ESTIMATION OFEXPECTED CREDIT LOSS (ECL) PARAMETERS
Background & challenges
In the context of improving ECL estimation and following the COVID-19 health crisis, the customer launched a project to overhaul ECL parameter measurement methodologies, and sought our advice on the most appropriate and relevant methods to use.
The mission consisted of making methodological proposals on :
- credit portfolio segmentation ;
- estimation of the migration matrix ;
- integration of COVID-19 and forward-looking data into PD and LGD models;
- PD lifetime estimate.
Solution provided
Quanteam set up a team of consultants who were able to propose methodologies based on the consultants' expertise and market benchmarks. To meet the customer's needs, the Quanteam team and the customer agreed on three streams:
- Determination of segmentation axes and estimation of rating transition matrices
- The inclusion of the COVID-19 period in PD, LGD and forward-looking models
- PD lifetime estimation and its use in bucket classification
For each of these streams, five methodologies have been proposed, along with their advantages and disadvantages, and the extent to which they are used by European and American banks.
Our approach consisted in setting up intermediate meetings to get to know the existing situation and present our methodological solutions for each stream. A detailed report and a summary report were delivered at the end of the mission.
Customer benefits:
Our expertise in credit risk models and our knowledge of the models used on the Paris market enabled the client :
- A range of methodologies already used by banks and new, innovative ones
- A detailed report and a summary report on all proposed methodologies (description, calibration, R/SAS package, strengths and weaknesses).
In addition, the choice of profiles adapted to the customer's needs (expert consultants and credit risk management consultants) enabled us to answer further questions from the customer during feedback meetings and produce high-quality methodological notes within the allotted time.
In short: a methodological proposal to improve ECL calculations and take into account the impact of the COVID-19 crisis in ECL calculation parameters.
Quanteam expertise makes the difference
- Excellent knowledge of the European banking and regulatory environment
- A team of consultants created and dedicated to this consulting mission
- Proven experience in credit risk modelling
- Experience in developing models for ECL calculations
- Ability to deliver high-quality methodological notes within the allotted time
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