Dear,
As we commented in previous posts, SAP Bank Analyzer does not have an strong Market Risk engine yet, particularly if we compare Bank Analyzer functionalities with other competitors like Sunguard.
Anyway, SAP Bank Analyzer is being designed with the holistic purpose of measuring and managing the main risks a financial institution is exposed to.
Credit Risk is very well covered with the correspondent Bank Analyzer risk engine, Liquidity Risk is very well covered by Bank Analyzer in combination with the SAP HANA-Liquidity Risk Management solution, and it’s a matter of time that SAP enhances the Strategy Analyzer sub-module of Bank Analyzer for covering the requirements of an strong Market Risk solution.
Strategy Analyzer sub-module of Bank Analyzer supports GAP Analysis and Net Present Value Analysis of the bank’s portfolio, examining the cash-flows at Financial Transaction or Financial Instrument level (contract level).
Strategy Analyzer requires to be provided with alternative, scenario based, market data sets and the contract Financial Conditions of the Financial Transactions and Financial Instruments. With this information, the Source Data Layer cash-flow generator will provide the scenario based cash-flows, and the risk engine calculator will give us the scenario based valuation of the portfolio, according to the correspondent market data set.
The complete modelization of the Financial Position Objects in the Bank Analyzer Results Data Layer supports the alternative scenario-based valuations of the portfolio.
Selecting properly the granularity of the characteristics contained in the Financial Database will guarantee a seamless transformation of the Results Data Layer positions on an analytical risk hierarchy.
All the above can be very useful to banks which have already implemented the Accounting for Financial Instruments module of Bank Analyzer.
After AFI has been fully implemented, enhancing the capabilities of Bank Analyzer for supporting GAP and Net Present Value analysis of the bank’s portfolio requires a relatively low effort.
But as I mentioned before, this is not enough to be considered a best of breed Market Risk technology, and I thought it would be a good idea to look at what functionalities should be included in SAP Bank Analyzer from Market Risk perspective.
GAP Analysis and Net Present Value Analysis represent the foundation of Market Risk Analysis as they told us the expected value and the cost of opportunity of our portfolio, in alternative or even stressed scenarios, but they don’t tell us what’s the statistical probability and the confidence level of the analysis.
In order of including this relevant information on the results of our analysis SAP Bank Analyzer should include an strong Value at Risk calculator, and this is precisely what SAP Bank Analyzer does not have today.
For those of you who are not familiar with the Value at Risk concept, Value at Risk is a statistical technique used to measure and quantify the level of financial risk in an investment portfolio over a specific time frame.
Value at Risk calculation is measured in three dimensions; the amount of potential loss (already provided by Net Present Value and GAP Analysis, but also the probability of that calculated loss, and the time frame in which the Market Risk event should occur.
This information is extremely useful to bank’s executives and risk managers, as it provides an statistical measure of the level of market risk the bank is exposed to, in every portfolio and by all risk hierarchy dimensions.
Additionally, detailed control of the evolution on the value at risk parameters will provide the basis for triggering alerts in case actual valuations are suffering deviations from the expected results, as Basel III agreement requires.
Looking forward to read your opinions.
Kindest Regards,
Ferran
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