ESTIMATION OFEXPECTED CREDIT LOSS (ECL) PARAMETERS
Background & Challenges
As part of efforts to improve ECL estimation and in the wake of the COVID-19 health crisis, the client launched a project to overhaul the methodologies used to measure ECL parameters and sought our advice on the most appropriate and relevant methods to use.
The assignment involved developing methodological proposals on:
- the segmentation of a loan portfolio;
- estimation of the migration matrix;
- the incorporation of data from the COVID-19 period and forward-looking data into PD and LGD models;
- the estimation of the lifetime probability of failure.
Solution
Quanteam has assembled a team of consultants that has enabled the company to develop methodologies based on the consultants’ expertise and market benchmarks. To meet the client’s needs, the Quanteam team and the client agreed on three streams:
- Determining segmentation axes and estimating rating transition matrices
- Incorporating the COVID-19 period into PD, LGD, and forward-looking models
- Estimating lifetime probability of default and its use in bucket classification
For each of these streams, five methodologies were proposed, along with their advantages and disadvantages and the extent to which they are used by European and American banks.
Our approach involved holding interim meetings to assess the current situation and present our methodological solutions for each stream. A detailed report and a summary report were delivered at the end of the project.
Benefits for the customer:
Our expertise in credit risk models and our knowledge of the models used in the Paris financial market enabled the client to:
- To have a set of methodologies already used by banks, as well as new and innovative methodologies
- A detailed report and a summary report on all proposed methodologies (description, calibration, R/SAS package, strengths and weaknesses)
In addition, selecting the right profiles to meet the client’s needs (expert consultants and credit risk management consultants) enabled us to address the client’s additional questions during the debriefing sessions and produce high-quality methodological notes within the allotted timeframe.
In summary: a methodological proposal to improve the calculation of the ECL and to account for the impact of the COVID-19 crisis in the parameters used to calculate the ECL.
Quanteam’s expertise makes all the difference
- Extensive knowledge of the European banking and regulatory environment
- A team of consultants established specifically for this consulting assignment
- Proven expertise in credit risk modeling
- Experience in developing models for calculating ECL
- The ability to produce high-quality methodological notes within the allotted time
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