Advanced IRB Modelling

2 days
Prague, NH Hotel Prague
  • Dynamics of Internal Rating Systems
  • Building, Validating, and Using PD Models
  • Measuring Market, Workout and Implied LGD
  • Modelling PD and LGD in Low-Default Portfolios (LDP)
  • Measuring EAD of Loans, Credit Lines and OTC Derivatives
  • Backtesting and Validation of PD, LGD and EAD Models
  • Practical Applications of Internal Rating Models
A two-day course on how to build, implement and validate models for calculating PD, LGD, EAD and RWA

The purpose of this workshop is to give you a practical understanding of methods for estimating and using the risk parameters (PD, LGD and EAD) in the Basel III IRB Risk Weight Function.

The course is primarily targeted towards persons who work "hands-on" with credit risk modelling in banks. The course is, however, also very relevant to senior staff members and to regulators, who need a thorough understanding of the "workings" of the IRB-A approach and of the challenges of estimating, implementing and validating models for quantifying credit risk.

We start with a brief introduction to the IRB approach to measuring credit risk. We explain and demonstrate how estimates for the risk parameters are translated into risk weights using the Supervisory Risk Function, and we discuss the underlying assumptions.

We then turn to look in more detail at various approaches to modelling PD, LGD and EAD. We will focus particularly on challenging issues such as the modelling of PD and LGD for low-default portfolios and the estimation of recoveries under the "workout" method. We also thoroughly explain methods for estimating the EADs for credit lines and OTC derivatives.

Finally, we explain how PD and LGD models can be validated and how the outputs can be used for regulatory and internal management purposes.

The course is designed as mix of theoretical presentations/discussions, practical examples and small exercises.

09.15 - 12.00 Modelling LGD

  • Definitions of Default and Loss
  • What Does Basel Demand on LGD Key Criteria
  • LGD Drivers
  • An Illustrative LGD Decision Tree Framework
  • Three Broad Ways of Measuring LGD
    • Market LGD
    • Workout LGD
    • Implied LGD
  • A Closer Look at Workout LGD
    • Recoveries
    • Costs
    • Discount rates
  • Collateral Allocation and Collateral Valuation
  • Measuring LGD for Non-Performing Portfolios
  • Measuring LGD Low-Default Portfolios
  • Validation of LGD
    • Proportional decomposition method
    • Marginal decomposition method
  • Worked Examples and Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Modelling EAD

  • Credit Characteristics
    • Fixed vs. floating, revolving or non-revolving
    • Covenants, restructuring
    • Obligor-specific characteristics
  • Three Important Concepts in EAD Modelling: LEQ, CCF and EADF
  • CCF Risk Drives - Choice of Method
  • EAD - Design of Model and Back-Testing
  • Measuring Downturn EAD
  • Measuring EAD of OTC Derivatives Portfolios
    • The add-on method
    • The internal modelling method

Putting It All together

  • Complete Worked Example of the Estimation and Applications of PD, LGD and EAD Models

Evaluation and Termination of the Seminar

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