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Value at Risk (VAR)

Value at Risk is about understanding the total value of risk in a portfolio; it incorporates all credit and operational risk factors.  The management of risk is taking on increasing importance in asset finance as lenders strive to improve margins and reduce losses.  Sophisticated measures of risk such as PD (Probability of Default) and LGD (Loss Given Default) are becoming 'the standard risk measures' whose use is being encouraged by regulators across the world.

The precursor for calculating PD and LGD is to determine VAR and to demonstrate that all aspects of portfolio risk - credit and asset - are managed and quantified.

Basel

The Basel Accord promotes the use of PD and LGD (and others) as a means of controlling risk and reducing regulatory capital adequacy cover.  Basel requires lenders to actively manage credit and operational risk as part of overall portfolio management, failure to do so effectively can result in a lender having to provide additional capital adequacy cover, the supervisor imposing extra control and reporting requirements or other penalties.

Active Asset Management

Active asset management is a major component in managing overall risk that is inherent in all asset finance transactions and portfolios and is essential for determining VAR. At the most basic level it includes verifying the existence of an asset and the bone fides of the operator. At the higher end of the spectrum ensuring the value of the asset by regular inspection and revaluing against the market, monitoring status against operating and return conditions act to ensure that value is being maintained in the asset for the lender.

ALM’s asset management services and PAM™ system deliver the capability for managing all asset related risks that make up VAR, secure the lender's interest and maintain asset value.

 

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