Euromoney Audit Training

Course Description: 
The purpose of this course is to assist those individuals charged with the ongoing responsibility of auditing and supervising the internal efforts of banks following the Basel II, Internal Ratings Based (IRB) Approaches. While the risk models, ratings systems and risk components for IRB institutions are typically developed by expert teams within the financial institution, Basel II requires that internal auditors and supervisors possess the capability to independently assess the validity and accuracy of the overall IRB system. To that end, this course explores the current industry practices and frontier approaches for monitoring both ratings processes and ratings systems. Among other important issues considered, the course addresses the challenges involved in auditing and supervising often highly-technical modeling frameworks. Also considered are the various hurdles involved in IRB system implementation—such as data deficiencies, IT incompatibilities and model selection difficulties. Accordingly, "checklist" of important, primary considerations for auditors and supervisors—regardless of technical background--is provided.

In this 5 day course Participants will learn:

• The essential elements necessary in validating an internal credit ratings system
• The essential elements necessary in validating an internal credit ratings process
• The key difficulties that model developers often face in developing credit risk models
• How to establish whether the key difficulties have been appropriately addressed
• How to evaluate various common solutions
• How key difficulties should affect the model design
• How data deficiencies and other difficulties affect risk component estimation
• How data deficiencies and other difficulties challenge the quantitative validation process (i.e., back testing and benchmarking)
• Weaknesses in current quantitative validation techniques
• How to address problems in data quality
• Solutions to reporting and data handling problems
• How to interpret and implement IRB use tests

This course is intended for:

• Bank Internal Auditors
• Bank Supervisors and regulatory authorities
• Basel implementation team members
• Bank Board of Directors members and senior management which require an understanding of Basel methodology
• Heads of risk management and those responsible for implementation
• Risk Managers
• Banking IT professionals

Day 1

Introduction and Overview

• Basel II IRB validation requirements and guidelines
• Insights from Working Paper 14
• Validation of the rating system versus validation of the rating process—the role for auditors
• Missing elements and practitioner insights
  
  

Validation of the Customer Rating System


Validation of how scorecards/scoring models are implemented and applied

• Validation of the development process
• Validation of the ongoing use process

                Use test considerations

• Validation of the testing process used by the developers
  
  

Database Validation: Assessing data limitations

• Establishing the appropriate default definition

                Real versus “false” defaults

• Database structure

                Understanding how the structure and form of the database influences scoring strength, validity and appropriateness as well as testing
                Time series forms
                Cross Sectional forms
                Panel data forms


Data amount

• How much data are enough?
  
  

Data Quality

• How do we deal with missing data
  
  

Data feeds and operational risk


Day 2


Customer ratings system validation (contd.)


In-sample Scorecard/Scoring model selection

• Scorecard/Scoring model selection
• Qualitative/Quantitative scoring
• Statistical Models, Analytical Models, Recursive Partition algorithms
• The relationship between model choice and how to determine whether choice fits data limitations
  
  

Scoring model/Scorecard construction
Univariate selection

• Correlation
• Accuracy measures
• Plots
• Parametric measures
• Evaluating strengths and weaknesses of the various approaches
  
  

Fixing variables

• Fat-tailed ratios
• Outliers
  
  

Multivariate selection (In-sample testing)

• Construction of correlation matrices
• Staged selection
• Use and misuse of R2
• Using p-values and t-values
  
  

Model form selection

• Logit, Probit and other forms—knowing which one is appropriate for the data at hand

Day 3


Customer ratings system validation (contd.)


Out-of-Sample Scorecard/Scoring Model Validation

• Testing Sample construction
• Error rate estimation
• Discrimination tests

              ROC Plots and Area Under the ROC (AUROC) accuracy ratios
              Cumulative Accuracy Profile (CAP) curves and Area under the cap (AR) accuracy ratios
              Meaning, use and misuse of these measures


Comparing models using the tests


Rating Scale construction and validation (Optional, depending upon whether banks are determining their own internal scales)

• Using discrimination measures on ratings
• Calibration of ratings to the model
  
  

Model selection and development


Day 4

Customer ratings system validation (contd.)


Probability of Default (PD) Estimation and calibration

• Permitted PD estimation methods under Basel

               Historical default experience
               Statistical default prediction models
               Benchmarking

• Testing discriminatory power of PD models and methods
• Calibrating PDs produced by the methods

               Binomial tests
               Hosmer/Lemeshow tests
                Brier Score
                Other tests


Facility ratings validation (Part 1): Loss Given Default (LGD)


Requirements for calculating and estimating Loss Given Default

• Data needed
• Challenges
• Recovery Drivers and Stylized facts
• Methods for calculating recoveries
  
  

Multi-sample tests for discerning differences in recovery rates
Back testing LGD with confidence intervals
Working paper 14 validation suggestions


Facility ratings validation (Part 2): Exposure at Default (EAD)

• Requirements for estimating EAD
• The Usage Given Default (UGD) component for revolving facilities
• Modeling UGD
• Data needed and database construction
• Estimation methods
• Lack of sample tests
• Back testing suggestions
  
  

Day 5

Any unfinished topics and business from Days 1-4


Case study review on:

• Database construction
• Scoring model construction and selection

               Discrimination testing

• Rating scale determination

               Discrimination testing

• PD model construction

               Discrimination testing

• PD model calibration
  
  
• LGD calculation

               Recovery rate estimation

• LGD calibration
  
  
• EAD estimation
  
  
• EAD calibration

• Maurice Ewing

  Dr Maurice Ewing, FRM

  Globally-Experienced Risk Management Specialist

  Dr. Maurice Ewing, FRM has trained and advised individuals from institutions worldwide in risk management - at both the executive and operational levels. Formerly on the full-time faculty of the Kellogg - HKUST business school, a Princeton PhD and a chartered FRM holder, Dr. Ewing opened the first dedicated, emerging markets risk management consultancy in 2003, basing it in Hong Kong. Since that time he has expanded his practice to Africa, Europe, Latin America and the Middle East. A specialist in resolving difficulties associated with quantitative implementation, Dr Ewing is renowned for his abilities to convey often complex concepts to non-specialists in simple terms and is a widely sought after speaker and adviser to boards of directors as well as regulatory supervisory panels. His banking experience stems both from his work at the Federal Reserve Board of Governors and the New York Federal Reserve Bank as well as his firsthand experience in advising numerous (successful) Basel II compliance efforts over 4 continents. Moreover, Dr. Ewing enjoys incorporating his wide range of experiences in his classrooms, always focusing solely on proven methods of practical implementation while balancing he pedagogical needs of his participants.

  Apart from his membership in the Global Association of Risk Professionals (GARP), the Professional Risk Managers International Association (PRMIA), the Risk Management Association (RMA), Dr Ewing is an affiliate of the Institute of Risk Managers (IRM) and numerous other professional organizations. He currently lives in the Mediterranean with his wife and two small children, avidly reads Byzantine history, drives like he is from the region and occasionally practices Wing Chun kung fu. He is a terrible golfer.

  Courses run by this instructor

  • Enterprise Risk Management - New York City
  • Risk Management Oversight & Board Members & Executives - New York City

Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.

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