This article discusses the risks associated with the use of vendor models for IFRS9 compliance by financial institutions, which have increasingly turned to external agencies for model development. While these models are complex and require rigorous evaluation, evaluating vendor models can be particularly challenging due to the proprietary components that vendors may choose not to disclose. The article highlights four types of risks related to vendor models: vendor-specific, institution-specific, implementation-related, and business continuity-related, and outlines different industry-standard approaches to mitigate these risks. The considerations specific to IFRS9 usage of vendor models will help users align their model risk management policies and practices with regulatory guidance. The article emphasizes the need for caution when incorporating vendor models into IFRS9 compliance strategy and recommends Finalyse Risk Advisory team as a trusted partner to guide financial institutions through the complex process of vendor model usage.

In this article we explore the impact of increasing interest rates on Asset and Liability Management (ALM) and offer best practices for effective ALM, using the recent case of Silicon Valley Bank (SVB) as an example. In today’s unpredictable world, marked by events such as the 2008 financial crisis, the ongoing global health crisis, and geopolitical changes, financial institutions as well as their management and decision boards have a crucial responsibility to deploy best practices to protect the interests of their shareholders and customers. Managing the mismatches between assets and liabilities, both in terms of interest rate and liquidity risks is essential to maintain a healthy balance sheet.

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.

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.

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.