Increasing competition and narrowing profit margins require banks to manage their loan portfolios more efficiently and with a finer balance between maximum returns, minimal costs and the bank’s appetite for risk. An incorrectly priced loan can upset this balance and result in losses to the bank. Traditional, uniform loan pricing policies can result in loan prices that are insufficient to cover the additional risk.
Oracle Financial Services Pricing Management, Capital Charge Component enables banks to actively manage their credit portfolios based on risk-adjusted returns, optimize utilization of capital, and obtain a complete view of the risk and profitability of each new exposure through on-demand pricing reports and dashboards. Front-line managers can now rapidly and accurately assess the risks associated with each new transaction and calculate the profitability of each deal and customer.
The new application complements Oracle Financial Services Pricing Management, Transfer Pricing Component to offer a comprehensive risk-based pricing solution that calculates, in real time, the risk-adjusted returns of each proposed exposure while taking into account the associated costs and the required capital collateral. While the Transfer Pricing Component calculates the transfer price and minimum required rate for each exposure, the Capital Charge Component estimates the capital to be held against the exposure, the validity of the interest rate charged and the resulting risk-adjusted profitability. The application enables relationship managers to easily request and access all relevant information relating to the exposure in order to provide a quick response to customer inquiries.
The new analytical application enables front-line managers to assess risk and profitability based on user-specified parameters and make rapid comparison against benchmarks. It also enables analysis of metrics under various customer ratings transition scenarios.
Oracle Financial Services Pricing Management, Capital Charge Component covers all products on the assets side of the balance sheet, including amortization loans, bullet loans, and structured products, and calculates the risk-adjusted performance measures, risk-adjusted return on capital (RAROC), and shareholder value added (SVA). It also supports multiple pre-packaged regulatory capital Runs that meet guidelines specified by U.S. regulators, the Bank for International Settlements (BIS), and the Reserve Bank of India (RBI).
“Oracle Financial Services Pricing Management, Capital Charge Component provides front-line managers with on-demand access to the information they need to assess the costs and risks associated with each new exposure and then determine an optimal price for transactions,” said S. Ramakrishnan, group vice president and general manager, Oracle Financial Services Analytical Applications. “Banks can now manage their portfolios based on risk-adjusted returns and optimize the allocation of capital by distinguishing between low- and high-risk customers.”