This large Latin America Multilateral Development Bank offers financial support to promote sustainable development and regional integration of Latin American and Caribbean countries.

The bank's Credit and Investments Risk Management team embarked on a journey to establish and formalize a comprehensive credit scoring approach throughout the organization. The bank aimed to implement a dual risk rating system, generating Probability of Default (PD) scores and Loss Given Default (LGD) estimates. Beyond this, the bank was eager to incorporate scenario analysis, considering forward-looking macroeconomic conditions to more reliably capture losses. By leveraging all these insights, they aimed to precisely estimate capital requirements and further enhance their strategic planning capabilities.

Credit and Investments Risk Management team embarked on a journey to establish and formalize a comprehensive credit scoring approach throughout the organization.

Pain Points

The Credit and Investments Risk Management team faced the challenge of estimating capital requirements for their diverse portfolio, spanning various asset classes such as corporates, project finance, local and regional governments (cities, states, provinces, etc.) and financial institutions. Seeking a consistent framework to encompass all exposures, they lacked extensive internal default data and recovery data crucial for constructing robustly calibrated and validated models.

Moreover, the bank aspired to analyze credit risk profiles (PD and LGD) considering the local dynamics and the differences between countries in Latin American and the Caribbean. Given their strong commitment to Sustainability, they aimed to introduce a methodology that consistently assessed creditworthiness evaluating the impact of Environmental, Social, and Governance (ESG) factors on credit. Due to regulatory compliance, transparency and a well-documented approach emerged as a crucial requirement, emphasizing the need to comprehend the primary drivers of credit scores.

The Solution

S&P Global Market Intelligence discussed a framework that could provide a globally accepted methodology to transparently capture credit risk and accurately estimate capital requirements. The approach uses:

• S&P Global Market Intelligence’s PD Credit Assessment Scorecards: The Scorecards are Excel^®-based tools that use forward-looking qualitative factors, converging trends, and relationships between key drivers to derive PD scores.  The scores are broadly aligned with S&P Global Ratings criteria and are further supported by historical default data back to 1981.
• S&P Global Market Intelligence’s ECL impairment overlay: This overlay incorporates macroeconomic conditions, as well as market information, to adjust the Scorecard PD output. The adjustments consider reasonable and supportable current and forward-looking information to ensure that the Scorecards can produce one-year and lifetime point-in-time (PiT) PD estimates.
• S&P Global Market Intelligence’s LGD Credit Assessment Scorecards: These Scorecards are designed to estimate LGD, which is a PiT estimate reflecting current economic conditions and capturing the fact that default during an economic downturn is typically accompanied by lower recoveries.

The S&P Global Market Intelligence Scorecard solution would enable the team to:

	Microsoft Excel based model	Provides a consistent and transparent framework for calculating credit risk
	Identification of Default Risk	Through a granular 20-point scoring scale. Users can generate PD values for their complete portfolio and perform sensitivity analyses, scenario analyses, and stress tests
	Scores that are designed to broadly align with S&P Global Ratings1	Scorecard numerical scores that are broadly aligned with S&P Global Ratings’ criteria and further supported by historical default data from 1981.
	ESG factors’ impact on creditworthiness	ESG credit factors are considered in detail, enabling the bank to assess their impact on credit risk while working through the regular credit assessment process. For each of the three ESG dimensions (environmental, social and governance), key ESG credit risk factors are those that can materially influence the creditworthiness of an entity and for which there is sufficient visibility and certainty.
	Technical documentation	Describes the analytical/ statistical processes used to develop a Scorecard, identifies the data used in construction and provides testing performance results. Performance testing with 75% of a Scorecard’s outputs on average being an exact match, or within one notch of, the S&P Global Ratings’ credit rating.
	Scorecard implementation and application training workshops	To quickly get up to speed in credit analysis of the different asset classes implementation workshops are conducted in you preferred/native language.
	Ongoing analytical and operational support	Training and ongoing analytical assistance to help groups understand the range of available capabilities and continue to get the most out of the solutions.

Key Benefits

Members of the Credit and Investments Risk Management team saw the Credit Assessment Scorecards as a way to formalize a comprehensive credit scoring approach throughout the organization. The team now benefits from having:

• • An off-the-shelf, transparent and intuitive credit assessment framework based on the credit rating methodology.
  • Productivity gains with a fully developed and globally implemented scoring solution. Users can automate the spreading of financial data with an Excel Plug-In feature to eliminate time-consuming data entry and model adjustments.
  • Outputs that can be mapped to S&P Global Ratings' letter scale and observed defaults back to 1981, or the company’s own internal scale.
  • Methodological transparency reveals all risk factors, weights, benchmarks and scoring algorithms.
  • Technical documentation describing the analytical/statistical processes used to develop the Scorecard, identifying the data used in construction and providing testing performance results.
  • Market Intelligence’s annual review process, which validates models to maintain performance and reflect updates in the User Guide.
  • Global sector-specific coverage: The Scorecards provide globally applicable sector and geographic coverage for all major asset classes.
  Training and ongoing analytical assistance to help groups understand the range of available capabilities and continue to get the most out of the solutions.  

To learn more about how we help Development Banks of all sizes optimize estimating capital requirements, speak to the team here.