This section contains information about the Credit Line feature and includes sections on Specific Provision, Calculation of 12 Month and Lifetime ECL Irrespective of the Stage, Provision Matrix Assignment, Calculation of Allowance and Provision, and Loss Given Default (LGD) Term Structure.
The application calculates both the 12 month and lifetime ECL values for credit lines.
For Credit Line, the provision is calculated as the product of Undrawn Amount, CCF, PD, and LGD. For the Credit line, both the 12 month and lifetime provisions are calculated by taking the respective PD, CCF, and LGD.
The PD values are calculated from the interpolated PD term structures.
For accounts with Maturity greater than 12 months, four quarters, two half years, one year, and so on, the 12 Month PD corresponds to the Cumulative PD at the end of the 12th Month and the Lifetime PD corresponds to the Cumulative PD of the period corresponding to the account's maturity date.
For accounts with Maturity less than 12 Months, the 12 Month PD and the Lifetime PD both correspond to the Cumulative PD of the period corresponding to the account's maturity date.
NOTE:
Both the 12 Month PD and the Lifetime PD are calculated for all accounts irrespective of the stage. This is required to compute both the 12 Month and Lifetime Expected Credit Losses, however, only one among those is used for reporting. The out-of-box reports report on the lifetime values.
The LGD value that is used in the Specific Provision method is obtained from the interpolated LGD term structure. The input LGD term structures are processed to calculate the LGD values at the bucket frequency. This processing is applied for accounts under the Specific Provision methodology as well. After the LGD term structures are processed, each account is associated with an LGD value against the current period. As mentioned in the section on LGD processing, the current period value corresponds to the 1st period or the 1st bucket.
This value, corresponding to the zeroth period or bucket, is assigned as the LGD value that is used in the Specific Provision method.
The 12 Month PD, Lifetime PD, and LGD values are stored for reporting.
Mitigant Effect on Expected Credit Loss enables you to calculate the Effective Loss Given Default (ELGD). The ELGD is calculated as the product of LGD and the Mitigant Effect. The Mitigant Effect is calculated using the following formula:
Mitigant Effect = {(Exposure - ((1- HairCut for Collateral)*Collateral Value) + Recovery Cost) or Exposure}
The LGD Term Structure feature in the LLFP application allows you to change the LGD values over different periods by reflecting the changes in Loan value, collateral value, lien, and so on at an account level granularity. This also helps in obtaining more accurate ECL numbers while calculating the lifetime losses.
The processing of LGD Term Structures has the following four phases:
· Obtaining LGD Data in Staging
· Movement of LGD Data into Processing
LLFP application consists of a staging table to obtain the LGD term structures at an account level granularity, that is, every account is provided with a series of LGD values over a period at a specific frequency. However, within a series, the values must be of constant frequency. In certain cases, there could be accounts with only a single LGD value that assumes LGD is constant. The single LGD is considered as the current period LGD.
Because the LGD values are bound to change over every period, the term structure is given at every MIS Date.
The LGD Term Structures are transferred to the processing area and adjusted as required for ECL computations, simultaneously. While the LGD series, term structure, in the staging table could be at any given frequency, the same is converted to the bucket frequency and during this process, the number of periods for which the LGD values have to be calculated or interpolated and extrapolated is dependent on the time to maturity of the account.
To enable the calculation of both 12 months and Lifetime ECL, with the primary difference being the Probability of default values computed against each of these, the run-in LLFP application now computes two different calculations starting from the PD computation step.
The Data Model has also been enhanced to capture all intermediate computations that enable this feature.
The following processes are involved in this calculation:
· 12 Month and Lifetime PD computation - Specific Provision
· Specific Provision - when Undrawn flag Y or N the 12 Month and Lifetime Allowance and Provision are computed as follows:
§ 12 Month Provision = Undrawn * CCF * LGD * 12 Month PDLifetime Provision = Undrawn * CCF * LGD * Lifetime PD
The bucket-wise LGD values are assigned to the corresponding cash flows using the bucket ID stamped against those cash flows.