Quantitative Solutions

Mazars quant experts developed a tool to assess provisions under IFRS 9

Mazars has adapted their ECL/ CECL calculators to assist clients with responding to COVID-19, where they can:

• Apply overlays across their portfolio by allocation segmentation
• Adjust staging by allowing management override on default and staging triggers
• Modify amortisation schedules to allow for moratoria, impacting both EAD and LGD
• Incorporate additional economic scenarios to reflect multiple downside pathways

Through greater flexibility, clients will be able to better equip themselves during these uncertain times.

Financial instrument valuation

The valuation of financial instruments calls for an in-depth knowledge of financial markets and an understanding of specific risks. Using their expertise and the customized tools that have been developed by Mazars, our team members have a rigorous and systemic approach when pricing your financial instruments which include:

• Selection of relevant market data;
• Identification of the inherent risk drivers for each instrument and selection of:
  • The adapted pricing model
  • The best calibration instruments based on their liquidity and relevance
  • The appropriate numerical method
• Implementation of independent valuation models; and
• Review of the potential valuation gaps via a step by step approach that leads to a precise understanding of the causes.

Therefore, we can:

• Perform independent pricing of your financial instruments for all existing financial markets (interest rate, credit, FX, inflation, equities, commodities, hybrids etc.) and all types of instruments (from plain vanilla to exotics and complex structures);
• Support and advice you in your model choice (adequacy, limits, validity domain etc.), calibration (calibration algorithm, market data etc.), numerical method (consistency, stability) and produce the adapted documentation; and
• Validate and review your valuation methodologies and tools.

Risk assessment and management

The 2008 financial crisis showed the low resiliency of banks and other financial institutions to a rapid deterioration of the whole economy. In order to address this high sensitivity to economic stress, the regulatory and accounting frameworks have been enforcing guidelines that are increasingly restrictive, detailed and complex.

Mazars Quantitative team has been supporting a wide range of banking institutions in implementing adapted, precise and compliant solutions for a number of years. In addition to it, various local and supranational regulators (such as the ACPR, PRA, BCE etc.) have commissioned Mazars Quantitative team. For instance:

• Mazars was appointed as an ECB highly-qualified external provider regarding the assessment of a credit institutions’ risks and provided its expertise in the context of the Asset Quality Review; and
• Mazars reviewed a bank’s credit governance framework for the PRA.

Assisting both our clients and regulators have helped us to build a relevant, tried-and-tested approach to set up an efficient risk assessment and management system. Find out more about our Risk Management services.

As a consequence, we can help you to be compliant with:

The regulatory requirements:

• ICAAP/ILAAP: Implementation of the capital requirement and liquidity assessment process in line with the unique monitoring mechanism demands;
• FRTB: Support in the understanding of the segmentation criteria between the trading book and the banking book. Constant tracking of the methodological and regulatory evolutions for both the standard approach and the internal model; and
• Regulatory Initial Margin: Standard model implementation (SIMM) and review of the impacts on the exposure projection methodology (xVA).

The accounting standards:

• IFRS 9:
  • Implementation of both PiT and forward looking models for probability of default and LGD;
  • Credit risk degradation assessment via the definition of adapted and significant segmentation criteria between Stage 1 and Stage 2; and
  • Implementation of user-friendly provision (12-month expected credit losses / Lifetime expected credit losses) calculation tools adapted to client’s available data.
• IFRS 13:
  • Exhaustive Fair value adjustments (xVA) due to credit and liquidity risks.

As both the banking industry mechanisms and the regulatory framework become increasingly complex, bank institutions have to continuously improve their models.  TRIM (Target Review of Internal Models, following the AQR (Asset Quality Review) and also led by the ECB (European Central Bank), highlights the necessity of internal model improvement and assessment in the eyes of the regulator. Mazars is able to help you stay ahead of this evolving landscape.

The notable experience of our team in internal model assessment can help you to deal with the new challenges involves by the increasing quantitative complexity. In practice, we can:

• Challenge your model;
• Optimize your model governance thanks to our benchmark capacity;
• Enhance robustness and flexibility of your internal models; and
• Improve your risk management framework.

The understanding and interpretation of regulator requirements in the context of internal models is a key element we can help you with. Other challenges include the robustness of the assumptions built into models (e.g. correlation assumptions, choice of risk factors). These will be under scrutiny from regulators and will need to be adequately justified.

State-of-the-art tools and data providers ensure our work quality

All market data used by Mazars Quantitative team are supplied by providers external to our clients to ensure the data accuracy and the consistency. A permanent access to market data is necessary to guarantee our valuation and model review quality and includes:

• Bloomberg® is used by Mazars in order to access market information. Bloomberg is a well-known external provider of market data, ensuring our independence and thus guaranteeing the quality of our valuations and audit of internal models.
• Price-It® and Numerix® use a “plug and play” technology that offers extensive flexibility (pay-off description, pricing, calibration and numerical methods). They allow a reliable and independent comparison of the valuations obtained via the library with those obtained from large investment banks.
• Mazars’ internal tools which are tailor-made tools that have been developed by Mazars Quantitative team insofar as a notable share our time is dedicated to research and development. These tools are necessary to deal with complex valuations and risk measures that need individual and specific approaches.

All team members have proven hands-on experience in valuing financial instruments in complex and sophisticated environments and reviewing risk measurement and control processes. Our experts are accustomed to working in multi-cultural, international environments offering bespoke solutions adapted to local issues in Europe.

Interested in finding out more? Please don’t hesitate to contact us.