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6

Sep, 2017

Credit spread risk in the banking book: Is it material?

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Basel Definition The Basel guidelines (BCBS 368) on Interest Rate Risk in Banking Book (IRRBB) define Credit Spread Risk in the Banking Book (CSRBB) as a related risk to IRRBB that refers to any kind of asset/liability spread risk of credit-risky instruments that is not explained by IRRBB and by the expected credit/jump to default risk. It adds that any change in the market liquidity spreads and market credit spreads that are not specific to the instruments are combined within the definition of CSRBB. The guidelines further explain that CSRBB […]

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16

Aug, 2017

Understanding cash flow behavior: The key to managing bank liquidity and product pricing

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The Cash Flow View Supply of money can be said to be the vital life line of an economy. It is the enabler of production, movement and consumption of goods & services that define the economy. The banking system, which is a core component of a country’s economy, is essentially in the middle of all such monetary cash flows. In fact, a bank can be viewed precisely as a conduit that enables the cash flows of an economy. For an entity, the stock of all cash flows accumulated over time […]

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15

May, 2017

Basel IRRBB Guidelines – Riding the Rate Curve

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Banks perform important roles in the economy by acting as financial intermediaries whereby they collect deposits from sectors with surplus liquidity and deploy these funds to finance long term development requirements of social and corporate infrastructure of the economy. The deposits typically are short term in nature reflecting general investment appetite and cash settlement requirements of the society while the financing needs are of longer term in nature thereby requiring banks to extend the maturities of their deposits through maturity transformation of their balance sheet. This act of maturity transformation […]

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17

Dec, 2016

IFRS 9 Impairment Solution: The Future is Now

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Are you still clinging on to your rusty legacy technology that’s gracefully aging towards obsolescence? Perhaps you are still running important applications on legacy databases with legacy operating systems because they’re “good enough” and still “work fine.” In many aspects, your old legacy technologies are like a rusty old car. You know where the kinks are and it gets you where you need to go. But lurking below the surface of that rusty old car and your old technologies can be hidden risks that can result in very big problems, […]

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15

Nov, 2016

Effective Interest Rate – Solving the Riddle

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Aptivaa has been a key representative speaker across panels of various risk events held recently such as the PRMIA Qatar chapter event, a Workshop on IFRS 9 organized by FIS for banks at Kuwait City, 3rd Banks Risk Management conference 2016 at Amman and the IFRS 9 workshop at GARP Istanbul chapter. During these interactions a number of participants have reached out to us for views on the approach for estimation of Effective Interest Rate (EIR). Also, as a part of our current engagements on IFRS 9 with several Banks, […]

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5

Aug, 2016

IFRS9 Model Risk Management – Given the Short Shrift?

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Banks are scrambling to meet with IFRS 9 guidelines and are setting down on the path to implement various ECL estimation methodologies and models. But a topic that hasn’t been given enough attention is the need for governance of these models and the attendant model risk management framework that needs to be set up to lend credibility to the model estimates. IFRS 9 is the new accounting standard for recognition and measurement of financial instruments that will replace IAS 39. Several banks are planning to perform parallel run by Q1 […]

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28

Jun, 2016

Exposure at Default: IFRS 9 Ramifications

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Under IFRS9 Framework, impairment assessment requires computation of Expected Credit Loss (ECL) that reflects a probability-weighted outcome, the time value of money and the best available forward-looking information. The ECL can be computed using cash shortfall approach or modular approach using risk parameters like PD, LGD, EAD and Maturity. Of these, we have discussed PD and LGD in detail in our previous blogs. In this blog we intend to touch upon Exposure at Default (EAD). Exposure at Default (EAD) is an estimate of a financial institution’s (FI) exposure to its counterparty at the time […]

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10

Jun, 2016

Cash Shortfall & LGD – Two Sides of the Same Coin

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Under IFRS 9, Expected Credit Loss (ECL) for financial instruments should be an unbiased and probability weighted amount, which is determined by evaluating a range of possible outcomes. To meet this requirement, banks will be required to determine “Expected” default path of the financial instruments and estimate the possible “Credit Losses” along that path. IFRS 9 defines “Credit Loss” in terms of “Cash Shortfall” or credit loss estimation through projected cash flow discounting. However, there is little explicit information available as to how “Cash Shortfall” should be computed; should it be computed separately or along […]

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25

May, 2016

Crystal Gazing – Estimating Lifetime PDs

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In our earlier blog, we discussed PD terminology and PD calibration approaches as applicable to the IFRS 9 framework. IFRS 9 has mandated computation of Impairment Losses, approach for which has been discussed in our 6th blog post. For computation of Expected Credit Loss (ECL), IASB expects organizations to consider forward looking information including macroeconomic factors that are relevant to the exposure being evaluated and that must go beyond historical and current available data. BCBS strongly endorsed this requirement in its paper published on 18th December 2015 (Please refer to our white paper around BCBS Guidelines […]

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