Regulators globally are increasingly pushing banks to make stress testing a routine exercise. As the process evolves and regulatory scrutiny increases, banks will benefit from easily deployable tools that simplify and streamline that process.
Technology and modern finance have enabled individuals and companies to become connected in complex ways. Key insights about the reputational risk of banking a customer are now buried inside tangled relationships that cross legal, company, and geographical borders
Brexit Fallout: Using Scenario Analysis and a Systemic Risk Approach to Assess Corporate Credit Risk
The June 23rd referendum, in which UK voters chose to leave the European Union, has fanned financial volatility and may precipitate a recession in the UK economy. The updated economic and financial outlook has implications for corporate credit risk.
This whitepaper discusses the findings of our simulation exercise to the corporate loan portfolios of Australia's five largest banks.
This quantitative analysis of CCAR 2014 Severely Adverse scenarios, Moody's Analytics finds that the Federal Reserve Bank's (FRB's) and banks' own modeled estimates of capital ratios, revenue, net income, and loan credit losses are generally well aligned, although variations in all measures and across all banks are evident. In addition, the FRB's estimates are generally more conservative than those of the individual banks, reflecting differences in the FRB's industry-based models vs. the banks' portfolio specific models, treatment of missing or invalid data in the FRB's modeling approach, and assumptions about projected balance sheet volumes. The wide variation among bank modeled estimates and their overall alignment with FRB modeled estimates argues against banks targeting general industry benchmarks (such as average loss rates) and in favor of building models around their own business models and portfolio characteristics.
The European Central (ECB) has begun a year-long comprehensive assessment of the Euro area banking system. The assessment is expected to include approximately 130 "significant" banks owning 85% of bank assets in the Euro area. The results will be closely watched by global market movers and stakeholders alike. In this paper, Moody's Analytics seeks to provide a default data-driven context for the ECB's exercise and a preview for what is to come.
The European Central (ECB) has begun a year-long comprehensive assessment of the Euro area banking system. In this webinar, Moody's Analytics seeks to provide a default data-driven context for the ECB's exercise and a preview for what is to come.
In this paper we describe the modeling methodology behind Moody's Analytics Stressed EDF measures for Western Europe. Stressed EDF measures are one-year, default probabilities conditioned on holistic economic scenarios developed in a large-scale,structural macroeconometric model framework.
In this Viewpoints, we briefly recount the methodology used to construct Stressed EDF measures and then highlight some of their strengths for macroeconomic stress testing. History shows that Stressed EDF measures are capable of accurately predicting credit risk under severe economic onditions. The degree of granularity afforded by these firm-level PDs increases flexibility and improves precision in credit analytics where portfolio composition is important. We also show that Stressed EDF measures can be used to simulate the macroeconomic stress testing exercises of supervisory authorities, such as the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR).
In this paper we describe the modeling methodology behind Moody's Analytics Stressed EDF measures. Stressed EDF measures are one-year, default probabilities conditioned on holistic economic scenarios developed in a large-scale, structural macroeconometric model framework. This approach has several advantages over other methods, especially in the context of stress testing. Stress tests or scenario analyses based on macroeconomic drivers lend themselves to highly intuitive interpretation accessible to wide audiences – investors, economists, regulators, the general public, to name a few.