Case Study: Loxon and MKB Bank

This report details the implementation of a risk rating/scoring solution by Loxon for MKB Bank, a universal bank based in Hungary.

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<h3>Background: the growing importance of credit risk ratings</h3>

<p>Credit risk management is becoming an increasingly important element of how financial institutions (FIs) operate, in part because of the increasing connection between the risk and finance departments. As a result of recent global accounting standards, such as International Financial Reporting Standard (IFRS) 9, FIs are now adopting a more ‘risk-aware’ view, in which risk management plays a key part in the construction of their balance sheets. Credit risk is becoming a key factor in forecasting default events, a development that has manifested itself in functions such as expected credit loss (ECL) calculations. Consequently, the risk and finance functions are continuing to merge, creating a need for more diversified skill-sets and increased collaboration on technology systems and the reporting and analysis of credit risk.</p>

<p>Credit risk ratings and evaluation tools are now critical to the technology infrastructure in retail and commercial banks. What’s more, the implementation and integration of a new system into an existing architecture is a multi- faceted project which does not end when the implementation project finishes – full integration can take a long time.</p>

<p>For the system implementation explored here, MKB Bank – following a change of ownership and direction – replaced its legacy risk rating and risk management systems (which consisted of three separate modules) with a solution from Loxon that included a risk ratings engine, a financial data analysis module and a risk data mart.</p>

<h3>The case study: research process and findings</h3>

<p>In developing this report, Chartis conducted interviews with representatives from both Loxon and MKB Bank to understand:</p>

<li>Their perspectives of the problem that needed to be solved.</li>
<li>The parameters of the implementation project.</li>
<li>How the requirements were fulfilled.</li>

<p>As part of our research we also assessed the vendor landscape, to provide context around the suitability of Loxon’s capabilities for the bank’s needs.</p>


<p>Ultimately, the implementation supplied:</p>

<li>A single integrated platform supporting MKB Bank and its subsidiaries (such as leasing companies). The platform combined a risk ratings engine, a financial data analysis module and a data mart for risk.</li>
<li>Tools and interfaces that can be tailored to the specific needs of the bank’s staff and users (with test models delivered throughout the process).</li>
<li>A rapid implementation – the project was completed within 12 months. Given its scope and scale, this was a significant result.</li>
<li>Considerable cost savings: according to MKB, the consolidated Loxon system is five to 10 times cheaper to run than the systems it displaced.</li>

<p>Integrating a system of such wide scope with a bank’s technology architecture is a lengthy process, and in our experience it is rare for a non- incumbent vendor to meet its client’s expectations within a relatively short timeframe. According to the bank, however, the project was a resounding success – benefits included significant savings in both time and cost, while negative impacts were relatively slight: mostly delays in forecasting and integrating with pre-existing IT systems.</p>

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