Probability of default tools had only been available for the large corporate credit markets. Until now…
In response to client demand for accurate assessment of each small business borrower within a total portfolio, PayNet, in collaboration with Professor Darrell Duffie of Stanford University Graduate School of Business, has developed the next generation of a credit risk tool – PayNet AbsolutePD. Providing an absolute measure of credit risk at both the borrower and portfolio level, PayNet AbsolutePD provides a consistent, transparent and objective loan management process mandated by management, auditors, regulators and investors.
Product Sheet White Paper
Industry Leading Innovation
The PayNet AbsolutePD model combines current macroeconomic information with payment histories from PayNet's comprehensive proprietary database of term debt contracts to produce statistical estimates of probabilities of default, up to eight quarters ahead.
The credit history of the counterparty, the nature of each investment, and macroeconomic factors are taken into consideration in calculating the counterparty's probability of default and the portfolio's aggregate probability of default without the necessity of updated financial statements.
This industry-leading innovation represents the next generation of credit risk measures by factoring in economic conditions with the borrower's payment experience. This is not a score but rather a dynamic tool this is recalibrated quarterly as economic conditions change. Business development is smarter through targeted acquisition and profitable pricing. Risk is less expensive through lower credit losses and less provision surprises. Compliance costs are reduced by giving regulators transaction level risk ratings rather than score or exception based approaches.
PayNet's Solution vs. Bank's Manual Risk Rating
PayNet's Analysis of a Typical US Commercial Bank's Portfolio of Privately-held Companies
Key Results of Validation with PayNet AbsolutePD
- Capital allocations to credit-worthy borrowers substantiated with quantified default
- Provision accuracy improved with empirical evaluation using statistical estimates of probabilites of default (PD's) provided over forecast horizons up to 8 quarters
- Management's estimation corroborated with independent review of defaults
- Improved communication among management, regulators, and auditors with a standard metric
Key Benefits with PayNet AbsolutePD Include:
- A ready-now answer for large US banks required by Basel II to provide regulators with a documented process for assigning small business probabilities of default.
- The ability to quickly and accurately calculate the probability of default for any size portfolio of obligations without the need to have current financial statements.
- Creating an Empirically Derived Statistically Sound (EDSS) evaluation process with substantial improvements in the consistency of the default evaluation, since all loans are looked at with a single analytic eye no matter what the size of the portfolio.
- Sharp reductions in the cost of the probability of default evaluations as the time consuming labors of highly paid key bank personnel are reduced to one known fixed cost.
- The possibility of more frequent evaluations of the portfolio since the turnaround time for an evaluation is reduced and the personnel load is diminished. Evaluations can now be made quarterly at less than the time and aggravation of annual or semiannual reviews.
- Allowing the Chief Risk Officer (CRO) to consistently provide the Chief Financial Officer (CFO) with more reliable information for setting the Loan Loss Reserve for the bank's portfolio.
PayNet AbsolutePD Solutions
Auditors and/or regulators expect financial institutions to comprehensively monitor the business to support capital requirements. In turn, management expects accurate financial forecasts based on credible and consistent risk assessment throughout business cycles. Meeting these expectations has been very difficult for many institutions due to lack of information, technical capabilities and significant shifts in default rates related to the economic cycle.
To meet these challenges, financial institutions are adopting new systems that provide future probabilities of default without collecting and analyzing thousands of small business financial statements. These portfolio management systems provide the oversight needed to stay current on credit issues and demonstrate internal controls to regulators. See how PayNet AbsolutePD provides the solution for many of these challenges.
- Increasing demands for risk ratings on each small-business borrower
- Provide an absolute measure of credit risk at both the borrower and portfolio level
- Managing thousands of small business relationships in a cost effective manner
- Automate the portfolio review process for less expensive, more frequent reviews and lower credit losses and provision surprises
- Collecting current financial statements each quarter on smaller private businesses
- Rate millions of small business borrowers when current or reliable financial statements are unavailable
- Discovering problem loans ahead of time to avoid rapid write-offs and increased scrutiny from regulators
- Generate quantitatively-driven, granular risk ratings to meet regulatory demands
- Understanding differing risk profiles of industry sectors and geographic regions as a means to identify the most profitable small-business customers
- PayNet AbsolutePD is the unique blend of powerful macroeconomic factors and extensive small-business borrower and contract-level history derived from PayNet's proprietary term-debt database