New definition of default

In the context of the EBA’s new definition of default requirement, Avantage Reply was asked to assist the client, a European D-SIB, in conducting an impact analysis on the application of the new requirements. Avantage Reply successfully implemented a custom SAS-based solution to evaluate the gaps between the current and the new definition. Based on the gap analysis, the client has been provided with the impact estimation (default rate, cure rate, LGD, RWA). Avantage Reply also assisted the client in delivering the quantitative assessment requested by the ECB.

The main challenge was the short period of time available to realise a custom end-to-end solution. The fact that not all the data/information was available at the beginning of the project made it more complicated.

Avantage Reply implemented a SAS-based solution. This solution was divided into three main parts. The first part focused on the import of data, for which it was crucial to understanding the input information due to the huge amount of data (a daily snapshot for all credits was available for a time window of several years). The solution was optimised as much as possible.

The second part was dedicated to the implementation of the new default definition guidelines and defaults due to the new materiality thresholds, UTP’s (Unlikeness to Pay) and forbearance. To ensure a comparison between the new and current default definition, we also reproduced the client’s current default application.

The last part concerned the key figures and reports produced (RWA, LGD, PD, Cure rate, Default rate, ECB report, detailed reports on the differences between the current and new definitions).