How Marketplace Lenders in Europe Can Calculate Credit Risk

European credit risk modeling

In the burgeoning world of technology and finance, credit has a unique importance. Banks provide loans involving credit risk; the risk of default is immense and can even lead to bank failure. After learning from the vicious financial hurricane in 2008, banks became more watchful to whom they are lending in order to avoid such […]

European credit risk modeling

In the burgeoning world of technology and finance, credit has a unique importance. Banks provide loans involving credit risk; the risk of default is immense and can even lead to bank failure. After learning from the vicious financial hurricane in 2008, banks became more watchful to whom they are lending in order to avoid such a meltdown.

The European Banking Authority (EBA) supervises the European banking sector and safeguards the banking ecosystem. The Basel committee also took substantial steps to strengthen Basel II framework after the collapse of Lehman Brothers during the financial crisis. The consequence of such turmoil demonstrated the limitations of technical analysis of credit risk due to incomplete data and an overdependence on credit agencies. Therefore to reduce risk in the economy, quantitative assessment of risk should be coupled with qualitative measures and judgment.

Open Source Investor Services B.V. (OSIS) is a service provider that quantifies risks involved in credit. The company intends to fill the gap through its suite of technical products where investors not only get a credit rating but are also made available the relevant qualitative data and the requisite solutions necessary for further in-depth analysis. Founded in 2010 by two veteran bankers, Jeroen Batema and Dr. Burkhard Heppe, OSIS is headquartered in The Hague, the Netherlands and has a team of approximately 10 professionals. It alsohas offices in Austria and the UK.

Credit Risk Tools for Lenders

OSIS aims to provide services to investors, insurers, and financial service providers to help calculate the risks involved in credit through statistical analysis of data using tools like LoanCracker RA for banks and LoanPilot ABS for investors, as well as a collection of tools to fulfill other strategic purposes.

Specializing in credit portfolio management solutions and guidance for IFRS 9 loan loss provisions, OSIS quantifies expected 12-month credit losses which is further put to use in the modeling of securitization and stress testing. It has a portfolio optimization platform that provides essential insights to the database to help the company achieve credit rating due diligence. It also monitors data quality through LoanQualifier and provides services for validation of credit data, credit risk modeling in compliance with Basel II and Solvency II, loan level data check, loan market analysis, stress testing techniques, and evaluation of ABS securitization deals. Basel II compliance and transparency regarding capital adequacy numbers is an extremely vital area of compliance for tier-1 banks and OSIS, and its portfolio of solutions ensures banks are not only evaluating credit risk properly but also are on the right side of the regulator.

OSIS aims at providing visualized information to originators and investors for a refined understanding of credit risk complexities. The objective is to give an alternative to the cliché credit rating agency services that give comprehensive data for decision making. With a high level of risk involved and previous fallacies of credit agencies exposed, each participant is cautious and desirous to conduct their own risk assessment rather than depending upon credit rating agencies, which only display the results and hide the assumptions behind them. Unlike those agencies, OSIS is transparent and publishes the risk assessment done through rigorous and statistical data analysis while letting its clients know the true nature of risk.

LoanPilot ABS helps clients to calculate an internal rate of return and expected losses based on the Basel II and Solvency II credit models. After rating and valuation, disclosures are uploaded to the cloud where both parties have easy access to the disclosures. Investors and originators can facilitate data in such a manner that each party sees the same portfolio with different angles. This helps the client look at data and results from multiple perspectives, something that can be valuable in a market frenzy.

OSIS made a great achievement by signing a contract with Global Credit Data, the largest interbank credit loss sharing database in the world with approximately 40 member banks in Australia, South Africa, Europe, Asia, and North America. OSIS provides its analytical services to all member banks to help them analyze the collected data using its proprietary tools.

OSIS has completed over 1,000 checks on mortgages and 1,200 on SME loan portfolios. The company was hired as an advisor on data quality improvement at European Data Warehouse in 2013 and since then has provided billions of data quality calculations on SME and residential mortgage-backed securities (RMBS) data at EDW. It has worked with AMAL asset management, a third–party servicer in Australia and New Zealand. It also has a partnership with Dutch Securitization Association which has been successful in managing the first country-wide standardized investor report for RMBS. OSIS has eminent clients like ING, PECDC, NIBC, DSA, European Data warehouse, Van and Lanschot Bankiers and is looking to partner with other fintech companies including marketplace lenders. Its tech can help originators understand credit risk and the attendant issues in multiple scenarios. Also, it will allow young lending startups to separate the element of credit scores from their lending models and see borrowers and their finances in a more comprehensive state along with the analytics.

The Team Behind OSIS

Batema is chief executive officer. Prior to OSIS, he was a director in BNP Paribas Fortis in Brussels, Belgium, holding the responsibility of all capital relief securitizations. His 15 years in banking, along with being the chairman of the Global Credit Data management board, helped him understand how data sets from different banks create a more complete picture and help build a prudential system of analysis for the Basel II regulations.

Heppe is chief technical officer. Before the incorporation of OSIS, he worked as managing director of Merrill Lynch, in the wealth management division of Bank of America, and as vice president at Citigroup.

One other prominent members OSIS is Tony Lee, global head of sales & business development, whose experiences in fintech, securitization, credit risk and IT & software sales have proven to be a catalyst in the sales of complex solutions and analytical tools.

Future Prospects for Fintech and OSIS

OSIS has provided an easy and cost-effective way of analysis, making it much simpler for market participants to get standardized data & results and make improved judgments on credit risk. OSIS is a trusted partner with financial institutions and has created a potent niche for itself with future prospects for growth. As the fintech lending industry matures and credit performance becomes more important than “growth,” partnering with marketplace lenders should be its next area of focus.


Written by Heena Dhir.