This paper studies how earnings volatility induced by credit risk can impact share price performance for financial institutions under CECL and IFRS 9, and quantifies the benefit of an active credit risk management practice.
The new accounting standards can have material implications for allowance and earnings dynamics. Join our researchers, Amnon Levy and Pierre Xu, explore a large sample of banks to better understand channels by which the standards affect shareholder value.
This paper introduces an approach that quantifies the additional capital buffer an institution requires, beyond the required regulatory minimum, to limit the likelihood of a capital breach.
This paper explores how CECL and IFRS 9 might impact loss allowance, earnings, and capital dynamics, and how these dynamics might affect credit portfolio management.
Using a long history of public firm defaults from Moody's Investor Services and Moody's Analytics, this study illustrates a validation approach for jointly testing the impact of PD and correlation upon model performance. We construct predicted default distributions using a variety of PD and correlation inputs and examine how the predicted distribution compares with the realized distribution. The comparison is done by looking at the percentile of realized defaults with respect to the predicted default distribution. We compare the performance of two typical portfolio parameterizations: (1) a through-the-cycle style parameterization using agency ratings-based long-term average default rates and Basel II correlations; and (2) a point-in-time style parameterization using public EDF credit measure, and Moody's Analytics Global Correlation Model (GCorr™). Results demonstrate that a through-the-cycle style parameterization results in a less conservative view of economic capital and substantial serial correlation in capital estimates. Results also show that when point-in-time measures are used, the tested economic capital model produces consistent and conservative economic capital estimates over time. A version of this paper appears in the Journal of Risk Model Validation, March 2013.
Amnon Levy, managing director and head of portfolio and balance sheet research at Moody's Analytics, discusses the evolving expectations of institutions for credit portfolio management, as well as how it is being altered and adapted amid greater impact from new regulatory and technological advancements.