A fresh take on risk and valuation
This article discusses how Finalyse carries out implementation of BCBS 239 projects. It shows the stumbling blogs that typically hinder implementation of such projects, such as big-bang approach or lack of communication between stakeholders. To avoid these pitfalls, Finalyse proposes a piecemeal, iterative approach which is discussed in further detail in this article. The article also provides several tips for translating a BCBS 239 plan into current systems.
ReadThis post demonstrates step-by-step a possible way to conduct Non-Maturity Deposit Modeling. It shows the practical challenges, taking as an example the overnight deposit rates in Hungary. In the current low-interest-rate environment, the modelling of non-maturity deposits has attracted interests from Banks. These models are used for critical purposes in banks such as the management of the interest rate risk of the balance sheet, or in their earnings, as it is now also expected from supervisory authorities. Finally, they are also used to determine a transfer price for deposits, to retribute the business lines in charge of collecting the deposits appropriately.
ReadMachine learning is today’s buzzword and it has gone through some phenomenal changes over the last few years. However, despite widespread adoption, machine learning models remain mostly black boxes. Hence it is essential to have techniques for explaining these black boxes in an interpretable manner. This article looks at the methods that are most used for interpreting machine learning models: SHAP, LIME and CP Profiles. It discusses advantages and drawbacks of each and shows how are they being used in practice.
ReadThe 2008 financial crisis has shown that it is vital to have a good recovery and resolution policy. Because the European-level policy on resolution and recovery of the insurers is insufficient, some national authorities have adopted their own recovery and resolution policies. However this has led to a fragmented regulatory landscape across the EU. Therefore, the European Commission was requested to create a harmonised framework. This article explains eight proposed recommendations on the future amendments to the Solvency II regulation published on that topic by EIOPA In the Consultation Paper on Solvency 2 review 2020.
ReadEvery bank is highly interested in predicting the impact that the application of the new default definition would have on various aspects. That prediction can be achieved via a comprehensive simulation of the default under the new definition on the available historical data of the credit portfolio. Knowing the broad impact of the new definition on capital requirements, IFRS 9 models, precision is highly recommended for the sake of planning of own funds requirements.
ReadThe 2020 Solvency II review intends to bring about several changes to the Solvency II Framework Directive. It follows the 2018 Solvency II interim review, which amended the Solvency II Delegated Acts. In this article, we focus on the EIOPA’s opinions on technical provisions. For now, we are excluding Long Term Guarantee (LTG) measures, a topic which deserves an article all to itself.
ReadFollowing the introduction of Solvency 2, the European Commission and Council have decided to continue their efforts to develop a common regulatory framework for the financial industry to strengthen its governance. On 13th January 2017, the regulators laid down a new milestone in the pensions market with IORP2, the new directive that replaced the existing and much amended directive 2003/41/CE. This new directive had to be transposed into national laws before 13th January 2019.
ReadEquity options are excluded the collection of IM until January 2021 in the EU. “The option seller should be able to choose not to collect initial or variation margins for these types of OTC derivatives as long as the option seller is not exposed to any credit risk. The counterparty paying the premium (‘option buyer’) should however collect both initial and variation margins”. Thereby, even if the option seller does not face any potential future exposure with the premium paid, the option buyer is still required to post the IM and VM, unless he is able to isolate this trade from other potential future exposures with the option seller.
ReadTruth be told, from a regulatory perspective, there is much more of the latter going on. Risk appetite is now widely recognised to be the main maker – or breaker – of success for financial institutions. As post mortem examinations of failed companies showed, a poor definition of risk appetite potentially leads to multiple errors in the course of business, such as taking unwarranted risks, resorting to short-term funding while taking long-term commitments, or to a general lack of alignment towards risk taking within the firm. These risk management mistakes could already prove to be fatal to the organization in isolation; if they happen simultaneously within an institution, demise is most certainly unavoidable.
ReadPrivate equity valuation considering illiquid stakes, companies at an early stage of development for which future cash-flows are very uncertain, or companies past the startup phase, but without significant revenues and with negative EBITDA. In this article, these particularities are highlighted, as well as the possible adjustments and methods that can be used when valuing private companies. We assume that, since you are at the stage where you are looking for elements to adjust your valuation output, you already are at an advanced stage of your valuation process.
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