2DRR Flashcards
(26 cards)
What is the LGD?
The percentage of principal expected to be lost in the event of default calculated as the average of several default simulations.
Why did the bank adopt the 2DRR?
To make the bank more competitive and more accurate.
The bank is required to use an objective risk rating system in order to qualify for lower regulatory capital requirements
What is the adjusted EDF?
It is the EDF after adjustments for industry position and management assessment
How does the 2DRR impact pricing?
The EDF and LGD are combined to determine economic capital requirements which in turn help determine facility pricing requirements
What provides the basis for probability of default?
Corporate borrower with agency rated debt outstanding
RiskCalc
Credit edge
How is public debt rating information used?
It is combined with credit edge and entered directly into the model. The assumption is that debt rating agencies have access to more information about the borrower than what is reflected in financial statements.
Where does RiskCalc apply?
Institutional banking
Middle market
Business banking transactions of sufficient size
Healthcare (Non-real estate lending)
Certain types of private banking transactions
When should RiskCalc not be used?
LOB Exceptions:
Commercial real estate and real estate construction
Healthcare (where real estate is the primary asset)
Public-sector entities
Business banking less than $1 million in aggregate exposure
Production agriculture and dairy
Private banking
Industry Exceptions:
Financial services companies (including lessors)
Nonprofit enterprises
Foreign companies (except Canadian)
Companies that employ a cash basis accounting method
Contractors (using percentage of completion accounting method)
Does LGD incorporate any adjustments for industry?
Yes.
How does the LGD calculation classify liabilities?
Super senior (Tax liabilities, legal liabilities) Senior secured Junior secured Bank debt Unsecured Subordinated
What is “enterprise view of loss”?
Enterprise view refers to the fact that the 2DRR model considers all assets and liabilities of the borrower to estimate LGD
Does the model include off-balance sheet assets and liabilities?
Yes, the analyst must include them in the model
Should the model include not our debt?
Yes.
What is the waterfall calculation?
For each level of liability, the liability is repaid with the following calculation: Each "repayment" is proportionally distributed among all accounts in each class of assets. A $1MM super senior liability is repaid with $0.625MM of AR (out of $5MM AR total) and $0.375MM Inventory (out of $3MM inventory total)
Super senior is repaid with unpledged assets with any remaining balance paid from pledged assets
Liabilities with guarantees are first paid from the guarantee. If the guarantee is $2MM, then a $12MM LOC and an $8MM term loan each get $1.2MM and $0.8MM, respectively.
Then liabilities with pledged assets are repaid. If any portion of the liabilities are left over, the model considers those portions unsecured.
Then liabilities with blanket liens. Any portion not covered is unsecured.
Any left over assets cover unsecured liabilities.
Any assets left over after unsecured liabilities repay subordinated debt.
Why markings as on or off balance sheet?
To prevent any double counting
What is the EAD?
It is the exposure at default. Calculated as Outstanding balance + LEE% [Loan Equivalent Exposure] * Unused Commitments.
Where do the LEEs for Fx, interest or commodity swaps, and other derivatives come from?
There are two options:
But the easiest way is to have LEE of 100%, and LEV as total commitment with 0 outstanding.
What is a facility group?
A facility group is created for each group of obligations with the same collateral support.
What are the special rules for mortgages?
Mortgages should be entered whether or not they are with us and whether or not they are first or second mortgages. Second mortgages must be denoted as junior debt.
If facilities are secured by blanket lean, but corporate assets include mortgaged real estate, then a separate facility group should be created for the mortgages and associate real estate collateral. Whether or not the mortgages are with key.
Should non-key debt with prior or equal claim to the same collateral be included in the list of obligations?
Yes. Including lines of credit. For syndications, include aggregate borrowing amounts, not just our share.
What balance should the 2DRR user use to fill out the 2DRR?
The model user should always use the most current information when completing the 2DRR. The user may also need to adjust the corresponding financial statement value if the facility outstanding balance or collateral value changes significantly from the financial statement date.
Which assets require frequent adjustment?
Intangible assets and related party assets.
What liabilities typically require adjustment?
Any current facility outstanding balances or collateral values. Further it should be verified that all obligations have been imported to their appropriate levels.
Does the model treat a blanket lien differently than a blanket lien on all assets including but not limited to AR, Inv, and machinery and equipment?
Yes. An all assets filing is secured by blanket lien. The second, with Ar, Inv, and M&Equip is secured by pledged assets + blanket lien.
