Content

The definition of default (DoD) is a fulcrum of the Basel framework for credit risk and the Capital Requirements Regulation. Differences in application, regulation and regulatory practice of default criteria were pointed to as major sources of RWA variability during the redesign of the Basel framework. Following the financial crisis, the European Banking Authority (EBA) has established tighter standards around the definition of default (CRR Article 178) to achieve greater alignment across banks and jurisdictions. The two-phase introduction of the new regulation for banks supervised by the ECB has lead to major changes in risk classification at banks and of the management of distressed assets.

Banks that have carried out a quantitative impact analysis have found that the new DoD can materially impact the number, timing, duration and even outcome of defaults. Where the impact is material, risk management and valuation processes need to be updated, including accounting (IFRS9) and capital requirement modeling (IRB and ICAAP).

This deep-dive course provides context of changes to regulatory requirements for the definition of default, the challenges during the implementation of the definition of default, for example:

• Determining the number of days past due for default identification
• Indications of unlikeliness to pay
• Conditions for return to non-defaulted status
• the application of the DoD in external data
• the update of the internal policies and risk management processes

Moreover, this course will cover the topics of

• evidencing the correct implementation of the DoD
• monitoring the effectiveness of the new policy
• recalibration of the IRB risk parameters by applying appropriate adjustment of historical data and appropriate quantification of MoC.

Learning Goals

In this course you will gain knowledge of the following topics:

• the classification of exposures to defaulted and performing
• the context and impact of recent developments of regulation regarding the definition of default and non-performing exposures
• details of the requirements regarding the new definition of default in the new regulation
• an overview of the changes to policies, systems, models and processes triggered by the change in regulation
• main challenges banks face in implementing these changes and their impact
• typical data modelling and data quality issues concerning DoD changes faced by banks
• approaches for calculating appropriate adjustments of historical data in order to reflect the new DoD
• main drivers of uncertainty related to DoD changes and the associated margin of conservatism

Target Audience

The course module is intended for

• IRB model developers and validators
• Auditors
• Specialist supervisors and JST members
• Credit risk managers

Prerequisites

The material will be taught in English. Participants are advised to come equipped with a broad understanding of credit risk, Basel and capital requirements regulation.

Schedule

The module will be taught over 2 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 PD calibration for low-default portfolios 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 EAD estimation for a low-default specialized lending portfolio
• Compare and understand the impact of different treatments of LGD estimation based on prepared code samples and realistic data sets

Please Contact us for details and options.