital and RAROC framework that has been used successfully at banks for managing risk and capital is also useful in the P&C insurance industry. The use of P&C RAROC could significantly improve shareholder value in this industry. The next step for insurers is to focus on applying the analytical approach at more detailed levels to inform strategic and tactical decisions.

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