Risk-based reference pool capital reducing systems and methods
View Patent ↗Embodiments consistent with the present invention provide a credit enhancement structure for risk allocation between parties that minimizes the regulatory capital reserve requirement impact to an institution subject to capital reserve requirement. A subject pool of assets held by the institution, such as a pool of loans, is rated to determine its risk levels. Based on the rated risk levels, a guarantor party agrees to be responsible for a portion of the risk associated with the pool of assets, which may define the maximum risk exposure of the institution holding the asset pool. The risk-rated capital reserve requirements are applied to the asset pool based on the risk level rating and the guarantor's agreed upon risk responsibility such that the institution holds a reduced amount of reserve capital compared to what it would otherwise be required to hold.
1. A method, implemented using a data processing system, for reducing capital required to be held in connection with a subject pool of loans comprising:
obtaining, as an input to the data processing system, a credit risk rating of the loans in the subject pool;
allocating, using the data processing system, credit risk for the subject pool among a plurality of parties, based on the credit risk rating and a loss performance of the subject pool in comparison to a reference pool of loans having similar characteristics to the loans in the subject pool;
applying, using the data processing system, capital reserve requirements to the subject pool based on the credit risk rating and the credit risk allocated to a party subject to the capital reserve requirements for loans in the subject pool;
calculating, using the data processing system, an amount of capital to hold against the subject pool based on application of the capital reserve requirements; and
providing an indication of the amount of capital to hold to the party.
2. The method of claim 1 , wherein allocating credit risk for the subject pool further comprises:
for the party subject to the capital reserve requirements from the plurality of parties, capping a portion of the credit risk allocated to the party at a maximum level.
3. The method of claim 2 , wherein the maximum level is a percentage of the subject pool value.
4. The method of claim 1 , wherein allocating credit risk for the subject pool comprises:
assigning a portion of the credit risk for the subject pool to the party subject to the capital reserve requirements; and
assigning a remaining portion of the credit risk to a second party.
5. The method of claim 4 , wherein the credit risk rating includes a plurality of rating categories, and wherein assigning a portion of the credit risk for the subject pool further comprises:
retaining a portion of credit risk on a category by category basis for each of a plurality of rating categories; and
capping the portion of retained credit risk to a maximum level for each of the plurality of rating categories.
6. A system comprising:
a processor for executing computer-readable instructions; and
a non-transitory computer-readable storage medium storing the program instructions, the program instructions, when executed by the processor, performing a process to reduce capital required to be held in connection with a subject pool of loans, the process comprising:
assisting in obtaining a credit risk rating of the loans in the subject pool;
allocating credit risk for the subject pool among a plurality of parties, based on the credit risk rating and a loss performance of the subject pool in comparison to a reference pool of loans having similar characteristics to the loans in the subject pool;
applying capital reserve requirements to the subject pool based on the credit risk rating and the credit risk allocated to a party subject to the capital reserve requirements for loans in the subject pool;
holding an amount of capital against the subject pool based on application of the capital reserve requirements.
7. The system of claim 6 , wherein allocating credit risk for the subject pool further comprises:
capping a portion of the credit risk to a maximum level for the party subject to the capital reserve requirements from the plurality of parties.
8. The system of claim 7 , wherein the maximum level is a percentage of the subject pool value.
9. The system of claim 6 , wherein allocating credit risk for the subject pool comprises:
assigning a portion of the credit risk for the subject pool to the party subject to the capital reserve requirements; and
assigning a remaining portion of the credit risk to a second party.
10. The system of claim 9 , wherein the credit risk rating includes a plurality of rating categories, and wherein assigning a portion of credit risk for the subject pool further comprises:
assigning the portion of credit risk on a category by category basis for each of a plurality of rating categories; and
capping the portion of assigned credit risk to a maximum level for each of the plurality of rating categories.
11. A non-transitory computer-readable medium comprising computer-executable instructions for reducing capital required to be held in connection with a subject pool of loans by:
accessing data regarding a credit risk rating of the loans in the subject pool;
accessing data regarding allocating credit risk for the subject pool among a plurality of parties, based on the credit risk rating and a loss performance of the subject pool in comparison to a reference pool of loans having similar characteristics to the loans in the subject pool;
applying capital reserve requirements to the subject pool based on the credit risk rating and the credit risk allocated to a party subject to the capital reserve requirements for loans in the subject pool;
presenting an indication of the amount of capital held in connection with the subject pool based on application of the capital reserve requirements.
12. The non-transitory computer-readable medium of claim 11 , wherein accessing data regarding allocating credit risk for the subject pool further comprises:
for the party subject to the capital reserve requirements from the plurality of parties, accessing data regarding capping the specified party's a portion of the credit risk allocated to the party to a maximum level.
13. The non-transitory computer-readable medium of claim 12 , wherein the maximum level is a percentage of the subject pool value.
14. The non-transitory computer-readable medium of claim 11 , wherein accessing data regarding allocating credit risk for the subject pool comprises:
accessing data regarding assigning a portion of the credit risk for the subject pool to the party subject to the capital reserve requirements; and
accessing data regarding assigning a remaining portion of the credit risk to a second party.
15. The non-transitory computer-readable medium of claim 14 , wherein the credit risk rating includes a plurality of rating categories, and wherein an assigned portion of the credit risk applies on a category by category basis for each of a plurality of rating categories, and the assigned portion of credit risk is capped to a maximum level for each of the plurality of rating categories.
16. A method, implemented using a data processing system, for reducing capital required to be held in connection with a subject pool of assets comprising:
obtaining, as an input to the data processing system, a risk rating of the assets in the subject pool;
retaining, by a party subject to capital reserve requirements for loans in the subject pool among a plurality of parties, a portion of risk for the subject pool, based on the risk rating and a loss performance of the subject pool in comparison to a reference pool of loans having similar characteristics to the loans in the subject pool;
applying, using the data processing system, the capital reserve requirements to the subject pool based on the risk rating and the portion of risk retained by the party subject to the capital reserve requirements for loans in the subject pool;
determining, using the data processing system, an amount of capital to hold in reserve in connection with the subject pool based on application of the capital reserve requirements; and
presenting the determined amount of capital to the party.
17. A system comprising:
a processor for executing computer-readable instructions; and
a non-transitory computer-readable storage medium storing the program instructions, the program instructions, when executed by the processor, performing a process to reduce capital required to be held in connection with a subject pool of loans, the process comprising:
obtaining a risk rating of the assets in the subject pool;
retaining, by a party subject to capital reserve requirements for loans in the subject pool among a plurality of parties, a portion of risk for the subject pool, based on the risk rating and a loss performance of the subject pool in comparison to a reference pool of loans having similar characteristics to the loans in the subject pool;
applying the capital reserve requirements to the subject pool based on the risk rating and the portion of risk retained by the party subject to the capital reserve requirements for loans in the subject pool;
determining an amount of capital to hold in reserve in connection with the subject pool based on application of the capital reserve requirements; and
presenting the determined amount of capital.