Technical Guides

Banking Model Validation

Banking model validation is the independent, second-line function that tests a bank model's conceptual soundness, implementation accuracy, and ongoing performance against actual outcomes. This guide covers the three pillars of a banking model validation exercise: conceptual soundness review (does the model's design make sense for its intended use), implementation testing (does the model as built actually implement its intended design), and outcomes analysis (does the model's output track what actually happens over time) — and why validation is a distinct discipline from a structural audit.

Banking Scenario Analysis

Scenario analysis in a bank model means building multiple forward-looking cases — a base case and one or more alternative cases — as parameter variations of the same underlying model structure, not as separate, disconnected workbooks. This guide covers how to structure a bank's scenario framework generally, how scenarios should be selected and switched cleanly, and how stress testing and loan loss forecasting fit as specific, more prescriptive applications of this same underlying discipline.

Basel Capital Ratios

The Basel III framework defines three core capital ratios — Common Equity Tier 1, Tier 1, and total capital — each measured against risk-weighted assets, layered with additional capital buffers above the hard minimums. This guide sets out the ratio definitions, the minimum and buffer levels the framework establishes, and how a bank model should represent each ratio and buffer as a distinct, named threshold rather than a single blended capital requirement.

Battery Energy Storage Models

A battery energy storage system earns revenue and degrades differently from generation assets: degradation is driven primarily by charge/discharge cycling rather than time or resource exposure, revenue is typically stacked across multiple distinct streams (energy arbitrage, capacity, and ancillary services), and round-trip efficiency and depth of discharge directly determine both revenue capture and degradation rate. This guide covers how each of these storage-specific mechanics should be built into the model.

Battery Storage Investment Models

Investing in battery storage as a climate mitigation asset class, across a portfolio of storage assets rather than a single project, requires assessing revenue stack risk aggregated across multiple markets and assets, financing recurring augmentation capital expenditure across the portfolio, and framing storage's climate contribution, enabling higher renewable penetration, distinct from the single-project degradation and multi-revenue-stream stacking mechanics covered elsewhere in this Knowledge Centre.

Biomass Models

A biomass generation project's economics are driven substantially by its feedstock — the biomass fuel supply's volume, calorific value, and price, all of which are subject to supply chain risk in a way a solar or wind project's resource is not. This guide covers how to model feedstock supply chain risk, the calorific value and heat rate mechanics converting fuel into output, fuel supply contract structure, and sustainability certification requirements that increasingly affect biomass project bankability.

Biotechnology Financial Models

Biotechnology companies, particularly pre-commercial ones, are financially defined by clinical trial phase progression, cash burn against a defined financing runway, and pipeline value that is inherently probability-weighted rather than certain. This guide covers how to model phase-gated development cost and timing, how probability of success should be applied to pipeline valuation, and how financing runway should be modelled against the cash burn profile of an unprofitable, clinical-stage company.

Blue Economy Models

Blue economy investments, sustainable fisheries, marine conservation, and coastal resilience among them, share nature-based finance's co-benefit valuation challenge but add ocean-specific measurement difficulty and, for blue carbon projects specifically, a crediting methodology still less mature than terrestrial nature-based credits. This guide covers how blue economy investments should be modelled, their relationship to blue carbon crediting, and the financing structures typically required.

Broken Links in Financial Models

Broken links in financial models are references to cells, ranges, or external files that no longer resolve correctly. They occur in two forms: internal broken links, where a cell references a named range, cell address, or worksheet that has been deleted or renamed within the same workbook; and external broken links, where a cell references a cell or range in a separate workbook file that is unavailable, moved, or renamed. Both types can cause formula cells to return errors or silently retain stale cached values, distorting model outputs without visible indication to the user.

Budget Model Structure

A budget model is built on the same three-statement mechanics as any other corporate forecast, but its defining discipline is governance rather than formulas: a fixed period, an assumption freeze once the budget is approved, and a variance-tracking structure that compares actuals against that unchanging baseline throughout the period. This guide covers how to structure a budget model correctly — top-down and bottom-up build methods and when each is appropriate, the assumption freeze and formal change-control process that distinguishes a budget from a forecast, and how the variance schedule should be built so that a variance is explained by its driver, not just its size.

Build-to-Rent Model Structure

A build-to-rent model spans two structurally distinct phases within one project — a development appraisal phase through practical completion, and a stabilised income-producing asset phase from lease-up onward — joined by an explicit transition point rather than a single continuous structure. This guide sets out how the lease-up curve should be modelled, how the transition to a term investment facility should be represented, and how the two phases hand off to each other.

Build-to-Sell Model Structure

A build-to-sell model is a development appraisal whose exit is realized as sales proceeds rather than retained income, which means the model closes out completely once the final unit is sold rather than transitioning into a stabilised income structure. This guide sets out how sales revenue recognition, deposit and completion payment timing, and the closed-out returns calculation should be built, and how this differs from the build-to-rent model this page's sibling guide addresses.

Business Combination Models

A business combination model applies the accounting perspective to a transaction — the acquisition method under IFRS 3 or ASC 805, fair value re-measurement of the acquiree's identifiable assets and liabilities, and the resulting consolidated financial statements — distinct from, though closely related to, the merger model's financing-and-EPS perspective covered on Merger Model and Accretion/Dilution Structure. This guide covers the accounting consolidation mechanics specifically, and clarifies where the two perspectives converge and diverge in a single transaction model.

Business Unit and Segment Model Structure

A business unit or segment model extends the standard three-statement foundation across more than one internal operating unit within a single legal entity, requiring two mechanics a single-unit model does not need: a defined, consistently applied method for allocating shared corporate overhead across units, and a reconciliation ensuring the sum of segment-level results ties exactly to the group total. This guide covers how to structure each unit's own detail before allocation, the common overhead allocation methods and when each is appropriate, and how to build the reconciliation that catches an allocation or roll-up error before it reaches a report.

Buy-Side Due Diligence

Buy-side due diligence is the due diligence process run by, or on behalf of, a prospective acquirer, investigating a target business before the acquirer commits to a price and signs a transaction agreement. It typically runs in phases — preliminary diligence ahead of a non-binding offer, then confirmatory diligence during an exclusivity period ahead of signing — across the seven standard workstreams, with findings flowing into the acquisition model, the purchase agreement's protective terms, and the final negotiated price.

CET1 Modelling

Common Equity Tier 1 (CET1) capital is the highest-quality, most loss-absorbing layer of regulatory capital, and it is the numerator of the most closely watched Basel ratio. This guide covers how to build the CET1 capital base in a model: the eligible components (common shares, retained earnings, certain reserves), the regulatory deductions applied (goodwill, certain deferred tax assets, other intangibles), and how the balance should roll forward period over period as retained earnings and other capital actions occur.

Capacity Payment Models

Capacity payments compensate a generation asset for being available to generate, independent of whether it is actually dispatched, and require a distinct modelling treatment from energy (dispatch-based) revenue. This guide covers how capacity payment mechanics — availability testing, penalty and de-rating provisions, and contract tenor — should be built into a power project model as their own explicit revenue component.

Capex Planning for Hospitals

Hospital capital expenditure spans two structurally different asset categories: building fabric, renewing on a multi-decade cycle, and clinical and medical equipment, renewing on a materially shorter cycle driven by both physical wear and rapid clinical technology advancement. This guide covers how to model each category's renewal timing and cost, and how to prioritise capex allocation when available funding is less than the technically justified renewal requirement.

Capital Adequacy Models

Capital adequacy modelling represents the constraint regulatory capital requirements place on how much risk-weighted balance sheet a bank can carry against its available capital base. This guide covers how to structure a capital adequacy model — the capital tiers, the risk-weighted asset base they are measured against, minimum ratio and buffer requirements — and how it should be built as a live check against the balance sheet forecast rather than a standalone reporting exercise calculated after the forecast is already complete.

Capital Allocation Model Structure

A capital allocation model ranks the competing uses of a company's available free cash flow — reinvestment in the business, debt paydown, dividends, share buybacks, and acquisitions — against a common hurdle rate, and builds an explicit waterfall showing how each dollar of available capital is actually deployed across those uses in priority order. This guide covers how to structure that ranking and waterfall: measuring each use's return against the same cost-of-capital hurdle, building the priority waterfall as an explicit, traceable calculation rather than a set of independent, unreconciled decisions, and reconciling the total capital deployed back to the free cash flow actually available in the period.