CECL

Release of version 0.4.1 of the transitionMatrix package focuses on stressing transition matrices

Further building the open source OpenCPM toolkit this realease of transitionMatrix features:

1. Feature: Added functionality for conditioning multi-period transition matrices
2. Training: Example calculation and visualization of conditional matrices
3. Datasets: State space description and CGS mappings for top-6 credit rating agencies

Conditional Transition Probabilities

The calculation of conditional transition probabilities given an empirical transition matrix is a highly non-trivial task involving many modelling assumptions. This version of the transitionMatrix includes a canonical implementation that assumes a Gaussian single factor process as the driver of the joint rating dynamics. The technical documentation is available under in Open Risk Manual under the transition matrix category.

Release of version 0.4 of the transitionMatrix package

Further building the open source OpenCPM toolkit this realease of transitionMatrix features:

1. Feature: Added Aalen-Johansen Duration Estimator
2. Documentation: Major overhaul of documentation, now targeting ReadTheDocs distribution
3. Training: Streamlining of all examples
4. Installation: Pypi and wheel installation options
5. Datasets: Synthetic Datasets in long format

Enjoy!

Is the IFRS 9 or CECL standard more volatile? Its all relative

Objective

In this study we compare the volatility of reported profit-and-loss (PnL) for credit portfolios when those are measured (accounted for) following respectively the IFRS 9 and CECL accounting standards.

The objective is to assess the impact of a key methodological difference between the two standards, the so-called Staging approach of IFRS 9. There are further explicit differences in the two standards. Importantly, given the standards are not prescriptive, it is very likely that there will be material differences in interpretation and implementation of the principles (for example on the nature and construction of scenarios). In this study we perform a controlled comparison adopting a ‘ceteris-paribus’ mentality: We assume that all other implementation details are similar and we focus on the impact of the Staging approach.

Credit Portfolio PnL volatility under IFRS 9 and CECL

Objective

We explore conceptually a selection of key structural drivers of profit-and-loss (PnL) volatility for credit portfolios when profitability is measured following the principles underpinning the new IFRS 9 / CECL standards

Methodology

We setup stylized calculations for a credit portfolio with the following main parameters and assumptions:

• A portfolio of 200 commercial loans of uniform size and credit quality
• Maturities extending from one to five annual periods
• A stylized transition matrix producing typical multiyear credit curves
• Correlation between assets typical for a single business sector and geography portfolio
• Focusing on PnL estimates one year forward, with PnL being impacted both by Realized Losses

(defaults) and Provision variability (both positive and negative).

Credit Portfolio Management in the IFRS 9 / CECL and Stress Testing Era

The post-crisis world presents portfolio managers with the significant challenge to asimilate in day-to-day management the variety of conceptual frameworks now simultaneously applicable in the assessment of portfolio credit risk:

• The first major strand is the widespread application of regulatory stress testing methodologies in the estimation of regulatory risk capital requirements
• The second major strand is the introduction of new accounting standards (IFRS 9 / CECL) for the measurement and disclosure of expected credit losses While both Regulatory Stress Testing and IFRS 9 / CECL accounting require investment in analytic capabilities and provide unique new insights, both are aimed at satisfying evolving prudential or investor disclosure requirements. Neither is designed to help credit portfolio managers analyse and steer their portfolios in the bottom-up fashion that is an essential part their mandate.

The above developments are overlaid into pre-existing conceptual and practical frameworks such as