Effective and robust forecasting allows greater understanding of portfolio risks and supports efficient capital planning. Benefits of forecasting include the ability to identify emerging risks and provide greater confidence in future risk metrics included in financial planning. For IRB organisations, it should be a key component of the use test.
Effective forecasting models should allow the production of accurate forecasts for a range of financial metrics including:
Credit RWA (standardised and/or IRB)
IFRS 9 impairment allowance
Loan impairment charge
Additionally, dependent upon the chosen methodology, it should also be possible to utilise the forecasts for collections capacity planning.
4most have generally developed combined forecasting and stress testing solutions incorporating sophisticated methodologies for both portfolio dynamics (new business, maturation) and macro-economic factors.
We have undertaken stress testing/forecasting developments, designs and validations for several clients across all portfolios and asset classes. Our stress testing developments are tailored to the client’s requirements, allowing full customisation to the portfolio behaviour, IFRS 9 model methodology and RWA approaches.
The preferred method is to develop granular simulation approaches as this allows detailed reporting at the point of forecast creation. This therefore reduces future analytics effort in understanding movements in actuals versus expectations.
As well as building forecasting models, we offer support with the development of forecasting frameworks. These are critical to ensure that maximum value is gained from the development of a new forecasting tool.
We can help you with the following elements in developing your forecasting framework:
Documented and agreed, information and process flows for product development and planning cycles
Governance documentation templates for approval of product development and planning cycles
Guidelines for model monitoring and parameter refresh
Data templates to ensure consistent and efficient information transfer
Training to all areas of the business on the model methodology overview and its uses.