#Banking #Finance #Modeling #Credit risk # Basel4 #Banking regulation

Background & challenges

In the context of changes in Basel regulations, particularly concerning the scope of credit risk, the customer has launched two major programs:

  • New Definition of Defect
  • Basel developments

As part of the "Evolutions Bâloises" program, our client's risk management and permanent control department wanted support in setting up a methodology for estimating downturn LGD and margins of conservatism for four of its European subsidiaries.

The challenges of the mission were as follows:

  • Gain a better understanding of banking regulations on calculating the LGD downturn by producing a methodological note.
  • Propose methodological solutions that take the new regulations into account
  • Conducting an impact assessment of the new regulations
  • Support subsidiaries in dealing with the new regulations and the proposed methodological solutions

Solution provided

Our methodological approach was based on collaborative work with the steering and development teams within the Risk Division and with the development teams within the European subsidiaries. It drew on our expertise in banking regulations, our experience in the operational implementation of new banking regulations and the development of new credit risk models. Our approach enabled the client to benefit from our knowledge of the methodologies most widely used by banks and accepted by European banking supervisors.

The proposed system and the actions carried out were as follows:

  • Proposal of a procedure for implementing the LGD downturn calculation project in four subsidiaries, three of which are international;
  • Methodological proposals :
    • Methods for identifying periods of economic crisis (nature, severity and duration)
    • Estimation methods for approach 1 (based on observed impacts) and approach 2 (based on estimated impacts)
  • Implementation of approaches 1, 2 and 3 (recalibration of LGD and calculation of LGD downturn)
  • Impact study of the three approaches
  • Documentation of methodology, codes and test results
  • Active participation in the Working Group (WG) organized by the customer to present our methodological proposals and the results of the impact studies;
  • Coordination of exchanges and teams involved in estimating the LGD downturn ;
  • Training and support for modeling teams in subsidiaries in the deployment of the proposed and implemented methodology.

Customer benefits:

Our approach enabled our customer to better understand the new regulations, and to implement them on schedule by internalizing the expertise.

The work carried out by Quanteam enabled the customer to :

  • understand the new banking regulations on calculating LGD downturn
  • a methodological note on calculating the LGD downturn
  • a study of the impact of the new regulations on shareholders' equity
  • train model development teams in the methodologies proposed and implemented

In summary: The work carried out to implement the LGD downturn has enabled the customer to comply with the new banking regulations.

Quanteam expertise makes the difference

  • Excellent knowledge of the European banking and regulatory environment
  • Experience in deploying new banking regulations
  • Proven experience in credit risk modelling
  • Experience in project management and working with international teams

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