Tier one bank required a full rebuild of their Residential Mortgage Loss Given Default models (LGD).

This engagement included providing thought leadership to the internal development team, reviewing and making recommendations to the bank’s methodology and then develop the LGD for the Mortgages portfolio.

These models are used in regulatory capital estimation under the revised capital framework proposed by APRA.

Our solution reviewed current methodology and provided advice on peer practice, benchmark methodologies and estimates related to Mortgage LGD.

Reviewed current issues, validation reports and analytical work done to date.

Reviewed approach of adapting PiT LGD estimates to downturn conditions.

Reviewed and made recommendations of integrating expert judgement into the LGD model (Bayesian approach).

Provided on-going thought leadership and advice across the model development, including with

The segmentation and stakeholder discussions.

Ensuring appropriateness of model weights, segment/industry adjustments and calibration.

Provided support in assessing the reasonableness of LGD values produced by the proposed LGD model in the context of their use in regulatory capital estimation (industry benchmarking).

Provided ongoing guidance on APRA engagements and Internal approvals.

The bank was able to identify segments of the Mortgage portfolio that had unique characteristics and separately developed sub-models.

Stakeholders understood the resulting models, and in joint sessions lead to alignment with their understanding of the portfolio risks.

Senior leadership were engaged on every critical point in the development journey and were comfortable with results.

APRA has approved this model and it’s currently in production.