Moody's Corporation · NYSE:MCO
Moody's — Moody's Analytics — Technical Presentation (November 2020)
40 slides from Moody's's technical presentation, November 2020
Slide 1: Banks' Stress Testing: Linking Credit Risk Capital and Liquidity Requirements
West Africa Webinar Series: Banks’ Stress Testing: Linking Credit Risk Capital and Liquidity Requirements November, 2020
Slide 2: Agenda
Agenda 1. Introduction: RIMAN 2. Enterprise Stress Testing Framework • Recent regulatory guidance on the adequacy of capital and liquidity resources • Best practices in modelling for stressed credit risk losses, capital impact and liquidity risks 3. Managing Liquidity Risk Under Regulatory Constrain
Slide 3: Speakers
Speakers » Dr Biodun Adedipe - Chief Consultant, BAA Consult » Nicholas Kunghehian, Director, Moody’s Analytics » Wasim Karim, Director, Moody’s Analytics » Metin Epozdemir, CFA – Director, Moody’s Analytics Linking Credit Risk Capital and Liquidity Requirements 3
Slide 4: Introduction by RIMAN
1 Introduction by RIMAN
Slide 5: Stress Testing of Banks' Assets and Liquidity
Stress Testing of Banks’ Assets and Liquidity Underlying Issues and Imperatives BAA Consult
Slide 6: Dimensions to COVID-19 Disruptions
Dimensions to COVID-19 Disruptions From Complicated to Complex to Chaos BAA Consult Source: Torsten Pistor: Decision Making in a Crisis (June 2020)
Slide 7: Dimensions to COVID-19 Disruptions (contd.)
Dimensions to COVID-19 Disruptions (contd.) Acronym Element Characteristics ❑ Unexpected, unstable events/issues V Volatility ❑ Unknown duration BAA Consult ❑ Lack of critical information U Uncertainty ❑ Knowledge of cause and effect ❑ Some information is available C Complexity ❑ Interconnected vari
Slide 8: Resulting Economic Challenges and Implications
Resulting Economic Challenges and Implications ❑ Total or partial collapse of global ❑ Pervasive VUCA disruptions. supply chains, whole economic ❑ Demand shock. sectors (hospitality, tourism, BAA Consult ❑ Supply shock. aviation, luxury goods, etc.) and ❑ Inflation shock. businesses (with job losses
Slide 9: COVID-19 Impact on the Banking/Finance: The Critical Nine
COVID-19 Impact on the Banking/Finance The Critical Nine ccv Raised default Raised fraud rate vulnerability BAA Consult Business Liquidity model failure shortfalls Market volatility Business disruption Increased counterparty •Lockdown and remote working risk Increase in Cost Cybersecurity (especiall
Slide 10: Inferences: Stress Scenarios
Inferences Stress Scenarios BAA Consult (Minor; Moderate; Major) Credit risk capital Liquidity
Slide 11: BAA Consult
BAA Consult B. Adedipe Associates Limited Lateef Jakande House (3rd Floor), 3/5 Adeyemo Alakija Street, PO Box 73983, Victoria Island, Lagos. +234-9021150255, 90217371000 info@baaconsult.com.ng ‘Biodun Adedipe, Ph.D., FCIB, MIoD Thank for listening +234-8023061981 bioduna@baaconsult.com.ng; God bles
Slide 12: Enterprise Stress Testing Framework
2 Enterprise Stress Testing Framework
Slide 13: Regulatory Guidance from CBN
Regulatory Guidance from CBN Guideline on Stress Testing for The Nigerian Banks – Effective 03/2019 Framework, Governance, Procedure Documented procedures, stress adequacy of internal capital and expected credit losses. Assess vulnerability to different risks and external shocks. Report to regulator
Slide 14: Simplified Process Overview
Simplified Process Overview Data Scenarios Balance Sheet Results Forecast(s) Internal + Moody’s + Budget = Pro Forma External Bank Models Scenarios Linking Credit Risk Capital and Liquidity Requirements 14 Confidential and proprietary – Not to be distributed without the prior written consent of Mood
Slide 15: Global Stress Testing Framework
Global Stress Testing Framework CBN Guidance reflects on SREP aligned with best practice 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 man
Slide 16: Typical Effort for Setting Up Stress Testing Framework
Typical Effort for Setting Up Stress Testing Framework 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
Slide 17: 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 18: 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 19: 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 20: Economic Scenarios
Economic Scenarios Nigerian Banks to determine expected PD under stressed conditions Brent crude oil 1-month forward [fob] (USD per bbl, NSA) Real GDP, 2019Q4 = 100 128 112 120 112 Stress Downside Stress Downside 104 96 Low Oil Price Baseline 104 88 Low Oil Price Baseline 80 72 64 96 56 48 40 32 88
Slide 21: 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 “Banks should also, where applicable, consider making use of their other internall
Slide 22: Managing Liquidity Risk Under Regulatory Constraints?
3 Managing Liquidity Risk Under Regulatory Constraints?
Slide 23: Daily liquidity modelling
Daily liquidity modelling From cash flows to advanced analytics Cash flows modelling contractual, statistical, behavioral and regulatory cash flows Balance Sheet Forecasting Static, dynamic and regulatory stress tests and scenarios Regulatory Compliance Outsourcing the regulatory maintenance burden
Slide 24: Counterbalancing capacity: bonds sell-off
Counterbalancing capacity: bonds sell-off » Identify unencumbered positions including long, short positions and repos » Simulating outright sale modeled with Time Series e.g. 20% of the position in one day, 50% in one week Reporting Sale Sale Maturity date of date the bond Defined through a time ser
Slide 25: New generation of regulatory reports
New generation of regulatory reports » Consistency: single set of data to produce all analytics » Regulatory mapping: phase Data Enrichment Calculation Analytics that affect regulatory categories according to a supervisor and slice deposits balance Dynamic enrichment » New business: multiple NSFR, L
Slide 26: CFMR reports
CFMR reports » Regulatory dimensions part of the reports, a mix between operational ALM and regulatory compliance » What-if scenarios, i.e. not only regulatory scenario » Behaviors needs to be incorporated Linking Credit Risk Capital and Liquidity Requirements 26
Slide 27: Liquidity Management
Liquidity Management Example of reports Components » Same data to produce all analytics Regulatory – BS Management: Liquidity and IRRBB classification – Regulatory: LCR and NSFR » Instrument modeling for contractual cash flows » Behavioral models for maturing and non- maturing contracts » Regulatory
Slide 28: Optimizing your balance sheet
Optimizing your balance sheet LCR forecast objectives » Analyze the impact of all assumptions on the different regulatory analytics » Consistency: use the same engine to compare “spot” results and “forecast” results » Mitigating actions: what are the good hedging strategies » Performance: launch mul
Slide 29: Liquidity Ratios
Liquidity Ratios Analyze the LCR & NSFR and its evolution
Slide 30: Sell-off impact on LCR forecast
Sell-off impact on LCR forecast LCR optimized by sell-off of Bonds to boost earnings LCR LCR 160% 200% Sell-off HQLA 1 sold Linking Credit Risk Capital and Liquidity Requirements 30
Slide 31: Benefits of an integrated platform
Benefits of an integrated platform Regulatory True Risk-adjusted Compliance Optimization pricing Banks need to be Regulatory constraints in Models need to be prepared for new business simulations is shared by the Bank and regulatory requirements key to forecast and be consistent for all and must be
Slide 32: Tools and Technologies for Compliance and Management
4 Tools and Technologies for Compliance and Management
Slide 33: 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 33
Slide 34: Awards
Awards Credit stress-testing product of the year Enterprise-wide stress-testing product of the year Linking Credit Risk Capital and Liquidity Requirements 34
Slide 35: White Paper: Stress Testing Under COVID-19
White Paper Stress Testing Under COVID-19 » Published on the MA website » Published in the American Banker Linking Credit Risk Capital and Liquidity Requirements 35
Slide 36: 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 37: 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 38: Stress testing is a significant undertaking
Stress testing is a significant undertaking Requires data, analytics and technology infrastructure …and upskilling specialist resources
Slide 39: West Africa Autumn Webinar Series
West Africa Autumn Webinar Series Episode 2 Wednesday, 2December 09:00 GMT | 10:00 WAT Implementing an Effective Model Validation Framework
Slide 40: Linking Credit Risk Capital and Liquidity Requirements
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