Introduction
Credit risk modelling is more and more at the heart of the banking business as it intends to allow banks to effectively measure the exposure to credit risk, the most prominent risk banks are typically exposed to. This measurement can be done (i) for regulatory purposes, when internal models (under the so-called IRB approach) play a fundamental role in the calculation of risk weighted assets (RWA) and/or for economic capital computation purposes (Pillar 2), (ii) for the calculation of impairments under IFRS 9 (international accounting standards ruling impairment determination), or (iii) for multiple business-oriented decisions (for credit granting, monitoring or recovery).
As an area subject to increased supervisory attention and highly regulated since mid of last decade, technological innovation is also playing its role in increasing model performance, namely with the emergence of Generative AI (GenAI), the use of machine learning techniques and, most recently, where climate-related and environmental (C&E) risk factors have to be integrated in credit risk.
Challenges you might be facing
- Simplification of IRB model landscape
- Integration of C&E modelling into the IRB space
- IT implementation of new models
- Interconnection between IRB and IFRS9 modelling frameworks
- New generation of models for decision purposes (ML/AI)
Simplification of IRB model landscape
In anticipation of the adoption of CRR3 (Basel IV) and as reaction of the recurrent ECB’s appeal for model landscape simplification, several banks are revising their plans for the future IRB perimeter, which implies a revised combination of reversions to SA, changes of scope of the PPU usage and, for certain portfolios, a step back to F-IRB. All this shall take place in a context where the ECB shall be very keen in understanding the criteria for reversion to SA/F-IRB approaches (e.g., operational effort and costs, data availability, impact on capital requirements, impact on risk management) and shall expect banks to submit a single comprehensive and consistent request for all the rating systems.
Banks shall so need to perform cost-benefit and feasibility assessment across all rating systems, submit a formal request to the ECB and for the segments that potentially shall not remain under the IRB approach, define how other models will be affected (e.g., IFRS9, Pillar 2).
How can we help
PwC has supported numerous banks, across several geographies, in addressing their credit risk modelling challenges, particularly in the IRB space. In fact, PwC set up a dedicated team in 2015 – year where EBA announced its first plans for revising the IRB framework – that since then has not only closely monitored all key regulatory and supervisory developments, but also been highly engaged in supporting clients throughout the TRIM exercise, in the implementation of IRB repair programs, in the simplification of the IRB landscape or already in the adoption of Basel IV IRB requirements.
As such, we are in great position to assist you with the following topics:
- Carry out cost-benefit and feasibility assessments across rating systems to support all needed decisions in relation to the future IRB perimeter, inclusive in the preparation of the formal request to be submitted to the ECB.
- Support in the integration of C&R risk factors within the IRB framework, starting with the identification of relevant C&E risk factors and concluding with the respective incorporation in the final model design, calibration approach and/or override framework.
- Help in re-thinking the target model deployment capacity so as to allow for a timely model implementation.
- Enhance synergies across the IRB and IFRS9 frameworks converging in what is common and justifying the divergent assumptions and methodological choices.
- Support clients in understanding the potential usage of AI/ML in enhancing the performance of their credit risk models, having in consideration the best market practices.
- Provide strategic, technical and project management expertise for the implementation of CRR III as well as in IMIs (internal model investigation) mission.
Contact us
Credit Risk Modelling Workstream Lead, Partner, PwC Portugal
Tel: +351 914 201 014
