Featured Product

    Quantitative Research Webinar Series: The Degree to Which Regulatory Capital is Constraining and the Impact on Investment Decision Rules

    August 2016

    Pierre Xu provides an overview to the Composite Capital Measure. He discusses how the measure should be parameterized to reflect the degree to which an institution is constrained by regulatory capital requirements and examine the dynamics and investment implications of the measure under different economic scenarios.

    Pierre Xu provides an overview to the Composite Capital Measure. He discusses how the measure should be parameterized to reflect the degree to which an institution is constrained by regulatory capital requirements and examine the dynamics and investment implications of the measure under different economic scenarios.
    Related Articles
    Whitepaper

    Earnings Volatility, Share Price Performance, and Credit Portfolio Management Under CECL and IFRS 9

    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.

    April 2019 WebPage Dr. Amnon Levy, Xuan Liang, Dr. Pierre Xu
    Webinar-on-Demand

    Moody's Analytics Webinar: Credit Earnings Volatility and Share Price Performance: Implications of IFRS 9 and CECL

    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.

    February 2019 WebPage Dr. Amnon Levy, Dr. Pierre Xu, Anna Krayn

    Moody's Analytics Webinar: Credit Earnings Volatility and Share Price Performance: Implications of IFRS 9 and CECL

    Join us as our experts, Amnon Levy, Managing Director, Pierre Xu, Director, and Anna Krayn, Senior Director, explore the relationship between share price performance and earnings volatility and the implications for credit portfolio management.

    February 25, 2019 WebPage Dr. Amnon Levy, Dr. Pierre Xu, Anna Krayn
    Whitepaper

    A Composite Capital Measure Unifying Business Decision Rules in the Face of Regulatory Requirements Under New Accounting Standards

    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.

    May 2018 WebPage Dr. Amnon Levy, Xuan Liang, Dr. Pierre Xu
    Article

    A Composite Capital Allocation Measure Integrating Regulatory and Economic Capital, and the Impact of IFRS 9 and CECL

    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.

    May 2017 Pdf Dr. Amnon Levy, Dr. Pierre Xu
    Whitepaper

    What Do 20 Million C&I Loan Observations Say about New Origination Dynamics? — Insights from Moody's Analytics CRD Data

    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.

    February 2017 Pdf Dr. Pierre Xu, Tomer Yahalom, May Jeng
    Whitepaper

    Measuring and Managing Credit Earnings Volatility of a Loan Portfolio Under IFRS 9

    IFRS 9 materially changes how institutions set aside loss allowance. With allowances flowing into earnings, the new rules can have dramatic effects on earnings volatility. In this paper, we propose general methodologies to measure and manage credit earnings volatility of a loan portfolio under IFRS 9. We walk through IFRS 9 rules and the different mechanisms that it interacts with which flow into earnings dynamics. We demonstrate that earnings will be impacted significantly by credit migration under IFRS 9. In addition, the increased sensitivity to migration will be further compounded by the impact of correlation and concentration. We propose a modeling framework that measures portfolio credit earnings volatility and discuss several metrics that can be used to better manage earnings risk.

    January 2017 Pdf Dr. Amnon Levy, Dr. Yanping Pan, Dr. Yashan Wang, Dr. Pierre Xu, Dr. Jing Zhang, Xuan Liang
    Webinar-on-Demand

    The Degree Regulatory Capital is Constraining and Impact on Investment Decision Rules

    Pierre Xu, Associate Director of Portfolio Research at Moody’s Analytics will discuss how required economic capital (EC) accounts for economic risks such as diversification and concentration effects.

    October 2016 WebPage Dr. Pierre Xu
    Webinar-on-Demand

    Quantitative Research Webinar Series: The Degree Regulatory Capital is Constraining and Impact on Investment Decision Rules

    Pierre Xu, Associate Director of Portfolio Research at Moody’s Analytics will discuss how required economic capital (EC) accounts for economic risks such as diversification and concentration effects.

    October 2016 WebPage Dr. Pierre Xu
    Whitepaper

    Managing Earnings Volatility and Uncertainty in the Supply and Demand for Regulatory Capital: The Impact of IFRS 9

    This paper presents a novel modeling approach that allows for better management of the interplay between supply and demand dynamics for regulatory capital, combining an economic framework with regulatory capital and new loss recognition rules. The framework is particularly relevant in understanding the extent to which IFRS 9 can lead to more aggressive provisioning, which feeds into earnings volatility. Our approach provides guidance on how organizations can better manage their capital buffer, considering investment concentration, its impact on earnings volatility, and the relationship with regulatory capital requirements. Imperative to portfolio management, the framework recognizes the likelihood of a capital shortfall being significantly impacted by portfolio asset class, geography, industry, and name concentration, as extreme fluctuations in capital supply and demand occur more often for institutions holding more concentrated portfolios. Finally, we discuss integrated investment and strategic decision measures that account for the full spectrum of economic risks and interactions with regulatory and accounting rules, as well as instruments' contribution to earnings volatility and capital surplus dynamics.

    September 2016 Pdf Dr. Amnon Levy, Dr. Pierre Xu, Dr. Jing Zhang, Andriy Protsyk
    RESULTS 1 - 10 OF 13