- absolute EUR 100 (retail) and EUR 500 (non-retail) in the sum of all overdue receivables of the client
- relative 1% vs. the ratio of the sum of all client claims to the client's total exposure
New definition of client default
Implementation of the requirement of the Czech banking market regulator - CNB (Czech National Bank) and the European regulator EBA (European Banking Authority) for a new definition of customer default in the relevant company systems.
MONETA Money Bank, a. s.
MONETA Money Bank, a. s. is one of the leading banks on the Czech banking market and a pioneer in the digitalization of financial products. It has a strong position on the market of credit products for Czech households, and a growing position in the area of loans for tradesmen, small and medium-sized enterprises. It offers its clients cutting-edge digital services/solutions, while providing them with the convenience and facilities of branches in the regions where they live.
This initiative by the European Banking Authority, subsequently adopted by local national regulators, is an effort to unify the view of the problem of default across all financial institutions operating in the EU.
This new definition introduces
"limits" for the new calculation of "days past due" (DPD):
- where the client, although no longer fulfilling any of the default conditions, is still in default for a period of time
- where the client is forced to remain in a state of "default" for a minimum of one year from the debt restructuring or from the last default after the debt restructuring
Expected consequences of the change in the definition of "client default”
The implementation of the requirement to introduce a relative barrier of 1% of the total claims of the economically connected client group has led to a major refactoring of the categorisation tool within the company's data warehouse (EDWH).
The second major impact was the need to recalculate a significant part of the default history on selected portfolios taking into account the newly required rules, which was a very data-intensive task.
Finally, based on these newly calculated historical defaults, it was necessary to reassess the changes in PD, LGD and CR values and their impact on the calculation of provisions under IFRS 9
Preparatory phase of the project
The first step towards a full understanding of the impact on the bank's systemic environment was a thorough gap analysis of the current status of the client default calculation against the required EBA regulatory standard.
Although the impact on the Bank's processes and subsequently systems was the primary task of the project, it was similarly necessary to adequately assess the impact of the new definition at the level of internal procedures and policies.
A big challenge for me was to "dig through" the CNB and EBA documents, which eventually led to a change in the original assignment we received from Risk Management. At times you felt like a "lawyer" when every word, conjunction, comma, etc. matters:) But it was a great learning experience and an opportunity to broaden my professional horizons outside of IT.
Implementation phase in a nutshell
The whole implementation consisted of 5 basic steps:
Reprogramming existing logic in the EDWH to reflect the revised definition of the default.
Estimates of the impact of the new version of the default on the calculation of RVA, EL and NPE.
Calculation of historical default values.
Switching from the old version of the algorithm to the new one.
Parallel running of the old and new versions of the default calculations in EDWH.
Project team and management methods:
The project core team consisted of 8 experts, representatives of the RISK and IT departments. The whole implementation lasted about 8 months, the pilot (parallel) calculation according to the new rules then ran for another 8 months.
In terms of project management methodology, it was an agile approach or a combination of agile & waterfall. The waterfall aspect was reflected in the fact that the entire functionality had to be deployed into production as a single unit, completely replacing the existing categorisation calculation. The agile approach was adopted in the analysis and development of new rules, their testing and the gradual calculation of their historical progress.
A few numbers in conclusion:
Jiří Krčmář from epptec worked as a Senior Analyst in my last project - Implementation of a new definition of client default. He demonstrated excellent communication skills in his work, easily bridging the communication gap between business and IT and preparing a full specification of the required changes. Jiří also prepared a full range of user access tests for the team and negotiated the necessary changes with the IT department. With his structured thinking and always professional approach, he moved the project forward and contributed significantly to the successful and timely completion