The Forward Looking Model for credit risk applied by Crédit Agricole: a strategic response to the new prudential regulation

Abstract

After analysing the structure and characteristics of credit risk measurement systems, this Paper aims to shed light on the repercussions that new regulations – i.e. the new Calendar Provisioning requirements, the IFRS9 accounting standard and the new Definition of Default – will have on lending institutions’ credit costs, asset quality and operating strategies. In particular, by analysing Crédit Agricole Italia’s proprietary Forward Looking system, this Paper aims to describe how such repercussions could be avoided by preventing the default of corporate counterparties so as to ease the pressures on the NPL portfolio, especially in terms of i) number of default procedures, ii) length of the recovery process and iii) costs (being there operating costs, provisioning costs and impairments costs).