Credit Risk, Capital Planning & Requirements from the FCA

My name is Mark Watkins and I work in the Economics unit of Experian responsible for looking after organisations across financial services.

During recent client visits, I’ve been helping to answer questions concerning how risk and audit teams should respond to the anchor scenario released by the Financial Conduct Association (FCA). These clients specifically want to know how to incorporate it in to their Internal Capital Adequacy Assessment Process (ICAAP) or internal capital planning framework and how to validate the process to make sure it’s robust and fit for purpose.  My response is that it’s generally not easy unless you have an economics degree and a great deal of modelling experience!

As we all know, The Bank of England is taking a much more rigorous approach to capital adequacy planning and have an in depth understanding and expectation of the modelling processes organisations should be undertaking during this task.  In turn this means organisations need to have a greater understanding, at a detailed level, of the types of narratives and scenarios that drive the modelling process. They should also know how these relate specifically to the risk concentrations in their business – and what particular downside situations they should be considering when they devise their own scenarios.

In fact, latest guidance is that the Prudential Regulation Authority (PRA) will be putting even more onus on organisations to devise their own specific scenarios rather than relying on the previously supplied ‘high’ and ‘low’ variants.

‘Marvellous’ I hear you say. But in fact it’s is logical progression of this work that organisations should  own the process. Similarly, those legally responsible for risk management, and senior teams in organisations, should be fully engaged in this work to ensure it lines up – and has consistent assumptions to the strategy planning process for the business. After all, they will need to explain the thinking and headline detail behind the work when the regulator visits. I would suggest these parts of the process have to be tightly linked to ensure the process is credible to the FCA.

This type of approach needs expertise, data and analysis to succeed. Some of our larger clients are able to do a lot of this work themselves and come to us for detailed forecast data to help drive their modelling processes.  Others are at the start of the journey in building this capability, or generally wish to outsource the majority of this work to partners.  At Experian, we work with a number of our clients helping them in these situations, either by supplying detailed macro or regional economic forecasts, helping derive and validate the narratives behind the process, building base case or bespoke stress scenarios and general modelling expertise.

I’m lucky enough to work with a large team of economists and modellers backed up by the rest of the capability in Experian’s Decision Analytics business. We can also call on the  the extensive power of our bureau data so we’re able to help different sizes of organisations with a customised approach to each individual situation.

The question is – can I help you? Get in touch to discuss the opportunities.