A methodology to measure the impacts of scenarios through expected credit losses

Mahmood Alaghmandan, Meghal Arora and Olga Streltchenko

Journal of Credit Risk

Abstract: In this paper, we present a methodology for measuring the impact of scenarios on the expected losses of exposures by leveraging the existing provisioning infrastructure within financial institutions, where scenario effects are captured through changes in probabilities of default. This methodology formed the theoretical foundation of the 2024 standardized climate scenario exercise conducted by the Office of the Superintendent of Financial Institutions Canada and Québec’s Autorité des Marchés Financiers. We also describe how to design and implement a scenario test, where risk drivers are given for standardized groupings of exposures and the groupings are defined based on common features of the exposures.

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