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Key Sessions

David Grünberger

Basel IV and IFRS 9:Interaction and Impacts


Credit Risk Modelling - European Banking Summit 2018 Agenda
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08:30 - 09:10 40 mins
09:10 - 09:20 10 mins
Chairperson’s Opening Remarks
  • Christian Düsterberg - Senior Advisor Enterprise Risk Management,, ERSTE GROUP BANK
09:20 - 10:05 45 mins
Basel IV and IFRS 9:Interaction and Impacts
  • David Grünberger - Head of Prudential Policy & Accounting, EUROPEAN CENTRAL BANK
10:05 - 10:40 35 mins
Addressing the Implementation of the EBA’s New Definition of Default Requirements and ECB’s Regulatory Change Process
  • Carol Lynch - Senior Management Team, Capital Change Programme, BANK OF IRELAND

Banks are actively working on the design and implementation of their solutions for the EBA’s new Definition of Default and Materiality Threshold requirements. Effective implementation requires detailed analysis of current default practices to understand the changes that are required across policy, processes, procedures, modelling and systems. This involves a well-coordinated effort across business, risk, finance and data/system expertise. Additionally, Banks are invited by the ECB to engage in a Two-Step Process for the implementation of the new Definition of Default with a year-end deadline for submission of the completed Application Pack. This session covers:

  • The key requirements of the Definition of Default Guidelines and the Materiality Threshold requirements
  • Approach to documenting the ‘As Is’; Interpretation of requirements and; Designing the ‘To Be’
  • Coordinating the effort across Business, Risk, Modelling, Finance and IT/Data Solutions expertise
  • Approach to the completion of the Definition of Default Application Pack
  • Ensuring that the Application pack submission is comprehensive, complete and clear
10:40 - 11:00 20 mins
Networking & Registration Break
11:00 - 11:35 35 mins
Tackling the EBA’s New Rules for Loss Given Default (LGD) Estimation for Non-Defaulted and Defaulted Exposures
  • Viktor Tchistiakov - Senior Associate FRM, RABOBANK

In 2017-2018 EBA published three guidelines papers about LGD estimation: the final version on LGD (for performing) and ELBE for defaulted exposures as well as three draft versions on LGD downturn, where 2018 versions represent revision of the 2017 proposal. 

  • EBA/GL/2017/16, 20/11/2017. Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures.
  • EBA/CP/2018/07, 22 May 2018. Consultation Paper: Draft Regulatory Technical Standards on the specification of the nature, severity and duration of an economic downturn.
  • EBA/CP/2018/08, 22 May 2018. Consultation Paper: On Guidelines for the estimation of LGD appropriate for an economic downturn (‘Downturn LGD estimation’).
  • CP/EBA/2017/02 01 March 2017 Consultation Paper: Draft Regulatory Technical Standards on the specification of the nature, severity and duration of an economic downturn.

In the final version there are several new requirements (like the independence period) as well as more details on the requirements for estimation methods (like the maximum length of resolution process and set up of reference dates). Those essential requirements form a great challenge for modelling and methodology departments of a bank. This session will cover the practical implications of this regulatory change, including:

  • Additional data requirements.
  • Setting up the same estimation methods used ELBE and LGD for non-defaulted exposures.
  • Using IFRS9 provisions for ELBE.
  • Avoiding unnecessary deviation of LGD estimates in-default shortly after the date of default and immediately before it.
  • Determining reference dates.
  • Setting up the maximum period of the recovery process.
  • As a modelling solution satisfying those requirements, we propose the usage of survival models for interval censored data for LGL and Cure Rate model components.  Moreover the cure rate model is based on competing risks framework.
11:35 - 12:10 35 mins
Insights into Firms’ Reactions to TRIM and the Impacts on Credit Risk Modelling Practices
  • Javier Calvo - Partner, MANAGEMENT SOLUTIONS

As a consequence of the ECB TRIM project and the regulation aiming at harmonising the criteria for approving internal models for RWA calculation purposes in the SSM jurisdictions, banks are experiencing an increasing challenge on their entire model-related ecosystem: governance, organisation, methodology, tools, data, etc. This session will focus on the industry response to these challenges, based on direct experience with banks and on ECB’s publicly disclosed information, and is likely to include:

  • An overview of the current status of the TRIM project and model-related regulation
  • Direct impact of TRIM: a summary of the main findings received by banks
  • Other concurrent trends and challenges (cost control and efficiency in modelling, model risk management, model map optimisation, industrialisation of model development and validation, etc.)
  • Low-default portfolios (LDP): next in line
  • Banks’ reactive and proactive response to TRIM and other challenges
  • A glimpse on the potential future evolution of TRIM and the industry modelling practice
12:10 - 12:45 35 mins
Addressing the Interaction Between Validation of IFRS 9 and Basel Credit Risk Methodology and Models
  • Christian Zuchowski - Director, Head of Credit Validation, DEUTSCHE BANK

After successful implementation of IFRS 9, banks now deal with post-implementation IFRS 9 challenges including validation and modelling complexities. There is a clear link between credit risk models and stress testing, and banks have to figure out how to optimise this relationship. This session focusses on the required regular re-validation activities across these model classes, including:

  • General (re-)validation challenges of ECL modelling
  • Establish holistic validation criteria and framework for ECL models
  • Align validation approaches across ECL, Credit Risk and Stress Test model classes
  • Establish an integrated model inventory to connect the different models and to visualise their dependencies
  • Leverage validation results of connected (Credit Risk) model classes
12:45 - 13:45 60 mins
Networking Break & Lunch Break
13:45 - 14:30 45 mins
Panel Session: Tackling the Challenges of Aligning Basel and IFRS 9 Credit Risk Requirements
  • Christian Zuchowski - Director, Head of Credit Validation, DEUTSCHE BANK
  • Christian Düsterberg - Senior Advisor Enterprise Risk Management,, ERSTE GROUP BANK
  • Alan Burke - IFRS 9 Programme Director, SANTANDER
14:30 - 15:05 35 mins
Highlighting IFRS 9 Modelling Lessons Learned and Refining Approaches in 2018
  • Alan Burke - IFRS 9 Programme Director, SANTANDER

Highlighting IFRS 9 Modelling Lessons Learned and Refining Approaches in 2018
2017 was a busy year for banks as they worked hard to implement the new and complex ECL calculations required for IFRS 9. 2018 has been a year of taking stock, understanding
the dynamics of the new calculations, and looking at how the calculations can be embedded in other processes such as stress testing. The presentation looks at these issues and

  • Reviewing the key assumptions for IFRS 9 implementation
  • Lesson learned since implementation
  • Where next for model development
  • Scope for simplification
  • The challenges of meeting stress testing requirements
15:05 - 15:30 25 mins
Networking Break & Refreshment Break
15:30 - 16:05 35 mins
Tackling Key Forecasting Challenges for Stress Testing and IFRS 9 / CECL
  • Achim Mattes - Head of CECL Analytics, CREDIT SUISSE

The new IFRS 9 and US GAAP CECL accounting standards require forward looking credit loss models for provisioning. The models need to forecast credit losses in return to a macroeconomic outlook, similar to the existing stress testing models for Pillar II. Therefore, banks face the question whether they can leverage their stress testing models for provisioning. This presentation explores the pros and cons by relating to examples.

  • General forecasting challenges
  • Alternative modelling approaches
  • Differential requirements for IFRS 9 / US GAAP and stress testing
  • Situations where differential approaches should be considered
  • Pros and cons of harmonizing approaches
16:05 - 16:40 35 mins
Enhancing Validation Framework of Credit Portfolio Models in the TRIM Context
  • Peter Quell - Head of Portfolio Modelling for Market & Credit Risk, DZ BANK

During the regulatory "Targeted Review of Internal Models" (TRIM) activities related to risk model validation gained a lot of attention. After describing the main characteristics of a sound validation framework this session will provide a pragmatic approach to some enhanced validation tools. This session will also critically reflect on the reach of big data in credit risk.

  • Building a validation framework for credit portfolio models
  • Some (non-) standard validation tools
  • Experiences with the TRIM process for credit portfolio models. Are some model risk aspects missing in TRIM?
  • What lies ahead? Comments on risk models and risk model validation in the age of (big) data analytics and machine learning
16:40 - 16:50 10 mins
Chairperson’s Summation and Close of Conference