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.

Credit Regimes and the Race against Defaults

When times are good, it’s easy to forget that they’ll end, even if the endpoint is unknown. Forgetting that can be very costly. We explain how the big risk builds during calm times. Losses in subsequent bad times can only be managed in good times. We hint at a new service that measures the risk to manage.

Credit Regimes: the Race Against Default Waves

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

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.
CCAR 2016 BHC Loss Rate Graphs
The slideshow below consists of 16 graphs: eight for the SR 15-18 firms and a matching eight for the SR 15-19 firms. Each graph presents the Fed’s and the firm’s forecasted average loss rate for each portfolio. To stop the show–to remain on one graph–hover over it with your mouse or cursor. Please note that…
Read more: CCAR 2016 BHC Loss Rate Graphs
What Are the Differences between SR 15-18 and SR 15-19?
The original two-way comparison of SR 15-18 and SR 15-19, section by section and appendix by appendix. See the 2023 revision for how the guidance now applies across Categories I to IV.
Read more: What Are the Differences between SR 15-18 and SR 15-19?
Predictions, Forecasts and the Value of Scenario Analysis
According to the The Wall Street Journal, “In Uncertain Times, CEOs Lose Faith in Forecasts” and “CEOs Put Less Stock in Predictions,” which is the title of an abbreviated article in the July 13, print edition. The authors state that “uncertainty has been a given for business since the financial crisis, but business leaders say recent…
Read more: Predictions, Forecasts and the Value of Scenario Analysis