RiskBowl Live - Wholesale Credit Risk Modelling Roundtable - Insights

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RiskBowl Live - Wholesale Credit Risk Modelling Roundtable

London, 30th June

The inaugural session of our Oliver Wyman-moderated RiskBowl Live series brought together senior risk and modelling practitioners from the UK's largest banks. It was well-received by the attendees, which also included our guest attendee, Colin Jennings (senior ex-PRA, industry practitioner).

The discussion covered the finer points of current industry trends and practices of wholesale credit risk modelling, from more the general points, such as supervisory interactions, scales of IRB usage, and model implementation, to more segment specific questions for corporate, bank, and NBFI exposures.

Whilst we covered lots of ground, there were still many topics that we ran out of time to discuss that we will aim to cover at the next iteration of RiskBowl Live in November - reach out if you'd like to participate.

High-level Roundtable discussion summary

General IRB topics

Interaction with the Regulator

Firms do not have a clear view of PRA’s expectations on whether a model needs to be formally withdrawn or can be remediated (for example, approved with obligations similar to the ECB’s approach)
In general, models that have fewer issues are open for remediation, but in practice, banks have much more to do a lot given the moving target
It was noted that this stance may evolve with the PRA’s formal “minded to approve” approach, e.g., as they have done with mortgages models
An additional accelerator is the increased 2LoD responsibility - due to higher submission volumes, the ECB is allowing model validation teams to close lower severity findings (F1, F2) without further escalation

Raising the bar on IRB usage, including the F-IRB reversion

Several banks outlined a significant simplification of their modelling landscape over the last couple of years
Multiple institutions are evaluating F-IRB reversion for entire asset classes, contingent upon business case justification (especially where unsecured exposures are more prevalent)
It was emphasised that, consistent with CRR Article 494(d), reversion must apply to the whole asset class (or e.g., fully for the non-retail part of SME)

Model Implementation

The benefits of shadow implementation were discussed, including the ability to gather business feedback and provide evidence of use test
Although shadow implementation is a regulatory requirement under the ECB framework, its adoption for wholesale models in the UK remains limited

Segment specific questions - Corporates

Model segmentation

Historically, model segmentation has been influenced by business unit and system boundaries
Regulators are softly encouraging alignment of segmentation more closely with asset class definitions

Subsidiary rating and cascading

Count as a single obligor if it is the same rating
Credit risk officer decides if there is a support via rules (e.g., idea of an Obligor Risk Group (ORG))

LBO

Approaches to modelling LBO credit risk vary across banks: Some institutions treat LBO exposures as a calibration segment within corporate models; while others develop standalone LBO models, especially when aligned with specific business lines
When LBOs are included in corporate models, projected financials serve as input overrides, contributing to input override budget

Segment specific questions - Banks/ NBFIs

External Benchmarks (RiskCalc / Credit Benchmark)

Benchmarks are primarily used to investigate and validate developed models
Example of a funds modelling / calibration approach
Use of expert ranking approach (experts given a list of N funds to rank from 1 to N); sample size is a balance between coverage vs fatigue of experts
Van der Burgt methodology for calibration
Participants mentioned that the PRA was not focused on the sampling methodology used as long as representativeness was demonstrated