WAGNER Creditrisk PDF

The SAS Credit Risk Solution
Dr Eva Wittmann, Dr Hendrik Wagner

SAS EMEA
Copyright © 2003, SAS Institute Inc. All rights reserved.

Agenda
! Credit Scoring
• Internal Rating Systems as part of a Credit Risk solution
• Solution capabilities for Basel 2
• Benefits of in-house scorecard development
• Project Methodology
• Case Study: Integration with Credit Portfolio Risk
! Credit Portfolio Risk
• Disclosure Reporting
• Analytics
− Risk Weighted Assets calculation (IRB)
− Economic Capital calculation
• Data Management and Data Access
Copyright © 2003, SAS Institute Inc. All rights reserved. 2
- Credit Scoring -
Hendrik Wagner
Product Manager Data Mining Solutions
SAS EMEA

SAS® Risk Management for Banking
! Credit Risk Data Mart

! Scorecard Development
! Scorecard Monitoring
! Interfaces to operational
systems
! Knowledge transfer

SAS Credit Risk Solution
Portfolio Data BIS-Guidelines: "Standardized
•Loans Pricing •Exposures "Internal Ratings Based (IRB)
•Mortgages •Risk weights
•Cash-flow data
Engine •Credit risk mitigation
•Credit Cards….. •Haircuts
Mark-to-Market
•MtM of Collaterals
Collateral Data ------------------------
Financial Instruments •Beyond Basel II:
•Securities
SAS Credit Risk Warehouse
Mapping •MtM of Credit Portfolio
SAS Credit Risk Dashboard

•Guarantees
•Netting Agree-
ments
SAS Internal Rating SAS Risk Engine
•Real Estate
•PD •Risk Weighted Assets
•Credit
•PD-grades standardized
Derivatives…..
•Exposure at Default
•LGD
•Expected Loss
•LGD grades •Risk Weighted Assets IRB
Reports
•Capital adequacy •Disclosure
Market Data •Scenarios / Stress Testing •Capital Adequacy
•Key Risk Indicators •Model Performance
•Interest rates
Analysis Monitoring
•Credit spreads •Risk Measures
---------------------------------
Beyond Basel-II: •Key Risk Indicators
•Credit VaR
Counterparty •Economic Capital
•Retail customer
•Corporate
customer (Small,
mid-sized, Large)
•External Ratings,
external PDs

SAS Credit Scoring
Capabilities for Basel
! Development of rating models
! Individual PD from statistical models
! Definition of rating grades and pools
! LGD and EAD estimation
! Proof of risk differentiation
! Recognition of all factors
! Representative samples

SAS Credit Scoring
Capabilities for Basel
! Documentation through process flow diagrams
! Transparent / Robust
! Data management processes
• Data Access and Collection
• Reporting Data Mart
• Scorecard Development Data Mart
! Scorecard development processes
! Flexible to adapt to changing environments and
strategies

Benefits of in-house
scorecard development
! Faster
! Cheaper
! More flexible
! More accurate
! More secure
! Basel compliant
! Reusable skills
! Better monitoring

SAS Credit Scoring
Projectmethodology
! Phase 1: Defining the problem
! Phase 2: Evaluating the environment
! Phase 3: Making data available (data mart)
! Phase 4: Model development
! Phase 5: Model deployment
! Phase 6: Performance monitoring

Case Study:
Interfacing with SAS Credit Portfolio Risk


Model Development Data

Process Flow Diagram: Input Data

Model Development Data

Process Flow Diagram: Scorecard

Scorecard

Process Flow Diagram:
Interactive Grouping

Interactive Grouping

Process Flow Diagram: Regression

Process Flow Diagram: Assessment

Assessment: Power Curve

Process Flow Diagram: Score Analysis

Define Rating Grades

Defining Rating Grades

Rating Grade Definition

Rating Code Export

Assign Ratings

Writing Ratings Back

- Credit Portfolio Risk-
Dr Eva Wittmann
Product Manager Risk Management
SAS EMEA

SAS® Risk Management for

Banking supporting Credit
Portfolio Risk:
! Reporting.
! Analytics.
! Data Management and
Data Access/Extraction.

SAS Credit Risk Solution
Portfolio Data BIS-Guidelines: "Standardized
•Loans Pricing •Exposures "Internal Ratings Based (IRB)
•Mortgages •Risk weights
•Cash-flow data
Engine •Credit risk mitigation
•Credit Cards….. •Haircuts
Collateral Data Financial Instruments Mark-to-Market

•Securities Mapping
•MtM of Collaterals
SAS Credit Risk Dashboard

•Guarantees ------------------------
•Netting Agree- •Beyond Basel II:
ments SAS Internal Rating •MtM of Credit Portfolio
•Real Estate •PD
•Credit
•PD-grades
Derivatives….. SAS Risk Engine
•LGD
•Risk Weighted Assets
•LGD grades standardized
•Exposure at Default
Market Data •Expected Loss Reports
•Risk Weighted Assets IRB •Disclosure
•Interest rates •Capital adequacy •Capital Adequacy
•Credit spreads •Scenarios / Stress Testing •Model Performance
•Key Risk Indicators Monitoring
Analysis •Risk Measures
--------------------------------- •Key Risk Indicators
Counterparty Beyond Basel-II:
•Retail customer •Credit VaR
•Corporate •Economic Capital
customer (Small,
mid-sized, Large)
•External Ratings,
external PDs
SAS Credit Risk Solution / Regl. Disclosure
Disclosure of
! Exposure at Default.
! Risk measures:
! Risk Weighted Assets (standardized, IRB-
Approach)
! Expected Loss
! Capital charges.
! Online Aggregation and Decomposition of all
results including risk measures.
Beyond Basel-II:
! Credit VaR (incl. CVaR Model Validation).
! Economic Capital.
! Key Risk driver Analysis.
SAS Credit Risk Web Portal / Exposure at default

SAS Credit Risk Web Portal / Risk Weighted
Assets

SAS Credit Risk Web Portal / Capital charges

SAS Credit Risk Web Portal /
Online Aggregation and
Decomposition

SAS Credit Risk Web Portal / Comparison of
Approaches
!Significant decrease of Capital
charges when going from
Standardized to IRB Foundation
approach.
! Increase by 302% for the

“TRANSPORT” sector: referring
positions contain large exposure
towards very bad counterparty.
!IRBF: PD (counterparty)= 20%,

# BIS IRBF risk weight = 625%;
!Standardized approach: worst

BIS risk weight is 150%.
# IRB approaches are penalizing when applied to “bad” counterparty.

SAS Credit Risk Solution / Analytics "Standardized
"Internal Ratings Based (IRB)
Analytics: Analyses and simulations configurable according to

customers requirements.
! Mark-to-Market of Collateral
! Risk Weighted Assets standardized
! Exposure at Default
! Expected Loss
! Risk Weighted Assets IRB
! Capital charges
! Scenarios / Stress Testing
! Beyond Basel-II:
! Credit VaR
! Economic Capital
! Key Risk driver Analysis
Risk Weighted Asset Calculation / Overview
! PDs tell probability of default of individual

counterparties.
! LGDs tell size of loss in case of a default of the
counterparty.
! Purpose of Risk weighted assets:
• Give weights to credit exposures according to the
associated PDs and LGDs, higher weight for higher PD
or higher LGD.
• Risk mitigants associated with the credit exposures
lower the associated risk weights.
• Aggregated figure: Total risk weighted assets is the
linear sum of the individual risk weighted assets.
IRB Framework
Credit Risk Mitigants
Guarantees
Derivatives
Collateral
Credit
Mitigants’ Evaluation
! Mark-to-Market
! Haircut adjustments
! Maturity mismatch
Corporate
PD PD*
Scoring
Credit
Mitigants’
Retail Value •Risk
LGD LGD* Weighted
Assets
Sovereign •Regulatory
EAD*
Categorization
Bank EAD Adjust for:

Capital
Exposure
! Provisions
Corporate ! Add-ons for
Retail
Equity
M Derivatives
! CCFs for off-
M
balance sheet
items
CCF: Credit Conversion Factors

SAS IRB Framework/Interface to Internal Rating
! IRB-F: Read PDs per rating grade and per exposure type
from Internal Rating system.
! IRB-Adv: read in addition LGDs per LGD-grade from
Internal Rating system.
R a ting P D _ Av g
1 0,0009
2 0,0017
3 0,0027
4 0,0041
5 0,0061
6 0,0076
7 0,0106
8 0,0144
9 0,0259

SAS IRB Framework / Mark-to-Market
results for credit risk mitigants
Ins trume nt ID Ins trume nt T y p e Co lla te ra l T y p e Co untry Curre nc y Ma rk-to -Ma rke t Va lue
C_42 Ba nkBo nd Ba nkCo rp US US D 4 9 .4 7 1 .6 2 2 ,8 5
C_43 Ba nkBo nd Ba nkCo rp US US D 7 5 .8 4 5 .3 0 1 ,4 0
C_44 Ba nkBo nd Ba nkCo rp DE EUR 2 6 .6 6 6 .8 3 3 ,9 0
C_45 Ba nkBo nd Ba nkCo rp DE EUR 6 .0 6 0 .2 7 9 ,4 3
C_109 Co rp Bo nd Ba nkCo rp US US D 3 0 .6 8 1 .2 3 9 ,6 2
C_111 Co rp Bo nd Ba nkCo rp US US D 1 .5 3 2 .5 6 4 ,4 6
C_126 Go vBo nd S o uve re ig n DE EUR 1 9 .0 8 6 .4 6 0 ,8 6
C_127 Go vBo nd S o uve re ig n DE EUR 4 .1 7 4 .0 2 7 ,0 4
C_1 Ca s h CAS H EUR 1 9 .6 3 3 .0 0 0 ,0 0
C_2 Ca s h CAS H EUR 2 .5 4 0 .0 0 0 ,0 0
C_4 Ca s h CAS H EUR 4 .7 1 7 .0 0 0 ,0 0
C_5 Ca s h CAS H EUR 3 2 .6 7 8 .0 0 0 ,0 0
G_1 Gua ra nte e s US US D 7 .1 0 0 .7 1 5 ,6 6
G_3 Gua ra nte e s DE EUR 3 .8 8 3 .0 0 0 ,0 0

SAS IRB Framework: EAD, RW, RWA, Capital
COMP AN Y Co untry Is o c o d e Outp utVa ria b le Va lue

BELGIAN S HELL BE Exp o s ure 1 6 3 .3 8 9 ,5 3
BELGIAN S HELL BE R is kWe ig hts 7 ,7 1
BELGIAN S HELL BE R WA 7 .3 3 0 ,1 5
BELGIAN S HELL BE Ca p ita l 5 8 6 ,4 1
ABB S EMICONDUCTOR S CH Exp o s ure 3 4 .6 9 6 ,1 3
ABB S EMICONDUCTOR S CH R is kWe ig hts 3 ,9 0
ABB S EMICONDUCTOR S CH R WA 1 .3 5 2 ,2 4
ABB S EMICONDUCTOR S CH Ca p ita l 1 0 8 ,1 8
BTI S WITS ERLAND CH Exp o s ure 1 7 6 .9 9 6 ,7 3
BTI S WITS ERLAND CH R is kWe ig hts 2 ,6 9
BTI S WITS ERLAND CH R WA 2 .2 1 5 ,6 4
BTI S WITS ERLAND CH Ca p ita l 1 7 7 ,2 5
BAS F DE Exp o s ure 4 3 .3 4 5 ,6 1
BAS F DE R is kWe ig hts 4 ,8 1
BAS F DE R WA 2 .4 2 3 ,6 5
BAS F DE Ca p ita l 1 9 3 ,8 9
BAYER AG DE Exp o s ure 1 9 .8 1 1 ,5 2
BAYER AG DE R is kWe ig hts 0 ,4 6
BAYER AG DE R WA 1 0 6 ,4 3
BAYER AG DE Ca p ita l 8 ,5 1
BMW DE Exp o s ure 8 4 .5 4 2 ,8 5
BMW DE R is kWe ig hts 4 ,7 2
BMW DE R WA 2 .2 8 5 ,7 7
BMW DE Ca p ita l 1 8 2 ,8 6
MER CEDES DE Exp o s ure 2 7 5 .5 5 6 ,6 9 43
Economic capital / Overview
Economic Capital (EC) is
! A measure of risk, which potentially may be used to
allocate real capital to cover those risks.
! Measure of unexpected loss at high Confidence Level.
! More generally a measure of potential volatility of
economic income at a high confidence level.
! EC capital calculation makes use of more or less the same
input data as regulatory capital calculation.
! Economic capital is driven by the idea of diversification /
correlation and unexpected losses allowing to consider a
wider range of impact factor.

SAS Economic Capital Framework
Probability Distribution of Potential Credit Loss
for a Portfolio of Many Obligors
3.0%
Probability of Credit Loss
Loss at a very high

Expected Loss (EL)
2.5% CL (e.g. 99.9%)
2.0% Economic Capital for Credit Risk

to cover Unexpected Loss (UL)
1.5%
1.0%
0.5%
0.0%
-160 -140 -120 -100 -80 -60 -40 -20 0
Potential Credit Loss ($mm)
The composition of the portfolio and the definition of credit loss influences:
•The probability distribution of potential credit loss,
•and the size of Unexpected Loss and Expected Loss.

Economic Capital
Credit Risk Mitigants
Guarantees
Derivatives
Collateral
Credit
Mitigants’ Evaluation
PD
Corporate PD Model
Scoring
Portfolio
Credit
• Probability
Retail LGD
Evaluation: distribution of
LGD Model Mark-to- Credit losses
Sovereign Market • Distribution
Categorization
Bank properties:
Exposure
Risk factor
Corporate CVaR,
Retail scenarios*
Economic
Equity Risk Factor
Capital
Models
*Risk factor scenarios may include FX, IR, credit spreads, counterparty behavioral attributes, correlations, ….
Key risk driver analysis

SAS Credit Risk Solution / Access & Data
Management
Risk Warehouse & ETL
processes:
• Entirely supported by SAS
Warehousing technology.
• Integrated part of SAS Credit
Risk Solution, including:
−Data extraction: SAS Access
engine # heterogeneous
infrastructure (e.g. portfolio
capture systems, trading
systems, data from risk factor
agencies).
−Data Validation.
−Data transformation.
−Data historization: Build history
of validated, transformed and
QCed data.
Agenda
! Credit Scoring
• Internal Rating Systems as part of a Credit Risk solution
• SAS Solution capabilities for Basel 2
• Benefits of in-house scorecard development
• SAS Project Methodology
• Integration with Credit Portfolio Risk
! Credit Portfolio Risk
• Disclosure Reporting
• Analytics
− Risk Weighted Assets calculation (IRB)
− Economic Capital calculation
• Data Management and Data Access
SAS Credit Risk Management / Summary
! SAS offers a solution to support entirely Basel II
Compliant integrated system including:
• Internal Rating
• Credit Portfolio Risk Management
• Reporting for Regulatory Disclosure.
! True end-to-end.
! Open, flexible and extensible System.
! You design the strategy, SAS enable it with
technology and methodology:
# You retain the flexibility and transparency.

“We had talked to other vendors,
but they simply could not offer us
what SAS did. We needed world-
class risk management software
from a worldwide provider, and
SAS provided us just that.”
Paolo Pirona, head of information

services, Generali Asset Management

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The SAS Credit Risk Solution

Dr Eva Wittmann, Dr Hendrik Wagner

Copyright © 2003, SAS Institute Inc. All rights reserved.

Copyright © 2003, SAS Institute Inc. All rights reserved.

! Credit Risk Data Mart

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Mapping •MtM of Credit Portfolio

SAS Credit Risk Dashboard

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SAS® Risk Management for

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Collateral Data Financial Instruments Mark-to-Market

SAS Credit Risk Dashboard

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! Increase by 302% for the

!IRBF: PD (counterparty)= 20%,

!Standardized approach: worst

# IRB approaches are penalizing when applied to “bad” counterparty.

Analytics: Analyses and simulations configurable according to

! PDs tell probability of default of individual

Bank EAD Adjust for:

CCF: Credit Conversion Factors

Copyright © 2003, SAS Institute Inc. All rights reserved. 41

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COMP AN Y Co untry Is o c o d e Outp utVa ria b le Va lue

Copyright © 2003, SAS Institute Inc. All rights reserved. 44

Loss at a very high

2.0% Economic Capital for Credit Risk

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Paolo Pirona, head of information

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