A Guide to SAP's Credit Risk Analyzer
- by Mary Loughran, Independent Consultant
- January 18, 2016
SAP’s Credit Risk Analyzer sub-module focuses on measuring, analyzing, and controlling counterparty risks. Learn how to use and configure it.
Reading this article, you will learn:
- What Credit Risk Analyzer is
- How companies use it
- The steps for configuring Credit Risk Analyzer
- The primary transaction codes included in Credit Risk Analyzer
The Credit Risk Analyzer includes a risk control through limits and flexible limit management with online monitoring and reporting. This functionality allows corporate executives to set limit controls in their SAP systems, monitor their risk exposure, and minimize default risks. The inputs to Credit Risk Analyzer are limits, bank account balances, and treasury trades. Based on the inputs specified, Credit Risk Analyzer reports on the credit and or settlement risk exposure to counterparties (banks). The Credit Risk Analyzer is for exposure to banks either through bank accounts or treasury trades. It is not to monitor exposure to customers. Exposure to customers is supported through SAP’s Credit Management module.
Within SAP’s Treasury and Risk Management modules are three analyzers: Market Risk Analyzer, Credit Risk Analyzer, and Portfolio Analyzer. In this article, I focus on Credit Risk Analyzer.
SAP’s Credit Risk Analyzer module is used to measure, analyze, and attempt to control counterparty default risk. Counterparty default risk refers to the possible loss arising should a counterparty not fulfill its trade-related contractual obligations. An example is a company that has a direct investment (e.g., time deposit or CD trade, with a counterparty or bank to pay interest and repayment of principal at the maturity of the trade, and the bank is unable to make the payment). Counterparty risks are subdivided into credit risk and settlement risk. Credit risks exist over the complete life of the transactions. Settlement risks only exist during the settlement period of the transactions. The module provides a limit utilization (exposure) report that is available in both real time and in an end-of-day report across banks showing the risk exposure to different counterparties or banks.
Counterparty risk is if a company has, for example, direct investments or derivative trades with a bank, and the bank defaults or fails to pay when trade-related payments are due. For example, assume a company enters into an interest rate swap trade with bank ABC to pay a fixed rate and receive a floating interest rate on a notional of $500 million. When it comes time for bank ABC to pay its side of the interest rate swap and it is unable to do so, this is an example of counterparty risk. The bank is unable to live up to its contractual agreement with the company.
The functionality described in this article is included in SAP ERP Central Component (ECC), though licensing may be required to use the SAP Treasury and Risk Management module. To make full use of the Credit Risk Analyzer module, SAP Treasury or Cash Management should be implemented.
Before going through the article, I recommend that you review the definitions in the “Key Terms” sidebar.
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