Ermas Consulting Inc. : Exceeding Expectations

Key Features:-

·    An enter­prise-scale risk platform for managing, analyzing and reporting financial risk, allowing consolidating all business lines (e.g. capital markets, corporate banking, commercial & residential mortgages, retail and private banking, project financing, etc.). It allows combining and integrating market- and credit risk analysis for the total firm-wide portfolio and at the same time drilling into transaction level results.

·    Financial Product Stress Testing combines market, credit and macro-economic stress testing, including consideration of second-round effects; it allows analyzing concentration risk to a single counterparty or groups of counterparties, and analyzing correlation risk across market and credit risk based on jointly stressing market, credit and macro-economic risk factors; provides ability to feed stressed PDs, LGDs, and EADs to Basel II Regulatory Capital engines to perform Stress Capital Analysis.

·    Is extendable to other risk categories such as liquidity risk and operational risk, and to support a wide range of risk analyses.

·    The creation of user defined sub-portfolios helps to quickly and effectively pre-sort your portfolio into tranches that may affect future performance.

·    Accommodates open integration with third party pricing functions ensuring unlimited financial product coverage and leveraging full pricing, hence shedding light on the impact of scenarios on positions with respect to both their linear and nonlinear price characteristics.

·    Highly configurable,  for instance to accommodate user-defined models such as user-defined risk factor models, stress testing models, pricing models, yield curve models, and implied volatility models; to implement proprietary economic capital models; to configure own netting rules; to make your own choice on drill-down hierarchies; to configure the various reporting templates or to add customized reports.

·    Highly scalable, the ERMAS software can be used by a wide range of Financial Institutions, from local organizations to large head offices of multinational banks.

·    Incorporates a number of project accelerators based on industry best practices for fastest delivery. These accelerators include a performance optimized data model, pre-defined scenarios, ready-to-go pricing routines based on fully integrated pricing functions, a data dictionary, a set of reporting templates, and pre-defined netting logic.

Ad-hoc Stress Testing

Creating ad-hoc scenarios enables the user to model a certain situation occurring ‘as-of-today’ and to analyze the referring stress impact for the total portfolio, for user defined sub-portfolios, and at the transaction level. The user can apply shocks to individual risk factor(s) (one or multiple), individual risk factor curves (one or multiple), entire risk factor categories (one or multiple) or any combination of the previously mentioned, allowing for instance to jointly stress market, credit and macroeconomic risk factors.

Financial Product Stress Testing features second-round stress testing allowing for the user to relate changes of observable variables to changes of risk components such as PD, LGD or EAD changes through Stress Testing Models. Stress Testing Models can be linear or non-linear multi-factor regression models or other models. For example, PD or LGD shocks can be modeled dependent on shocks of macroeconomic factors such as unemployment rate, gross domestic product growth rate or house price index data among other factors.  Financial Product Stress Testing can be extended to cover additional risk factor types, for instance liquidity risk, allowing stressing liquidity drivers such as deposit retention rate, credit spreads, domestic/foreign wholesale balance run-off rate, time required to unwind positions, loan portfolio growth rate, levels of delinquent/non-performing loans, or level of loan losses. These risk factors can be included in any scenario analysis.

Stress Capital

Within the Basel II regulatory framework for credit risk Pillar I requirements include stress testing with regard to the risk components PD, LGD, and EAD, and Pillar II requirements include demonstration of capital adequacy based on the stress testing results (ICAAP), requiring Macroeconomic Stress Testing among other stress tests. In using the stressed parameters in the Pillar II Capital Adequacy Assessment Framework, there appear to be two options:

1.        Estimate the mark-to-model (MTM) stress losses (i.e. stress impact) and demonstrate that the stress MTM losses are less than the current capital level.

2.        Calculate the stressed economic and regulatory capital requirements using the stressed parameters and demonstrate that the stressed capital requirements are less than the current capital level.

Financial Product Stress Testing supports both Stress Impact Analysis (option 1) and Stress Capital Analysis (option 2). For Regulatory Stress Capital Analysis for credit risk the shocked risk components PD, LGD and EAD across risk segments (e.g. per asset classes, sub-asset classes and per rating segments) are available as system output, and Stress Capital Analysis is performed based on open integration with Basel II Regulatory Capital engines from third parties such as Fermat, Reveleus, SAS or in-house developed systems.  Regulatory Stress Capital results are reported back within the Financial Stress Testing portlet technology and are presented based on standardized reports. 

Reporting Templates

Financial Product Stress Testing & Economic Capital Evaluation provides a set of web-based reporting templates being customizable and extendable. These templates include Stress Impact reports which relate to a single point in time, Stress Impact trend reports relating to a time period, Portfolio Reports and Capital Reports:

Stress Impact Reports Relating to a Single Point in Time:

1.        Stress Results at Transaction Level

2.        Single Scenario Report

3.        Multiple Scenario Report with Total Added Stress

4.        Stress results by Financial Product Type

5.        Investment Portfolio Reports: Stress results broken down by categories such Industry, Obligor Risk Rating and Legal Vehicle

6.        Loan Portfolio Reports: Stress results broken down by categories such as Region, Customer Rating Pool/Segment, Product Type and Delinquency Status

7.        Portfolio Sensitivity Summary Report

Portfolio Reports

1.        Portfolio Transaction level report showing P/L

2.        Portfolio Summary Report showing P/L

3.        Delinquency Reports for Loan Portfolios

4.        Bank Level Report showing P/L with selected scenario results

All Portfolio reports have drill-down capabilities with configurable drill-down hierarchies.

Performance Optimized Reporting Repository

The web user interface retrieves data from a performance optimized Reporting Repository in order to process the web-based reports. Performance optimization is incorporated through a normalized data model of semi-star schema allowing quick access to the underlying fact tables through a set of dimensional tables. In addition, performance of report processing is optimized by parallelizing the referring ETL processes. As a result Financial Product Stress Testing & Economic Capital Evaluation can easily be deployed for analyzing millions of transactions/positions at globally operating financial institutions.