![]() In contrast to the Roll Rate Analysis, however, the Rating/ Scoring Migration Analysis allows the transition from one state to each other state. The states of this process are rating or scoring values, but might also be buckets of days past due, where one or several scores/days past due buckets are defined as default. It is also based on a Markov chain process. The Rating/Scoring Migration Analysis is very similar to the Roll Rate Analysis. The component needs the following historical data information as input:Ĭomponent “PD (PIT) Rating/Scoring Migration Analysis ” By characterising one or several buckets as an indicator for default, a PD can be calculated as the probability of a loan ending up in this type of bucket. The Roll Rate Analysis of days past due is based on a Markov chain process, and the states of this process are buckets of loans for days past due. The PDs (PIT) will be used directly in ECL calculation in IFRS 9. This component derives the PDs (PIT) for the lifetime of a deal directly from the available historical default data and macroeconomic parameters. In addition, internal or external historical default rates (or accounting data) in past periods/years (by segment/portfolio) need to be provided. For each scenario, the bank needs to input a maximum of 5 macroeconomic parameters for a timeline. By applying the regression method, a correlation can be set up between the derivation of the default rate for a specific period compared with the average default rate over the periods and underlying macroeconomic parameters. The component studies the correlation between default patterns in past periods with the relevant macroeconomic parameters available in those periods. ![]() It is up to the bank to decide for each scenario if it will represent a baseline, upside and downside scenario or maybe two different downside scenarios in addition to the baseline scenario. These scenarios are named “Scenario 1, Scenario 2 and Scenario 3” in the component. The component considers macroeconomic parameters for 3 different macroeconomic scenarios. If the component “PD (PIT)” is in use, the functionality of the component “Macroeconomic Factor” is already embedded. This component calculates macroeconomic factors and is only required if the PD (TTC) is to be transferred to PD (PIT). This component derives macroeconomic factors on the basis of macroeconomic parameters. Shift scenarios (such as -25 bps or 25 bps) will be configured for other scenarios (e.g. If an estimation of macroeconomic parameters for future periods is not available, the moving average method will be applied for forecasting macroeconomic parameters (e.g. Estimation of macroeconomic parameters for future periods.PD (TTC) at segment/portfolio or at deal level.Correlation between derivation of the default rate and macroeconomic parameters (output from component “Macroeconomic Factor”).This output will be considered as input in the components “PwECL Simulation” and “PwECL Calculation”. The output of this component is the PD (PIT) for time periods in the future. PD (PIT) for each period in the future is calculated by applying PD (TTC) with a correlation between derivation of the default rate and the projected macroeconomic parameters of that period. By adjustment via macroeconomic factors, the economic scenario in a specific period is considered. The target of this component is to use the existing PD (TTC) by applying macroeconomic factors. ![]() It is conceptually different to requirements in IFRS 9 which requires looking forward over the lifetime of a financial instrument while considering economic scenarios. PD (TTC) is commonly used in risk management with the concept of “through the cycle (TTC)”. It requires a PD (TTC) as a starting point that can be calculated in another model or can be imported from an external source.Ĭomponent "Transfer PD (TTC) to PD (PIT)" This variant has to be applied if a customer decides to transfer an existing PD (TTC) to a PD (PIT) applying macroeconomic factors. Variant A - Transfer PD (TTC) to PD (PIT) Component "PD (PIT) Rating/Scoring Migration Analysis".Component "Transfer PD (TTC) to PD (PIT)".Variant B, in which the available historical scoring information is evaluated in combination with macroeconomic parameters for the direct derivation of a PD (PIT)ĭepending on the variant selected, different components are used:. ![]()
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