Fair, Isaac and Company, through its recent acquisition of Risk Management Technologies (RMT), today announced its commitment to further enhance RMT’s RADAR(TM) RiskManager enterprise-wide credit risk management model to fully meet regulatory norms for safety and effectiveness. More sophisticated models will help financial institutions make better use of capital and increase their risk-adjusted return.
The new initiative combines Fair, Isaac’s industry leading experience in data analysis and predictive modeling with RMT’s proven enterprise risk analysis framework and its forward-looking bank simulation model. RADAR RiskManager application environment models the effects of interest rate changes on credit portfolio behavior. RADAR RiskManager will fully integrate credit and market risk management enterprise-wide.
RMT CEO David LaCross said, “Only Fair, Isaac’s ‘gold standard’ approach to discrete credit risk management provides the rich, multidimensional framework needed to accurately model most of the firmwide credit risk in an integrated bank. Fair, Isaac is now uniquely positioned to merge the best retail and wholesale risk evaluation methodologies into a single, effective view.”
The initiatives in development have the potential to improve the internal credit risk management process and allow a less restrictive regulatory regime for capital allocation. Fair, Isaac Executive Vice President Robert Heller said, “With more precise forecasts of credit losses, financial institutions will be able to reduce the risk premiums they apply to the prices of products. This will produce several improvements: Banks will price more competitively, enjoy better profit margins, and may reduce hedging activities used to mitigate risk. They also may be able to reduce the amount of capital they must allocate to most credit portfolios.”
The solution will encompass two analytical approaches for different parts of the balance sheet. For wholesale credit — investments and relationships involving large, publicly held companies — Fair, Isaac is adopting an extended implementation of JP Morgan’s CreditMetrics(TM) analytical framework. Fair, Isaac’s 40 years of experience with consumer and small business credit risk management will provide the remaining domain expertise and analytical technology needed to provide a comprehensive enterprise-wide solution.
Information and analysis from both Fair, Isaac and CreditMetrics are based on analyzing historical behaviors of customers and counterparties. The resulting analytical understanding is being incorporated into ongoing improvements to the dynamic credit risk submodel already running within RADAR RiskManager application. This enhanced functionality will be released progressively beginning in 1998. RMT clients can already take advantage of externally provided Fair, Isaac credit scores to differentiate market risk results according to customer credit quality.
These ongoing initiatives are being announced now to support recent calls by the Federal Reserve Board for improvements in the credit risk area. At the BAI Asset-Liability and Treasury Management Conference, November 3, Federal Reserve Governor Susan Phillips noted “the inadequacy of the existing risk-based capital regime, where such assets as loans are all treated as having the same risk.” She went on, “We are actively encouraging the development of more effective approaches to credit risk management” at the enterprise level.
Since 1956, Fair, Isaac has helped businesses maximize the value of data for strategic decision making. The company pioneered the commercial development of empirically derived predictive models for the credit industry and popularized their use in lending decisions. Today, Fair, Isaac and its subsidiaries provide data-driven decision making solutions such as customer and operational data management and modeling, information analysis, strategy design, and software to a variety of industries worldwide. Its subsidiary, Risk Management Technologies (RMT), provides complete asset-liability management solutions to large financial institutions. Headquartered in San Rafael, California, Fair, Isaac employs over 1,200 people and has offices throughout the United States and Europe as well as in Canada, Mexico, South Africa, and Japan. For the fiscal year ended September 30, 1997, the company reported revenues of $199.0 million, a 28 percent increase over the prior year.Details