(EBA-) Stress PD-Shifts

  • Introduction

    Macro-economic stress testing and scenario analysis has become an increasingly popular tool for assessing the resilience of financial institutions to adverse macro-financial developments. The recent financial crisis and the euro area sovereign debt crisis (which exposed the financial sector to unprecedented adverse shocks), reinforced this trend. Despite the substantial analytical advances in stress testing techniques made in recent years by the (European Central Bank) ECB and other institutions, several challenges remain. One key element is the consistent projection of macro-economic (stress) scenarios on assets and liabilities of the balance sheet – often referred to as satellite models. In particular asset classes like corporate SME portfolios and low default portfolios (e.g. financial institutions) are in many cases covered by approaches based on strong assumptions and non-representative data. While sometimes this might be sufficient from a pure regulatory perspective, the models cannot provide sufficient input on the true underlying economic risk drivers from an economic perspective because they do not demonstrate sufficient granularity for pro-active portfolio management. Additionally, assessing creditworthiness of single obligors with rating models on one hand, and credit portfolio quantification and management on the other, often rely on inconsistent information. Specifically, all types of risk analysis are plagued by their backward-looking nature and often outdated data. Balance sheet ratios at best reflect a company’s situation one year ago. In response to this CreditDynamix®  represents an innovative and intuitive approach to bridge the gap between these obstacles.
  • Details

    The CreditDynamix® satellite model calculates the impact of the EBA baseline and adverse scenarios on a single corporate level and then aggregates across industry and country level:
    • Selection of corporate reference portfolio: Corporate/FI data is selected and segmented along turnover size categories, industry classifications and countries
    • Calculation of individual corporate balance sheet & P/L projections: CDX corporate/FI financial data projection starts on the last available financials. 2016-2018 financials are based on EBA baseline and adverse scenario definitions.
    • Calculation of projected PDs per corporate: Projected Balance sheet & P/L data are transformed into PDs based on an internal corporate PD calculator of QRS or any other (internal) rating model.
    • Calculation of PD shifts (multiples) per sub-portfolio: Aggregated PDs are calculated as average of the individual projected corporate/FI-PDs
      pd_multiples