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.
10.03.2018
The new definition of default – How is it going to affect you?

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.

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01.02.2018
IFRS 9 Expected Loss Model Validation

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.

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02.01.2018
Private Equity: is valuation fair?

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.

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12.12.2017
Basel Rules and their European Counterparts

A number of our customers were slightly unclear about the way Basel rules are translated into the European framework. This expert input took it on itself to examine how BCBS standards get translated into European Legislature and what their European counterparts are. To some extent, some confusion is understandable. European lawmakers – after all - make many changes, so much so that the European law is in fact materially non-compliant with Basel standards. This article examines the way in which the main component of the new (but pre December 2019) Basel standards are likely going to differ once implemented in the European Union. More specifically, the article examines the leverage ratio, Net Stable Funding Ratio and FRTB. The adoption of 2017 BCBS document may have rendered parts of this paper obsolete.

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10.12.2017
Machine Learning in Risk Management

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.

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04.12.2017
IFRS 17 and its impact on the insurance sector

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.

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06.11.2017
How the second Payment Services Directive (PSD2) disrupts financial services – even beyond payments

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.

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10.09.2017
Non-Cleared Derivatives: Approaches towards initial Margin Calculation

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.

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10.08.2017
EBA report on Results from the second impact assessment of IFRS 9

This Expert input addresses the degree of preparedness of Banks for the implementation of IFRS 9 as of February 2017 based on an EBA report. In this report, the EBA has carried out a thorough examination of the different stages of the implementing process of IFRS 9, that various different institutions find themselves at, notably making a distinction between the challenges faced by bigger (generally better prepared) and smaller (generally less prepared) institutions. The input finishes with some interesting quantitative observations and a list of EBA worries as well as a list of IFRS 9 challenges that the institutions will need to address once the scramble to formally adopt the standards is complete.

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20.06.2017
TOWARDS EMIR II? New EMIR reporting standards & the EMIR review

This article discusses the review of the European Market Infrastructure Regulation, conducted in May 2017. It lists a brief overview of the regulatory framework to date, including RTSs (on complex trades, cleared trades, Collateral Exchange, notional amount, etc.), ITSs (on the use of LEIs, classification of collateralization, generation of UTIs, etc.) as well as updates to the official Q&A. Apart from this basic overview, the article delves deeper into the specific changes for reporting and reporting standards. It portrays four main fields that we have some reason to believe that the review is going to be concerned with, together with predictions of how these challenges will be addressed.

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