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1. Warning 134 Webpage Dialog Are you sure you want to delete these Transition Matrix definitions Local intranet Transaction Matrix Definition Screen Delete HTM Oracle Financial Services Software Confidential Restricted 66 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Historical Transition Matrix Execution To generate the Historical Transition Matrix execute the Historical Transition Matrix Population Run HTM related metadata are provided in a separate segment While generating the Transition Matrix the Oracle Financial Services HTM generates the Transition probability Transition probability can be based on any measure Regular measures used in HTM are as follows Number of Counterparties Number of Accounts Outstanding Exposure For more information on Run Execution refer to the Run Management User Manual Data Requirements Data are populated to processing table through product processers Two sets of data are populated Corporate Data Population In Corporate Data population Product processors like Cards Investments Loan Contracts and Overdraft Accounts data are expected Also Customer data is expected Retail Data Population In Retail Data population Product processors like Cards Loan Contracts and Overdraft accounts data are expected The main processing tables are as follows e ACCOUNT DETAILS e FCT CUSTOMER e
2. To allocate cohort level amortized cost back to the account level as per allocation factor Collectively Assessed Exposure Amortized Cost Calculation Rule is used To allocate cohort level allowance back as per allocation factor Collectively Assessed Exposure Allowance Allocation Rule is used 2 Allowance is capped to carrying amount using Reporting Allowance Calculation Rule which takes maximum and minimum of carrying amount and calculated allowance Allowance amount threshold check is applicable for all the methods in EL run Threshold is checked against sum of allowance across accounts for a customer and product type combination Product type is one of the source hierarchies in method selection Ensure that underlying accounts have undergone the same provision calculation method Eligible Allowance amount for the underlying accounts is considered as 0 if the sum total of allowance of its account set at which threshold was checked is less than or equal to the given threshold Eligible Allowance is same as the allowance if sum total of allowance of its account set at which threshold was checked is greater than the given threshold Threshold amount is assigned through rule at Legal Entity Product type and Reporting Currency level Provision Matrix Method exposures under Provision Matrix method will be individually assessed Collective Assessment approach is not applicable for Provision Matrix method Provision
3. E Execution Date Time of Execution 05 09 2013 17 32 53 11 49 05 14 2013 1 to 10 of 10 Reporting flag To Copy the Parameter 1 Select the checkbox adjacent to the required Run 2 Click the icon from the navigation bar The Run Execution Parameter window appears The parameters are populated as the selected execution and it can be modified or can create a batch and execute the same Oracle Financial Services Software Confidential Restricted 38 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Loss Forecast and Provision Calculation MeL Expected Loss Approach s amp Run Execution Parameters Legal Entity Consolidation Type Reporting Currency Bucket Convention Interpolation Method FIC MIS Date Run Execution Description Audit Panel Created By SYSADMN Created Date 03 07 2013 Last Modified By SYSADMN Last Modified Date 04 25 2013 Run Execution Parameters To Execute the Parameter 1 Select the checkbox adjacent to the required Run 2 Click 8 icon from the navigation bar The status of the triggered batch is displayed In the execution summary screen multiple selections of the execution ids is available to trigger a batch 15043 Batch Triggered successfully Batch ID LLFPINF 1307062279559 20130514 2 Batch triggered dialog box Oracle
4. MARKET DATA POPULATI IRC DATA POPULATION EXCHANGE RATE DATA EXPOSURE DATA POPULA LOAN DATA POPULATION OVERDRAFT DATA POPUL CARDS DATA POPULATIO INVESTMENTS DATA MITIGANT VALUE POPUL MITIGANT VALUE POPUL BASEL RE CLASSIFICAT Basel Customer Type Basel Product Type R Basel Asset Class Re METHOD SELECTION Provision Calculatio Method Override Charge off Materiali SYSADMN SYSADMN SYSADMN ROOT RATING RE CLASSIFICATION RATING RE CLASSIFICATION ROOT MARKET DATA POPULATION MARKET DATA POPULATION ROOT EXPOSURE DATA POPULATION EXPOSURE DATA POPULATION EXPOSURE DATA POPULATION EXPOSURE DATA POPULATION ROOT MITIGANT VALUE POPULATION ROOT BASEL RE CLASSIFICATIONS BASEL RE CLASSIFICATIONS BASEL RE CLASSIFICATIONS ROOT METHOD SELECTION METHOD SELECTION METHOD SELECTION Creation Date Last Modification Date Last Authorization Date RATING CODE POPULATION RATING RE CLASSIFICATION DATA POPULATION MARKET DATA POPULATION LOAN DATA POPULATION OVERDRAFT DATA POPULATION CARDS DATA POPULATION EXPOSURE DATA POPULATION MITIGANT VALUE POPULATION Basel Customer Type Re classif Basel Product Type Re classifi BASEL RE CLASSIFICATIONS Provision Calculation Methodol Method_Override 03 07 2013 12 03 42 04 25 2013 01 58 10 04 26 2013 01 57 22 View details 5 2 3 Modifying a Run Run Parameters Subprocess Table Load Classificati
5. Transition matrix is assigned to each and every applicable account exposure or cohort that is group of accounts exposures Cash Flow Engine CFE calculates the cash flows for each concerned exposure till its maturity The LLF amp P Application requires Cash Flows for two purposes as follows Calculation of provision Calculation of EIR or EIS Cash flows are generated as of account start date for the EIR or EIS calculations whereas Cash flows are generated as of current date in case of provision calculation If collective assessment has been selected the cash flows are generated for cohort instead of each account Every cohort is treated as single exposure from a cash flow perspective Note Carrying amount is stored in carrying cost column for processing and reporting purpose N_CARRYING_COST_NCY For more information on the concept of collective assessment see Collective Assessment section Projected cash flow is then converted to expected cash flow by multiplying with the expected cash flow rate The Loss Rate and Expected cash Flow are calculated as follows Oracle Financial Services Software Confidential Restricted 4 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Loss Rate Default Probability Applicable as of Cash Flow Date LGD at Account Level Expected Cash Flow Rate 1 Loss Rate Expected Cash Flow Projected Cash Flow Expected Cash Flow R
6. e Save Click Save to save the revised details of the Transition Matrix Copy You can edit the existing Transition matrix by creating a new Transition matrix using the Copy button displayed on the screen refer Figure 12 By clicking this button you will be able to edit the screen and the copy button would no longer be available on the screen All the values would display details as per the previous saved data except the Transition Matrix Name and Transition Matrix description which should be unique values You can either override edit the data populated in the Transition Matrix Details State Space and Filter panel or can proceed with the selected values In either case provide a unique Transition Matrix Name and Transition Matrix description If you wish to edit the data with new values selecting a different value from the browser window displayed next to the text fields On selecting a different value you will be prompted by a warning message Click Yes to override the selected text field applicable for all the three data sets Transition Matrix Details State Space and Filter Once you have provided the unique Transition Matrix Name or Transition Matrix description and edited the text fields click the Save button You have successfully defined a transition matrix which will be displayed in the transition matrix field Deleting an HTM To delete a transition matrix select the check box displayed next to the transition matrix ids
7. CREDIT RISK SUMMARY Also for predictive modeling General Market Variable Rated Bond Prices Interest Rate Data are populated These data is required only if predictive modeling is performed through OFSAAI For more information on the complete data requirements for HTM Generation refer to the Download Specifications Document DL Specs Previous Period Data For transition matrix generation we require information of the previous period Here previous period refers to Previous Month Previous Quarter and Previous Year Previous period is identified using the oracle function ADD MONTHS The example of dates is provided in the following table 31 Dec 10 30 Nov 11 30 Sep 11 31 Dec 09 15 Dec 10 15 Nov 10 15 Sep 10 15 Dec 09 30 Nov 10 31 Oct 11 31 Aug 11 30 Nov 09 1 Feb 05 1 Jan 05 1 Nov 04 1 Feb 04 Previous Period Data The solution updates the customer s previous rating and the exposure s previous delinquency state If previous period information is not available then NULL blank will be updated Accounts or Customers which don t have previous period information will not be considered for HTM Generation Oracle Financial Services Software Confidential Restricted 67 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Historical Transition Matrix Generation HTM Generations are done through a DT FN_DT_HIST_TRANSITION_RATES HTM is populated into FSI HIST TRANSITION MATRIX
8. Oracle Financial Services OFS Loan Loss Forecasting and Provisioning LLF amp P v 1 5 0 0 0 is a successor to the application s 1 0 0 0 0 version The highlight of this release is introduction of Collateral value Based Method for Oracle Financial Services Software Confidential Restricted iv User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 computation of provisions Under this method the provision is calculated as the difference between exposure and collateral value Oracle Financial Services Software Confidential Restricted V User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 1 Introduction International Financial Reporting Standards IFRS guidelines have set out new requirements on classification and measurement of financial assets and liabilities It specifies two approaches for the measurement of assets namely Amortized Cost and Fair Value approach The scope of Oracle Financial Services Loan Loss Forecasting and Provisioning is to focus only on the amortized cost approach Oracle Financial Services Loan Loss Provisioning and Forecasting LLF amp P is designed to aid institutions in calculating the provision or allowance for exposures as per IAS39 and IFRS 9 Proposed guidelines want institutions to estimate the future loss and make provisions accordingly Thus the LLF amp P Application calculates expected loss as well as incurred loss
9. Oracle Financial Services Software Confidential Restricted 37 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Run Name Run Type 1 99 100 101 102 103 Loss Forecast and Provision BASELINE RUN Run Execution Details Run Skey Run Execution Id FIC MIS DATE 1368087 1368166 12 1368171821075 1368205591919 1368339367851 1368205591919 13683 1 1368448585776 13684 1368461561781 094 Run Execution Summary Run ID Execution Status COMPLETE COMPLETE COMPLETE FAILED COMPLETE FAILED COMPLETE FAILED FAILED COMPLETE cose 1362638022900 Execution Date Time of Execution 17 32 53 11 49 26 18 52 13 05 1 05 14 2013 1 to 10 of 10 Reporting flag To View Run Execution Summary Screen the Parameter details 1 Select the checkbox adjacent to the required Run 2 Clickthe icon from the navigation bar The parameter details are displayed Run Execution Details Run Skey v Run Execution Id FIC MIS DATE 102 Run Execution Parameters Bucket Convention Consolidation Type Interpolation Method Legal Entity Reporting Currency Execution Status COMPLETE COMPLETE COMPLETE FAILED COMPLETE FAILED COMPLETE FAILED FAILED COMPLETE Beginning of the Bucket Consolidated Linear Bank New York US Dollar
10. This is the date from which IFRS 9 is applicable for a given bank IFRS 9 tells us that on this date the entity shall recognize the asset to be valued either as a fair value or amortized cost For amortized cost this is the date on which EIR will be calculated In case of applicable loans and bonds on this date Effective interest rate is calculated Hence expected loss on this date will be zero IFRS 9 Phase 1 Under IAS 39 an entity accounts for credit losses in financial assets only if a loss event has occurred without considering the effects of future expected losses This is an OFSS specific term This means EIR or EIS of required exposures calculated as of initiation date are available for all future dates This includes IRR of contractual cash flows as well This data is available across the runs and for all future references Suggestion has been received to change the same which will be done in the subsequent revision Post first day of implementation the LLF amp P application will calculate EIR EIS IRR and store the same as part of initiation data Loan Loss forecasting and Provisioning This is similar to EL Run in terms of functionality except that it uses underlying tables compatible with OBP interface Oracle Financial Services Software Confidential Restricted 74 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Period Applicable PM Provision Amount Provision Method
11. Transaction costs Variable interest rate This is the period for which Transition matrix is applicable Provision Matrix An expense set aside as an incremental allowance Allowance Loan loss Reserve for bad loans over and above previous year allowance This implies that to calculate amortized cost of an underlying asset the LLF amp P Application will use provision rates and cash flows will not be generated for the same The method is common for both impaired and non impaired status of the Receivable type of assets This is an OFSS specific term Transition Matrix They are incremental costs that are directly attributable to the acquisition issue or disposal of a financial asset or financial liability see Appendix a paragraph AG13 An incremental cost is one that would not have been incurred if the entity had not acquired issued or disposed of the financial instrument IAS 39 PARA 9 An interest rate that changes according to the underlying or Benchmark interest rate index like Treasuries or LIBOR rates Oracle Financial Services Software Confidential Restricted 75 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 ORACLE Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 User Guide July 2013 Version number 1 0 Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores CA 94065 U S A Worldwide Inquiries Phone
12. A Run in the LLF amp P Application specifies the approach Expected Loss or Incurred Loss to be used to calculate Loan Loss Provisioning Broadly these approaches Expected loss and Incurred loss are further classified depending upon the product type and impairment status of the account The following out of the box Runs are configured in this application Expected Loss EL Run Incurred Loss IL Run Historical Transition Matrix HTM calculation EL Run OBP Oracle Banking Platform Interface This is similar to EL Run in terms of functionality except that it uses underlying tables compatible with OBP interface Further details are mentioned later in this guide 1 1 5 of the Application The International Financial Reporting Standards IFRS has set standards for calculating loan losses and its subsequent provisioning IFRS 9 is being discussed and issued in 3 phases e IFRS 9 Phase I Classification and Measurement For more information refer Financial Instruments Classification and Measurement published in July 2009 IFRS 9 Phase 2 Impairment Methodology For more information refer exposure draft Financial Instruments Amortized Cost and Impairment published in November 2009 IFRS 9 Phase 3 Hedge Accounting For more information on the details on the criteria to classify the asset as either value using amortized cost or fair value refer to Appendix Section 4 1 and 4 26 of the Phase 1
13. Populate contractual cash flows for each account to be treated under Forward Exposure Method using T2T rule This includes populating principal component and interest component for each cash flow date 3 Assign Transition Matrix Transition matrix is assigned based on the following parameters Customer Type Currency Product Accordingly rating and delinquency based transition matrix data is populated for Poisson processing This is done using the T2T RATING TRANSITION MATRIX POPULATION and DPD TRANSITION MATRIX POPULATION 4 Each rating scale or delinquency band scale has a default grade state which indicates defaulted accounts Allowance amount is a function of transition probability to default or impairment To calculate allowance you may keep the impaired state the same as default grade scale or assign some other impaired state depending on the credit policy or outlook 5 Transition probability for credit rating grade of impaired state rating and below will be accumulated and considered for Lamda calculation for Poisson process It is done using Cumlt Impaired Prob Calc DT 6 Similarly assign impaired state delinquency band 7 Poisson process is executed to arrive at a monthly transition probability You can change Monthly to Quarterly or Yearly by setting it up in the Reveleus Parameter Master Table by changing LLF amp PBUCKETLENGTH Oracle Financial Services Software Confidential Restricted 20 User Guide Oracle F
14. SEMI STATIC DATA POPULATION There is one base run each for EL and IL approach of LLF amp P Provision Matrix method and Recovery Rate method are part of both the Runs In EL run an account can be mapped to either of the EL Provision Matrix or Recovery Rate method Similarly in IL run an account can be mapped to either of IL Provision Matrix or Recovery Rate method Output Table Population batch is used to populate provision amount to fct output table for OBP CSA interface to fetch the output data NOTE Hierarchies need to be resaved after the DIMENSION DATA POPULATION batch execution 5 2 Run Management The Run Management framework is a unique feature of the LLF amp P which enables a business user without assistance from a technical analyst to easily define and execute a Run The features of this framework are as follows Displays all the Runs Provides details of the Run Parameters be entered at the Run Level The Existing Parameter values can be edited and there is an option to create and execute a batch The Execution Summary page provides the selected Run Execution details for each execution there is an option to check the following Parameters defined Copy option to copy the parameters of the execution selected Option to trigger batch Refer to the following steps to navigate to the Run Management Screen 1 Click Risk Application on the Left Hand Side LHS pane of the
15. respective MIS date or earliest rate available till previous five days of the pre defined source Default value displayed for Legal Entity consolidation Type and Reporting Currency is as set in Run Default Parameter Bucket Conversion For discounting purposes the LLF amp P application works on monthly bucketing Here month is representative of 30 days bucket the cash flows falling in a given bucket will be discounted by the same interest rate as selected in the Time Convention Similarly for variable rate cash flows spot rate is required to discount You can select one of the three time conventions namely e Beginning of Bucket e Mid of Bucket e of Bucket If you select Beginning of Bucket it means benchmark interest rate as of first day of month will be used as the discount rate Similarly mid means middle of month and end means end of month The beginning mid and end are referred to bucket period and not calendar month Interpolation Method If the exact interest rate is not available for the period of cash flow then the applicable needs to be calculated as by interpolating from the Oracle Financial Services Software Confidential Restricted 35 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 available interest rate The method to be used for interpolation can be selected from this dropdown box Methods available in pre configure
16. 0 0 Cumulative Loss rate for period t across TM period Cumulative Prob for Period t 1 Cumulative Prob for Period t 6 Expected Cash Flow rate at period t 1 Cumulative Loss rate for period t 3 Understanding the LLF amp P Application The main objective of this chapter is for you to get familiarized with the various functions of Oracle Financial Services Loan Loss Forecasting and Provisioning through the process flow The logical order in which the LLF amp P application functionalities are executed will help in understanding executing and maintaining data in the LLF amp P Application LLF amp P Business Processes are majorly classified into the following e Provision Calculation e Loss Forecasting 3 1 Provision Calculation Two types of approaches that are used to calculate provision which are as follows Incurred Loss IL Approach e Expected Loss EL Approach Each approach is a separate Run in the LLF amp P application For more information on executing a Run refer to chapter 5 Execution A high level process flow to calculate provision is as follows Setting up Data Execution of Run Reclassifying Rules Method Selection Calculate Allowance and Provision Value IL and EL Reporting The Expected Loss Run applies any one of the following methods to an account Oracle Financial Services Software Confidential Restricted 12 User Guide Oracle Financial Services Loan Loss Foreca
17. 1 650 506 7000 Fax 1 650 506 7200 http www oracle com us industries financial services Copyright 2013 Oracle and or its affiliates All rights reserved No part of this work may be reproduced stored in a retrieval system adopted or transmitted in any form or by any means electronic mechanical photographic graphic optic recording or otherwise translated in any language or computer language without the prior written permission of Oracle Financial Services Software Limited Due care has been taken to make this Oracle Financial Services Historical Transition Matrix User Guide and accompanying software package as accurate as possible However Oracle Financial Services Software Limited makes no representation or warranties with respect to the contents hereof and shall not be responsible for any loss or damage caused to the user by the direct or indirect use of this User Manual and the accompanying Software System Furthermore Oracle Financial Services Software Limited reserves the right to alter modify or otherwise change in any manner the content hereof without obligation of Oracle Financial Services Software Limited to notify any person of such revision or changes All company and product names are trademarks of the respective companies with which they are associated Oracle Financial Services Software Confidential Restricted 76
18. 2 Md PERLE 6 3 TRANSITION MATRIX 6 4 COMPARISON ANALYSIS 55 3 eo eee teo ee Poo 6 5 STRESS TEST REPORTS cnc ei EE Pe Du odo en aa MERO pub eu th Lau sho Saa De Du bd dn eeu ah neu aln 6 6 LOSS ehidd cip 7 RESOLUTION OF LLF amp P IMPLEMENTATION ISSUES eese enne ANNEXURE A UNDERSTANDING KEY TERMS AND CONCEPTS eee ANNEXURE B THINGS TO REMEMBER ANNEXURE C FREQUENTLY ASKED ANNEXURE D HISTORICAL TRANSITION MATRIX ANNEXURE E CASH FLOW ANNEXURE F PRODUCT TYPE MAPPING heaven ANNEXURE G DATA FLOW ACRONYMS AND GLOSSARY TERMS e etna esee secsceeesecteccesssteecesscosceecssssceses Oracle Financial Services Software Confidential Restricted iii User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Preface Intended Audience Welcome to Release 1 5 0 0 0 of the Oracle Financial Services Loan Loss Forecasting amp Provisioning LLF amp P User Guide This guide is intended for Technical Analyst This user ensures that the data is populated in the relevant tables as per the specifications executes schedule
19. Financial Services Software Confidential Restricted 39 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 5 2 5 Database Design Logical Data Model Data model for Run Management consists of Run Management UI Tables and Rules Framework tables Storage for Run Management is as follows The definition is stored in the Run Management UI tables The data is later inserted into the PR2 batch group tables Run Management UI tables are listed in the following tables lt Run Management Data Model xlsx Setup Tables The following Setup tables are used in the Run Management framework is as follows e Run Parameter Details table V SEGMENT CODE Stores the segment codes V PARAM ID Stores the parameter id of the parameters used in the default parameter screen V PARAM DESC Stores the description of the parameters PARAM TYPE Stores the information on the parameter type The type can be HIER for Hierarchy LIST for dropdown TEXT for input RADIO for radio button CALENDAR for calendar 15 MANDATORY Stores the information whether the parameter is mandatory or not DISPLAY ORDER Specifies the order in which the parameters need to appear in the screen 15 DEFAULT PARAM Specifies if the parameter is default or not NODE SELECTION Specifies if the hierarchy selection is single level or multi level RUN TYPE Specifies the type of run BR for B
20. Flow Population This task makes cash flow calculated by previous Run available for the subsequent Run Run skey of the previous Run from which the value should be taken is given as property value of Data File Name as RUNSK Run Skey This can be updated from Batch Maintenance Oracle Financial Services Software Confidential Restricted 41 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 6 Loan Loss Forecasting amp Provisioning Reports LLF amp P uses the Oracle Dashboard reporting tool for expected loss and incurred loss executables The reports are in graphical and tabular form The reports are generated by using the following filters Execution Date It refers to the FIC_MIS_DATE of the RUN executed RUN Name This is the name of the Run When selecting this filter it should be noted that only those Runs falling under the execution date would be displayed in the drop down menu RUN Skey You are supposed to select the RUN skey corresponding to the Run Like in case of Run name the Run skey would also display only those Skey s corresponding to the execution date and Run name Oracle Business Intelligence has the following set of tabs classified for simpler user interface Home Page Trend Analysis Transition Matrix Comparison Analysis Stress Test Reports Loss forecast Apart from the above tabs some of the reports are allowed to drill down to a more granular detai
21. This is to validate input data to CFE All errors are logged in FIC DTDQ MESSAGE LOG with value of the column V MAIN PROG NAME as FN DT PRE CF VALIDATIONS values need to be picked up for the current batch Generate cash flow and calculate principal and interest component of the cash flow amount Errors thrown by CFE are logged in FSI OPS ERROR DETAILS Periodic Cumulative Loss Rate is calculated by multiplying LGD with cumulative impaired transition probability using a Rule Expected cash flow rate is derived from cumulative loss rate using a Rule Expected cash flow amount is calculated using cash flow amount and expected cash flow rate calculated earlier EIS Calculation EIR and EIS values are considered in the following order First the application checks for EIR EIS value in stage table values If EIR EIS value is present in the stage table then the application checks in the Account Inception table If not present in the Account Inception table then the LLF amp P application calculates by itself While calculating records having erroneous data are skipped Errors during processing are logged in FSI OPS ERROR DETAILS In addition account start date is mandatory for EIR EIS calculation EIR EIS is calculated at account level and not at cohort level Table is updated with calculated EIR and EIS as on account start date This is done using Upd Inception Rates EIR is aggregated at cohort level with relative weight of c
22. as download No If cash flow is given as download then corresponding account is treated individually 34 Can the application calculate EIR EIS if cash flow is provided as a download Yes EIR EIS can be calculated with downloaded cash flow and Transition matrix valid as on account origination date Oracle Financial Services Software Confidential Restricted 53 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Annexure D Historical Transition Matrix A Transition Matrix is a square matrix in which the rows and columns correspond to categories defined in equivalent ways Usually the row categories refer to one time period and the column categories to a subsequent time period The entries can be frequencies probabilities or conditional probabilities Table 2 and Table 3 is an example on transition probability which show the transition in the ratings of Investment Banks in the year 1996 For example we have considered a sample of 100 Banks and their transition in the rating through the year Banks which have moved from AAA rating to AAA rating from 1996 to 1997 expressed in terms of rate is 0 6 9 15 Around 60 9 15 AAA Rated Banks Rating has not changed Table 1 Transition Matrix Yewi96 AMA AA a BB D os 0 13333 0 06667 0 13333 006667 o o 06087 0 13043 0086 o o o o o1 0125 05625 0 0
23. document Oracle Financial Services Loan Loss Provisioning and Forecasting Release 1 5 0 0 0 caters to the IFRS 9 Phase standards which expects institutions to classify the exposures in its banking and trading book into those valued using the fair value concept and those valued using amortized cost Other regulations which an institution needs to follow as a pre requisite to using the LLF amp P Application are as follows e IFRS 9 Phase I Classification amp measurement e IAS 39 Other local accounting regulations as applicable Oracle Financial Services Software Confidential Restricted 2 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 2 Understanding Provision Calculation methods This chapter gives a better understanding of the various methods applied by the LLF amp P application An Expected Loss approach applies the following methods Cash Flow Based Method Provision Matrix Method Recovery Rate Method e Collateral Value Based Method An Incurred Loss approach applies the following methods Cash Flow Based Method Provision Matrix Method Recovery Rate Method Both Expected Loss and Incurred Loss runs have a few activities in common which are as follows 1 Load the data as per data download requirements 2 Assign the relevant provision calculation method 3 Setting Charge off materiality 4 Decide whether a collective assessment or an individua
24. impaired assets as it does not generate cash flows NOTE Cash Flow Data Generation Alternative 1 Collective Assessment The purpose of using collective method is to gain operational efficiency to generate cash flow saving time required for calculation and in cases where detailed information is not available For internal CFE account information including cash flow is expected to be available at individual level Oracle CFE In cases where the Oracle Cash Flow Engine is used the LLF amp P application needs IRR of the contractual cash flows as a download This will be required for the computation of EIS NOTE Cash Flow Data Generation Alternative 2 When cash flows are provided as a download FIC MIS DATE in STG ACCOUNT CASH FLOW is an important field to be considered For EIR or EIS calculations cash flows as of Account Start Date are required and for provision calculations cash flows as per Current Date or FIC MIS DATE is provided In the first instance FIC MIS DATE in STG ACCOUNT CASH FLOW must be as per Account Start Date and in second case it should be normal FIC MIS DATE The steps to be followed for Cash Flow Based Method for both the Expected Loss and Incurred Loss approaches are detailed as follows 2 1 1 Cash Flow Based Method Expected Loss Approach The features of this approach are the use of Effective Interest Rate EIR and Effective Initial Spread EIS The procedure to compute this method is as follows
25. period filters There is no drill down reports provided in this report The report is in graphical format Impaired Assets across Line of Business The impaired asset report is displayed under two measures Allowance Graphical representation of Allowance at each line of business of those assets which are impaired Provision Graphical representation of Provision at each line of business of those assets which are impaired Charge of Rate by Line of Business Charge off rate refers to the ratio of net charge off and carrying amount The reports are displayed in graphical across LOB for a particular period Charge of Rate Trend The trend displays five years or twelve months or twelve quarters based on the filter selected The charge off rate is at the Run level unlike in 1 6 which is at Line of business level 6 2 Trend Analysis the reports in this tab provide the historical trend in graphical form Accordingly the following set of reports is displayed Allowance Trend by Line of Business The Allowance amount trend is displayed at each line of business level The trend displays five years or twelve months or twelve quarters based on the filter selected Charge off Trend by Line of Business The report summarizes the charge off trend at line of business level with three measures Gross charge off Net Charge off Oracle Financial Services Software Confidential Restricted 43 User Guide Oracle Financial Services Loan
26. table For all the active HTM definition matrix is generated and population The solution calculates Monthly Transition Rates Quarterly Transition Rates and Yearly Transition Rates If yearly information is not available then the solution will continue with monthly and quarterly rate computation If the duplicate definitions are used the solution continues to calculate the transition rates for both You only have to restrict the computation using the active flag of the definition FN DT HIST TRANSITION RATES generates the transition rates for one period that is considering previous month and not for previous to previous month For example if the execution data is 31 Dec 2010 then matrix is generated as on 31 Dec 2010 only Matrix will not be generated for 30 Nov 2010 if data is available You need to execute the same run with the execution date 30 Nov 2010 For multiple period executions use the FN DT HIST TRANS MULTI PERIOD function which calculates the transition rates for the complete history period HTM definition has the transition basic as Number of Customers Transition Rate is computed for AAA AAA as Current Month AAA Rated Customers out of Previous month AAA Rated Customers Suppose Total AAA customer in the previous month is 800 AND Current Month AAA Rated Customers out of previous month AAA Rated Customers is 720 Then the Transition Rate is 720 800 1 0 90 Transition Rates will be negative if the exposure outsta
27. 0 0 0 Acronyms and Glossary Terms Allowance Allowance account Amortized cost Benchmark interest rate Carrying Cost Cash flow engine Cash Flow Method CFE Charge off Contractual cash flow Credit Conversion Factor Effective interest rate EL Approach Emergence Period Expected Cash Flows Expected Loss Approach Recovery Cost Allowance is an amount set aside for adequacy to absorb the potential credit losses in a Bank s portfolio of loans HTM securities or other assets When financial assets are impaired by credit losses and the entity records the impairment in a separate account For example an allowance account used to record individual impairments or a similar account used to record a collective impairment of assets rather than directly reducing the carrying amount of the asset it shall disclose a reconciliation of changes in that account during the period for each class of financial assets IFRS 7 PARA 16 Present value of the expected cash flows over the remaining life of the financial asset or a pool of assets discounted using the original effective interest rate A rate used as a yardstick for measuring or setting other interest rates for example LIBOR Carrying Cost of an asset is its value stated carried in the books of accounts on a measurement date Also called Current Carrying Cost This is an OFSAA Specific terminology Cash Flow Engine is a component used in the Oracle ALM appli
28. 625 00625 0065 o f o EF NEN 005556 0 16667 or o o o MEN B o 02 00991 o 054545 0 09091 0 09001 _ o2 o o os Table 2 Transition Matrix Oracle Financial Services Software Confidential Restricted 54 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 A Historical Transition Matrix HTM is a square matrix which calculates the transition movement from one stage to another in the past This is calculated using the observed transition over a period Period can be monthly quarterly and yearly Transition is based on the following Number of customers Number of accounts Total exposure outstanding HTM provides the transition probability of movement of customers accounts or exposure outstanding from one stage to another This transition probability can be used as a dependent variable in the model to predict or forecast the future transition probability The following table shows the historical transition in the ratings of Investment Banks for the financial years 1996 1999 3 years For example We have taken a sample of 100 Banks and their transition in the rating over the financial years Banks which have moved from AAA rating to AAA rating from 1996 to 1997 expressed in terms of rate is 0 6 9 15 This mean
29. Amortized cost calculation for individual assessment rule is used for this Oracle Financial Services Software Confidential Restricted 16 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 15 Amortized cost of a cohort is calculated as sum of present value of expected cash flow from the cohort Amortized cost calculation for collective assessment rule is used for this 16 Net charge off is calculated using Net Charge off Calculation Rule that subtracts cumulative recovery from gross charge off This is done for all product types 17 Net charge off rate is calculated from net charge off as proportion of carrying amount Net Charge off Rate Calculation Rule is used for this 18 Allowance is calculated as difference between carrying amount and amortized cost Allowance calculation using Amortized Cost Individual Assessment rule is used for this 19 For collectively assessed exposure allowance is calculated at cohort level as difference between carrying amount and amortized cost of the cohort This is done using the allowance calculation using Amortized Cost Collective Assessment 20 In Collective assessment amortized cost and allowance is calculated at cohort level and then apportioned to account level as per allocation factor Allocation factor is calculated as per proportion of carrying amount of an account in the cohort This is done using Allowance Allocation Factor Calculation Rule
30. Dimension SCD data It is a set of Dimension tables wherein data changes by a small amount regularly over a period of time Following SCD tables are used in LLF amp P stage customer type master stage geography master dim organization structure NOTE To work with OBP interface dim_org_structure needs to be updated directly based on records in stg_legal_entity_master Dim data population batch does not update dim_org_structure from stg_legal_entity_master stage industry master stage IRCS stage LOB master stage market variables master stage product master stage mitigant master or stage collateral master NOTE For EL OBP interface collateral specific tables are used For EL run Mitigant related tables are used Setup Data Setup Data is a static data and does not change at regular intervals List of setup data tables is provided in Seeded Data Tables sheet in the attached Download Specification For more information refer to the Download Specification DL Specs document Fact Data Fact Data can be populated in either the Product Processors or Other Stage tables as follows Product Processor is an entity in the LLF amp P Application which stores data from the Operational Systems of the Bank This entity is created based on the various financial products that the bank caters to Stage tables for Product Processors have been categorized as Exposures data of Product Processors The Product Pr
31. G FORWARD EXCHG RATES table for the respective MIS date or earliest rate available till previous five days of the pre defined source Source of currency conversion rate should be given at Legal Entity level in V ATTRIBUTE ASSIGN VALUE column of STG LEGAL ENTITY ATTR INTF table with corresponding parameter in V ATTRIBUTE VARCHAR LABEL as FX SRC Cohort level provision is updated for reporting purpose using Cohort Provision DT 3 1 2 Incurred Loss IL Approach IL Approach consists of the following major business processes Basic Procedure Forward Exposure Method Provision Matrix Method Recovery Rate Method Net Charge Off Calculation e Provision Calculation Currency Conversion Basic Procedure The basic procedure is as follows 1 Load the setup data and run data as mentioned in chapter 4 Preparing for Execution 2 Basel reclassification rule is used to map Bank s customer type and product type to Basel Customer Type and Basel Product Type respectively It is used for reporting purpose This is done using the following reclassification rules e Basel Customer Type Re classification e Basel Product Type Re classification Basel Asset Class Re classification 3 Methodology is selected based on following source hierarchies e Product Type e Customer Type Oracle Financial Services Software Confidential Restricted 19 User Guide Oracle Financial Services Loan Loss Forecasting
32. Loss Forecasting and Provisioning Release 1 5 0 0 0 Recoveries Allowance Trend by Product Allowance amount trend is given at product level The trend displays five years or twelve months or twelve quarters based on the filter selected Charge off Trend by Product Charge off Trend is at product level selected in a filter The trend displays five years or twelve months or twelve quarters based on the filter selected Charge off Rate Trend The report is at Line of Business LOB Level The trend displays five years or twelve months or twelve quarters based on the filter selected Charge off Rate Trend The report is at product level The trend displays five years or twelve months or twelve quarters based on the filter selected 6 3 Transition Matrix Transition matrix displays the square matrix individually for both retail and corporate separately along with historical and predicted Transition Matrix Historical Average Transition Matrix Wholesale You have to select the Transition Matrix name as a filter to display the matrix in the same browser The reports are populated from fct rating transition matrix It is identified with N PERIOD APPLICABLE as 1 Historical Average Transition Matrix Retail You have to select the Transition Matrix name and the product as a filter to display the matrix in the same browser The reports are populated from and fct dpd transition matrix It is identified with N PERIOD APPLICABLE as 1 Predicted
33. OFSAAI Oracle Financial Services Software Confidential Restricted 30 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 2 Click Loan Loss Forecasting amp Provisioning under Run Execution to open Run Management screen 3 Click Run Management on LHS pane to open Run Management Summary screen 5 2 1 Run Management UI Icons The following table aims to familiarize you with the common icons available in the Run Management UI Pagination Options Helps in navigating from one page to another View Bl Helps to view details of a particular Run Run Default Parameters ER Click this icon to allow you to update the Run Default Parameters Run Execution Parameters Click this icon to allow you to update the Run Execution Parameters Add Helps in adding a hierarchy Run Execution Summary Helps in viewing the Run Execution details PS Click this icon to display the Run Execution Parameters window to modify Copy E or create a batch Execute Oo Click to execute a Run 5 2 2 Displaying a Run Run Management Summary The Run management Summary screen displays the list of runs defined in the PR2 except the Immediate Execution Option Yes in the grid It provides the following details of the run e Runname e Run Type e Created By e Creation Date e Last Modification By e Last Modification Date The Search Panel has a provision to search b
34. Oracle Financial Services Loan Loss Forecasting and Provisioning User Guide Release 1 5 0 0 0 July 2013 ORACLE FINANCIAL SERVICES User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Contents PRE FAC Bieiiiessiesaveievedavecsvancvscevncsoacscenenesenesseececssacedensnsesae IV Tra 727 REC IV DOCUMENTATION ACCESSIBILITY cssseeceseseseseseseseseseseceeeceseseseseseseceseseseceseseseseseseceeeeeseceseceseseseseseseneseseceeecesececesecererererens IV ACCESS TOORACLE SUPPORT EL IV 48 EENE Gop dun PO BAR EUR IV RELATED INFORMATION SOURGES 5 IV WHATS NEW IN codd CRAT IV 1 INTRODUCTION etate eset ntes eck etes tee nte bea iw eR ie 2 1 1 SGOPE OF THE APPLICATION PEL inate dee co Ep nte E Ee ER ccu rapere 2 2 UNDERSTANDING PROVISION CALCULATION METHODS 3 2 1 GASH FLOW BASED METHODS a Ec Eve PRU Pc wee dere vic tar te Od e von elias EL E ea PEL OR Es 3 2 1 1 Cash Flow Based Method Expected Loss enean nnns ta aaa asses eaa 4 2 1 2 Cash Flow Based Method Incurred Loss Approach 5 2 1 3 Galeulat
35. SVIEW Matrix HTM UI Function Code Oracle Financial Services Software Confidential Restricted 56 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Accessing the HTM UI Refer to the following steps to access the HTM UI Click Risk Application gt Loan Loss Forecasting amp Provisioning gt Historical Transition Matrix Definition from the Left Hand Side LHS menu of the OFS AAI Click Historical Transition Matrix which displays the Transition Matrix Summary Screen Overview of Transition Matrix Summary Screen The various functionalities supported by the Transition Matrix Summary screen are explained in a tabular format as follows Loan Loss Forecasting amp Provisionin ORACLE z 3 User l puser Connected 1 Loan Loss Forecasting amp Provisioning Transition Matrix Summary Historical Transition Matrix Definiton 36 9 amp Run Management earch E Transition Matrix Name 11 Transition Matrix 5 ransition Matrix Jd Transition Matrix Name 1 Transition Matrix immation Corporate Clients 2 Transition Mptrix Fount Corporate clients 3 Transition Matrix Bummation Retail Customers 4 Transition Matrix Count Retail Customers 11 2721 16 20 11 3 4 2 E 7 Transition Matrix Summary Screen Using the Transition Matrix Summary screen you can create edit or delete trans
36. This involves reduction of future cash flow by the percentage of expected credit losses The expected loss model requires an entity to make an ongoing assessment of expected credit losses which may require earlier recognition of credit losses It represents cost of recovery to recover the outstanding amount of the account in case of default Oracle Financial Services Software Confidential Restricted 73 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Fair Value Fic MIS DATE Fixed interest rate Gain and Loss Held for trading Held to Maturity securities HTM HTM Incurred But Not Reported IBNR IL Approach Impaired Asset Impairment Loss Inception Initial Recognition Incurred loss Approach Initiation Data LLF amp P OBP Oracle Banking Platform As defined by IASB it is the amount for which an asset can be exchanged or a liability is settled between knowledgeable willing parties in an arm s length transaction This is OFSS specific terminology meaning current date or date stamp for which data belongs to which is also referred to as current date A loan or other financial asset with an interest rate that will remain at a constant rate for the entire life Maturity A gain or loss on a financial asset that is measured at amortized cost and is not part of a hedging relationship see paragraphs 89 102 of IAS 39 shall be recognized in p
37. Transition Matrix Wholesale You have to select the Transition Matrix name and the time period applicable as a filter to display the matrix in the same browser Predicted Transition Matrix Retail You have to select the Transition Matrix name the product and time applicable as a filter to display the matrix in the same browser 6 4 Comparison Analysis The tab compares the provision amount between two runs or two periods based on your selection of comparison Provision Comparison across Business Lines The filter used is the Run Identifier Each identifier is the combination of Run Name and Run Skey Upon selection of these filters you can compare the provision amount across business lines between two separate Runs in graphical form Provision Comparison This is the comparison report of all the available Runs The comparison is between Allowance beginning of period end of period Provision Carrying amount and Net charge off across the Runs 6 5 Stress Test Reports Stress reports would have the following filters e Scenario e Stress Run e RunSkey Each stress Run would have multiple scenarios Only those scenarios corresponding to the particular Run is displayed NOTE Stress Test Reports are not a part of the out of box product However if it Is created and executed on the LLF amp P application the complete report will be displayed Allowance for Credit Losses Stress report for collective assignment and individual
38. and Oracle Financial Services Software Confidential Restricted 65 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 click the icon in the Transition Matrix Summary screen refer Figure 9 You will be prompted with a warning message Click Yes to delete the selected transition matrix or else click No to close the warning window and to stop deletion of the transition matrix NOTE Multiple deletions are also possible Loan Loss Forecasting amp Provisioning Windows Internet Explorer Loan Loss Forecasting amp Provisioning User l puser Connected To LLFPINF ORACLE ur Loss Forecasting amp Provisioning Transition Matrix Summary Historical Transition Matix Detnton amp Run Management Search B Transition Matrix Name Transition Matrix Summary 1104014 Transition Matrix Id Transition Matrox Name Active Created By Created Date Last Modified By Last Modified Date v 1 Transition Matrix summation Corporate Clients Y LLFPUSER 11 2 2011 16 14 53 LLFPUSER 11 8 2011 15 55 14 2 Transition Matrix Count Corporate cients Y LLFPUSER 11 2 2011 16 16 59 LLFPUSER 11 6 2011 15 55 24 3 Transition Matrix Summation Retail Customers Y LLFPUSER 11 2 2011 16 18 22 LLFPUSER 11 8 2011 15 55 34 4 Transition Matrix Count Retail Customers y LLFPUSER 11 2 2011 16 20 11 LLFPUSER 11 2 2011 16 20 11
39. and Provisioning Release 1 5 0 0 0 e Impairment status Forward exposure method is mapped using the rule Provision Calculation Methodology Selection IL Run to the following Source Non Impaired Asset AND Insurance companies AND Product OR Non Impaired Asset AND Corporate Small AND Product OR Non Impaired Asset AND Corporate Medium AND Product OR Non Impaired Asset AND Corporate Large AND Product OR Non Impaired Asset AND Banks AND Product 4 Setting Charge off materiality If Gross charge off is greater than the charge off materiality threshold then its net charge off is adjusted from the calculated provision amount In the pre configured run charge off materiality threshold amount is 500 This is done using Charge off Materiality Assignment rule Charge off materiality is also used to identify accounts for collective assessment treatment Materially charged off accounts are not considered for collective assessment Cash Flow Based Forward Exposure Method The process for computing Forward Exposure Method is as follows 1 Classify the accounts to be treated collectively using Collective Assessment Assignment Rule To improve the overall efficiency of the process to generate cash flows using Oracle Cash Flow Engine CFE Accounts having similar characteristics are grouped together to form a cohort Typically all retail customers having non impaired accounts can be assessed collectively to calculate provision 2
40. ar 6 year and so on This makes Marginal Transition Matrix a better choice over Cumulative Transition Matrix Examples of Marginal Transition Matrices pa aa 060 750 733 054 006 050 347 Oracle Financial Services Software Confidential Restricted 47 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 B 0 005 045 028 592 73 00 2059 Marginal Transition Matrix Year 1 Let us assume that we are using time homogeneous matrices then the same matrix will be used for year 2 also C aa oom 347 04 20 5 _ os 016 sawl sse oma 0170 396 sa 403 698 owa 005 02 532 756 ire 00 005 04 028 592 13 00 20598 Marginal Transition Matrix Year 2 However if it has been cumulative transition matrix then we have for up to year 2 transitions as From To AA Ja jee e 78 42 13 65 1 40 0 08 0 04 0 42 5 98 1 09 76 76 12 84 1 34 0 21 1 23 6 53 A 6 164 ons 5 20 sse os ese 712 657 225 127 Bb 04 060 57 5794 1205 00 033 05 565 33590 Cumulative Transition Matrix Year 2 Oracle Financial Services Software Confidential Restricted 48 User Guide Oracle F
41. arrying amount of the account in the cohort Weighted Average EIR for Collective Assessment Rule is used for this EIS is aggregated at cohort level with relative weight of carrying amount of the account in the cohort Weighted Average EIS for Collective Assessment Rule is used for this EIR or EIS value is updated in the cash flow table This is done using EIS Update DT Benchmark interest rate is populated till the highest maturity for all distinct benchmark curves mapped to accounts and risk free rate for all distinct currencies Benchmark rate is interpolated and updated If benchmark rate is not available for the specified period then it is interpolated using either linear cubic and quadratic interpolation method as selected in Run execution parameters Discounted rate used in the EL method for discounting future cash flows is EIR as on inception for fixed interest rate assets and EIS as on account origination added to benchmark rate for variable rate assets This is assigned using the Rule Periodic Discount Rate calculation Calculate discounting factor using discounting rate assigned as above This is done using Periodic Discount Factor Calculation rule Present value of expected cash flow is calculated by multiplying cash flow with discounting factor Expected Cash Flow Present Value Calculation Rule does this task 14 Amortized cost of an account is calculated as sum of present value of expected cash flow of the account
42. ased on Segment Run Name and Run Type Search Segment Run Type Run Management Summary E LLFSG s Run Name Search Panel Oracle Financial Services Software Confidential Restricted 31 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Financial Services Analytical Applications Infrastructure User lfpuser Connected To LLFPINF ORACLE Financial Services Applications Run Management Summary LLFP Search amp Run Management Segment LLFPSEG List of Runs 1103013 Run Name Run Type Created By Created Date Last Modified By Last Modified Date patties Cee ENIM toes BASELINE RUN SYSADMIN 03 07 2013 SYSADMN 04 25 2013 Loss Forecast and Provision Calculation Expected Loss approach OBP interface BASELINERUN SYSADMIN 04 25 2013 Loss Forecast and Provision Calculation incurred Loss sum mme Approach Run Management Summary Screen You can see the complete list of Runs with the help of pagination by navigating from one page to another by clicking the Next Previous icons By clicking the No Records icon you can provide the number of records to be displayed per page or on the bar You can also sort the records to view it in convenient way View a Run You can view individual Run details at any gi
43. aseline Run SR for Simulation Run ST for Stress Run 15 LEBASED Specifies that the run is LE based e Run Parameters Lov Table V SEGMENT CODE Stores the segment codes V PARAM ID Stores the parameter id of the parameters used in the default parameter screen VALUE CODE Stores the code of the list of values to be displayed V PARAM VALUE DESC Stores the description of the list of values to be displayed DISPLAY ORDER Specifies the order in which the parameters need to appear in the screen Oracle Financial Services Software Confidential Restricted 40 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 RUN TYPE Specifies the type of Run BR for Baseline Run SR for Simulation Run ST for Stress Run 5 2 6 Processed Data Maintenance Batch The LLF amp P application can reuse previously calculated EIR or EIS and cash flow values using Processed Data Maintenance Batch This batch is an ICC batch and requires previous run skey as parameter from which data needs to be fetched for future use Primarily it performs following tasks e Inception Rates Maintenance It makes EIR and EIS calculated by previous Run available for the subsequent Run Run skey of the Run from which the value should be taken is given as property value of parameter list in Task definition as SRUNSK Run skey This can be updated from Batch Maintenance e Stage Cash
44. assignment Oracle Financial Services Software Confidential Restricted 44 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 are done separately The report is similar to that available in the baseline report in the home page Stressed Provisions Across Business Lines The report displays the comparison of provision amount between the baseline Run and the stressed Run Charge off Rates Charge off rate is similar to that of baseline Run displayed in the home page Stressed Impaired Assets Across Business Lines The report summarizes the impaired assets across business line The comparison is done between two measures which are carrying amount and Allowances Stressed Effective Interest Rate or Spread across Business Lines The report summarizes the interest rates of all the active accounts For fixed rate instruments weighted average EIR is calculated and for variable rate instruments weighted average EIS is calculated Expected Loss Across Business Lines Expected loss is calculated as the percentage of allowance of individual business line to the corresponding carrying amount The comparison is between baseline and stressed reports 6 6 Loss Forecast Loss forecast is an independent function of any Run The filters used for these reports are Run Skey Run Name and Execution Date Oracle Business Intelligence reports the following Loss Forecast for Wholesale Exposures Based on the measu
45. ate Expected cash flows are then discounted to the current date using EIR or EIS For Fixed Rate Instrument Discount Rate EIR For Variable Rate Instrument Discount Rate Variable Rate Applicable for Cash Flow Date EIS Sum of these cash flows at account or cohort level is known as amortized cost Allowance as of date Carrying amount Amortized cost If charge off is material Provision as of date Allowance as of Previous date Allowance as of current date Net Charge off else it is difference between two previous period allowances 2 1 2 Cash Flow Based Method Incurred Loss Approach The procedure to compute this method is as follows 1 Assign the following to each and every applicable account exposure or cohort You can also provide a download at the required granularity Transition Matrix Emergence period Risk Free Rate 2 Cash Flow Engine calculates the cash flows for each concerned exposure till the maturity Note If you have selected a collective assessment the cash flows are generated for cohort instead of each account Every cohort is treated as a single exposure from a cash flow perspective 3 Projected Cash Flows are converted to Expected Loss using loss rate and Loss Given Default LGD The Loss Rate and Expected Loss Amount are calculated as follows Loss Rate Default Probability Applicable as of Cash Flow Date LGD at Account Level Exposure at Default Principle Outstandi
46. ateral Value Based CVB Method is used to calculate allowance for Mortgage products or other retail products only In the Collateral Value Based Method shortfall between the collateral value and carrying amount with expected recovery cost of an exposure is calculated Allowance is calculated based on shortfall amount subject to shortfall threshold Collateral is assumed to be allocated at 10096 mitigate an exposure which means the full value of collateral is available for the account it is mapped to Hence if collateral is shared across accounts of different product type then the all associated accounts should be excluded from provision calculation processing For non retail customers or for customers having accounts not passed through CVB methods it is assumed that same customer will not have same product type if the customer is shared across legal entity 2 4 1 Allowance Calculation To arrive at allowance amount CVB Method requires calculating shortfall of collateral amount to cover carrying amount and expected recovery cost Allowance is calculated only if shortfall is a positive value Shortfall is calculated as follows Shortfall Collateral Value Carrying Cost Expected Recovery Cost Expected recovery costs and carrying amounts are provided as input data at account level granularity Collateral value is also provided as input data at a collateral level granularity Since CVB Method is to be applied on home loan and for r
47. ates pertaining to the account start date is required e Old accounts may not have transition matrix as of account start date However interest rate data should be available which is not a serious issue nowadays Yet calculating EIR or EIS of these old accounts is an important decision to be made mainly due to transition matrix According to IFRS in its draft on Amortized cost published in 2009 refer to the pages with Para 23 27 However this is left to the interpretation of each entity NOTE olnstitutions are expected to make use of all the possible data available This necessarily means that even if we have data not as of account start date but some reasonable date in history it can be used However it is expected to use the same transition matrices pertaining to a given period for all the accounts having their account start date in the given period This will enable benchmarking oIn the LLF amp P Application you need to define a separate run named aptly In this run you can assign the appropriate transition matrix to the concerned exposures and define a run only till EIR or EIS calculations Later post verification you can post the same to the INCEPTION TABLE Later in the provision calculation run this can be used as an input for discount rate oAlternatively you can provide the EIR or EIS a download based on some assumptions like EIR is x o below IRR This at times either underestimates or overestimates the risk Howev
48. available 5999 For payment pattern of Cards 6000 For payment pattern of Purchase Receivables For payment pattern of cash credit and 6001 overdraft Can we download TM with different interval for example 1 with lyear 3 year 5year and so on No Refer Question No 10 for more details Does the user need to give cash flow download every time for same day execution Yes Cash flow needs to be in stage table for each run Can EL and IL approach be combined and executed Yes To combine EL and IL run Provision Calculation Methodology Selection rule needs to be modified In addition some rules which are specific to the approach need to be included for processing Can download TM with different frequency for example TM1 with 1 year 6 month 1 month and so on No To generate Lamda for Poisson process and subsequent usage Transition Matrix needs to be of same frequency for all period Please refer Q No 10 for more detail Can Charged off account be part of a collective assessment No Charged off written off and impaired accounts are cannot be part of any cohort Is it feasible to compare individually calculated allowance and those which are allocated back to account level from collective assessment Accounts having similar behaviour and potential cash flow are combined to generate cash flow more efficiently These are typically large in volume accounts like retail exposures Considering carrying amount as wei
49. cation This implies to calculate amortized cost of underlying asset the LLF amp P Application will project cash flows It typically includes Loans and Held to Maturity securities HTM Securities This is OFSAA specific term Cash Flow Engine Process of removing uncollectible loans or closed accounts or other assets from the Balance Sheet This conveys that cash flows are generated using terms and conditions as specified in the contract This is contrasted against the expected cash flows where cash flows are multiplied by probability which is not part of the contract This term is generally referred from Basel accord by BIS The credit risk exposure attached to off balance sheet items is calculated by multiplying the face amount of each of the off balance sheet items by the credit conversion factor Thus this serves as numerical factor for conversion The Effective Interest Rate EIR is the rate that exactly discounts estimated future cash flows to the net carrying amount of the financial instrument through the life of an asset In context of IFRS 9 this means rate that exactly discounts probability weighted future cash flows to the net carrying amount of the financial instrument through the life of an asset Expected Loss Approach The emergence period is typically defined as the time it takes from the date a loss event occurred to the date the entity identifies it has occurred Contractual cash flows adjusted for expected credit losses
50. ccounts will be excluded from provision calculation processing Note Provision calculation Method selection rule is expected to be customized based on client s data and requirement Further Method override process may override the method assigned by the rule to ensure that all accounts of the customer under same product type are assigned CVB method to if one of the account is assigned to CVB Method 4 Setting Charge off materiality If gross charge off is greater than the charge off materiality threshold then its net charge off is adjusted from the calculated provision amount In the pre configured Run charge off materiality threshold amount is 500 This is done using Charge off Materiality Assignment rule Charge off materiality is also used to identify accounts for collective assessment treatment Materially charged off accounts are not considered for collective assessment Cash Flow Based Expected Loss Method The process for computing Expected Loss Method is as follows 1 Using Collective Assessment Assignment Rule accounts are classified to be treated collectively All retail customers having non impaired accounts are assessed collectively to calculate provision 2 Populate contractual cash flow from the stage table for each account using the T2T rule CONTRACTUAL CASH FLOW POPULATION This includes populating the principal component and the interest component for each cash flow date 3 CFE CONTRACTUAL CASH FLOWS Thi
51. common platform of frequency For example For a given set of exposures if the matrix frequency period ranges from Monthly Quarterly Half yearly to Yearly the minimum frequency period of all the matrices available monthly will be used as a base frequency for the other matrices to undergo Poisson process The forecasting is done for five 5 months in case of rating based and twenty four 24 months in case of DPD based excluding current period 2 Loss forecast for Current Period For current period values the LLF amp P application will just populate the summation of the values on the given dimension This will not need any matrix intervention Normally loss forecast is done on pre determined dimensions like product type product asset class and so on Hence while reporting the current period LLF amp P will sum up the values across the selected dimensions for both exposure count and exposure amount level 3 Poisson Parameter The Poisson process is initiated after successful assignment of Individual exposures undergoing Expected Loss or Incurred Loss approach to transition matrix The matrix is assigned based on predetermined dimensions Customer type product type and currency All the matrices irrespective of the frequency applicability will undergo Poisson parameter Poisson Parameter 1 exp 2 where the probability of default values for given period 4 Calculation of Probability of Defaults The default values f
52. culation rule c To allocate cohort level allowance back as per allocation factor Collectively Assessed Exposure Allowance Allocation rule is used 14 Allowance is capped to carrying amount using Reporting Allowance Calculation rule which takes maximum minimum of carrying amount and calculated allowance NOTE Each method calculates allowance amount as of FIC_MIS _Date Provision Matrix Method Refer to Provision Matrix method explained in EL Approach Recovery Rate Method Refer to Recovery Rate Method explained in EL Approach Net Charge off Calculation Refer to Net Charge off Calculation explained in EL Approach Provision Amount Calculation Refer to Provision Calculation explained in EL Approach Currency Conversion Refer to Currency Conversion explained in EL Approach 3 1 3 Historical Transition Matrices HTM Keeping an eye on the set of exposures where these transition matrices are used different granularities of data are used to generate different historical transition matrices They represent the institution s experience Probability of Transition Count of Transition between two grades Total Transition from a source grade In this calculation The sum of all transitions is one thus maintaining unity constraint Oracle Financial Services Software Confidential Restricted 22 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 New a
53. cy band of the exposure This field is accompanied by a browser button By clicking this button a window is displayed to select a hierarchy from the available hierarchies for HTM definition For HTM definition hierarchy selection is limited through the Parameter Master table reveleus_parameter_master A hierarchy can be selected using the arrow key Once you have selected the hierarchy click the OK button to display the selected dataset on the Transition Matrix summary screen 4 Active checkbox 5 Data Set 6 State Space 7 Transition Basis Transition Basis is a measure based on which the Transition Probability is calculated for HTM This field is accompanied by a browser button By clicking this button a window is displayed to select a measure from the available measures for HTM definition A measure can be selected using the arrow key Once you have selected the measure click the OK button to display the selected dataset on the Transition Matrix Summary screen For more information on Transition Basis click here Oracle Financial Services Software Confidential Restricted 61 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Using this Transition Matrix Definition Screen you can define a new HTM 8 Filter A Filter panel is provided to you to filter the data for the HTM calculation To calculate transition probability for only Line of Business LOB Re
54. d Run are e Linear e Quartic e Cubic Spline FIC_MIS_DATE Date as on which data should be picked and processed The date can be selected from the calendar icon Run Execution This is to describe a Run in detail It is an optional parameter Description amp Run Details Loss Forecast and Provision Calculation Run Name Expected Loss Approach Run Execution Parameters Legal Entity Consolidation Type Reporting Currency Bucket Convention Beginning of the Bucket Interpolation Method Linear FIC MIS Date Run Execution Description Audit Panel Created By SYSADMN Created Date 03 07 2013 Last Modified By SYSADMN Last Modified Date 04 25 2013 Run Execution Parameters Screen Oracle Financial Services Software Confidential Restricted 36 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 5 2 4 Executing a Run Run Execution Summary To execute a Run 1 Select the checkbox adjacent to the required Run 2 Click icon from the navigation bar The Run Execution Summary screen is displayed The screen has two panels e Run Details e Execution Details The Run Details panel displays the following e Run Name e Run Type e RunID The Run Execution Details displays the following e RunSkey Run Execution Id e FIC MIS DATE e Execution Status e Execution Date e Time of Execution e Reporting Flag
55. d Recovery Cost Shortfall Collateral Value 2 Customer N Accounts gt carrying kost gt Expected Recovery Cost Allowance Calculation Single Account For a single customer and single account scenario allowance amount is calculated from shortfall amount as follows Allowance Shortfall if Shortfall gt Threshold amount Or Allowance 0 if Shortfall Threshold amount Threshold amount is assigned by computing a Rule at Legal Entity Product type and Reporting Currency level Allowance Calculation Multiple Accounts If one customer is holding multiple accounts then the shortfall is calculated at product type and customer level as follows Shortfall 1 gt Collateral Value Carrying Cost X Expected Recovery Cost Shortfall amount thus calculated will undergo threshold check at product type and customer level Eligible Shortfall Shortfall if Shortfall gt Threshold amount Or Eligible shortfall 2 0 if Shortfall Threshold amount Threshold amount is a semi static download amount at Legal Entity Product type and Reporting Currency level Allowance amount is derived at account level from the eligible shortfall amount using the waterfall approach In this approach the shortfall amount is first used to cover the account with the maximum carrying amount and then the account with the second highest carrying amount is covered and so on till the shortfall amount is e
56. e following Rating Aaa Aa Baa Default Probability S One year rating transition probability matrix Example Oracle Financial Services Software Confidential Restricted 23 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 3 2 Loss Forecasting Apart from calculating the provision by EL and IL approach Oracle Financial Services Loan Loss Forecasting and Provisioning forecasts the losses by using ratings or days past due matrices based on the number of customers or total amount of exposures across product types Loss forecast component doesn t report the losses for the future period instead it predicts the status of the exposure count or exposure amount For example For the current period if the total exposure value at a given product type is 3000 and the forecasted PD for period 1 is 10 then the loss forecasted value would be 300 than 2700 The user input matrices would differ in their frequency ranging from a month to one year The forecasted period is based on the least available frequency to five 5 periods in case of rating based and twenty four 24 periods in case of days past due DPD based Loss forecasting procedure is computed as follows 1 Determination of Min Frequency Minimum frequency period of the matrices for both rating based and days past due based is used as an input for Poisson process to bring down all the other matrices to the
57. e at time t Allowance at time t 1 Provision is calculated using Provision Calculation rule 2 7 Other Important Calculation Transition Matrix Transition Matrix is the probability of an exposure or a customer moving from one credit grade to another over a defined period of time Grades can be defined as Credit rating For example AAA AA Or Delinquency bands For example 0 30 Days 31 60 days Transition matrix is used in the following steps 1 Calculating a set of Historical Transition Matrices 2 In Predicted Transition Matrix use Poisson process to convert these probabilities to a suitable frequency 2 7 1 Historical Transition Matrices Keeping an eye on the set of exposures where these transition matrices are used different granularities of data are used to generate different historical transition matrices They represent the institution s experience Oracle Financial Services Software Confidential Restricted 10 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Probability of Transition Count of Transition between two grades Total Transition from a source grade In this calculation e The sum of all transitions is one thus maintaining unity constraint e New and closed accounts are excluded NOTE New accounts are those which are not available in the last data point whereas they are available in the current data point The concept of closed account is
58. earching the Transition bus ER Matrix by providing the Transition E Matrix Name in the text box displayed next to it Refer to OFSAAI manual for text box features All the Transition Matrices which contain the unique input 9 name will be displayed in a tabular format in Transition Matrix Summary panel Reset Icon The Reset icon when clicked refreshes the screen clears the text typed in the text field and restores the default screen Add Refer Section Define a New HTM 10 View Refer Section View Edit A Refer Section Edit an HTM Oracle Financial Services Software Confidential Restricted 58 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Using the Transition Matrix Summary screen you can create edit or delete transition matrices as required Delete Refer Section Delete an HTM 11 Expand Using this icon you can expand or Collapse collapse the panel your convenience Transition Matrix Summary Screen Overview NOTE For the benefit of users tool tips are displayed over a mouse hover for all the icons Defining New To define a new HTM click icon in the Transition Matrix Summary Screen This will direct you to the Transition Matrix Definition Screen shown in Figure 10 NOTE To return to the Transition Matrix Summary Screen click Historical Transition Matrix a hyperlink on the left top corn
59. ecte 0100510 0160510 Transaction Matrix Definition Screen View HTM Editing an HTM To edit a particular transition matrix select the check box displayed next to transition matrix id and click the A icon in the Transition Matrix summary screen refer Figure 9 You will be directed to the Transition Matrix Definition screen to edit the details of the selected Transition matrix NOTE Multiple selection of transition matrix is not possible On multiple selections the View icon will be disabled Oracle Financial Services Software Confidential Restricted 64 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Transition Matrix Definition atrix gt Transition Matrix Definition Transition Matrix Details Transition Matrix Transition Matrix Description State Space State Space Transition Basis Filter 0100010 2 No Element Selected Oto 0cf0 Transaction Matrix Definition Screen Edit HTM The text fields in Transition Matrix Definition screen is non editable except the Active Checkbox You can only change the status of a transition matrix to Active or Inactive by selecting the Active Checkbox When you check or uncheck the active check box refer Figure 12 the following buttons are displayed Cancel If cancel button is clicked you will be directed to the Transition Matrix Summary screen
60. ed benchmark rates This is done using type 3 rule Discount Factor Calculation NOTE Average Recovery period can be given in number of days months or years Amortized cost for Recovery Rate method is the product of carrying amount recovery rate 1 LGD and discounting factor It is calculated using Amortized Cost Calculation Impaired Assets Allowance is calculated as difference between carrying amount and amortized cost Collateral Value Based CVB Method Collateral Value Based CVB Method is used for retail customer of mortgage portfolio CVB Method is expected to be used to calculate allowance for retail assets The CVB method is calculated as follows 1 Ifthe provision calculation method is CVB then the following is computed e Collateral Value for each collateral e Carrying amount and Recovery cost at the account level e Account to collateral mapping 2 The Carrying Amount Recovery Cost and Collateral Value are converted to Reporting Currency 3 The Shortfall RCY at customer and product type level is calculated as follows Shortfall Collateral value Carrying amount Y Recovery costs 4 If Shortfall gt Threshold an account with the same customer and product type and which has the highest carrying amount to which shortfall is not allocated is considered Account level EoP Allowance RCY Minimum balance eligible shortfall carrying amount 5 Ifthe customer does not have another account w
61. eesscceesssccceessscecessseceesssseceessesscuasecsessssecessesecusseceesseseceeaes 22 3 2 LOSS FORECASTING ente UPPER UNE vore BRE Se eco epe Cu x eR os pee 24 4 PREPARING FOR EXECUTION cccccscccssccccscsccscsccsccccecsccecsccesscsecsccecscseccescscsecscseccesecss 25 4 1 DATAREGUIREMENTS 1 rt a a EARS edo Ya 25 4 2 IMPORTANT METADATA DEFINITION cccccccessscececececcessscecececeauessececececeeuenenceceseceeueseececessaeeueneeceseseaeeneneeeeeeeeagenss 26 5 EXECUTIONE E E 30 5 1 DATA QUALITY FRAMEW ORI ite ree neut ce eoe Cerere rapper ue Ege 30 5 2 RUN MANAGEMENT 30 5 2 1 Management Ul Icons 31 5 2 2 Displaying 31 5 2 3 RUN 33 5 2 4 Executing 37 5225 4 vDatabase Designs sis edo er tee e tied nna dr oe C d ae debate ends ex dee eda de enda tees 40 5 2 6 Processed Data Maintenance Batch ee eee eee eee 41 6 LOAN LOSS FORECASTING amp PROVISIONING 5 42 6 1 HIOME PAGE REPORTS ehverko coc esee eoa ei e eoa 42 Oracle Financial Services Software Confidential Restricted ii User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 6
62. en transition matrix can the user define the impairment grade The user can change the default grade by selecting a Target Hierarchy in Rating Impairment State Assignment or DPD Impairment State Assignment However impairment status should be at a transition matrix level and hence source hierarchy in this should be consistent with that of transition matrix selection Effective Initial Rate and Effective Initial spread provided by Oracle LLF amp P are calculated as of which date Effective Initial Rate and Effective Initial spread provided by Oracle LLF amp P are calculated as of account start date What are the conditions when Effective Initial Rate and Effective Initial spread are recalculated in Oracle LLF amp P EIR and EIS values are considered in following order e or EIS value is in Stage Table value e If EIR EIS value is not there in Stage table then it checks in Account Inception Table e If not found there then application calculates by itself How to select the approach for available products Following rules are used to assign a method in EL and IL approach respectively Provision Calculation Methodology Selection EL Run and Provision Calculation Methodology Selection IL Run You can change this rule to select the approach based on the requirement How is collective assessment handled in Oracle LLF amp P Accounts that can be assessed and treated collectively are identified based on their credit rating delinquenc
63. ent of cash flow amount Errors thrown by CFE are logged in FSI OPS ERROR DETAILS 3 Periodic Cumulative Loss Rate is calculated by multiplying LGD with cumulative impaired transition probability using a rule 4 Expected cash flow rate is derived from cumulative loss rate using a rule 5 Expected cash flow amount is calculated using cash flow amount and expected cash flow rate calculated earlier 6 Benchmark interest rate is populated till highest maturity for all distinct benchmark curves mapped to accounts and risk free rate for all distinct currencies Interpolate benchmark rate and update interpolated benchmark rate If benchmark rate is not available for the specified period then it is interpolated using either linear cubic and quadratic interpolation method as selected in the Run execution parameter 7 Calculate Exposure at Default for revolving and non revolving exposure Value in Revolving Exposure Indicator will determine the nature of exposure a For Non revolving Lines it is done using a DT EAD Non Revolving Lines It updates EAD for non revolving exposures and undrawn amount for revolving exposure b For revolving lines it is done using a type 3 rule Exposure at Default Calculation Revolving Lines It is calculated as Principal Run off Undrawn Amount Credit Conversion Factor 8 Expected loss amount is calculated up to the emergence period Expected Loss is the product of Exposure at Default and Periodic Cum
64. er being approximate numbers provision using these rates and actual rates should be compared to arrive at a logical decision which should be in compliance with regulatory requirements if any Oracle Financial Services Software Confidential Restricted 46 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Annexure A Understanding Key Terms and Concepts Poisson Process and Exponential Distribution The Poisson process is a counting process for the number of events that have occurred up to a particular time It is at times called a jump process as it jumps up to a higher state each time an event occurs It is also a special case of a continuous Markov process It has potential applications in the Financial Industry For example Total Credit default amounts consist usually of a sum of individual default amounts The number of defaults is usually assumed to occur according to a Poisson process The exponential distribution plays a very important role in Poisson process partly because the time between events or jumps follow an exponential distribution Random variable X is said to have an exponential distribution if density has the form fX x for x 0 Splitting of Poisson Processes For Example Times between births in a family follow an exponential distribution The births are categorized by gender For Example Times between back pains follow an exponential distribution Howe
65. er of the screen The important functionalities of the Transition Matrix Definition Screen have been explained in a tabular format Refer Table 8 Oracle Financial Services Software Confidential Restricted 59 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Transition Matrix Definition Historical Transition Matrix gt Transition Matrix Definition 2 ition Matrix ans ansition Matrix Description 3 State Space Kimer _ D gt 8 0100010 No Element Selected 010000 2 n Comments System ID 7 Created By LLFPUSER Creation Date 2011 10 11 18 58 50 Transaction Matrix Definition Screen Define HTM Using this Transition Matrix Definition Screen you can define a new HTM E This panel describes the name description data Transition a Et set and active checkbox for a transition matrix 1 Matrix Details which are mandatory for adding or creating any HTM Definition Transition Matrix Name is a text field The name of a Transition matrix should be unique should 2 not be duplicate of any existing Transition Transition matrix The maximum length of transition 2 Matrix h name is 100 characters The following special characters are the only ones which will be accepted by the solution 96 amp Q 1 1 2 l Transition Transition Matr
66. etail customers it is assumed that collateral amount expected recovery cost and carrying amount will be in same currency that is the natural currency of the account Based on number of collaterals for an account there will be following possible scenarios and hence potentially varied formula to calculate shortfall Scenario ID Description Shortfall Calculation Formula Shortfall Collateral Value Carrying Cost 1 1 Account 1 Collateral Expected Recovery Cost Shortfall gt Collateral Value 2 1 Account N Collaterals Carrying Cost Expected Recovery Cost In addition to the above there could be a case where one customer is holding multiple accounts to be treated by CVB Method In such case shortfall needs to be necessarily calculated at product type level for each customer and then allowance has to be allocated back to account level using waterfall approach as explained in Allowance Calculation Multiple Accounts section Based Oracle Financial Services Software Confidential Restricted 8 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 number of accounts for a customer there will be following possible scenarios and hence potentially varied formula to calculate shortfall Scenario ID Description Shortfall Calculation Formula Shortfall 1 gt Collateral Value 1 1 Customer 1 Account Carrying Cost Expecte
67. ght for individual allocation allowance may be compared with individual treatment If allocation factor is other than Carrying amount then there will be some difference Why recoveries are not part of collective assessment assignment Recovery pattern and impact on cash flow parameters may not be same To maintain homogeneity of accounts within cohort these accounts are not part of collective assessment Can we download TM with non continuous time period For example with applicable period 1 3 5 years and so on No Refer Question No 10 for more details Are EIR and EIS calculated collectively or individually EIR EIS is calculated at account level and not at cohort level Then it is allocated back to account level using carrying amount of the account in the cohort as allocation factor Can a Run be without collective assessment Oracle Financial Services Software Confidential Restricted 51 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 20 21 22 23 24 25 26 27 28 29 30 31 32 Yes Collective assessment is done to efficiently generate cash flow for identical accounts Can Provision Matrix be based on External Ratings No User can map external rating to internal rating at account level and then internal rating based provision matrix can be mapped to it Which Transition Matrix is used for Loss Forecasting Transition Matri
68. higher provisioning than that for non charged off accounts To maintain homogeneity of accounts within cohort these accounts are not part of collective assessment The purpose of using collective method is to gain operational efficiency saving time required for calculation and in cases where detailed information is not available Collective assessment helps reduce the time required for calculation with minimal loss in accuracy However at the bank level where prudent provisioning is required differences between collective assessment and individual assessment turns out to be trivial If one calculates the provision at individual account level and then compares the same with the provision allocated to the individual account from cohort then this will create a difference Oracle Financial Services Software Confidential Restricted 6 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 NOTE Collective Assessment Allowance The criteria for cohort formation are a key decision to be made by you You can choose all the available parameters as the criteria This will make lots of cohorts giving some sense of enhanced accuracy However operational efficiency achieved would be minimal On the other hand one can choose only a few required parameters This will create fewer cohorts thereby increasing operational efficiencies However it also creates an impression of being less accurate Often comparison
69. inancial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 NOTE Frequency period of the input transition matrix should be greater than that of bucket length For example input transition matrix cannot be Monthly and LLF amp PBUCKETLENGTH be Quarterly In this case all transition matrices should have a frequency period of at least quarterly and more 8 Accounts to be assessed and treated collectively are identified based on their credit rating delinquency band customer type start date interest rate cash flow pattern and other such characteristics that can affect cash flow amount Cohort is formed according to such data Cohort_Identification DT is used to achieve this 9 After identifying such cohorts data pertaining to accounts forming a cohort is aggregated for collective treatment This is done using T2T rule COHORT_DATA_POPULATION Following parameters are calculated at cohort level with relative weight of carrying amount of the account in the cohort e Emergence Period e LGD e CCF For an account or at a cohort level if account is part of cohort following steps are performed to calculate allowance 1 Pre cash flow validation This is to validate input data to CFE All errors are logged in FIC DTDQ MESSAGE LOG with value of the column V MAIN PROG NAME FN_DT_PRE_CF_VALIDATIONS values need to be picked up for the current batch 2 Generate cash flow and calculate principal and interest compon
70. inancial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Annexure B Things to Remember Basel Reclassification rule is for reporting purposes only and does not have any effect on method selection or calculation LLF amp P application expects one internal rating for only one external rating Provision matrix method is assigned for specific condition and as default method for all unless otherwise specified In case cash flow is given as download then all accounts are treated individually Overnight rate 1 Day is mandatory for Interest Rate Curve Historical Average Transition Matrix reports are populated from fct_rating_transition_matrix for wholesale and fct dpd transition matrix for retail It is identified with N_PERIOD_APPLICABLE as 1 Method override also checks for accounts having different product types but sharing same collateral Such accounts are not assigned any provision calculation method and hence Provision amount is not calculated for it For Poisson process the desired frequency period should be less than the input matrix frequency period To calculate proper coefficient no consecutive interest rates in historical interest rate curve table should be precisely same Maximum of 100 data points interest rate points can be given for interpolation coefficient calculation LLFP does not handle partial allocation of mitigant value to an account i e 100 of the mitigant value is considered t
71. interested in monthly probabilities then we look for Poisson calculations In these calculations per period loss rate which is credit grade specific is the most important for calculations Every grade calculation differs depending on the probability of default The per period loss rate is computed through the following steps 1 Calculate the Poisson Parameter for the Poisson Process of converting the Poisson parameter to the lower granularity based on the inputs of time Monthly Quarterly Semi annually or Annually using the below formula for each credit grade Formulae used 1 t t year cumulative probability All other parameters apart from Poisson Parameter are input Thus we solve this for The value for Poisson Parameter should be stored 2 Calculation is performed at a Monthly level which will be the default option provided in the LLF amp P Application The output is a cumulative probability at a given frequency 3 Cumulative probabilities are then adjusted for LGD 4 Adjusted cumulative probabilities are used to calculate per period loss rate Period Loss rate for period t Cumulative Prob for Period t Cumulative Prob for Period t 1 5 Then conversion to cumulative probability across years takes place where Oracle Financial Services Software Confidential Restricted 11 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0
72. ionof EIR sand EIS uui eae ee eate eee 5 2 1 4 Collective Assessment uan unu auia in iii i 6 2 2 PROVISION MATRIX METHOD s0sssssecccccuccssssceccsecuecesessecesecuecusessecesscuscusessscesscueceseseseessceecusessseesseuneusesseeeesensees 7 2 3 RECOVERYIRATEIMIETHOD tooe iet tero beet esee Ree te Seed eR Eae Prat abeo pete 7 2 4 COLLATERAL VALUE BASED METHOD chai roro ern n e Pho 8 241 Allowance Calculation 3 nta ndi deu dd d reru i 8 2 5 ALLOWANGE TBRESHOLD E o E e E ebd a o E Y ole ped edv eb 10 2 6 PROVISION AMOUNT CALCULATION sse setas 10 2 7 OTHER IMPORTANT CALCULATION TRANSITION MATRIX 10 2 7 1 Historical Transition Matrices sat ana aida n d tessuti d d aded sav a d eain 10 2 2 Poisson Calculations ree dite nire ba da tute onte ean eu dd du due aT an eu vn Mba e a etu du un 11 3 UNDERSTANDING THE LLF amp P APPLICATION 12 3 1 PROVISION CALCULATIONS 12 3 11 EXp cted Loss ELI Approach e inei Cate 13 3 1 2 Incurred LOSS IL Approach ssssesssssseses sese nada assa tasa ss sa asses 19 3 1 3 Historical Transition Matrices HTM cccccccccc
73. ique internal rating Market Data Population It populates Interest Rate data and Exchange Rate data using 2 DATA POPULATION and EXCHANGE RATE DATA POPULATION respectively Runskey marked as 1 will the actual history data For each run data from 1 will be populated with execution runskey in the same table Approach Setting The Rules associated with this task are Provision Calculation Methodology Selection EL Run Provision Calculation Methodology Selection IL Run As mentioned earlier Allowance can be calculated using Cash Flow method or Provision Matrix Method In case of Cash flow based method impaired assets needs to be treated based on recovery rate method whereas non impaired can be treated with the projected cash flow and EIR or EIS in expected loss approach or with risk free rate in incurred loss approach Provision Matrix method assigns provision rate to an account based on rating or delinquency band as per mapping To select the treatment each account is mapped to an approach based on following criteria e Impairment Status e Customer Type e Product This rule is expected to be reviewed and customized based on data and mapping strategy of the bank Transition Matrix Mapping The Rules associated with this task are Transition Matrix Assignment In EL approach future cash flows need to be adjusted with the probability of transition to impaired state Transition probability is calculated based on P
74. is made between two allowance numbers a Calculated when exposure is treated as an individual asset b Calculated when it is part of a cohort There are various factors affecting these calculations namely criteria used for cohort formation and the allocation factor itself Depending on these two numbers the collective assessment allowance will either be close or depart It is suggested that a comparison should be made between similar components Hence sum of allowance for a group of exposures when they are treated as individual exposures should be compared with allowance at cohort level assuming the composition is the same in both the cases It is this comparison which should drive the decision for cohort formation criterion and allocation factor 2 2 Provision Matrix Method This mainly involves the usage of direct provision rates instead of cash flow projection This is applied on the financial assets mapped to Provision Matrix based methods There is no constraint to the application of this method This method is common for both impaired and non impaired exposures Note It is assumed that in case of an impaired status a higher rate of provisioning is to be applied This can be achieved by adding impairment status as one of the dimensions while applying the Provision Matrix method The following steps are required to be completed to use the Provision Matrix method 1 Assign the provision matrix to each and every account exposu
75. ith the same product type then the account level EoP Allowance is converted to the natural currency Eligible Allowance Min EoP Allowance Carrying amount in NCY 6 Provision is then calculated and converted eligible allowance and Provision Value to Reporting Currency Net Charge off Calculation Net charge off is calculated using Net Charge off Calculation Rule that subtracts cumulative recovery from gross charge off This is done for all product types Net charge off rate is calculated from net charge off as proportion of carrying amount Net Charge off Rate Calculation Rule is used for this Oracle Financial Services Software Confidential Restricted 18 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Provision Amount Calculation Provision is calculated as a difference between allowance of current period and allowance of previous period The provision calculation is based on f_Chargeoff_Materiality_Flag If the flag is Y then the provision calculation formula will be Allowance t Allowance t 1 Netchargeoff If the flag is N the provision calculation formula will be Allowance t Allowance t 1 Provision is calculated using Provision Calculation rule Currency Conversion Allowance Provision and other reporting measures are converted to reporting currency using Key Measure RCY Conv task Please note that exchange rate will be applied as defined in ST
76. ition matrices as required 1 Transition This is a unique Transition Matrix Matrix ID reference number 2 Transition A unique name defined by you for a Matrix transition matrix Name 3 Active This column displays the status of the created transition matrix The executions Oracle Financial Services Software Confidential Restricted 57 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Using the Transition Matrix Summary screen you can create edit or delete transition matrices as required done would consider only the data of the Active Transition matrix which is shown as Y on the screen 4 Created By This section displays the name of the user who has created the Transition matrix 5 Creation This section displays the date on which Date the transition matrix is created 6 Last Displays the name of the user who has last Modified modified the Transition matrix By 7 Last This section displays the date on which Modified the transition matrix was last modified Date 8 Pagination Pagination options are displayed on the Options Transition Matrix Summary screen to facilitate you to choose from the available dropdown the number of transition matrices to be displayed on the screen Navigation options like First Previous Next and last is also available in form of arrow keys which navigates the user from one page to another Search This icon helps in s
77. ix Description is a text field The 3 Matrix description field should explain the particular id Description and should be a maximum of 100 characters Oracle Financial Services Software Confidential Restricted 60 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Using this Transition Matrix Definition Screen you can define a new HTM A check box with label Active is be checked by default This check box is editable It indicates if a transition matrix is active or inactive If you select the check box then this Transition Matrix would be considered while performing executions Only those HTM Definitions which are active will be processed during the HTM Run execution Data Set is a field accompanied by a browser button By clicking the button a window is displayed to select a dataset from the available datasets for HTM definition For HTM definition dataset selection is limited through the Parameter Master table reveleus_parameter_master The pre configured solution comes with two datasets like Corporate Historical Transition Matrix and Retail Historical Transition Matrix A dataset can be selected using the arrow key Once you have selected the dataset click the OK button to display the selected dataset on the Transition Matrix summary screen State Space is the form or stage in which transition happens State Space can be the rating of the customer or delinquen
78. ix provided for EIR or EIS calculation should be valid as of account origination date that is account origination date should be in between record start date and record end date of the transition matrix assigned 6 Assign Transition Matrix Transition matrix is assigned based on following parameters e Customer Type e Currency e Product This is done using Transition Matrix Assignment Rule Accordingly rating and delinquency based transition matrix data is populated for Poisson processing This is done using T2T RATING_TRANSITION_MATRIX_POPULATION and DPD_TRANSITION_MATRIX_POPULATION 7 Each rating scale or delinquency band scale has a default grade state which indentifies defaulted accounts Allowance amount is a function of transition probability to default or impairment To calculate allowance you may keep impaired state the same as default grade scale or assign some other impaired state depending on the credit policy or outlook To enable this you need to assign impaired state rating absorbing state for the transition matrix This is done using the same source hierarchies that are used for Transition Matrix assignment Transition probability for credit rating grade of impaired state rating and below will be accumulated and considered as Lamda calculation for Poisson process 8 Similarly assign impaired state delinquency band 9 Poisson process is executed to arrive at monthly transition probability It is done using Cumlt Im
79. l EIR and EIS Calculations xlsx You can decide the accounts for which EIR or EIS is required to be calculated There can be various reasons for which EIR or EIS needs to be calculated or re calculated namely new accounts and change in important contract terms and so on However except on the first day of implementation percentage of new accounts for which EIR or EIS is to be calculated is expected to be small Thus EIR or EIS can be re calculated based on your instructions taken as input during the data download stage The re calculated EIR or EIS would exist along with pre determined values but with a new as of date and status as active The LLF amp P application considers the EIR or EIS with status as active and those with the latest as of date for further computation of loan loss provision Note Upon recalculating EIR or EIS the loan loss provision for the current period would be close to NIL 2 1 4 Collective Assessment Collective assessment is combining the exposures with similar characteristics resulting in a single exposure known as a cohort Hence collective assessment is referred to as Cohort Formation in the LLF amp P application Cohort is strongly linked to the Oracle Cash Flow Engine CFE It uses all the mandatory cash flow calculation parameters as the basis of Cohort formation Charged off written off and impaired accounts are not allowed to use collective assessment Charged off accounts may require
80. l assessment is to be made Assign or reclassify a few aspects as follows Map the external rating grades to internal credit grades for transition matrices Note Only one external rating from a rating source can be mapped to only one internal rating Map the Bank Customer type to Basel Customer type used for reporting only Map the Bank Product type to Basel Product type used for reporting only Map the Bank Asset class to Basel Asset type used for reporting only 2 1 Cash Flow Based Method This method mainly involves projecting cash flows using the asset contract definition This method is applied on the financial assets for which cash flows can be generated which includes loans and Held to Maturity HTM securities In addition assets for which cash flows are projected using behavior assumptions can also be included This is a single name given to the method applicable for non impaired cash flow based products under Expected Loss and Incurred Loss approach For Expected Loss approach time horizon for which the cash flow method is applied is till the maturity of assets For Incurred Loss approach Forward Exposure Method IBNR time horizon for which the cash flow method is applied till the emergence period Oracle Financial Services Software Confidential Restricted 3 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Limitation This method is not applicable for
81. ling of the outputs Stress reports and Loss forecast and some of baseline reports are provided with a drill down option 6 1 Home page Reports The objective of the Home Page reports is to provide a glimpse of the entire outputs starting from carrying amount information to the loss forecast There are seven such classifications provided Tabular Reports The set of reports provide the details for parameters like allowance impairment transition matrices and loss forecast in tabular format You have to click the individual reports to display the same in a new browser You have to select the three filters mentioned above Oracle business Intelligence provides the following Tabular Reports Allowance for Credit Losses Basel Asset class Allowance for Credit Losses Product Type Impaired Assets Product Type Impaired Assets Basel Asset Classes Impaired Assets Line of Business Trend Reports of Provision Basel Asset Classes Historical Transition Matrix Effective Interest Rate Report Charge off Rates Product Type Predicted Transition Matrix Stress Scenario Oracle Financial Services Software Confidential Restricted 42 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Charge off Report Loss Forecast Retail Exposures Loss Forecast Wholesale Exposure Allowance for Credit Losses The report is generated at a RUN level Overall allowance value for the Run i
82. n it is only a logical delete To restore the definition change the flag There is no interface to do this activity It has to be done manually Matrix outputs are stored in FSI HIST TRANSITION MATRIX table For Corporate HTM Definition Dataset should be Corporate Historical Transition Matrix and State Space hierarchy should be Internal Rating For Retail HTM Definition Dataset should be Retail Historical Transition Matrix and State Space hierarchy should be Delinquency Band Oracle Financial Services Software Confidential Restricted 69 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Annexure E Cash Flow Dictionary Cash flow processing is executed from Oracle Financial Services Cash Flow Engine CFE This processing accesses specific fields from instrument tables to perform cash flow calculations In order for OFSA cash flow processing to generate appropriate results the data within the accessed instrument tables must be appropriate and consistent The OFSA cash flow edits function provides a measure of validation for this data However the cash flow edits function cannot ensure that the input data from the instrument tables is correct and faithfully reflects reality Therefore this chapter contains detailed information necessary for correct data population including field definitions formulas used in the cash flow process calculations and recommended default values for the cash flow p
83. nd closed accounts are excluded NOTE e New accounts are those which are not available in the last data point whereas they are available in the current data point The concept of closed account is the exact opposite of new account e Denominator is the base of the previous period This means either the total number of accounts or the sum of carrying cost is used as the denominator which belongs to the previous period At every instance transition matrix from one period to another is calculated For multi period transition matrix one needs to execute multiple times Once the institution has this set ready it needs to predict or forecast the transition matrix for future years These predicted transition matrices are used in the LLF amp P application For more information on the predicted or forecasted transition matrix see the LLF amp P Application User Manual Identifying Default State A default state is to be identified which can be a helpful tool to tweak the probability without substantial changes like changing the matrix itself Thus with the account status remaining the same it is the probability of default that gets altered You can use different combinations for different granularities For example shown below we have two choices Credit grade D can be the default state in which case no additional calculation is required If you define everything beyond B as the default state then the above matrix reduces to th
84. nding has negative values Error messages are logged into FIC DTDQ MESSAGE LOG table Data Maintenance Dataset selection in HTM UI is restricted through reveleus_parameter_master table Pre configured solution comes with two datasets namely e Corporate Historical Transition Matrix e Retail Historical Transition Matrix If you want to add new dataset an entry has to be made in the reveleus_parameter_master table Parameter Code always should be suffixed with HTRNSDS HTRNSDS lt lt any value gt gt lt lt Dataset Code gt gt Add New DataSet State space selection in HTM UI is restricted through reveleus parameter master table Pre configured solution comes with two hierarchies namely Internal Rating Delinquency Band If you want to add new hierarchy an entry has to be made in the reveleus_parameter_master table Parameter Code always should be suffixed with HTRNSH Oracle Financial Services Software Confidential Restricted 68 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 HTRNSH lt lt any lt lt Hierarchy value gt gt Code gt gt Add New Hierarchy Matrix definition 15 stored in FSI_HIST_TRANSITION_MTRX_MAST FSI HIST TRANS MTRX FILTER Transition rate is calculated based on measure definition If the measure definition aggregate function is count distinct then count distinct is used to transition rate computation If you delete the HTM definitio
85. ng as of each Cash Flow Date excluding Principle Payment as of said Cash Flow Date Expected Loss Amount Exposure at Default Loss Rate 4 Expected loss amount is calculated up to the emergence period 5 Expected cash flows are discounted to the current date using Risk Free rate assigned Allowance as of Date Sum of Expected Loss Amount at Account Level If charge off is material Provision as of Date Allowance as of Previous Date Allowance as of Current Date Net Charge off else it s the difference between two previous period allowances 2 1 3 Calculation of EIR and EIS EIR and EIS are calculated for CFE based methods Here cash flows are calculated till maturity Oracle Financial Services Software Confidential Restricted 5 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 covering the entire life span EIR is the yield to maturity calculation for expected cash flows This is calculated for fixed interest rate contracts Calculation of expected cash flows will be detailed in further sections EIS is calculated as follows This is calculated for variable interest rate contracts Effective Initial Spread Initial Contracted spread IRR Contractual Cash Flows IRR probability weighted cash flows Internal Rate of Return IRR is yield to maturity calculation for contracted cash flows The calculation of EIS and EIR are explained in the following document H
86. o be associated with the account Threshold can only be applied at product type Legal Entity and Currency level Accounts with Negative balance or 0 as carrying amount will be forced to have an allowance of 0 Loss forecasting is done for five 5 periods in case of rating based and twenty four 24 periods for DPD based excluding the current period where a period is the minimum frequency period of the transition matrix mapped For example if there are 3 transition matrices TM1 TM2 and TM3 mapped to various accounts in a run and frequency period of these transition matrices are TM1 quarterly TM2 quarterly and TM3 yearly period then forecasting is done for 5 quarters for rating based and 24 quarters for DPD based Oracle Financial Services Software Confidential Restricted 49 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Annexure C Frequently Asked Questions 1 Can LLF amp P be used with other cash flow engines instead of Oracle CFE If yes then what is required be done Oracle LLF amp P can be used with other cash flow engines LLF amp P uses Oracle cash flow engine to generate contractual cash flow at account level and cash flow as of account start date to calculate EIR and EIS If any external engine is used then cash flow generated by other engines need to be given as download in stg account cash flows table in the format as specified in download specifications For a giv
87. ocess direct accounts of the legal entity and not that of its child entities Select Consolidated if you want to process all the accounts under the legal entity and its child entities In case of Consolidated all intra group exposures are excluded Reporting Currency You can define reporting currency by selecting one in this field Allowance threshold is based on reporting currency NOTE The exchange rate is applied as defined in STG_FORWARD_EXCHG_RATES table for the respective MIS date or earliest rate available till previous five days of the pre defined source Run Parameters Windows Internet Explorer amm x si Run Details Loss Forecast and Provision Calculation Expected Loss Approach Run Name 5 Run Execution Parameters Legal Entity Consolidation Type lt Reporting Currency Audit Panel Created By SYSADMN Created Date 03 07 2013 Last Modified By SYSADMN Last Modified Date 04 25 2013 Run Parameters Screen Run Execution Parameters In addition to the Run Default parameters Run Execution Parameter window allows you to enter and save the Run execution parameters By clicking the button a batch with the entered Run execution parameters is created The batch created can be executed by clicking Oracle Financial Services Software Confidential Restricted 34 User Guide Oracle Financial Services Loan Loss Forecasting and P
88. ocessor tables have been represented in the following tables stage cards stage investments stage loan contracts stage over draft accounts Oracle Financial Services Software Confidential Restricted 25 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Others In addition to Product Processors there are other stage tables which are used to store customer and account attributes as represented in the following tables stage customer details stage customer master stage issuer master NOTE Issuer data is also expected to be in customer master table for customer reclassification purpose and to get customer specific attribute in method selection rule stage party rating details stage account cash flows Stage account inception rates stage forward exchange rates stage irc rate history stage market variables stage dpd transition matrix stage provision matrix stage rating transition matrix stage mitigants or stg collaterals stage account mitigant map or STG EXP MITIGANT MAPPINGS NOTE For EL OBP interface collateral specific tables are used For EL run Mitigant related tables are used NOTE e Transition Matrix should be complete that is all rating or delinquency bands should be there e Square Matrix that is source and destination rating or DPD band should be equal e Transition frequency unit should be consisten
89. on Rule Subprocess Table Load Table Load Subprocess Table Load Table Load Table Load Table Load Subprocess Table Load Subprocess Classification Rule Classification Rule Classification Rule Subprocess Classification Rule Data Transformation Computation Rule Run Parameter window allows you to enter and save the Run level parameters To input the run level parameters 1 Select the checkbox adjacent to the required Run 2 Click the icon from the navigation bar The Run Parameters window is displayed where you can view and input Run level parameters related to the corresponding Run You can add or modify the parameter values and store the same NOTE To modify or view the parameters the Modify Run Parameters role should be mapped to your user profile The following parameters are to be updated Legal Entity The accounts of the selected legal entity and its child entity depending on the consolidation type selected is processed to calculate provision Parent child relationship between Legal Entity will be as defined in DIM ORG STRUCTURE table Consolidation Type This field is read in conjunction with the Legal Entity field It is a dropdown box and the value could be Solo or Consolidated Select Oracle Financial Services Software Confidential Restricted 33 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Solo if you want to pr
90. or the forecasted period 5 periods 24 periods are loaded by using time homogeneous and time non homogeneous matrices For those matrices with variant frequency the Poisson process of decomposition is used to trickle down the matrices to a common platform of frequency and then loaded for the respective periods 5 Customer count amp Exposure amount LLF amp P application supports the forecast based on the customer count and exposure amount Under the given dimensions Product type Geography and so on the sum of exposures or amount of exposures are multiplied with the corresponding default values For the second consecutive period the output of the first period is multiplied with the corresponding default values and so on Oracle Financial Services Software Confidential Restricted 24 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 4 Preparing for Execution The main objective of this chapter is for you to get familiarized with the various requirements of LLF amp P before data execution This chapter is classified into the following e Data Requirements e Important Metadata Definition 4 1 Data Requirements The most important activity to commence working on the LLF amp P Application is configuration of data into the application Data can be divided into the following categories Master Data or Dimension Data This set of data includes the following Slowly Changing
91. paired Prob Calc DT You can change monthly to quarterly yearly by setting it up in Reveleus Parameter Master table by changing LLF amp PBUCKETLENGTH NOTE Frequency period of the input transition matrix should be greater than that of bucket length For example Input transition matrix cannot be monthly and LLF amp PBUCKETLENGTH as Quarterly In this case all transition matrices should have frequency period as at least quarterly or more 10 Accounts to be assessed and treated collectively are identified based on their credit rating delinquency band customer type start date interest rate cash flow pattern and other such characteristics that can affect allowance amount Cohort is formed according to such data Cohort Identification DT is used to achieve this 11 After identifying such cohorts data pertaining to accounts forming a cohort is aggregated for collective treatment This is done using T2T rule COHORT DATA POPULATION Oracle Financial Services Software Confidential Restricted 15 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 12 Loss Given Default is calculated at cohort level with relative weight of carrying amount of the account in the cohort Weighted average LGD for Collective Assessment rule is used for this 13 For an account or at a cohort level if account is part of cohort following steps are performed to calculate allowance a Pre cash flow validation
92. rate may vary based on rating and delinquency days across various counterparties products or impairment statuses Hence Provision Matrix is assigned based on the following parameters Impairment Status Customer Type Product Provision Matrix Assignment Rule is used for mapping provision Matrix The parameters required for provision matrix assignment are source hierarchies in the Rule Applicable provision rate from Provision Matrix is assigned to an account based on its rating or delinquency band using Provision Rate Assignment Rule Amortized cost is calculated using provision rate as Oracle Financial Services Software Confidential Restricted 17 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Amortized cost Carrying amount 1 Provision rate Allowance is calculated as difference between carrying amount and amortized cost NOTE Each method calculates allowance amount as of FIC_MIS _Date Recovery Rate Method Based on method selection criteria that is which has the impairment status as Y across products and customers Recovery rate method is followed Recovery rate method requires discounting of recovery amount till average recovery period based on type of interest rate Recovery amount at the time of recovery are discounted using IRR for fixed interest rate assets For variable interest rate assets discount rate is original contractual spread added to interpolat
93. re or cohort These provision matrices are either based on credit rating or delinquency bands or both 2 Apply provision rate to each exposure depending on the credit rating and or delinquency band from an assigned provision matrix Provision Matrix Assignment Rule is used for mapping provision Matrix The parameters required for provision matrix assignment are source hierarchies in the Rule Applicable provision rate from Provision Matrix is assigned to an account based on its rating or delinquency band using Provision Rate Assignment Rule Amortized cost is calculated using provision rate as Amortized cost Carrying amount 1 Provision rate Allowance is calculated as difference between carrying amount and amortized cost 2 3 Recovery Rate Method In case of impaired accounts a formula based approach is used wherein the LLF amp P application uses average recovery period and IRR of an account to calculate the provision Amortised Cost of Impaired Asset Carrying cost at Impairment 100 LGD 1 7r Oracle Financial Services Software Confidential Restricted 7 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Carrying amount Carrying amount at impairment LGD Loss given Default Original Effective interest rate given as a download that is IRR of contractual cash flows t average time to recovery 2 4 Collateral Value Based Method Coll
94. re selected the forecast period is provided for five periods excluding the current period The reports are given at two measures Total customers Total Exposure Value The period selection is displayed at the top of the report Loss Forecast for Wholesale exposures by time period The report gives the graphical representation of customer count and exposure value Accordingly the percentage report is also computed graphically Loss Forecast for Retail Exposures Based on the measure selected the forecast period is provided for five periods excluding the current period The reports are given at two measures e Total customers e Total Exposure Value The period selection is displayed at the top of the report Loss Forecast for Retail exposures by time period The report gives the graphical representation of customer count and exposure value Accordingly the percentage report is also computed graphically Oracle Financial Services Software Confidential Restricted 45 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 7 Resolution of LLF amp P Implementation Issues Data related issues can be generally classified as Initiation Date Date of initial application and Subsequent Day subsequent day being any day other than initiation date Initiation date of implementation is crucial from data perspective Few notable ones are as below e To calculate EIR or EIS transition matrix and interest r
95. redicted transition matrix and converted to suitable frequency using Poison process Largely Transition Probability may vary depending on the currency of exposure product and customer type of the account In the pre configured run transition matrix is mapped with following source hierarchy e Currency e Customer Type e Product This rule is expected to be reviewed and customized based on data and mapping strategy of the bank Oracle Financial Services Software Confidential Restricted 27 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Provision Matrix Mapping The Rules associated with this task are Provision Matrix Assignment Accounts for which cash flow cannot be predicted or not available can be treated with provision matrix method wherein provision rate is assigned to an account based on its rating or delinquency days or both If Provision Matrix given is only rating based then delinquency band given at account level if any is ignored and vice versa for delinquency based matrix Provision rate for the accounts having same rating or delinquency band may vary across products customer type or impairment status Hence Provision Matrix is mapped based on following criteria e Impairment Status e Customer Type e Product This rule is expected to be reviewed and customized based on data and mapping strategy of the bank Basel Re classification The Rules associated with
96. rocessing fields Unless otherwise stated when calculations refer to frequency or term fields in this chapter the implication is that both the frequency or term and its associated multiplier fields are used For example if N INTEREST FREQ is used in a formula it refers to N INTEREST FREQ and V INTEREST FREQ UNIT to determine the true payment frequency The cash flow processing columns have been explained in detail in the following document Oracle Financial Services Cash Flow D Oracle Financial Services Software Confidential Restricted 70 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Annexure F Product Type Mapping Each product in STG_PRODUCT_MASTER should be mapped to one of the Product Type as mentioned in the following document In addition each product type should be mapped to product sub category product category and product group as mentioned therein lt Product Types and Categories xlsx Oracle Financial Services Software Confidential Restricted 71 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Annexure G Data Flow The LLF amp P Application data flow is represented in the following diagram INPUT DATA NOTE This diagram is only for overview purpose Oracle Financial Services Software Confidential Restricted 72 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5
97. rofit or loss when the financial asset is derecognized impaired or reclassified in accordance with paragraph 5 3 2 and through the amortization process IFRS 9 Phasel PARA 5 4 2 A financial asset or financial liability is held for trading if 1 Itis acquired or incurred principally for the purpose of selling or repurchasing it in the near term ii on initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short term profit taking or iil It is a derivative except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument Security that a company intends to hold until its date of Maturity Held to Maturity The losses pertaining to exposures that have not been reported as such by the obligor Incurred Loss Approach An asset which is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset Ref IAS 36 However for the scope of this application impaired status is downloading Impairment loss is the difference between the carrying amount of the financial asset before the change in estimate and the present value of the expected cash flows of that asset after including the change in estimate that is difference between carrying amount before change and amortized cost estimated after factoring the change
98. rovisioning Release 1 5 0 0 0 Execute button To execute a Run ensure that the Execute Run role is mapped to the user profile To input the Run execution parameters 1 Select the checkbox adjacent to the required Run 2 Click the ck icon from the navigation bar The following Run execution parameters are to be updated Legal Entity Default Legal Entity set for the Run as mentioned in Default Parameters for Run can be changed for the specific execution The accounts of the selected legal entity and its child entity depending on the consolidation type selected are processed to calculate provision Parent child relationship between legal entities will be as defined in DIM ORG STRUCTURE table Consolidation Type Default Consolidation Type set for the Run as mentioned in Default Parameters for Run can be changed for the specific execution This field is read in conjunction with Legal Entity field It is a dropdown list and the value could be Solo or Consolidated Select Solo if you want to process direct accounts of the Legal entity and not that of its child entities Select Consolidated if you want to process all the accounts under the Legal Entity and its child entities In case of Consolidated all intra group exposures are excluded Reporting Currency You can define reporting currency by selecting one in this field NOTE Exchange rate will be applied as defined in STG FORWARD EXCHG RATES table for the
99. s T2T is used if Oracle Asset Liability Management ALM and LLF amp P is installed together and the current cash flow is generated using Oracle Asset Liability Management ALM and if you want to reuse cash flows of Oracle Asset Liability Management ALM AS OF DATE is FIC MIS DATE for LLF amp P to generate cash flows as on FIC MIS DATE In addition the ALM process ID should be updated in the LLF amp P T2T Oracle Financial Services Software Confidential Restricted 14 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 4 Amortized cost using EL approach is calculated when the Expected Interest Rate EIR and Expected Interest Spread EIS are as of account start date If it is not provided as a download then the application calculates the same EIR or EIS calculation indicator needs to be updated to indicate that EIR and EIS need to be calculated This flag is updated by task EIR EIS Flag Update which updates the flag to A 5 To calculate EIR or EIS as of account origination date LLF amp P needs cash flow from account origination and expected cash flow after considering the cumulative loss rate If cash flow is a download as of account start date it needs to populated using ACCT ORIGINATION CASH FLOWS DT Cumulative loss rate is calculated with the help of the transition matrix as described in the following steps NOTE If you want to calculate EIR or EIS then the transition matr
100. s and monitors the execution of Runs as batches Business Analyst This user reviews the functional requirements and information sources like reports Data Analyst This user would be involved with cleaning validation and importing of data into the Download Specification Format Administrator The Administrator maintains user accounts and roles archives data loads data feeds and so on The administrator would control the access rights of users Documentation Accessibility For information about Oracle s commitment to accessibility visit the Oracle Accessibility Program website at http www oracle com pls topic lookup ctx acc amp id docacc Access to Oracle Support Oracle customers have access to electronic support through My Oracle Support For information visit http www oracle com pls topic lookup ctx acc amp id info or visit http www oracle com pls topic lookup ctx acc amp id trs if you are hearing impaired Structure 1 Introduction Understanding Provision Calculation methods Understanding the LLF amp P Application Preparing for Execution Execution Loan Loss and Forecasting amp Provisioning Reports P Ud BS Resolution of LLF amp P Implementation Issues Annexure Related Information Sources Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 has been referred to as LLF amp P in this User Guide What s New in this Release
101. s displayed It has an additional filter on period Only when previous period data exists both the current period and previous period details are made available in the report If you do not have previous period data only current period details are displayed Allowance for Credit Losses by Line of Business The report displays allowance values across Lines of Business LOB level in a tabular format You are supposed to select the period filter and click the Apply icon to see the previous period data In addition you can opt for a more granular view by drilling down till account level For each level of drill through corresponding filters need to be selected separately Allowance at Product Type level The report is viewed filtering LOB and Product type This allows you to interpret the allowance amount at each product type level at LOB level Allowance at Product Level The report is viewed filtering LOB product type and product level This allows you to interpret the allowance amount at each product level falling under a particular product type and Line of Business Allowance at Account Level The report is viewed filtering LOB product type product and Account level This allows you to view the allowance at the most granular level of account Allowance Account Trend This report allows you to interpret the allowance values at Asset Class Level The list of Basel Asset Class is displayed in the drop down You can select the Asset class and the
102. s that 60 of the total numbers of Banks have moved from rating AAA from 1996 to AAA 1997 the same logic applied for other years also This movement of ratings is termed as transition and the table which shows this transition over years at a group level is known as Historical Transition Matrix Historical Transition Matrix AAA AA A BBB BB CCC aaa 0 13333 006667 0 13333 006667 o o aa 0 17391 013043 00861 o o o o a ous ous osos oes oos o o 00556 016667 osi 0 00556 o o used p doge Jp x o o oms 0009 054545 0 09091 Oracle Financial Services Software Confidential Restricted 55 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Historical Transition Matrix HTM generation is delivered through the Oracle Financial Services Analytical Applications Infrastructure OFSAAT You can build your own HTM definitions using HTM User Interface You can generate the HTM values for the past period by executing the Run Historical Transition Matrix HTM can be defined as a Rating Based Matrix and Delinquency Band Based Matrix Rating Based Matrix In Rating Based ratings are the row category and column category Generally these types of matrices are generated for corporate counterparties Number of counterparts and the outstanding e
103. sk are Collective Assessment Assignment Rule Cohort_Identification DT To improve overall process efficiency to generate cash flow accounts having similar characteristics typically small in value and large in volume accounts like retail accounts are grouped together to form a cohort Cash flow and allowance is then calculated at cohort level Amortized cost and allowance calculated at cohort level is allocated back to account level based on allocation factor of an account Allocation factor is typically carrying amount of an account in the cohort Gross Charge off Threshold The Rules associated with this task are Charge off Materiality Assignment This rule sets materiality flag based on for gross charge off amount to be considered for Provision calculation Oracle Financial Services Software Confidential Restricted 29 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 5 Execution The main objective of this chapter is for you to get familiarized with the data execution process This chapter is classified into the following e Data Quality Framework e Run Management 5 1 Data Quality Framework Data from stage table is checked for quality of data Any erroneous data that is not processed and are reported in log file SCD is executed in following order 1 DIMENSION DATA POPULATION 2 MARKET DATA POPULATION 3 ACCOUNT DATA POPULATION 4 MITAGANT MAP DATA POPULATION 5
104. sting and Provisioning Release 1 5 0 0 0 e Cash flow based Method Provision Matrix Method Recovery Rate Method e Collateral Value Based CVB method The Incurred Loss Run applies any one of the following methods to an account e Cash flow Based Method Provision Matrix Method Recovery Rate Method NOTE Provision Calculation method is expected to be changed 3 1 1 Expected Loss EL Approach EL Approach consists of the following major business processes 1 Basic Procedure Expected Loss Method Provision Matrix Method Recovery Rate Method Collateral Value Based CVB Method Net Charge Off Calculation Provision Calculation 9e fX Ov Re S9 dg Currency Conversion Basic Procedure The basic procedure is as follows 1 Load the setup data and Run data as mentioned in chapter 4 Preparing for Execution 2 Baselreclassification Rule is used to map the bank s customer type and product type to Basel Customer Type and Basel Product Type respectively It is used for reporting purposes This is done using the following reclassification Rules e Basel Customer Type Re classification e Basel Product Type Re classification e Basel Asset Class Re classification 3 Methodology is selected based on following source hierarchies e Product Type e Account Status Indicates Accrual Status Write Off Indicator Closed Account Indicator and other statuses e Days Past Due DPD band e C
105. t across time periods that is if it is yearly transition matrix given for 2 periods then it should be 2 yearly transition matrices Any other combination like 1 year and 4 quarters and so on is not valid e Transition Matrix should be available for a continuous time period starting from period 1 that is if transition matrix is available for 3 years then it should be for first three consecutive years In case of external rating transition matrix rating source and external to internal mapping is mandatory For more information on the list of columns and tables to be populated within each table refer to the Download Specifications document After data population to stage and setup table follow the Run Chart 4 2 Important Metadata Definition Rating Re classification It populates rating data and reclassifies external rating to internal rating Data population is done Oracle Financial Services Software Confidential Restricted 26 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 using T2T and reclassification is done using a Type 2 rule External Rating to Internal Rating Re classification Current Application supports only 1 1 mapping of External Rating to Internal Rating This rule is expected to be reviewed and customized based on internal rating and mapping strategy of the bank NOTE As each rating has its unique characteristics it is required to map each external rating to a un
106. tail 1 Select the filter hierarchy Line Of Business 2 Select the Retail node of the hierarchy while processing it will pick on the LOB Retail data and calculate the transition probability for this definition 3 Click the OK button to display the selected hierarchy on the Transition Matrix definition screen The selected hierarchies would be displayed as a hyperlink on the screen 4 Click the hyperlink of any of the selected hierarchy to sub filter This would replace the No Element Selected with the selected hierarchy The Add icon displayed on the right side of the selected hierarchy will become active 5 Click the Add icon to display the available hierarchies You can select single or multiple hierarchies 6 Click the OK button to display the selected hierarchy hierarchies on the Transition Matrix definition screen 9 Audit Trail Audit Trail panel displays the following columns Created By ast Modified By Creation Date Last Modification Date The purpose of this panel is to provide the details of the user who has created or modified a transition matrix as on date This detail would be seen only when the transition matrix has been created and you want to view or edit the id details It also has a user comments tab where you can write any comments as part of transition matrix creation or for reference Transaction Matrix Definition Screen Overview Define HTM Oracle Financial Ser
107. the exact opposite of new account Denominator is the base of the previous period This means either the total number of accounts or the sum of carrying amount is used as the denominator which belongs to the previous period At every instance transition matrix from one period to another is calculated For multi period transition matrix one needs to execute multiple times Once the institution has this set ready it needs to predict or forecast the transition matrix for future years These predicted transition matrices are used in the LLF amp P application For example Assume internal rating is from AAA to D in the order of credit rank with AAA as most sound and D as rating for defaulted assets If you keep the rating D as impaired state rating then the transition probability from AAA to D will be considered as probability of impairment for exposure having AAA rating If you keep a rating better than D say as impaired state rating then all the ratings from to D both rating inclusive in the order of credit rank will be considered as impaired state rating The transition probabilities from to and to all other rating between and D C C will be aggregated and considered as probability of impairment for exposure having AAA rating 2 7 2 Poisson Calculations Poisson calculations are used to convert the probability from one frequency to another For example if the Transition Matrix frequency is annually and we are
108. this task are Basel Customer Type Re classification Basel Product Type Re classification Basel Asset Class Re classification For regulatory reporting and consolidation purpose bank product and customer needs to be re classified to Basel product type and Basel customer type respectively In addition Basel customer type and Basel Product Type are reclassified to Basel Asset class for future purpose of regulatory capital calculation and reporting This rule is expected to be reviewed and customized based on data and mapping strategy of the bank Impaired State Identification The Rules associated with this task are Rating Impairment State Assignment DPD Impairment State Assignment To allocate probability of transition to impairment for an account impairment state should be identified Transition probability of rating identified as impaired state and below will be aggregated to be counted as impairment probability Impaired state may vary depending on the various factors of an account In pre configured rule impaired state is identified based on the following e Currency e Customer Type e Product Oracle Financial Services Software Confidential Restricted 28 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 This rule is expected to be reviewed and customized based on bank s strategy to identify the impaired default state Collective Assessment The Rules associated with this ta
109. ts number of accounts as a measure for calculating delinquency band based transition rates the final output gives the count of the transition of accounts across delinquency band in the form of transition rate over the period at a group level When EOP Outstanding is selected as the measure for calculating delinquency band based transition rates the final output would provide the Sum of the transition amount as of current period across delinquency band in the form of transition rate over the period at a group level Viewing an HTM To view a particular transition the check box displayed next to Transition matrix id and click in the Transition Matrix summary screen refer Figure 9 NOTE Multiple selection of transition matrix is not possible On multiple selections the View icon will be disabled You will be directed to the Transition Matrix Definition screen to view the details of the selected Transition matrix This screen is non editable Refer figure 11 Click Close to return to the Transition Matrix Summary Screen Oracle Financial Services Software Confidential Restricted 63 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Transition Matrix Definition x gt Transition Matrix Definition amp Transition Matrix Details Transiti Name n Matrix Description Dati State Space State Space Transition Basis Filter No Element Sel
110. ulative Loss rate It is calculated by a type 3 rule Expected Loss Calculation 9 Discounting rate used in Forward Exposure Method for discounting future cash flow is risk free rate This is assigned using a rule Periodic Discount Rate Calculation Oracle Financial Services Software Confidential Restricted 21 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 10 Calculate discounting factor using risk free rate This is done using Periodic Discount Factor Calculation rule 11 Present value of Expected Loss is calculated by discounting each cash flow with the discounting rate This is done by multiplying cash flow with discounting factor Loss Amount Present Value Calculation rule does this task 12 Allowance as of date is calculated as sum of Present value of Expected Loss Amount at account level This is done using a type 3 rule allowance calculation using Forward Expected Loss Individual Assessment 13 For collectively assessed exposure allowance is calculated at cohort level and then apportioned to account level as per allocation factor a Allowance is calculated at a cohort level as sum of Present value of Expected Loss Amount This is done using type 3 rule Allowance calculation using Forward Expected Loss Collective Assessment b Allocation factor is calculated as per proportion of carrying amount of an account in the cohort This is done using Allowance Allocation Factor Cal
111. unt threshold is denominated Charge off amount threshold is in account s Natural Currency User has the flexibility to set the threshold currency wise also by selecting currency as source hierarchy in the rule Can user give average recovery period for monthly quarterly or yearly period Average recovery period can be in Days Months or Years Can user give emergence period for monthly quarterly or yearly period Emergence period can be in Days Months or Years Why charge off materiality flag is calculated based on Gross charge off and not based on net charge off which would consider recoveries as well Charge off materiality flag helps in deciding whether particular exposure to be considered as charged off instance of default or not Whereas whether recoveries are done or not does not impact this decision it helps to arrive at actual LGD Does LLF amp P calculate carrying amount based on amount of principal outstanding write off interest and other such component that could potentially form carrying amount Oracle Financial Services Software Confidential Restricted 52 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 While we take these individual components as download it is left to the user to arrive at carrying amount based on their accounting requirement Presently carrying amount is EOP Balance 33 Can collective assessment be used when cash flow for all accounts is provided
112. ustomer Status Indicates Bankruptcy Indicator and Fraud Indicator e Account Based Provisioning Approach Indicator Preferential method assignment indicator Oracle Financial Services Software Confidential Restricted 13 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 e Carrying Amount Band e Cash Flow Approved Indicator e Customer Type e Impairment status a Cash Flow Based Expected Loss EL method is mapped using the Rule Provision Calculation Methodology Selection EL Run For Non retail customers this method can be used b Provision Matrix method is mapped using the rule Provision Calculation Methodology Selection IL Run for the following Source Non Impaired Asset AND Customer Type AND Product OR Impaired Asset AND High Net Worth Individual AND Credit Cards OR Impaired Asset AND Corporate Small AND Overdraft OR Impaired Asset AND Corporate Medium AND Overdraft OR Impaired Asset AND Corporate Large AND Cash Credit Method Override Assume a customer has many accounts If any one account is treated by CVB method then all the other accounts should be treated by CVB method meant for mortgage loans and other retail loan portfolios It is assumed that same customer will not have same product type if shared across legal entity Among all the accounts mapped to CVB method if the collateral is shared across accounts of different product types then the associated a
113. ven point Ensure that the Modify Run Parameters role is mapped to the user profile To view the existing Run details 1 Select the checkbox adjacent to the required Run 2 Click the amp View icon from the navigation bar The window displays the details of the Run and the details relating to the underlying processes and the rules if any amp List of Runs oe 1 to 3073 Run Type Created By Create Last Modified Last Modified Date and Provision Calculation Expected Loss BASELINE RUN SYSADMN 03 07 2013 SYSADMIN 04 25 2013 m Calculation Expected Loss SYSADMN 0422522013 m and Provision Calculation Incurred Loss BASELINE RUN SYSADMN 03 07 2013 Oracle Financial Services Software Confidential Restricted 32 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Run Management Summary gt gt Run Definition View Mode Linked to Folder LLFPSEGP Master Information Properties D 1362638022900 Version 1307062279559 Active Loss Forecast and Provision Calculation Expected Loss Approach Type Base Run Detail Information E Loss Forecast and Provision Audit Trail Comments Audit Trail Created Last Modified By Last Authorized By RATING RE CLASSIFICA RATING CODE POPULATI External Rating to
114. ver the degree of pain may be categorized as per the required medication which depends on the degree of pain Consider a Poisson Process fN t where in addition to observing an event the event can be classified as belonging to one of r possible categories Define Ni t no of events of type i during 0 t fori 1 2 r N t N1 t 2 0 Nr t This process is referred to as splitting the process The LLF amp P Application makes use of this property to arrive at n period probability from a given Transition matrix This method is used to calculate monthly probabilities from the annual transition matrices Marginal Transition Matrix Vs Cumulative Transition Matrix Cumulative Transition Matrix refers to the cumulative which includes transitions from previous years as well Marginal Matrix refers to transitions that are incremental or only one unit of time at a time Generally Cumulative Transition Matrices are used when you are required to compute at the transition rates at the end of period n whereas when you want to analyze incremental defaults marginal transition matrices are used In the LLF amp P Application if you want to calculate provision at exposure level for each time period like each year individually throughout the life time of the asset then factors like discount rate for the same cash flow makes a considerable impact on the overall amortized cost compared to discounting from chosen milestones like 3 ye
115. vices Software Confidential Restricted 62 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Once all the above mentioned fields are populated with mandatory values click the Save button This Transition matrix is now displayed in the Transition Matrix Summary screen To exit the screen without saving the data click Cancel button This will direct you to the Transition Matrix Summary screen without creating any transition matrix NOTE Transition Basis is of two types Transition basis Corporate Historical Transition Matrix For corporate credit exposure in LCY and number of corporate customers measures are available in the transition basis browser window When a customer selects number of corporate customers as a measure for calculating internal rating based transition rates the final output gives the count of the transition of customers across the ratings in the form of transition rate over the period at a group level When credit exposure in LCY is selected as the measure for calculating internal rating based transition rates the final output would provide the Sum of the transition amount as of current period across the ratings in the form of transition rate over the period at a group level Transition basis Retail Historical Transition Matrix For Retail number of accounts and EOP Outstanding measures are available in the transition basis browser window When a customer selec
116. x mapped to the accounts is used for Loss Forecasting In addition same matrix is used for Provision calculation in Cash flow based approach Is account mapped with PMM RRM considered for loss forecasting computation Yes all accounts mapped with Transition Matrix are considered for Loss Forecasting irrespective of approach mapped Does LLF amp P compute the EIR EIS for impaired state accounts No LLF amp P does not calculate EIR EIS for accounts mapped to Recovery Rate Methodology and Provision Matrix Methodology EIR EIS are calculated only for the accounts mapped to Expected Loss Methodology Cash Flow Based Can user use the calculated EIR EIS in the future execution runs Yes it can be used for future execution by maintaining in Account Inception Table Calculated EIR EIS can be posted in FSI ACCOUNT INCEPTION RATES using batch name PROCESSED DATA MAINTENANCE and Task Name Processed Data Maintenance Is overnight rate 1 Day mandatory for Interest Rate Curve Yes Is Risk free IRC mandatory for IL Run Yes Discounting of cash flow till average recovery period is done using risk free rate Can you use the cash flows to generate in EL to IL Run The generated cash flows can be re used by populating those values back to the stage table Then it will be considered as a download and would not be recalculated Batch Name 1 PROCESSED DATA MAINTENANCE and Task Name Stage Cash Flow Population In which currency charge off amo
117. xhausted The waterfall approach is explained with an example in the attached worksheet Oracle Financial Services Software Confidential Restricted 9 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 Al Example xlsx 2 5 Allowance Threshold Threshold is checked against the sum of allowance across accounts for a customer and product type combination Since the product type is one of the source hierarchies it is assumed that the underlying accounts would have undergone same provision calculation method Eligible Allowance amount for the underlying accounts can be considered as 0 if sum total of the allowance of its account set at which threshold was checked is less than or equal to the given threshold Eligible Allowance is the same as the allowance if sum total of allowance of its account set at which threshold was checked is greater than the given threshold Threshold amount is assigned through rule at Legal Entity Product type and Reporting Currency level 2 6 Provision Amount Calculation Provision is calculated as a difference between allowance of current period and allowance of previous period The provision calculation is based on f_Chargeoff_Materiality_Flag If the flag is then the formula is Provision at time t Allowance at time t Allowance at time t 1 Net Charge off And if the flag is N then The formula is Provision at time t Allowanc
118. xposure measures are used for transition probability computation Delinquency Based Matrix In delinquency based delinquency bands are the row category and column category Generally these types of matrices are generated for retail exposures Number of accounts and outstanding exposure measures are used for transition probability computation There are five roles and functions supported by the HTM UI as follows ADMIN An important function a user group having access to this function is allowed to access the HTM UI Function code is HTRNSADMIN NEW This function allows you to create any HTM definition Function code is HTRNSNEW VIEW This function allows you to view any HTM definition Function code is HTRNSVIEW EDIT This function allows you to edit HTM definition Function code is HTRNSEDIT DELETE This function allows you to delete any HTM definition Function code is HTRNSDEL Role and Function mapping are available as part of the pre configured solution A User Group can be mapped to any of the functions as required However the Admin function is a mandatory function to access the HTM user interface These functions are at a user group level In the pre configured solution a user group is mapped to all the functions Transition Matrix HTRNSADMIN Admin Delete transition HTRNSDEL Matrix Edit Transition HTRNSEDIT Matrix Add Transition HTRNSNEW Matrix View Transition HTRN
119. y band customer type start date interest rate cash flow pattern and other such characteristics that can affect allowance amount Cohort is formed according to such data Allowance and provision amount is calculated for cohort and then allocated back to account level using carrying amount as allocation factor If we provide only rating based Provision Matrix then is it compulsory to provide rate for delinquency band as well In case of rating only provision matrix delinquency band is considered as missing value 0 and delinquency band of the account is not considered for provision rate assignment Are there any conditions on Transition matrix data download in Oracle LLF amp P Transition Matrix should be Complete e Square e Transition frequency unit should be consistent across time periods Oracle Financial Services Software Confidential Restricted 50 User Guide Oracle Financial Services Loan Loss Forecasting and Provisioning Release 1 5 0 0 0 10 11 12 13 14 15 16 17 18 19 e Transition Matrix should be available for continuous time period starting from period 1 In case of external rating transition matrix rating source and external to internal mapping is mandatory For more information refer to the DL Specs Can cash flow be generated for revolving products Yes cash flow can be generated for revolving products using payment patterns Following Pre configured payment patterns are
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