Insights & News

Insights on risk management, model development, loss forecasting, CECL, and stress testing from practitioners who build the models. Thought before calculation, every time.

The Good, the Bad and the Ugly

We extend our Fort Myers Fannie mortgage loss analysis by showing how loans, ranked by expected loss rates and updated LTVs, perform if home prices decline 57%.
We then compare 2007 and 2025 portfolios to show why a crisis could re-occur.

The Good, the Bad & the Ugly

private credit

Private Credit’s early growth resulted from regulated banks retreating from making riskier loans. With its capital structure, PC maintains an incentive to make riskier loans than banks. Credit losses tend to be either large or small, with no in-between, and we’ve been in a low-loss state for awhile. PC’S recent success may be attributed to the wrong factors.

Was Private Credit Fooled by Its Own Success?

stress testing

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.

Regimes, Risk Management & Stress Testing

Recent Insights

Alternatives to Unemployment as a Commercial Loan Loss Predictor
Read more: Alternatives to Unemployment as a Commercial Loan Loss Predictor
Unemployment as a Commercial Loan Loss Predictor
This 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…
Read more: Unemployment as a Commercial Loan Loss Predictor
2017 – 2019 Federal Reserve and Company Run CCAR Results
Almost four years ago, we aggregated and published the Fed’s and Companies’ 2016 CCAR results. We’re surprised by the continued interest in those nearly four-year-old numbers; so, we asked one of our analysts to generate similar graphs for 2017, 2018, and 2019. Please note that a few observations from companies are missing; those firms purge…
Read more: 2017 – 2019 Federal Reserve and Company Run CCAR Results
Bigger Risk Staffs, Better Risk Management?
Risk headcount expanded after the Financial Crisis. Reporting grew faster than managing. Better risk management actually requires scenarios, stress testing, and then planning and acting on the answers.
Read more: Bigger Risk Staffs, Better Risk Management?
Q1 2020 Large Bank CECL Estimates
There is intense curiosity about the effects of CECL on banks’ financial statements via credit reserves–the ALLL or Allowance for Loan and Lease Losses; so, we surveyed the earnings releases, investors’ presentations and 10Qs and Ks of CCAR banks—plus one more. We present the aggregated results, below, as absolute and percentage changes in the ALLL…
Read more: Q1 2020 Large Bank CECL Estimates
Stress Testing and the Corona Virus at Risk.net Training
Lately, our business has been CECL, CECL and more CECL, but if all goes well, Andy will present two sessions on the other type of loss forecasting at Risk.net’s Stress Testing Training in New York City on March 26 & 27. 1. Building a Stress Testing Framework If you can’t forecast losses, how can you…
Read more: Stress Testing and the Corona Virus at Risk.net Training
Spero Risk at Stress Testing: CCAR & DFAST Seminar
Next Wednesday and Thursday, June 13 and 14, Phil Chamberlain, EVP of Risk and Data Governance, and Andy Spero will present sessions at Risk.net’s two-day course in New York City, Stress Testing: CCAR & DFAST. On Wednesday, Phil will present “Risk Appetite and Scenario Design in Stress Testing.” He will explain how a board’s risk appetite…
Read more: Spero Risk at Stress Testing: CCAR & DFAST Seminar
Congratulations Lucy!
While there are similarities in approach, usually, there’s not much overlap between Spero Risk Associates (SRA) and Andy’s other job as the head track and field coach at John Carroll Catholic High School. However, our part-time, administrative assistant, Lucy, is a hardworking member of both teams. From left-to-right, Lucy and her teammates, Mandy, Alexis and…
Read more: Congratulations Lucy!
Spero Risk – WBA Webinar Series
In conjunction with the Western Banking Association (WBA), we’re offering a series of webinars, entitled, “Crucial Resources for the Effective CRO.” The three webinars will go beyond regulations and bureaucracy to explain what you need to know about stress testing, modeling, and data governance. The WBA was formed in 2018 through a merger of the California…
Read more: Spero Risk – WBA Webinar Series
Wells, Cross Selling, Incentives, et. al.
Last week’s news about Wells Fargo’s retail sales tactics provides excellent evidence that all of the required ethics and UDAAP (Unfair, Deceptive, or Abusive Acts or Practices) training to which bankers are subjected is no match for poorly-designed incentive schemes and unobservant (or complicit) supervisors. We have two main points to make regarding this well-publicized…
Read more: Wells, Cross Selling, Incentives, et. al.