Leveraging regulatory investments with portfolio risk-based pricing
| Date | 01 September 2005 |
| Pages | 215-223 |
| DOI | https://doi.org/10.1108/13581980510622072 |
| Published date | 01 September 2005 |
| Author | Paul Cartwright,Hanna Sarraf |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Leveraging regulatory investments with
portfolio risk-based pricing
Paul Cartwright and Hanna Sarraf
Received: 18th January, 2005
Accenture, London, UK
Paul Cartwright is the global managing
partner of Accenture’s financial services
group in London and leads the Basel II
and Solvency II practice. He has led the
planning, design and installation of com-
plex change programmes in major banks
and insurance companies in the UK,
Europe and America. He earned his MA in
Economics from Cambridge University and
is a Fellow of the Institute of Chartered
Accountants.
Hanna Sarraf is a manager in Accenture’s
financial services group in London. He
focuses on Basel II, enterprise-wide risk
and performance management, share-
holder value and SAP solutions for the
banking book in financial institutions. He
earned his postgraduate degree in Finan-
cial Engineering from the ESSEC Business
School in France and holds a Masters
degree in Finance from the Paris-Dau-
phine University.
ABSTRACT
KEYWORDS: risk-based pricing, commod-
ity pricing, portfolio diversification,
Pillar 2, economic capital, RAROC, eco-
nomic profit, value destroyers, share-
holder value, ‘use tests’ requirements
In preparing to comply with the new Interna-
tional Financial Reporting Standards and the
Basel II Accord’s capital adequacy standards,
leading banks are leveraging investments in
these regulations by applying risk management
and capital allocation best practices to adjust
pricing decisions. Among the dizzying array
of pricing models, risk-based pricing can most
effectively help turn regulatory compliance into
a competitive advantage and ultimately, trans-
form lenders into high performance businesses.
Risk-based pricing is an underwriting method
by which a credit application is evaluated
based on how much risk it contributes to a
reference portfolio of the bank. Taking concen-
tration risk into account allows banks to iden-
tify deals with ‘good’ and ‘bad’ structure,
relative to portfolio pricing. In today’s slug-
gish growth environment, the struggle to
improve shareholder returns is slowly pushing
banks towards commodity pricing, resulting in
widespread margin and fee discounts. The tra-
ditional process of assessing loan applications
is burdensome, costly, and unable to incorpo-
rate the impact of portfolio diversification.
Risk-based pricing, in contrast, can improve
shareholder value by driving banks to differ-
entiate pricing based on individual customer
and transaction risk as well as portfolio risk
characteristics. Correct pricing can be leveraged
to ‘cherry pick’ the most profitable transac-
tions, increase price on certain segments, and
target the portion of the customer base which
is destroying value. With proper training and
buy-in of bank personnel, plus the right tech-
Page 215
Journal of Financial Regulation and Compliance Volume 13 Number 3
Journal of Financial Regulation
and Compliance, Vol. 13, No. 3,
2005, pp. 215–223
#Emerald Group Publishing
Limited, 1358–1988
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