The Market Risk Analysis (IS-B-RA-MR) component, as part of the Industry Business Solution, mySAP Banking, assists with the global risk management of credit institutions. Market price risks in the trading book area and market price/revenue risks in the non-trading book area are represented transparently for purposes of risk control. Based on the calculated risk figures, a flexible limit system serves to permanently monitor and control the different types of risk for the whole bank. The possibility of using fictitious transactions further helps the treasurer (and the trading areas) to control the revealed risk clusters.

Risk Analysis can be used for bank-internal risk control, as well as for regulatory external control. Both processes are required by the Capital Adequacy Directive, for example, the idea being that there should be no conflicting goals between external and internal risk controlling.

Today’s risk management concepts either focus on NPV target figures (such as equity NPV), or on a periodic result. In SAP’s Risk Management you can use both types of figure for controlling.

For trading book areas, value at risk and NPV figures are calculated using stress scenarios. Grid scenarios are used for option price risks. In these scenarios, you can depict the risk effect of interest and volatility shifts on option portfolios. The system also offers standard procedures for the annual band method and the duration method in compliance with the German Banking Act. The requirements for internal models laid down by the Capital Adequacy Directive are fulfilled, and also the main requirements of Principle I of the German Banking Act.

The value at risk and NPV concept procedures are also used in the non-trading book area. Gap analyses, balance sheet structure simulations and P+L simulations (all supporting strategic new transaction simulations) are available in the system for depicting period risks. These tools allow you to disclose risks quickly – in particular revenue risks. Several different procedures are available for determining new transaction volumes. These can be used to plan and evaluate new transactions in the context of different organizational structures.

To use the functions of the Market Risk Analysis (IS-B-RA-MR) application component, you need to make the necessary system settings in Customizing under SAP Banking ® Strategic Enterprise Management (SEM) ® Risk Analysis ® Market Risk Analysis.

P+L simulations are used to simulate the net interest income as well as interest and currency related write-down risks. By means of these calculation routines, you can calculate the desired loss limitation for a given horizon (in compliance with CAD, for example). In addition to P+L simulation, the gap and NPV analysis functions can be applied to future periods in time, taking into account the new transactions planned. The possibility of taking planned new transactions into account allows you to determine the market value of your equity at the end of the following month, for example.

The Risk Analysis modules comprise the following evaluations:

1. NPV analysis
2. Value at risk analysis
3. Gap analysis
4. Balance sheet structure and P+L simulation

Risk Analysis is designed (in particular with regard to data aggregation) to enable you, in the context of risk-return approaches, to compare the revenues and risks of any organizational units or product groups, as well as view them in relation to the risks and revenues of the entire bank. This leads to greater transparency for future decision-making, particularly when you are dealing with questions relating to optimal equity capital allocation.