German investment bank Dresdner Kleinwort Wasserstein (DrKW) has purchased analytic software that, it hopes, will put it on the cutting edge of risk management.

WhiteLight Systems, the Palo Alto, CA-based company, has announced that the investment bank selected analytics and Web reporting software for a global risk management solution in a licences and services contract valued at $2.3 million.

The bank is using WhiteLight to develop applications that will help control the bank's exposure to risk. DrKW hopes the applications will improve the visibility of data about its investment banking portfolio, such as foreign exchange, equities and derivatives, to a much wider range of business decision makers across the global business and provide a more flexible system for interrogating the data. The bank also expects the new applications to uncover new product and market opportunities.

The initial project involves developing three applications: credit risk, market risk and product control. Based on WhiteLight's AnalyticServer, DrKW will roll out the applications in 2001 across its major international trading centers, including Frankfurt, London, New York and Tokyo. AnalyticServer's multi-dimensional modeling engine is at the core of WhiteLight's application suite. It is designed to allow complex interactive analysis within large and varying data sources.

Additionally, DrKW has selected iApplicationServer, WhiteLight's solution for Web-based analytics, to enable DrKW's decision makers worldwide to operate from a unified global view of business data. Using iApplicationServer, the German bank will be able to create and deploy interactive reports to any user on the Web.

The bank is not talking about its purchase, but Peter Beard, WhiteLight's vice president of world wide sales, could confirm that DrKW is our biggest physical user in the world. It has 25 WhiteLight servers in production, and it has purchased the largest number of our servers within our customer base, in the shortest amount of time. Other project areas within the bank are looking at how to use WhiteLight.

Other European banks are considering buying the technology, developed as the next step up from online analytical processing (OLAP), which is regarded as increasingly unwieldy and inflexible in the wake of the e-business revolution. Merrill Lynch predicts that the total e- business analytics market opportunity will top $25.1 billion by 2004.

Growing market

It's a fact that the scope of business is ever expanding, from the size of an institution's operations to the markets and customers it can reach. At the same time, market conditions and customer requirements change rapidly, and there are more factors and variables to be considered before decisions can be made, WhiteLight says.

Gartner analysts agree and they predict significant growth in the predictive analytics business. By 2005, enterprises will need three times as many professionals on their analytic staff as they need today, Gartner believes, and the demand for analytic talent today outweighs supply by at least two to one. The killer trend for e-business will likely be the real-time enterprise, i.e. an enterprise able to collect nearly instantaneous feedback on business processes and to take the right adaptive, corrective or preventative action. Web analytics enables executives and managers to know where the company stands in its quest to become a real-time enterprise and when the company will achieve real-time business capability across all channels, from the shop floor to the e-marketplace says Gartner.

Accordingly, a new generation of analytic applications, dubbed predictive analytics, is needed to help managers understand what is happening and why, and to test the outcome of prospective decisions.

WhiteLight's Analytic Application Suite has been developed to allow the near-instant extraction of critical and previously unavailable decision-support information from large and complex databases, the company says.

It is still very new and can be categorized as an early adopter market, says Beard of the technology. People are looking at two scenarios. There are those companies that want to be leading edge, or those which have used traditional methods (of risk management) and found their limits. With operational risk, the only way to do anything remotely like we do is with Excel, and it results in the 25-page spreadsheet from hell which only one or two people in the company can understand. We can put the data on a server rather than a desktop and all users are permitted to see all facets. Business managers or analysts don't need to know SQL to create multi-dimensional models. They can define formulas and data sources using a drag and drop interface.

According to Beard, All the products that have grown up over the last 10 years have been what I call rearview mirror technology. It's historical data, looking at where you have come from. Predictive analytics takes the same data, but in increasingly large volumes and puts it into a model so that analysts can interact with that. What if, for example, there were to be a change in the underlying rate by 10 basis points? You can make the change and see the impact across the entire model.

Growing interest

Although the impact of predictive analytics on DrKW's bottom line is not yet known, WhiteLight says that one of its clients involved in loan collateralization believes it will be able to return $20 million to the balance sheet thanks to the software. Financial institutions will also be able to hang onto costly legacy systems, says Beard. Every bank has legacy systems on which they have spent millions. We sit above that in a platform. Pertinent data is modeled within the WhiteLight server.

Other financial institutions in Europe are keen to follow in DrKW's footsteps, says Beard, who already counts Barclays, J.P. Morgan Chase and Lehman Brothers among his company's customers. We are involved in a major project with a large multi-national Dutch bank with the same profile as DrKW. It is an existing customer with whom we will be putting the technology group wide. It owns a number of other banks across Germany and Holland. And over the next month we will be able to announce three new contracts in Switzerland, Germany and Holland.

The Bank for International Settlements (BIS) has created a groundswell of interest in predictive analytic applications with its new Basel Capital Accord. The accord is based on three pillars that allow banks to evaluate properly the various risks they face. It focuses on minimum capital requirements, the supervisory review of an institution's capital adequacy and market discipline through effective disclosure to encourage safe and sound banking practices, according to the BIS. The new accord will be finalized at the end of the year, and is expected to be implemented in member jurisdictions by 2004.

It will be a real benefit to banks if they can reduce the amount of provision they must have. It is a clearly defined initiative with massive tangible benefits, says Beard.

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