Written by Chartis Research
In the past decade, changing capital adequacy requirements have resulted in an increasing spotlight on models for measuring credit exposures. Firms with proven models will build trust with regulators and can optimize capital in a more efficient way, making model validation essential for protecting the bottom line.
Ed Young, Moody's Analytics
The vendor with a proven track record in the credit risk category – Moody’s Analytics – was crowned winner of the inaugural award for Model Validation. The Moody’s Analytics RiskCalc™ offering features a global suite of models for evaluating commercial and industrial credit risk. RiskCalc™ includes more than 35 validated region- and industry-specific models created using the Moody’s Analytics Data Alliance Database, which contains over 85 million financial statements on more than 17 million borrowers. Ed Young, Senior Director, Moody’s Analytics, says RiskCalc™ has a global presence and is now used by more than 550 customers.
With models that undergo extensive validation and are supported by documentation, firms can be better positioned to improve capital management, perform stress testing and comply with regulation and accounting standards. Accounting standards, in particular, are today driving a growing focus on validation as deadlines fast approach for firms to address validation procedures for models calculating expected credit losses. “The CECL [Current Expected Credit Loss] accounting standard is right on the heels of IFRS 9, and there’s an ever-increasing demand for validating credit risk models and ongoing monitoring,” says Young.
In response to the growing need for validation, the latest Moody’s Analytics problemsolving solution, CAP, will soon add an app to monitor model performance. The app provides direct insight into the company’s years of modelling expertise as well as the model validation process. “We have what we feel will be a transformational tool that improves benchmarking and ongoing monitoring,” says Young. The new app will leverage RiskCalc™, which is already used in-house at Moody’s Analytics to help firms customize risk calculations on the fly. Customers will be able to use the app to compare their modelling results to the industry standard RiskCalc™ modelling results.
“We’ve been able to benchmark monitoring for a while, but recent enhancements significantly improve efficiency,” Young says, explaining that the upcoming release fits with the overall team vision of helping customers automate processes to reduce time spent on operational tasks and documentation.
Another focus area has been customization of models using robust datasets and cutting-edge analytics, and Young comments that institutions are seeking a tailored credit risk solution that fits their risk profile. To further enhance capabilities, Moody’s Analytics will be looking to leverage the 2017 acquisition of information provider Bureau van Dijk, which has extensive coverage of private company datasets that can be relevant for further enhancing models.