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Ey Quant Masterclass
Masterclass
& Networking
Event
Welcome!
Frank De Jonghe
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Sonja Koerner
Partner, FS Advisory
PhD Physics, MSc Mathematical
Finance
15 years in Advisory
Joined consultancy straight
from academia
Recent / current projects:
Things to do today:
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ROOM:
15.00 15.15: You deserved a coffee break outside Vista (9th floor)
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by Frank De Jonghe
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Early indicators
RF2
RF1
RF6
12m to default
RF3
IRB
IFRS9
RF7
RF4
Acquisition
RF5
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Affirm
US
Consumer loans
Prospr
US
P2p lending
LendingClub
US
P2p lending
Avant
US
Wonga
UK
Consumer loan
Kreditech
GER
Personal Loans
Approach to scoring
Lookup online profile (linkedin, other,..)
Try to answer the question is the person who they pretend to be
Nearly no data required for subscription (social security number).
They do get additional data from credit bureaus, other lending companies, banks,.
Web data: IP address, geography, browser type etc..
Similar to prospr
Big data, "thousands of variables"
Same application form as Prospr and Affirm
"Social Media data
Cell phone usage, rental info.
"more than 8000 data points"
Little disclosures on data used. Described as user's "unwittingly leaked data"
(speculative):
products used to visit the website. IP address, source leading to website.
Customer way of filling application (type, type, technology used,)
Facebook data is asked for
Other online data (house value, genealogy databases, online business information)
Same as above.
-transaction history (income, sale, online tools used)
-user feedback rating, online presence, likes, responsiveness,
"thousands of data points".
TO qualify: 1 year history, 100k revenu, and owner credit score above 500
Kabbage
US
Business loans
OnDeck
US
Business Loans
SoFi
US
Student Loans
Klarna
SW
Consumer loans
Basic info: E-mail and delivery adress, size of the purchase, time of the day, device used,
Credit Rating
Education, employment, past due, stability of employment history, Cash flow, FICO score
Lenddo
China
Ant Financial
Services
China
Paypal
US
Consumer loans,
Business loans
ZestFinance
US
Credit rating
NeoFinance
US
Automobile loan
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Data gathered at
application +
credit bureau
Trusted network
Use of transaction
data
Trusted network
data
Speakers
IFRS 9
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Advanced Analytics
London2016
http://advancedanalytics.ey.net/
6.8 billion
ACTIVE MOBILE
SUBSCRIPTIONS
96% of the
worlds
population
2.7 billion
INTERNET USERS IN
THE WORLD
39% of the
worlds
population
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6 billion TB
THE VOLUME OF DATA GENERATED
OR PROCESSED IN 2016 WILL EXCEED
8 ZETTABYTES
Sensors
Hadoop
Reporting
Digital
Computing Science
Data scientist
Velocity
Geospatial Analytics
Machine
Learning ADVANCED
ANALYTICS
Enterprise
Intelligence
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Hub
Cloud
Web
Analytics
Predictive
Analytics
Business
Intelligence
Database
https://www.youtube.com/watch?v=l95h4alXfAA
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Data Engineers
Data Scientists
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Data Visualizers
USE CASE
Smart Cities: Analytics applied for real time decision making
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Government
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Citizens
Companies
48 million customers
17,500 ATMs
7,500 Branches
500,000 Point of
Sale Terminals
30M cards
24 mill transactions/day
Source: Total number of transactions includes Internet banking
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scoring
job
default
origin
language
mortgage
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e-banking
telephone
status
income
transactions
payments
deposits
date
relationships
loans
address
currency
ATM cards
time
preferences
location
transfers
details
Age
stock
expenses
products
credit
salary
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Visitors presence
+
Flickr pictures
Average payment
+
Big spenders ratio
Students
Repeat payment
+
+
Twitter
Repeat Foursquare
+
Foursquare
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Restaurant Y
Restaurant x
Alvarez de Baena 4
Zurbano 31
Restaurant z
Presidente Carmona 2
Restaurant M
Ferraz 2
Restaurant M
Miguel Angel 29
/table
Men: 91%
Visitors
38%
Men: 82%
Men: 76%
City
31%
City
49%
Visitors
25%
Visitors
Province
60%
9%
Province
13%
36% 36%
34%
26%
43%
24%
5%
18-2930-4445-60 >60
73%
4% 1% 1%
20%
6% 3% 1%
Province
17%
40%
42%
33%
48%
11%
70%
21%
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Men: 68%
Visitors City
31% 52%
City
Province 58%
20%
30%
5%
2%
Visitors
22%
City
56%
Province
18%
37%
Men: 82%
19%
18%
4%
12% 2% 3% 1%
9%
21%
3% 3% 1%
17%
5% 7% 2%
What for?
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Distribution Strategy
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Evidences
Real time
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IFRS 9
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Agenda
IFRS9 overview
Transfer Criteria
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IFRS 9 Overview
Stage 2
12-month ECL
Stage 3
Lifetime ECL
Credit risk has increased significantly since initial
recognition
Lifetime ECL
criterion
Credit-impaired
Interest revenue
recognised
EIR on
amortised cost
EIR on
gross carrying
amount
EIR on
gross carrying
amount
Improvement
Deterioration
At initial recognition all assets are recognised in stage 1, however some may move to stage 2 very quickly.
Criteria for transition from stage 1 to stage 2: significant increase in credit risk
Criteria for transition from stage 2 to stage 3: objective evidence of impairment
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IFRS9 vs IAS39
IFRS 9
Good Book
IBNR provision:
Emergence
Period length
expected loss
Good Book
12m Expected
Loss
ECL =
PD LGD EAD D (1
To build
To leverage
Quality
Impaired
Lifetime
expected loss
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Impaired
Lifetime
expected loss
Transfer Criteria
Probability-weighted
ECL
Existing forecast
techniques
Existing infrastructure:
Key areas of adjustments
A pre-requisite is to have an IRB default definition that includes more than 90 days past due default trigger.
Best practice is to align the IFRS9 credit impairment definition to the IRB default definition
Effective interest
Point-in-time rate as discount
calibration
rate
IRB
Expected
loss
IFRS9 12-month
expected credit
loss
Reversal of conservatism:
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Regulatory floors
Pipeline lending
Downturn adjustments
Prepayment/overpayment models
Lifetime Modelling
Level of
complexity
Parameter
Key considerations
PD
Retail portfolios
Lifetime PD models represent 12m PD term structures which reflect expected movements in
default risk over the lifetime of the exposure. Key components to consider:
Vintage analysis
Seasoning
Macroeconomic effects
LGD
Retail Secured
LGD
Retail Unsecured
EAD
Retail Secured
Amortisation schedule
Prepayments
Overpayments
EAD
Retail Unsecured
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High
Low
New Concepts:
Transfer Criteria
Key Requirements
Pre-emptive
Forward-looking
Stage 2
composition
Retail
PD
assessment
Backstops
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Commercial/Wholesale
forbearance
New Concepts:
IFRS 9 .5.5.20: For revolving facilities, ...measure ECL over the period an entity is exposed to credit risk and
expected credit losses would not be mitigated by credit risk management actions, even if that period extends beyond
the maximum contractual period
Stage 1:
Current trend is to use a 12M lifetime even if the behavioral life is shorter
Stage 2/3:
ITG Steer: Behavioural life for facilities expected to revert to stage 1 or remain in stage 2 + time to
default and collect for those to transfer to stage 3
Lifetime can be capped to the date of the next credit review provided that is at least as thorough as that
which took place on origination
Bank # 1
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Bank # 2
Bank # 3
New Concepts:
Emerging trends:
1
4
1
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The journey
IASB issues
IFRS9 which
enters in force in
Jan 2018
Jul 2014
Basel Committee
issues Guidance
on accounting
for ECL
February 2015
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April 2015
Sept 2015
Dec 2015
BBA meetings on
probability weighted ECL
calculation
Jan 2016
Today
2016-2017
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Model governance
Documentation quality
Preparation is critical as TRIM has already started and will continue to dominate the agenda for the next years.
Design phase
Execution starts
Execution
H1 2016
H2 2016
2019
2018
2017
As the largest area in scope, the main focus is on credit risk, however other risks are also included in the review.
The review will be based on the EBA draft Regulatory Technical Standards (RTS) on supervisory practices for Internal Ratings-Based approach (IRB), and also aligned to model lifecycle
requirements as per Federal Reserve Board guidance and emerging regulation, such as IRB revamp.
Definition of
default and loss
Risk quantification
Management
of changes to
the rating
systems
Stress test
Internal
governance
and validation
Design,
operational
details
documentation
of rating
systems
Assignment of
exposures to
exposure
classes, grades,
pools
Implementation
plan and PPU
Own funds
requirements
calculation
Requirement for
equity exposures
Implementation plan and permanent partial use: Consistent implementation, clear responsibilities and decision- making process.
Internal governance and organisational matters: Relevant procedures and policies are subject to management attention in full detail;
organisation, governance and independence of validation.
Role of internal audit: Focus on audit strategy and whether internal audit is focusing on the material aspects of rating systems.
Validation framework: Organisation of validation function vs. Credit Risk Control Unit (CRCU), procedures for facilitating independence of
validation, decision process on validation results, including follow up on actions decided, validation policies and size of validation teams.
Use test and experience test: Making the use test tangible and proving output role in risk management, credit approval and decisionmaking.
Model change: Responsible organisational body and process, justifications and frequency of changes, including materiality thresholds,
notifications and reasons for model change.
Data quality management: Banks need defined data quality standards setting objectives and scope of data quality management process
concerning completeness, accuracy, consistency, timeliness; consider alignment with BCBS 239.
Third-party involvement: Detailed requirements when banks outsource rating model operations or data.
Assignment of exposures to exposure classes, grades, pools: understanding of automated and manual assignment to classes;
particular focus on specialised lending.
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Workshops
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Problem setting
Lack of observability
http://www.markit.com/Product/Totem
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Contributors submit prices over a wide range (of strikes and terms)
Standard deviation
Number of contributors
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Contributors submit prices over a wide range (of strikes and terms)
Standard deviation
Number of contributors
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Problem setting
Lack of observability
liquidity on inputs
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Contributors submit prices over a wide range (of strikes and terms)
Standard deviation
Number of contributors
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Contributors submit prices over a wide range (of strikes and terms)
Standard deviation
Number of contributors
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IPV is the process by which market prices or inputs are verified for
accuracy (inputs are sourced independently from the desk)
Differences between desk pricing and IPV results may result in the
build up of specific reserving
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IPV is the process by which market prices or inputs are verified for
accuracy (inputs are sourced independently from the desk)
Differences between desk pricing and IPV results may result in the
build up of specific reserving
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Bloomberg
However, yellow coloring does not mean that the index/stock is traded
(can be obtained via quotes only)
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Bloomberg
However, yellow coloring does not mean that the index/stock is traded
(can be obtained via quotes only)
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One-way markets
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One-way markets
Q6: What are the controls and checks you apply (or expect to be
applied)?
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What is a model?
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Model Governance
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Executive summary
Governance Vision
Model
universe
Embedding
model risk
MRM
procedures
MRM policy
rollout
2013
Year 2
Inventory and
dashboards
H2 2012
Year 1
H1 2012
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Background
The past
Problem statement
Solutions adopted
Lessons learned
The future
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Problem statement
What questions remain to be answered?
Where do quant fit in?
Basel II
SMA
Removal of internal
models. Focus on
simplicity, comparibility
and risk sensitivity
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No models!
Why involve quants?
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Scope:
Calculation:
Aim:
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Internal data:
External data:
Scenarios
BEICFs
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Endless debates
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There's no sense in being precise when you don't even know what you're
talking about
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Scope:
Calculation:
Aim:
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SMA World
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SMA World
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SMA World
Cause
People
Event
Effect
Process
Systems
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External
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Area
Description
Problem
Statement
EY
Objectives
EY Market
Offerings
example
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PD
(Part 1)
PD
(Part 2)
2. Log-odd shift
3. Forecast transition matrix or roll rate
LGD
(Part 1)
1. Direct regression
2. PD-LGD correlation
3. Flat downturn LGD (for stress testing)
LGD
(Part 2)
EAD
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Description
Identify
calibration
segments
Link macro
factors to
segment
default rate
Forecast
segment
default rate
using scenario
Apply at
facility or
grade level
Build
cumulative PD
at facility or
grade level
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Illustration
Part 1 (step 1-3): forecast segment-level default
rate
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Leadership Skills
Individual contributor
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Closing Plenary
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Concluding remarks
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Concluding remarks
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Contacts
Frank De Jonghe
Sonja Koerner
Partner FS Advisory
skoerner@uk.ey.com
Oana Butnariu
James Shaikh
Senior Recruiter
oana.butnariu@be.ey.com
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Recruitment Manager
jshaikh@uk.ey.com
Thank you !
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