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Argo Magazine

2023 Download Area
Argo Magazine N.24 2023
Cover of the article Argo Magazine N.24 2023

Issue N. 24-2023

Incremental Valutation Frameworks

Advances in Incremental Valuation of Financial Contracts and Definition of the Economic Meaning of the Capital Value Adjustment (KVA)

Environmental, Social, and Governance Risks

Market Risk Modeling Extension with Climate and Environmental Risk Factors

Credit Risk

LGD Stress Testing: a Bayesian Averaging Modeling Approach

Interest Rate Risk on the Banking Book

Managing IRRBB: Overview of the New EBA Guidelines and the Importance of an Advanced Sight-deposits Behavioural Model

Argo Magazine N.23 2023
Cover of the article Argo Magazine N.23 2023

Issue N. 23-2023

FinTech

Quantum Monte Carlo Option Pricing

Model Risk Management Principles and the Impact of Machine Learning Models

Climate Change Risk

Network Analysis Applied to the Euro Stoxx 50: Impact of the ESG Score on the Stock Market

AML/CFT Risk - Italian Regulatory Framework

Riciclaggio e Finanziamento del Terrorismo: Normativa ed Evidenze

2022 Download Area
Argo Magazine N.22 2022
Cover of the article Argo Magazine N.22 2022

Issue N. 22-2022

Climate Stress Test

ESG Climate Scenarios: a Dedicated Framework

Advancements in Bank Stress Tests: from Bayesian Averaging to Causal AI

Market Risk

Real-time CCR Exposures and xVAs: a Neural Network Approach

FinTech

CBDC - Exploring a New Digital World

Argo Magazine N.21 2022
Cover of the article Argo Magazine N.21 2022

Issue N. 21-2022

Insurance Risk

Risk Sharing Insurance Schemes for Invoice Discounting Platforms

Credit Risk

Credit Risk: Basel IV Regulatory Framework and New Frontiers

Market Risk

Risk Attribution

AML/CFT Risk

New Challenges on Money Laundering and Financial Terrorism Risks

2021 Download Area
Argo Magazine N.20 2021
Cover of the article Argo Magazine N.20 2021

Issue N. 20-2021

Market Risk

A Quantization Overview to Credit Counterparty Risk

AML/CFT Risk

Introduction on Money Laundering and Financial Terrorism Risks

Pandemic Effects on Financial System

Impact of Covid-19 Announcements on Financial Markets

Vulnerability Analysis on Italian Bank during the Covid-19 Pandemic

2020 Download Area
Argo Magazine N.19 2020
Cover of the article Argo Magazine N.19 2020

Issue N. 19-2020

Systemic Risk

The Propagation of Liquidity Shocks in the Interbank Market: an Analysis on Systemic Risk

New Market Standards

The LIBOR Reform and the Revolution of the New Benchmark Rates: Overnight Rates and New Conventions on Contracts and Instruments

Climate Change Risk

Climate Change Risk: Overview of the Current Landscape and Next Steps for Financial Institutions

Argo Magazine N.18 2020
Cover of the article Argo Magazine N.18 2020

Issue N. 18-2020

New Ways of Working

Remote Working: Advices to Reduce Risks and Boost Productivity

New Market Standards

The LIBOR Reform and the New Reference Rates Revolution: Origin and Guidelines

Trading Book

New Challenge on SA-CCR: an Overview on Implementation Process

2019 Download Area
Argo Magazine N.17 2019
Cover of the article Argo Magazine N.17 2019

Issue N. 17-2019

Credit Risk

2020 EU-wide EBA Stress Test: A Methodological Analysis on the Credit Risk Perspective

NPL Classification a Random Forest Approach

FinTech

FinTechs and Challenger Banks: Old Business, Brand New Approach

Market Risk

Security Market: an Overview of Repo and Security Lending Transactions

Argo Magazine N.16 2019
Cover of the article Argo Magazine N.16 2019

Issue N. 16-2019

FinTech

BigTech and New Banking Landscape - Evolution, Benefits, Risks and Oversights

Stress Test

Are EBA Stress-Test Driving Banks into Different Business Models?

Market Risk

2019 FRTB Review: Main Interventions

Argo Magazine N.15 2019
Cover of the article Argo Magazine N.15 2019

Issue N. 15-2019

Credit Risk

A Benchmark Framework for IFRS9 Multiyear-PD Curves Estimation and Stress Testing Exercise: an Application

Portfolio Management

Maximizing Cumulative Prospect Utility for Target Annuity Investment Strategies

Incremental Valutation Frameworks

Advances in Incremental Valuation of Financial Contracts and Definition of the Economic Meaning of the Capital Value Adjustment (KVA)

2018 Download Area
Argo Magazine N.14 Fall 2018
Cover of the article Argo Magazine N.14 Fall 2018

Issue N. 14-2018

New Market Standards

Interest Rate Benchmarks Reform: Time to Transition is Now

An overview of BREXIT effects on the Banking System

Banking Book

Analysis of the New Standards to Measure and Manage the Interest Rate Risk of the Banking Book Issued By BIS Committee

Argo Magazine N.13 Summer 2018
Cover of the article Argo Magazine N.13 Summer 2018

Issue N. 13-2018

Trading Book

Synergies and challenges in the implementation of Basel IV regulations

SA-CCR: Implications and Challenges of the New Regulation

Stress Test

Modelling Banking Commissions: An Application to the Italian Banking System

Argo Magazine N.12 Winter 2018
Cover of the article Argo Magazine N.12 Winter 2018

Issue N. 12-2018

Alm & Irrbb

A Benchmark Framework for Non Maturing Deposits: An Application to Public Data Available from Banca d'Italia

Trading Book

The Effects of FRTB in the CVA Risk Framework

2016 Download Area
Argo Magazine N.11 Winter 2016
Cover of the article Argo Magazine N.11 Winter 2016

Issue N. 11-2016

Banking & Finance

Risk and Profitability of Sight Deposits in the Italian Banking Industry

The Fundamental Review of the Trading Book Standardised Approach for Market Risk: Revision and Challenges

Argo Magazine N.10 Spring 2016
Cover of the article Argo Magazine N.10 Spring 2016

Issue N. 10-2016

Banking & Finance

Pricing and Hedging Multi-Asset Options with High-Dimensional Quasi Monte Carlo: FD vs AAD Greeks

Energy & Commodity Finance

The Energy Storage Systems

What Are the Consequences Arising from MIFID II for Energy Operators?

Argo Magazine N.09 Winter 2016
Cover of the article Argo Magazine N.09 Winter 2016

Issue N. 09-2016

Energy & Commodity Finance

To Combine or not to Combine? Recent Trends in Electricity Price Forecasting

Banking & Finance

Complexity and the Mistakable Law of One Price

2015 Download Area
Argo Magazine N.08 Fall 2015
Cover of the article Argo Magazine N.08 Fall 2015

Issue N. 08-2015

Banking & Finance

The Revision of the CVA Capital Charge by the Basel Commitee

Energy & Commodity Finance

When has OPEC Spare Capacity Mattered for Oil Prices

Argo Magazine N.07 Summer 2015
Cover of the article Argo Magazine N.07 Summer 2015

Issue N. 07-2015

Energy & Commodity Finance

Off-shore Wind Investment under Uncertainty: Part II

OW Bunker : from IPO to Bankruptcy

Banking & Finance

Modelling of Libor-Ois Basis

Argo Magazine N.06 Spring 2015
Cover of the article Argo Magazine N.06 Spring 2015

Issue N. 06-2015

Banking & Finance

Pricing and Risk Management with High-Dimensional Quasi Monte Carlo and Global Sensitivity Analysis

Efficient Computation of the Counterparty Credit Risk Exposure

Energy & Commodity Finance

Off-shore Wind Investment under Uncertainty: Optimal Timing, Size and Leverage

Structural Positions in Oil Futures Contracts

Argo Magazine N.05 Winter 2015
Cover of the article Argo Magazine N.05 Winter 2015

Issue N. 05-2015

Energy & Commodity Finance

Order-Flow and Liquidity Provision

Monetary Measurement of Risk: A Critical Overview - Part IV: Coherent Portfolio Risk Measures

Banking & Finance

Market Instruments for Collateral Management

A Critical Review of Central Banks Satellite Models for Probbilities of Default

2014 Download Area
Argo Magazine N.04 Fall 2014
Cover of the article Argo Magazine N.04 Fall 2014

Issue N. 04-2014

banking & finance

Collateral Management

Bond Settlement Migration

energy & commodity finance

Natural Gas Statistical Arbitrage

Monetary Measurement of Risk: A Critical Overview - Part III: Convex Measures of Risk

Argo Magazine N.03 Summer 2014
Cover of the article Argo Magazine N.03 Summer 2014

Issue N. 03-2014

energy & commodity Finance

Security of Supply and the Cost of Storing Gas

Monetary Measurement of Risk: A Critical Overview - Part II: Coherent Measure of Risk

banking & finance

Towards a Theory of Internal Valuation and Transfer Pricing of Products in a Bank

special interview

Alessandro Mauro

Argo Magazine N.02 Spring 2014
Cover of the article Argo Magazine N.02 Spring 2014

Issue N. 02-2014

banking & finance

Fast Monte Carlo princing of Nth-to-default swaps

Analytical Credit VaR Stress Tests

energy & commodity finance

Stochastic Optimization for the Princing of Structured Contracts in Energy Markets

Pricing Spark Spread Option with Co-Dependent Threshold Dynamics

special interview

Marco Bianchetti

Argo Magazine N.01 Winter 2014
Cover of the article Argo Magazine N.01 Winter 2014

Issue N. 01-2014

banking & finance

Sight Deposit and Non-Maturing Liability Modelling

Dividen Risk and Dividen-based Instruments

Analytical Credit VaR under Different Scenarios for Probabilities of Default and Recoveries

Optimal Quantization Methods

special interview

A talk with Fabio Mercurio

energy & commodity finance

Asian Options with Jumps

A General Approach to Modelling and Pricing in Energy and Weather Markets

Trading Oil spreads: Statistical Arbitrage

crash course

Monetary Measurament of Risk: A Critical Overview

Argo Collection

2023 Download Area
Argo Collection N.05 2023 - Winter
Cover of the article Argo Collection N.05 2023 - Winter

Issue N. 05-2023

Insurance Risk

Risk Sharing Insurance Schemes for Invoice Discounting Platforms

Credit Risk

EBA Supervisory Handbook on the Validation of Rating Systems under the Internal Ratings-Based Approach

Market Risk

Real-Time Exposures and xVAs: a Neural Network Approach

Interest Rate Risk on Banking Book

Managing IRRBB: Overview of the New EBA Guidelines and the Importance of an Advanced Sight-deposits Behavioural Model

Environmental, Social, and Governance Risks

Market Risk Modeling Extension with Climate and Environmental Risk Factors

Stress Test

Advancements in Bank Stress Tests: from Bayesian Averaging to Causal AI

Argo Collection N.06 2023 - Digital Euro
Cover of the article Argo Collection N.06 2023 - Digital Euro

Issue N. 06-2023

Chapter 1

CBDCs: Financial Stability and Monetary Policy Implications

Chapter 2

Architecture of the Digital Euro Environment

Chapter 3

Commercial Banks in the Digital Euro Landscape

Chapter 4

Distribution Models, Risks and Security

2022 Download Area
Argo Collection N.04 2022 - ESG
Cover of the article Argo Collection N.04 2022 - ESG

Issue N. 04-2022

EU Taxonomies on ESG Regulation

Bank of Italy: Supervisory Expectations on Climate and Environmental Risks

Lessons Learnt on 2022 Climate Stress Test

2021 Download Area
Argo Collection N.03 2021 - FinTech
Cover of the article Argo Collection N.03 2021 - FinTech

Issue N. 03-2021

EU Regulation on Artificial Intelligence

AI Fairness Addressing Ethical and Reliability Concerns in AI Adoption

A Random Forest Approach to Evaluating NPL Porfolios

Argo Collection N.02 2021 - The Benchmark Reform
Cover of the article Argo Collection N.02 2021 - The Benchmark Reform

Issue N. 02-2021

The LIBOR Reform and the New Reference Rates Revolution: Origin and Guidelines

The LIBOR Reform and the Revolution of the New Benchmark Rates: Overnight Rates and New Conventions on Contracts and Instruments

New Standard Conventions for Cash Products and Impacts on Banking Processes and Procedures

Fallback Rate: Cash and Derivatives Products

2020 Download Area
Argo Collection N.01 2020 - Basel IV Revision and Challenges on Market Risk
Cover of the article Argo Collection N.01 2020 - Basel IV Revision and Challenges on Market Risk

Issue N. 01-2020

Basel IV Overview

Synergies and Challenges in the Implementation of Basel IV Regulations

2019 FRTB Review: Main Interventions

New Challenges on SA-CCR: an Overview on Implementation Process

The Effects of FRTB in the CVA Risk Framework

Research Paper Series

2024 Download Area
EBA Supervisory Handbook on the Validation of Rating Systems under the Internal Ratings-Based Approach
Leonardo Bandini
Riccardo Cortesi
Michele Ferrandino
Vincenzo Frasca
Nicolas Nedertoft Melis
Photo of Leonardo Bandini
Leonardo Bandini
Business Analyst

Photo of Riccardo Cortesi
Riccardo Cortesi
Business Analyst

Photo of Michele Ferrandino
Michele Ferrandino
Business Analyst

Photo of Vincenzo Frasca
Vincenzo Frasca
Senior Credit Risk Consultant

Photo of Nicolas Nedertoft Melis
Nicolas Nedertoft Melis
Quantitative Analyst

Graduated in Economics, he is currently supporting the Internal Validation Area of a big Italian bank regarding Credit Risk.

Executive Summary
Cover of the article EBA Supervisory Handbook on the Validation of Rating Systems under the Internal Ratings-Based Approach

In August 2023, the European Banking Authority (EBA) published its Supervisory handbook on the validation of rating systems under the Internal-Ratings Based approach. The handbook provides an overview of the validation framework and describes the elements where the Validation function is expected to form an opinion, without prescribing any specific methodology. It covers both the tasks related to the model performance assessment (including risk differentiation, risk quantification and other specific points) as well those dealing with the modelling environment, such as data quality and model implementation assessment. In addition, the handbook addresses some issues and challenges related to the outsourcing of the validation activities, the validation in the context of usage of external data and in the context of data scarcity, providing some recommendations and suggestions to be followed in these cases. With the publication of the handbook, the EBA aims to achieve harmonised supervisory understanding and supervisory practices and to promote convergence on Competent Authorities (CA) approaches by providing good and best practices for a sound IRB validation. The present document provides an overview of the background and objectives of the EBA supervisory handbook, and then describes the main elements on which the Validation function is expected to form an opinion when performing its validation tasks on IRB models, also providing details on the peculiarities of the Validation assessment in the model validation cycle (first vs. on-going validation).

Asset Tokenization: Potential Applications
Valerio Ciminelli
Nicola Mazzoni
Giuseppe Morisani
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Valerio Ciminelli
Consultant

Photo of Nicola Mazzoni
Nicola Mazzoni
Business Analyst

Photo of Giuseppe Morisani
Giuseppe Morisani
Business Analyst

Executive Summary
Cover of the article Asset Tokenization: Potential Applications

The growing interconnections between markets and technologies are fostering radical changes in traditional business paradigms supporting potential groundbreaking shifts in various industries. This research aims to uncover the disruptive potential embedded in asset tokenization within this evolving landscape. Explaining first the features and the characteristics of both its operative environment and its regulatory landscape. The paper proceeds in the analysis of two key markets where asset tokenization could boost the growth and bring transformative shifts. In summary, the main object of the research is to provide both a technical and applicative vision of the evolution of the market on asset tokenization, providing a brief but solid knowledge of the potential of these technologies.

2023 Download Area
Market Risk Modeling Extension with Climate and Environmental Risk Factors
Michele Bonollo
Antonio Menegon
Gianmarco Mori
Antonio Scarinci
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Michele Bonollo
Chief of Risk Methodologies Officer

He holds a degree in mathematics, a master degree in mathematical finance and a PHD in statistics. He worked as an executive in both large and regional italian banks. He has also collaborated with some consultant companies in the broad area of risk management, asset management, pricing models, software systems and regulatory compliance. Along with his professional activities, he always develops applied research in the above fields, with about 20 papers published in scientific journals and dozens of speeches in international conferences. He currently gives seminars and lessons in some top ranked italian universities.

Photo of Antonio Menegon
Antonio Menegon
Manager and Senior Risk Quant

With six years of experience in Risk Management and Consulting industries, he is currently leading the team of Business Analysts and Financial Engineers at one big pan-European bank. Graduated in Mathematics from Università degli Studi di Padova, he has been continuously interested in new quant topics, focusing in the last years on Machine Learning and its application in finance.

Photo of Gianmarco Mori
Gianmarco Mori
Senior Consultant

He holds a Bachelor in Banking and Finance and a Master degree in Statistics and Actuarial science. He obtained a specialization in Quantitative Finance at Politecnico di Milano and he had worked in a consulting firm for two year focused in Credit and Liquidity Risk Management. After these years, he moved to banking sector in Risk Management area and currently he has been working in Iason as financial engineer for some of the major italian players.

Photo of Antonio Scarinci
Antonio Scarinci
Quantitative Analyst

He holds a Bsc in Economics and Finance from Bocconi University and a Msc in Mathematical Engineering - Major in Quantitative Finance, earned after taking integrative courses in mathematics and engineering from the Bsc, from Politecnico di Milano. He worked as a bond arbitrage trader in an HFT firm and equity proprietary trader in the Equity Portfolio Management desk of Intesa Sanpaolo. He is currently a iason Financial Engineering consultant for the Financial Engineering - Rates, Credit & Inflation Desk of Intesa Sanpaolo.

Executive Summary
Cover of the article Market Risk Modeling Extension with Climate and Environmental Risk Factors

Extending risk management models to encompass the broad concept of sustainability remains an unresolved issue within both academic and financial communities. The current state of risk measurement models is deemed unsatisfactory due to various weaknesses in data feasibility, and the ongoing debate centers on what new models should measure. To address this, we propose a model aimed at enhancing existing market risk models by incorporating sustainability risk sources. The foundation of our approach lies in the incremental risk charge (IRC) model, specifically a 1 year 99.9 percent value at risk, which addresses default and migration risk. By expanding upon this traditional model, we introduce the environmental incremental risk charge (E-IRC) with two key improvements. Firstly, we incorporate new environmental, social, and governance (ESG) risk factors through data analysis and statistical techniques to provide a better understanding of portfolio behavior. Secondly, we refine the default probabilities from rating agencies by combining market-observed green premiums (lower spreads) with available ESG scores for each obligor. To evaluate the efficacy of our model, we subjected it to testing using a real portfolio through a Montecarlo engine. The results demonstrated that the new model has minimal impact on existing IRC outcomes, allowing for continuity in the reporting process. The primary advantage of E-IRC lies in its ability to facilitate a more effective risk decomposition process, thus enabling a clear identification of ESG contributions to overall risk.

Managing IRRBB: Overview of the New EBA Guidelines and the Importance of an Advanced Sight-deposits Behavioural Model
Alessandra Carnaroli
Chiara Stabellini

Alessandra Carnaroli wrote the article during the collaboration with Iason Consulting

Chiara Stabellini wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Managing IRRBB: Overview of the New EBA Guidelines and the Importance of an Advanced Sight-deposits Behavioural Model

On October 2022, the European Banking Authority (EBA) published the new regulatory package on IRRBB. In addition to the provisions already in place for IRRBB, this package also includes specific paragraphs that institutions must follow to implement a robust framework for credit spread risk on the banking book CSRBB. Furthermore, the EBA has introduced Regulatory Technical Standards (RTS) that provide a standardized approach for IRRBB and Supervisory Outlier Tests for both EVE and NII. Given the importance of sight deposit modeling, both in this new regulatory framework and in the current macroeconomic environment, the paper presents an analysis conducted on Italian data by implementing a stochastic and advanced sight-deposit modeling approach. The results show that with an advanced behavioural model, financial institutions are better able to predict customer decision choices and thus enhance the existing Asset and Liability Management to reflect the current macroeconomic environment.

LGD Stress Testing: a Bayesian Averaging Modeling Approach
Raffaele Di Sivo
Andrea Mauri
Evgenii Veksin
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Raffaele Di Sivo
Business Analyst

Photo of Andrea Mauri
Andrea Mauri
Senior Credit Quant

Photo of Evgenii Veksin
Evgenii Veksin
Business Analyst

Executive Summary
Cover of the article LGD Stress Testing: a Bayesian Averaging Modeling Approach

In this paper we introduce a methodological set-up to estimate LGD Satellite Models for Italian counterparties in the non-financial firm and household segments. We start from publicly available data provided by Bank of Italy to model the target variable in terms of historical time-series of recovery rates and regress against a pool of suitably selected macro-economic explanatory variables. The statistical technique examined to estimate the Satellite Models is the Bayesian Averaging of Classical Estimation (BACE), which is widely used in building benchmark models. The estimation methodology provides an algorithmic and automatized instrument for model selection which is easily generalized to other segments or more granular data. The models we estimate are then tested against macroeconomic baseline and adverse scenarios, simulating a stress test exercise for the LGD parameter.

Advances in Incremental Valuation of Financial Contracts and Definition of the Economic Meaning of the Capital Value Adjustment (KVA)
Antonio Castagna
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Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Advances in Incremental Valuation of Financial Contracts and Definition of the Economic Meaning of the Capital Value Adjustment (KVA)

We extend the analysis we sketched in "Towards a Theory of Internal Valuation and Transfer Pricing of Products in a Bank: Funding, Credit Risk and Economic Capital" and we provide an application of the framework we introduced to incrementally evaluate financial contracts within a financial institution’s balance sheet.

Riciclaggio e Finanziamento del Terrorismo: Normativa ed Evidenze
Lorena Corna
Gianmarco Milone
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Lorena Corna
Business Analyst

As Business analyst she currently works within the Risk IT dedicated team of a big pan European Bank. In particular, she follows the back-testing model for Counterparty Credit Risk.

Photo of Gianmarco Milone
Gianmarco Milone
Business Analyst

Executive Summary
Cover of the article Riciclaggio e Finanziamento del Terrorismo: Normativa ed Evidenze

Gli Autori ripercorrono le evoluzioni normative internazionali e nazionali che hanno caratterizzato le attività a contrasto del riciclaggio e del finanziamento del terrorismo, fra cui la recente proposta europea (c.d. AML Package). Dopo una prima rassegna del quadro normativo nazionale sulle due fattispecie, gli Autori hanno focalizzato la propria attenzione su due aspetti: i) la profilazione del cliente e la sua verifica e, ii) la segnalazione delle operazioni sospette. Nel primo capitolo, gli Autori presentano l’evoluzione del processo di analisi del cliente che oggi si fonda sull’approccio basato sul rischio e conseguenti azioni intraprese da parte dei soggetti obbligati e Autorità competenti. Nel secondo capitolo, viene fornita una panoramica sull’attività di segnalazione e analisi delle operazioni sospette, in particolare l’impatto della normativa corrente e delle nuove metodologie FinTech a supporto delle analisi condotte dalla UIF. Le risultanze del 2022, con un quantitativo di segnalazioni di operazioni sospette dodici volte superiore a quanto registrato nel 2008, segnala l’importanza crescente di tali rischi nell’ambito finanziario.

Network Analysis Applied to the Euro Stoxx 50: Impact of the ESG Score on the Stock Market
Martina Cattaneo
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Martina Cattaneo
Quantitative Analyst

She holds a M.Sc. in Mathematical Engineering, Quantitative Finance, at Politecnico di Milano and she is currently working on the supporting activities for a big pan-European Bank regarding Counterparty Credit Risk.

Executive Summary
Cover of the article Network Analysis Applied to the Euro Stoxx 50: Impact of the ESG Score on the Stock Market

With this work it has been attempted to understand if and how the ESG score of the companies plays a role in the creation of replicating portfolios of market indices, more precisely in the case of the Euro Stoxx 50. \\ Complex networks are built using the daily closing price time series of the fifty stocks that make up the Euro Stoxx 50 index in the time period between 3 September 2019 and 31 August 2021. These stocks, which correspond to quoted companies, are the nodes of the network while the links are determined thanks to a binary approach which involves the insertion of a connection between two nodes only if their cross correlation has a larger value than a certain fixed threshold. Since all the networks constructed in this way are scale-free for high values of the correlation, it is possible to deduce that the main market changes can be captured by a small group of stocks that show similar variation profiles over a given period. It is therefore reasonable to expect that when a new index is created by selecting only a few of the most correlated initial companies it will be possible to obtain a good approximation of the Euro Stoxx 50 index. By comparing these results with those obtained by also introducing the ESG score of each company in the selection criterion of the stocks used to compose the new index, it can be finally concluded that there is a general improvement in the approximation of the evolution of the reference index. Moreover, focusing on the ESG score of the companies selected for the replication of the index in the two situations, it can be deduced that it is not necessary to have a high scoring to be an important player in the financial market.

Quantum Monte Carlo Option Pricing
Alessandro Oriente

Alessandro Oriente wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Quantum Monte Carlo Option Pricing

At the end of 20th century, many scientists begin to imagine the possibility to introduce some mechanisms of quantum mechanics into computers. It was proved, at least theoretically, that such mix between quantum mechanics and informatics could take computing power on such levels that problems with an exponential complexity for that time could be easily solved. It did not take much time that this new field of quantum computation involved other fields such as finance, where many features of quantum computing would change significantly the amount of time and resource used for financial institutions for their business. Nowadays, quantum computers are still at prototype level but it is already possible to test with simple experiment what a quantum computer can do. Here, the author have tested a method that is the quantum version of Monte Carlo method, that is a best practice for pricing derivatives instruments and it is shown how it is possible for a Quantum Monte Carlo to obtain same results with a quadratic speed-up respect its classical version.

CBDC - Exploring a New Digital World
Gianmarco Mori
Federico Pizzamiglio
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Gianmarco Mori
Senior Consultant

He holds a Bachelor in Banking and Finance and a Master degree in Statistics and Actuarial science. He obtained a specialization in Quantitative Finance at Politecnico di Milano and he had worked in a consulting firm for two year focused in Credit and Liquidity Risk Management. After these years, he moved to banking sector in Risk Management area and currently he has been working in Iason as financial engineer for some of the major italian players.

Photo of Federico Pizzamiglio
Federico Pizzamiglio
Junior Quantitative Analyst

Executive Summary
Cover of the article CBDC - Exploring a New Digital World

The advent of Blockchain technology and the diffusion of Cryptocurrencies have generated notable impacts on the financial system. Transactions and the issuance of money are no longer the exclusive matter of banks which have to understand how to fit into or coexist with a decentralized parallel ecosystem. The blockchain technology, in its different forms and shades, has been the cornerstone for the development of new services and products in many sectors, and the financial industry is no different in this regard. From the disintermediation and decentralization opportunities Decentralized Finance, better known as DeFi, was born. In this scenario and for some years now, central banks are moving to deploy a safe and sound response to the new paradigm, designing solutions, guidelines and regulations to prevent chaos and (possible) serious systemic crisis from raging. Giving the uncontrolled spread of cryptos, the speculation and collapse which most of these had or are facing, the issuance of central bank digital currencies (a.k.a. CBDCs) is meant to be a tool to stabilize the DeFi ecosystem. Giving the shaky ground central banks and regulators must walk though where protocols and best practices are not yet defined, players who noisily break in to suddenly just fall apart (e.g., Terra Luna, FTX), introducing digital currencies is a tough challenge, which comes with many regulatory and technical hurdles.

Real-Time Exposures and xVAs: a Neural Network Approach
Andrea Carapelli
Antonio Menegon
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Andrea Carapelli
Quantitative analyst

He holds a master's degree in Quantitative Finance from Universita' degli Studi di Siena. He started his career on the trading floor of an Italian bank, now he is working as a consultant and team leader in quantitative projects, staffed in the Risk Management of major Italian banks.

Photo of Antonio Menegon
Antonio Menegon
Manager and Senior Risk Quant

With six years of experience in Risk Management and Consulting industries, he is currently leading the team of Business Analysts and Financial Engineers at one big pan-European bank. Graduated in Mathematics from Università degli Studi di Padova, he has been continuously interested in new quant topics, focusing in the last years on Machine Learning and its application in finance.

Executive Summary
Cover of the article Real-Time Exposures and xVAs: a Neural Network Approach

Machine Learning (ML) techniques have been studied in the very recent years as challenger or complementary models in Finance, respectively opposite to or in support to the best practices. In this article the authors, leveraging also on the industry literature, present an application of a ML model that can predict, almost real-time, Counterparty Credit Risk exposure profiles, XVAs and the corresponding sensitivities for a "toy" netting set of Interest Rate Swaps. The goal is explaining how a fairly simple Artificial Neural Network (ANN), alongside an existing risk infrastructure, can approximate accurately a Monte Carlo Risk engine. Such an approach can be used as a useful monitoring and stress testing tool to complement an existing Monte Carlo Risk framework, with faster speeds of execution with respect to the usual risk pipelines. It is worth to account that this article reflects the first step of a broader research, it is meant to be introductory, and therefore it is not deemed complete nor final.

Advancements in Bank Stress Tests: from Bayesian Averaging to Causal AI
Tommaso Ferretti
Andrea Mauri
Nicola Polino
Nicola Rogante
Danilo Rubicondo
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Tommaso Ferretti
Data Scientist

Data Scientist with experience in Bank Stress Test and Risk Analysis related research. He is currently working on the design and IT implementation of a VaR decomposition engine.

Photo of Andrea Mauri
Andrea Mauri
Senior Credit Quant

Photo of Nicola Polino
Nicola Polino
Data Scientist

He holds a master's degree in Electronics Engineering from Politecnico di Milano. He has research experience in the semiconductor solid state memories field developing transport and reliability models for novel chalcogenides based memory and select devices. He is currently interested in developing Machine Learning and AI models supporting credit risk decisions and recommendation systems.

Nicola Rogante wrote the article during the collaboration with Iason Consulting

Photo of Danilo Rubicondo
Danilo Rubicondo
Data Scientist

Neuroscientist with over 10 years of experience in the computational modelling of cognitive functions. He is currently working on AI systems supporting credit risk decisions and investment strategies.

Executive Summary
Cover of the article Advancements in Bank Stress Tests: from Bayesian Averaging to Causal AI

Banks all over the world are required to perform stress tests for different types of risks to comply with regulatory guidelines. The purpose of stress tests is to estimate the financial impact arising from changes in macroeconomic factors. In turn, the impact estimate provides an indication of the amount of capital necessary to maintain in order to withstand the hypothetical adverse scenarios considered. However, such an estimation process is peculiar and cannot be adequately addressed with statistical tools commonly used for regression tasks. The present work focuses on climate-related risk stress testing, specifically on the technical challenges involved in inference of the impact of macroeconomic changes on credit default risk. Financial institutions, academics and international organizations have proposed several approaches to model climate-related impacts, but estimates remain far from an acceptable degree of confidence. In fact, some peculiar statistical points need to be addressed to produce sensible predictions. It should be noted that stress tests consist of examining the effect of historical variations in macroeconomic variables to forecast the future impact (3-5 years) of hypothetical and unprecedented macroeconomic scenarios. The risk scenarios vary in baseline and adverse risk outline. Commonly, statistical and Machine Learning (ML) models, such as General Linear Model (GLM) and Tree Ensebles are frequently leveraged to accomplish the prediction task, by using the available historical records for optimization purposes. Such a procedure is likely to introduce biases, as does not guarantee the model to be able to generalize from historical (baseline) records, to unrealized adverse scenarios. As such a crucial generalization problem cannot be entirely addressed from a statistical perspective, we stress the importance that predictive models should be highly consistent with available theoretical knowledge on the modelled dynamics. The present work investigates the application of three different methodologies to forecast credit defaults that occur as a consequence of climate shocks in the energy sector. All proposed predictive architectures integrate, to some extent, a general top-down macroanalysis conducted by credit risk experts, which ensures that the models are consistent with theoretical expectations. The first proposed architecture, G-RiskPar, is an automatic, iterative and theory-driven approach, based on Bayesian Averaging of Classical Estimates (BACE). The second approach, MLRisk, combines statistical techniques, such as GLM, and computational methods drawn from ML. Finally, the third architecture, Causal AI, is a Structural Causal Model, which uncovers causal connections in data and use them to upgrade the confidence around the prediction, according to Bayesian inference.

Model Risk Management Principles and the Impact of Machine Learning Models
Matteo Cecchin
Dario Esposito
Bianca Ghilardi
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Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

Photo of Dario Esposito
Dario Esposito
Chief Risk Regulatory Officer

Experienced professional with a demonstrated history of working in the financial services industry. Skilled in Enterprise Risk Management, Basel III and IV and AML. Strong finance professional postgraduated from University of London and IMD in Lausanne (International Institute for Management Development).

Photo of Bianca Ghilardi
Bianca Ghilardi
Business Analyst

She holds a master degree in Management and Finance from Università del Piemonte Orientale in Novara. After a few months in the IT sector as tester engineer, she moved to the risk management field. Actually, she is working in a Model Risk Management project in one of the largest Italian banks.

Executive Summary
Cover of the article Model Risk Management Principles and the Impact of Machine Learning Models

The increasing use of models to inform key business decisions and the increasing complexity of models invariably increases firms’ potential exposure to model risk. This RPS suggests some principles - proposed by Regulatory and/or Supervisory - which are considered key in establishing an effective model risk management (MRM) framework. The principles are intended to complement existing requirements and supervisory expectations in force on MRM and include different proposals for identifying and managing the risks associated with the use of Artificial Intelligence (AI) technology in modelling techniques such as Machine Learning (ML), with particular focus on the validation of these models.

ESG Climate Scenarios: a Dedicated Framework
Giacomo Colombo
Lorena Corna
Letizia Malara
Alessandro Prati
Michele Silano
Photo of Giacomo Colombo
Giacomo Colombo
Business Analyst

He holds a master degree in Economic, with a specialization in Corporate Finance. After two years in the M&A sector, he moved on the risk management field. He is specialized in the automated computation and methodologies implementation. As functional leader, he currently manages several tasks in the largest Italian bank and follows regulatory and managerial stress test exercises.

Photo of Lorena Corna
Lorena Corna
Business Analyst

As Business analyst she currently works within the Risk IT dedicated team of a big pan European Bank. In particular, she follows the back-testing model for Counterparty Credit Risk.

Letizia Malara wrote the article during the collaboration with Iason Consulting

Photo of Alessandro Prati
Alessandro Prati
Business Analyst

He holds a MSc in Economic and Finance obtained at the University of Milano-Bicocca. He joined iason in 2021 working on projects mainly focused on Market Risk. In early 2022, he worked with the team in the process of data collection and scenario implementation of the first Climate Stress Test exercise administered by the ECB.

Michele Silano wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article ESG Climate Scenarios: a Dedicated Framework

The ECB’s Thematic Review on Climate-related and Environmental Risk provides a cross-sectional analysis conducted on supervised banks and aims to identify the strategy, governance and management framework for Climate-related and Environmental Risks. This analysis lead to much evidence, including the soundness of practices. In this respect, the ECB requires banks to provide risk metrics based on climate-related and environmental risks that include measures such as VaR or Stress Test. This paper aims a proposal for the structuring of a Climate Scenario’s framework from input variables that take into account environmental impacts and translating them into macroeconomic and financial variables in order to obtain shocks that can be applied to market data. This consists on: I) an analysis of short-term Transition Climate Risk; II) an analysis of the requirements shared during the ECB’s Thematic Review; III) a study of the existing models and their implementation; IV) a methodological proposal for scenarios climate-related. The authors present a methodology for a financial institution to estimate the ESG Risk: the high degree of flexibility and discretion in management choices represent the main advantages of the approach described.

2022 Download Area
Bank of Italy: Supervisory Expectations on Climate and Environmental Risks
Matteo Cecchin
Dario Esposito
Bianca Ghilardi
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Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

Photo of Dario Esposito
Dario Esposito
Chief Risk Regulatory Officer

Experienced professional with a demonstrated history of working in the financial services industry. Skilled in Enterprise Risk Management, Basel III and IV and AML. Strong finance professional postgraduated from University of London and IMD in Lausanne (International Institute for Management Development).

Photo of Bianca Ghilardi
Bianca Ghilardi
Business Analyst

She holds a master degree in Management and Finance from Università del Piemonte Orientale in Novara. After a few months in the IT sector as tester engineer, she moved to the risk management field. Actually, she is working in a Model Risk Management project in one of the largest Italian banks.

Executive Summary
Cover of the article Bank of Italy: Supervisory Expectations on Climate and Environmental Risks

The Bank of Italy, in line with similar ECB initiatives, has drawn up an initial set of supervisory expectations regarding the integration of climate and environmental risks into the business strategies, governance and control systems, risk management frameworks and disclosures of supervised banking and financial intermediaries. Expectations provide general non-binding information. Their implementation at an operational level is left to the individual intermediary. The document is addressed to all entities whose activities are subject to authorization and supervision by the Bank of Italy according to the "Testo Unico Bancario - TUB" and "Testo Unico della Finanza - TUF": banks, SIMs, SGRs, self-managed SICAVs/SICAFs, financial intermediaries under Article 106 TUB and their parent companies, payment institutions, IMELs. During 2022, the Bank of Italy will initiate a discussion with the intermediaries on the degree of compliance with expectations and plans for adaptation. This assessment will be included in the supervisory analysis paths, with the aim of ensuring the progressive alignment of business practices with expectations.

Lessons Learnt on 2022 Climate Stress Test
Giacomo Colombo
Alessandro Greselin
Andrea Mauri
Alessandro Prati
Nicola Rogante
Photo of Giacomo Colombo
Giacomo Colombo
Business Analyst

He holds a master degree in Economic, with a specialization in Corporate Finance. After two years in the M&A sector, he moved on the risk management field. He is specialized in the automated computation and methodologies implementation. As functional leader, he currently manages several tasks in the largest Italian bank and follows regulatory and managerial stress test exercises.

Alessandro Greselin wrote the article during the collaboration with Iason Consulting

Photo of Andrea Mauri
Andrea Mauri
Senior Credit Quant

Photo of Alessandro Prati
Alessandro Prati
Business Analyst

He holds a MSc in Economic and Finance obtained at the University of Milano-Bicocca. He joined iason in 2021 working on projects mainly focused on Market Risk. In early 2022, he worked with the team in the process of data collection and scenario implementation of the first Climate Stress Test exercise administered by the ECB.

Nicola Rogante wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Lessons Learnt on 2022 Climate Stress Test

This Research Paper analyzes the key aspects of the European Central Bank's first Climate Stress Test exercise held in early 2022. This work looks at the experience from the Credit Risk and the Market Risk perspective, focusing on the issues that rose both in data preparation and modelling activities as well as in the interpretation of the scenario provided by the regulator. We analyse the results of the stress test from this stance. Climate Stress Test exercise has highlighted some critical issues in the process of defining and including climate risk in the current stress test framework of banking institutions. Given the current political and economic climate, all banks are expected to have a considerable impact in terms of reviewing both the modelling approach and the IT process and infrastructure. In this paper we take a look at how these processes were reviewed and improved in the Credit Risk and Market Risk areas, suggesting some further refinements that could be brought forward in the next future. In conclusion, banking institutions must necessarily improve their ESG data collection processes and the regulator should aim at achieving a greater degree of homogeneity in the classification methodologies of climate metrics at European and international level.

Risk Attribution
Michele Bonollo
Giacomo Giannoni
Antonio Menegon
Matteo Urni
Photo of Michele Bonollo
Michele Bonollo
Chief of Risk Methodologies Officer

He holds a degree in mathematics, a master degree in mathematical finance and a PHD in statistics. He worked as an executive in both large and regional italian banks. He has also collaborated with some consultant companies in the broad area of risk management, asset management, pricing models, software systems and regulatory compliance. Along with his professional activities, he always develops applied research in the above fields, with about 20 papers published in scientific journals and dozens of speeches in international conferences. He currently gives seminars and lessons in some top ranked italian universities.

Photo of Giacomo Giannoni
Giacomo Giannoni
Quantitative Analyst

Photo of Antonio Menegon
Antonio Menegon
Manager and Senior Risk Quant

With six years of experience in Risk Management and Consulting industries, he is currently leading the team of Business Analysts and Financial Engineers at one big pan-European bank. Graduated in Mathematics from Università degli Studi di Padova, he has been continuously interested in new quant topics, focusing in the last years on Machine Learning and its application in finance.

Photo of Matteo Urni
Matteo Urni
Business Analyst

He graduated in Quantitative Finance at Bocconi University. As Business Analyst, he is currently working on the development of risk analysis and attribution methods and the IT implementation of a VaR decomposition engine for one of the major Italian banks.

Executive Summary
Cover of the article Risk Attribution

The well-known Value at Risk (VaR) is the standard market risk quantification for financial institutions. Despite its wide and consolidated usage, evaluating VaR and its decomposition along the desired risk components in a portfolio is still a complex exercise. Commonly, banks do not have automatic risk decomposition frameworks: drill-downs are performed through P&Ls analysis and proxies with sensitivities. Risk controllers and management lack then of a fast and easily readable attribution of VaR (or other risk metrics) to marginal components at both position and risk factor levels. Leveraging on the last two decades of literature on the topic, our approach seeks to provide with a risk decomposition framework which is able to spot (additive) risk and diversification sources within the portfolio(s) at hand that can be beneficial for many goals: risk analysis, uncovering of new (risk-adjusted) business opportunities, improved capital allocation and increased soundness for auditing and supervisory purposes.

Credit Risk: Basel IV Regulatory Framework and New Frontiers
Mariagreca Amorese
Fausto Bonacina
Marco Carminati
Matteo Cecchin
Dario Esposito
Marco Musto
Nicolas Nedertoft Melis

Mariagreca Amorese wrote the article during the collaboration with Iason Consulting

Fausto Bonacina wrote the article during the collaboration with Iason Consulting

Photo of Marco Carminati
Marco Carminati
Manager

After taking a Bachelor in Finance and a Master of Science in Economics, he specialized in Credit Risk Management and Modelling through almost 10 years of experience in both banking and consultancy industry with special focus on the development and validation of models for Credit Risk for regulatory and managerial purposes. Currently in charge of several projects in the Credit Risk Management area and Head of the iason Credit Risk Competence Center.

Photo of Matteo Cecchin
Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

Photo of Dario Esposito
Dario Esposito
Chief Risk Regulatory Officer

Experienced professional with a demonstrated history of working in the financial services industry. Skilled in Enterprise Risk Management, Basel III and IV and AML. Strong finance professional postgraduated from University of London and IMD in Lausanne (International Institute for Management Development).

Marco Musto wrote the article during the collaboration with Iason Consulting

Photo of Nicolas Nedertoft Melis
Nicolas Nedertoft Melis
Quantitative Analyst

Graduated in Economics, he is currently supporting the Internal Validation Area of a big Italian bank regarding Credit Risk.

Executive Summary
Cover of the article Credit Risk: Basel IV Regulatory Framework and New Frontiers

In December 2017 the Basel Committee finalized and released the 4th iteration of reforms on Banking Supervision. This new set or reforms takes the official name of “Basel III: Finalizing post-crisis reforms”, but in the financial industry is also known as “Basel IV”. Basel IV is the natural step, with the same objective of improving the resilience of the banking system, along with continuous support to the real economy. Among the principal revisions of Basel IV there is the excessive variability of Risk-weighted assets (RWAs), with a particular focus on Credit Risk reforms. This paper will generally introduce the main changes proposed to the Basel framework and a detailed drill-down will be made on the Standardized Approach and IRB Approach of Credit Risk. Furthermore, the topic of new frontiers on credit risk models will be deepened, in particular the use of ML techniques for IRB credit models.

EU Taxonomies on ESG Regulation
Matteo Cecchin
Dario Esposito
Ulisse Filipponi
Photo of Matteo Cecchin
Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

Photo of Dario Esposito
Dario Esposito
Chief Risk Regulatory Officer

Experienced professional with a demonstrated history of working in the financial services industry. Skilled in Enterprise Risk Management, Basel III and IV and AML. Strong finance professional postgraduated from University of London and IMD in Lausanne (International Institute for Management Development).

Ulisse Filipponi wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article EU Taxonomies on ESG Regulation

The importance of ESG is subject to increasing attention from regulator, supervisor and institution and there is a growing awareness of the need to integrate all the ESG factors into bank’ strategies, process, and disclosures to the public. In one hand, Corporates are subject to a growing number of disclosure requirements related to ESG factors, which have an impact on financial institutions. In the other, financial institution must act now on the assessment of ESG risks opportunities of their activities and on the development of correct ESG information, to be prepared for changing needs arising from both the market and the regulator. In this sense, regulatory obligations (i.e., Sustainable Finance Disclosure Regulation (SFDR), Non-Financial Reporting Directives (NFRD), the integration of the Corporate Sustainability Disclosure Directive (CSRD) and the EU Taxonomy) can play an important role in scaling up sustainable finance and, in turn, in supporting the achievement of high-level goals such as the Paris Agreement and the UN sustainable development goals.

AI Fairness Addressing Ethical and Reliability Concerns in AI Adoption
Luca Rosato
Danilo Rubicondo

Luca Rosato wrote the article during the collaboration with Iason Consulting

Photo of Danilo Rubicondo
Danilo Rubicondo
Data Scientist

Neuroscientist with over 10 years of experience in the computational modelling of cognitive functions. He is currently working on AI systems supporting credit risk decisions and investment strategies.

Executive Summary
Cover of the article AI Fairness Addressing Ethical and Reliability Concerns in AI Adoption

During the last 15 years there has been considerable advancements in AI algorithms, leading AI to achieve comparable - and sometimes superior - performance to human expert judgment. Not surprisingly, AI is now ubiquitous in financial industry: financial firms apply AI to select investments, banks to score creditworthiness, insurances to identify frauds - just to mention a few examples. However, AI algorithms do not resemble (human) logic, but leverage subtle statistical associations in data to make point estimate predictions. This results in black-box architectures, which lack of transparency and do not ensure that predictions generalize to changes in data distribution induced by exogenous factors. Therefore, increasing concerns have risen on AI reliability, resiliency along with several ethical threads, which extend well beyond AI failure or malicious use. In the present document, AI-related risks and their technical origins are discussed. Furthermore, a summary of the regulatory framework for AI, recently proposed by the European Commission, is provided, accompanied by methodologies to address the mentioned issues. Finally, while most AI applications are built on top of data-driven pattern recognition algorithms, which enforce agnostic models on data, the authors advocate the reversed approach. Probabilistic graphs, which can integrate theory-driven models with high-level information, allow to generate predictions in the form of posterior probability distributions. Probabilistic graphs bring multiple technical and epistemological benefits, as exposing their functioning principle, allowing risk assessment, counterfactual reasoning and increasing knowledge of the phenomenon being studied.

EU Regulation on Artificial Intelligence
Alberto Bove Natellis
Matteo Cecchin
Dario Esposito
Ulisse Filipponi
Photo of Alberto Bove Natellis
Alberto Bove Natellis
Senior Business Analyst

Photo of Matteo Cecchin
Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

Photo of Dario Esposito
Dario Esposito
Chief Risk Regulatory Officer

Experienced professional with a demonstrated history of working in the financial services industry. Skilled in Enterprise Risk Management, Basel III and IV and AML. Strong finance professional postgraduated from University of London and IMD in Lausanne (International Institute for Management Development).

Ulisse Filipponi wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article EU Regulation on Artificial Intelligence

Artificial Intelligence (AI) is a fast-evolving family of technologies that can bring a wide array of economic and societal benefits across the entire spectrum of industries and social activities. However, the same elements and techniques that drive the socio-economic benefits of AI can also bring new risks or negative consequences for individuals or for the society. In particular, these risks for the financial sector could be related to unintended bias or discrimination against, i.e. certain groups of consumers, underpricing of financial products or systematic errors in underwriting new financial consumers. Benefits and risks are the main reasons that lead the supervisors and regulators to set some initial principles and guidelines, in order to manage risks, without excluding any firms from the use of such technology. In this paper there will be a drill-down of some European-level initiatives on AI. In particular, the European Commission’s proposal for regulation on Artificial Intelligence published in April 2021 will be analyzed in Part I. Subsequently, the principles for the use of big data algorithms and artificial intelligence in decision-making processes published by BaFin in June 2021 will be proposed in Part II. Finally, the analysis of the European Banking Authority published in June 2021 on the benefits and challenges for financial institutions and supervisors on RegTech solutions will be proposed in the last Part of this paper.

A Random Forest Approach to Evaluating NPL Porfolios
Paolo Guarnieri
Massimiliano Zanoni
Photo of Paolo Guarnieri
Paolo Guarnieri
Credit Risk Quant

After his MSC in Financial and Actuarial Statistical Sciences, he has worked, as a credit risk quant, in credit risk projects at one big pan-EU bank, mainly in the development, enhancements and maintenance of tools for the calculation of the main risk metrics. In particular, he was involved in IFRS9 processes and consequent capital impacts required in the EBA stress test and ICAAP exercises.

Photo of Massimiliano Zanoni
Massimiliano Zanoni
Senior Manager

He has over 20 years’ experience in the management of complex projects in credit and financial risk within leading national and international financial services; maturing a combination of quantitative analysis and problem-solving capabilities. Besides, his consulting experience ranging from model development to the implementation of management reporting system; to compliance and IRB validation in credit risk and ALM project, he has worked for Veneto Banca as the Head of Methodology and Reporting - Risk Management Department. In the same period, he was also the Risk Management delegate in the Risk committees of foreign banks and the Risk Management delegate in the Board of Banca Apulia where he directly oversaw the transition process to the Solvency II framework. In Iason, he has been involved in the development of credit risk solutions and the implementation of a Dynamic Balance Sheet framework.

Executive Summary
Cover of the article A Random Forest Approach to Evaluating NPL Porfolios

Artificial Intelligence has quickly entered in the financial services industry covering a wide range of applications. Its use is not new in Financial Institutions, to reach better predicting power, specifically for default forecast and classification purposes but it has grown significantly of recent years, thanks to the exponential increase in data availability and storing capacity, coupled with the improvements in computing power. Models based on Machine Learning approaches are often quite effective in classifying NPL and estimating debtors default probabilities, due to the ability in catching complex connections existing among variables, however, this often occurs at the expenses of clarity and interpretation as the connections among inputs and results are often obscured by the complexity of the process. This is one of the main reasons why, though ML models provide an opportunity to interpret massive and unstructured data sources, they have not been rapidly adopted into institutions' IRB models without an adequate understanding by the management and supervisors who see them more like a black box[6]. This work proposes a structured framework for the classification and evaluation of unsecured commercial NPLs according to their potential recovery level. The first part of the work introduces the methodology used to create homogeneous clusters through decision trees, i.e. by recursively splitting the variable space. Following, the most relevant performance indicators, necessary to select and validate models estimated, are presented. Beside standard single variable indicators, providing a rapid overview of performances, the ’Confusion Matrix’ is explained and extended. Finally, the definition of the threshold necessary to correctly identify recovered dossiers is determined following different criteria. In order to evaluate the approach analyzed, the results form the Random Forest framework are compared to those of more classical Logit methods proving to be as reliable and slightly more performing even with a limited set of information. The RF approach used to forecast the overall recovery at aggregate levels is then extended to analyze the recovery dynamic on the basis of provided payment flows, obtaining good results again at aggregate level. Like for the overall recovery rate model, the dynamic is also studied at aggregate level on the basis of a simple functional form for which parameters’ fitting is much less calculation intensive, obtaining a good fit to the real recovery profile.

Risk Sharing Insurance Schemes for Invoice Discounting Platforms
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Risk Sharing Insurance Schemes for Invoice Discounting Platforms

This paper analyses how a peer-to-peer (P2P) insurance scheme can be set up to cover credit losses originated by unpaid invoices traded on invoice discounting marketplace platforms. We propose i) how companies selling their receivables on the marketplace platforms can pool resources to guarantee the coverage of the credit losses suffered by the buyers of the invoices, ii) how to allocate the share of losses on each participant to the pool, and finally iii) how to redistribute amongst participants the remaining share of the pool after the losses are covered. We start by studying the trivial case of the loss suffered by the buyer on a single invoice, then we show how a form of loss coverage can be obtained by each seller and finally we analyse the full risk sharing by all sellers, and the insurance mechanism that can be set up that is fair to each participant.

2021 Download Area
Climate Change Risk: Guidelines for Financial Institutions and Stress-Test Frameworks
Fausto Bonacina
Alessandro Cappo
Marco Carminati
Andrea Mauri

Fausto Bonacina wrote the article during the collaboration with Iason Consulting

Photo of Alessandro Cappo
Alessandro Cappo
Quantitative Analyst

He holds a MSc. in Mathematical Engineering and he is currently involved, as a quantitative analyst, on the engine used by one of the major Italian banks to produce risk metrics via full revaluation approach, carrying out tasks varying from enhancements to pricing functions to purely IT activities.

Photo of Marco Carminati
Marco Carminati
Manager

After taking a Bachelor in Finance and a Master of Science in Economics, he specialized in Credit Risk Management and Modelling through almost 10 years of experience in both banking and consultancy industry with special focus on the development and validation of models for Credit Risk for regulatory and managerial purposes. Currently in charge of several projects in the Credit Risk Management area and Head of the iason Credit Risk Competence Center.

Photo of Andrea Mauri
Andrea Mauri
Senior Credit Quant

Executive Summary
Cover of the article Climate Change Risk: Guidelines for Financial Institutions and Stress-Test Frameworks

During the last few years climate-related risks and their impacts on financial institutions have increasingly become one of the main topics of discussion in the financial environment. This paper aims, first of all, to provide the definitions of ESG factors and risks, together with an overview of the supervisory expectations about their inclusion into financial institutions’ business strategy, internal governance and risk management framework. Secondly, it describes the status quo of the stress test framework, focusing on the main challenges to be faced by financial institutions when adapting their existing engines to the peculiarities of ESG risks, with a deep-dive on the climate change specific stress-test which will be conducted by ECB in 2022.

Impact of Covid-19 Announcements on Financial Markets
Roberta Fontana
Photo of Roberta Fontana
Roberta Fontana
Quantitative Analyst

Graduated in Mathematical Engineering witha major in Quantitative Finance, she iscurrently working on the supportingcounterparty credit risk activities for a bigpan European Bank.

Executive Summary
Cover of the article Impact of Covid-19 Announcements on Financial Markets

The purpose of this content is to provide a detailed analysis of the financial markets trend after the outbreak of the novel Coronavirus, trying to explain how the covid-related announcements have affected the markets. In particular, the paper focuses on highlighting the differences between the first and second wave of Covid-19. After a brief illustration of the pandemic effect on financial markets during 2020, two main categories have been identified among the announcements that most influenced the markets: medical bulletins, which report the daily number of confirmed cases and deaths, and government actions to counter the health and economic impact of the pandemic, including closure policies and social distancing, prevention campaigns and the use of medical devices and economic aids. These measures, together with the redundancy of news talking about the severity of the pandemic, also affected investors sentiment, which in turn weighed on equity market returns. Through a pooled OLS regression analysis with panel data, we find that during the first wave the stock market reacts negatively to the rise in confirmed cases, to lockdown and social distancing policies. Throughout the second wave, the markets are generally independent of medical bulletins and reacts negatively to the increase in government healthcare actions. The introduction of vaccine may have played a crucial role in these months, bringing new hopes and changing the markets trend. For this reason, future studies may focus on the relation between vaccines administrations and stock markets.

A Quantization Overview to Credit Counterparty Risk
Andrea Principe
Giacomo Vigo
Photo of Andrea Principe
Andrea Principe
Financial Engineer

He holds a MSc. in Mathematics and he iscurrently working, as a financial engineer, onthe supporting activity for a major Italianbank on the engine used to produce riskmetrics via full revaluation approach. He isinvolved in the enhancements to pricingfunction and also in the analysis andaggregation process of risk figures values.

Giacomo Vigo wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article A Quantization Overview to Credit Counterparty Risk

The counterparty risk topic has become predominant over the past few years according to the worldwide financial crisis happened in 2007-2008 and the following European sovereign debt crisis. It began to receive a growing attention from regulators, which required financial institutions to comply with more punctual conditions concerning counterparty credit exposures arising from derivatives, securities financing transactions, default and downgrade risks characterizing the Over The Counter derivatives market. Consequently, banks started to develop a series of effective and more accurate measures of risk, aimed at estimating the future MTM (or MTFs) value of a derivative at a potential default date, which is typically highly uncertain (as seen from today), over prescribed time horizon and fixed grid of time buckets. The most common approach to quantify the future MTM value is Monte Carlo simulation, which exhibits remarkable difficulties in terms of high computational cost, particularly when the problem dimension increase. Indeed, it’s particularly dependent on the number of considered assets. This is why many financial players moved to more effective and time saving technologies, e.g., based on grid computing and Graphics Processing Units (GPU) capabilities. Within this paper we would like to approach an alternative method based on different algorithmic strategies, quantization. The present paper gives an initial overview of both Monte Carlo Method and quantization approach with a subsequent comparison of the numerical application results among different practical cases. The goal is to show how the quantization approach outperforms Monte Carlo, both in terms of accuracy and computational efforts.

New Standard Conventions for Cash Product and Impacts on Banking Processes and Procedures
Michele Bonollo
Paolo Cobuccio
Alessandro Santocchi
Photo of Michele Bonollo
Michele Bonollo
Chief of Risk Methodologies Officer

He holds a degree in mathematics, a master degree in mathematical finance and a PHD in statistics. He worked as an executive in both large and regional italian banks. He has also collaborated with some consultant companies in the broad area of risk management, asset management, pricing models, software systems and regulatory compliance. Along with his professional activities, he always develops applied research in the above fields, with about 20 papers published in scientific journals and dozens of speeches in international conferences. He currently gives seminars and lessons in some top ranked italian universities.

Photo of Paolo Cobuccio
Paolo Cobuccio
Project Manager

As a Project Manager for one major italian bank, he is currently involved in a project aimed at managing impacts and corrective actions deriving from the introduction of significant regulatory changes within the interest rates world, offering his experience in project management and business analysis.

Photo of Alessandro Santocchi
Alessandro Santocchi
Business Analyst

He holds a Master in Science in Nuclear Engineering and a Master in Corporate Finance. He’s worked as Business Analyst for different consultant companies in top tier banks and oilgas companies in varied areas: risk management, IT and software systems and forecasting models.

Executive Summary
Cover of the article New Standard Conventions for Cash Product and Impacts on Banking Processes and Procedures

IBOR reform may risk to create divergences in the cash products market as there are not standards defined at internation level. The market participants are facing a transformation which will bare the results only in the next years. Also, the deadline of the LIBOR dismission, changes depending on the currency area and this does not help to reach standards and to provide a clean and stable picture of the markets to participants. The sterling working group, the ARCC and the Euro working group are working to define same conventions to mitigate the unpredictable changes of the transition and this articles aims to clear the different choices and the actions made so far.

Fallback Rate: Cash and Derivatives Products
Michele Bonollo
Paolo Cobuccio
Alessandro Santocchi
Photo of Michele Bonollo
Michele Bonollo
Chief of Risk Methodologies Officer

He holds a degree in mathematics, a master degree in mathematical finance and a PHD in statistics. He worked as an executive in both large and regional italian banks. He has also collaborated with some consultant companies in the broad area of risk management, asset management, pricing models, software systems and regulatory compliance. Along with his professional activities, he always develops applied research in the above fields, with about 20 papers published in scientific journals and dozens of speeches in international conferences. He currently gives seminars and lessons in some top ranked italian universities.

Photo of Paolo Cobuccio
Paolo Cobuccio
Project Manager

As a Project Manager for one major italian bank, he is currently involved in a project aimed at managing impacts and corrective actions deriving from the introduction of significant regulatory changes within the interest rates world, offering his experience in project management and business analysis.

Photo of Alessandro Santocchi
Alessandro Santocchi
Business Analyst

He holds a Master in Science in Nuclear Engineering and a Master in Corporate Finance. He’s worked as Business Analyst for different consultant companies in top tier banks and oilgas companies in varied areas: risk management, IT and software systems and forecasting models.

Executive Summary
Cover of the article Fallback Rate: Cash and Derivatives Products

Fallback clause is one of the most important pieces to complete the LIBOR reform. It allows legacy contracts to have legal continuity and avoid litigation among contractual parties. The main organizations for Cash products and derivatives propose different approaches about the application of the clause in the legacy contracts. ISDA, for derivatives contracts, launched in October 2020 a protocol to amend contracts by using the fallback clause previously defined in the various working groups. The supplement will amend ISDA’s standard definitions to incorporate robust fallbacks for legacy derivatives linked to IBORs from January 25th, 2021. For cash products, FCA and LMA, with the support of the main regulators, have been working together with the market participants in order to define common rules and waterfall choices to amend the contracts. The following papers tries to illustrate (i) the different approaches in the two areas, (ii) the trigger events for the fallback clause and (iii) how the migration could happen once the LIBORs will be dismissed.

Introduction on Money Laundering and Financial Terrorism Risks
Lorena Corna
Photo of Lorena Corna
Lorena Corna
Business Analyst

As Business analyst she currently works within the Risk IT dedicated team of a big pan European Bank. In particular, she follows the back-testing model for Counterparty Credit Risk.

Executive Summary
Cover of the article Introduction on Money Laundering and Financial Terrorism Risks

The author would provide an overview of Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) policies and procedures in place. In the first section, the author presents a general overview of International Standards with a focus on interpretative notes on the risk-based approach and FIU. To follow, the author gives a summary of the European legislation and the last contributions of i Basel Committee and European Banking Authority.

Vulnerability Analysis on Italian Banks during the Covid-19 Pandemic
Matteo Cecchin
Dario Esposito
Photo of Matteo Cecchin
Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

Photo of Dario Esposito
Dario Esposito
Chief Risk Regulatory Officer

Experienced professional with a demonstrated history of working in the financial services industry. Skilled in Enterprise Risk Management, Basel III and IV and AML. Strong finance professional postgraduated from University of London and IMD in Lausanne (International Institute for Management Development).

Executive Summary
Cover of the article Vulnerability Analysis on Italian Banks during the Covid-19 Pandemic

The results of this vulnerability assessment show that the Italian banking sector is fairly positioned to take on the pandemic-induced stress impact, but capital depletion in this scenario could be material especially for Retail Lenders and Small Domestic banks that have the greatest CET1 impact and need a capital increase between 2021 and 2022 to comply with the prudential capital ratios set by the Supervisor. The most significant effects on banks’ capital requirements are given by the credit component, since the effect of the credit support measures (moratoria and loan guarantees) reveal partially the real risk of credit exposures thus increasing the risk of “cliff effect”.

2019 FRTB Review - Main Interventions (Rev.)
Nicola Giancaspro

Nicola Giancaspro wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article 2019 FRTB Review - Main Interventions (Rev.)

This paper provides a summary on the main innovations about the Fundamental Review of the Trading Book, the new regulatory capital requirements for Market Risk. In particular, the author focuses on the modifications of the standards introduced by the Basel Committee on Banking Supervision in January 2019, highlighting the amendments with respect to the 2016 version and providing a qualitative assessment on each kind of intervention.

Synergies and Challenges in the Implementation of Basel IV Regulations Process (Rev.)
Marco Gavioli

Marco Gavioli wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Synergies and Challenges in the Implementation of Basel IV Regulations Process (Rev.)

Due to the need for all European banks to comply with the upcoming regulatory frameworks issued by BCBS and ISDA authorities, the authors decided to analyze three of the most impacting regulations for the bank Risk IT function. The recent regulatory need to have a more risk-sensitive framework translated into the design of quite refined methodologies also for standardized approaches: considering the sensitivity-based common approach, the authors chose to focus on the FRTB-SBM, SIMM and SA-CVA regulations and to give a representation of the workflow needed for the metric calculation. The article has the intention to find all relevant similarities and synergies, both on a methodological and technical point of view, that can be exploited by banks, as well as to warn against some challenges that can arise from their implementation.

The Effects of FRTB in the CVA Risk Framework (Rev.2)
Gianbattista Aresi
Marco Gavioli
Luca Olivo
Photo of Gianbattista Aresi
Gianbattista Aresi
Senior Manager and Chief Operating Officer Iason Italia

As Manager, he currently manages an Iason team working on the Market and Counterparty Credit Risk systems for a big pan-European Bank. The team is responsible for the monitoring and the governance of any new products and/or intervention the bank wants to implement in the financial risk chain to be compliant with markets or regulatory needs.

Marco Gavioli wrote the article during the collaboration with Iason Consulting

Photo of Luca Olivo
Luca Olivo
Managing Director Iason Italia

Leading Iason teams to support Systemically Important Financial Institutions in the Monitoring and Governance of Risk Models. The teams are specialised in the analysis, development and integration of End-to-End processes for the implementation of new models and products in the banks financial and credit risk chains. The team also supports SIFIs during the periodical on-site inspections of regulators for the review of the internal models.

Executive Summary
Cover of the article The Effects of FRTB in the CVA Risk Framework (Rev.2)

In the light of the recent publication of the finalised Basel 3 review by the Basel Committee on Banking Supervision (BCBS), the authors analyse the effects of the incoming FRTB regulation on the CVA risk framework. As explained in the article, the Basel Committee in 2015 started an important review of the CVA risk framework which has been finalized in December 2017 with the publication of the new Basel 3 standards. In July 2020, BCBS published the revised version of CVA risk framework after November 2019 consultation. The regulator is proposing a new sensitivity-based CVA risk charge with the intention of being much more consistent with the FRTB standardised approach. The paper is also a chance for the authors to explore the shortcomings and the challenges implied in the newly proposed CVA regulation, especially with respect to the concurrent financial risk frameworks.

2020 Download Area
The LIBOR Reform and the Revolution of the New Benchmark Rates: Overnight Rates and New Conventions on Contracts and Instruments
Michele Bonollo
Paolo Cobuccio
Alessandro Santocchi
Photo of Michele Bonollo
Michele Bonollo
Chief of Risk Methodologies Officer

He holds a degree in mathematics, a master degree in mathematical finance and a PHD in statistics. He worked as an executive in both large and regional italian banks. He has also collaborated with some consultant companies in the broad area of risk management, asset management, pricing models, software systems and regulatory compliance. Along with his professional activities, he always develops applied research in the above fields, with about 20 papers published in scientific journals and dozens of speeches in international conferences. He currently gives seminars and lessons in some top ranked italian universities.

Photo of Paolo Cobuccio
Paolo Cobuccio
Project Manager

As a Project Manager for one major italian bank, he is currently involved in a project aimed at managing impacts and corrective actions deriving from the introduction of significant regulatory changes within the interest rates world, offering his experience in project management and business analysis.

Photo of Alessandro Santocchi
Alessandro Santocchi
Business Analyst

He holds a Master in Science in Nuclear Engineering and a Master in Corporate Finance. He’s worked as Business Analyst for different consultant companies in top tier banks and oilgas companies in varied areas: risk management, IT and software systems and forecasting models.

Executive Summary
Cover of the article The LIBOR Reform and the Revolution of the New Benchmark Rates: Overnight Rates and New Conventions on Contracts and Instruments

The advent of the new reference rates, strongly desired following the credibility crisis of LIBORs, has led for almost all currencies, to the definition of specific Overnight rates as new reference (risk-free) rates. This determines a strong innovation in all banking and financial products indexed at these rates. In the article technical aspects and open problems.

The Propagation of Liquidity Shocks in the Interbank Market:an Analysis on Systemic Risk
Giampietro Bernini
Giacomo Colombo
Livio Purromuto

Giampietro Bernini wrote the article during the collaboration with Iason Consulting

Photo of Giacomo Colombo
Giacomo Colombo
Business Analyst

He holds a master degree in Economic, with a specialization in Corporate Finance. After two years in the M&A sector, he moved on the risk management field. He is specialized in the automated computation and methodologies implementation. As functional leader, he currently manages several tasks in the largest Italian bank and follows regulatory and managerial stress test exercises.

Livio Purromuto wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article The Propagation of Liquidity Shocks in the Interbank Market:an Analysis on Systemic Risk

The main concern of this work is on the understanding of the drivers of financial contagion within the banking sector. The interbank market represents the major channel through which liquidity shocks propagate within the financial system. The analysis provides a description of the repo market's dynamics, that represents the main source of short term funding for financial intermediaries. The evolution of the structure of this market is characterized by a sharp increase in complexity and concentration. This tendency has increased the exposure of the financial system to systemic outbreaks. Moreover, we consider a theoretical framework based on graph theory, that is able to reproduce a financial network and its dynamics in response to a set of liquidity shocks. The work takes into consideration two distinct graph models, Erdös and Rényi model and the Scale Free model. The former is characterized by a binomial degree distribution while the latter produces network structures characterized by power law degree distributions, that are suitable to reproduce the high levels of concentration that are actually observed in real financial configurations. The resilience of the banking sector is then evaluated through the use of an enhancement of the model for the dynamics of financial contagion, developed by Gai, Haldane and Kapadia [15] that is applied to the two network structures previously introduced. The analysis also stresses the importance of both micro and macro-prudential regulation in order to prevent systemic outbreaks. From a macro perspective, the introduction of a periodical stress testing framework for liquidity risk would increase the central supervision over the risk of observing crunches in the interbank market that might impair several interlinked financial markets and ultimately the real economy.

Climate Change Risk: Overview of the Current Landscape and Next Steps for Financial Institutions
Alessandro Cappo
Simone Manca
Alessandro Miola
Ekaterina Mironenkova
Photo of Alessandro Cappo
Alessandro Cappo
Quantitative Analyst

He holds a MSc. in Mathematical Engineering and he is currently involved, as a quantitative analyst, on the engine used by one of the major Italian banks to produce risk metrics via full revaluation approach, carrying out tasks varying from enhancements to pricing functions to purely IT activities.

Simone Manca wrote the article during the collaboration with Iason Consulting

Photo of Alessandro Miola
Alessandro Miola
Quantitative Analyst

He graduated in Mathematical Engineering at Politecnico di Milano. In Iason, he has mainly supported a Pan-European bank for the credit stress test exercise as well as on IT projects. In particular, he has collaborated to the development of Satellite models for the estimation of stressed credit risk metrics, to the maintenance of tools for credit loss estimation, IFRS9 staging allocation and to the IT implementation of a rating engine.

Ekaterina Mironenkova wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Climate Change Risk: Overview of the Current Landscape and Next Steps for Financial Institutions

Despite the overshadowing effect of the Covid-19 pandemic during the second quarter of the year, discussions centered on the impacts and opportunities arising from the inclusion of climate change risk into financial institutions' governance, strategy, risk management and disclosure frameworks are constantly getting more intense: this paper aims to provide help to banks (and risk managers, in particular) in comprehending the nature and implications of such new types of risk and to comply with future directives. The paper will provide an overview of the most recent developments in Regulatory and Supervisory expectations for the European area, as well as suggestions related to risk metrics computation's methodologies and a simple practical example of scenario analysis performed with the use of Iason's G-RiskPar tool.

Remote Working:Advices to Reduce Risks and Boost Productivity
Lisa Agostoni

Lisa Agostoni wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Remote Working:Advices to Reduce Risks and Boost Productivity

This article has the main purpose to put forward some ideas to embrace a new way of working, that implies a change of mentality but can also be very effective at the productive level; we provide some practical advices on how to manage potential operative risks and maximize benefits working from home. In the last part, we shows how technology can play a pivotal role in supporting and maximizing performances of remote working.

The LIBOR Reform and the New Reference Rates Revolution: Origin and Guidelines
Michele Bonollo
Paolo Cobuccio
Alessandro Santocchi
Photo of Michele Bonollo
Michele Bonollo
Chief of Risk Methodologies Officer

He holds a degree in mathematics, a master degree in mathematical finance and a PHD in statistics. He worked as an executive in both large and regional italian banks. He has also collaborated with some consultant companies in the broad area of risk management, asset management, pricing models, software systems and regulatory compliance. Along with his professional activities, he always develops applied research in the above fields, with about 20 papers published in scientific journals and dozens of speeches in international conferences. He currently gives seminars and lessons in some top ranked italian universities.

Photo of Paolo Cobuccio
Paolo Cobuccio
Project Manager

As a Project Manager for one major italian bank, he is currently involved in a project aimed at managing impacts and corrective actions deriving from the introduction of significant regulatory changes within the interest rates world, offering his experience in project management and business analysis.

Photo of Alessandro Santocchi
Alessandro Santocchi
Business Analyst

He holds a Master in Science in Nuclear Engineering and a Master in Corporate Finance. He’s worked as Business Analyst for different consultant companies in top tier banks and oilgas companies in varied areas: risk management, IT and software systems and forecasting models.

Executive Summary
Cover of the article The LIBOR Reform and the New Reference Rates Revolution: Origin and Guidelines

Starting from the well-known problem of LIBOR rates manipulation, on the thrust of the Financial Stability Board, an extensive reform, for the development of new benchmark rates (RFRs), was conducted at the international level. In this work, the first of a series, after a brief introduction, we try to focus the attention on the operational changes expected within the interest rate market, in light of the indications provided by the Regulators.

New Challenge on SA-CCR: an Overview on Implementation Process
Lorena Corna
Francesco Zorzi
Photo of Lorena Corna
Lorena Corna
Business Analyst

As Business analyst she currently works within the Risk IT dedicated team of a big pan European Bank. In particular, she follows the back-testing model for Counterparty Credit Risk.

Photo of Francesco Zorzi
Francesco Zorzi
Quantitative Analyst

As a quantitative analyst, he is currently working on the supporting activity for a major Italian global bank dealing with the counterparty credit risk framework. He also supports new regulation implementation on the aggregation phase of the counterparty credit risk chain.

Executive Summary
Cover of the article New Challenge on SA-CCR: an Overview on Implementation Process

All European banks need to comply with the improvements in the calculation of capital requirements introduced with Basel III. In 2014, the Basel Committee introduced a Standard Approach for Counterparty Credit Risk (SA-CCR) that is the object of some review by the European Banking Authority and Financial Industry in the last years. The authors have been focused on the last changes of the SA-CCR framework, highlighting the amendments introduced and the industry response to the proposed framework. Furthermore, the authors provide an overview of SA-CCR implementation in a European Bank, highlighting possible critical points in the implementation phase.

2020 EU-wide EBA Stress Test:A Methodological Analysis on the Credit Risk Perspective
Milica Antonijevic
Tancredi Mollica

Milica Antonijevic wrote the article during the collaboration with Iason Consulting

Tancredi Mollica wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article 2020 EU-wide EBA Stress Test:A Methodological Analysis on the Credit Risk Perspective

This paper addresses the main novelties brought by the 2020 EU-wide stress test methodological note. These variations are mainly a consequence of results of the last stress test exercise as well as the regulatory changes (new DoD, new securitization framework and CRR II as well as the prudential back-stop rule), which have already or will come into effect during the timespan of the exercise. In comparison to the previous methodology (i.e. 2018 EU-wide stress test methodological note), the paper analyses the main topics on which clear differences emerge: scenario reversion, macro-economic projections, provision calculation for NPEs, securitisation exposures, PIT parameters, provision for sovereigns, LTV and impact on REA and IRB regulatory EL. In addition to that, the paper provides a constructive overview of the critical points for the future consideration of the stress test methodology

NPL Classification A Random Forest Approach (Rev.)
Milica Antonijevic
Andrea Fenu
Alessandro Palmisano
Riccardo Redaelli
Massimiliano Zanoni

Milica Antonijevic wrote the article during the collaboration with Iason Consulting

Andrea Fenu wrote the article during the collaboration with Iason Consulting

Alessandro Palmisano wrote the article during the collaboration with Iason Consulting

Riccardo Redaelli wrote the article during the collaboration with Iason Consulting

Photo of Massimiliano Zanoni
Massimiliano Zanoni
Senior Manager

He has over 20 years’ experience in the management of complex projects in credit and financial risk within leading national and international financial services; maturing a combination of quantitative analysis and problem-solving capabilities. Besides, his consulting experience ranging from model development to the implementation of management reporting system; to compliance and IRB validation in credit risk and ALM project, he has worked for Veneto Banca as the Head of Methodology and Reporting - Risk Management Department. In the same period, he was also the Risk Management delegate in the Risk committees of foreign banks and the Risk Management delegate in the Board of Banca Apulia where he directly oversaw the transition process to the Solvency II framework. In Iason, he has been involved in the development of credit risk solutions and the implementation of a Dynamic Balance Sheet framework.

Executive Summary
Cover of the article NPL Classification A Random Forest Approach (Rev.)

Artificial Intelligence has quickly entered in the financial services industry, covering a wide range of applications. This work proposes a structured statistical approach to classify NPL assets according to their potential recovery level, within an unsecured commercial portfolio. Asset classification is based on the information provided with the NPL portfolios and, possibly, some information gathered during the recovery process. The framework adopted is based on two different components: one targeting the cases that will be recovered and one estimating their recovery level, in particular the work compares a Machine Learning technique known as Random Forest to a better-known Logit approach. The first is introduced with a review of the underlining Decision Tree theory, including its performance metrics, to which an extended Confusion table is added to facilitate the comparison of the event recovery forecasts provided by the different models. The comparison shows that the Random Forest approach is as reliable and performing as the more known Logistic approach, providing a solid overall performance even with a limited set of information. It also successfully tests the ability to compare a portfolio under management to a new one of the same type.

FinTechs and Challenger Banks: Old Business, Brand New Approach
Ilaria Biondo
Antonio Menegon

Ilaria Biondo wrote the article during the collaboration with Iason Consulting

Photo of Antonio Menegon
Antonio Menegon
Manager and Senior Risk Quant

With six years of experience in Risk Management and Consulting industries, he is currently leading the team of Business Analysts and Financial Engineers at one big pan-European bank. Graduated in Mathematics from Università degli Studi di Padova, he has been continuously interested in new quant topics, focusing in the last years on Machine Learning and its application in finance.

Executive Summary
Cover of the article FinTechs and Challenger Banks: Old Business, Brand New Approach

FinTechs are increasingly challenging the status quo of the financial system, either providing brand new services or revisiting the actual players' offerings. The rise of these companies is fueled by big financing from PE, VC and crowdfunding, and by an extremely favourable ground from both a regulatory and a clientele point of view. Given this general scenario, the paper focuses on the major new fintech players in the European banking landscape, analysing their business model and the possible implications for the traditional commercial banks.

2019 Download Area
Security Market: an Overview of Repo and Security Lending Transactions
Giammarco Dalessandro
Nicola Giancaspro
Francesco Zorzi

Giammarco Dalessandro wrote the article during the collaboration with Iason Consulting

Nicola Giancaspro wrote the article during the collaboration with Iason Consulting

Photo of Francesco Zorzi
Francesco Zorzi
Quantitative Analyst

As a quantitative analyst, he is currently working on the supporting activity for a major Italian global bank dealing with the counterparty credit risk framework. He also supports new regulation implementation on the aggregation phase of the counterparty credit risk chain.

Executive Summary
Cover of the article Security Market: an Overview of Repo and Security Lending Transactions

With this work, we would like to provide an overview of the Repurchase Agreement (Repo) and the Security Lending markets. Often, it could be difficult to distinguish Repo and Security Lending: analyzing both typologies of instruments we first look for any differences for what concerns their technical structures, economic profile, participants, legal arrangements. Second, we analyze how these kind of instruments behaved and which vulnerabilities appeared during the last financial and banking crisis. We end the article focusing on structured typologies of Repo, tri-party trade and the total return swap highlighting characteristics in common with classic Repo.

NPL Classification A Random Forest Approach
Milica Antonijevic
Andrea Fenu
Alessandro Palmisano
Riccardo Redaelli
Massimiliano Zanoni

Milica Antonijevic wrote the article during the collaboration with Iason Consulting

Andrea Fenu wrote the article during the collaboration with Iason Consulting

Alessandro Palmisano wrote the article during the collaboration with Iason Consulting

Riccardo Redaelli wrote the article during the collaboration with Iason Consulting

Photo of Massimiliano Zanoni
Massimiliano Zanoni
Senior Manager

He has over 20 years’ experience in the management of complex projects in credit and financial risk within leading national and international financial services; maturing a combination of quantitative analysis and problem-solving capabilities. Besides, his consulting experience ranging from model development to the implementation of management reporting system; to compliance and IRB validation in credit risk and ALM project, he has worked for Veneto Banca as the Head of Methodology and Reporting - Risk Management Department. In the same period, he was also the Risk Management delegate in the Risk committees of foreign banks and the Risk Management delegate in the Board of Banca Apulia where he directly oversaw the transition process to the Solvency II framework. In Iason, he has been involved in the development of credit risk solutions and the implementation of a Dynamic Balance Sheet framework.

Executive Summary
Cover of the article NPL Classification A Random Forest Approach

Artificial Intelligence has quickly entered in the financial services industry, covering a wide range of applications. This work proposes a structured statistical approach to classify NPL assets according to their potential recovery level, within an unsecured commercial portfolio. Asset classification is based on the information provided with the NPL portfolios and, possibly, some information gathered during the recovery process. The framework adopted is based on two different components: one targeting the cases that will be recovered and one estimating their recovery level, in particular the work compares a Machine Learning technique known as Random Forest to a better-known Logit approach. The first is introduced with a review of the underlining Decision Tree theory, including its performance metrics, to which an extended Confusion table is added to facilitate the comparison of the event recovery forecasts provided by the different models. The comparison shows that the Random Forest approach is as reliable and performing as the more known Logistic approach, providing a solid overall performance even with a limited set of information. It also successfully tests the ability to compare a portfolio under management to a new one of the same type.

BigTech and New Banking Landscape - Evolution, Benefits, Risks and Oversights
Ilaria Biondo
Antonio Menegon

Ilaria Biondo wrote the article during the collaboration with Iason Consulting

Photo of Antonio Menegon
Antonio Menegon
Manager and Senior Risk Quant

With six years of experience in Risk Management and Consulting industries, he is currently leading the team of Business Analysts and Financial Engineers at one big pan-European bank. Graduated in Mathematics from Università degli Studi di Padova, he has been continuously interested in new quant topics, focusing in the last years on Machine Learning and its application in finance.

Executive Summary
Cover of the article BigTech and New Banking Landscape - Evolution, Benefits, Risks and Oversights

Nowadays advance in technology, coupled with huge amount of heterogeneous data being available, is boosting developments in fields as marketing, robotics, automotive, etc. In this sense, the financial sector is not any different, having already experimented substantial changes from, just to name a few, trading activities to credit lending's. Entrance of new players, from small FinTech companies to BigTech firms, has the potential of either enhance or disrupt the status quo of the financial ecosystem. Examples are already tangible in countries like China, were Alipay, Tencent and Ant Financial are having a sensible impact on payments and credit provisioning activities. Since even more firms are attracted by the potential revenue streams coming from opportunities within the financial sector, regulators has started posing questions about how non-financial institutions should be regulated. This paper aims at providing an overview of the current FinTech and BigTech landscape, with emphasis on the main services provided, coupled with a summary of the assessments already performed by surveillance authorities (mainly BIS) on risks and opportunities the financial sector is facing.

Risk and Profitability of Sight Deposits in the Italian Banking Industry (Rev)
Antonio Castagna
Giovanni Mistè
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Giovanni Mistè wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Risk and Profitability of Sight Deposits in the Italian Banking Industry (Rev)

This article presents a stochastic risk factor approach to gauge the expected profitability and the liquidity and duration risks of sight deposits of the Italian banking industry, using public data available from Banca d'Italia, spanning over a long period of time that includes the Euro Crisis. The approach is applied to both retail and corporate customers, and it considers their different behaviour based on the size of their deposit.

Modeling of Libor-Ois Basis (Rev)
Matteo Camelia
Antonio Castagna
Andrea Cova

Matteo Camelia wrote the article during the collaboration with Iason Consulting

Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Andrea Cova wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Modeling of Libor-Ois Basis (Rev)

The authors introduce a set of models that explain the market phenomenology of Libor forward fixings implied in swap prices. The models are all based on the idea that the Libor fixings refer to a panel of primary banks whose composition may change over time. This effect is crucial to obtain the observed humped forward fixing curves, that could not be otherwise retrieved by a simple credit default model or by a forward interest rate analogy. The models differ only in the assumptions on how the panel composition will change in the future.

Market Instruments for Collateral Management (Rev)
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Market Instruments for Collateral Management (Rev)

We analyse the most common market instruments to manage and optimise collateral allocation: the repo, the sell/buy back and security lending.

Collateral Management: Processes, Tools and Metrics (Rev)
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Collateral Management: Processes, Tools and Metrics (Rev)

Collateral management is a crucial activity in the financial industry. The author introduces a framework to analyse the supply and the demand of collateral internally originated by the banking activity, the tools to manage both and the targets that should be aimed at.

Towards a Theory of Internal Valuation and Transfer Pricing of Products in a Bank: Funding, Credit Risk and Economic Capital (Rev)
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Towards a Theory of Internal Valuation and Transfer Pricing of Products in a Bank: Funding, Credit Risk and Economic Capital (Rev)

In this article the author outlines a framework to theoretically identify the components of the value that a bank should attach to a deal. Moreover the framework suggests how to charge these components to the relevant departments and/or to the final counterparty (client) by an internal transfer pricing system.

Maximizing Cumulative Prospect Utility for Target Annuity Investment Strategies
Elia Mazzoni

Elia Mazzoni wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Maximizing Cumulative Prospect Utility for Target Annuity Investment Strategies

The aim of this paper is to show how to use the cumulative prospect theory, created by Kahneman and Tversky, that takes into account the customer's parameters of risk-aversion and reaction to extreme events, loss and gains, in order to plan an investment strategy (mainly based on portfolio insurance techniques) to receive a target annuity after a previously established period of time.

Are EBA Stress-Test Exercises Driving Banks into Different Business Models?
Damiano Cutri
Dario Esposito

Damiano Cutri wrote the article during the collaboration with Iason Consulting

Photo of Dario Esposito
Dario Esposito
Chief Risk Regulatory Officer

Experienced professional with a demonstrated history of working in the financial services industry. Skilled in Enterprise Risk Management, Basel III and IV and AML. Strong finance professional postgraduated from University of London and IMD in Lausanne (International Institute for Management Development).

Executive Summary
Cover of the article Are EBA Stress-Test Exercises Driving Banks into Different Business Models?

The paper provides a general analysis of banking business models identification and evolution, and the relationship between the historical behaviour of business models and EBA stress-test projections, with particular attention to Italian banks. The authors propose a new approach to identify business models and then investigate if EU wide stress-test exercises reflect or contrast the past. In addition, they suggest that several banks involved in the stress-test exercises changed business model in order to respond to the continuously increasing regulatory framework even at the expense of economic performances. Finally, the focus on Italian banks, highlights the role of national characteristics that should be considered when analyzing and comparing banks.

A Benchmark Framework for IFRS9 Multiyear-PD Curves Estimation and Stress Testing Exercise - an Application
Antonio Scaravaggi
Elia Stucchi

Antonio Scaravaggi wrote the article during the collaboration with Iason Consulting

Elia Stucchi wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article A Benchmark Framework for IFRS9 Multiyear-PD Curves Estimation and Stress Testing Exercise - an Application

This paper presents an econometric and statistic methodologies to manage the enhancement of credit risk modelling introduced with the IFRS9 regulation and it sketches a framework to asses the new IFRS9 measures on a credit portfolio considering different macro-economic scenarios. More specifically, we calibrate the models with the purpose of creation of the multi-year IFRS9 PD curves that can be used to evaluate the Expected Credit Loss 1y and Lifetime for Italian credit portfolios. The framework developed take advantage of the well known theory behind the satellite models to define the sensitivity of credit risk to the macroeconomic environment where the creditors operate. The data, that are a benchmark of Italian system, are retrieved from the public database of "Banca d'Italia" where they are collected according to geographical area and economic activities. To model the macroeconomic environment we calibrate a structural vector autoregression model, in order to describe the behavior of the most relevant economic indicators. The statistical technique examined to estimate the satellite models and VAR parameters is the Bayesian Averaging of Classical Estimation which is widely used also by the ECB in building benchmark models. This framework allows for i) evaluating different macro-economic scenarios; ii) identifying an Italian benchmark of credit risk measure under the new IFRS9 approach; iii) defining a solid framework in order to calculate the Expected Credit Loss for accounting purposes, which can be used on any Italian credit portfolios; iv) estimating the credit risk portfolio sensitivity to the macro-economic shocks, according to its composition in term of economic activities and geographic area of the creditors that belonging to it.

2019 FRTB Review - Main Interventions
Marco Carandina

Marco Carandina wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article 2019 FRTB Review - Main Interventions

This paper provides a summary on the main innovations about the Fundamental Review of the Trading Book, the new regulatory capital requirements for Market Risk. In particular, the author focuses on the modifications of the standards introduced by the Basel Committee on Banking Supervision in January 2019, highlighting the amendments with respect to the 2016 version and providing a qualitative assessment on each kind of intervention.

Advances in Incremental Valuation of Financial Contracts and Definition of the Economic Meaning of the Capital Value Adjustment (KVA)
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Advances in Incremental Valuation of Financial Contracts and Definition of the Economic Meaning of the Capital Value Adjustment (KVA)

We extend the analysis we sketched in Castagna and we provide an application of the framework we introduced to incrementally evaluate financial contracts within a financial institution's balance sheet

2018 Download Area
An overview of BREXIT effects on the Banking System
Elia Stucchi

Elia Stucchi wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article An overview of BREXIT effects on the Banking System

The decision by Great Britain to leave Europe is certainly an extraordinary event. Following what has been proposed by some Regulatory Opinions and some already developed works, this article presents a brief overview of the systemic effects for the Banks active in the Community market and in the UK. The effects of the so-called BREXIT can be observed in all the operating levels of the Banks and will determine the need, by the Institutes, to develop a series of procedures to mitigate the risks inherent in this event.

Interest Rate Benchmarks Reform - Time to Transition is Now
Raphael Cavallari
Luca Olivo

Raphael Cavallari wrote the article during the collaboration with Iason Consulting

Photo of Luca Olivo
Luca Olivo
Managing Director Iason Italia

Leading Iason teams to support Systemically Important Financial Institutions in the Monitoring and Governance of Risk Models. The teams are specialised in the analysis, development and integration of End-to-End processes for the implementation of new models and products in the banks financial and credit risk chains. The team also supports SIFIs during the periodical on-site inspections of regulators for the review of the internal models.

Executive Summary
Cover of the article Interest Rate Benchmarks Reform - Time to Transition is Now

The paper provides a general overview on the ongoing process of reforming Interest Rate Benchmarks, with particular attention to the Euro Area. The authors highlight the potential implications that this reform would have on both business and technical aspects of banks' processes, with focus on the Risk Management fields. Due to the magnitudo of the change and the challenges posed by its implications, the authors believe banks should start transition processes now in order to minimize disruption when current IR benchmarks will cease to be contributed (for some of them as early as 2020). In addition, they suggest banks could take this transition also as a chance to optimize current processes within their risk frameworks in order to reduce complexity and increase efficiency.

SA-CCR Implications and Challenges of the New Regulation
Lorena Corna
Photo of Lorena Corna
Lorena Corna
Business Analyst

As Business analyst she currently works within the Risk IT dedicated team of a big pan European Bank. In particular, she follows the back-testing model for Counterparty Credit Risk.

Executive Summary
Cover of the article SA-CCR Implications and Challenges of the New Regulation

In light of the revised regulatory frameworks for market and counterparty risks, the author gives an overview on the Standardised Approach for Counterparty Credit Risk (SA-CCR) and its implementation issues in a bank Risk framework. The approach presented by the Basel Committee on Banking Supervision on March 2014 required a study performed by the European Banking Authority concerning the mapping of derivative transactions to risk categories and the correction of regulatory formulas in the current context of negative interest rates. Although the new regulation solves some shortcomings of the current standard approach to CCR, e.g. partially recognizing netting benefits coming from margining and hedging, a few features still need particular attention in order to properly measure the risks associated to the instruments in scope of the regulation. In particular, as also pointed out by EBA, a significant impact on the final capital requirement (the EAD) can derive from the methodology employed to identifiy the primary risk driver of each transaction. After revising the methodologies proposed by EBA, a case study is presented, based on a portfolio including cross currency swaps, and an alternative methodology, aimed at assessing the materiality of each risk driver of the transaction, is proposed. The details on the latter are left to a future publication.

Synergies and challenges in the implementation of Basel IV regulations
Beatrice Bianco
Michele Romanini

Beatrice Bianco wrote the article during the collaboration with Iason Consulting

Michele Romanini wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Synergies and challenges in the implementation of Basel IV regulations

Due to the need for all European banks to comply with the upcoming regulatory frameworks issued by BCBS and ISDA authorities, the authors decided to analyze three of the most impacting regulations for the bank Risk IT function. The recent regulatory need to have a more risk-sensitive framework translated into the design of quite refined methodologies also for standardized approaches: considering the sensitivity-based common approach, the authors chose to focus on the FRTB-SBM, SIMM and SA-CVA regulations and to give a representation of the workflow needed for the metric calculation. The article has the intention to find all relevant similarities and synergies, both on a methodological and technical point of view, that can be exploited by banks, as well as to warn against some challenges that can arise from their implementation.

Modelling Banking Commissions
Antonio Castagna
Federico Mondonico
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Federico Mondonico wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Modelling Banking Commissions

This paper presents a procedure for the modelling of net bank commissions (Non Interest Rate Income) as a function of macroeconomic variables. The methodology used to estimate the models is based on a Bayesian approach (BACE) method which provides the degree of relevance for each macroeconomic variable, determining its impact in explaining the evolution of the commissions. Uses of the procedure described above range from internal management purposes to regulatory and supervisory stress testing. A quantitative analysis of the commissions is presented for the Italian banking system, at an aggregate level, and for a sample of Italian banks, at single entity level.

Analysis of the New Standards to Measure and Manage the Risk of the Banking Book Issued by BIS Committee
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Analysis of the New Standards to Measure and Manage the Risk of the Banking Book Issued by BIS Committee

This paper presents an analysis of the new standards issued in April 2016 by the Basel Committee, on the measurement and the management of the IRRBB. We will investigate how the new rules will affect the processes currently run by banks and if they are consistent with sound financial principles.

The Effect of the FRTB in the CVA Risk Framework (Rev)
Gianbattista Aresi
Luca Olivo
Photo of Gianbattista Aresi
Gianbattista Aresi
Senior Manager and Chief Operating Officer Iason Italia

As Manager, he currently manages an Iason team working on the Market and Counterparty Credit Risk systems for a big pan-European Bank. The team is responsible for the monitoring and the governance of any new products and/or intervention the bank wants to implement in the financial risk chain to be compliant with markets or regulatory needs.

Photo of Luca Olivo
Luca Olivo
Managing Director Iason Italia

Leading Iason teams to support Systemically Important Financial Institutions in the Monitoring and Governance of Risk Models. The teams are specialised in the analysis, development and integration of End-to-End processes for the implementation of new models and products in the banks financial and credit risk chains. The team also supports SIFIs during the periodical on-site inspections of regulators for the review of the internal models.

Executive Summary
Cover of the article The Effect of the FRTB in the CVA Risk Framework (Rev)

In the light of the recent publication of the finalised Basel 3 review by the Basel Committee on Banking Supervision (BCBS), the authors analyse the effects of the incoming FRTB regulation on the CVA risk framework. As explained in the article, the revision of regulatory CVA standards, started in 2015 with consultative papers, has been finalised in December 2017 by the Basel Committee with the publication of the new Basel 3 framework. The regulator is proposing a new sensitivity-based CVA risk charge with the intention of being much more consistent with the FRTB standardised approach. The paper is also a chance for the authors to explore the shortcomings and the challenges implied in the newly proposed CVA regulation, especially with respect to the concurrent financial risk frameworks.

2017 Download Area
Benchmark Framework for NMDM
Antonio Castagna
Antonio Scaravaggi
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Antonio Scaravaggi wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Benchmark Framework for NMDM

This paper presents an application of stochastic risk factor approach to model the non-maturing deposits and it sketches a benchmark framework to assess the related expected profitability and the liquidity and duration risks of a bank compared with the rest of the economic system it works within. More specifically, we calibrate the model to system data for sight deposits of the Italian banking industry, available from the public statistical data base of Banca d'Italia, spanning over a long period of time that includes the Euro Crisis. The approach is applied to both retail and corporate customers, and it considers their different behaviour based on the size of their deposit. It allows for i) an integrated modelling of the market interest rates, creditworthiness of the bank and evolution of the deposits' volume; ii) stochastic risk factors driving deposits' rates and volume; iii) unified and consistent measurement of the interest rate risk and the liquidity; iv) negative interest rates, both at inception and in the future; v) the evaluation of optionalities such as the zero floor on the deposits rates; vi) stress testing for ALM purposes.

The Effect of the FRTB in the CVA Risk Framework
Gianbattista Aresi
Luca Olivo
Photo of Gianbattista Aresi
Gianbattista Aresi
Senior Manager and Chief Operating Officer Iason Italia

As Manager, he currently manages an Iason team working on the Market and Counterparty Credit Risk systems for a big pan-European Bank. The team is responsible for the monitoring and the governance of any new products and/or intervention the bank wants to implement in the financial risk chain to be compliant with markets or regulatory needs.

Photo of Luca Olivo
Luca Olivo
Managing Director Iason Italia

Leading Iason teams to support Systemically Important Financial Institutions in the Monitoring and Governance of Risk Models. The teams are specialised in the analysis, development and integration of End-to-End processes for the implementation of new models and products in the banks financial and credit risk chains. The team also supports SIFIs during the periodical on-site inspections of regulators for the review of the internal models.

Executive Summary
Cover of the article The Effect of the FRTB in the CVA Risk Framework

In the light of the recent reviews performed by the BCBS, the authors analyse the effects of the incoming FRTB regulation on the CVA risk framework. As explained in the article, the consultative papers published by the Basel Committee between July 2015 and March 2016 are proposing a new sensitivity-based CVA risk charge that would be much more consistent with the FRTB standardised approach than the current Basel 3 framework. The article is also a chance for the authors to explore the shortcomings and the challenges implied in the newly proposed CVA regulation, especially with respect to the concurrent financial risk frameworks.

2013 Download Area
Funding Valuation Adjustment (FVA) and Theory of the Firm: A Theoretical Justification of the Inclusion of Funding Costs in the Evaluation of Financial Contracts
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Funding Valuation Adjustment (FVA) and Theory of the Firm: A Theoretical Justification of the Inclusion of Funding Costs in the Evaluation of Financial Contracts

We propose a justification of the current practice to charge funding costs in the price of the investments of a bank (and more generally of a firm) within the classical theory of the firm originated from the works by Modigliani and Miller and Merton. This is a first attempt to generalize these works leading to interesting, but not completely sound, results.

Pricing of derivatives contracts under collateral agreements: liquidity and funding value adjustments
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Pricing of derivatives contracts under collateral agreements: liquidity and funding value adjustments

* A Brief Digression on Price and Value * Pricing in a Simple Discrete Setting * Replicating Portfolio in Continuous Time * Pricing with Funding Rate Different from Investment Rate * Funding Rate Different from Investment Rate and Repo Rate * Interest Rate Derivatives * Organization of the Dealing Room

Smile-consistent CMS adjustment in closed form: introducing the Vanna-Volga approach
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Smile-consistent CMS adjustment in closed form: introducing the Vanna-Volga approach

In this article, we introduce the Vanna-Volga approach for an alternative valuation of CMS convexity adjustments. Our pricing procedure leads to closed-form formulas that are extremely simple to implement and that retrieve, within bid-ask spreads, market data of CMS swap spreads.

Consistent pricing of FX options
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Consistent pricing of FX options

In the current markets, options with different strikes or maturities are usually priced with different implied volatilities. This stylized fact, which is commonly referred to as smile effect, can be accommodated by resorting to specific models, either for pricing exotic derivatives or for inferring implied volatilities for non quoted strikes or maturities. The former task is typically achieved by introducing alternative dynamics for the underlying asset price, whereas the latter is often tackled by means of statical adjustments or interpolations. In this article, we deal with this latter issue and analyze a possible solution in a foreign exchange (FX) option market. In such a market, in fact, there are only three active quotes for each market maturity, thus presenting us with the problem of a consistent determination of the other implied volatilities. FX brokers and market makers typically address this issue by using an empirical procedure, also named Vanna-Volga (VV), to construct the whole smile for a given maturity. Volatility quotes are then provided in terms of the option’s ∆, for ranges from the 5∆ put to the 5∆ call.In the following, we will review this market procedure for a given currency. In particular, we will derive closed-form formulas so as to render its construction more explicit. We will then test the robustness (in a static sense) of the resulting smile, in that changing consistently the three initial pairs of strike and volatility produces eventually the same implied volatility curve. We will also show that the same procedure applied to European style claims is consistent with static-replication results and consider, as an example, the practical case of a quanto European option. We will finally prove that the market procedure can also be justified in dynamical terms, by defining a hedging strategy that is locally replicating and self-financing.

Sight deposit and non-maturing liability modelling
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Sight deposit and non-maturing liability modelling

In this article we present a review of the most significant approaches provided by the literature and the market practice for the modeling of non-maturing deposits accounts. We describe the bond portfolio replication approach and then move to the class of stochastic factor models, showing how the latter are capable of provide more effective tools for the interest rate and liquidity risk management of these balance-sheet items.

2012 Download Area
On the dynamic replication of the DVA: do banks hedge their debit value adjustment or their destroying value adjustment?
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article On the dynamic replication of the DVA: do banks hedge their debit value adjustment or their destroying value adjustment?

We investigate if it is feasible to dynamically replicate the DVA. If the answer is positive, the DVA is a quantity that can be fairly deducted from the liabilities of a financial institution. In this case, the argument in Burgard and Kjaer, where a dynamic replication strategy is derived in details, will be accepted. If on the contrary the answer is negative, then the DVA should be considered as a cost and as such it should be deducted from the equity of the financial institution. In this second case we confirm the results in Castagna. We will analyse the problem under a very wide perspective. We will show that dynamically replicating the DVA hides very subtle assumptions about the composition of the balance sheet of the financial institution. We will also point out which are the (negative) consequences for the business if the financial institution will organize the derivatives business so as to hedge and replicate also the DVA and we will demonstrate how the bank’s franchise will be gradually eroded.

Pricing of collateralized derivatives contracts when more than one currency are involved: liquidity and funding value adjustments
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Pricing of collateralized derivatives contracts when more than one currency are involved: liquidity and funding value adjustments

In this paper we try and complete the analysis conducted in Castagna "Pricing of derivatives contracts under collateral agreements: Liquidity and funding value adjustments" by investigating the valuation of collateralized derivative contracts when more than one currency are involved. This can happen for three reasons: 1. The contract’s pay-off is denominated in some currency YYY but collateral is posted in another currency XXX; 2. The contract is written on an FX rate; 3. The contract’s pay-off depends on assets or market variables denominated in different currencies (e.g.: a cross currency interest rate swap). In theory we could have many currencies involved, but in what follows we restrict our analysis to the case when only two currencies have to be considered. We will analyse all the cases enumerated above and we will define the liquidity value adjustments and funding value adjustments for collateralized contracts.

Analytical pricing of CDOs in a multi-factor setting by a moment-matching approach
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Analytical pricing of CDOs in a multi-factor setting by a moment-matching approach

The financial crisis started in the 2007 highlights the need for a more robust approach to accurately pricing and measuring the risk of investment positions held by financial institutions in credit derivatives such as collateralized debt obligations (CDOs). Pricing of CDOs is typically performed by modelling the correlation between debtors. The approaches followed are of two types: a reduced form approach, relying on the specification of the default as a rare event (basically it is the first jump of a Poisson process), so that default correlation can be attained via some form of dependency of the debtors’ default intensities; and a structural approach, based on the Merton’s model, assuming a dependency of the debtors’ asset dynamics on one ore more common factors, thus obtaining a default correlation that can be seen as the result of a copula function.

2011 Download Area
Funding, liquidity, credit and counterparty links and implications
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Funding, liquidity, credit and counterparty links and implications

The problem of how to include correctly liquidity costs into the pricing of financial contracts has recently risen. The connections between the funding costs and the adjustments due to the compensation that a party has to pay to the counterparty for the losses on a contract caused by its default (the so called debit value adjustment, hereon DVA) have been inquired in some work. The related issue on how to properly compute and consider the DVA has been investigated by other authors. In this work we try and clarify what is the essence of the DVA: we believe we offer a robust conceptual framework to consistently include the DVA in the balance sheet of a financial institution. Under this perspective, to our knowledge never proposed before, the DVA does not manifest any counterintuitive effects, such as a reduction of the current value of the liabilities of a counterparty when its creditworthiness worsens. On the other hand, the link between funding costs and DVA will be easily identified and considered, and in this way we can also establish in a thorough fashion how to discount positive and negative future cash-flows.

Pricing swaps including funding costs
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Pricing swaps including funding costs

In Castagna "Funding, liquidity, credit and counterparty risk: Links and implications." we have tried to correctly define the Debit Value Adjustment (DVA) of a derivative contract, coming up with a definition that declares the DVA the worsening of contract conditions for a counterparty because it has to compensate the other party for the possibility of its own default. The DVA is very strictly linked to funding costs (FC) when the contract is a loan, a bond or more generally some kind of borrowing. The link is much less tight, and in fact it could even be non existent, for some derivatives contracts such as swaps. The funding costs for a derivative contract is actually the DVA (plus liquidity premium and intermediation cost, if priced in market quotes) that a counterparty has to pay on the loan contracts it has to close to fund, if needed, negative cumulated cash-flows until maturity. In this paper we study how to include funding costs into the pricing of interest rate swaps and we show how they affect the value of the swap via a Funding Value Adjustment (FVA), in analogy with the Credit Value Adjustment (CVA) and the DVA. In what follows we consider the pricing of swap contracts with no collateral agreement or any other form of credit risk mitigations.

2009 Download Area
Analytical credit VaR with stochastic probabilities of defaults and recoveries
Antonio Castagna
Photo of Antonio Castagna
Antonio Castagna
Managing Partner

Antonio Castagna is currently managing partner and founder of the consulting company Iason. He previously was in Banca IMI, Milan, from the 1999 to 2006: there, he first worked as a market maker of cap/floor’s and swaptions; then he set up the FX options desk and ran the book of plain vanilla and exotic options on the major currencies, being also responsible for the entire FX volatility trading. He started his carrier in the investment banking in the 1997 in IMI Bank, in Luxemborug, as a financial analyst in the Risk Control Department. He graduated in Finance at LUISS University in Rome in 1995, with a thesis on American options and the numerical procedures for their valuation. He wrote papers on different topics, including credit risk, derivative pricing, collateral management, managing of exotic options risks and volatility smiles. He is also author of the books “FX options and smile risk” and “Measuring and Managing Liquidity Risk”, both published by Wiley

Executive Summary
Cover of the article Analytical credit VaR with stochastic probabilities of defaults and recoveries

We extend the model presented in Bonollo et al. "II second pillar: An analytical VaR with contagion and sectorial risks" by introducing a multiscenario framework that allows for a richer and more realistic specification, including non-static (stochastic) probabilities of default and losses given default. Though more complex from a computational point of view, the model with scenarios is still tractable analytically, yielding results in closed form expressions. The approximated value at risk has been calculated by generalizing the procedure exposed in "II second pillar: An analytical VaR with contagion and sectorial risks" for the single scenario case, in the presence of granularity in the exposures, sector concentration and contagion. The outcome is not simply a weighted sum of the VaRs in the individual scenarios, but results in a more involved function of the single scenarios’ parameters. The theoretical model description is complemented with an in-depth numerical analysis.

Just in Time

2024 Download Area
BCBS Consultative Document: Recalibration of Shocks for Interest Rate Risk in the Banking Book
Matteo Bazzucchi
Alessandra Carnaroli
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Matteo Bazzucchi
Business Analyst

Alessandra Carnaroli wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article BCBS Consultative Document: Recalibration of Shocks for Interest Rate Risk in the Banking Book

In this paper, published in December 2023, the Basel Committee (BSBC) aims to propose a new methodology for calculating interest rate shocks in the Interest Rate Risk in Banking Book (IRRBB) framework. In the first part of the paper, a small overview of the current methodology for calculating interest rate shocks is proposed. Afterwards, the new methodology is explained and applied to the shock scenarios to highlight the differences with the current framework. Additional Issues and planned future steps are then reported.

ECB - SSM Supervisory Priorities 2024-2026
Matteo Cecchin
Bianca Ghilardi
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Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

Photo of Bianca Ghilardi
Bianca Ghilardi
Business Analyst

She holds a master degree in Management and Finance from Università del Piemonte Orientale in Novara. After a few months in the IT sector as tester engineer, she moved to the risk management field. Actually, she is working in a Model Risk Management project in one of the largest Italian banks.

Executive Summary
Cover of the article ECB - SSM Supervisory Priorities 2024-2026

The SSM supervisory priorities for 2024-2026 reflect ECB Banking Supervision’s medium-term strategy for the next three years and rest on a comprehensive assessment of the main risks and vulnerabilities for supervised institutions. Supervised institutions have navigated the adverse macro-financial and geopolitical shocks of recent years well. The European banking sector is facing several challenges that require enhanced vigilance by supervisors and banks alike. While the risk landscape has evolved further since last year, the supervisory priorities and corresponding activities set out in 2022 remain valid overall and still address the main vulnerabilities in the banking sector.

ECB - Aggregated Results of SREP 2023
Pierpaolo Carrozzino
Matteo Cecchin
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Pierpaolo Carrozzino
Business Analyst

Photo of Matteo Cecchin
Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

Executive Summary
Cover of the article ECB - Aggregated Results of SREP 2023

• The 2023 Supervisory Review and Evaluation Process (SREP) for banks supervised by the ECB confirm that the banking sector continues to show strength: it has maintained robust capital and liquidity positions against the backdrop of an uncertain economic environment; the prevailing geopolitical climate, digitalisation of finance and banks' growing dependence on IT critical third-party providers are a concern, given the notable rise in operational and IT/cyber risks; ECB Banking Supervision has stepped up measures to ensure banks adequately identify, assess, and manage climate-related and environmental (C&E) risks, while transparently disclosing the risks they are exposed to.

BIS - Progress in Adopting the Principles for Effective Risk Data Aggregation and Risk Reporting
Pierpaolo Carrozzino
Matteo Cecchin
Photo of Pierpaolo Carrozzino
Pierpaolo Carrozzino
Business Analyst

Photo of Matteo Cecchin
Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

Executive Summary
Cover of the article BIS - Progress in Adopting the Principles for Effective Risk Data Aggregation and Risk Reporting

The Basel Committee on Banking Supervision published a progress report on banks' implementation of the BCBS 239 Principles for effective risk data aggregation and reporting. Nearly ten years after the initial publication of the BCBS 239 principles and seven years after the expected date of compliance, banks are at different stages in terms of aligning with the Principles. Of the 31 G-SIBs banks assessed, only two banks are fully compliant with all the Principles. Also, there is not a single Principle that has been fully implemented across all banks.

2023 Download Area
EBA Report on the Role of Environmental and Social Risk in the Prudential Framework (EBA/REP/2023/34)
Matteo Bazzucchi
Matteo Cecchin
Lorena Corna
Riccardo Cortesi
Vincenzo Frasca
Alessandro Prati
Photo of Matteo Bazzucchi
Matteo Bazzucchi
Business Analyst

Photo of Matteo Cecchin
Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

Photo of Lorena Corna
Lorena Corna
Business Analyst

As Business analyst she currently works within the Risk IT dedicated team of a big pan European Bank. In particular, she follows the back-testing model for Counterparty Credit Risk.

Photo of Riccardo Cortesi
Riccardo Cortesi
Business Analyst

Photo of Vincenzo Frasca
Vincenzo Frasca
Senior Credit Risk Consultant

Photo of Alessandro Prati
Alessandro Prati
Business Analyst

He holds a MSc in Economic and Finance obtained at the University of Milano-Bicocca. He joined iason in 2021 working on projects mainly focused on Market Risk. In early 2022, he worked with the team in the process of data collection and scenario implementation of the first Climate Stress Test exercise administered by the ECB.

Executive Summary
Cover of the article EBA Report on the Role of Environmental and Social Risk in the Prudential Framework (EBA/REP/2023/34)

Risks stemming from environmental and social issues are changing the risk picture for the financial sector. This highlights the need to enhance the prudential framework to better account for environmental and social risks. On May 2, 2022, the EBA released a Discussion Paper (DP) on The role of environmental risks in the prudential framework. The final report published on 12 October 2023 explores the appropriateness and feasibility of possible clarifications and targeted enhancements to better reflect the importance of environmental and social risk drivers in the prudential framework, focusing on those elements of the framework which are most likely to be affected by environmental risk drivers and hence where the analysis is most relevant.

The Crypto Ecosystem: Key Elements and Risks
Mattia Bainotti
Gianmarco Mori
Photo of Mattia Bainotti
Mattia Bainotti
Business Analyst

Photo of Gianmarco Mori
Gianmarco Mori
Senior Consultant

He holds a Bachelor in Banking and Finance and a Master degree in Statistics and Actuarial science. He obtained a specialization in Quantitative Finance at Politecnico di Milano and he had worked in a consulting firm for two year focused in Credit and Liquidity Risk Management. After these years, he moved to banking sector in Risk Management area and currently he has been working in Iason as financial engineer for some of the major italian players.

Executive Summary
Cover of the article The Crypto Ecosystem: Key Elements and Risks

The crypto ecosystem's market capitalization, despite experiencing a substantial decrease in 2022, amounts to trillions of dollars and the circulation of crypto coins numbers in the thousands. This document, based on BIS Report submitted to the G20 Finance Ministers and Central Bank Governors, wants to introduce the key elements and peculiarities of the crypto ecosystem while highlighting the market mechanism and its main structural flaws and risks. It is possible to underline three main takeaways regarding the sources of risks of the crypto universe: Firstly, a high degree of fragmentation and congestion in the market. Secondly, even though crypto and DeFi were initially founded on principles of decentralization, they frequently exhibit significant centralization (i.e., stablecoins). Lastly, DeFi largely duplicates the services found in the traditional financial system (TradFi), but it is mostly self-referential without any impact in the real economy.

EBA Supervisory Handbook​ on the Validation of Rating Systems​ Under the Internal Ratings-Based Approach​ - Part 2
Leonardo Bandini
Michele Ferrandino
Vincenzo Frasca
Nicolas Nedertoft Melis
Photo of Leonardo Bandini
Leonardo Bandini
Business Analyst

Photo of Michele Ferrandino
Michele Ferrandino
Business Analyst

Photo of Vincenzo Frasca
Vincenzo Frasca
Senior Credit Risk Consultant

Photo of Nicolas Nedertoft Melis
Nicolas Nedertoft Melis
Quantitative Analyst

Graduated in Economics, he is currently supporting the Internal Validation Area of a big Italian bank regarding Credit Risk.

Executive Summary
Cover of the article EBA Supervisory Handbook​ on the Validation of Rating Systems​ Under the Internal Ratings-Based Approach​ - Part 2

In August 2023, the European Banking Authority (EBA) published its Supervisory handbook on the validation of rating systems under the Internal-Ratings Based approach (EBA/REP/2023/29). The handbook provides an overview of the validation framework and describes the elements where the Validation function is expected to form an opinion. It covers both the tasks related to the model performance assessment as well those dealing with the modelling environment, such as data quality and model implementation assessment. With the publication of the handbook, the EBA aims to achieve harmonised supervisory understanding and supervisory practices and to promote convergence on Competent Authorities (CA) approaches by providing good and best practices for a sound IRB validation. The present publication is organized in two parts. The first one, presented in the previous publication, focused on the assessment of the risk differentiation and risk quantification phase. This second part, following a brief introduction, focuses on the assessments the Validation function is expected to perform on other specific points and on the modelling environment, as well as on specific challenges for the Validation when dealing with external data, outsourcing and data scarcity.

EBA Supervisory Handbook on the Validation of Rating Systems Under the Internal Ratings-Based Approach
Leonardo Bandini
Michele Ferrandino
Vincenzo Frasca
Nicolas Nedertoft Melis
Photo of Leonardo Bandini
Leonardo Bandini
Business Analyst

Photo of Michele Ferrandino
Michele Ferrandino
Business Analyst

Photo of Vincenzo Frasca
Vincenzo Frasca
Senior Credit Risk Consultant

Photo of Nicolas Nedertoft Melis
Nicolas Nedertoft Melis
Quantitative Analyst

Graduated in Economics, he is currently supporting the Internal Validation Area of a big Italian bank regarding Credit Risk.

Executive Summary
Cover of the article EBA Supervisory Handbook on the Validation of Rating Systems Under the Internal Ratings-Based Approach

In August 2023, the European Banking Authority (EBA) published its Supervisory handbook on the validation of rating systems under the Internal-Ratings Based approach (EBA/REP/2023/29). The handbook provides an overview of the validation framework and describes the elements where the Validation function is expected to form an opinion. It covers both the tasks related to the model performance assessment as well those dealing with the modelling environment, such as data quality and model implementation assessment. With the publication of the handbook, the EBA aims to achieve harmonised supervisory understanding and supervisory practices and to promote convergence on Competent Authorities (CA) approaches by providing good and best practices for a sound IRB validation. The present publication is organized in two parts. The first one, presented in this document, provides an overview of the background and objectives of the EBA supervisory handbook, and describes the main elements on which the Validation function is expected to form an opinion when performing its validation tasks on IRB models, focusing on the assessment of the risk differentiation and risk quantification phase. A second document will follow in the upcoming weeks, with a focus on the assessments the Validation function should perform on other specific points and on the modelling environment, as well as on specific challenges for the Validation when dealing with external data, outsourcing and data scarcity.

2023 EBA Stress Test Results
Luca Capitanio
Raffaele Di Sivo
Riccardo Greco
Marco Zanolli
Photo of Luca Capitanio
Luca Capitanio
Business Analyst

Photo of Raffaele Di Sivo
Raffaele Di Sivo
Business Analyst

Photo of Riccardo Greco
Riccardo Greco
Business Analyst

Photo of Marco Zanolli
Marco Zanolli
Business Analyst

Executive Summary
Cover of the article 2023 EBA Stress Test Results

2023 EU-wide stress tests results show that European banks remain resilient under an adverse scenario which combines a severe EU and global recession, increasing interest rates and higher credit spreads. The resilience of EU banks partly stems from a strong capital position at the start of the exercise, featuring an average fully-loaded CET1 ratio of 15%, which enables banks to withstand capital depletion under the adverse scenario. The capital depletion under the adverse stress test scenario is 459 bps, resulting in a fully loaded CET1 ratio at the end of the scenario of 10.4%. Notwithstanding cumulative losses amounting to EUR 496 billion, EU banks maintain adequate capitalization to sustain the economy, even during periods of severe distress.

Digital Assets: A Regulatory Overview
Nicola Mazzoni
Chiara Stabellini
Marco Zanolli
Photo of Nicola Mazzoni
Nicola Mazzoni
Business Analyst

Chiara Stabellini wrote the article during the collaboration with Iason Consulting

Photo of Marco Zanolli
Marco Zanolli
Business Analyst

Executive Summary
Cover of the article Digital Assets:  A Regulatory Overview

In recent years, the bond between Financial Markets and Technology is much more rapidly strengthening. In this fast-paced environment Investors are showing a growing attention for a potential disruptive Technology such as Asset Tokenization Along that, the high volatility of Crypto Assets and the recent Bankruptcies of important Exchanges and Market Players have enlightened the need for enhancements in the current Financial Markets Regulation to govern the adoption of innovative technologies This document will introduce the key concepts that support the idea that a strong Regulatory Framework will help the growth of the Markets, alongside with the Challenges that Regulators will face in this task. The final part will focus on the actual Framework in force in the EU with a brief overview on some interesting other Countries Frameworks.

EBA Follow-Up Report on the Use of Machine Learning for Internal Ratings-Based Models
Leonardo Bandini
Matteo Cecchin
Riccardo Cortesi
Vincenzo Frasca
Photo of Leonardo Bandini
Leonardo Bandini
Business Analyst

Photo of Matteo Cecchin
Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

Photo of Riccardo Cortesi
Riccardo Cortesi
Business Analyst

Photo of Vincenzo Frasca
Vincenzo Frasca
Senior Credit Risk Consultant

Executive Summary
Cover of the article EBA Follow-Up Report on the Use of Machine Learning for Internal Ratings-Based Models

In August 2023 EBA published a follow-up Report presenting the feedback received during the consultation on DP on Machine Learning (ML) used in the context of internal ratings-based (IRB) models. In addition, this report discusses the interaction between prudential requirements on IRB models and two other legal frameworks that have an impact on internal credit risk models that use ML techniques (General Data Protection Regulation (GDPR) and Artificial Intelligence (AI) Act). The follow-up report focuses on the more complex models than traditional techniques, such as regression analysis or simple decision trees, which are also the most difficult to understand and often less ‘transparent’. The report also focuses on the challenges highlighted by respondents regarding the use of ML techniques for IRB models.

ECB - Guide on Effective Risk Data Aggregation and Risk Reporting
Matteo Cecchin
Dario Esposito
Photo of Matteo Cecchin
Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

Photo of Dario Esposito
Dario Esposito
Chief Risk Regulatory Officer

Experienced professional with a demonstrated history of working in the financial services industry. Skilled in Enterprise Risk Management, Basel III and IV and AML. Strong finance professional postgraduated from University of London and IMD in Lausanne (International Institute for Management Development).

Executive Summary
Cover of the article ECB - Guide on Effective Risk Data Aggregation and Risk Reporting

The ability of institutions to effectively manage and aggregate risk-related data is an essential precondition for sound decision-making and strong risk governance. This applies to any data used to steer and manage institutions, both strategically and operationally, as well as data used for risk, financial and supervisory reporting. The ECB strongly recommends that significant institutions make substantial progress in improving their data aggregation capabilities and internal risk reporting practices and has identified seven key areas of concern. These seven areas are considered important prerequisites for robust governance and effective processes to identify, monitor and report risks. They are intended to be addressed within a reasonably short time frame, if not properly addressed already.

EBA - One-off Fit-for-55 Climate Risk Scenario Analysis
Matteo De Luca
Pietro Maironi Da Ponte
Luigi Ratibondi

Matteo De Luca wrote the article during the collaboration with Iason Consulting

Pietro Maironi Da Ponte wrote the article during the collaboration with Iason Consulting

Photo of Luigi Ratibondi
Luigi Ratibondi
Quantitative Analyst

Executive Summary
Cover of the article EBA - One-off Fit-for-55 Climate Risk Scenario Analysis

The objective of this presentation is to provide a general overview on "One-off Fit-for-55 climate risk scenario analysis“ as a part of the Fit-for-55 package and related open consultations on it. The European Banking Authority has launched a dedicated consultation on draft templates and guidance to gather climate related data from European banks by filling in dedicated templates.

“Cambiali Finanziarie”: A New Perspective for the Italian Papers Market
Valerio Ciminelli
Francesco Dell'Unto
Nicola Mazzoni
Alessandro Santocchi
Martina Scheda
Photo of Valerio Ciminelli
Valerio Ciminelli
Consultant

Francesco Dell'Unto wrote the article during the collaboration with Iason Consulting

Photo of Nicola Mazzoni
Nicola Mazzoni
Business Analyst

Photo of Alessandro Santocchi
Alessandro Santocchi
Business Analyst

He holds a Master in Science in Nuclear Engineering and a Master in Corporate Finance. He’s worked as Business Analyst for different consultant companies in top tier banks and oilgas companies in varied areas: risk management, IT and software systems and forecasting models.

Martina Scheda wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article “Cambiali Finanziarie”: A New Perspective for the Italian Papers Market

The recent changes and evolutions in the financial markets caused by the latest crises and the subsequent increase in inflation have prompted financial institutions to change their strategies by focusing on new ways to take advantage of the markets. In this context, the Italian money market is experiencing a possible renewal guided by the possibility for Banks of issuing commercial papers (“financial bills” pursuant to Italian law) given by Legislative Decree 34/2020 (“Relaunch Decree”). The Document will initially focus on the US and EU Commercial Papers Markets describing the Cambiali Finanziarie and then the possible prospects for the Italian Commercial Papers Markets.

European Commission – Proposal for a Regulation on the Transparency and Integrity of ESG Rating Activities
Leonardo Bandini
Riccardo Cortesi
Vincenzo Frasca
Photo of Leonardo Bandini
Leonardo Bandini
Business Analyst

Photo of Riccardo Cortesi
Riccardo Cortesi
Business Analyst

Photo of Vincenzo Frasca
Vincenzo Frasca
Senior Credit Risk Consultant

Executive Summary
Cover of the article European Commission – Proposal for a Regulation on the Transparency and Integrity of ESG Rating Activities

As part of its continuous effort to boost investments for a sustainable future, in June 2023 the European Commission put forward a new package of measures to strengthen the EU sustainable finance framework and to ensure that it continues to support companies and the financial sector. The package includes a Proposal for Regulation with new rules for Environmental, Social and Governance (ESG) rating providers, which will increase transparency on the market for sustainable investments. As a matter of fact, the Commission acknowledges that ESG ratings play an important role in the EU sustainable finance market as they provide essential information to investors and financial institutions. At the same time, the ESG ratings market currently suffers from a lack of clarity and transparency on the underlying methodologies and data sources. The Proposal includes new organizational principles and clear rules to prevent conflicts of interest. Moreover, it requires that ESG rating providers operating in the EU be authorised and supervised by the European Securities and Markets Authority (ESMA). These new rules will enable investors to make better informed decisions regarding sustainable investments and will ensure the quality and reliability of ESG ratings to protect investors and ensure market integrity.

EBA Progress Report on Greenwashing Monitoring and Supervision
Tommaso Casagrande
Alessandro Ghisoni
Michele Penza
Photo of Tommaso Casagrande
Tommaso Casagrande
Business Analyst

Photo of Alessandro Ghisoni
Alessandro Ghisoni
Business Analyst

Michele Penza wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article EBA Progress Report on Greenwashing Monitoring and Supervision

Climate change and the need to transition to a more sustainable economy have become one of the most pressing global issues and a top priority on the EU policy agenda.  Related to this, the demand for and supply of sustainable products has also increased by providing financing for the green transition by banks and other financial institutions. One of the side effects of this change is the phenomenon of greenwashing, which, can impact the transition by reducing investor confidence, generating reputational and financial risks for the institutions involved, and affecting the overall credibility of sustainable finance policies and products. In May 2022, the European Supervisory Authorities (ESAs) received a request from the European Commission for each ESA to provide input on the phenomenon of greenwashing. The EBA's progress report is a document that considers the following points: a  high-level understanding of the greenwashing phenomenon with its main characteristics, most relevant types, associated risks, monitoring tools, and gaps and inconsistencies in the current legislative framework.

ECB – Market Risk Level SREP Methodology
Mario Bernardo
Francesco Silvetti
Photo of Mario Bernardo
Mario Bernardo
Business Analyst

Photo of Francesco Silvetti
Francesco Silvetti
Business Analyst

Executive Summary
Cover of the article ECB – Market Risk Level SREP Methodology

ECB provides a more detailed description of the methodology for assessing market risk at significant institutions (SIs), as part of the Supervisory Review and Evaluation Process (SREP).  The SREP methodology is subject to continuous improvement and alignment with identified best practices and new developments in the applicable regulations. The risk level methodology has been revised being applied as of SREP 2023, while the risk control methodology is due to be revised in 2023. The remainder of this document focuses on the updated risk level methodology.

Behavioral Modelling and ALM A Scenario Analysis on the Italian Banking System
Alessandra Carnaroli
Chiara Stabellini

Alessandra Carnaroli wrote the article during the collaboration with Iason Consulting

Chiara Stabellini wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article Behavioral Modelling and ALM A Scenario Analysis on the Italian Banking System

Considering the current financial scenario of high volatility of interest rates, a robust ALM framework becomes crucial in financial institutions Particularly in the Italian banking system, which is characterized by heavy reliance on demand deposits as funding instrument and diversified asset investment strategies, it is essential for risk managers to have in place robust and advanced behavioral models for managing interest rate and liquidity risk of sight deposits; this allows proper readjusting of hedging strategies and minimizes the risk of losses due to outflows We present a 5-year scenario analysis carried out on Italian system data that allows to appreciate the characteristics of iason's behavioral models for managing non-maturing deposits The analysis shows how depositors may react differently to movements in interest rates, on the basis of: their characteristics (Retail vs Non-financial Corporate) their depositing amounts (below € 50k, between € 50k and € 250k, above € 250k)

Asset Tokenization
Valerio Ciminelli
Nicola Mazzoni
Giuseppe Morisani
Photo of Valerio Ciminelli
Valerio Ciminelli
Consultant

Photo of Nicola Mazzoni
Nicola Mazzoni
Business Analyst

Photo of Giuseppe Morisani
Giuseppe Morisani
Business Analyst

Executive Summary
Cover of the article Asset Tokenization

In today's rapidly evolving digital landscape, Asset Tokenization has emerged as a groundbreaking concept that promises to revolutionize traditional Asset ownership, trading, and investment. By digitizing real-world Assets and representing them as Tokens on blockchain or distributed ledger technology (DLT) platforms, Asset Tokenization opens up a world of possibilities and benefits for various industries. The document wants to introduce the fundamental characteristics of Asset Tokenization and to explore the most relevant changes that it could bring to a wide variety of Industries. Furthermore, the analysis will focus on the Asset Tokenization features that will drive the upcoming changes in the financial markets.

EBA - ML/FT Risk Management by Payments Institutions
Lorena Corna
Laura Tramarin
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Lorena Corna
Business Analyst

As Business analyst she currently works within the Risk IT dedicated team of a big pan European Bank. In particular, she follows the back-testing model for Counterparty Credit Risk.

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Laura Tramarin
Business Analyst

Executive Summary
Cover of the article EBA - ML/FT Risk Management by Payments Institutions

In 2022, the European Banking Authority (EBA) conducted a risk assessment of ML/TF risks in the payment institutions sector. This evaluation aimed to understand the scale and nature of ML/TF risks, the adequacy and effectiveness of AML/CFT systems and controls in payment institutions and, at last, the effectiveness of current supervisory approaches. The EBA's findings indicate that ML/TF risks in the payment institutions sector may not be effectively assessed and managed. Addressing these findings is crucial for safeguarding the EU's single market from financial crime and improving access to payment accounts for payment institutions by addressing the root causes of de-risking. Findings of this risk assessment will feed into the EBA’s bi-annual ML/TF risk assessment exercise.

Sound Practices in Counterparty Credit Risk Governance and Management ECB/2023/06 
Valerio De Sanctis
Marco Najm
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Valerio De Sanctis
Quant Analyst

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Marco Najm
Business Analyst

Executive Summary
Cover of the article Sound Practices in Counterparty Credit Risk Governance and Management ECB/2023/06 

Over the past ten to fifteen years the low interest rate environment incentivized some banks to increase the volume of capital market services towards more risky and less transparent counterparties, often non-bank financial institutions (NBFIs) and less regulated or unregulated entities such as hedge funds and family offices. In its planning for 2022-24 the European Centra Bank (ECB) identified exposures to Counterparty Credit Risk (CCR) as a supervisory priority for 2022 and initiated a range of supervisory actions. The ECB reviewed  the risk management practices of a sample of banks that were particularly active in providing prime brokerage services, as specific capital markets activity with high CCR exposures and in August 2022 published its supervisory expectations for prime brokerage services (PBS).  The document provides a collection of good practices in CCR governance and management that were observed during the execution of the targeted review and an assessment of the convergence towards those practices, accounting for the proportionality principle (particularly for institutions with a less complex CCR business). The ultimate objective is to encourage institutions to improve their risk management capabilities in a way that is commensurate with their CCR profile.  The targeted review and the on-site inspections showed that some of the institutions in the sample apply leading practices in each of the four areas of the assessment, namely: (i) CCR governance, (ii) risk control, management and measurement, (iii) stress testing and WWR, and (iv) watchlist and default management process (DMP).

ECB – Credit Risk Level SREP Methodology
Riccardo Cortesi
Michele Ferrandino
Vincenzo Frasca
Nicolas Nedertoft Melis
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Riccardo Cortesi
Business Analyst

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Michele Ferrandino
Business Analyst

Photo of Vincenzo Frasca
Vincenzo Frasca
Senior Credit Risk Consultant

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Nicolas Nedertoft Melis
Quantitative Analyst

Graduated in Economics, he is currently supporting the Internal Validation Area of a big Italian bank regarding Credit Risk.

Executive Summary
Cover of the article ECB – Credit Risk Level SREP Methodology

The Supervisory Review and Evaluation Process (SREP) is a formal process carried out by Supervisory Authorities to evaluate the risk exposure of supervised entities, verifying their ability to manage the risks they face through their capital and liquidity availability, as well as the suitability of their business model, strategies and governance processes. The SREP falls within the so-called “Second Pillar” of the Basel framework and is conducted by Supervisors at least yearly. At the end of May 2023, the European Central Bank published the document “Credit risk SREP methodology”, which describes the approach followed by the Joint Supervisory Teams (JSTs) when assessing credit risk within the SREP. The document published by ECB focuses mainly on the credit risk level assessment, which has been updated this year, while the credit risk control part is still under revision and a dedicated publication will follow as soon as the revision will be completed. The present document provides first a brief overview of the overall SREP process, and then summarizes the key elements of the ECB publication, describing the main phases of the process and the aspects considered by the Supervisor when conducting the assessment.

Crypto-asset Service Providers Introduction on ML/TF Risk Factors Guidelines
Lorena Corna
Laura Tramarin
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Lorena Corna
Business Analyst

As Business analyst she currently works within the Risk IT dedicated team of a big pan European Bank. In particular, she follows the back-testing model for Counterparty Credit Risk.

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Laura Tramarin
Business Analyst

Executive Summary
Cover of the article Crypto-asset Service Providers Introduction on ML/TF Risk Factors Guidelines

In July 2021, the European Commission proposed four legislative reforms to enhance the EU’s AML/CFT framework. One of the proposals was to amend Regulation (EU) 2015/847 on information accompanying transfers of funds (FTR) to include transfers of crypto assets. It also aimed to subject cryptoasset service providers (CASPs) to the same AML/CFT requirements and supervision as credit and financial institutions. Article 38 of the proposed regulation mandates the EBA to issue guidelines on risk variables and factors that CASPs should consider when entering business relationships or conducting transactions with crypto assets. In anticipation of this requirement, EBA proposed to amend the ML/TF Risk Factors Guidelines.

L’impatto del Rischio Alluvione sulla Ricchezza Immobiliare in Italia
Michele Ferrandino
Vincenzo Frasca
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Michele Ferrandino
Business Analyst

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Vincenzo Frasca
Senior Credit Risk Consultant

Executive Summary
Cover of the article L’impatto del Rischio Alluvione sulla Ricchezza Immobiliare in Italia

L’Italia è soggetta a un elevato rischio idrogeologico, come purtroppo dimostrato anche dai tragici eventi alluvionali che hanno interessato alcune aree dell’Emilia-Romagna nel corso del mese di maggio 2023. Durante lo stesso mese di maggio, la Banca d’Italia, nell’ambito della serie di Occasional Papers - Questioni di Economia e Finanza (QEF), ha pubblicato uno studio dal titolo «L’impatto del rischio alluvione sulla ricchezza immobiliare in Italia»1. Tale ricerca illustra le principali fonti di dati e la metodologia per la stima dell’impatto del rischio di alluvione in Italia e fornisce una valutazione del potenziale danno fisico al patrimonio abitativo, individuando altresì le principali carenze nell’attuale set informativo. Come mostrato dallo studio, le valutazioni sull’esposizione e la perdita annua attesa sono molto variabili a seconda degli scenari di pericolosità utilizzati, delle assunzioni sulla vulnerabilità degli edifici e del livello di granularità dei dati. Il presente documento sintetizza i principali elementi di tale studio, descrivendo le basi dati e le metodologie utilizzate per l’analisi ed illustrandone i risultati, in termini di esposizione e perdita annua attesa, utilizzando diverse mappe di pericolosità e facendo riferimento a diverse assunzioni sui periodi di ritorno e sul grado di vulnerabilità degli edifici.

UIF - Nuovi Indicatori di Anomalia
Lorena Corna
Laura Tramarin
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Lorena Corna
Business Analyst

As Business analyst she currently works within the Risk IT dedicated team of a big pan European Bank. In particular, she follows the back-testing model for Counterparty Credit Risk.

Photo of Laura Tramarin
Laura Tramarin
Business Analyst

Executive Summary
Cover of the article UIF - Nuovi Indicatori di Anomalia

Come previsto dal d. lgs. 231/2007, la UIF ha emanato nuovi indicatori di anomalia per l'individuazione delle operazioni sospette da parte dei soggetti obbligati. Il provvedimento pubblicato nel maggio 2023 prevede 34 indicatori suddivisi nei seguenti sub-indici: sezione A)  profili riguardanti il  comportamento e/o alle caratteristiche qualificanti del soggetto cui è riferita l’operatività; sezione B) concernente le caratteristiche delle operazioni; sezione C) operatività attinenti al finanziamento del terrorismo e programmi di proliferazione di armi di distruzione di massa. Ciascun soggetto obbligato vaglia in via preliminare gli indicatori rilevanti sulla base della propria attività e successivamente individuare i relativi sub-indici rilevanti. Tale provvedimento verrà pubblicato in Gazzetta Ufficiale ed entrerà in vigore il 1 gennaio 2024: da tale data i precedenti indicatori emanati dalla Banca d'Italia, dal Ministero della Giustizia e dal Ministero dell'Interno.

EIOPA YE2021 Comparative Study on Market and Credit Risk Modelling
Michele Bonollo
Gaspare Campaniolo
Vincenzo Frasca
Antonio Menegon
Luca Pacifico
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Michele Bonollo
Chief of Risk Methodologies Officer

He holds a degree in mathematics, a master degree in mathematical finance and a PHD in statistics. He worked as an executive in both large and regional italian banks. He has also collaborated with some consultant companies in the broad area of risk management, asset management, pricing models, software systems and regulatory compliance. Along with his professional activities, he always develops applied research in the above fields, with about 20 papers published in scientific journals and dozens of speeches in international conferences. He currently gives seminars and lessons in some top ranked italian universities.

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Gaspare Campaniolo
Project Manager

Photo of Vincenzo Frasca
Vincenzo Frasca
Senior Credit Risk Consultant

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Antonio Menegon
Manager and Senior Risk Quant

With six years of experience in Risk Management and Consulting industries, he is currently leading the team of Business Analysts and Financial Engineers at one big pan-European bank. Graduated in Mathematics from Università degli Studi di Padova, he has been continuously interested in new quant topics, focusing in the last years on Machine Learning and its application in finance.

Luca Pacifico wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article EIOPA YE2021 Comparative Study on Market and Credit Risk Modelling

This document summarises the key findings from the Market and Credit Risk Comparative Study (MCRCS) undertaken by EIOPA in 2022 and based on year-end 2021 data. The objective of the EIOPA study is to ensure a consistent and regular collection of information and have an up-to-date overview of the modelling approaches on market and credit risks in the insurance market, as well as to further develop supervisory tools and foster common supervisory practices. The study, based on simplified asset-liability-portfolios, focuses on EUR denominated instruments, but also looks into selected GBP and USD denominated instruments as well as the corresponding foreign exchange rate indices. It is important to note that the study focuses on drivers of the value of investments, but does not aim to cover the overall SCR. The scope of the exercise consists of 20 participants from 7 different Member States, which cover close to 100% of the EUR investments held by all undertakings with an approved internal model covering market and credit risks in the European Economic Area (EEA). In line with previous editions, the overall results of the exercise show moderate to significant dispersion in some asset model outputs, which could be partly attributable to model and business specificities already known by the relevant Competent Authorities, but also indicate a certain need for continuous supervisory scrutiny.

Climate-related Financial Disclosures of the Eurosystem’s Corporate Sector Holdings for Monetary Purposes
Samuele Perfetti
Chiara Stabellini
Marco Zanolli
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Samuele Perfetti
Business Analyst

Chiara Stabellini wrote the article during the collaboration with Iason Consulting

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Marco Zanolli
Business Analyst

Executive Summary
Cover of the article Climate-related Financial Disclosures of the Eurosystem’s Corporate Sector Holdings for Monetary Purposes

To limit global temperature increases to 1.5ºC, the Paris Agreement requires countries to decarbonize their economies and investors to make finance flows consistent with a pathway low greenhouse gas emission Countries’ efforts to reduce emissions and adapt to the impact of climate change are summarized in Nationally Determined Contributions (NDCs) which are registered in accordance with the United Nations Framework Convention on Climate Change (UNFCCC) For the EU, the European Climate Law implements the Paris Agreement in Union law by setting the goal for Europe’s economy and society to become climate-neutral by 2050 and additionally setting the intermediate target of reducing net emissions by at least 55% by 2030 compared with 1990 levels. The Eurosystem calls on corporates to set and deliver on decarbonization targets in line with the goals of the Paris Agreement This report aims to improve transparency on the Eurosystem’s activities and contributes to the ongoing work on climate change. It presents the Eurosystem’s first annual climate-related financial disclosures on its corporate securities holdings purchased for monetary policy purposes under the programs.

EBA Consults on standards for Supervisors Assessing the New Market Risk Internal Models under the FRTB (EBA/CP/2023/04)
Mario Bernardo
Filippo Corti
Andrea Principe
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Mario Bernardo
Business Analyst

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Filippo Corti
Quantitative Analyst

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Andrea Principe
Financial Engineer

He holds a MSc. in Mathematics and he iscurrently working, as a financial engineer, onthe supporting activity for a major Italianbank on the engine used to produce riskmetrics via full revaluation approach. He isinvolved in the enhancements to pricingfunction and also in the analysis andaggregation process of risk figures values.

Executive Summary
Cover of the article EBA Consults on standards for Supervisors Assessing the New Market Risk Internal Models under the FRTB (EBA/CP/2023/04)

EBA aims to ensure clarity on the assessment performed by competent authorities, to guide the implementation of FRTB internal models in EU. These draft RTS set out a framework for competent authorities to assess these requirements and focus on three main aspects: governance, internal risk measurement model (covering the expected shortfall, and the stress scenario risk measure) and Internal default risk model.

EBA Report on the 2022 Benchmarking Exercise on Credit Risk
Marco Carminati
Vincenzo Frasca
Giorgio Lucarelli
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Marco Carminati
Manager

After taking a Bachelor in Finance and a Master of Science in Economics, he specialized in Credit Risk Management and Modelling through almost 10 years of experience in both banking and consultancy industry with special focus on the development and validation of models for Credit Risk for regulatory and managerial purposes. Currently in charge of several projects in the Credit Risk Management area and Head of the iason Credit Risk Competence Center.

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Vincenzo Frasca
Senior Credit Risk Consultant

Giorgio Lucarelli wrote the article during the collaboration with Iason Consulting

Executive Summary
Cover of the article EBA Report on the 2022 Benchmarking Exercise on Credit Risk

The European Banking Authority (EBA) has recently published its Report on the annual Credit Risk Benchmarking Exercise conducted in 2022. This exercise aims at monitoring the consistency of risk weighted assets (RWAs) across all EU institutions authorised to use internal approaches for the calculation of capital requirements. This year’s Report continues to provide in-depth analysis of the observed and potential impact of the COVID-19 pandemic on the IRB parameters used to calculate own funds requirements, which shows that the support measures continue to significantly influence the observed default rates and the average PD estimates. The Report also provides an analysis of the share of energy firms in the IRB portfolio of the institutions in the benchmarking sample, to assess the presence of any expectations or signs of the energy crisis on December 2021 credit risk parameters. The present document provides an overview of the key evidences of this year’s Reports, describing the main characteristics of the dataset used, the analyses performed and summarizing the main results of the exercise.

EBA Report on the 2022 Benchmarking Exercise on Market Risk
Mauro Martis
Marco Najm
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Mauro Martis
Business Analyst

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Marco Najm
Business Analyst

Executive Summary
Cover of the article EBA Report on the 2022 Benchmarking Exercise on Market Risk

The report present the results of the 2022 supervisory benchmarking exercise according to the article 78 of the Capital Requirement Directive (CRD) and the related regulatory and implementing technical standards (RTS and ITS) that define the scope, procedures and portfolios for benchmarking internal models for market risk (MR) The report summarizes the conclusions drawn from a hypothetical portfolio exercise (HPE) conducted by the EBA during the 2021/2022 The primary objective is to assess the level of variability observed in risk-weighted assets (RWA) for market risk produced by banks’ internal models The results show a reduction in the dispersion of the IMV (Initial Market Valuation). In general, variability is lower than in the previous exercise, this is likely to be due to a decrease in market volatility, which impacted the level of the risk measures, decreasing the dispersion. The ITS 2022 introduced the sensitivity-based method (SBM) component of the alternative standardized approach to the EBA Benchmarking exercise The 2022 analysis of the SBM own funds requirements (OFR) are overall at an acceptable level in terms of data quality ad exhibit a lower level of dispersion with respect to the IMA risk measures.

EURIBOR: Scenari di Fallback e Tassi €STR Term
Nicola Mazzoni
Giuseppe Morisani
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Nicola Mazzoni
Business Analyst

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Giuseppe Morisani
Business Analyst

Executive Summary
Cover of the article EURIBOR: Scenari di Fallback e Tassi €STR Term

La riforma dei Tassi Benchmark sta vivendo in questi anni una continua evoluzione in termini di regolamentazioni e aumento del numero e della complessità dei tassi di interesse di riferimento che vengono utilizzati per determinati strumenti finanziari. In questo contesto, presentiamo le ultime evidenze disponibili sul mercato dei tassi in currency EUR, tra le quali troviamo le proposte effettuate dal Working Group on Euro Risk-Free Rates per il possibile fallback del tasso EURIBOR, la cui dismissione non è stata ancora annunciata e le novità derivanti dalla recente introduzione dei tassi EMMI EFTERM e REFINTIV TERM €STR, per i quali proponiamo una sintesi delle rispettive metodologie di calcolo. Analizziamo inoltre le raccomandazioni del Working Group per la determinazione degli Adjustment Spread che gli operatori del mercato dovranno calcolare in autonomia.

CEPS - Definition of Artificial Intelligence
Matteo Cecchin
Dario Esposito
Bianca Ghilardi
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Matteo Cecchin
Business Analyst

He holds a master degree in Finance from Ca' Foscari University of Venice. After three years in banking and insurance sector in Lending and Internal Audit areas, he moved on the risk management field. Currently, he is working on a new project in the Model Risk field in one of the largest Italian banks.

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Dario Esposito
Chief Risk Regulatory Officer

Experienced professional with a demonstrated history of working in the financial services industry. Skilled in Enterprise Risk Management, Basel III and IV and AML. Strong finance professional postgraduated from University of London and IMD in Lausanne (International Institute for Management Development).

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