What constitutes an optimal Solvency Capital Requirement (SCR) target ratio? Since Solvency II’s introduction, this question has challenged boards and management teams. While there’s no universal answer, aligning SCR targets with a (re)insurer's unique circumstances and risk appetite is critical. Industry trends show convergence toward a middle ground, but diverse practices persist.

Discover how automated process mapping transforms insurance workflows, optimizing efficiency and transparency in financial reporting, valuation, risk management, and pricing. This article explores manual versus automated process mapping, showcasing how insurers can accelerate spreadsheet-based processes using open-source tools like R and yEd. Learn how auto-generated process maps enhance scalability, accuracy, and user experience while identifying bottlenecks and improving governance. Additionally, delve into advanced technologies such as process mining for deeper insights and generative AI for converting Excel workflows into code, streamlining operations. Embrace automation to future-proof insurance workflows and stay tuned for more insights in our blog series.

Following a prolonged period of low interest rates, recent sharp increases have marked the fastest rise in decades. As central banks such as the ECB and the FED initiate policy rate reductions amidst ongoing geopolitical and economic uncertainties, the interest rate market remains volatile. This article offers a comprehensive overview of the regulatory and organizational frameworks that banks utilize to manage interest rate risk. It further delves into conventional measurement tools and discusses various techniques and strategies for effectively managing and hedging against potential adversities from fluctuating interest rates, emphasizing the need for cautious and proactive risk management in the banking sector.

Insights into climate change risk management in insurers' ORSA processes. Learn how the 2024 cycle reflects EIOPA guidance, challenges in stress testing scenarios, and the shift toward short-term approaches. Discover best practices for integrating climate risks into insurance risk management frameworks.

After Brexit UK implementation of the Basel Framework diverged from approach took by EBA in EU. This article highlights the differences across all risk types, disclosure requirements, and the level of regulatory expectations. Finalyse worked extensively with Banks across EU, successfully delivering Basel 3.1 compliant models, supporting model risk management, developing MI, and driving technology change.

With the introduction of IFRS 9, financial institutions are required to adopt a structured framework for calculating expected credit losses (ECL), which includes both 12-month and lifetime ECL estimations. This study explores a robust approach to determining worst-case default rates (WCDR) using the Z-score methodology. The Z-score methodology incorporates key variables such as asset correlation, market factors, and threshold values, and can be applied at both the portfolio and pool levels. The article discusses methods for calculating asset correlation and optimizing transition probabilities between credit states. Additionally, it outlines how Z-scores can be used in regression analysis with macroeconomic variables to forecast future default probabilities. By providing a comprehensive framework for probability of default (PD) estimation, this study enhances the precision of credit risk modelling and supports the implementation of forward-looking ECL assessments as mandated by IFRS 9.

Dans un contexte économique complexe, les assureurs vie français font face à des défis majeurs liés à la gestion des taux d'intérêt élevés. Finalyse offre des solutions innovantes pour optimiser l'ALM, renforcer la solvabilité et saisir les opportunités de marché, garantissant ainsi une gestion stratégique efficace dans ce secteur dynamique.

The Solvency II Review has reached a crucial milestone with the European Parliament and European Council publishing agreed amendments in January 2024. Initiated in December 2020 by EIOPA and formalized by the European Commission in September 2021, the review has undergone extensive deliberations, including the EU Council's views in June 2022 and the ECON's approval in late 2023. Although the new Solvency II Directive aims for implementation by January 2026, further steps at the European Parliament level could extend this timeline. Stay updated on the latest developments in EU insurance regulation.

Environmental, Social, and Governance (ESG) reporting has become essential for corporate transparency and sustainability. Financial institutions are facing complex regulations and diverse data requirements in this arena. This article serves as a comprehensive guide for financial institutions, detailing the significance of ESG reporting, the regulatory landscape, key challenges, and essential steps for effective ESG disclosure. Effective management of ESG data ensures credibility of ESG reporting, contributing to sustainable business practices and fostering stakeholder trust.

Effective liquidity risk management is crucial for (re)insurance companies to meet financial obligations under adverse conditions. This guide highlights the importance of a robust framework for stability and success, emphasizing compliance with the 2024 Solvency II Directive amendments, which require detailed annual liquidity risk management plans. It covers liquidity risk, the uncertainty of timely payment obligations, necessitating alignment with regulatory frameworks, stakeholder communication, and structured governance. Key processes include risk identification, assessment, monitoring, and stress testing. A well-defined contingency plan and regular reviews by the Chief Risk Officer, with Board approval, ensure readiness for potential crises. This guide offers insights into principles, methodologies, and governance for a resilient liquidity strategy.

The Bermuda Monetary Authority (BMA) is set to introduce major regulatory changes impacting Bermuda-based reinsurers. Recognized globally for its business-friendly environment, Bermuda is revising its insurance regulations to maintain equivalence with Solvency II. The BMA’s 2023 updates will significantly alter the calculation of technical provisions, capital requirements, and governance. Key changes include a revamped Scenario-Based Approach (SBA) and updated methodologies for risk margin and BSCR calculations. These reforms aim to bolster transparency and risk sensitivity, affecting both existing and new businesses. Learn how these updates will reshape the Bermudian reinsurance landscape and what reinsurers must do to comply.

Environmental, Social, and Governance (ESG) reporting has become essential for corporate transparency and sustainability. Financial institutions are facing complex regulations and diverse data requirements in this arena. This article serves as a comprehensive guide for financial institutions, detailing the significance of ESG reporting, the regulatory landscape, key challenges, and essential steps for effective ESG disclosure. Effective management of ESG data ensures credibility of ESG reporting, contributing to sustainable business practices and fostering stakeholder trust.

Ce vendredi 26 avril 2024 les agences de notation Moody's & Fitch vont actualiser la notation financière de la France. Quelle sera l'issue de cette annonce? Perspective stable ou dégradation? Et en cas de dégradation quel impact sur le taux d'intérêt des obligations d'état françaises ? Ces questions concernent notamment les institutions financières qui sont sujettes à des effets de revalorisation de leurs stocks d'obligations au gré des évolutions de taux.

A number of EU member states, including Ireland, France and Germany, have already established domestic recovery and resolution planning requirements. However, many others lack such specific legislation. While these other countries are well protected by Solvency II, insurer failures still occur and pose significant risks to financial stability and to policyholders. The IRRD addresses this gap by creating a harmonised framework for the recovery and resolution of insurance and reinsurance undertakings.

In response to the escalating challenges posed by climate change, regulatory bodies are intensifying efforts to equip financial institutions with the tools necessary to confront these risks. The European Central Bank (ECB) released guidelines in 2020, providing a crucial framework for banks to manage climate-related risks effectively. However, compliance poses challenges including interpretation hurdles, resource constraints, governance complexities and data deficiencies. This article outlines key challenges and offers a structured roadmap. Beginning with a gap analysis, it emphasizes stakeholder engagement, governance setup, and robust risk identification. Quantitative metrics and transparent disclosures are vital for stakeholder confidence and informed decision-making.

Participants worry that CRR3 implementation would reduce the attractiveness of securitisation and even question its economic viability. Although the last amendments adopted after the trialogue discussions in 2023 comprise transitional arrangements that will smoothen the impact of the Output Floor on securitised positions, worries are persisting for the long-term efficiency of newly issued programs that are typically planned to produce effects over several years. In this article we will explore in detail the mechanisms affecting securitisation efficiency under CRR3.

The European Banking Authority’s (EBA) Draft Guidelines on ESG Risk Management, issued in January 2024, usher in a significant shift in the banking sector’s approach to environmental, social and governance (ESG) factors. This paper provides an in-depth analysis of the EBA guidelines, focusing on compliance requirements and strategies for effective ESG risk management. Key aspects covered include proportionality in risk management, methodological approaches to ESG data collection and monitoring, and principles for effective management. The guidelines emphasize the need for aligning ESG plans with business strategies, reflecting a broader push towards sustainability. By adhering to these guidelines, financial institutions can mitigate ESG related risks while capitalizing on emerging opportunities, paving the way for a more resilient and sustainable financial sector.

This article provides an insightful exploration of the European Banking Authority's (EBA) latest regulatory developments in the context of the Fundamental Review of the Trading Book (FRTB) framework. Specifically, it delves into the finalized Implementing Technical Standards (ITS) released on January 11, 2024, which significantly expand Pillar I market risk reporting requirements. The ITS introduces novel templates aimed at capturing detailed information pertinent to the alternative standardized approach (ASA) and alternative internal model approach (AIMA). Emphasizing the effective date of March 31, 2025, the article examines the implications of these updated reporting standards, with a particular focus on the ASA reporting. By dissecting key components of the recent updates, this article offers valuable insights into the evolving regulatory landscape and its potential ramifications for financial institutions navigating the complexities of market risk management.

The Corporate Sustainability Reporting Directive (CSRD), effective in the EU since January 2023, marks a pivotal shift in corporate sustainability reporting, supplanting the Non-Financial Reporting Directive. With heightened requirements spanning carbon emissions, pollution, waste, and biodiversity, the CSRD mandates robust disclosures integrated into annual reports. This directive offers a unique chance for companies to embed ESG principles into core strategies, enhancing transparency for stakeholders and expanding coverage to nearly 50,000 entities, fostering informed decision-making and risk management.

"Explore the Basel Committee's latest public consultation on recalibrating shocks for interest rate risk in the banking book. Learn how recent banking turmoil has spurred a revaluation of global standards to safeguard capital and earnings amidst changing economic conditions. Comment by 28 March 2024."

Explore this post (Halperin, 2020) dissecting the Black-Scholes model's flaw in assuming a perfect hedge. The article introduces a discrete model, sidestepping continuous rebalancing, and employs Q-learning to solve it efficiently. Covering classical derivation, discrete modelling, and Q-learning primer, it unveils the QLBS model. This ground breaking approach simultaneously provides optimal hedging and option prices, reshaping option pricing dynamics.

Financial institutions face increasing challenges in complying with BCBS-239 principles, particularly in documenting data lineage and mapping process flows for relevant risk metrics. The inefficiencies and complexities in data transformation and aggregation processes are attributed to the growing number and complexity of regulatory reporting requirements. This article explores the development of an Integrated Data Layer as a strategic solution to streamline risk data aggregation and reporting, leveraging BCBS-239 artifacts and aligning with the European Central Bank's (ECB) Banks' Integrated Reporting Dictionary (BIRD) initiative.

Actuarial modelling plays a pivotal role in the decision-making processes of insurance and reinsurance companies, encompassing functions such as pricing, reserving, capital projections and asset-liability modelling. This article provides an overview of Moody’s AXIS, a widely used actuarial modelling software in the insurance industry, highlighting its design and functionalities.

Dive into the world of actuarial modelling with FIS® Prophet, as this article explores the intricacies of this powerful tool. Uncover the key features propelling FIS ® Prophet’s popularity among insurers and gain insights into advanced functionalities like the Asset Liability Strategy library and stochastic calculations. Discover the essential steps in model consolidation, migration, and validation, crucial for insurers navigating the complex landscape of regulatory compliance and seamless decision-making. Explore the FIS® Insurance risk suit (a.k.a. Prophet) and revolutionize your approach to actuarial modelling.

The Insurance Capital Standard (ICS) represents a crucial development in the global regulatory landscape for Internationally Active Insurance Groups (IAIGs), with the International Association of Insurance Supervisors (IAIS) striving to establish a common framework ensuring comparable outcomes across jurisdictions. The ICS, an integral component of the Common Framework for the Supervision of IAIGs, is poised for implementation as a group-wide prescribed capital requirement following its ongoing five-year monitoring period. This article delves into the technical intricacies of the ICS, focusing on its three key components: market-adjusted valuation (MAV), qualifying capital resources and the standard method for ICS capital requirement.

Discover how machine learning is transforming credit scoring models. Explore cutting-edge techniques for feature engineering, including advanced methods for handling missing data, variable transformation, and dimensionality reduction. Uncover the key to improved accuracy, flexibility and adaptability in the evolving landscape of credit risk modelling. Stay ahead of the curve in the AI-driven financial industry.

This article discusses the impact of the International Financial Reporting Standard 9 (IFRS9) on provisioning behaviour in banks, particularly during economic shocks like the COVID-19 pandemic and energy price shocks. This shift from the Incurred Loss model to the Expected Credit Loss (ECL) model introduced by IFRS 9 aimed to make provisioning more forward-looking and responsive to economic conditions. However, the study reveals the provisioning and its impact on transparency and risk. Concerns about excessive procyclicality in IFRS 9 are addressed, emphasizing the importance of finding the right balance between flexibility and transparency to maintain financial system resilience.

This article provides an overview of the CSSF's thematic review on the validation of Value at Risk (VaR) models used by UCITS Management Companies for global exposure calculation. The review focuses on CSSF observations and recommendations, emphasizing the independence of model validation, comprehensive UCITS coverage, detailed VaR validation reports, robust mathematical foundations, completeness of VaR calculation, and effective back-testing and stress-testing procedures. The article highlights the challenges that IFMs face depending on their risk management organization.

This article discusses the significant amendments to the Solvency II directive, a comprehensive review published by the European Commission (EC) in September 2021. The amendments, proposed after extensive research by EIOPA, were submitted to the European Parliament for evaluation and endorsement. The Committee on Economic and Monetary Affairs (Econ) within the European Parliament has recently approved a range of amendments to the EU's Solvency II rules and introduced a new directive focusing on the recovery and resolution of insurers. The article explores the impact of these approved changes on the regulatory framework for insurers operating within the European Union. After more than a year of deliberation, Econ members voted on compromises and amendments, leading to the majority approval of the Solvency II proposals. Furthermore, the article highlights the proposed implementation date of January 1st, 2026, for the amended directive, as put forth by Econ. This milestone marks a significant step toward reshaping the regulatory environment for insurers in the EU.

In July 2023, ACPR launched its second climate stress test which targets insurers. Focused on market risk and underwriting risk in various insurance lines, the exercise includes three long-term scenarios (up to 2050) and a short-term stress scenario (up to 2027). This article outlines the scenarios and ACPR's objectives with regards to addressing climate change risks. The timing coincides with the new requirement for climate risk analysis in insurers' ORSA, monitored by EIOPA from April 2023. The framework used in this exercise may be of interest to insurers outside of France, also, as they enhance their ORSA approach.

Explore the journey of enhancing risk management practices in major banks through BCBS 239 compliance. Learn how the Basel Committee's data management framework aims to improve risk reporting and decision-making, challenges faced by banks, and the pragmatic approach taken by Finalyse's data governance toolkit for efficient implementation.

ECB's Revised Guide to Internal Models: Enhancing Risk-Weighted Asset Determination and Capital Calculation. Explore the incorporation of climate-related and environmental risks, support for simplified approaches adoption, standardized definition of credit risk default, measuring default risk in the trading book, and rules governing internal models for counterparty credit risk. Public consultation until Sept 15, encouraging feedback from banks and stakeholders. 60% of risk-weighted exposure amounts for credit risk among ECB-supervised banks calculated using internal models, amounting to €8.6 trillion in 2022.

Optimize credit risk model performance with meticulous data preparation. Transform raw data into structured format. Iterative process ensures relevancy over time. Explore, treat missing/outlier values, encode, scale, and transform variables. Select best model using data partitioning. Validate with training, validation & test sets. Ensure accuracy and reliability with statistically significant variables.

Credit risk analysis plays a crucial role in assessing the creditworthiness of borrowers. This article explores the application of various statistical techniques and machine learning algorithms for credit risk modelling. Apart from discussing the commonly employed techniques through their underlying principles and estimation techniques, the article also presents a case study involving a sample banking dataset containing demographic and credit bureau variables. Four algorithms are implemented and compared using performance evaluation metrics. The dataset is divided into training and testing datasets to assess model accuracy on unseen data. Important statistical tests are considered to ensure model validity. The article emphasizes the significance of selecting variables based on statistical significance and handling non-linear relationships. The findings contribute to the understanding of machine learning techniques in credit modelling and provide insights for better credit risk assessment.

Explore the impacts and challenges associated with the revised Standardised Approach, concerning real estate exposures. The implementation of Basel IV, specifically the 3rd Capital Requirements Regulation (CRR3), is rapidly approaching and has become a growing concern for banks. CRR3 – the EU translation of the Basel IV standards – aims to address the deficiencies of the pre-crisis package and enhance the credibility and comparability of banks’ capital ratios. One of the significant changes introduced by CRR3 is the limitation on the use of internal models, with an Output Floor restricting the benefits to 72.5% of risk-weighted assets (RWA) calculated using the Standardised Approach.

The European Commission has conducted a comprehensive review of the Solvency II Directive, based on the work of EIOPA. The proposed changes have been submitted to the European Parliament and Council for approval, expected in 2023. Member states will have 18 months to transpose it into national law. Updates to Delegated Acts and Implementing Technical Standards will be applicable soon. The proposed changes cover various key topics, including risk margin estimation, volatility adjustment, interest rate risk, and extrapolation of the risk-free yield curve.

Discover a pragmatic approach to integrating climate risk into credit risk models in this informative article. Since the release of the ECB Guidelines on Climate-Related and Environmental (C&E) risks, banks have been exploring ways to incorporate these risks into their frameworks. Stress testing and client-acceptance frameworks have been employed, but direct integration into risk models remains challenging. Finalyse offers a solution by presenting a conceptual framework that allows banks to make necessary adjustments during the model development phase. Learn how this approach addresses the limitations of historical data and enables banks to account for the dynamic nature of climate-related risks. Dive into the details of this data-driven implementation and enhance your understanding of the topic.

Discover the revised reporting requirements for derivatives under EMIR effective from April 2024. Learn how the European Market Infrastructure Regulation (EMIR) aims to enhance transparency and reduce risks in OTC derivatives markets. Explore the two categories of counterparties, the clearing obligations for CCPs, and the methods used to determine the types of OTC derivatives subject to clearing duty. Stay informed and compliant with the evolving EMIR framework and its impact on financial and non-financial entities.

Finalyse Flood Risk Prototype was created in response to the supervisory expectations set by the European Central Bank (ECB) regarding effective management of climate and environmental risks. The ECB published these expectations in November 2020, followed by the release of the thematic review results and a compendium of good practices in November 2022. The article highlights the practical implementation of the Finalyse Flood Risk Prototype specifically for the exposure class of commercial and residential real estate mortgage loans (CRRE). The objective of the exercise is to evaluate the impact of fluvial flood risk on capital requirements for financial institutions, specifically by considering the impact on their Risk-Weighted Assets (RWA). Overall, the development and implementation of the Finalyse Flood Risk Prototype address the ECB’s supervisory expectations and provide banks with a practical tool to assess and manage physical risks associated with flooding, with potential for expansion into other areas of risk assessment.

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.

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.

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.

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

We intend to raise the awareness on how Data Science can be leveraged on in the context of insurance pricing and how to go from theory to practice, from scripting to deploying your model. This article is the first of a series of four articles on this topic. ​Understanding the risk factors and their impacts on the pricing is essential in risk assessment, particularly in a competitive market. In this process, generalised linear models combined with regularisation techniques can be useful. Moreover, GLMs help to understand what impacts your policy's pure premium so the product managers and brokers can effortlessly understand how the model works.

On January 24th 2022, the EBA published its final draft implementing technical standards on Pillar 3 disclosures for Environmental, Social and Governance (ESG) risks. This article aims to summarise, contextualise, and critically assess the disclosures' essential aspects. It situates the disclosures within the larger spectrum of comparable disclosures of environmentally sustainable economic activities presented by other governing bodies in the EU. It discusses the different templates included and the timeline provided by the EBA for completing each set of disclosures. It offers preliminary methodological recommendations on key aspects of the disclosures based on Finalyse's internal requirements assessment. Eventually, it provides some general concluding remarks on Banks' challenges related to the disclosure of ESG risks.

Effective January 1st, 2019, the EU securitisation market has undergone a substantial overhaul in terms of the overall regulatory framework that governs the securitisation activities of the different players in the Member States. The overhaul represents a major milestone in the EU’s Capital Markets Union (CMU) agenda and includes several interrelated and complementary regulations. This article provides a general overview of the EU Securitisation Framework, highlighting its most key components and considerations from the perspective of banks and (re)insurers subject to the new requirements.

We welcome the proposal by the EU to create a harmonised resolution regime via an Insurers Recovery and Resolution Directive. This will end the fragmented landscape of national resolution legislation and create a level playing field amongst EU member states. The IRRD will hopefully improve policy holder’s and claimant’s protection and reduce the amount of insurance companies bailed out by taxpayers. However, the Directive will create an additional administrative burden for insurers, so insurers will need to prepare accordingly for this Directive's extra work.

On 27th October 2021 the European Commission has released its proposal of a new banking package, that (among other things) implements the first pillar of Basel IV into the banking regulation. This package introduces a big change to the European Banking industry. The combination of changes to the credit risk (which is the main risk driver in the EU), and output floor will be particularly strongly felt across the EU.The new requirements are computationally difficult and institutionally challenging. They require variety of tools and data all of which will be costly. The current release is a Commission proposal only and still needs to go through the council and the parliament before its release in the official Journal of the EU. However, it is not expected to undergo very many additional changes and its adoption should be smooth.

The article walks the reader through the different modules of the 2022 ECB Climate Stress Test. While we still find ourselves at the dawn of introducing climate risk into the existing risk management frameworks, the ECB continues to pave the way for financial institutions. In the methodology paper released in October 2021, the regulator has showcased their expectations for the upcoming bottom-up stress test. By elegantly side-stepping the intricacies of advanced climate modelling, financial institutions are enabled to start their climate stress testing journey while laying strong foundations for more advanced approaches in future exercises.

Was the ability of banks to navigate through COVID 19 crisis substantially bolstered by the Basel reforms? The article draws on a series of studies conducted by BCBS. The studies mostly focused on what measures materially improved the bank resilience.

This article introduces the reader to the regulatory background behind SFTR and outlines the challenges the new standards pose to market participants. The regulation was adopted to provide a more transparent disclosure of the securities financing market and to promote a better account of the risk posed by the interconnectedness via short-term collateralized funding and the reuse of the collateral. Although the regulation was published in December 2015, the associate Technical Standards were only approved in March 2019 with a phased in implementation that concluded in January 2021. This said, the time was short for market participants to adapt and acquire all the information required in over 150 fields.

This article discusses the “Value at Risk (VaR)” metric and its use in the face of recent regulatory developments. The VaR is one of the industry’s most widely used metrics for risk management, though specific implementations vary significantly. In the last years, particularly following the introduction of Basel’s fundamental review of the trading book, the VaR became to be superseded by Expected Shortfall (ES), which is meant to better represent the tail risk. In both Var and ES, the methodology and the data are very important. This article also offers the steps that Finalyse takes to ensure that your VaR/ES models are optimal.

This article introduces the reader to the taxonomy regulation. The taxonomy regulation is intended to identify the investments, that are contributing towards the EU climate goals as expressed in the European Green deal. Against the backdrop of COVID 19, it is very likely that the taxonomy will serve as an important funnel for the stimulus/recovery money. However, given the strictness of the EU plans it is likely that the investments that qualify under taxonomy will be supported even further in the future, whereas the investments that do not may experience some adverse treatment. The taxonomy, therefore, is an important glimpse to the future. Read this paper in order to find out more about the basic principles underpinning the Taxonomy.

The ECB has published the “Guide on climate-related and environmental risks” in November 2020 to encourage banks to facilitate investments in a more sustainable economy. This guide outlines the ECB’s take on the prudent management of climate risk and describes how the institutions are expected to integrate that dimension into their already existing risk management framework in the form of 13 recommendations. This article outlines our interpretation of the ECB guide and presents some key points to facilitate understanding and implementing those regulatory expectations from the point of view of banking institutions.

First in the series of blog posts that are to shed more light on the multitude of different changes in the Solvency 2 framework that are to arise from the solvency 2020 review. On the basis of EIOPAs opinion, as well as some other documents this paper sets out to primarily discuss the Volatility Adjustment and the number of concerns regarding the current provisions that either EIOPA or the national supervisors may have together with some proposals of addressing these concerns. The said concerns cover everything from the lack of clarity on the underlying assumptions of VA, to the possibility of cliff-edge effect from the EU member state VA during some particular periods. The secondary topic of this article is the General Application Ratio and the level it should be set to. The EIOPA argues it should be in the region between 65% to 85%.

Climate change poses a serious risk for society and for (re)insurers, with the harmful impact of global warming already being visible. Without further international climate action, global average temperatures and the associated physical risks will continue rising, resulting in increased underwriting risk of insurers, impacting asset values, and challenging their business strategies. On the 5th October 2020, the EIOPA has published a consultation paper on the use of climate change risk scenarios in the ORSA in the form of a draft supervisory Opinion. The consultation is a follow-up to the Opinion on Sustainability within Solvency II released in September 2019 which recommended that (re)insurers should consider climate risks beyond the one-year time horizon within their system of governance, risk-management system and ORSA.

The global COVID-19 pandemic has forced governments all over the world to impose strict measures intended to defend their healthcare systems. These measures have had a significant adverse effect on many business and economic lives of private individuals, more specifically: liquidity issues and difficulty in due payments of financial obligations. In answer to the expected liquidity shortfall, Member States implemented wide range of supportive (economic) measures, including certain forms of moratoria on payment of financial obligation, to address short-term operational and liquidity issues faced by business and private individuals. This paper looks at the latest guidelines on moratoria in face of COVID 19 and its impact on the already existing moratoria.

This article focuses on giving an overview of the Insurance Capital Standard (ICS), a capital framework which has been developed by International Association of Insurance Supervisors (“IAIS”). The ICS is being developed as a group-wide prescribed capital requirement (PCR), which is a solvency control level above which the supervisor does not intervene on capital adequacy grounds. The ICS is not intended to replace existing arrangements or capital standards for legal entity supervision in any jurisdiction.

On the 25th June 2020, the International Accounting Standard Board (IASB) has published several amendments to IFRS 17. These amendments address many of the concerns raised by the industry and aim at facilitating the implementation of IFRS17, without deviating from its underlying principles. Along with a postponed implementation deadline, the amendments aim mostly at decreasing the administrative cost and complexity as well as improving the consistency of the financial statements results. This article goes through all the changes that result from these amendments, and discusses their impact on the IFRS 17 implementation.

This article discusses one of the aspects of the new IORP II directive implementation - transparent communication. It outlines requirements regarding communication between funds and their members through an annual pension benefit statement (PBS). It guides through PBS's main goals and principles, explains its importance, and presents two model PBS's.

This article discusses the benefits of applying advanced analytics in the development of behavioural scoring models. It investigates how Machine Learning techniques can be used to model the behavioural scores of consumers in each step of the development and model assessment. Some concerns regarding the usage of Machine Learning in behavioural scoring models are addressed.

This article unveils challenges of implementing changes on complex tools that use advanced databases. Based on the example of QRM Analytical Framework, it recommends a suitable change management process. Although this high level recommendations are based on Finalyse experience with QRM, the notions therein may apply to other sophisticated tools of similar nature.

This article analyses the effects of the COVID-19 from a bank’s credit risk point of view. First, it assesses how COVID-19 hurts the economy, the way the risk profiles of stock and potential clients deteriorate due to the pandemic’s negative effects on the economy, and it shows how this lowers credit supply. Then it elaborates on the regulations and policies – which basically target the amount of risk that banks can take on - aimed at preventing credit shortages and the results they had. Then, it explains the challenges that banks’ internal credit risk frameworks consequently face, and details valuable partners to help tackle them.

IFR and IFD have clearly been drafted in order to fil a gap in terms of prudential and governance regulation framework. The former situation presented some kinds of loophole between Credit Institutions that are subject to CRR / CRD IV, Investment funds that are subject to AIFM and UCITS (these regulations also provide a framework in terms of governance, risk management, remuneration, reporting and disclosure), and MIFID Investment Firms that were subject to none of them until now. The gap is now filled completely! The question I am sure all actors have in mind is how far EBA and ESMA are ready to go to consider the “implementation burden” for institutions! We might have a beginning of answer on the 4 September 2020!

This article details the mechanisms governing risk decisions and the underlying complexity of using risk appetite as a component of the strategic decision.

This article introduces the challenges of the ECB supervised entities regarding their internal validation of the IRB Approach. It also considers a benefit of use of Model Validation tool.

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.

This 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.

Machine 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 they are being used in practice.

The 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.

Every 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.

The 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.

Following 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.

Equity options are excluded from 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.

Truth 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.

Private 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.

This blog discusses the impact that the December 2017 Basel reforms will have on the way banking institutions are going to use their data when constructing their credit risk models. Whilst these changes are not going to impact every financial institution in exactly the same way and the bigger institutions that make use of IRB approach will be affected disproportionately harder, this article provides a description of all major Basel IV data elements that all banking institutions will have to account for and in what way. These elements include: External Ratings, Collaterals Sourcing, Credit Conversion Factor (CCF), SME Indicator, Revolver/Transactor Indicator and others. Coordinates to the specific regulatory pieces are provided if you are interested in exploring any particular topic in greater detail.

The three languages were compared using a simple setup, as close as possible to a real-life situation. The exercise consisted in calibrating a logistic regression to identify loans likely not to be repaid on time in a sample dataset. The choice of logistic regression was driven by the fact that it is a simple but powerful approach still widely used in the industry.

The NDoD is expected to increase the comparability of risk parameters and own funds requirements, particularly for those financial institutions already applying the IRB method. It will also impact the own funds requirements under both the IRB Approach and the Standardized Approach. Depending on the high gaps between the institutions’ current definition and the new one, the effect may be considerable. Given the magnitude of effort banks are expected to put into integrating the new rules of default identification and exit into their internal procedures and IT systems, the deadline of 1st January 2021 is challenging.

This expert article on the 2018 Solvency II review consists of a high level summary of the Solvency II review and a table providing a detailed overview of all changes brought about by this 2018 Solvency II review.

This blog post dives deeper into the topic of Adjustment for the loss-absorbing capacity of deferred taxes.

This Expert input discusses reverse stress testing. A type of stress testing that does not ask what the results of certain pre-defined shocks are going to be, but rather, what shocks would have to happen in order for a pre-defined scenario to occur. The reverse stress testing is a tool complementing the normal stress tests, very much required by the regulators. Nevertheless, it is seldom addressed by official documents and serves like a bit of an enigma, even to the institutions that are legally obliged to conduct it. This expert input does not only discuss the regulatory requirements inherent to the stress testing, but also, how Finalyse typically sets to carry out the reverse stress testing.

The regulation of SFTs has been with us since late 2015. By far its most challenging part, however, the reporting has not yet come into play as many of its aspects had to be further specified by RTSs and ITSs. With these technical standards suddenly reappearing in the mid 2018 and on course of being implemented, this expert input gives a broad overview of SFTR in its entirety and delves deeper into the novel reporting obligations, which it compares with the reporting obligations under EMIR. It discusses the main challenges of implementing the reporting standards, particularly for the institutions that have no prior experience with reporting under EMIR.

This Expert input is a follow-up to a previous expert input on finalising Basel III, this time with a focus on operational risk – an unsung villain of risk management. It gives a brief overview of the history of operational risk management and shows how exactly the crisis motivated a multitude of measurement approaches at the beginning (AMA) in particular, and their subsequent standardisation in Standardised Measurement Approach (AMA). There is a detailed outline of how the AMA formula works and a short discourse on output floor.

This expert input addresses the independent valuation of structured products, and particularly of OTC derivatives. It explains for what reasons and under what conditions independent valuation is necessary and lists all other potential advantages of performing valuation independently. It further reveals how valuation is generally performed and all the necessary steps that need to be taken in order to make sure that the valuation is the best possible and unbiased estimate of the value of the assets. It shows the greatest challenges in valuation and how we, in Finalyse, seek to address them.

This is an extensive overview of most of the major changes to Basel II since its original publication. It focuses particularly on the changes brought about by the December 2017 release, especially on credit risk and RWA, changes to both standardised and IRB approaches of calculating RWA and whether the latter is allowed to be used or not. It also discusses the floored inputs. The next section discusses Market Risk and consequently FRTB. It gives a summary of the fundamental changes and then dwells deeper into the specific changes in standardised approach and internal models approach. The last part focuses on Interest Rate Risk in the Banking Book – more specifically on the governance, measuring and modelling of the IR risk and changes to the disclosure requirements. This paper does not address Operational risk as it is addressed elsewhere.

This article – a courtesy of our partners from Clearstream, focuses on collateral management as a part of derivatives trading, in light of the adoption of EMIR. It discusses the general landscape of markets in OTC and non-OTC derivatives, as well as the main collateral related topics – variation margin and initial margin, but also challenges in exchanging collaterals. There is a sizable list of suggestions on how to deal with said challenges and how to generally move in this landscape and how to navigate the regulatory requirements as well as scramble for liquidity. It ends with a short note on TARGET-2 and the way it has helped to simplify the collateral challenge.

This Expert input delves into the new EBA definition of default that will apply as of January 2021. It examines who is going to be most impacted by the change and what is going to be the difference in the impact on institutions that use the IRB approach versus institutions that use the Standardised approach. It looks at the most substantial changes in the new definition – like the differences in unlikeliness to pay, past due criterion and the criteria for return to the non-defaulted status. Lastly, it addresses briefly the challenges related to the use of external data – particularly for those institutions that use IRB only.

This expert input focuses on the validation of Expected Credit loss model validation; more specifically, it explains why it is a good idea now, after the scramble to have IFRS 9 compliant models in time, to consider validation. This input addresses the challenges of a methodological review of all models, and more specifically, it addresses the review of selected variables – macroeconomic factors, obligor characteristics, etc. It shows how to make the best use of the new ability to compare the outcomes of the models against the observed losses. In addition, this article tackles another challenge: the review of data quality – particularly of the modelling data set and new data.

This Expert input concerns itself with the valuation of Private Equity, an intriguingly difficult topic, but also one well worth exploring, considering just how large a portion of the equity takes the form of a private equity. It shows why the private equity is an interesting prospect for investors and in what way the independence of the valuation is desirable and demanded by regulators. It also depicts how investing in private equity is often conducted and what such an approach entails for the investor. Lastly, it depicts various techniques used to estimate a private equity value and how the preferred technique is chosen depending on the information available.

This Expert input works as an overview of the basis of most available machine learning techniques and serves as a great stepping stone to get into the intricate world of ML. Whilst mostly written with credit risk in mind – offering some advice for the use of machine learning to help us model Expected credit loss and its components (PD, LGD, EAD), the list of the potential techniques depicted steps far beyond this relatively singular use and examines a multitude of approaches, ranging from Supervised ML (Decision trees, Artificial Neural networks, etc.) through ensemble ML (Random forests, Gradient boosting), to unsupervised ML (Deep learning, Clustering methods, etc.). The input concludes with several general tips and tricks regarding machine learning.

This Expert input gives a basic overview of IFRS 17 and how it is going to be different from the current standards (IFRS 4). We note that there are some similarities between some of the aspects of Solvency II and IFRS standards and examine them, as well as the differences. Furthermore, there are predictions on how the standards are going to influence the operations of insurers and their contracts. Since the insurers are likely to implement IFRS 17 in concert with IFRS 9, the expert input also focuses on how this joint implementation is likely to proceed, what the main challenges are and why it is ultimately a good decision to implement them together.

This expert input addresses PSD 2 and the possibly underappreciated impact it could have on (and arguably beyond) financial services, opening many hitherto closed doors. It looks at the regulatory progress all the way from PSD 1 to PSD 2. It notes that the development of the Single Euro Payments Area – SEPA – would not have been possible without PSD 1, and an analogous paradigm shift may be expected with PSD 2. The article notes that PSD 2 may lead to the emergence of new and a separation of old services in the hands of innovative FinTech companies, though the established players still hold a very strong position to compete, if only they adjust to the new reality.

This Expert input addresses the EMIR-related requirement of keeping a variation and initial margin; more specifically, the initial Margin is the main focus of the article. It lists the advantages of using the scheduled-based approach but shows that the margin requirements using this methodology may be a bit too steep. It further examines the possibility of internal models and concludes that their development could be just too cumbersome for most. It proposes ISDA SIMM as having the advantage of simplicity together with lower (or at least more realistic) requirements. The article finishes with comparing ISDA SIMM with the sensitivity-based approach for FRTB.