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Barriers to trade have many repercussions in the real economy, including price hikes, rising inflation, interest rate volatility and supply-chain disruptions. But what impact will the trade wars,...
May 16, 2025 | By Marco Folpmers
IFRS 9 rules for calculating the lifetime expected credit loss (ECL) continue to create confusion. Currently, there is a lot of talk about post-model adjustments that need to be made to IFRS 9...
April 11, 2025 | By Marco Folpmers
Probability of default (PD), loss-given default (LGD) and exposure at default (EAD) have been the go-to methodologies for credit risk measurement for the past four decades. However, they are...
February 7, 2025 | By Marco Folpmers
Fueled by rampant geopolitical uncertainty, sovereign risk is on the rise in Europe. Policymakers and regulators, however, continue to assign a zero-risk weight to sovereign debt issued by any EU...
January 10, 2025 | By Marco Folpmers
Financial risk managers continue to rely heavily on statistical hypothesis testing in modeling and statistical analysis, even though a group of scientists are now arguing that these tests have lost...
November 27, 2024 | By Marco Folpmers
Governance and risk culture remain insufficient at European banks, even though progress has been made in these important areas. That, at least, is the perspective offered by the European Central Bank...
October 11, 2024 | By Marco Folpmers
Banks are continuously confronted with new risks that require evaluation. It is, however, quite difficult to handle emerging risks – particularly when attempting to estimate potential credit losses...
September 13, 2024 | By Marco Folpmers
The drive to increase the discriminatory power of a model is like the search for the Holy Grail for credit risk modelers. The quest can be cumbersome, success is not guaranteed, and both endurance...
August 2, 2024 | By Marco Folpmers
For many years, in the aftermath of the global financial crisis (GFC), a stigma was attached to extremely large, global banks. They were perceived by many, including regulators, as institutions that...
June 7, 2024 | By Marco Folpmers
The European banking sector is on the verge of a substantial transformation, with the impending deployment of Capital Requirements Regulation 3 (CRR3) and the European Union's Artificial Intelligence...
May 17, 2024 | By Marco Folpmers
The latest update to the capital requirements regulation under Basel 3.1 reinforces the notion that EU supervisors strongly favor a standardized approach (SA) to credit risk measurement over an...
March 22, 2024 | By Marco Folpmers
European banks experienced record-breaking profitability and capitalization toward the end of last year, according to a recent report from the European Banking Authority (EBA). But in volatile...
February 9, 2024 | By Marco Folpmers
Buy Now, Pay later (BNPL) applications offer consumers the opportunity to defer payment on goods and services. The usage of BNPL has increased six-fold globally since 2019, and now represents a...
January 12, 2024 | By Marco Folpmers
Developing sector-driven correlation matrices is no small task for risk modelers. Traditionally, these modelers have used a combination of equity return data and expert judgment to measure...
December 8, 2023 | By Marco Folpmers
The failures earlier this year of a group of midsized U.S. banks grabbed headlines and yielded many questions about the effectiveness of their risk management programs. But how big was this crisis,...
November 17, 2023 | By Marco Folpmers
European banks, amid the current environment of rising interest rates, inflation volatility and geopolitical risk, now face the tall task of calculating expected credit losses (ECL) in compliance...
October 6, 2023 | By Marco Folpmers
Generative AI has been a smash hit with consumers. Earlier this year, for example, OpenAI’s ChatGPT chatbot set a record by racking up 100 million users within two months of its launch. But does this...
September 1, 2023 | By Marco Folpmers
Credit risk modelers are under pressure to improve the accuracy of default projections – and are increasingly using models driven by machine learning (ML) to achieve this goal. ML models, moreover,...
July 28, 2023 | By Marco Folpmers
Banks are going to be required to use the so-called foundation approach (F-IRB) to credit risk measurement, for some key asset classes, under the Basel III accord. But is removing the option for...
June 16, 2023 | By Marco Folpmers
Credit risk models that are adaptable, flexible and fast, one could argue, are what’s needed in the current financial environment of uncertainty and volatility.
Banks need to be able to respond to...
May 19, 2023 | By Marco Folpmers
One of the key factors behind the 2007-08 global financial crisis was an overreliance on external ratings. Could we be heading down a similar road after the expected January 2025 implementation of...
April 14, 2023 | By Marco Folpmers
European banks that must comply with the IFRS 9 financial reporting standard suffer today from a lack of supervisory guidance on how, exactly, they should go about weighting the scenarios they use to...
March 10, 2023 | By Marco Folpmers
How effective have Basel III reforms truly been? A December 2022 report by the Basel Committee on Banking Supervision (BCBS) takes a self-congratulatory tone. However, while banks are certainly...
January 27, 2023 | By Marco Folpmers
In October, two regulatory studies of great interest to credit risk managers were published: the Basel Committee on Banking Supervision’s (BCBS) paper on buffer usability and procyclicality, and a...
November 11, 2022 | By Marco Folpmers
In these volatile and unpredictable times, European banks continue to face a major obstacle in their efforts to comply with the IFRS 9 accounting standard for expected credit losses (ECL): assessing...
October 21, 2022 | By Marco Folpmers
Banks’ internal ratings-based (IRB) processes for validating credit risk models have historically been subject to rules-based supervision established by the European Banking Authority (EBA). However,...
September 9, 2022 | By Marco Folpmers and Gerrit Reher
Economic capital has always been a key measure of a bank’s solvency. But under Basel III, the set of international banking regulations that are scheduled for implementation next January, proper...
August 12, 2022 | By Marco Folpmers
Financial institutions and regulators have demonstrated their adaptability amid the volatile market conditions sparked by the pandemic, but COVID-19 also reminded us that there is still more work to...
July 8, 2022 | By Marco Folpmers
Challenged by lockdowns, temporary or permanent closures of businesses, and cash-flow shortfalls for many of their business clients, European banks have faced an unprecedented “real-life” stress test...
June 10, 2022 | By Marco Folpmers
A loan portfolio with zero defaults over, say, the past 12 months, is generally considered excellent – as long as the return on the portfolio is strong, of course. However, for credit risk...
May 13, 2022 | By Marco Folpmers
Credit risk and interest rate risk are often perceived by banks as worlds apart, thanks in part to the well-established risk taxonomy of the Basel Committee on Banking Supervision (BCBS). However, in...
April 8, 2022 | By Marco Folpmers
In 2023, as part of a Capital Requirements Regulation (CRR3) amendment, the probability of default (PD) input floor will rise from three basis points (bps) to five. While this may not seem like a...
February 11, 2022 | By Marco Folpmers
Until now, European banks have been hesitant to apply machine learning (ML) to their internal-ratings-based (IRB) models for credit risk. The supervisory requirements they had to meet to ensure they...
December 10, 2021 | By Marco Folpmers
Throughout 2021, European banks have devoted considerable time to reassessing and recalibrating their probability-of-default (PD) and loss-given-default (LGD) models. Consequently, irregularities in...
November 12, 2021 | By Marco Folpmers
As a general rule, the bigger the bank, the more sophisticated its credit-risk models. But determining the size of a bank is very dependent on one's measurement approach. The same holds true, on a...
October 8, 2021 | By Marco Folpmers
Financial institutions are using machine-learning-driven models for everything from anti-money laundering to fraud protection. However, while ML models have undoubtedly yielded gains in these areas,...
September 10, 2021 | By Marco Folpmers and Linda Torn
Transition matrices measure the transition probabilities for credit-risk ratings over specific time intervals, and are among the most vital tools at the disposal of a credit risk manager for...
August 13, 2021 | By Marco Folpmers
The Jeffreys test is the most important diagnostic tool for assessing the calibration of the bucket probability of default (PD). However, it actually has a wider range of applications.
Potentially,...
July 9, 2021 | By Marco Folpmers
Bigger is better. At least, it seems, with respect to the riskiness of banks.
The capital, profitability and credit risk differences between small and large banks were highlighted in a European Bank...
June 11, 2021 | By Marco Folpmers
The Basel Committee on Banking Supervision (BCBS) recently published an interesting framework for climate risk that includes helpful advice on how a financial institution can integrate climate...
May 14, 2021 | By Marco Folpmers
Every risk professional knows that price shifts can widely diverge. Daily or weekly returns can go up or down in a more significant way than predicted by a normal distribution. When assessing and...
April 9, 2021 | By Marco Folpmers
Over the past 12 months, bank have faced a myriad of difficulties, ranging from data deficiencies to dwindling profits to rising default risk and falling interest rates. Complicating matters further,...
March 12, 2021 | By Marco Folpmers
A couple of years ago, risk professionals had great expectations about artificial intelligence (AI). But the expected paradigm shift hasn't yet occurred - at least not for probability of default (PD)...
February 12, 2021 | By Marco Folpmers
All banks need to meet quality standards for their probability of default (PD) rating systems, and the Population Stability Index (PSI) is an easy-to-use PD stability assessment tool. However, it's...
January 29, 2021 | By Marco Folpmers
In response the pandemic, borrowers across Europe were given more time to repay their loans in 2020, with the help of government-support programs and guidelines issued by the European Banking...
December 11, 2020 | By Marco Folpmers
In the aftermath of the 2008 global financial crisis (GFC), economic capital (EC) - a popular tool for calculating capital requirements across different risk types - fell into disfavor at some banks....
October 9, 2020 | By Marco Folpmers
Proper back-testing is crucial for any bank that submits its PD and LGD models to its supervisor for approval. To meet the requirements of regulators like the European Central Bank (ECB), banks must...
September 18, 2020 | By Marco Folpmers
When working earlier this year in San Francisco, I found myself in a small breakfast restaurant in the Embarcadero area, where I was enjoying breakfast and the newspaper. Since the place was...
August 14, 2020 | By Marco Folpmers
Contending with the economic shocks of COVID-19 - including unemployment, decreasing revenues and high projected credit losses - banks must now overcome unprecedented credit risk management...
June 19, 2020 | By Marco Folpmers
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