Kategorie: Credit Decision & Risk Modelling

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Webinar – Foundations of the ESG Ratings

A growing number of financial institutional investors are looking to incorporate environmental, social and governance (ESG) factors into their lending processes, alongside the traditional financial factors for risk assessment. Others aspire to implement basic ranking mechanisms for simple internal or external reporting purposes. Some are planning to develop a more sophisticated future model that requires a large, comprehensive data base. However, there are still a significant number of differences to note compared with the classical PD or LGD models, starting with the one-year horizon for the latter predictions versus a more than forty-year horizon for climate events to transpire.

IRB 2.0: Current Validation “trends” and commonly observed difficulties in practice during the validation exercise

To shorten the waiting time until our regulatory IRB-Homeschooling starts, we would like to give you some insights into our experiences around validation exercise, we gained with various national and international credit institutions.


As institutions are developing models for an increasing scope of risk management and decision making, concurrently, the number of models has been rising dramatically (i.e. models for capital provisioning and stress testing, pricing, strategic planning as well as asset liquidity purposes). More complex models are being developed with even more advanced analytics techniques (i.e. machine learning) to achieve higher performance. Big data and advanced analytics are opening new opportunities for more sophisticated models.

There are several reasons for this phenomenon; banks have started using more data sources about the retail lending activities, and new regulatory changes such as IFRS9 have introduced the use of new models what has not been in the bank’s agenda some ten years ago.

Next part of the Homeschooling series 2020: become an IRB expert with the IRB Homeschooling webinar 2020!

Due to the great success of our new webinar homeschooling format, we are now offering a new IRB Homeschooling webinar series!

In the recent years a number of new regulatory requirements brought significant challenges to the IRB risk parameter model development. In parallel to the changing of the regulatory setting, the ECB conducted a large number of on-site inspections (under the TRIM program) – where banks’ IRB models and parameters were subject to an intensive and rigorous scrutiny -, during which a relevant number of findings were identified across the euro zone.

Observations about the impact of a downturn period on the main components of the LGD Model

The concept of an economic downturn was designed to address potential adverse macroeconomic conditions within estimations of the Internal Ratings-Based (IRB) risk parameter models. The regulatory definition of a downturn was first introduced in the earliest Basel II regulation, however, there were no strict rules and no detailed guidance on how the downturn period should be identified, and how a downturn adjustment should be estimated. The whole regulatory and risk management community within the European Central Bank (ECB) regulated single market spent significant time developing and updating the downturn methodology of their respective financial institutions. In this blog article we will talk about the latest regulatory requirements on this topic and will discuss the impact of a downturn period on the main components of the LGD Model.

IRB Loss Given Default Modelling: Risk Differentiation Function

A well-functioning Loss Given Default (LGD) model is expected to be present with all Advanced IRB banks as required by the Regulation (EU) No 575/2013, later referred to as CRR and subsequently by a set of regulatory papers released by the EBA and ECB.

EBA Guidelines on the PD estimation, the LGD estimation and the treatment of defaulted exposures (EBA/GL/2017/16) further referred as “GL on PD&LGD estimation” distinguishes two steps in the development of the LGD framework:

  1. Model development in LGD estimation as per section 6.2 (which is commonly known as the Risk Differentiation Function)
  2. LGD calibration as per section 6.3

In this article, we will be focusing solemnly on the first step; thus, it will be mainly concerned with how to differentiate obligors/facilities in terms of their relative risk, measured in LGD. The second step (LGD calibration), we will address as a topic with a separate blog post.

Implications for ECB regulated banks currently engaged with their IRB Repair Programme

For many banks, the TRIM reports of the inspection ECB teams revealed many findings in the last two years. And the banks have received in return time to prepare their remediation plans. These plans usually have accommodated several remediation actions so that banks might be able to keep their IRB status going forward. The plans were in length discussed with the JST and in most cases were tied up to some deadlines; i.e. for several banks there were need for the redevelopment of the LGD models, where new components had to be incorporated. In most cases, banks were held to keep higher capital for their IRB portfolios under the remediation programme as their IRB risk parameters were not necessarily fully in compliance due to the TRIM findings, and expectedly this capital add-ons were only to be lifted once the full remediation took place. Such model redevelopments naturally require extensive new data collection, where the data should be tempered and aligned with the New Default Definition requirements. Such actions take significant time and require several internal sources in the bank work closely in coordination. Under the current circumstances as many bank risk resources will be working remotely from home and will not have the chance to meet frequently with their team members as during the normal times. Due to this it would be not possible for the bank to achieve a certain level of efficiency to be prepared to fulfill the tasks for the committed deadlines along the remediation plans that had been already agreed with the JSTs of the respective banks regulated directly with the ECB.

Willkommen zur PwC Inspiring Credit Risk Modelling Conference!

Unsere Inspiring Credit Risk Modelling Conference ĂĽber die Zukunft regulatorischer und betriebswirtschaftlich optimierter Modelle am 17. und 18. Februar 2020 in Frankfurt am Main – jetzt anmelden unter: www.pwc-events.com/credit-risk-modelling-conference!

Die Risikomodellierung beschäftigt die Banken bereits seit längerem und ist damit einer der Investitionsschwerpunkte der letzten Jahre. Durch veränderte regulatorische Anforderungen und neue aufsichtsrechtlichen Erwartungen stehen Banken vor der Herausforderung, ihre Modelle grundlegend und zeitnah zu überarbeiten, um den neuen Standards gerecht zu werden. Gleichzeitig erhöht sich der Kosten- und Wettbewerbsdruck innerhalb der Finanzbranche.

Wie wird Ihre Bank den Sturm veränderter Regularien und aufsichtsrechtlichen Vorgaben überstehen ? Wie gestalten Sie Ihre Modelle, um den neuen Anforderungen gerecht zu werden ? Wie nutzen Sie dabei neue Technologien ?

Welcome to the PwC Inspiring Credit Risk Modelling Conference!

PwC’s Inspiring Credit Risk Modelling Conference on the future of regulatory and business-driven models – now open for registration at www.pwc-events.com/credit-risk-modelling-conference!

The Inspiring Credit Risk Modelling Conference will be held in Frankfurt am Main on Monday February 17th and Tuesday February 18th 2020.

Risk modelling has been one of the main sources of concern for banks over the last few years – and, as such, one of the main focuses of investment. With the altered regulatory rules and new supervisory expectations, banks have to make urgent and fundamental changes to their models to meet the new standards. Meanwhile, the need to increase revenues and/or cut costs has become an ever more pressing issue.

  • How is your bank going to weather this storm of altered rules and new supervisory expectations? Are you reshaping your models to meet the new standards?
  • How are you harnessing new technologies?

Redefining default, revising historical datasets, introducing new data standards and implementing revised validation procedures are just some of the steps that need to be taken to avoid increases in RWA or reputational damage.

Over the course of two days, we will bring together international PwC experts, practitioners from the banking industry and supervisory bodies. Together we will gain insights in the current hot topics: IRB Modelling, Basel IV, AI and machine learning, and data-driven solutions for regulatory purposes. We will explore what IRB 2.0 will mean for the industry and where the EBA, ECB and Basel IV will take us next. We will also examine how to organise modern and cost-efficient model development and validation functions, and how latest technologies can help enhance profitability.



Please click on the link for additional event information and registration: www.pwc-events.com/credit-risk-modelling-conference

We look forward to seeing you in Frankfurt am Main!