Moody’s Analytics, a leader in risk measurement and management, today
announced the release of the RiskFrontier™ 4.0 software, the latest
version of its award-winning portfolio management and economic capital
solution for banks, insurance companies, asset management firms, and
corporations. The software includes two significant modeling
innovations: the GCorr Macro Model, an expanded correlation model which
enables clients to perform portfolio level stress testing; and, the
ability to model the behavior of an exposure’s future cash flow using
both credit and interest rate risk.
The GCorr Macro model supports single-period, simulation-based stress
testing and reverse stress testing, as well as multi-period stress
testing, as required by the Federal Reserve’s Comprehensive Capital
Analysis and Review (CCAR). The first approach utilizes simulation
output from Moody’s Analytics RiskFrontier software, taking into account
portfolio effects such as concentration, diversification and credit
migration. This enables clients to apply stress scenarios to their
entire portfolios, measuring resulting losses and the portfolio’s
sensitivity to each scenario.
For example, using a 35 billion sample corporate portfolio and 2013 CCAR
variables, a simulation-based stress test shows that 54% of the
portfolio loss is due to CCAR variables, while the remaining 46% of
portfolio loss is due to other factors, such as industry or regional
effects.
“GCorr Macro allows clients to see the effect macroeconomic scenarios
have on an entire portfolio that might span commercial and industrial,
small-medium enterprises, commercial real estate and retail loans,” said
Dr. Amnon Levy, Head of Portfolio Research at Moody’s Analytics.
“Clients can use the model to determine which variables have the
greatest impact on a portfolio, or to determine which sectors are the
most sensitive to specific variables. It also allows users to leverage
their existing infrastructure, so implementation is relatively
straightforward.”
Moody’s Analytics also implemented a bottom-up approach in the
RiskFrontier 4.0 software to evaluate the losses accounting for both
credit and interest rate risk at the instrument level. While
historically these two risks have been evaluated in isolation, Moody’s
Analytics built a framework which allows clients to model their
interactions in a consistent way. For example, during simulations, an
option on a fixed rate callable bond is optimally exercised based on the
interest rate environment and the credit quality of the issuer.
“Financial institutions have long been struggling to integrate credit
and interest rate risk, often having no choice but to account for these
risks in silos and then combine them using crude approaches,” said Chris
Shayne, Head of Portfolio & Valuation Products, Moody’s Analytics.
“Moody’s Analytics integrated credit and interest rate risk model is the
first of its kind that natively integrates the two sources of risk,
improving the accuracy of results.”
The RiskFrontier 4.0 software will help financial institutions to
measure the impact of rising interest rates, which are broadly
forecasted by economists to increase throughout 2014, putting negative
pressure on fixed-rate bond portfolios. Users can also measure the
effect of growing volatility on call options and forecast economic
losses resulting from changes in credit quality.
Financial institutions globally use the RiskFrontier software for credit
portfolio management, valuation, capital optimization, risk based
pricing, performance management and stress testing. It provides a
granular analysis of a portfolio’s risk drivers through advanced
analytics and modeling methodologies.
For more information, please visit http://www.moodysanalytics.com/riskfrontier2014.
About Moody’s Analytics
Moody’s Analytics helps capital markets and risk management
professionals worldwide respond to an evolving marketplace with
confidence. The company offers unique tools and best practices for
measuring and managing risk through expertise and experience in credit
analysis, economic research and financial risk management. By providing
leading-edge software, advisory services and research, including
proprietary analyses from Moody’s Investors Service, Moody’s Analytics
integrates and customizes its offerings to address specific business
challenges. Moody's Analytics is a subsidiary of Moody's Corporation
(NYSE:MCO), which reported revenue of $2.7 billion in 2012, employs
approximately 8,300 people worldwide and has a presence in 31 countries.
Further information is available at www.moodysanalytics.com.
Copyright Business Wire 2014