Content

This deep-dive course provides context of regulatory requirements for identifying economic downturn periods and of those for estimating the downturn LGD and CCF risk parameters. Key challenges met by model developers when applying the regulatory requirements concerning economic downturn are treated in detail, for example

• When are economic indicators deemed relevant for identifying an economic downturn?
• How should one determine what is considered to be an economic downturn period?
• Which of the approaches identified in regulation should be followed for quantifying Downturn LGDs?
• How can the volatility of capital requirements be limited if LGD estimates are sensitive to economic conditions?
• How should the downturn LGD for in-default exposures be modelled and what is the relation to the ELBE?
• What are the main drivers of model risk for Downturn LGD and CCF estimates, and which Margin of Conservatism items should be considered for Downturn quantification purposes

Learning Goals

• Selection of relevant economic indicators
• Considerations with regard to geography and sectors
• Choice of historical period, frequency of the data and implications
• Guidance for transformations of economic indicators
• Co-movement of economic indicators
• Identification of adjacent peaks and troughs
• Pitfalls in the downturn period identification

Furthermore, participants will be able to quantify Downturn LGD by gaining knowledge on the following topics:

• Three main Downturn quantification approaches:
  • Type 1 – Observed impact approach
  • Type 2 – Extrapolation/haircut approach
  • Type 3 – Flexible approach with minimum add-ons
• Treatment of incomplete recovery cases in Downturn estimates
• Accounting for LGD estimates that are unduly sensitive to the economic cycle
• Backtesting Downturn estimates
• Regulatory challenger model
• Choosing a final relevant Downturn period
• When to use Downturn LGD estimates in the calculation of capital requirements
• Pitfalls in the downturn LGD quantification

Participants will also gain knowledge of the following topics:

• Margin of Conservatism for Downturn
• Quantification of Downturn CCF
• Key process steps in Downturn quantification
• Focus points during Model Validation
• Relation between Downturn requirements and related requirements for LGD and PD.

Target Audience

The course module is intended for

• IRB model developers and team leads with a specific interest in economic downturn IRB modelling.
• Model validators and team leads with similar interests.
• Supervisors and policy advisors wishing to gain insight in the challenges of applying regulation with regard to economic downturn.
• Credit risk managers wishing to enhance their understanding of Downturn LGD modelling

Prerequisites

The material will be taught in English. Participants are advised to come equipped with aasic understanding of:

Schedule

The module will be taught over4 sessions of each 4 hours. The track schedule will be planned in coordination with the client based on the selection of modules.

Example case studies

For this module, examples of case studies are

• Present arguments whether or not a proposed treatment of identifying a downturn period is compliant with regulation
• Give a comprehensive list of potential deficiencies of a downturn LGD derivation based on shared documentation
• Identify the major policy decisions underlying a compliant downturn EAD estimation
• Define an approach for identyfing an economic downturn and estimating downturn LGD values given documentation and data on portfolio characteristics, economic series and the opportunity of a Q&A session with a business representative

Please Contact us for details and options.