PROJECTION INSTEAD OF PROVISIONING – RETHINKING CREDIT RISK

CREDIT RISK – WHERE WE STAND TODAY

In many respects, the year 2021 will bring about fundamental changes to the economy and society around the globe. This will also have an impact on risk management practice in credit institutions. Numerous topics that the CRO may have had on his long-term agenda until now (or even considered immaterial altogether) - especially the management of real estate, ESG, and generally non-financial risks - have suddenly come into his focus as they have materialized almost overnight. Primarily, of course, but not only, because of the global response to the SARS-COV-2 virus.

DEVELOPMENT OF THE RISK PROFILE 

Predicting the development of the risk profile (not to be confused with simply forecasting losses in the coming year) poses challenges for institutions, but means immense benefits for the strategy and management of the organization.

Proactive Management

Never before have banks had to make such far-reaching and irreversible decisions. The constantly changing world (VUCA) raises questions and demands reactions. The changes are continuous, but can also be disruptive. Taking credit risk is a long-term business and portfolios and their composition (and possibly concentrations) remain on banks' balance sheets for the long term, as cost-efficient transfer as well as hedging of credit risk is not feasible. Forward-looking management - anticipating the development of risk - helps to identify irreversible paths in the development and to consciously integrate them into the decision-making process.

Reviewing the Risk Strategy

The risk projection additionally enables a target vs. actual monitoring of planned risk development with the risk path that has occurred. In addition to the risk/return ratio, the review of and compliance with the risk strategy is one of the most important components in the bank's risk appetite framework. 

Challenges

New business in future periods plays an important role in establishing multi-period risk management. Business development scenarios must be considered together with scenarios for market data (currencies, interest rates, etc.) and credit risk parameters (ratings, migration matrices, loss given default and correlations). These are not independent of each other, which adds to the complexity. Risk models must be supplemented by the ability to calculate statements for future points in time, considering future portfolios and market data/parameters.

SOLUTIONS


Concept and feasibility

ifb has broad experience in the conceptual development of multi-period risk models and their prototypical implementation. Within the framework of preliminary and feasibility studies ("proof of concept"), the feasibility of the concepts developed individually with you is demonstrated. This enables a deeper and practice-oriented understanding of model mechanics.    


Implementation

The ifb Financial Navigator is a production-ready implementation of the projection of the risk situation. A wide variety of models can be implemented in Python or R, for example, and a wide variety of machine learning platforms can be integrated. 

Sample implementations already exist on several data and computing platforms. In addition, there is flexibility in the selection of the reporting platform for the implementation of dynamic dashboards.

We offer support forthe design as well as the implementation.

  • Design and prototypical implementation 
  • Production implementation

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What impact does digitalization have on financial and risk management?

A future-oriented insight and outlook for professionals and experts. On pages 117-137, you can read more on Predictive Risk Management.
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