Credit Risk Analyzer
Purpose
This CFM component enables you to measure, analyze and control default risks. Default risk refers to the possible loss arising from a financial transaction should the business partner not fulfill his contractual obligations either due to specific, economic or political reasons. Default risks are classified as follows:
Counterparty/issuer risk describes the danger of a loss in the value of a receivable due to a worsening of the creditworthiness of the business partner. Country risks arise when either the country of the business partner or the country of the transaction currency becomes insolvent. Counterparty/issuer risks are subdivided into credit risk and settlement risk. The existence of both these risks depends on the timing of the analysis of the transactions. Credit risks exist over the whole term of the transactions. Settlement risks only exist during the settlement period. Credit risk can consist in a pure counterparty risk or an issuer risk, depending on the transaction category (for example, securities transactions).
The functions for country risk were only developed as part of a project solution and have not been released for the market. The functions affected will be pointed out in the documentation.
Implementation Considerations
The tightening of regulations on risk controlling endorses the increasing significance of analyzing and limiting insolvency risks. Out of commercial considerations too it is essential to have a system that supports the measurement, analysis, control and limitation of counterparty/issuer risks.
Scope of Functions
Attributable Amount Determination - Market-Centered Quantification of Different Risk Items
The system determines attributable amounts for each single transaction entered, showing the risk content of the respective transaction. Credit and settlement risks from classic credit transactions and trading book transactions are taken into account when quantifying default risk. Determination is in relation to counterparties and issuers.
The level of the default risk arising from classic credit transactions is determined by the amount of the capital commitment of the contract and the current drawings.
In the case of trading transactions, the level of the default risk is governed by the potential covering cost that would arise in the case of default by a business partner. The possible additional loss from a potential positive market value change of an existing transaction can be covered by transaction-specific markup rates.
The calculated risks are assigned to all affected portfolio segments, for example, the counterparty, the industry sector, the product or a combination of these.
Limit Management - Risk Control by means of Limits and their Monitoring
Different limits are stored in central limit management. These can relate to one or more criteria (
Limit Characteristics). Limits reflect the organization’s allocations.Limit Updating – Comparison of Attributable Amounts and Limits
The integrated default risk limit check values each single transaction for risk at the time the transaction is created in the CFM Transaction Manager. Each transaction is checked against the relevant limits and updated. You can also let the system to update limit utilizations by revaluing all items in end of day processing. For risk control purposes, the relevant limit utilizations are shown in aggregated form.
Additional Notes
You can find the functions of the Credit Risk Analyzer in the application by choosing Accounting ® Corporate Finance Management ® Credit Risk Analyzer.
All subsequent menu paths contained in the documentation for the Credit Risk Analyzer start from this point.
You can find the relevant Customizing settings in the Implementation Guide by choosing Corporate Finance Management ® Credit Risk Analyzer.
The integrated default risk limit check is to be understood as an integrated single transaction check. Therefore, information provided for the single transaction check in sections of the documentation not specifically referring to the single transaction check (for example updating limit utilizations), applies also for the integrated default risk limit check.