Pierre Xu and his Portfolio Risk Analytics team design and implement credit portfolio and capital management solutions across a range of global financial institutions. They have pioneered approaches to managing portfolio risk in the face of a constraining regulatory environment. His team’s recent focus is on constrained credit portfolio optimization, quantification of risk appetite in risk-based limits, and portfolio design under CECL and IFRS 9.
Portfolio Optimization: Quantify diversification benefits across portfolios and define risk types that inform risk management and active asset allocation decisions.
Economic Capital : Moody’s Analytics insurance economic capital solution provides critical insights that help evaluate solvency positions and risk-based decision making.
Regulatory Capital : Moody’s Analytics insurance regulatory capital solutions help insurers comply with Solvency II and other similar regulatory regimes.
Portfolio Models: Models that enable portfolio managers to assess and optimize portfolio risk.
Regulatory Capital: Amount of capital financial institutions must hold as required by financial regulators.
Loss Accounting: CECL: New credit loss accounting standard that replaces the current ALLL accounting standard.
RAROC and RORAC solutions that account for allowance and forward-looking IFRS 9 / CECL measures in return and risk.
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.
We propose a composite capital allocation measure integrating regulatory and economic capital. The approach builds upon the economic framework underpinning traditional RORAC-style business decision rules, allowing for an optimized risk-return tradeoff while adhering to regulatory capital constraints. The measure has a number of depictions, and it can be viewed as a weighted sum of economic and regulatory capital, as economic capital adjusted for a regulatory capital charge, or as regulatory capital adjusted for concentration risk and diversification benefits. Intuitively, when represented as economic capital adjusted for a regulatory capital charge, the adjustment can be represented as the additional top-of-the-house regulatory capital, above economic capital, allocated by each instrument's required regulatory capital. We show that the measure has ideal properties for an integrated capital measure. When regulatory capital is binding, composite capital aggregates to the institution's top-of-the-house target capitalization rate. We find the measure is higher than economic capital, but lower than regulatory capital for instruments with high credit quality, reflecting the high regulatory capital charge for this instrument class. Finally, we address how IFRS 9/CECL impacts the CCM and discuss the broader implications of the new accounting standards.
We construct and examine new origination of C&I loans to middle-market borrowers using the Loan Accounting System data extracted from Moody's Analytics Credit Research Database (CRD/LAS). We find that C&I loan origination declines during the Great Recession and recovers soon after. The magnitude of the decline and the speed of the recovery varies across segments. For example, new lending to the financial industry decreases more than to the non-financial industry during the recession and recovers faster afterwards. Another example, new originations during the recession consists predominantly of short-term loans, while long-term lending becomes more dominant post crisis. This finding suggests that banks are using loan tenor as a means to mitigate risk during crises, at times even more so than credit quality.