SAP White Paper on a Solution Architecture for Economic Capital Quantitative Analytics, pre Credit Crunch

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John A Morrison developed a comprehensive White Paper for SAP, published in April 2006, pre-credit crunch, on the topic of a Solution Architecture for Economic Capital Quantitative Analytics; Basel II Pillar 2 (B2P2). This prescient WP pointed out then, that the reality of banking quantitative risk capital analysis was the reverse of the way it seemed, the shadow banking tail was wagging the main street lending dog and to quantify risk capital properly (as required by the now effectively cancelled CAD3) one really had to apply the “Calculus of Securitisation” across the whole bank; an analysis made pre-credit crunch which has proved to be absolutely correct. The paper can be accessed here;-


The paper explores for you in a non-didactive manner why the SAP Bank Analyzer platform is the leading Solution Architecture to support compliance with the requirements of Stress Testing which under-pin the Basel II Pillar 2 requirements. The paper places great emphasis upon the Gordy ASRF (Asymptotic Single Risk Factor) technique to determine retained capital in issued-securitised instruments but also looks at general stress testing techniques implementing the factor model framework.

The academic referee for this paper was Professor Alex McNeil of Heriot Watt, Edinburgh and the SAP Bank Analyzer architecture proposition was overseen by Dr. Nick Illingworth of SAP UK. The paper argues as we have argued elsewhere that even something as well engineered as Bank Analyzer cannot do it all on its own and the quantitative predictive analytics necessary to underpin a comprehensive and holistic Stress Testing process post-credit-crunch requires the integration of an intelligent data management platform such as SAP Bank Analyzer with a modern predictive analytic toolset. In this regard we at asymptotix recommend the Revolution Analytics products.

This paper was published in April 2006 in Dublin but was largely ignored by the Banking industry in Europe as it proceeded to generate a larger and larger asset bubble un-constrained by concerns of macroprudential responsibility, which in the detailed discussion of the business requirement, this paper discusses in depth. Given what we are learning today (Spring 2009) this paper remains a perspective as valid today as it was when it was written.

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