Seasoning effects in IRB model development
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Dear Risk community,
What are your thoughts on seasoning effects in IRB model development?
In this context we're especially concerned with changes in the risk parameters over the credit exposures lifetimes.
Do you expect this to be material over time? What's the best way to assess this?
And lastly, where this is observed, do you think it can be targeted via an overlay/adjustment on the model?
Best,
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Hi there,
Based on previous experience, for PD this is often not relevant: PDs are 12-month and the seasoning tends to be generally captured by the scoring model itself. A qualitative explanation of each scoring model and which characteristics it is considering that relate to seasoning may be enough, especially if complemented with quantitative analyses on the seasoning effect.
For a more quantitative approach, suggest testing time since origination and time until maturity as potential risk drivers using the general risk driver assessment framework during PD calibration - in the past I've observed this not to be significant but again, this is anecdotal evidence.
On LGD it may be relevant. However it should be understood that seasoning actually correlates with other significant risk drivers, particularly LTV and outstanding exposure amount. Here a deeper analysis of these parameters' significance should help "paint the broader picture".
Regards