Guiding the Way to Solutions.
Model Building and Economic Capital
Complex products require complex risk management tools. Promontory’s professionals have extensive experience developing and managing sophisticated models for federal government agencies and for private sector financial institutions. We possess the specialized technical knowledge needed to build effective quantitative and qualitative models that permit our clients to assess, anticipate and manage risk, including by developing effective liquidity and contingency plans. Promontory’s quantitative team has substantial expertise in the Basel II regulatory framework and the Value at Risk approach to economic capital determination.
Promontory's unique approach to assisting clients in this area combines a nuanced understanding of the perspectives of major bank supervisors around the world with a practical appreciation of the realities of modern banking. Promontory professionals include former members of the Basel Committee, as well as the former Chairman of the Basel Committee on Banking Supervision. These professionals provide our firm with a unique and in-depth understanding of Basel policy issuances. Our professionals directly participated in the development of the Risk-Based Capital guidelines in Basel. In addition, we have a lengthy roster of senior regulators and seasoned bankers with related expertise.
Banks and other financial companies that are active in international markets are committing large amounts of resources to build the credit and operational risk measurement systems they will need to comply with Basel II. Promontory’s team of former senior regulators can provide clients with an independent assessment of whether the systems and controls they have installed will be sufficient to pass regulatory muster. In addition, Promontory can review the risk management reports and other information that top management and boards of directors receive to ensure that they are sufficient to permit sound management and oversight of the institution.
Equally important is Promontory’s insight into the compliance and corporate governance functions, which have been the subjects of recent releases from the Basel Committee. Supervisors are raising the bar in terms of their expectations for managers and for boards of directors. The Basel Committee’s corporate governance paper, for example, mentions the need for more transparency to enhance market discipline — Pillar 3 of the New Accord. Deciding what to do is tricky because regulators want banks to satisfy both the letter and spirit of their guidance. Promontory helps banks to identify their regulatory risk exposure and determine the best ways to satisfy regulators.
Representative Engagements
Promontory was retained to conduct an evaluation of a bank’s credit portfolio, specifically with regard to valuation techniques utilized on asset-backed securities. Promontory reviewed the bank’s existing models and developed and assisting with the implementation of new models.
An international bank engaged Promontory to assist it with its efforts to determine the optimal capitalization and tax structures for its operations in the US, including its agencies in New York and Los Angeles.
Promontory valued a $1 billion portfolio of commercial real estate whole loans owned by a large Japanese financial institution. The valuation consisted of both a fundamental analysis and also took into account best judgment of market spreads. The fundamental analysis was the main driver of the valuation at a time when the market spreads were volatile and unreliable. We performed a detailed qualitative credit review (QCR) of each loan and used the results of the QCR to inform the valuation model through use of a metric.