J.P. Morgan & Co. is unveiling today a new system designed to help banks measure credit risk in their portfolios.
Parts of the program, which is called CreditMetrics, will be available free on the Internet. The rest will cost $25,000 to run.
"My feeling is this will be quite valuable," said Tanya Styblo Beder, principal at Capital Market Risk Advisors, New York. "It's an important step for people to be able to measure all the risks that matter in one place."
Up to now, most banks have been able to measure credit risk only by looking at their individual loans and figuring out the likelihood a client would default.
But as banks consolidate and make loans across the world, their portfolios are expanding greatly, and measuring how credit risk could affect the bank has become cumbersome as it is crucial.
By selling software that enables banks to gauge the credit risk contained in their entire portfolio, Morgan hopes to boost the nascent market for credit derivatives, of which it is a major dealer.
Credit derivatives are instruments that enable parties to swap credit risk, such as risk of default on a loan, to other parties without informing the obligors.
"CreditMetrics provides the necessary framework within which credit derivate and other derivative transactions, whether for hedging or investment, can be evaluated," said Morgan vice president Blythe Masters.
Use of sophisticated computer software to assess risk has grown markedly in recent years. And its growth has affected how federal and international regulators establish capital requirements for banks.
Many banks now use a system called value-at-risk, which aims to measure how changes in interest rates and other market conditions could affect a bank's portfolio. It has become something of a benchmark for measuring risk, and the Securities and Exchange Commission is contemplating requiring that all large businesses use it.
And the Bank for International Settlements in Switzerland earlier this year ruled that the internal market risk measurement systems banks use to gauge risk in their trading books were sufficiently sophisticated that they could set their own market risk capital standards if they wanted.
CreditMetrics' boosters are hoping their new toy will help quantify and increase awareness of credit risk in much the same way as value-at-risk did for market risk. And they hope that credit risk measurement will become sophisticated enough that regulators will revisit the capital requirements for credit risk that all banks must observe.