By: John Robertson Capital is the life-blood of financial institutions and has become more readily scrutinized since the global credit crisis. How one manages their capital is primarily driven by how well one manages their risk. The use of economic capital in measuring profitability enhances risk management efforts by providing a common indicator for risk. It provides pricing metrics such as RAROC (risk adjusted return on capital) and economic value added which include expected and unexpected losses consequently broadening the evaluation of the adequacy of capital in relation to the bank's overall risk profile. The first accounts of economic capital date back to the ancient Phoenicians, who took rudimentary tallies of frequency and severity of illnesses among rural farmers to gain an intuition of expected losses in productivity. These calculations were advanced by correlations with predictions of climate change, political outbreak, and birth rate change. The primary value of economic capital is its application to decision-making and overall risk management. Economic capital is a measure of risk, not of capital held. It represents the amount of money which is needed to secure the survival in a worst case scenario; it is a buffer against expected shocks in market values. Economic capital measures risk using economic realities rather than accounting and regulatory rules, which can be misleading. The concept of economic capital differs from regulatory capital in the sense that regulatory capital is the mandatory capital the regulators require to be maintained while economic capital is the best estimate of required capital that financial institutions use internally to manage their own risk and to allocate the cost of maintaining regulatory capital among different units within the organization. The allocation of economic capital to support credit risk begins with similar inputs to derive expected losses but considers other factors to determine unexpected losses, such as credit concentrations and default correlations among borrowers. Economic capital credit risk modeling measures the incremental risk that a transaction adds to a portfolio rather than the absolute level of risk associated with an individual transaction. In a previous blog I restated a phrase I had heard long ago; “Margins will narrow forever”. How well you manage your capital will help you extend “forever”. Has your institution started using these types of risk measures? The Phoenicians did. Learn more about our credit risk solutions.  

Originally contributed by: Bill Britto Smart meters have made possible new services for customers, such as automated budget assistance and bill management tools, energy use notifications, and "smart pricing" and demand response programs. It is estimated that more than 50 million smart meters have been deployed as of July 2014. Utilities and customers alike are benefiting from these smart meter deployments. It is now obvious the world of utilities is changing, and companies are beginning to cater more to their customers by offering them tools to keep their energy costs lower.  For example, several companies offer prepay to some of their customers who do not have bank accounts. For many of those "unbanked" customers, prepay could be the only way to sign up for a utility services. Understanding the value of prospects and the need to automate decisions to achieve higher revenue and curb losses is imperative to the utility. It is here where a decisioning solution, like PowerCurve OnDemand> can make a real difference for utility customers by providing modified decision strategies based on market dynamics, business and economic environments.  Imagine what a best of class decision solution can do by identifying what matters most about consumers and business and by leveraging internal and external data assets to replace complexity with cost efficiency?  Solutions like PowerCurve OnDemand deliver the power and speed-to-market to respond to changing customer demands, driving profitability and growing customer lifetime value – good for business and good for customers.

A new comarketing agreement for MainStreet Technologies’ (MST) Loan Loss Analyzer product with Experian Decision Analytics’ Baker Hill Advisor® product will provide the banking industry with a comprehensive, automated loan-management offering. The combined products provide banks greater confidence for loan management and loan-pricing calculations. Experian Decision Analytics Baker Hill Advisor product supports banks’ commercial and small-business loan operations comprehensively, from procuring new loans through collections. MST’s Loan Loss Analyzer streamlines the estimation and documentation of the Allowance for Loan and Lease Losses (ALLL), the bank’s most critical quarterly calculation. The MST product automates the most acute processes required of community bankers in managing their commercial and small-business loan portfolios. Both systems are data-driven, configurable and designed to accommodate existing bank processes. The products already effectively work together for community banks of varying asset sizes, adding efficiencies and accuracy while addressing today’s increasingly complex regulatory requirements. “Experian’s Baker Hill Advisor product-development priorities have always been driven by our user community. Changes in regulatory and accounting requirements have our clients looking for a sophisticated ALLL system. Working with MainStreet, we can refer our clients to an industry-leading ALLL platform,” said John Watts, Experian Decision Analytics director of product management. “The sharing of data between our organizations creates an environment where strategic ALLL calculations are more robust and tactical lending decisions can be made with more confidence. It provides clients a complete service at every point within the organization.” “Bankers, including many using our Loan Loss Analyzer, have used Experian’s Baker Hill® software to manage their commercial loan programs for more than three decades,” said Dalton T. Sirmans, CEO and MST president. “Bankers who choose to implement Experian’s Baker Hill Advisor and the MST Loan Loss Analyzer will be automating their loan management, tracking, reporting and documentation in the most comprehensive, user-friendly and feature-rich manner available.” For more information on MainStreet Technologies, please visit http://www.mainstreet-tech.com/banking For more information on Baker Hill, visit http://ex.pn/BakerHill