How can AI enhance the ability of corporate treasurers to better assess the counterparty risk?

The power of AI is like a bomb whose full force cannot be measured at this stage. However, treasurers are already seeing areas of activity where AI will be able to demonstrate all this power, and how it will change our function for the long term, giving us more means to mitigate financial risks.

AI can and will significantly enhance the ability of corporate treasurers to assess counterparty and bank counterparty risks in several ways. Indeed, if there is one risk that is still complicated to determine and evaluate, it is that of the counterparty, whether bank or customer. We can assume, based on what is being done and progressively developed, that this technology will finally make it possible to improve the management of this particular risk, which is so delicate to control correctly, given that speed has become a new factor. We've come to realize that a bank could fail in a weekend. In the absence of precise, infallible tools and implacable methodologies, AI can provide us with the tool we've been lacking (without being totally infallible - we'd like it to be efficient and capable of providing preventive alerts).

Data Analysis and Predictive Analytics:

AI can process vast amounts of financial data to identify patterns and trends that might indicate potential risks. Predictive analytics can forecast future risks based on historical data, helping treasurers make more informed decisions. Therefore, it is expected to get solutions to crunch figures and detect information to produce alerts on counterparties. As things move so fast these days, time is an issue. The faster you get access to the information, the faster you can react.

Real-Time Monitoring:

As mentioned above, time being the issue in terms of risks, it is key to be informed as soon as possible. AI systems can continuously monitor financial markets and counterparties in real-time, providing up-to-date risk assessments. This allows treasurers to react quickly to any changes in the risk profile of their counterparties. Time is a limited resource for treasury. Having a machine working 24/7 to detect any risk is a real game-changer.

Credit Risk Assessment:

Given the complexity of counterparty risk and huge amount of data, machines can help sorting out key items and by combining them, come to conclusions or recommendations. AI can enhance credit risk models by incorporating a wide range of data sources, including financial statements, market data, and news articles. This leads to more accurate and timely credit risk assessments. The art consists of compiling huge data from various sources and crunch them to detect potential signs of risks.

Fraud Detection:

Machine learning algorithms can detect unusual patterns and anomalies in transactions that may indicate fraudulent activities. This helps in mitigating risks associated with fraud and solvency risk (mainly for business clients). The subnormal behaviors can indicate risks and generate alerts for better controls.

Regulatory Compliance:

Counterparties can be "customers" and part of KYC processes. AI can assist in ensuring compliance with regulatory requirements by automating the monitoring and reporting processes. This reduces the risk of non-compliance and associated penalties. Knowing your counterparty and your customer are essential today to make business successfully.

Scenario Analysis and Stress Testing:

As for ECB, stress testing your counterparties could be interesting exercises to run. However, we treasurers have a lack of resources, of tools and often of expertise to proper assess these stress-cases. Machines can bring solutions. AI can simulate various economic scenarios and stress test the financial health of counterparties. This helps treasurers understand the potential impact of adverse conditions on their counterparties. Again, stress testing is a way to anticipate and pre-alert. Time being an issue, the faster you are informed, the better you can react.

AI is typically a technology suited to this need for counterparty risk detection tools. As there is no infallible method or technique, and a lack of human and technological resources in cash management, AI can do the job perfectly well, agglomerating data to extract its quintessence and alerting to a potential default risk to avoid a catastrophe. Of course, these tools complement a diversified investment strategy (for bank counterparty risk), a diversified partnership, a data platform, products such as rated money market funds (like IMMFA, for example, to diversify counterparties and assets) or guaranteed deposits, like tri-party repos on a platform like Treasury Spring. As we often wonder what AI could be used for, it's good to give some simple examples that will profoundly change management

By leveraging these AI capabilities, corporate treasurers can gain deeper insights into counterparty risks, enabling them to make more strategic and informed decisions.

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?Fran?ois Masquelier, CEO of Simply Treasury – October 2024