The client, a Tier 1 UK financial institution, requested the support of Avantage Reply on the development of an in-house credit impairment model that would produce more accurate expected credit loss estimates and comply with the requirements of the IFRS 9 standard.
Over the course of the project, Avantage Reply applied its expertise in model development and worked in close liaison with the Finance department to ensure the model met the required level of usability and comprehensiveness.
The main objective of the client was to develop an impairment model that (a) complies with all relevant regulatory requirements, (b) is consistent with the credit risk framework used in the bank, (c) is effectively embedded into the internal processes, (d) is well understood by the stakeholders and incorporates all desired features.
Apart from the compliance with the regulatory requirements and adoptability, as any other credit model, the impairment model was designed to produce sufficiently accurate estimates of the credit risk parameters as well as expected credit loss estimates for the IFRS 9 purposes.
The approach adopted in the model development aimed to ensure a smooth transition to the new methodology of the expected credit losses estimation from the one employed in the bank at that point of time, as well as take into account the internal capabilities for model implementation.
At the first stage, the current approach to the impairment calculations was reviewed along with the internal credit grading model employed in the bank, the available data sources were identified and the quality of the data assessed. This enabled the design of a new impairment model that would be consistent with the credit risk framework of the bank and reflect the availability of internal data.
Once the model design was defined and approved by the client, the detailed model methodology, including all assumptions involved, was developed taking into account the requirements of the IFRS 9 standard and industry best practices. This was followed by the technical model implementation, which reflected the preferences of the relevant stakeholders and ensured usability of the model. In order to evaluate the effect of the new methodology on the bank’s provisions level, an impact assessment was conducted along with a sensitivity analysis and the results were communicated to the key stakeholders.
Finally, the model delivered to the client was supplemented by the comprehensive and auditable model document describing all steps of the model development process, as well as the procedure document explaining in detail how the model should be used.
As a result, the end-to-end impairment model was delivered to the client along with the required documentation. The internal hand-over to the model users was performed, ensuring smooth adoption and the necessary support provided in order to embed the model into the bank’s risk framework and internal processes.