Benchmark Complete

Source: BENCHMARK_COMPLETE.md (ingested 2026-03-28)

IFRS 9 ECL Benchmark — Complete Submission Package

Directory Map

All files are in: mercor-llm-failsafe/outputs/benchmark_ifrs9_ecl/

benchmark_ifrs9_ecl/
|
|-- BENCHMARK_COMPLETE.md        <-- THIS FILE (index + all 5 Mercor fields inline)
|
|-- task_prompt.md               <-- Field 1: Copy-paste this into Gemini
|-- golden_solution_narrative.md <-- Field 3: Step-by-step correct answer
|-- golden_solution.py           <-- Runnable code that produces exact numbers
|-- golden_results.json          <-- Exact numerical outputs (auto-generated)
|-- rubric.md                    <-- Field 4: 100-point scoring rubric + 14 unit tests
|-- follow_ups.md                <-- 6 progressive hints for recovery testing
|-- failure_analysis.md          <-- Field 5: Why Gemini fails + cross-model comparison
|-- mercor_export.md             <-- Summary/overview of all 5 fields

Workflow

Open task_prompt.md, copy its full content, paste into Gemini 3.0 Pro
Save Gemini's response
Score against rubric.md (14 unit tests, 100-point scale)
Send hints from follow_ups.md (F1 through F6), record recovery
Get shareable Gemini conversation link -> paste into Field 2
Write final failure_analysis.md with actual (not just predicted) results

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FIELD 1: TASK PROMPT

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(Copy everything below this line through the next separator

and paste into Gemini 3.0 Pro)

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IFRS 9 Expected Credit Loss -- Commercial Real Estate Portfolio

Memorandum

TO: Credit Risk Analytics Team FROM: Sarah Chen, Chief Risk Officer RE: Q1 2026 IFRS 9 Expected Credit Loss Computation -- CRE Portfolio DATE: March 31, 2026 CLASSIFICATION: Internal -- Regulatory Reporting

1. Background and Objectives

The bank is required to compute Expected Credit Loss (ECL) provisions under IFRS 9 for its commercial real estate (CRE) loan portfolio as of the Q1 2026 reporting date (March 31, 2026). The ECL computation must comply with IFRS 9.5.5 requirements, including forward-looking macroeconomic scenarios and staging based on significant increases in credit risk (SICR).

This portfolio consists of 20 CRE loans across three property segments (Office, Retail, Industrial). You are to compute the full ECL provision using the bank's approved methodology described in Section 5.

This analysis feeds directly into the bank's quarterly regulatory filing. Accuracy and auditability are paramount.

2. Portfolio Data

Reporting date: March 31, 2026. All balances in USD.

| Loan ID | Balance ($) | Origination Date | Maturity Date | Orig Rating | Current Rating | Segment | LTV (%) | Interest Rate (%) | Rate Type | Undrawn Commitment ($) | Collateral Value ($) | ESG Risk Score | |---------|------------|------------------|---------------|-------------|----------------|---------|---------|-------------------|-----------|----------------------|---------------------|----------------| | L01 | 5,000,000 | 2021-03-15 | 2031-03-15 | 2 | 2 | Office | 65.0 | 4.50 | Fixed | 0 | 7,692,308 | 72 | | L02 | 3,200,000 | 2022-06-01 | 2029-06-01 | 3 | 4 | Retail | 72.0 | 5.20 | Fixed | 500,000 | 4,444,444 | 65 | | L03 | 8,500,000 | 2020-01-10 | 2032-01-10 | 1 | 1 | Industrial | 55.0 | 3.80 | Fixed | 1,000,000 | 15,454,545 | 88 | | L04 | 2,100,000 | 2023-09-01 | 2030-09-01 | 4 | 5 | Retail | 78.0 | 6.10 | Floating | 300,000 | 2,692,308 | 58 | | L05 | 12,000,000 | 2019-04-20 | 2031-04-20 | 2 | 3 | Office | 60.0 | 4.20 | Fixed | 2,000,000 | 20,000,000 | 75 | | L06 | 1,800,000 | 2023-01-15 | 2035-01-15 | 3 | 3 | Industrial | 50.0 | 5.00 | Fixed | 0 | 3,600,000 | 82 | | L07 | 6,500,000 | 2021-07-01 | 2029-07-01 | 4 | 6 | Retail | 85.0 | 6.50 | Floating | 800,000 | 7,647,059 | 45 | | L08 | 4,000,000 | 2018-11-01 | 2030-11-01 | B+ | 4 | Office | 68.0 | 4.80 | Fixed | 500,000 | 5,882,353 | 70 | | L09 | 7,300,000 | 2022-03-01 | 2034-03-01 | 2 | 2 | Industrial | 45.0 | 4.00 | Fixed | 1,500,000 | 16,222,222 | 90 | | L10 | 3,500,000 | 2020-08-15 | 2028-08-15 | 3 | 5 | Retail | 80.0 | 5.80 | Floating | 0 | 4,375,000 | 52 | | L11 | 9,000,000 | 2021-01-01 | 2033-01-01 | 1 | 2 | Office | 58.0 | 4.10 | Fixed | 1,200,000 | 15,517,241 | 85 | | L12 | 2,500,000 | 2024-01-15 | 2031-01-15 | 5 | 5 | Retail | 75.0 | 6.80 | Floating | 400,000 | 3,333,333 | 48 | | L13 | 15,000,000 | 2020-06-01 | 2037-06-01 | 1 | 1 | Industrial | 40.0 | 3.50 | Fixed | 3,000,000 | 37,500,000 | 92 | | L14 | 1,200,000 | 2023-06-01 | 2028-06-01 | 6 | 7 | Retail | 92.0 | 8.50 | Fixed | 0 | 1,304,348 | 35 | | L15 | 4,800,000 | 2019-12-01 | 2031-12-01 | 3 | 4 | Office | 70.0 | 4.60 | Fixed | 600,000 | 6,857,143 | 68 | | L16 | 6,000,000 | 2022-09-01 | 2030-09-01 | 2 | 3 | Industrial | 52.0 | 4.30 | Fixed | 800,000 | 11,538,462 | 80 | | L17 | 2,800,000 | 2023-03-15 | 2030-03-15 | 4 | 4 | Retail | 74.0 | 5.90 | Fixed | 200,000 | 3,783,784 | 62 | | L18 | 10,500,000 | 2020-10-01 | 2032-10-01 | 2 | 3 | Office | 62.0 | 4.40 | Fixed | 1,500,000 | 16,935,484 | 73 | | L19 | 1,500,000 | 2024-06-01 | 2031-06-01 | 5 | 6 | Retail | 88.0 | 7.20 | Floating | 0 | 1,704,545 | 40 | | L20 | 8,000,000 | 2021-09-01 | 2033-09-01 | 2 | 2 | Industrial | 48.0 | 4.10 | Fixed | 1,000,000 | 16,666,667 | 86 |

Total portfolio balance: $115,200,000 across 20 loans.

3. Internal Rating Transition Matrix

The bank uses a 7-grade internal rating scale (Grade 1 = strongest, Grade 7 = weakest) plus Default (D) as an absorbing state. The annual transition matrix below is calibrated to the bank's 2010-2025 default experience.

| From \ To | Grade 1 | Grade 2 | Grade 3 | Grade 4 | Grade 5 | Grade 6 | Grade 7 | Default | |-----------|---------|---------|---------|---------|---------|---------|---------|---------| | Grade 1 | 0.9200 | 0.0650 | 0.0100 | 0.0030 | 0.0010 | 0.0005 | 0.0003 | 0.0002 | | Grade 2 | 0.0100 | 0.9050 | 0.0600 | 0.0150 | 0.0050 | 0.0025 | 0.0015 | 0.0010 | | Grade 3 | 0.0020 | 0.0250 | 0.8800 | 0.0550 | 0.0200 | 0.0100 | 0.0050 | 0.0030 | | Grade 4 | 0.0005 | 0.0050 | 0.0300 | 0.8550 | 0.0600 | 0.0250 | 0.0150 | 0.0095 | | Grade 5 | 0.0000 | 0.0020 | 0.0050 | 0.0300 | 0.8320 | 0.0700 | 0.0350 | 0.0280 | | Grade 6 | 0.0000 | 0.0005 | 0.0020 | 0.0050 | 0.0300 | 0.8000 | 0.0800 | 0.0825 | | Grade 7 | 0.0000 | 0.0000 | 0.0005 | 0.0020 | 0.0050 | 0.0400 | 0.7530 | 0.1995 | | Default | 0.0000 | 0.0000 | 0.0000 | 0.0000 | 0.0000 | 0.0000 | 0.0000 | 1.0000 |

4. Macroeconomic Scenarios

Three scenarios are used for probability-weighted ECL computation. All projections are annual from 2026 through 2030. The CRE Price Index is rebased to 100.0 at the reporting date.

4.1 Base Case (Probability Weight: 50%)

Continued moderate expansion consistent with consensus forecasts.

| Year | GDP Growth (%) | Unemployment (%) | CRE Price Index | |------|---------------|------------------|-----------------| | 2026 | 2.1 | 4.2 | 100.0 | | 2027 | 2.3 | 4.0 | 103.0 | | 2028 | 2.0 | 4.1 | 106.0 | | 2029 | 1.8 | 4.3 | 108.0 | | 2030 | 2.0 | 4.2 | 110.0 |

4.2 Downside (Probability Weight: 30%)

Severe recession triggered by a commercial real estate correction and tightening credit conditions. Property values decline 25% peak-to-trough, with elevated defaults in retail and office segments.

| Year | GDP Growth (%) | Unemployment (%) | CRE Price Index | |------|---------------|------------------|-----------------| | 2026 | -1.5 | 5.5 | 100.0 | | 2027 | -3.2 | 7.8 | 92.0 | | 2028 | 0.5 | 7.2 | 85.0 | | 2029 | 1.0 | 6.5 | 82.0 | | 2030 | 1.5 | 5.8 | 86.0 |

4.3 Upside (Probability Weight: 20%)

Stronger-than-expected growth driven by technology sector expansion and infrastructure investment.

| Year | GDP Growth (%) | Unemployment (%) | CRE Price Index | |------|---------------|------------------|-----------------| | 2026 | 3.0 | 3.8 | 100.0 | | 2027 | 3.5 | 3.5 | 108.0 | | 2028 | 3.2 | 3.3 | 115.0 | | 2029 | 2.8 | 3.4 | 120.0 | | 2030 | 2.5 | 3.5 | 123.0 |

5. Approved ECL Methodology

5.1 Stage Classification (SICR Assessment)

Loans are classified into three stages per IFRS 9.5.5:

Stage 1: No significant increase in credit risk since origination. Provision = 12-month ECL.
Stage 2: Significant increase in credit risk (SICR) since origination, but not credit-impaired. Provision = lifetime ECL.
Stage 3: Credit-impaired (current rating = Grade 7 or Default). Provision = lifetime ECL.

SICR is identified when either condition is met:

The annualized lifetime PD has increased by more than 100% relative to origination (i.e., current annualized PD > 2 x origination annualized PD), OR
The absolute increase in annualized lifetime PD exceeds 150 basis points (1.50%).

Annualized lifetime PD is computed as:

annualized_PD = 1 - (1 - cumulative_PD)^(1/T)

where cumulative_PD is the cumulative probability of default over the relevant horizon T (in years), derived from the transition matrix via matrix exponentiation (see Section 5.2).

For SICR assessment:

Origination annualized PD: Use the origination rating and original loan maturity (full term).
Current annualized PD: Use the current rating and remaining maturity as of the reporting date.

5.2 PD Term Structure

Multi-year cumulative default probabilities are derived from the transition matrix M using matrix exponentiation:

cumulative_PD(t) = [M^t]_{rating, Default}

where [M^t]_{r,D} denotes the (r, Default) entry of the t-th matrix power of M.

Marginal (year-by-year) default probabilities:

marginal_PD(t) = cumulative_PD(t) - cumulative_PD(t-1)

with cumulative_PD(0) = 0.

Macroeconomic overlay: PDs are adjusted under each scenario using the bank's approved macro-credit model:

PD_adjusted(t, scenario) = PD_base(t) * exp(beta_GDP * delta_GDP(t) + beta_Unemp * delta_Unemp(t))

where:

delta_GDP(t) = GDP_scenario(t) - GDP_base(t) (in percentage points, e.g., -5.5 for a 5.5pp difference)
delta_Unemp(t) = Unemp_scenario(t) - Unemp_base(t) (in percentage points)
beta_GDP = -0.025 (negative: GDP decline increases PD)
beta_Unemp = 0.018 (positive: unemployment increase increases PD)
For projection years beyond the 5-year scenario horizon, use Year 5 values as long-run equilibrium.

Note: The base scenario overlay multiplier is 1.0 by definition (deltas are zero).

5.3 Loss Given Default (LGD)

LGD is computed using the collateral-based approach:

LGD = max(0, 1 - collateral_adjusted / EAD)

where:

collateral_adjusted = collateral_value * (1 - haircut)

Haircuts by property segment: | Segment | Haircut (%) | |---------|------------| | Office | 30 | | Retail | 35 | | Industrial | 25 |

Historical average recovery rates by property type: Office 58%, Retail 52%, Industrial 65%. These are provided for reasonableness checking of the collateral-based LGD estimates.

5.4 Exposure at Default (EAD)

EAD = Outstanding_Balance + CCF * Undrawn_Commitment

Credit Conversion Factors (CCF):

Stage 1: CCF = 75% (12-month horizon)
Stage 2 and 3: CCF = 100% (lifetime horizon -- full drawdown assumed)

5.5 ECL Computation

For each loan, under each scenario:

ECL(t, scenario) = marginal_PD_adjusted(t, scenario) * LGD * EAD * DF(t)

where:

DF(t) = 1 / (1 + EIR)^t is the discount factor at the loan's effective interest rate (EIR)
t ranges from 1 to the remaining maturity (rounded to nearest whole year)

By stage:

Stage 1: ECL = ECL(t=1) only (12-month expected loss)
Stage 2 and 3: ECL = sum of ECL(t) for t = 1, 2, ..., T_remaining (lifetime expected loss)

Probability-weighted ECL:

ECL_final = 0.50 * ECL_base + 0.30 * ECL_downside + 0.20 * ECL_upside

5.6 Discounting

Discount all future expected losses at the effective interest rate (EIR) of each loan. For fixed-rate loans, the EIR is the contractual interest rate. For floating-rate loans, use the current coupon rate as the best estimate of the EIR.

6. Deliverables

Provide a complete, auditable analysis including:

Data Quality Assessment -- Identify and document any data quality issues, inconsistencies, or anomalies found in the portfolio data, transition matrix, or macroeconomic scenarios. Describe how each issue is resolved.
Stage Classification -- For each loan, state the assigned stage (1, 2, or 3) with supporting calculations showing the origination annualized PD, current annualized PD, and SICR test results.
ECL by Loan -- For each loan, provide the probability-weighted ECL amount, showing the ECL under each of the three scenarios before weighting.
Summary Tables -- Aggregate ECL by:
- Segment (Office, Retail, Industrial)
- Stage (1, 2, 3)
- Portfolio total
Sensitivity Analysis -- Test sensitivity of the portfolio ECL to at least two key assumptions (e.g., scenario probability weights, haircut assumptions, SICR thresholds).
Assumptions and Limitations -- Document all assumptions made, any methodology limitations, and recommendations for model improvements.
Reproducible Code -- Provide Python code (or equivalent) that reproduces all calculations from the raw data.

7. Additional Notes

a) Rating System Change (Loan L08): Loan L08 was originated in November 2018 under the bank's previous letter-grade rating system. The previous system was replaced with the current 1-7 numeric scale in January 2020. An approximate mapping was established at that time: AAA/AA -> 1, A -> 2, BBB -> 2, BB -> 3, B+ -> 3, B -> 4, B- -> 5, CCC -> 6, CC/C -> 7. This mapping was validated against a limited 85-loan sample and should be treated as approximate.

b) ESG Risk Scores: The ESG Risk Score column is from a pilot sustainability assessment program initiated in Q4 2025. These scores are informational only and are not incorporated into the bank's approved credit model for ECL computation.

c) Transition Matrix Calibration: The transition matrix was last recalibrated in January 2025 using observed rating migrations from 2010-2024. It has not been updated to reflect post-January 2025 economic conditions.

d) Macro Overlay Model: The beta coefficients (beta_GDP = -0.025, beta_Unemp = 0.018) were estimated from a 15-year panel regression of observed default rates on macroeconomic variables.

e) Recovery Data: The historical recovery rates in Section 5.3 are based on 2015-2024 workout experience. They are provided for reasonableness validation only. The approved methodology uses the collateral-based LGD formula.

End of memorandum. Please direct questions to the Credit Risk Methodology team.

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FIELD 2: CONVERSATION LINK

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FIELD 3: GOLDEN SOLUTION

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Executive Summary

The probability-weighted ECL provision for the 20-loan CRE portfolio is $858,024, representing 0.74% of the total outstanding balance of $115,200,000. The provision is heavily concentrated in the Retail segment ($851,410, 99.2% of total) and in Stage 2 loans ($692,337, 80.7% of total). Ten loans have zero ECL due to full collateral coverage after haircuts.

Step 1: Data Quality Assessment

Issue 1 -- Transition Matrix Row-Sum Error (Critical)

The Grade 5 row of the transition matrix sums to 1.002, not 1.000:

0.0000 + 0.0020 + 0.0050 + 0.0300 + 0.8320 + 0.0700 + 0.0350 + 0.0280 = 1.0020

Resolution: Normalize the row by dividing each element by 1.002. This is standard for transition matrices. The 0.2% error compounds through matrix exponentiation -- approximately 2% deviation over 10 years.

Issue 2 -- Legacy Rating for Loan L08

Loan L08's origination rating is "B+", from the bank's pre-2020 letter-grade system. Per Note (a), B+ maps approximately to Grade 3.

Resolution: Use Grade 3 as origination rating for SICR. Note: mapping is approximate (85-loan validation sample). If the true grade were 2, L08 would trigger SICR and move from Stage 1 to Stage 2.

Issue 3 -- Macro Scenario Narrative Inconsistency

The downside scenario narrative states "property values decline 25% peak-to-trough." The CRE Price Index shows a maximum decline of only 18.0% (100.0 to 82.0).

Resolution: Use the quantitative index for the overlay; flag the 7pp discrepancy in limitations.

Issue 4 -- ESG Scores Not Part of Approved Model

Per Note (b), ESG scores are informational only. Excluded from all computations.

Step 2: Stage Classification

Annualized lifetime PD = 1 - (1 - cumPD)^(1/T) where cumPD comes from matrix exponentiation [M^T]_{rating, Default}.

| Loan | Orig Rtg | Curr Rtg | Orig Ann PD | Curr Ann PD | Relative | Absolute | Stage | |------|----------|----------|-------------|-------------|----------|----------|-------| | L01 | 2 | 2 | 0.60% | 0.30% | 0.50x | -0.30% | 1 | | L02 | 3 | 4 | 1.05% | 1.41% | 1.34x | +0.36% | 1 | | L03 | 1 | 1 | 0.27% | 0.11% | 0.39x | -0.17% | 1 | | L04 | 4 | 5 | 2.32% | 3.63% | 1.56x | +1.31% | 1 | | L05 | 2 | 3 | 0.72% | 0.80% | 1.11x | +0.08% | 1 | | L06 | 3 | 3 | 1.57% | 1.30% | 0.83x | -0.27% | 1 | | L07 | 4 | 6 | 2.49% | 8.28% | 3.32x | +5.79% | 2 | | L08 | B+(~3) | 4 | 1.57% | 2.11% | 1.34x | +0.54% | 1 | | L09 | 2 | 2 | 0.72% | 0.48% | 0.66x | -0.24% | 1 | | L10 | 3 | 5 | 1.16% | 2.75% | 2.37x | +1.59% | 2 | | L11 | 1 | 2 | 0.27% | 0.43% | 1.58x | +0.16% | 1 | | L12 | 5 | 5 | 4.79% | 4.49% | 0.94x | -0.30% | 1 | | L13 | 1 | 1 | 0.45% | 0.24% | 0.53x | -0.21% | 1 | | L14 | 6 | 7 | 9.37% | 18.18% | 1.94x | +8.82% | 3 | | L15 | 3 | 4 | 1.57% | 2.26% | 1.44x | +0.69% | 1 | | L16 | 2 | 3 | 0.48% | 0.62% | 1.30x | +0.14% | 1 | | L17 | 4 | 4 | 2.32% | 1.74% | 0.75x | -0.58% | 1 | | L18 | 2 | 3 | 0.72% | 1.13% | 1.56x | +0.40% | 1 | | L19 | 5 | 6 | 4.79% | 9.08% | 1.89x | +4.29% | 2 | | L20 | 2 | 2 | 0.72% | 0.39% | 0.54x | -0.33% | 1 |

Summary: 16 Stage 1, 3 Stage 2 (L07, L10, L19), 1 Stage 3 (L14).

Step 3: ECL by Loan

| Loan | Stage | EAD ($) | LGD | ECL Base ($) | ECL Down ($) | ECL Up ($) | ECL Weighted ($) | |------|-------|---------|-----|-------------|-------------|-----------|-----------------| | L01 | 1 | 5,000,000 | 0.000 | 0 | 0 | 0 | 0 | | L02 | 1 | 3,575,000 | 0.192 | 6,196 | 6,940 | 6,015 | 6,383 | | L03 | 1 | 9,250,000 | 0.000 | 0 | 0 | 0 | 0 | | L04 | 1 | 2,325,000 | 0.247 | 15,144 | 16,963 | 14,701 | 15,601 | | L05 | 1 | 13,500,000 | 0.000 | 0 | 0 | 0 | 0 | | L06 | 1 | 1,800,000 | 0.000 | 0 | 0 | 0 | 0 | | L07 | 2 | 7,300,000 | 0.319 | 504,396 | 580,007 | 485,928 | 523,386 | | L08 | 1 | 4,375,000 | 0.059 | 2,333 | 2,613 | 2,265 | 2,403 | | L09 | 1 | 8,425,000 | 0.000 | 0 | 0 | 0 | 0 | | L10 | 2 | 3,500,000 | 0.188 | 38,577 | 45,516 | 37,258 | 40,395 | | L11 | 1 | 9,900,000 | 0.000 | 0 | 0 | 0 | 0 | | L12 | 1 | 2,800,000 | 0.226 | 16,571 | 18,561 | 16,086 | 17,071 | | L13 | 1 | 17,250,000 | 0.000 | 0 | 0 | 0 | 0 | | L14 | 3 | 1,200,000 | 0.294 | 110,730 | 129,017 | 107,076 | 115,485 | | L15 | 1 | 5,250,000 | 0.086 | 4,087 | 4,578 | 3,967 | 4,210 | | L16 | 1 | 6,600,000 | 0.000 | 0 | 0 | 0 | 0 | | L17 | 1 | 2,950,000 | 0.166 | 4,401 | 4,929 | 4,272 | 4,533 | | L18 | 1 | 11,625,000 | 0.000 | 0 | 0 | 0 | 0 | | L19 | 2 | 1,500,000 | 0.261 | 125,023 | 139,754 | 120,590 | 128,556 | | L20 | 1 | 8,750,000 | 0.000 | 0 | 0 | 0 | 0 |

Step 4: Summary Tables

By Segment

| Segment | Loans | Balance ($) | ECL ($) | ECL/Balance | |---------|-------|------------|---------|-------------| | Office | 6 | 45,300,000 | 6,614 | 0.01% | | Retail | 8 | 23,300,000 | 851,410 | 3.65% | | Industrial | 6 | 46,600,000 | 0 | 0.00% | | Total | 20 | 115,200,000 | 858,024 | 0.74% |

By Stage

| Stage | Loans | Balance ($) | ECL ($) | ECL/Balance | |-------|-------|------------|---------|-------------| | Stage 1 | 16 | 102,500,000 | 50,202 | 0.05% | | Stage 2 | 3 | 11,500,000 | 692,337 | 6.02% | | Stage 3 | 1 | 1,200,000 | 115,485 | 9.62% | | Total | 20 | 115,200,000 | 858,024 | 0.74% |

Step 5: Sensitivity Analysis

Scenario Weights

| Configuration | ECL ($) | Change | |--------------|---------|--------| | Central (50/30/20) | 858,024 | -- | | Pessimistic (40/40/20) | 870,166 | +1.4% | | Optimistic (60/20/20) | 845,882 | -1.4% |

Collateral Haircuts (+/- 5pp)

| Change | ECL ($) | Change | |--------|---------|--------| | Central | 858,024 | -- | | +5pp all segments | 1,024,646 | +19.4% | | -5pp all segments | 691,745 | -19.4% |

Collateral haircuts are the dominant sensitivity (+/-19.4% vs +/-1.4% for scenario weights).

Step 6: Assumptions and Limitations

Assumptions: Matrix normalized (Grade 5 row); L08 B+ mapped to Grade 3; floating-rate EIR = current coupon; Year 5 values for beyond-horizon; ESG excluded.

Limitations: Macro narrative/data inconsistency (25% vs 18%); L08 mapping approximate; no collateral stress under downside scenario; point-in-time transition matrix.

Recommendations: Recalibrate matrix; reconcile downside narrative; stress collateral values; improve L08 mapping sample.

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FIELD 4: RUBRIC (100 Points)

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| # | Criterion | Points | Key Failure Modes | |---|-----------|--------|-------------------| | R01 | Transition Matrix Validation | 12 | FM-003, FM-004 | | R02 | Legacy Rating + Macro Issues | 10 | FM-004, FM-002 | | R03 | SICR Staging Methodology | 15 | FM-001, FM-008 | | R04 | PD Term Structure (matrix power) | 10 | FM-003, FM-008 | | R05 | LGD and EAD Computation | 10 | FM-001, FM-005 | | R06 | ECL Computation + Macro Overlay | 15 | FM-001, FM-003 | | R07 | Probability Weighting + Aggregation | 8 | FM-001 | | R08 | Sensitivity Analysis | 8 | FM-002 | | R09 | Assumptions + Limitations | 7 | FM-002, FM-005 | | R10 | Code Quality + Reproducibility | 5 | -- | | | TOTAL | 100 | |

Tiers: Strong 75-100 | Moderate 45-74 | Weak 0-44

R01: Transition Matrix Validation (12 pts)

12: Identifies Grade 5 row sums to 1.002, normalizes, discusses compounding impact
8: Identifies error and normalizes, no impact discussion
4: Mentions validation but misses the specific error
0: No matrix validation

R02: Legacy Rating + Macro Inconsistency (10 pts)

10: Maps L08 B+ to Grade 3 with uncertainty AND flags 25% vs 18% CRE discrepancy
7: Handles both correctly without uncertainty discussion
4: Handles one of the two correctly
0: Ignores both

R03: SICR Staging Methodology (15 pts) -- MOST DISCRIMINATIVE

15: Correct annualized lifetime PDs via matrix power, dual threshold, correct staging (16/3/1)
10: Correct approach with 1-2 misclassifications
6: Attempts annualization but compares cumulative PDs over different horizons without adjusting
3: Uses raw 1-year PDs from matrix diagonal
0: No SICR or uses rating change alone

R04: PD Term Structure (10 pts)

10: Matrix power M^t, correct marginal PDs, handles beyond-horizon
7: Correct approach with minor issues
4: Approximate methods with acknowledgment
0: No term structure

R05: LGD and EAD (10 pts)

10: Correct collateral LGD with haircuts, CCF differentiation (75%/100%), identifies fully-secured loans, excludes ESG
7: Correct formulas but misses some details
4: Incorporates ESG or uses historical recovery rates (-3 each)
0: No LGD/EAD computation

R06: ECL Computation + Overlay (15 pts)

15: Correct formula, 12-month vs lifetime, log-linear overlay with proper betas, loan-specific EIR
11: Correct framework, single discount rate
7: Correct formula, no horizon differentiation or no overlay
0: No ECL computation

R07: Probability Weighting (8 pts)

8: Correct weights (50/30/20), ECL by segment + stage + total, scenario-level shown
5: Correct weights, incomplete aggregation
0: No weighting or single scenario

R08: Sensitivity Analysis (8 pts)

8: 2+ sensitivities, identifies haircuts as dominant (~20% impact)
5: At least one meaningful sensitivity
0: No sensitivity analysis

R09: Assumptions + Limitations (7 pts)

7: All assumptions documented, limitations identified, recommendations provided
5: Most assumptions, some limitations
0: None documented

R10: Code Quality (5 pts)

5: Complete, runnable, well-structured code
3: Runs but has issues
0: No code

Automated Unit Tests

| ID | Test | Expected | Type | |----|------|----------|------| | T01 | Grade 5 row sum flagged as != 1.0 | Flagged | HARD | | T02 | L08 B+ mapped to numeric grade | Grade 3 | HARD | | T03 | L07 = Stage 2 | Stage 2 | HARD | | T04 | L04 = Stage 1 (boundary) | Stage 1 | HARD | | T05 | L14 = Stage 3 | Stage 3 | HARD | | T06 | 5yr cumPD Grade 4 via matrix power | 4.8-5.2% | SOFT | | T07 | All Industrial loans LGD = 0 | LGD = 0 | HARD | | T08 | L07 LGD ~ 0.319 | 0.30-0.34 | SOFT | | T09 | Portfolio ECL within 10% of $858K | $772K-$944K | SOFT | | T10 | L07 has largest individual ECL | L07 > all | HARD | | T11 | Downside ECL > Base > Upside | Ordered | HARD | | T12 | ESG not used in computation | Excluded | HARD | | T13 | 25% vs 18% macro inconsistency flagged | Noted | HARD | | T14 | Floating loans use current rate as EIR | Confirmed | SOFT |

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FIELD 5: FAILURE ANALYSIS

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Executive Summary

Gemini 3.0 Pro is predicted to score 30-45/100 (Weak tier), passing ~5-7 of 14 automated tests and triggering 4-5 failure modes. After hint recovery, expected improvement to 55-70/100 (Moderate tier) with ~50-67% recovery rate.

Predicted Failure Mechanisms

1. SICR Annualization Trap (FM-008 + FM-001) -- CRITICAL, 15pts at risk

Prediction: Compares raw 1-year PDs or cumulative PDs over different horizons instead of annualized lifetime PDs. This is the most discriminative failure -- specialized IFRS 9 regulatory knowledge that rarely appears in training data. Recovery: Medium (hint F2 provides conceptual nudge, but implementation is hard)

2. Transition Matrix Not Validated (FM-003) -- HIGH, 12pts at risk

Prediction: Accepts matrix as-given. Grade 5 row-sum 1.002 error undetected. Compounds through matrix power. Recovery: High (hint F1 directly asks about row sums)

3. ESG/Recovery Rate Incorporated (FM-005) -- MODERATE, 6-10pts at risk

Prediction: Incorporates ESG scores or uses historical recovery rates instead of collateral-based LGD. Recovery: High (hint F5 points to Notes b/e)

4. Legacy Rating Mishandled (FM-004) -- MODERATE, 5-7pts at risk

Prediction: Treats B+ as string error, maps to wrong grade, or finds mapping without discussing uncertainty. Recovery: High (hint F3 is direct)

5. Macro Inconsistency Not Flagged (FM-004) -- LOW, 3-5pts at risk

Prediction: Accepts downside narrative (25% decline) without comparing to CRE index (18% decline). Recovery: Very high (hint F4 is arithmetic)

Cross-Model Predictions

| Model | SICR | Matrix | ESG | L08 | Macro | Total | |-------|------|--------|-----|-----|-------|-------| | Gemini 3.0 Pro | Fail | Fail | Fail | Partial | Fail | 30-45 | | GPT-4o | Fail | Fail | Partial | Partial | Fail | 35-50 | | Claude Sonnet 4 | Partial | Partial | Pass | Partial | Pass | 45-60 | | DeepSeek-V3 | Fail | Fail | Fail | Fail | Fail | 25-40 |

Structural vs. Recoverable

Structural gap (~40% of lost points): SICR annualization -- requires genuine regulatory reasoning
Recoverable (~60% of lost points): Matrix validation, ESG exclusion, macro inconsistency, L08 mapping

Follow-Up Hints for Recovery Testing

F1 -- Transition Matrix (HIGH diagnostic value)

"Before proceeding with the PD computations, have you validated that the transition matrix is well-formed? Specifically, do all rows sum to exactly 1.0? What would happen to your multi-year PD estimates if a row were slightly off?"

F2 -- SICR Annualization (HIGH diagnostic value)

"When comparing origination PD to current PD for SICR, you need to account for the fact that the origination horizon (full original maturity) differs from the current horizon (remaining maturity). A 5% cumulative PD over 10 years is very different from 5% over 2 years. How should you adjust the comparison to make it apples-to-apples?"

F3 -- Legacy Rating L08 (MEDIUM diagnostic value)

"Loan L08 has an origination rating of 'B+' while all other loans use the 1-7 numeric scale. Check the Additional Notes section for information about the rating system change. How does this affect the SICR assessment for L08, and what uncertainty does the approximate mapping introduce?"

F4 -- Macro Inconsistency (MEDIUM diagnostic value)

"The downside scenario narrative describes 'property values declining 25% peak-to-trough.' Please compare this narrative claim against the actual CRE Price Index numbers in the downside scenario table. Are they consistent?"

F5 -- ESG and Recovery Rates (MEDIUM diagnostic value)

"The data includes ESG Risk Scores and historical recovery rates. Re-read Notes (b) and (e) in the memorandum. Which data columns are part of the approved credit model, and which are informational only? Has this distinction affected your LGD computation?"

F6 -- Worked Example for L07 (LOW diagnostic value -- gift)

"Let me walk through L07 as a worked example. L07: Grade 4 at origination (2021-07), currently Grade 6, maturity 2029-07, balance $6.5M, undrawn $800K, Retail segment (35% haircut), floating rate at 6.50%. Step 1: Remaining maturity = ~3.3 years (round to 3). Step 2: Stage 2 (SICR triggered -- origination annualized PD ~2.49%, current ~8.28%, relative increase 3.32x). Step 3: EAD = $6.5M + 100% x $0.8M = $7.3M (Stage 2 CCF). Step 4: Collateral adjusted = $7,647,059 x (1 - 0.35) = $4,970,588. LGD = 1 - $4,970,588/$7,300,000 = 0.319. Step 5: Compute 3-year marginal PDs from transition matrix (Grade 6), apply macro overlay per scenario, discount at 6.50%. Does your computation for L07 align with this framework?"

Expected Recovery Trajectory

Initial: ~35/100
After F1: +10 -> ~45
After F2: +8 -> ~53
After F3: +5 -> ~58
After F4: +4 -> ~62
After F5: +3 -> ~65
After F6: +7 -> ~72
Final: ~55-72/100 | Recovery rate: ~50-67%