• about reply
Avantage Reply Logo
Menu
  • About Us
    About Us
    • About Us
    • History
    • Our Approach
    • Values
    • Alumni
    • Strategic Partners
    • Media Contacts
    • Contact Us
  • Our Capabilities
    Our Capabilities
    • Our Capabilities
    • Risk
    • Insurance
    • Finance
    • Conduct & Compliance
    • Technology
  • Newsroom
    Newsroom
    • Newsroom
    • News
    • Events
    • Press Articles
    • Blog
    • Academy
  • Publications
    Publications
    • Publications
    • Briefing Notes
    • Case Studies
    • CRO Insights Journals
    • Infographics
    • White Papers & Practical Guides
  • Career
    Career
    • Career
    • BELGIUM
    • FRANCE
    • ITALY
    • LUXEMBOURG
    • NETHERLANDS
    • UK
  • about Reply
Avantage Reply Logo

Search

Case Studies

Case Study

Pillar II - Modelling credit and concentration risk on the portfolio of a commercial bank

FOCUS ON: Case studies, Credit Risk,

The client was seeking to develop a more risk sensitive measure of credit and concentration risks for internal steering purposes, and to comply with supervisory requirements. Avantage Reply assisted the client to identify the possible methodology options, and to conduct an impact study to estimate the impact on internal capital.

THE CLIENT

The client is one of the largest financial institutions in France. It offers its clients a wide range of products and services: savings, investment, treasury, financing, insurance and investment solutions.

THE CHALLENGE

Following an ECB on-site inspection, many findings pointed to the inadequate quantification approach for the evaluation of credit and concentration risks. In this context, the institution decided to launch a quantitative study to assess what would be the most appropriate quantitative approach to assess credit and concentration risks regarding the nature and the diversity of institutions’ portfolio.

APPROACH AND SOLUTION

Avantage Reply started its study by elaborating a benchmark of market practices in terms of credit risk quantification methodologies. In conjunction with scientific literature, several methodology options were proposed and discussed, including HHI index formula, Gordy granularity adjustment, tailored correlation parameters, and full credit portfolio model. Through various dedicated workshops and iterations, it was decided to test two different approaches to build tailored correlation parameters:

  • An extension of an asymptotic single risk factor model that recognises diversification or concentration based on the single factor Merton model.
  • A correlation matrix calibration, with the default rate correlation-based mode as in this modelling approach, and the correlation matrices estimated based on the Vasicek analytical equations using the empirical default rate (TD) for each category.

For each approach, our team has implemented a computerised mock-up to assess the impacts in terms of internal capital on a portfolio sample. At the end of this first phase of the project, further R&D investigations were still necessary to evaluate the internal capital impacts on the entire portfolio.

RESULTS AND BENEFIT

Through its practical experience and various elements of best practices, Avantage Reply has completed this study in line with client’s expectations. Both approaches have been specified and tested as the outcomes of the simulations and have allowed the client to demonstrate potential savings in terms of internal capital and a better measure of concentration/diversification of the portfolio. Being still in an R&D phase, our team has gathered a list of areas of improvements to integrate both approaches in the system.

RELATED CONTENTS

Case Study

Counterparty Credit Risk (Pillar 1 and 2)

The client, a major banking group specialised in the provision of online banking and trading services, was in the process of launching new derivative products for its retail clients and required assistance for the counterparty credit risk calculations and regulatory reporting of these products.

Case Study

Standardised Approach for Counterparty Credit Risk

The client, a major banking group specialised in the provision of online banking and trading services, was in the process of launching new derivative products for its retail clients and required assistance with calculating the capital requirements for counterparty credit risk under the new standardised approach. This project was a continuation of similar work which Avantage Reply performed prior for this client, regarding the mark-to-market approach.

Case Study

Development and implementation of the IRB-models

Avantage Reply supported a large bank in Luxembourg with a complete transformation of the internal credit risk model portfolio. In doing so, our team was involved in several steps of the model lifecycle: model development, model backtesting, model validation by the second line of defense, model review by the ECB and implementation of the model in the bank’s IT system.

 ​
 
 ​
 
Reply ©​​ 2022 - Company Information -
 Privacy Cookie Settings​
  • Abou​t Reply​​
  • Investors​​​
  • Newsroom
  • Follow Reply on
  • ​
​
  • ​About Avantage ​​Reply
  • Privacy & Cookies Policy
  • Information (Client)​
  • Information (Supplier)
  • Information (Candidate)