The latest version of a portfolio management system from Moody's Analytics includes features tailored to banks preparing for capital regulations under Basel III.
Moody's RiskFrontier 3.4 technology includes a new risk measure that combines regulatory and economic capital into a single metric, the company said in a press release Thursday. The system treats regulatory capital charges as a binding constraint that reduces profitability and calculates the impact of those charges with a series of metrics including expected return, return on risk-adjusted capital, and the Sharpe Ratio. These metrics allow banks to rank the instruments in their portfolio, as well as new deals, while accounting for risks and regulatory charges.
"As banks continue to respond to the capital regulations proposed under Basel III, they face the challenge of reconciling their regulatory requirements with their existing economic capital infrastructure," head of portfolio research Dr. Amnon Levy said in the release. "Our new model provides a practical and theoretically sound approach for evaluating both information sources as part of the decision-making process."
The RiskFrontier upgrade also introduces a risk analysis feature that can help banks determine which variables will have the greatest impact on their portfolio.