Basel II Credit Risk Modeling

3AI August 17, 2020

A diversified global financial services company

Problem Statement

• Compliance with Basel II regulations for Global Credit Card portfolio
• Need consolidated exposure at the parent level for the segments–wholesale and retail
• Existence of several versions of single model with virtually no documentation

Analytics Led Approach

• Relevant data elements merged to create single version of truth for customer’s credit exposure
• Multiple validation across different sources and different data granularity
• Scenario analysis to finalize segments for model build
• Developed probability of default models (PD) to score the entire institutional customer base in accordance with Basel 2 norms

Business Impact

• 40% jump in ability of PD models to accurately capture ‘at risk’ customers
• Effective credit portfolio management using the principle of risk adjusted return on capital
• Timely compliance with the capital adequacy guidelines outlined by the Basel committee
• Reduction in the overall regulatory capital charges due to better risk management

Critical Success Factors

• Understanding of Basel II norms
• Expertise in predictive modeling techniques (logistic regression, IV analysis, missing imputation, etc.)
• Expertise in modeling tools and languages (SAS, SQL etc.)
• Ability to embed compliance requirements into modeling parameters