Credit Risk Management for Basel II

Credit Risk Management for Basel II - Experiences in the...

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Experiences in the Implementation of Credit Risk Management for Basel II February 2008 PRMIA Shanghai Credit Risk Forum Gary Chen Principal, Credit Advisory Algorithmics, Fitch Group
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© 2007 Algorithmics Incorporated. All rights reserved. 2 Introduction Purpose: To provide ± An overview of sound practices for credit risk management under BIS II IRB Pillar 1 framework ± A framework for model development and validation based on sound industry practices ± A process for internal credit risk control aligned with regulatory principles and guidance
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© 2007 Algorithmics Incorporated. All rights reserved. 3 Agenda 1. Introduction 2. Pre-model Build Process 3. IRB Model Build Process 4. Rating System Validation Process 5. Credit Risk Control & Oversight
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© 2007 Algorithmics Incorporated. All rights reserved. 4 An Overview of credit risk measurement under BIS II Framework Quantitative Evaluation Qualitative Evaluation Internal Rating Loss Given Default (LGD) Exposure at Default (EAD) Correlation Stress Testing Calculation of Credit Risk Amount Expected Loss (EL) Unexpected Loss (UL) Risk Components Financial Data Portfolio Monitoring Provisioning Pricing Profit Management Capital Allocation Reporting to the Board Migration Matrix Probability of Default (PD) Quantification of Credit Risk Internal Rating System Internal Use Source: BoJ Sep 2005
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© 2007 Algorithmics Incorporated. All rights reserved. 5 A Simple Look on Pillar 1 IRB Tasks Internal Use “Use Test”*: Pricing, Portfolio Monitoring, Credit Risk Quantification? Validation Work Architecture of an Internal Rating System, Quantitative Rating Model Qualitative Evaluation Estimation of Risk Components Risk estimates (i.e., PD, LGD, EAD) predictive and accurate? Source: BoJ Sep 2005 * Use Test : IRB provision that requires ratings and default and loss estimates to “play an essential role” in the Institution’s credit approval, risk management, internal capital allocations and corporate governance functions.
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© 2007 Algorithmics Incorporated. All rights reserved. 6 3. Perform Development and Validation Activities for all IRB Components: Overview of Pillar 1 IRB Tasks Initial Setup 2. Check Policies/Documents Developmental Evidence Outcomes Analysis Ongoing Monitoring Rating System Quantification Data Controls Board & Senior Management Independent Validation Group ± Create credit /validation policy & procedural manual ± Define Roles & Responsibilities ± Form Independent Validation Group ± Establish System of Controls 1. Review IRB Gap Assessment Internal Audit
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© 2007 Algorithmics Incorporated. All rights reserved. 7 The need for clear CRM Roles and Responsibilities The Board Risk Control and Management Department Senior Management Business Unit Support Department Credit Policy Risk Quantification Credit Review and Control Business Development Risk Control Accounting Human Resource IT Legal Service Credit Process Internal Audit
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This note was uploaded on 03/12/2010 for the course ECON CRM taught by Professor Prof during the Spring '10 term at École Normale Supérieure.

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Credit Risk Management for Basel II - Experiences in the...

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