Cohort Formation for ECL Run

The Cohort Formation or Collective assessment feature as part of the ECL run of the LLFP application addresses the following two aspects:

  • Treat accounts with similar (Risk) characteristics in a similar manner
  • Improvement in Performance by reducing the total number of records to be treated

The application enables Collective Assessment by following the subsequent processes:

  • Dimensions and filters that define the eligibility of accounts to form Cohorts - Records satisfying these dimensions are eligible to form Cohorts (groups).
  • Dimensions that define the Formation of Cohorts - These dimensions decide which set of records form a group and also in that sense decide the total number of groups as well.
  • Cohort level Parameters for ECL calculation - Arrive at values for Parameters, associated with the Cohort, that is required for ECL calculation. This includes grouping cash flows or forward exposures, PD, and LGD.
  • ECL Calculation for Cohorts - using any of the methodologies
  • Apportion calculated metrics - Redistribute the metrics or values calculated at the cohort level to individual accounts.
  • Maintain Audit trail - Store the cohorts formed during the run for future reference.

The system stores the Minimum number of accounts that are required for a cohort to be formed as a setup parameter - MIN_ECL_COHORT_SIZE. This is to prevent the formation of groups with fewer accounts, thereby creating a large number of small-sized cohorts, which eventually leads to an increase in processing time and a decrease in accuracy. In the ready-to-use product, the MIN_ECL_COHORT_SIZE parameter is set to 50.

One preprocessing step required is to arrive at the Remaining Time to Maturity band for each account, with each band having a six-month gap. The remaining time to maturity band for the accounts is calculated as the difference between MIS Date and the Original or Revised maturity date.

If the Revised Maturity date is available, Time to Maturity = Revised Maturity Date -MIS Date else Time to maturity = Original Maturity Date -MIS Date.

The calculated Time to Maturity is then converted to a specific band.