New Version Includes Basel III Liquidity Coverage Ratio and Net Stable Funding Ratio Reports
Kamakura Corporation announced Wednesday that version 8.1 of its enterprise risk management system Kamakura Risk Manager (“KRM”) has been shipped to clients in 34 countries. Kamakura Risk Manager allows users to analyze credit risk, market risk, interest rate risk, operational risk, liquidity risk, counter-party risk and both economic and regulatory capital adequacy on a fully integrated basis. Version 8.1 expands functional capabilities and enhances processing efficiency while providing Boards of Directors, shareholders and regulators with an accurate view of the total risk of the organization. The new version incorporates reports on the Basel III-mandated liquidity coverage ratio and net stable funding ratio, along with a large number of other important enhancements.
Martin Zorn, chief administrative officer for Kamakura Corporation, said Wednesday, “We have been gratified by the financial institutions around the world that have abandoned the legacy analysis of risk by ‘silos’. This approach failed miserably during the 2007-2010 credit crisis. Our clients’ commitment to analyze risk on an enterprise-wide basis has driven the enhancements that are reflected in Kamakura Risk Manager version 8.1. Clients are particularly excited about the seamless integration of Basel III liquidity risk ratios in a full enterprise risk management framework. The speed and accuracy of the risk calculations in version 8.1 have again improved dramatically, and we will soon have some important new announcements to make in that regard.”
Like prior versions of Kamakura Risk Manager, KRM version 8.1 operates on a wide variety of relational database management systems, including DB2, MS SQL Server, Netezza and Oracle. KRM version 8.1 is fully compatible with Kamakura Risk Information Services (“KRIS”) default models for public firms, sovereigns and non-public firms. This link allows clients with both KRM and KRIS licenses to load KRIS default probabilities, default formulas, and default correlations into KRM for analysis with the click of a mouse. KRIS includes default probabilities for more than 31,000 public firms in 37 countries. It also includes default probabilities for non-public firms, for 183 sovereign nations, default rates for 4 classes of mortgage loans, as well as a number of other default models that are currently in development.
Kamakura Risk Manager Version 8.1 contains a wide range of new functionality:
Enhancements for the simulation of risk:
KRM version 8.1 offers a complete suite of liquidity risk reports that are in full compliance with Basel III regulatory requirements. Reports include the liquidity coverage ratio and net stable funding ratio. Version 8.1 also enables varying forecasts of default probabilities and recovery rates for rollover and new business activities for Basel-related calculations.
KRM version 8.1 adds a dramatically enhanced ability, the second generation of Kamakura Risk Information Services default models, to generate random variables driving risk in two different ways. Primary variables apply to all reference names and have distinct probability distributions. An example would be the level of the Case-Shiller home price index in the United States. Derived variables are generated by formulas which use primary variables as inputs. An example of a derived variable would be the one-year return on the Case-Shiller home price index.
KRM version 8.1 includes expanded reporting of default probabilities and time to default from credit risk simulations and expanded definitions of parent and subsidiary default relationships.
KRM version 8.1 allows the user to specify any mathematical function to drive prepayment rates, including the logistic function which has been applied very successfully to both default and prepayment analysis.
KRM version 8.1 adds a high speed liquidity risk calculation capability that ignores all cash flows beyond the time limit specified by the analyst, significantly reducing the time required for short-term liquidity analysis.
KRM version 8.1 significantly expands the range of yield curve types that can be processed by Kamakura Risk Manager. Yield curve types include inflation curves and yield curves with multiple spreads to a base yield curve.
KRM version 8.1 includes significant speed enhancements for Monte Carlo simulations sampled from historical data, a very common calculation used by equity portfolio managers and other risk analysts.
KRM version 8.1 gives users the flexibility to balance assets and liabilities for a multi-currency balance sheet in each currency separately or in a single base currency.
KRM version 8.1 adds several user choices that speed the processing of “new business,” both new assets and liabilities generated during a simulation.
KRM version 8.1 makes available a new function, CASE, for the execution of complex if/then formulations.
KRM version 8.1 incorporates expanded ability to capture random movements in asset balances, coupons, and exchange rates.
KRM version 8.1 includes significant speed improvements for the analysis of loan commitments.
KRM version 8.1 includes a SET function that allows a single statement for elements of a formula that are used repeatedly, considerably increasing the speed of calculation.
KRM version 8.1 incorporates expanded interest rate index functionality, including the ability of an index to be driven by tenors on two or more yield curves.
KRM version 8.1 includes expanded ease of use in reporting base case analysis for immediate stress tests, time-based stress tests, date-based stress tests, and stochastic forecasts.
KRM version 8.1 includes an expanded security administrator KRM-sa that allows for easier upgrades of KRM output tables that have been partitioned.
KRM version 8.1 adds expanded graphics capability to the KRM graphical user interface.
Enhancements for expanded transaction coverage:
KRM version 8.1 includes the addition of a new embedded call option type, the “make whole” call, where the call price is calculated by formula.
KRM version 8.1 includes expanded capabilities with respect to Rule of 78s amortization.
Enhancements for greater accuracy in valuation:
KRM version 8.1 adds the linear regression method of Longstaff and Schwartz to determine the optimal call strategy for an American call option in a Monte Carlo simulation for bonds, loans, swaptions and cancellable swaps.
KRM version 8.1 allows valuation yield curves to be applied at the transaction level in addition to the product-level definitions that have been available in prior versions of KRM.
KRM version 8.1 brings the powerful forward-looking Monte Carlo simulation of formula-driven risk factors, first available in version 8.0, to Monte Carlo simulations that are based on historical data as well.
KRM version 8.1 extends stress-testing capabilities in KRM with respect to default risk and recovery rates to include assets that will be added to the balance sheet in the future (“new business”).
KRM version 8.1 includes the capability to stress-test ratings used in Basel II calculations.
KRM version 8.1 includes user-defined allocation of hedges to a portfolio of underlying risk exposures.
KRM version 8.1 now uses exact historical holiday dates in calculating changes in risk factors in a Monte Carlo simulation based on historical data.
KRM version 8.1 gives users additional flexibility to specify risk factor movements in multi-period value at risk analysis.
KRM version 8.1 adds enhanced simulation of forward-looking foreign exchange rates.
KRM version 8.1 incorporates automated invocation of user-defined scripts for quality control on processed output from Kamakura Risk Manager.
KRM version 8.1 includes enhanced volatility calculations for historical data that are supplied on a basis other than daily.
KRM version 8.1 includes expanded results reporting for the analysis tools in KRM, including yield curve smoothing and term structure model parameter estimation.