A fresh take on risk and valuation
We keep moving forward, opening
new doors and doing new things,
because we are curious, and curiosity keeps
leading us down new paths.
A practical approach to predicting the IFRS9 Macroeconomic Forward-Looking PD

This article introduced a practical and end-to-end approach to model Point-in-Time PD in a manner that includes Forward-Looking Information for IFRS9 ECL calculation. Different techniques may produce results of varying accuracy depending on a specific dataset. The ‘best’ model should be selected by accessing different evaluation metrics and other aspects, e.g. related to model sensitivity.

Environmental Risks in the Microprudential Framework

Due to the unique features of environmental risks, extensive work is underway at the European and international levels to assess the extent to which they require urgent regulatory measures in addition to already existing frameworks. This article provides an overview of the microprudential framework’s most relevant shortcomings and their potential remediations. Its focus is on Pillar 1 aspects, addressing only the risk types most relevant from materiality viewpoint: credit, market and operational risks.

Machine learning for credit risk IRB models

This article examines the challenges and potential opportunities presented by machine learning when used to compute regulatory capital for credit risk using internal ratings-based (IRB) models. It also gives an overview of machine learning techniques that can be utilised for IRB modelling, as well as the results that can be expected.

2022 ECB Climate and Environmental risks agenda: preliminary indications

In recent years, the ECB has launched targeted actions to include climate and environmental risks in its ongoing supervision and has indicated addressing them in its list of priorities for 2022-2024. This article aims to go through the most relevant steps of the 2022 ECB supervisory C&E agenda and leverages on the results of the 2022 ECB climate stress test to provide preliminary commentary regarding banks’ preparedness for the existing and upcoming requirements.

Data management steps in credit risk modelling

This article discusses the main steps of data preparation, which determine the required fields/attributes that represent the baseline for model development where relevant data quality controls are applied. It will also discuss the ability to collect, analyse and integrate data requirements.

The 2022 ECB climate risk stress test results – a roadmap towards future best practices

On the 8th of July, the ECB published the results of its climate risk stress test (CST). The main goal of this exercise was to gain a clearer view of banks' climate-related vulnerabilities, identify data gaps, and understand how banks are currently managing climate risk. This article discusses the findings of the three modules of this climate risk stress test.

A First Look at Stress Testing Climate Change Risk For Insurers

On 27 January 2022, the European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the methodological principles of developing bottom-up stress tests for climate change risks focusing on the design and calibration of stress tests for climate change risks as part of the future supervisory testing framework. This article examines EIOPA's methodological considerations outlined in this paper.

Credit Spread Risk in The Banking Book

In December 2021, European Banking Authority published three consultation papers, including the guidelines on Interest Rate Risk in Banking Book (IRRBB) and Credit Spread Risk in The Banking Book (CSRBB), the regulatory technical standards (RTS) on the supervisory outlier test (SOT) and the RTS on the standardised approach (SA) and the simplified standardised approach (S-SA) for the economic value of equity (EVE) and the net interest income (NII). The 4-month-long consultation period finished on the 4th of April 2022. This article provides an overview of the first of the three consultation papers, the guidelines on CSRBB and discusses the methodology for the monitoring and assessment of CSRBB.

SA-CCR: The New Standardised Approach to Counterparty Credit Risk

With the SA-CCR differing substantially from the prior non-internal methods, there is significant work to be done by institutions to comply with the new regulatory requirements while minimizing the EAD (and by extension RWA) impacts on their derivative portfolios. The main effects can be split into those of a more operational versus strategic nature. On the operational side, the main challenges and considerations relate to the implementation and streamlining of the SA-CCR calculations

A deep dive on CRR III changes and the impact on credit risk modelling

The reforms will force banks to examine capital use throughout their whole operation and maybe revise their pricing and product offerings as a result. As a result, the new framework will impact company strategy and business strategies. The BCBS anticipates that this will result in a capital reallocation within the system. Larger banks will need to concentrate on capital floors, but smaller banks will need to carefully assess what infrastructure and technology changes are required to handle the greater amount and granularity of data required by the most advanced standardised techniques.