SOURCE: Kamakura Corporation

Kamakura Corporation

April 26, 2010 09:00 ET

Rand Merchant Bank and Kamakura Corporation Announce Progress in Default Probability Collaboration

October Research Pact Provides Quick Benefits to Both Firms

NEW YORK, NY--(Marketwire - April 26, 2010) -  Rand Merchant Bank ("RMB," a division of FirstRand Bank Limited) and Kamakura Corporation announced Monday that the firms have achieved very promising results from the joint credit risk research pact announced in October, 2009. As part of the research pact, RMB has served as a steering committee member on version 5 of the Kamakura Risk Information Services public firm default models. As a steering committee member, RMB contributed a number of important insights that have resulted in dramatic increases in long term predictive power of the KRIS version 5 models, on top of the very high accuracy that has already been achieved in KRIS version 4.1.

The dramatic increase in long term accuracy of the KRIS 5.0 models is very relevant to the proposed Basel III use of "downturn" default probabilities from the worst part of the business cycle. RMB and Kamakura believe that the ten year term structure of default probabilities in version 5.0 of the KRIS models embeds the business cycle evolution of the term structure of default very accurately. This makes the use of default probabilities from only one arbitrarily selected point in time both unnecessary and less accurate than using the full term structure of default based on the previous day's closing inputs. RMB and Kamakura have agreed to a joint research paper illustrating that this approach most accurately captures the long term capital needs of a sophisticated financial institution.

RMB and Kamakura also did an extensive comparison of alternative techniques for modeling the default risk of industries that have unique industry-specific explanatory variables available. The firms reached a very productive mutual understanding on the best way to achieve even greater incremental accuracy over the global data base by including certain industry insights. In addition, RMB and Kamakura conducted an extensive investigation of alternative techniques for constructing the long run term structure of default risk and proper measurement of accuracy over monthly horizons from 1 month to 10 years. The proprietary results, which will not be published, are distributed to KRIS users only in the forthcoming KRIS version 5.0 technical guide.

Rautie Nel, Head of Credit Portfolio Management at RMB, said on Monday, "RMB is very pleased with the progress that we have made under this research pact. As we announced in October, 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 has allowed us to test our South Africa-derived models on the much larger Kamakura Risk Information Services (KRIS) default data base for public firms containing data for firms in 32 countries. By testing RMB's models on the 2 million 'out of sample' observations in the KRIS database, RMB has firmly established 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. Our long relationship with Kamakura has benefitted both firms enormously in maximizing the accuracy of our measurement of default risk, both by 'best practice' and regulatory-defined standards."

RMB has been a subscriber to KRIS default probabilities for several 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: http://www.finextra.com/fullpr.asp?id=28309).

Kamakura's President Warren A. Sherman said Monday, "This partnership with RMB has helped us take the KRIS version 5 models to an even higher level of accuracy than we have achieved previously. Since the pioneering work of our Managing Director Robert Jarrow and Stuart Turnbull in 1995, we have spent 15 years moving mountains of credit risk data in search of the best possible predictions of default 10 years forward. RMB's contributions to KRIS 5 have allowed the KRIS models to open up an even more substantial accuracy differential versus legacy credit ratings and older modeling techniques than they have had in the past." 

About FirstRand Limited

Listed on the Johannesburg Stock Exchange and the Namibian Stock Exchange, FirstRand Limited is an integrated financial services group providing a comprehensive range of products and services to the South African market and niche products in certain international markets. FirstRand Limited is the second largest financial services group in South Africa by market capitalisation.

Since the creation of FirstRand in 1998, the diversified earnings base of the Group has delivered strong growth in earnings, assets and dividends. The Group's track record has been achieved through a combination of organic growth, acquisitions, innovation and creating extra sources of revenue through the start-up and development of completely new businesses.

The Group is differentiated by its decentralised structure and owner-manager culture. It has a portfolio branding strategy and there are a number of leading financial services franchises within the Group, such as Rand Merchant Bank (RMB), First National Bank (FNB), WesBank, Momentum and OUTsurance. For more on FirstRand Limited, see https://www.fnb.co.za/about-fnb/about-us/first-rand-group.html

About Rand Merchant Bank

Rand Merchant Bank is the investment banking arm of FirstRand, one of South Africa's largest, listed financial services groups, and is active in fixed income, currency and commodities trading, debt capital markets, private equity, structured, corporate and resources finance.

With a presence in the UK, the US, Australia and across Africa, RMB has considerable underwriting capacity due to its ability to trade off the $100bn FirstRand Group balance sheet.

Seeing unprecedented growth since its formation, RMB has developed a reputation for combining innovation and entrepreneurship and has pioneered the introduction of many new financial instruments to the local and African markets, in support of its philosophy of Traditional values. Innovative ideas.

About Kamakura Corporation

Founded in 1990, Honolulu-based Kamakura Corporation is a leading provider of risk management information, processing and software. Kamakura, along with its distributor Fiserv, was ranked number one in asset and liability management analysis and liquidity risk analysis in the RISK Technology Rankings in 2009. Kamakura Risk Manager, first sold commercially in 1993 and now in version 7.1, was also named in the top five for market risk assessment, Basel II capital calculations, and for "risk dashboard." Kamakura was also ranked in the RISK Technology Rankings 2008 as one of the world's top 3 risk information providers for its KRIS default probability service. The KRIS public firm default service was launched in 2002, and the KRIS sovereign default service, the world's first, was launched in 2008. Kamakura has served more than 200 clients ranging in size from $3 billion in assets to $1.6 trillion in assets. Kamakura's risk management products are currently used in 32 countries, including the United States, Canada, Germany, the Netherlands, France, Austria, Switzerland, the United Kingdom, Russia, the Ukraine, Eastern Europe, the Middle East, Africa, Australia, Japan, China, Korea and many other countries in Asia.

Kamakura has world-wide distribution alliances with Fiserv (www.fiserv.com), Sumisho Computer Systems (www.scs.co.jp), Unisys (www.unisys.com), and Zylog Systems (www.zsl.com) making Kamakura products available in almost every major city around the globe.

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