Risk modelling and ECL calculation
Financial institutions as well as non-financial institutions with significant exposures to risk assets need to do risk modelling for their portfolios. They also need to do ECL calculations on their exposures - as required by the financial institutions regulatory framework, as well as by accounting standards like IFRS 9. However, the issue is not only regulatory as risk assessment is vital for the operational effectiveness and overall risk performance of any financial institution. That is why proper risk modelling is important for operational purposes as well. There are many statistical methods employed in risk modelling - starting from the basic 12 month PD calculation and calculating ECL from it to using more complex models for risk estimations such as decision trees, scorecards and other advanced ML algorithms. In any case proper risk modelling is essential, especially in more turbulent economic environments like the one we have now. Analytical tools are a great way to model risk and provide a much deeper understanding of risk in your institution.