Case Study

Over 500 credit risk models validated annually for a global financial services company

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Large U.S.-based financial services company

Financial services

Business need addressed:
Ongoing periodic validation of ~500 credit risk models in place globally, based on quantitative and transparent metrics

Genpact solution:
Genpact set up model validation frameworks including performance monitoring and review of changes to source systems, market conditions and material revisions for both Probability of Default (PD) and Loss Given Default (LGD) models. The process was set up to validate these periodically according to the regulator’s standards.

Business impact:

  • Risk and compliance
  • Standardization and simplification

A Global financial major wanted to create a center of excellence that would validate the many credit risk models used globally. With its extensive experience in risk analytics, Genpact has helped validate and re-calibrate over 500+ models with exposures ranging from $300,000 to $40Bn across portfolios annually.

Business challenge

The headquarters of a large U.S.-based financial services company required periodic validation of all of its existing credit risk models globally. Key requirements included:

  • Periodic validation of all PD models for various products based on actual default behavior
  • Remapping/calibrating the PD/score to an internal rating scale, using the latest available data to enable consistent risk measurement across the portfolio
  • Periodic validation of all LGD models based on uniform, quantitative and transparent metrics

Genpact solution

The Genpact team refined the PD validation framework and conceptualized and established the LGD validation framework along with the client, setting up a process to periodically validate all models in keeping with regulatory standards. Key activities included:

  • Model performance monitoring (benchmarking, outcomes analysis, override/exception analysis)
  • Periodic model review of changes to source systems, market conditions and material revisions

Business impact

  • 500+ models (including PD, LGD and ALLL models) validated annually
  • Model types included statistical, judgmental and combination models, covering exposures ranging from $300,000 to $40 billion
  • Models validated across products (loans, leases, non-equity securities) and asset class (factoring, inventory financing, franchise financing)
  • More than 33% of the models validated are large exposure models with exposure > $300 million

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