FMI logoThe International Monetary Fund has requested the company AIS – Aplicaciones de Inteligencia Artificial to submit a novel RDF (Risk Dynamics into the Future) stress testing and economic capital calculation method for executives from the IMF, the World Bank and the IFC, which is the branch of the World Bank oriented towards the private sector. The aim is for these institutions to find out first hand the most advanced methods for solvency testing.

The analysis of the portfolio behaviour in extreme cases, stress testing, in a financial institution is becoming an indispensable part of risk management. This is due to both regulatory requirements (Basel II), and more importantly as support in the strategic analysis of financial institutions to identify the best policies in a market capable of undergoing critical changes.

The stress test is a diagnostic tool for understanding the risk profile of a company. At a time of crisis like now, it is very important to know what may happen to the portfolios of banks for defining strategies, investments, etc. Comparing the results of stress tests with existing business plans is an invaluable aid for making decisions on possible adjustments.

The innovation of the AIS system is that it is a scaleable platform with many applications which can cover all types of risks (credit, liquidity, market, etc). It is not only capable of calculating the distribution of losses conditional on a particular scene, but also lets you project the balance sheet and income statement conditional on certain events. This makes the method developed by the Spanish company a powerful simulation tool, providing valuable information for forming business strategies.

RDF has already been successfully submitted to some regulators and supervisors, including some central banks in Europe and other supervisory bodies in Latin America, as well as at several events organised by the Global Association of Risk Professionals (GARP) in London and New York. The new stress testing method developed by AIS has also been presented at academic institutions such as IESE, the Madrid Autonomous University and the Barcelona Autonomous University.

Ramon Trias, the President and CEO of AIS was delighted by the IMF invitation. “It’s a great honour for all AIS staff and a valuable recognition of our RDF method. It shows that we are again at the cutting edge worldwide with our advanced methods, and this is something we are extremely proud of. At AIS we have always believed in innovation, and to find that institutions of this calibre follow our work is very encouraging and very gratifying,” he said.

The benefits of using the RDF method

The method was conceived as a GNU product, whose knowledge is available to professionals and academics interested in its implementation and extension.

RDF incorporates a number of innovative features, such as a new concept of the economic scene, modelling of the probability of default (PD) and loss given default (LGD) using macroeconomic variables as covariates, VARMA multi-equation models of macroeconomic and sectoral variables, homogeneous risk measures associated with economic capital measures conditional on the scene, and an analytical method for calculating the multiple integral forming the losses probability distribution function (PDF), which is an alternative or auxiliary form of the Monte Carlo method.