How We Help: Dodd-Frank, Standard of Creditworthiness Compliance for Community and Other Banks

DIVER Analytics Case Study 2016-11-09T20:05:57+00:00
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Dodd-Frank has changed the landscape for banks with municipal bond holdings. In short, compliance with Dodd-Frank requires assuring an investment is appropriate for a client and ongoing monitoring of these investments. For most muni bonds, this means guaranteeing the firm and client know all there is to know about the bond and conducting an appropriate level of periodic monitoring. Different banks have established different policies and procedures regarding monitoring frequency and other criteria.
According to the OCC:

“Under the revised regulations, to determine whether a security is “investment grade,” banks must determine that the probability of default by the obligor is low and the full and timely repayment of principal and interest is expected. To comply with the new standard, banks may not rely exclusively on external credit ratings … but should supplement any consideration of external ratings with due diligence processes and additional analyses”.

As a result, our bank clients have told us they need:

  • Efficient internal analytical tools
  • Simple reports for bonds
  • Documentable “just-in-case” organizational solutions to show regulators how they adhere to best practices.

Client Problem

Our client, a large Bankers Bank, needs to solve for two problems. Firstly, they need an analytical tool to determine if an investment is appropriate for clients at or before the time of purchase. Secondly, they need ongoing monitoring of that investment. This Lumesis client has multiple portfolios and many smaller community banks that they provide with critical banking services.

In addition to using ratings, the Bankers bank needed an alternative set of predictive data to identify problems before they became a significant default risk.

In conversations about workflow and process, this client told Lumesis that certain economic data is helpful in projecting:

  • Economic activity in a geographic region
  • Overall economic health of a region
  • Financial strength of bonds issued in that region

The client requested a solution to quickly review bond information and then do a deeper dive to analyze multiple portfolios of diverse holdings against a set of economic data points for early identification of negative trends.

The client determined that six key economic data points were critical to understanding the underlying strengths and weaknesses of municipal borrowers and associated bonds. The team needed a combination of data and screening tools to quickly identify red flags across the many bonds in their portfolios.

DIVER by Lumesis Solution

For clients like this, a combination of DIVER data and tools are used to do a top-level review to identify, based on defined criteria for risk, bonds that require more in-depth analysis.

As a first step, at the time of, or prior to, buying a bond for a client, the client uses the DIVER Municipal Bond report to review all the critical information on the bond and often will send that same report directly to the client for their review.

We also provide a platform for deeper analysis and ongoing monitoring that is driven by the information most important to this client.

Specifically, Lumesis delivers:

  • Comprehensive CUSIP-driven Municipal Bond Reports (MBRs) for over 1.1 million bonds
  • MBR’s archived and documented at a particular point-in-time for an ongoing compliance audit trail.
  • The specific, continuously updated, data points needed to power a client’s particular algorithms or models.
  • Complete Quality Assurance around those data points.
  • Delivery to Excel or other platforms already in use.
  • A data filtering tool to see changes in data or search across time periods
  • Visualization tools, such as heat maps, to quickly see data and changes over time.
  • DIVER GEO Scores to provide an additional indicator of overall economic health on a 10 point scale.
  • Ongoing disclosure monitoring and alerting.
  • The ability to allow member banks to email Municipal Bond Reports directly to individual clients.

As a result of using DIVER solutions, this client has:

  • Saved significant time and resources.
  • Reduced risk.
  • Prepared themselves for a compliance reviews.
  • Received positive feedback from regulators.
  • Provided additional services to their extended group of Community Bank clients.
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