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Low Default Portfolios: Modelling and Calibration Approaches

The accurate estimation of the credit risk parameters is crucial for provisioning under IFRS9 and capital requirements (when using an IRB approach) as well as for setting up strategies for pricing, risk appetite setting, etc. Due to their unique characteristics, Low Default Portfolios (LDPs) pose distinct challenges that require modellers to explore different modelling and calibration approaches. The application of any alternative modelling technique for LDPs must be independently evaluated for each case based on various factors such as portfolio characteristics, segment, data availability, rating homogeneity, etc. This blog post elaborates on the relevant regulatory landscape, challenges and potential solutions for dealing with the LDPs.

Achieving sound, comprehensive, and effective climate-related and environmental risk assessment practices - Thoughts on the results of the ECB thematic review

In November 2022, the ECB published the “Walking the talk: Banks gearing up to manage risks from climate change and environmental degradation” report, which concludes that implemented practices do not always reach the desired level of soundness, comprehensiveness, or effectiveness. This article focuses on climate risk management. We argue that, whilst sophisticated practices are necessary, banks could optimise their approaches based on the structure of their portfolios without compromising their existing Net-Zero commitments. We discuss how to meet the regulator’s required level of maturity for materiality and credit risk assessments, whilst considering business logic and strategy in selecting the appropriate solutions to implement.

Bermuda Monetary Authority Guidance Note - CLIMATE CHANGE RISK MANAGEMENT FOR INSURERS

In August 2022, the Bermuda Monetary Authority (“BMA”) published the Guidance Note on management of climate change risks (“the guidance”) which outlines the BMA’s expectations for commercial insurers and insurance groups. This is a part of a wider movement in the insurance and banking sectors to recognise climate change risk and begin to analyse exposures and vulnerabilities. The BMA guidance presents a broad view of the expectations, including Board responsibilities and governance, strategy, risk monitoring and escalation regimes, staff training requirements, as well as the ORSA and scenario analysis expectations.

ECB Good practices for climate-related and environmental risk management

With the release of ‘Good practices for climate-related and environmental risk management’, the ECB recognized that industry-wide knowledge sharing will be pertinent for promoting and acceleration in the practices adoption. The provided examples and best practices in the report bring valuable starting point to financial institutions aiming to improve their internal operations and frameworks.

Getting ready for the Next Eu-wide Stress Test

On the 4th of November, the European Banking Authority (EBA) published the final package for the next EU-wide Stress Test, which will be officially launched in January 2023. This article outlines how the Stress Test exercise has changed, summarises the approach presented by the EBA Methodological Note for the next exercise’s run and discusses the future of stress testing.

Actuarial Data Science - Boost your model performance with Machine/Deep Learning

This article shows how machine learning techniques can boost model performance in terms of prediction accuracy and flexibility. These benefits may come with some setbacks: loss of interpretability (our next article will cover this topic) and additional hyperparameters to tune. To illustrate these different methods, we are going to use the French Motor Third-Part Liability dataset. This dataset contains risk features (such as exposure, power, vehicle age, driver age etc.), claim numbers and the corresponding claim amounts for the 413,169 MTPL policies over a one-year period.

Fundamental climate-related and environmental (C&E) risk considerations in the ICAAP

In this article we discuss the main C&E risk considerations to be made as part of the ICAAP, using the general ICAAP requirements as a starting point and combining them with the regulatory and supervisory expectations regarding C&E risk management.

Summary of TCFD progress report

Taking the 2022 Status Report published in October 2022 as a base for the analysis, this article discusses the current state of implementing TCFD (Task Force on Climate-Related Financial Disclosures) recommendations in the financial sector. We analyse why, despite some challenges, financial institutions should invest in developing methodologies for bridging the gap between the intended and realised shape of the TCFD reports.

EIOPA Application Guidance: Running Climate Change Materiality Assessment and Scenarios in the ORSA

EIOPA published the application guidance on running climate change materiality assessment and using climate change scenarios in the ORSA in August 2022 (“the guidance”). This is optional guidance which supplements EIOPA’s April 2021 Opinion on the supervision of climate change scenarios in ORSA (“the Opinion”). In this article, we discuss chapters 1 and 2, providing an overview of the guidance for the high-level reader.

Non-regulatory credit models – Retention and collection models

In this article we have presented the development of non-regulatory models and reasons why this work is important for risk related problems in financial industry. Those scorecards, even if they are not mandatory requested by the regulators, can significantly improve portfolio and cost control within the institutions. And although they are not directly connected with rating estimation/ECL calculation they can support risk estimation in many other ways.