RISK

In the beginning of 2018, IFRS 9 – Financial instruments, a standard for which banks and financial institutions were preparing for a long period of time, was finally put in place. In addition to the accounting effects that the application of the standard imposed, significant resources have been invested in the amendments of the existing process, models and IT infrastructure in order to satisfy the requirements of the standard. However, it is not the end of the effort on implementation of this standard. Risk Consulting can offer you solutions in the form of consulting services, as well as the tools for all the challenges that IFRS 9 delivers in the future period. Our practical knowledge means clients can expect a professional solution based on a significant global and CEE region experience that will be completely tailored to the size, complexity and preference of each client.

Further developments will largely depend on the level of fulfilment of expectations that were formed on 3 different sides – management expectations , auditors' expectations and the expectations of the regulator.

Management expectations are largely related to the profitability management, as the true challenge will be planning of credit risk costs. In that sense, they expect the financial effects to be as low as possible, above all referring to the levels of loan loss provisions. Therefore, it is necessary to do all possible actions leading to the reduction of expected credit losses and lower risk cost amount. Auditors’ and regulators’ expectations are generally directed to the improvement of the risk management system and moving to more advanced models. Considering that, it is assumed that banks and financial institutions will invest primarily in the development of an early warning system (already implicitly introduced via Stage 2), in the development of models that should stabilize the values of PD Parameters (rating models), and LGD parameter (Loss Given Default) as well, in more advanced models. It is assumed that more advanced models should make improvements (decrease) of the LGD parameter, because simpler models that are commonly used contain certain buffers for conservativity.

Risk Consulting offers EWS tool EWS tool which is a practical solution that adapts to the bank’s needs and is developed on the basis of historical data. It contains both application and behavioral component. Unlike other market solutions, it has the possibility of fine adjustment of parameters, as well as the possibility of action tracking – covers the process from identifying early warning signals to the measurement of the actions taken for preventing or minimizing credit losses.

In addition, banks and financial institutions will have less space in determining the price of credit products, as bank’s management estimates are that interest rates cannot absorb all the effects of additional risk costs that will be enacted by IFRS 9. This practically means that when determining active interest rates, you will be more careful about the component of the credit risk cost, especially through the eventual introduction of the FTP (Fund Transfer Pricing) model or RISK based Pricing methodology.

In addition to EWS tool, Risk Consulting also offers a solution to manage Retail portfolio, which includes the reporting system and activities for the management of the portfolio – vintage and delinquency analysis, fraud prevention system, Risk-driven Collection. Combined with EWS tool, Retail portfolio management is a valuable addition to the risk management system.