"Limited financial disclosure obligations for private firms in North Americaâand the lack of readily available market informationâhave made the credit evaluation process in North America more challenging than in Europe, where even unlisted SMEs have comparatively extensive financial reporting requirements," said Ashwani Aggarwal, director responsible for PD products at Standard & Poor's Risk Solutions.
"Our product is aimed at overcoming this information deficit," he continued. "We achieved this by combining a large and consistent databaseâcreated from the lending portfolios of some of North America's leading banksâwith robust Standard & Poor's modelling methodology. This combination has made Credit Risk Tracker North America the best performing model among the industry benchmarks and will, we believe, make it the common language of risk for banks with portfolios in this sector."
Credit Risk Tracker North America will help pricing decisions for loans and debt securitizations, as well as assisting in the more precise allocation of capital under the advanced level of Basel II. By providing a "second opinion" on credits, which are already internally rated by the bank, its outputs can also be used to refine and validate internal rating systems. Users input available financial data on specific private credits, before running the Credit Risk Tracker North America model to receive an individual credit risk score. While the first-generation model required users to calculate necessary financial ratios themselves, the new North America version performs this function itselfâmeaning users can directly input raw financial data provided by the counterparty.
The default indicators that drive the modelâincluding financial, industry-specific, and macro-economic variablesâhave been identified by combining Standard & Poor's Risk Solutions modelling expertise with Standard & Poor's vast credit analysis expertise. The model is also the most reactiveâwith daily updates allowing changes in industry credit trends and macroeconomic factors to be immediately reflected in the PD scores produced.
A further feature ahead of other available PD models is that Credit Risk Tracker North America captures interactions among credit factors. This means that by using advanced techniques, model over-fitting is mitigated and more factors are brought into play.
"PD determinants are complex and multifaceted," said Mr. Aggarwal. "They are not linear. There are interactions among them and Credit Risk Tracker North America is unique in capturing these."
"The growing market for PD tools is being driven by changing regulatory requirements such as Basel II, as well as technological and mathematical advances in the industry," said Mr. Aggarwal. "But there has also been increased emphasis on the need for robust risk management as a business management tool. Our intention is to provide the best performing PD model at a competitive price and with strong customer service."