Latest White Paper On Credit Transition Matrices Now Available To Download

For CECL and IFRS9 accounting, the choice of credit transition matrix and default probabilities is crucial and may have a significant impact on the final reserving required. The latest Credit Benchmark white paper demonstrates some of the key issues in choosing credit transition matrices:

  1. Market-implied PDs contain significant risk premiums, depending on credit category: these will tend to overstate impairments.
  2. Simple PD extrapolation may overstate or understate impairment, depending on credit category and the structure of the comparison matrix.
  3. Transition matrices derived from Rating Agency long run averages may understate impairment if the current PD volatility level is above the long run average; they will overstate impairment if the current PD volatility level is below the long run average.
  4. Crowd-sourced credit transition matrices based on broad, deep and frequently updated credit views address some of these shortcomings, providing:
    1. Real World PDs (undistorted by risk premium)
    2. Cumulative PDs which reflect the upgrades and downgrades embedded in the matrix (ignored by the so-called ‘survival’ approach)
    3. Frequently updated PD volatility and transition estimates from a very large underlying pool of 250,000 obligors
    4. Region and Sector specific PD volatilities and transition matrices

The paper is available to download here

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Credit Benchmark brings together internal credit risk views from over 40 leading global financial institutions. The contributions are anonymized, aggregated, and published in the form of consensus ratings and aggregate analytics to provide an independent, real-world perspective of credit risk. Risk and investment professionals at banks, insurance companies, asset managers and other financial firms use the data for insights into the unrated, monitoring and alerting within their portfolios, benchmarking, assessing and analyzing trends, and fulfilling regulatory requirements and capital.