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How to Build an Internal Rating System for Basel II Aidan O’Mahony Managing Director Tel: +44 207 826 3518 Standard & Poor’s Risk Solutions
Risk Solutions was formed in 2001 in response to client demand for tools and services to better manage credit risk exposures.  Risk Solutions is the customised risk management services arm of Standard & Poor’s focusing on: 1. Customised Credit Services (internal rating systems) 2. Credit Tools, Models, Data & Research (eg Pd & LGD) 3. Credit Training (Open enrolment and Custom Courses). Standard & Poor’s Risk Solutions
Agenda ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
What is an Internal Rating System ? Consistent rating approach across all classes  Desk-top IT application – intranet delivered across an organisation Analytical and Management tool for tracking credit exposures and linking into Raroc models Satisfies Basel II Internal Ratings-Based Approach requirements
Facility/ Exposure details Ratings summary Collateral and LGD details Qualitative inputs Audit Trail ,[object Object],[object Object],Quantitative inputs
Rating and PDs: Internal  Ratings System (RMS)  Qualitative assessment Quantitative Assessment S&P’s Rating Templates External Ratings External Models Peer comparison Bank’s own internal view
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],Stage 1 Stage 3 Stage 2 x x = Expected Loss Rating (PD) Corporates Banks Insurance Project Finance SME Exposure at Default Seniority Maturity etc Data Collateral Haircut Policy Loss Given  Default
3. Ratings and Pds Across different asset classes ,[object Object],[object Object],[object Object],High  volume of data +  Low  Exposure MODELS ARE SUITABLE Low  volume of data +  High  Exposure RATING TEMPLATES ARE SUITABLE Typical Loan Book
Large corporates and  specialised lending  ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Large corporates and specialised lending   Sample template – Insurance Companies European Bank Evaluation of Qualitative Factors Credit factors Weights
Clear and consistent rating criteria Large corporates and specialised lending   Sample template – Insurance Companies
Large corporates and specialised lending   Sample template – Insurance Companies Evaluation of Quantitative Factors European Bank
Quantitative Assessment Based on S&P’s Experience Benchmarks are provided per sector and market Large corporates and specialised lending   Sample template – Insurance Companies
S&P Scale Internal Rating Scale ,[object Object],[object Object],Satisfy board regarding the validity of an internal rating system Identify areas of inconsistency in order to improve an internal ratings process Backtest model results versus S&P ratings or estimates Compare results and  map the scales Backtesting and Mapping to External Indicators of PD Large corporates and specialised lending   Sample template – Insurance Companies 6 5 4 3 2 1 23.76 CCC 5.44 B 0.88 BB 0.19 BBB 0.02 A 0.02 AA 0 AAA 1-yr PD S&P  4 1 CCC 2 4 1 2 B 1 6 1 BB 1 5 BBB 1 5 A 1 2 3 AA 1 AAA 6 5 4 3 2 1
[object Object],[object Object],Modelling SMEs
[object Object],Stage 2: Exposure and Facility Analysis - Typically a corporate obligor will have a number of facilities with a bank, including secured and unsecured loans and overdraft facilities
5. LGD and  Definition of default US BASEL II UK FRANCE GERMANY ITALY Credit obligation default 90 days credit obligation default Debt restructuring Bankruptcy ,[object Object]
0 10 20 30 40 50 60 70 Recovery (%) 5. LGD – Loss Given Default  -  LGD Behaviour in the US ,[object Object],Industries with 9+ Observations Automotive Comp. & Elec Retail Food & Drug Gaming & Hotel Services & Leasing Real Estate Metals & Mining Retail Textile & Apparel Transportation Average Building Materials Healthcare Oil & Gas Television Manu. & Machinery Printing & Pub. Food & Beverage
LGD Behaviour LGD Behaviour by debt Structure and Industry Overall - No Clear pattern!! ,[object Object],[object Object],[object Object]
Data Pooling Exercise:  Project Finance -  Case Study ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],Data Pooling Exercise:  Case Study Analysis: Results: ,[object Object],[object Object]
Data Pooling: Next Steps ,[object Object],[object Object],[object Object],[object Object]
[object Object],Stage 3. Loss Given Default: LGD information is scarce and  complicated
[object Object]
Concluding Comments  ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
A idan O’Mahony Managing Director Standard & Poor’s Risk Solutions Tel: + 44 20 7826-3 518 Fax: + 44 20 7826-3565 E-mail:  Aidan_O’Mahony @StandardAndPoors.com Standard &Poor’s Risk Solutions Garden House 18 Finsbury Circus London EC2M 7NJ United Kingdom Contacts

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How To Biuld Internal Rating System For Basel Ii

  • 1. How to Build an Internal Rating System for Basel II Aidan O’Mahony Managing Director Tel: +44 207 826 3518 Standard & Poor’s Risk Solutions
  • 2. Risk Solutions was formed in 2001 in response to client demand for tools and services to better manage credit risk exposures. Risk Solutions is the customised risk management services arm of Standard & Poor’s focusing on: 1. Customised Credit Services (internal rating systems) 2. Credit Tools, Models, Data & Research (eg Pd & LGD) 3. Credit Training (Open enrolment and Custom Courses). Standard & Poor’s Risk Solutions
  • 3.
  • 4. What is an Internal Rating System ? Consistent rating approach across all classes Desk-top IT application – intranet delivered across an organisation Analytical and Management tool for tracking credit exposures and linking into Raroc models Satisfies Basel II Internal Ratings-Based Approach requirements
  • 5.
  • 6. Rating and PDs: Internal Ratings System (RMS) Qualitative assessment Quantitative Assessment S&P’s Rating Templates External Ratings External Models Peer comparison Bank’s own internal view
  • 7.
  • 8.
  • 9.
  • 10.
  • 11. Large corporates and specialised lending Sample template – Insurance Companies European Bank Evaluation of Qualitative Factors Credit factors Weights
  • 12. Clear and consistent rating criteria Large corporates and specialised lending Sample template – Insurance Companies
  • 13. Large corporates and specialised lending Sample template – Insurance Companies Evaluation of Quantitative Factors European Bank
  • 14. Quantitative Assessment Based on S&P’s Experience Benchmarks are provided per sector and market Large corporates and specialised lending Sample template – Insurance Companies
  • 15.
  • 16.
  • 17.
  • 18.
  • 19.
  • 20.
  • 21.
  • 22.
  • 23.
  • 24.
  • 25.
  • 26.
  • 27. A idan O’Mahony Managing Director Standard & Poor’s Risk Solutions Tel: + 44 20 7826-3 518 Fax: + 44 20 7826-3565 E-mail: Aidan_O’Mahony @StandardAndPoors.com Standard &Poor’s Risk Solutions Garden House 18 Finsbury Circus London EC2M 7NJ United Kingdom Contacts