Moody's Corporation · NYSE:MCO
Moody's — Moody's Analytics — Technical Presentation (November 2020)
27 slides from Moody's's technical presentation, November 2020
Slide 1: East Africa Webinar Series: Stress Testing and ICAAP
East Africa Webinar Series: Stress Testing and ICAAP November, 2020
Slide 2: Agenda
Agenda 1. Introduction: Dr Habil Olaka, KBA • Regulatory, Fiscal and Monetary Interventions to contain the impact of pandemic • Banking industry support for the enterprises and households. • The importance of credit risk capital for financial institutions. 2. Enterprise Stress Testing Framework • El
Slide 3: Speakers
Speakers » Dr Habil Olaka, CEO, Kenya Bankers Association » Nash Subedar, Director, Moody’s Analytics » Wasim Karim, Director, Moody’s Analytics » Metin Epozdemir, CFA – Director, Moody’s Analytics East Africa Webinar Series: Stress Testing and ICAAP 3
Slide 4: Introduction: Regulatory and Banking Industry Support During Pandemic
1 Introduction: Regulatory and Banking Industry Support During Pandemic
Slide 5: Enterprise Stress Testing Framework
2 Enterprise Stress Testing Framework
Slide 6: COVID-19 Impact on Credit Risk for Kenya
COVID-19 Impact on Credit Risk for Kenya Average Probability of Default for Corporate (All Industries) Probability of Default COVID -19 Impact 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Source:
Slide 7: Credit Risk Remains Elevated
Credit Risk Remains Elevated Widespread Disruption Hurts Borrower Repayment Capacity. Probability of Default 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Source: Based on Moody’s Analytics EDFTM
Slide 8: Sectoral Differences in Credit Risk Exists
Sectoral Differences in Credit Risk Exists COVID -19 Impact on Significant Industries 9.00% » Corporate sectors to which Banks are exposed (based on Moody’s rated bank portfolios’ sector 8.00% analysis) » All Industries across the board has seen an 7.00% increase in risk in Q1 6.00% » Relative riski
Slide 9: Regulatory Guidance
Regulatory Guidance KCB Guidance Note on Internal Capital Adequacy Assessment Process Supervisory Review & Evaluation Process Supervisory dialogue covering internal governance, organization of the institution's business and how it allocates capital against risk. Based on SREP, the Central Bank may r
Slide 10: General ICAAP Rules
General ICAAP Rules Guidance reflects on SREP aligned with best practice Normal & Formal and Stressed Documented Conditions Link to Updated for Strategy and Pandemic Business Plan (Oct 2020) All Material Regularly Risks Covered Validated East Africa Webinar Series: Stress Testing and ICAAP 10
Slide 11: Global Stress Testing Framework
Global Stress Testing Framework Objective Methodological approach ❑ Quick response to strategic Models Off-the-shelf Customized Top- ❑ ESG/climate change decision methodology Approach ❑ Quick scenario analysis in crisis down Macro-economic management/major macro- ❑ COVID-19 economic scenario changes
Slide 12: Simplified Process Overview
Simplified Process Overview Stress Testing Data and Analytics Data Scenarios Balance Sheet Results Forecast(s) Internal + Moody’s + Budget = Pro Forma External Bank Models Scenarios East Africa Webinar Series: Stress Testing and ICAAP 12
Slide 13: Example: Top Down Forecasting
Example: Top Down Forecasting Market Share is determined by interplay between the target Bank Level bank and its competitors Market Share Data Projection Market Bank Level Model Projection Share Industry Industry Aggregate Projection Industry Projection is determined by a separate macro model of cre
Slide 14: Example: Bottom Up Stress Testing
Key Sales Market Initiatives – 2H17/2018 Example: Bottom Up Stress Testing Process under IFRS 9 ECLs CET1 Ratio GDP Growth GDP Growth 100% 90% 3 3 14% 80% 2 2 13% 70% 12% 1 60% 1 11% 0 50% 0 10% -1 40% 9% -1 30% -2 8% -2 20% 7% -3 10% 6% -3 -4 0% Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Year 1 Year
Slide 15: Bottom Up Stress Testing Challenges
Bottom Up Stress Testing Challenges Direct modelling of stage Aggregation Forecasting Stage 2 Assets migrations Replicating the full IFRS 9 calculations at Only possible if the bank can backfill each point of the stress scenario very staging computationally intensive Transition matrices Complexity F
Slide 16: Building a Framework for the Future
Building a Framework for the Future The target end-state Weak Position Strong Position Strategic Advantage Board & Senior o Board does not fully understand o Board understands ST results and o Board fully understands areas of Management the risks in ST periodically revalues exposures vulnerability a
Slide 17: “Journey is the Reward”
“Journey is the Reward” Planning a Tailored Approach for Bank’s Requirements Context and Target Data model and modelling Tool configuration, testing Documentation and Solution assumptions and analysis training Key Activities » Assessment of industry data » Data mapping and data » Customization of fi
Slide 18: Economic Scenarios
Economic Scenarios Essential to Obtaining Forward-looking Views on Capital Adequacy Commercial bank - Lending rate, (%, NSA) Real GDP, 2019Q4 = 100 144 25 136 Stress 20 128 Downside 120 Baseline 15 112 10 Stress 104 Downside 96 5 Baseline 88 80 0 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1 2022Q1 2023
Slide 19: Leveraging Existing Models and Tools
Leveraging Existing Models and Tools Regulatory ICAAP Excercises Pillar I Capital Stress PDLGD- EAD Obligor IRB characteristics PD/LGD/ EAD Dynamic PD/LGD/EAD analysis IFRS 9 PD/LGD/ EAD Origination Pricing Provisions East Africa Webinar Series: Stress Testing and ICAAP 19
Slide 20: Tools and Technologies for Compliance and Management
4 Tools and Technologies for Compliance and Management
Slide 21: Strategic Capital Planning and Forecasting Tool
Strategic Capital Planning and Forecasting Tool Stress Testing & Scenario Analysis What if and CECL\ ECL Strategic Forecasting Analysis Capital Risk Analyzer Peer Group Capital Analysis Planning Forward- looking Profitability Linking Credit Risk Capital and Liquidity Requirements 21
Slide 22: Awards
Awards Credit stress-testing product of the year Enterprise-wide stress-testing product of the year Linking Credit Risk Capital and Liquidity Requirements 22
Slide 23: White Paper
White Paper Stress Testing Under COVID-19 » Published on the MA website » Published in the American Banker Linking Credit Risk Capital and Liquidity Requirements 23
Slide 24: Our Solution: Capital Risk Analyzer (CRA)
Our Solution: Capital Risk Analyzer (CRA) Analytics are embedded to support critical management outputs Forecast Credit Losses Balance Sheet & (top-down and bottom-up) Income Statements Forecast ECL Impairments (ImpairmentStudio recommended as well) Intuitive Data Visualizations Forecast RWA (basic
Slide 25: Capital Risk Analyzer Highlights
Capital Risk Analyzer Highlights One analysis will Stress testing, populate multiple benchmarking reports for and strategic regulatory and Easy to use capital planning interface works client-specific all in one easy- financial on tablets to-use tool statements Hosted on Designed the Cloud to produce
Slide 26: …and upskilling specialist resources
Stress testing is a significant undertaking Requires data, analytics and technology infrastructure …and upskilling specialist resources
Slide 27: East Africa Webinar Series: Stress Testing and ICAAP
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