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VKB Takes a Proactive Approach to Risk

Austrian bank VKB (Volkskreditbank AG) set out to develop a simpler and faster lending process with the goal of reducing its credit risk. Facing issues of employee motivation and acceptance of the Basel II rules, the bank chose SAS for flexibility and technical support resulting in improved credit scoring and Basel II compliance.

Founded in 1873, VKB is a high performing regional European bank, serving 171,000 customer accounts. Most of its customers are either medium-sized companies or self employed, high-income individuals. Trade publication The Banker ranks VKB as one of the top banks in the world, due in part to the fact that VKB has the second-highest capital assets ratio in its home country of Austria. "We are one of the truly independent Oberösterreichischen (upper Austrian) banks," says Christoph Wurm, Head of Risk Management and Controlling at VKB Bank. "We advise our customers and help them to be successful and have a strong financial base. The motivation for our implementation of the SAS solution for risk management was to gain income – and to stay in business."

Reforming the bank's credit risk practices had several objectives: to achieve a method of standardization, develop a simpler and faster lending process, and compress information for better decision making, all by using comprehensive mathematical procedures. The overall goal of the project was, naturally, to reduce credit risk.

A complex environment
According to Wurm, when the project began, the bank had an inconsistent and sometimes incomplete data system. "This project was very complex. We were missing Basel II definitions, had committed many professional and technical resources, and had to build up expert statistical knowledge and acceptance inside the company. There were also issues around employee motivation and acceptance of the Basel II rules."

With SAS Credit Risk Management, the bank uses stepwise logistic regression, decision trees and graphical descriptive analysis to support its credit rating model. The corporate rating model takes into account "hard facts" – such as line of business, return on investment, equity ratio, cash flow ratio and debtors' period – as well as "soft facts" relating to the competitiveness of the company's industry, management skills and internal organization. The rating model for SMEs (small to medium enterprises) is based on data from the corporate model, but focuses more on the personal attributes of the entrepreneurs.

All models developed at VKB have an override option, so that the personal judgment of the bank managers can prevail if necessary. This method is just a natural part of the way VKB works; the bank prides itself on the dialogue and consultative approach it takes with its customers.

The credit scoring model that is currently in use at the bank was developed for scoring new customers. To complement it, VKB plans to use a system for monitoring the credit risk of current customers. "For this type of system, we need some time to amass a store of meaningful historical information," Wurm explains. "Our credit risk management system will be more and more important to us as time goes on, and we will expand it accordingly. We always try to stay one step ahead."

Getting started
VKB Bank went through an audit process before choosing which software to use for this project. After narrowing down the field to three software vendors, the bank chose SAS because of the strength of its solution. According to Wurm, it was difficult to get started, as there was no bank in Austria that had a system that could be used as a practical example. "It was also important for us to choose a software vendor that could offer us support, since we are not a large institution and do not have quite enough expertise to fully support such a system," says Wurm.

"Because of the flexibility of our SAS solution, the VKB Bank was able to create a tailor-made credit rating. At this point, our credit scoring system gives us clearly a better result than our average before the system. We were successful in aligning the bank's process control with the Basel II directives, and with SAS, we have a product that meets our and our customers' requirements exactly."

Wurm sums up the success of VKB's SAS solution for credit risk: "With the right partners, even regional banks can run the best-integrated and innovative solutions within an acceptable budget. Using SAS, we 'got fit' for Basel II."

Copyright © SAS Institute Inc. All Rights Reserved.

Christoph Wurm

Head of Risk Management and Controlling, VKB Bank

VKB (Volkskreditbank AG)

Business Issue:
Managing credit risk for Basel II compliance. 
Solution:
SAS Credit Risk Management. 
Benefits:
Improved credit scoring, lending practices and Basel II compliance.

With the right partners, even regional banks can run the best-integrated and innovative solutions within an acceptable budget. Using SAS, we 'got fit' for Basel II. 

Christoph Wurm

Head of Risk Management and Controlling

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