unlocking credit cycles - z-risk engine · contact to find out more about z-riskengine please...
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Unlocking credit cycles
Wholesale credit risk over the past 30-40 years has exhibited pronounced cycles – with losses varying widely over time and across industries and regions.
Coupled with new regulations for IFRS9/CECL and Stress Testing – this creates the need for Point-in-Time (PIT) models – PIT models for PD, LGD and EAD are capable of accurately assessing credit losses (ECLs) at all points in the cycle – across all borrowers and individual exposures.
Z-RiskEngine® is an advanced solution for IFRS9/CECL and Stress Testing – developed and refined over the last 10 years – providing a single integrated customisable, Batch Analytics Solution for Wholesale, Corporate and Commercial Credit Portfolios – to successfully satisfy complex regulations.
Why use Z in Z-RiskEngine? ‘Z’ represents our notation for credit cycles. First used in our publications in 1998, Z is the key to measuring PIT risks and unlocking credit cycles.
Unlocking credit cycles
SOLUTION ARCHITECTURE
Existing Client Models and Data: PD, LGD, EAD and Stress Testing
PIT MODULE
Custom Industry-Region Credit Cycles provide:
Consistent set of credit indices used in all models, reducing model complexity
Assessment of PIT-ness of existing models
Conversion of hybrid model output to PIT
PIT PD, LGD and EAD measures
Fully automated batch processing based solution
Scenario Based Loss
Expected Credit Loss
Significant Deterioration Criteria from Client
UnconditionalMulti Period
PIT PD
PIT LGD
PIT EAD
Simulation #n
Simulation #1000
Simulation #2
Simulation #1
Probabilities and Scenarios from Client or Regulator
Simulation
Bridge
ECL MODULE SCENARIO FORECASTING
MODULE
Scenario #n
Scenario #2
Scenario #1
ConditionalMulti Period
PIT PD
PIT LGD
PIT EAD
Z-RiskEngine is a SAS® software based solution and is flexible to how SAS® is implemented within an institution. Utilising client data and existing credit and stress testing models, the solution provides full batch processing capability to apply customised industry/region credit indices and calculate credit losses.
WHY CREDIT CYCLES MATTER
BATCH PROCESSING
Understanding industry-region credit cycles are paramount to converting TTC credit models into PIT ones before assessing ECLs – as can be seen in the graphic on the right – over the last 30 years using various measures like Credit Edge™ EDFs, US Loan Charge-offs and Moody’s Default rates – credit cycles are real and accurately assessing them is a key capability of Z-RiskEngine that supports IFRS9/CECL and Stress Testing in a single solution suite.
500,000+ PIT PDs, LGDs, EADs
x10 years
500,000+ Stressed Losses
x10 years
500,000+ IFRS9/CECL Expected Credit Loss x10 years
BATCHPROCESSING
Client Model Parameters
Macro Economic Data
Client PD, LGD, EAD Data
Market Implied PDs
Using industry and regional credit cycles customised to each financial institution’s own footprint and the batch processing capabilities of SAS®, the solution provides the full ECL calculations for each facility, counterparty, portfolio or any customised user defined segment in a few hours.
THE BUSINESS CASE: A proven solution that can provide substantial benefits
Low Build and Operational Cost
Solution batch automation leads to low build and operational costs at a time of large regulatory changes
Scalable
One common scenario-based batch solution for any regional or geographic footprint and across regulator applications (Basel II/III, IFRS9/CECL and Stress Testing) but with customised models
Accuracy
More accurate and dynamic assessment of PIT risk (default rate, losses and exposure) customised to each institution’s portfolio of customers
Compliance
Trusted approach approved by UK regulators when AAA team built Basel II suite of models for two UK based global banks
Lower project execution risk
A business model where we can provide complementary services for implementation, process design, benchmarking and review services, reducing project execution risk
Integrated
One common solution covering all types of corporate and commercial credit models (PD, LGD and EAD) and all types of wholesale portfolio
CONTACT To find out more about Z-RiskEngine please contact:
Dr. Scott D. Aguais: +44 (0)7800 [email protected]
Aguais And Associates Ltd20-22 Wenlock RoadLondon N1 7GU, UK
[email protected] Z-RiskEngine.com
ABOUT Developers of world-leading Credit Analytic Solutions
Aguais And Associates (AAA) was founded in 2014 to bring Z-RiskEngine’s world leading solution to market globally to support key regulatory initiatives for IFRS9/CECL and Stress Testing. The team successfully achieved two Basel II Waivers at large UK global investment banks and has pioneered dual PIT-TTC framework, implementing the approach for the first time in 2005. This PIT-TTC solution was officially approved in these two Basel II Waivers.
The AAA management team has over 60 years combined experience developing, validating and implementing advanced wholesale credit models.
