Insights & News
Risk management insights on model development, loss forecasting, CECL, and stress testing — from practitioners who build the models.
Banks estimate what they could lose in stress tests. Credit losses exist in regimes — long stretches of low losses punctuated by sharp, severe transitions. The only value of stress testing is deciding what to do before the shift happens, but most banks don’t. They should use the results to know when to hold, when to fold, when to walk away and when to run.
Recent Insights
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Learning Opportunities from “A Christmas Story”
Read more: Learning Opportunities from “A Christmas Story”Learning is a benefit that is important enough to describe separately! Like much financial and credit model development, scenario analysis is research as much as development or construction. Scenario analysis leads to a better understanding of the relationships between the firm and its environment and risk factors. Note that these relationships change through time as…
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SR 12-7 and the Five Principles of Stress Testing
Read more: SR 12-7 and the Five Principles of Stress TestingIf CCAR/DFAST is the extent of a firm’s stress testing, then, (a) the firm does not comply with SR 12-7, particularly Principles 1 and 2, and therefore, Principle 5; (b) there are likely deficiencies in overall risk management and data governance/systems that prevent implementation beyond CCAR; and therefore, (c ) any beneficial synergies between or among other…
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Does Unemployment Predict Commercial Loan Losses?
Read more: Does Unemployment Predict Commercial Loan Losses?The Short Answer: Historically, No, It’s the Other Way Around The Long Answer: let’s look at scatter plots and correlations and see the two large problems with using it. This is the third in a series of three posts. Two Regimes In our first post, Unemployment as a Commercial Loan Loss Predictor, we showed time-series…
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Unemployment as a Commercial Loan Loss Predictor
Read more: Unemployment as a Commercial Loan Loss PredictorThis the first in a sequence of three posts. The second describes alternatives to the unemployment rate for C&I loss forecasting, and the third one provides more evidence why the unemployment rate is a poor choice for C&I loss forecasting. Recently, we were surprised to learn that many banks use a forecasted unemployment rate as…
