An effective risk management system is a precondition for future success


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.

Recovery plans

Introducing a mandatory preparation of the bank's recovery plans, regulators primarily require a full integration of these plans into the risk management system. This opens number of questions for identification and understanding of critical functions and key business activities, comprehensiveness of stress tests (at the level of the market and the bank itself) and integration of the recovery plan into the broad risk management system. The regulation requires a large engagement of resources at the level of the entire organization. Our experience in the field of recovery plans preparation will help you set up adequate early warning indicators integrated into the reporting system. This includes determining the adequate level of limits in order to cover the entire spectrum of stress and to enable adequate management reaction. Analysis of the recovery options and their enforceability and actual effects. We are here to provide you with the support in understanding the supervisory review of the plan and to ensure continuous improvement of the recovery plan.

Scoring models

An effective credit risk management system implies that the financial institution correctly assesses the initial risk, measures the credit risk that has already been taken and actively manages activities to prevent losses. Scoring models are the most popular tool for adequate credit risk assessment.

Credit rating techniques enable the assessment and prediction of potential client risks when approving new loans and the risks of customers already in the portfolio. The most often used types of scoring models are Application and Behaviour models.

A team of experienced professionals at Risk Consulting can assist you in setting up and developing scoring model for any of the above needs. International practical experience in the field of financial modelling will ensure our clients receive practical and tailored solution that will improve the segment of business which models are designed for.