Moody's Corporation · NYSE:MCO
Moody's — Technical Presentation (July 2016)
24 slides from Moody's's technical presentation, Jul 7, 2016
Slide 1: IFRS 9 Models: Complying with Impairment Calculations for Consumer Portfolios
IFRS 9 Models: Complying with Impairment Calculations for Consumer Portfolios BARNABY BLACK, CREDIT RISK EXPERT (EMEA)
Slide 2: About Moody's Analytics
Moody's Analytics helps capital markets and credit risk management professionals worldwide respond to an evolving marketplace with confidence. The company offers unique tools and best practices for measuring and managing risk through expertise and experience in credit analysis, economic research and
Slide 3: Speaker
Speaker Barnaby Black is a Credit Risk Analyst in Moody’s Analytics European office, responsible for building probability of default forecasting and stress testing models that incorporate business performance data with macroeconomic data for clients across the globe. Amsterdam, March 15th 2016, IFRS
Slide 4: Agenda
Agenda Demonstration of how to address IFRS 9 challenges by incorporating forward-looking information into impairment models for consumer lending portfolios. » Using Macroeconomic Drivers in Impairment Models » Lifetime length determination » Lifetime PDs at origination » Threshold setting Paper on
Slide 5: Using Macroeconomic Drivers in Impairment Models
1 Using Macroeconomic Drivers in Impairment Models 5
Slide 6: Linking Macroeconomic Drivers to Risk Parameters
Linking Macroeconomic Drivers to Risk Parameters Data Variable Selection Validation Significance of the driver Sensitivity of the driver on Availability of historical time the target variable series for macroeconomic indicator Worthwhile improvement on the model (e.g. increase in adjusted R² value)
Slide 7: Linking Macroeconomic Drivers to Risk Parameters
Linking Macroeconomic Drivers to Risk Parameters 1. Identify macroeconomic variables that are available historically & forecasted across scenarios 2. Run exhaustive search across 1 (univariate), 2, 3, 4 variables • How many macroeconomic variables can be brought into the model should become clear (i
Slide 8: Lifetime length determination
2 Lifetime length determination 8
Slide 9: An Approach to IFRS9 Impairment Modelling
An Approach to IFRS9 Impairment Modelling • A vintage-based panel-data approach can be utilised for modelling retail portfolios. • We propose instrument-level calculations of Expected Credit Loss after modelling at a more aggregated view. 9
Slide 10: Lifetime Length Determination
Lifetime Length Determination CREDIT EXAMPLES OF APPROACH FOR LIFETIME LENGTH TYPE PRODUCTS DETERMINATION NON-REVOLVING MORTGAGES CREDIT USE CONTRACTUAL END DATE LOANS TO IDENTIFY LIFETIME LENGTH AUTO-LOANS REVOLVING USE DATE OF PERIODIC REVIEWS CREDIT CARDS CREDIT OR CURRENT ACCOUNTS MODEL BEHAVIOU
Slide 11: Modelling the Behavioural Life for Revolving Credit
Modelling the Behavioural Life for Revolving Credit Source: Moody’s Analytics 11
Slide 12: Lifetime PDs at Origination
3 Lifetime PDs at Origination 12
Slide 13: Forward-looking Assumptions
Forward-looking Assumptions » When reasonable and supportable information that is more forward-looking than past due information is available without undue cost or effort, it must be used to assess changes in credit risk. » As the stage allocation should use the change in the risk of a default occur
Slide 14: Calculating a Lifetime PD at Origination
Calculating a Lifetime PD at Origination Source: Moody’s Analytics 14
Slide 15: Calculating a Lifetime PD at Origination
Calculating a Lifetime PD at Origination Source: Moody’s Analytics 15
Slide 16: Account-Specific Lifetime PD at Origination
Account-Specific Lifetime PD at Origination Source: Moody’s Analytics 16
Slide 17: Threshold Settings
Threshold Settings Moopy’s 7 ANALYTICS
Slide 18: An Approach to Stage Allocation
An Approach to Stage Allocation » For allocation into stage 2…what constitutes a ‘significant’ increase in credit risk? » We propose a quantitative approach with qualitative overrides (such as notable changes in bureau information, bankruptcy, forbearance etc.) » For quantitative assessment, conside
Slide 19: An Approach to Stage Allocation
An Approach to Stage Allocation Account Example Reference Description Value P Product Credit Cards (CC) A₀ Lifetime PD at Origination 3.56% A₁₂ Lifetime PD at Age 12 Forecasted at Origination 2.86% B₁₂ Current Reporting Date (Age 12) Lifetime PD 3.15% R₁₂ Ratio at Age 12 (B₁₂/A₁₂) 110% Step 1. Look
Slide 20: An Approach to Stage Allocation
An Approach to Stage Allocation SIGNIFICANT INCREASE IN CREDIT RISK? “Regardless of the way in which an entity assesses significant increases in credit risk, there is a rebuttable presumption that the credit risk on a financial asset has increased significantly since initial recognition when contrac
Slide 21: Concluding Remarks
Concluding Remarks » Number of elements to consider when bringing macroeconomic drivers into a forecasting model. » Lifetime length determination straight-forward for non-revolving credit but the approach for revolving credit requires some thought. » Existing 12 month point-in-time estimates can be
Slide 22: Moody's Analytics Credit Loss and Impairment Analysis Suite
Moody’s Analytics Credit Loss and Impairment Analysis Suite Moody’s Analytics Credit Loss and Impairment Analysis Suite improves credit loss estimation analysis and calculations. Its data integrity, analytics, and regulatory reporting solutions provide a modular, flexible, and comprehensive IFRS 9 i
Slide 23: Contact us
Contact us at help@economy.com or at a location below: United States United Kingdom Australia 121 North Walnut Street One Canada Square Level 10, 1 O'Connell Street Suite 500 Canary Wharf Sydney, NSW, 2000 West Chester, PA 19380 London E14 5FA Australia +1.610.235.5299 +44.20.7772.5454 +852.3551.307
Slide 24: Copyright and legal notice
© 2016 Moody’s Analytics, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMIN