Republic National Bank of New York says it is getting extra value from the Algorithmics Inc. risk software it installed a year ago.

The Toronto company's RiskWatch software, which Republic first used to measure market and liquidity risks in dollar interest rate and precious metals trading, is now being applied to other jobs too.

The bank, whose holding company has agreed to be acquired by London- based HSBC Holdings PLC, is now working to use RiskWatch for determining credit-risk exposure to trading counterparties and attributing risk to capital.

Republic sustained $165.4 million of after-tax losses related to credit risk last year when Russia defaulted. Such an event is widely considered to be so extraordinary as to evade detection by any risk management system.

But Ariel Salama, managing director and head of global risk assessment at Republic, said RiskWatch has helped make many risks linear and predictable.

So far, he said, RiskWatch has proven most useful for "stress testing"- simulating how portfolios might react under different market conditions 99% of the time.

(Mortgages are the exception. They are more difficult to model, because reliable data on prepayment options are hard to obtain, said Gideon Pell, head of portfolio risk at Republic.)

Simulations are also made for extreme market conditions, using 11 worst- case scenarios. For example, Mr. Pell said, stress tests proved meaningful in projecting cash flows and sensitivities during the Brazilian currency devaluation last year.

RiskWatch has "greatly improved" decision-making in the departments using it, he said. The software helps gauge risks and allocate capital internally against those risks, he said.

The global risk assessment group has designed a framework that will enable the bank to set risk-adjusted performance targets for each business unit in trading and treasury and to calculate the profitability of deals on a risk-adjusted basis, Mr. Pell said.

The framework is called "risk on risk-adjusted capital" - Rorac - in the spirit of Bankers Trust Co.'s well-regarded "risk-adjusted return on capital" framework.

Republic's global risk assessment group defines risk-adjusted capital as the funds required 99% of the time to cover a potential after-tax loss during a one-year holding period.

In implementing credit risk measurement with RiskWatch, data management was one of the toughest jobs, Mr. Pell said. Counterparty positions had to be moved to RiskWatch from more than 30 operating systems.

With credit data stored or fed into RiskWatch, Republic will be able to slice and dice credit risk by geography-highlighting pockets of credit risk concentration.

The next phase of the installation will let Republic use RiskWatch to gauge the probability of counterparty default.

Eventually the bank may integrate the measurement of risk in its banking and trading books. The banking book's traditional on-balance-sheet products, including loans and letters of credit, would be combined with the off-balance-sheet activity of the trading book, including such products as derivatives.

By moving to RiskWatch to manage credit risk in its trading book, Republic will be able to establish credit limits, monitor credit usage, and assess credit capital at risk, Mr. Pell said.

The next release of RiskWatch will include a credit simulation module encapsulating the approaches of Creditmetrics from Riskmetrics Group, a J.P. Morgan & Co. spinoff, and Credit Suisse's Creditrisk-Plus.

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