Standard & Poor's enters portfolio risk modelling

S&P claims the model covers a broader range of asset classes and a wider variety of sources of risk than traditional portfolio risk models. The model also incorporates structured exposures, such as asset-backed securities and collateralised debt obligations (CDOs), in the calculation of portfolio risk measures. For example, a bank can use the model to assess the impact of a CDO tranche on its value-at-risk or measure the benefits of securitising a portion of its balance sheet. Sovereign risk modelling enables a risk manager to cap the rating of a corporate at the level of its sovereign rating, or to include risky collateral or credit guarantees backing the loans.

The multiple-period model is dynamic, allowing risk to be analysed for any time period. It is supplied with S&P's data, but risk managers are not restricted to using the data supplied with the product. It offers a wide choice of transition and correlation matrixes, and users can change some or all data inputs for stress testing their capital calculations or scenarios testing.

The risk tracker has been developed in conjunction with professor William Perraudin of the University of London, and incorporates up-to-date research on default probabilities, recovery rates and correlations. Three choices for correlation estimates are offered: equity-based, spread-based and default-based measures, allowing risk managers to determine their real exposure to concentration risk.

The portfolio risk tracker model is aimed at banks and will initially be available in Europe. According to S&P Risk Solutions, approximately 50 banks have applied for demonstrations. S&P Risk Solutions intends to launch a version aimed at asset managers, corporate treasurers and insurance companies in the third quarter.

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