Credit Risk

Financial Institutions: 

• Analysis and Audit of the Credit Approval Process
• Analysis and Audit of the Credit Portfolio Management Process
• Efficient Management of Bad Debts and the Workout Process
• Credit Risk Models
• Analysis of the Credit Risk Management Process
• Collateral Management
• Stress Testing of Portfolio
• Compliance with Banking Regulation and Calculation of the Capital Requirement (Basel II/III)
• Calculation of Loan-Loss Allowances
• Calculation of NPV of Banks
• Fraud Management
• Implementation of an Early Warning System for Loan Exposures
• Risk Reporting
• Concentration Risk
• Anti Money Laundering (AML)

Non-Financial Institutions:

• Analysis of Credit Risk Management and Credit Limits Setting
• Debt Management from the Perspective of Delinquency Prediction, Prioritization of Debt Collection, etc.
• Development of Credit Scoring Models for Client Assessment

Analysis and Audit of the Credit Approval Process

• Analysis of the data used and verification of its accuracy
• Analysis of the efficiency of the credit approval process, including:
  • verification of whether the same client information is not being entered redundantly into multiple systems
  • assessment of whether all information collected from clients is properly utilized
  • analysis of the efficiency of communication between sales and risk management departments in the process of credit approval
• Design/audit of credit approval processes, including related methodologies, credit limit setting, collateral valuation, and other relevant procedures
• Verification of the process of acceptance of instruments used to secure granted loans and verification of compliance with requirements regarding the quality, seniority, and valuation of such instruments
• Proposal for changes in processes for cheaper and more efficient loan provision
• Training (or an e-learning course) for sales departments in order to teach employees of those departments how to properly assess the risks of loan applications
• Verification of the validity and comprehensibility of internal regulations for the credit approval process and preparation of proposals for their modification
• Analysis of compliance with internal regulations in the process of credit approval; this includes an assessment of relevant losses resulting from the failure to comply with those regulations

Analysis and Audit of the Credit Portfolio Management Process

• Assessment of the loan management process – verification of timely updates of information (on loans, borrowers, and external data sources indicating potential repayment issues)
• Analysis of update processes of:
  • internal client ratings within the bank’s systems (level of automation, process flow, duration, and procedures triggered in case of client rating deterioration, etc.)
  • credit limits
• Review of the system for regular assessment of customer quality and/or review of their internal ratings, including: 
  • authorities of individual employees
  • frequency of overruling
  • analysis of reasons for not performing the reassessment (e.g. excessive workload of risk managers, absence or unavailability of information or statements necessary for review, etc.)
  • potential consequences of not performing credit risk reviews (including statistics on the share of defaulted loans that were not reassessed)
• Analysis of efficiency of communication between trade and risk management departments
• In case any deficiencies are identified, proposal of changes leading to more efficient loan management
• Verification of the validity and comprehensibility of internal regulations for loan portfolio management and proposals of relevant modifications to those regulations
• Implementation of an Early Warning System (EWS) for already granted loans

Efficient Management of Bad Debts and the Workout Process

• Establishment and review of procedures for handling non-performing loans and receivables:
  • Does a system exist for collecting information indicating a deterioration in clients’ creditworthiness?
  • How is such information utilized?
  • How is this information shared among the bank’s departments?
  • Is timely communication with the client initiated? What are the subsequent steps?
• Analysis of receivables collection processes and proposals for their improvement, focused on:
  • prioritization of loans for collection
  • analysis of collection processes (methods of initiation and structure of individual procedures)
  • efficiency of individual collection methods and the entire workout department (different internal collection methods vs. sale of receivables)
  • assessment of the adequacy of the internal capacity of the workout department for the established collection procedures
  • internal monitoring of compliance with time limits for individual collection steps (including monitoring of statutory deadlines for taking legal action)
• Development of a system for prioritizing loans for collection, with an emphasis on minimizing losses (prioritizing significant loans)
• Development of a system for selling overdue receivables, including:
  • definition of rules identifying loans that, for strategic, business, or other reasons, should not be sold
  • valuation of loans for the internal collection scenario and for the sale scenario
  • creation of a model for automatic identification of loans suitable for sale
• Design of a motivation system for employees of the workout department

Credit Risk Models

• Analysis of data used for credit risk models
  • inclusion of relevant data sources
  • completeness and currency of information
  • accuracy and quality of data
• Development, calibration, or revision of (behavioral and application) scoring models as well as other models for measuring credit risk
• Audit of credit risk models:
  • assessment of methodological soundness
  • verification of practical implementation in software tools
• Design and calculation of parameters Probability of Default (PD), Loss Given Default (LGD), and Credit Conversion Factor (CCF), and validation of their calculation
• Design of methodology for incorporating the credit margin into loan pricing (risk-based pricing)

Analysis of the Credit Risk Management Process

• Analysis and proposal of options to improve the efficiency of the credit risk management system, focusing on:
  • accuracy of credit limit setting and its regular monitoring
  • effectiveness and timeliness of communication across departments
  • adequacy of systems/applications used for credit risk management and their optimalization (including identification of duplicate activities)
• Assessment of the documentation related to the credit risk management system – both in terms of its adequacy and comprehensibility
• Design of the credit risk reporting framework for both regulatory and managerial purposes
• Analysis of reports produced within the credit risk reporting process and assessment of how they are used in decision-making

Collateral Management

• Determination of what information, content and format should be collected about collaterals
• Inspection of revaluation of particular types of collaterals
• Definition of a model for automated revaluation of assets (e.g. real estate) that bank accepted as collateral and that must be revaluated on a regular basis

Concentration Risk

Nowadays, individual companies are getting increasingly economically connected. As a result, measuring and managing this risk is gaining in significance.

• Analysis of concentration risk, including determination of concentration risk level, determination of what impacts concentration risk, determination of impacts of higher concentration
• Creation/revision of methodology for concentration risk measurement and management
• Designing tools for concentration risk measurement and management

Compliance with Banking Regulation and Calculation of the Capital Requirement (Basel II/III)

• Verification of validity of models for capital requirements calculation from the point of view of correct methodology as well as from the point of view of technical realization
• Assistance with the development of software application for the purposes of regulatory capital calculation or delivery of the software solution CADCalc^® Credit developed by ARM, that allows calculation of the regulatory capital charge using all the approaches defined in the Basel II/III document (standardized approach, foundation and advanced IRB approaches)
• Assistance during the implementation of processes, reports or applications related to Basel II/III framework into daily routines – this applies not only to the risk management department but to other departments as well
• Global assistance in IRB approach implementation:
  • determination of discrepancies between Basel II/III regulatory requirements and actual settings of processes and systems in a bank
  • segmentation of exposures
  • process of delegation of responsibilities
  • educational training of bank employees focused on Basel II/III (e.g. what are the advantages and disadvantages of the IRB approach, what are the consequences of IRB implementation for daily routines?, What is expected from the employees in the context of IRB?)
  • proposal of a project map that includes the necessary actions for the implementation of the IRB approach
  • assistance with the project management of IRB approach implementation, verification and validation of individual reports and outputs (i.e. segmentation of expositions), assistance in formulation and validation of documentation and regulations
  • validation of risk factor computation (PD, LGD, CCF)
  • assistance with configuration of IT systems (collection of data required for calculations, validation of quality and cleanliness of data, inspection of technical realization of regulatory capital calculation and reporting)
  • assistance with formulation and completion of requests for implementation of IRB approach and assistance in communicating with the regulatory agent
• Assistance with risk measurement within Pillar 2 of Basel II/III:
  • identification of risk that a bank is facing and that should be covered within the framework of Pillar II
  • written formulation of methods for management and mitigation of risks that are not covered by regulatory capital
  • calculation of economic capital for measurable financial risks
  • determination of the amount of a bank’s internal capital required to cover risks within the framework of Pillar II

Calculation of Loan-Loss Allowances

• Draft of a methodology for calculating loan-loss allowances, both on an individual and a portfolio basis
• Preparation of a functional specification for a software tool used to calculate loan-loss allowances
• Delivery of the ECL Calculation Tool for the calculation of loan-loss allowances in accordance with the IFRS 9 standard (i.e., for stages 1, 2, and 3); the calculation can be performed using a portfolio-based PD/LGD approach or an individual approach (discounting expected cash flows under multiple scenarios)
• Cooperation in the implementation of IFRS 9 in the area of loan-loss allowances

Calculation of NPV of Banks

• Draft of the methodology or delivery of a software application CADCalc^® Market for the calculation of the net present value of a bank while taking into consideration the level of credit spreads for counter parties
• Development of a methodology for the calculation of credit spreads for individual types of clients from actually observed values of risk parameters PD and LGD
• Stress testing of the size of NPV to changes in interest rates or credit spreads
• Note: the method for the calculation of NPV can be used in determining the return on investment or projects while taking into account the size of the credit risk of the counter party

Fraud Management

• Assistance in the development or recalibration of “fraud cards” used for identifying potential fraud (definition of monitored criteria, threshold parameters, weights, scoring, etc.)
• Development of statistical models for fraud detection
• Development of software for automated assessment of potential fraud
• Assessment of severity of occurred fraud
• Establishment of processes aimed at minimizing the risk of fraud occurrence, and their integration into the organizational structure (in cooperation with sales departments, security, and operational risk management)
• Configuration of the reporting system

Anti Money Laundering (AML) 

• Assistance with the configuration of the AML system according to regulatory requirements
• Configuration of the system for monitoring of suspicious transactions or optimization of AML criteria within the existing monitoring system
• Integration of Fraud Management and AML systems or development of such integration system
• Configuration of the reporting system

Analysis of Credit Risk Management and Credit Limits Setting

• Assessment of the correctness and completeness of internal directives for credit risk management and a proposal for appropriate adjustments
• Analysis of the credit risk management process, including recommendations for optimization steps to increase efficiency and security
• Assistance in defining communication rules between sales departments and the credit risk management department
• Customer segmentation according to the credit risk level
• Evaluation of the loss level resulting from credit risk
• Assessment of the relevance of credit limit settings in relation to the size of realized credit risk losses
• Design and implementation of debt collection process procedures

Debt Management from the Perspective of Delinquency Prediction, Prioritization of Debt Collection, etc.

• Creation of a model for the delinquency prediction
• Analysis of the influence of real debts maturity on cash flow management (formalization of what is only in the heads of financial directors)
• Analysis of the existing collection system and a proposal for change