Rand Merchant Bank ("RMB," a division of FirstRand Bank Limited) and Kamakura Corporation announced Monday that the firms have agreed to a joint research pact focused on default risk modeling for public firms, with a special focus on financial institutions default modeling.
Under the research pact, RMB will serve as a steering committee member on version 5 of the Kamakura Risk Information Services public firm default models. The bilateral exchange of insights will maximize the accuracy of both the KRIS models and proprietary models that RMB has developed specifically for the South African market.
Rautie Nel, Head of Credit Portfolio Management at RMB, said on Monday, "RMB is very pleased to announce this research pact. Credit ratings are used as a key input in, inter alia, credit origination, limit setting, pricing, capital allocation and performance measurement. The appropriate measurement of credit risk is therefore very important for the bank. The accuracy ratio of our rating models, measured in terms of being able to differentiate between companies that have and have not defaulted, are very high if calculated on a database of listed companies in South Africa going back almost 15 years. This project will give us even more confidence in these models as we will be able to test the accuracy ratio thereof (and make refinements if necessary) on the much larger Kamakura Risk Information Services (KRIS) default data base for public firms containing data for firms in 30 countries. By testing RMB's models on the 2 million 'out of sample' observations in the KRIS database, RMB can firmly establish that the fundamental economics of our insights apply consistently around the world. This kind of model testing is also required by the Basel II capital rules put forth by the Basel Committee on Banking Supervision. For seven years, the KRIS multiple models approach to default probability modeling has shown the power of macro factor drivers of credit risk in a fully transparent, 'no black box' way. Our years of partnership with Kamakura and our mutual respect and team work make this new research pact a logical 'next step' for both firms."
RMB has been a subscriber to KRIS default probabilities for many years. With Fiserv, FirstRand and Kamakura announced on June 24, 2009 that FirstRand has also subscribed to the Kamakura Risk Manager ("KRM") enterprise wide risk management system (see more details here
Kamakura's President Warren A. Sherman said Monday, "We are extremely pleased to partner with RMB on this joint research effort. Our Managing Director Robert A. Jarrow pointed out in his 2003 paper for the FDIC that macro factors like home prices and interest rates were the key to driving financial institutions default in the United States. The partnership with RMB allows both of us to further refine and enhance these insights for financial institutions models with maximum accuracy. The ability to load these models seamlessly into Kamakura Risk Manager is another big synergy that our joint research will employ."
As part of the joint research effort, RMB will have direct access from Johannesburg to the proprietary KRIS research data bases and related explanatory variables that reside on Kamakura servers in California and Honolulu. The project teams will communicate daily via real time Vidyo telecommunications, in addition to reciprocal visits by the project teams to each firm's head office. The Kamakura research effort is led by Professor Robert A. Jarrow (Managing Director and Cornell University), Professor Jens Hilscher (Senior Research Fellow and Brandeis University), and Sean Klein (Senior Research Fellow and Massachusetts Institute of Technology), with support from the KRIS team led by Kamakura CEO and founder Dr. Donald R. van Deventer and Managing Director Mark Mesler.