Driven by interest rate swings and new value-based accounting rules, U.S. Bancorp has turned to sophisticated risk management software to manage its balance sheet.

The result has been less fluctuation in interest margins than in years past. Last year's net interest margin was the bank's highest ever. The software has allowed the Portland, Ore.-based company to price and fund its products more effectively.

"I like to think that the technology has assisted us in that, and will help us to avoid an interest rate disaster going forward," said Phill Rowley, senior vice president and manager of capital and financial risk management at U.S. Bancorp. "This gives us a much better picture than we had before."

The bank ended 1995 with a net interest margin of 5.38% - and the figure was even higher (5.48%) before the acquisition of West One Bancorp was completed in November.

U.S. Bancorp installed Radar, a client/server system from Risk Management Technologies of Berkeley, Calif., two and a half years ago. The system helps manage interest rate risk, and can be used to manage currency, credit, and operational risk as well. The software borrows techniques for risk measurement from the trading and investment arenas, but takes traditional asset/liability management a step further. Traditional systems were confined to ensuring that a bank had the cash on hand to meet current liabilities. But rates have grown more volatile and instruments on banks' balance sheets have grown more complex.

New software such as Radar manages portfolios in a more dynamic way, predicting the value of portfolios based on various interest rate scenarios. Radar also lets U.S. Bancorp figure the risk to its equity from interest rate swings, a calculation required by regulators.

"There's more embedded interest rate risk today than ever before," Mr. Rowley said. Mortgage portfolios, for example, have lost their reputation as benign retail assets and become somewhat risky. And new products - such as a structured loan offered by U.S. Bancorp that allows corporate customers to choose an interest rate tied to the prime rate or to the London interbank offered rate - have made it more difficult to assess the value of the balance sheet.

The bank has slowed the growth of some consumer lending products, because the system has helped the bank see that they are not sufficiently profitable.

"Radar allows us to demonstrate the risk in a much easier fashion than before," said Mr. Rowley. The bank runs interest rate scenarios and figures out the frequency of particular interest rate margins. It then creates a standard, and works to keep the deviation from the standard within a certain range.

"That's easily demonstrated to the asset/liability committee," Mr. Rowley said. "It makes it easy for people to understand interest rate risk."

"Radar has definitely changed the functionality of my job," said William Bechtol, the bank vice president who heads the asset/liability team.

As before, Mr. Bechtol and his team spend time each month making sure the bank is on track with its goals, and with regulatory requirements. But what Radar also allows him to do is to look ahead, and to work with business line managers to chart product strategies that maximize profits within the bank's risk guidelines.

In about an hour, his team can do 100 computer simulations of the effect of random rate risk movements on the balance sheet. Recently, the simulations identified the most profitable way to retain assets that customers were taking out of savings accounts. Radar helped the bank find the right alternative (indexed money market accounts) and the right pricing.

"We can now illustrate how we manage risk, rather than simply avoiding it," said Mr. Bechtol.

Even a few years ago, personal computers couldn't handle the volume and complexity of these calculations, Mr. Rowley said. "The volume of information is just tremendous," he said.

As part of the project, U.S. Bancorp installed five new Hewlett Packard workstations running the Unix operating system, at a cost of about $160,000. The higher-speed workstations let the bank run a number of scenarios simultaneously.

Before installing Radar, U.S. Bancorp was using an asset/liability system from Sendero Corp. It was a good product, Mr. Rowley said, but did not match Radar's level of detail.

The bank installed the Radar software, then new on the market, in August 1993, and began by examining the effect on its mortgage portfolio of certain interest rate scenarios. By the following spring, the bank's five asset/liability managers were using the system to evaluate the entire balance sheet.

U.S. Bancorp is one of the first banks to install a system to manage risk across the enterprise. Banks such Canadian Imperial Bank of Commerce, Bankers Trust New York Corp., and J.P. Morgan & Co. are developing or installing systems to manage not just interest rate but currency and credit risk across the enterprise.

Risk Management Technologies counts among its customers Chemical Banking Corp., Wachovia Corp., First Union Corp., and Credit Suisse. The California firm is a relative newcomer to the field of asset/liability management software vendors, which includes Sendero Corp. and Treasury Services Corp.

Most of its bank customers use Radar for asset/liability management. But some companies, like Chemical and GMAC Mortgage, a unit of General Motors Corp., are using Radar to manage other types of risk.

"Radar is at the crossroads between traditional ALM (asset/liability management) products, which is what banks would have used three or four years ago, and new systems that predict future value," said Deborah Williams, a consultant with Tower Group, a bank technology consulting firm in Wellesley, Mass. When first introduced, Radar "was one of the only products that saw the balance sheet as a group of portfolios, using trading and investment management tools to manage the portfolio in a dynamic way."

Radar has three components:

*RiskManager, which provides standard analyses such as gap, duration, and cash flow projections, and risk-adjusted return on capital.

*ProfitBuilder, which allows companies to simulate business unit and product line profitability, and contains a module for transfer pricing.

*DataScope, which allows clients to investigate a variety of information - ranging from raw data stored in a warehouse to detailed analytical reports.

The company also provides a tool for creating data warehouses that extracts data from legacy systems, makes it consistent with data extracted from other legacy systems, and makes it available for use in decision support systems.

Other companies, such as SunGard, have developed risk management products that are aimed at the entire enterprise. Traditional asset/liability management systems ran on stand-alone PCs; the more sophisticated systems run on Unix workstations and cost close to $1 million, exclusive of hardware, Ms. Williams said. "It's very trendy now to talk about enterprisewide risk management," said Risk Management Technologies chief executive David LaCross.

That was not the case a few years ago, when the firm first entered the market, he said. Mr. LaCross spent 10 years at Bank of America as an investment banker, and in 1987 was made responsible for interest rate and foreign exchange risk management products. He left the bank to join America First Financial Corp., a California-based buyout firm. By then, he says, he had discovered "there was a huge void in risk management analytics."

In 1989 he joined Jefferson Braswell, a systems engineer who had worked with Bank of America, among other clients, to form his current company, which is privately held.

The company's plans for upgrading Radar are focused on giving bankers more frequent snapshots of their business. Originally, risk management systems provided such portfolio pictures on a monthly basis. Now the software gives updates as frequently as every day or even within a day.

Radar "lets us look at our opportunities going forward," said Mr. Rowley of U.S. Bancorp. "We have a much better picture now of what those opportunities are."

Jeanne Brokaw is a freelance writer based in San Francisco.

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