As part of an effort to make better use of capital, many banks are moving for the first time to computer systems that help manage risk across the entire institution.

The new systems - called "enterprisewide risk management systems" in a report by the Tower Group - differ from traditional interest rate risk or asset-liability management systems. They cover a broader spectrum of market and credit risks and provide detailed analysis over longer periods. The risk management software used by most banks today is a front-office package that supports intraday decision-making.

But many bank companies - including Chase Manhattan Corp., Bankers Trust New York Corp., Citicorp, Canadian Imperial Bank of Commerce, and Toronto- Dominion Bank - want a more comprehensive risk picture so they can deploy capital more efficiently.

To that end, each of these banks is spending tens of millions of dollars to install systems that manage credit and interest rate risk for checking accounts, mortgages, and even certificates of deposit. "This is an exciting time in banking," said Robert Selvaggio, director of treasury analytics at Chase Manhattan. "We're seeing a revolution in the way banks look at asset-liability management."

Spurring the growth in new systems is the changing nature of risk in the banking business. Many banking products have risk embedded in them, and as they get more complex, giving customers more and more options, the bank's risk often rises.

For example, mortgages increasingly have prepayment risks, and middle- market lending - which is in vogue at many institutions - carries higher credit risks than do loans to top-rated companies. And when banks securitize their loans, they often end up holding the riskier portion. So under pressure from regulators and shareholders, banks are learning how to understand the relationship between credit and interest rate risk so that they can better allocate capital and price their products. "Shareholders are saying, 'For your level of risk, I need a required rate of return,' " said Andre Shih, a director in the risk management practice group at Treasury Services Corp., Santa Monica, Calif.

Traditional asset-liability risk management systems would treat many of these products as if they were static instruments with predictable maturities. "It's very easy when using static models to lose profitability," said David Tanner, vice president of asset-liability management at Toronto- Dominion Bank. "You can be destroying value without realizing it." Conversely, the new, enterprisewide systems get transaction data and the results of product-specific risk analyses from what could be hundreds of front-office transaction systems, according to Deborah Williams, author of the Tower Group's report.

Using those data, asset-liability managers draw conclusions about the bank's overall risk exposures. Worldwide, about $85 million was spent on enterprisewide risk management systems in 1995, the report said. Of that, about 70% was dedicated to in- house systems development.

Each project can cost $20 million to $25 million, including applications software, tools, hardware, integration, consulting, and middleware, Ms. Williams said.

During the past 12 months, some good tools have been introduced, she said, but until recently the products available have been insufficient. The biggest difficulty is finding a single vendor who can supply all the pieces, including software for data aggregation, data mapping, and data extraction.

Most companies tend to have a specialty - either data processing or analytics. And the software vendors are small - usually with fewer than 50 employees.

This can pose a problem to banking institutions that strictly limit with whom they do business, Ms. Williams said. Firms such as Algorithmics, based in Toronto; Kamakura Corp., based in Japan; Cats Software Inc., based in New York; and Midas-Kapiti International, based in London, are leading vendors of enterprisewide risk management systems.

For the largest banks, it is not easy to decide between building their own risk management systems or using packaged software, experts said. But either path can pay off. Toronto-Dominion Bank is going the packaged software route. The Canadian bank has tested Kamakura's Risk Manager product in conjunction with Treasury Services' option-adjusted valuation software. It intends to use the software on the nontrading side of the bank.

The software is expected to have the biggest impact on areas where risk is most difficult to calculate - such as demand deposit accounts and mortgage portfolios. In Canada, when someone plans to take out a mortgage, the bank holds a rate for the customer for 60 to 90 days. Even if market rates go up meanwhile, the customer can get a mortgage at the guaranteed rate. That is a risk the bank must be able to quantify.

The newest risk management systems would make least impact on products that have maturities, like certificates of deposit. But even so, banks are adding "lots of bells and whistles to entice clients," Mr. Tanner said. Even with CDs, there can be some embedded risk, he said. One of the biggest problems banks face is trying to do more with a system than is practical. At Toronto-Dominion, the focus was on asset-liability management - improving measurement of interest rate risk and liquidity. Some banks will try to do customer profitability profiles through the same system, but Mr. Tanner cautioned against adding too many functions to the software. Chase Manhattan hopes to avoid such pitfalls as it builds its own enterprisewide risk management system. Chase expects to roll out a model by the end of October to measure the economic value of its portfolio equity. Each product on each side of the balance sheet will be priced using options analytics. "Shareholders don't just care about net interest income, they care about total return," said Chase's Mr. Selvaggio. "So we're trying to get a more complete picture of interest rate risk." That is a lesson Chase learned last year when one of its largest shareholders, Michael Price, pressured the bank to get its stock price up, prompting Chase's merger with Chemical Banking Corp. Chemical has been using BankMaster from Logica Inc. but will gradually switch to the new in-house system.

Why did the company decide to develop a system in-house? "We believe there's a proprietary element to our analytics - to our prepayment function, our credit card model, the way we handle options in esoteric products," said Mr. Selvaggio.

But for most institutions, he said, the best way to go is with a vendor package because of analytics software's cost of development. "Many of these vendors are dead on" in their approach. Chase has spent tens of millions of dollars and has the biggest part of the project behind it.

The biggest challenge for system designers at both Chase and the software vendors is making the product accessible to the people who must use it. "I want this to be something that the corporate treasurer can use," Mr. Selvaggio said. Ms. Brokaw is a writer based in San Francisco.

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