A fresh take on risk and valuation
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because we are curious, and curiosity keeps
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Private Equity: adjusting valuation output

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.

Basel IV - data from a bank's perspective

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 Language War in Credit Risk Modelling: SAS, Python or R?

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.

New Definition of Default: Insight on Challenges to Implementation

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.

A guide to Solvency II review

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.

Adjustment for the loss-absorbing capacity of deferred taxes

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

Reverse Stress Testing

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 ECB 2019 Regulatory Priorities

Following the ECB’s publication of its supervisory priorities, this expert input examines them to a somewhat greater depth. The ECB list of priorities may indicate where the future development of new financial sector regulation will occur later this year. Whilst we provide an exhaustive account on all ECB financial supervisory ambitions as expressed in their released documents, we also offer a particular descriptive and analytical input on the topics of credit underwriting criteria, NPL’s, Targeted review of internal models (TRIM), and a small section on valuation with most of our own input concentrating on the credit-risk related items. We put a greater focus on these areas in this text for a simple reason: they are also our greatest expertise.

An Update on SFT Regulation

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.

Basel III: Operational risk in Banking

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.