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Featured Column: Modeling Risk

Culture & Governance

How to Mitigate Risk and Improve Decision-Making via Probabilistic Thinking and Rare Events Modeling

Many Americans now believe the economy is in recession, the stock market is faltering and unemployment is at its highest level in 50 years, according to a recent Harris poll that highlighted the...

June 7, 2024 | By Cristian deRitis

Market

Managing Inflation Risks: A Practical Guide

Inflation is a critical challenge that demands the attention of risk managers. It is a focal point for central bankers, businesses and households, and the impact inflation can have on businesses and...

May 2, 2024 | By Cristian deRitis

Credit

When Insurance Becomes a Risk Factor

If compound interest is humanity’s greatest invention, insurance may be a close contender. Today, activities we take for granted – such as securing a home loan – would be significantly more expensive...

April 5, 2024 | By Cristian deRitis

Culture & Governance

How to Take the Stress Out of Stress Testing

If the outcomes of stress tests are predictable, why go through the time and expense of executing such complex and rigorous exams? That’s the question du jour in the wake of the Federal Reserve’s...

March 1, 2024 | By Cristian deRitis

Technology

How to Measure and Model the Multi-Layered Threat of Cyber Risk

Cyberattacks present a complex, advancing danger to the global financial system, with recent breaches exposing deep-rooted vulnerabilities. Given the rapid digitization of the financial sector and...

February 2, 2024 | By Cristian deRitis

Market

5 Risk Predictions for 2024

Which specific risks should financial risk managers keep a particularly close eye on this year, and what steps can financial institutions take to mitigate these threats? My son’s recent ice-skating...

January 5, 2024 | By Cristian deRitis

Market

Navigating and Managing Geopolitical Risks

Geopolitical risks are broad, complex and hard to predict. Just consider, for example, the ramifications of the ongoing Russia/Ukraine military conflict in Ukraine, which has increased tensions...

December 1, 2023 | By Cristian deRitis

Credit

Can Banks Reliably Estimate Credit Losses?

To what extent have rules developed in the aftermath of the Great Recession enhanced the reliability of credit loss forecasts? This is a complex question. On the one hand, banks now have access to a...

November 10, 2023 | By Cristian deRitis

Technology

Transforming Risk Management with Generative AI

The revolutionary potential of generative artificial intelligence applications, like ChatGPT or Google's Bard, is undeniable. Fueled by the promise of skyrocketing productivity and a turbocharged...

October 6, 2023 | By Cristian deRitis

Technology

The Impact of Evolving Central Bank Digital Currencies on Banks and Risk Management

Central bank digital currencies (CBDCs) are on the horizon and risk managers need to pay closer attention to them. While CBDCs are still in their infancy and their adoption in major markets like the...

September 1, 2023 | By Cristian deRitis

Credit

Traditional vs. Fixed Analysis: Weighing the Pros and Cons of An Alternative Approach to Scenario Design

Imagine a world where risk modelers turn conventional wisdom upside down and use fixed economic scenarios with dynamic probabilities to calculate expected credit losses. This unconventional approach...

August 4, 2023 | By Cristian deRitis

Market

A Midyear (Global) Report Card: Economic Trends, and Ongoing and Emerging Risks

Inflation, geopolitical risk, and escalating interest rates and energy prices were among the factors that were expected to send the global economy spiraling in 2023. But a funny thing has happened...

July 7, 2023 | By Cristian deRitis

Culture & Governance

Risk is Everybody’s Business: Moving Toward Integrated Risk Management

Risk professionals need to break out of their narrow confines and recognize both the necessity and benefits of partnering with colleagues across their organizations. Recent bank failures have...

June 2, 2023 | By Cristian deRitis

Culture & Governance

Ted Lasso’s Guide to Risk Management: Finding Purpose and Meaning

Motivating risk managers can be challenging. At best, they do their jobs well, make all the right decisions, back up their work with solid analytics and reasonable assumptions and … drumroll …...

May 5, 2023 | By Cristian deRitis

Credit

SVB and Signature Bank: Risk Management Revelations

Risks tend to linger in obscure, unexpected places. So, even when your firm seemingly makes safe investments, things can go suddenly and terribly wrong if you don’t practice prudent risk management...

April 6, 2023 | By Cristian deRitis

Credit

Measuring and Modeling Residential Real Estate Risk in Unprecedented Times

Are we on the verge of another housing bubble, rife with spiraling prices? As we transition to a higher interest rate, low-growth world, risk managers and bank regulators are rightly concerned about...

March 3, 2023 | By Cristian deRitis

Climate Risk Stress Testing and the Role of Central Banks

Should central banks care about climate risk? The Federal Reserve's recent release of its pilot climate scenario analysis exercise has sparked a heated debate on the role of central bankers in...

February 3, 2023 | By Cristian deRitis

Market

5 Risk Predictions for 2023

As global economies confront multiple threats, ranging from inflation and rising energy prices to armed conflict and natural disasters, 2023 is shaping up to be a challenging year. While accurately...

January 6, 2023 | By Cristian deRitis

Culture & Governance

Risk Managers’ Role in Expanding DEI Opportunities

Relative to the days when a singular lending officer would subjectively review applications to grant or deny credit, today’s algorithmic underwriting and credit scoring have helped to create a more...

December 9, 2022 | By Cristian deRitis

Credit

The Holiday Season Outlook for Credit Risk

American consumers are the main pillar of support for both the U.S. and global economies. Indeed, in the current environment of restrained business investment and constrained government finances,...

November 4, 2022 | By Cristian deRitis

Technology

Wall Street Warms to Tokenization

Settlement delays are costly enough to concentrate the minds of the financial markets’ biggest institutions and infrastructure operators. Depository Trust & Clearing Corp. (DTCC) is leading an effort...

October 28, 2022 | By Michael Shari

Technology

The Risk Matrix Approach: Strengths and Limitations

One of the key tasks of the financial risk manager, as one on my colleagues eloquently put it, is to “help people to worry more intelligently.” In part, the risk management field addresses our...

October 7, 2022 | By Cristian deRitis

Market

Decoding Country Perils: The Nature and Causes of the Risk of Nations

Even before the Russian invasion of Ukraine, country risk was already a top concern facing manufacturers, retailers and financial institutions. Estimating this risk, however, entails far more than...

September 2, 2022 | By Cristian deRitis and Eric Gaus

Credit

A Date with Destiny: The Importance of Demographics for Risk Modelers

“Demography is destiny.” These words, attributed to French philosopher Auguste Comte nearly two centuries ago, apply well to today’s economy. Population size has been – and continues to be – a direct...

August 5, 2022 | By Cristian deRitis

Credit

Let’s Get Real: Managing Consumer Credit Risk in a Time of Inflation

Consumer credit lenders need to prepare for the impact of inflation and higher interest rates on their portfolios. However, loss forecasting models trained on recent history may be blind to both...

July 1, 2022 | By Cristian deRitis

Credit

Will the Housing Bubble Pop or Fizzle?

The Federal Reserve’s sudden pivot towards tightening monetary policy this spring has sent interest rates skyward and stock investors to their bunkers. After the sharp run up in real estate prices...

June 3, 2022 | By Cristian deRitis

Credit

Calibrating Recession Risks

Consumer price inflation is rising at rates we haven’t seen since the early 1980s. The odds of a recession, moreover, have increased considerably, with central banks focusing all their attention on...

May 6, 2022 | By Cristian deRitis

Operational

Russia/Ukraine Fallout: Mitigating and Managing a Multitude of Risks via KYC

Sanctions put in place after the Russian invasion of Ukraine highlight the need for companies and risk managers to not only verify the identities of their direct customers and suppliers, but even...

April 22, 2022 | By Cristian deRitis

Credit

2022 Stress Testing Expectations

Should stress-testing downturn scenarios developed by regulators take into account potential government bailouts? If they do not, do risk modelers still need to consider what could happen to banks,...

March 4, 2022 | By Cristian deRitis

Operational

The Joys and Perils of Spreadsheet Models

Recently, I was surprised to learn that revenues from competitive esports exceeded $1 billion in 2021, an increase of nearly 15% from 2020. I don’t understand the appeal of watching somebody else...

February 4, 2022 | By Cristian deRitis

Culture & Governance

5 Risk Predictions for 2022

As we start a new year, it’s a natural time to reflect on the past as well as our future. The last two years have shown that we still live in a complex and uncertain world, despite all the advances...

January 14, 2022 | By Cristian deRitis

Market

Tail-Risk Reduction Through Resilience

Supply-chain failures, and their knock-on effect on inflation, have risen to the top of the list of economic concerns for both households and businesses. Their fears are well-grounded. As the world...

December 3, 2021 | By Cristian deRitis

Credit

What Time Is It? Practical Considerations for Risk Modelers

Lockdown restrictions during the COVID-19 pandemic have given many of us time to reflect on what matters in our careers and what we might hope to achieve in life once the crisis subsides. For some,...

November 5, 2021 | By Cristian deRitis

Market

Mortgage Risk: Are Escalating Home Prices Dangerous or Defensible?

U.S. home prices rose by 19% over the prior year in June 2021, the fastest pace of growth in 45 years. Price increases in certain states and metropolitan areas have been even more eyepopping, with...

October 1, 2021 | By Cristian deRitis

Technology

Digital Currencies: Risks and Opportunities

The financial services landscape may eventually be altered, significantly, by digital assets like cryptocurrencies and central bank digital currencies (CBDCs). Banks must therefore be prepared, not...

September 3, 2021 | By Cristian deRitis

Technology

Cyber Risk Economics: Building Exposure Into ERM

Mounting financial losses due to cyberattacks have business leaders scrambling for answers and cyber insurance carriers searching for cost-effective solutions. Damages from cybercrime are projected...

August 26, 2021 | By Christopher Hetner

Culture & Governance

Climate Risk: Forecasting, Policy and Scenario Analysis Challenges

What does a critique of econometric analysis from the 1970s have to do with addressing climate risk today? Everything! Risk managers, forecasters and modelers need to keep the Lucas Critique top of...

July 9, 2021 | By Cristian deRitis

Technology

The Complexities of Modern Risk Forecasting: Anticipating the Anticipation Economy

What do Carly Simon's 1971 hit single and Amazon's 2013 patent for forecasting product demand have in common? They both focus on the concept of anticipation. As data and models permit faster, more...

June 4, 2021 | By Cristian deRitis and Laurent Birade

Market

What's Next? A Guide to Managing Inflation Risk

My 4-year-old son learned to ride a bicycle recently. This was not only a great accomplishment but also provides a perfect metaphor for risk professionals, especially now as we turn our attention to...

May 7, 2021 | By Cristian deRitis

Culture & Governance

5 Post-Pandemic Lessons for Risk Managers

While COVID-19 continues to weigh on public health and the economy, signs of resolution are on the horizon. Though we remain focused on the pandemic, vigilance today does not preclude us from...

April 1, 2021 | By Cristian deRitis

Credit

Stress Testing in Volatile Times: A Logical Approach

How should we handle stress testing when we are already experiencing stress? If the objective is to identify weaknesses before shocks happen, we might conclude that there is limited value to running...

March 5, 2021 | By Cristian deRitis

Credit

Too Much of a ‘Good Thing': How to Manage Government Stimulus Risk

Large-scale government interventions like the ones we've experienced recently can provide essential support in an emergency, preventing a recession from developing into a depression. However, they...

February 5, 2021 | By Cristian deRitis

Credit

The Hope and Challenge of Vaccines: Implications for Credit Loss Forecasting

Positive news on vaccine development from Pfizer/BioNTech, Moderna and AstraZeneca/Oxford is a major step in combating the COVID-19 public health and economic crises. At the same time, coronavirus...

January 8, 2021 | By Cristian deRitis and Amnon Levy

Credit

What Lies Ahead: Credit Risk Under a Biden Administration

2020 is a year we will never forget, but will gladly put behind us. Although our short-term prospects remain uncertain given the recent acceleration of the spread of COVID-19, the announcement of...

December 4, 2020 | By Cristian deRitis

Technology

COVID-19 Lessons Learned: Nonbinary Risk and the Power of Organization

The rhetoric around the coronavirus pandemic has been intense, creating tension, confusion, and even violence over the right way to handle this crisis. Some have argued that locking down the economy...

November 6, 2020 | By Cristian deRitis

Credit

CECL and CCAR Updates: COVID-19 Effects, and the Future of Risk

After a relatively quiet August, September brought forward significant risk management challenges - ranging from the estimation of losses for another quarterly CECL submission to the Federal...

October 2, 2020 | By Cristian deRitis

Credit

The End of Credit Scores?

Just as COVID-19 has accelerated trends in online shopping, remote working and videoconferencing, the measurement and provision of credit is bound to experience a transformation in coming years....

September 4, 2020 | By Cristian deRitis

Credit

COVID-19 Broke My Credit Loss Model

The early returns on the impact of the pandemic on credit performance are now in, with some surprising results. The unprecedented spike in unemployment caused by COVID-19 naturally yielded...

August 14, 2020 | By Cristian deRitis

Credit

Will COVID-19 Kill CECL?

Adoption of the Current Expected Credit Loss (CECL) standard couldn't have come at a worse time. Earlier this year, companies and investors were just getting used to the idea of embedding...

July 10, 2020 | By Cristian deRitis

Credit

Managing the Risk Multiverse with Scenarios: How to Be Better Prepared for the Next Pandemic

If there is any good that can come from a crisis like the coronavirus, it's that it causes us to reexamine our actions and decisions. “Am I on the right road?” That's a question today that pertains...

June 5, 2020 | By Cristian deRitis

Culture & Governance

Pandemic Fallout: The Risk of Reopening Too Early or Too Late

As we surpass 60 days since the first 100 COVID-19 infections were confirmed in the United States, states and local municipalities are debating how and at what pace to reopen their economies. Some...

May 15, 2020 | By Cristian deRitis

Market

When Risk Management Turns into Crisis Management

Like everyone else, I've been cycling through the five stages of grief these past few weeks, saddened by the human tragedy unfolding across the world and the loss of a way of life that already seems...

April 9, 2020 | By Cristian deRitis

Credit

Stress Testing, CECL and Coronavirus: The Importance of Telling the Story Behind the Numbers

[Editor's Note: We would like to welcome Cristian deRitis, the Deputy Chief Economist at Moody's Analytics, as our new Modeling Risk columnist. Cris, who has 20 years of experience as a modeler and a...

March 6, 2020 | By Cristian deRitis

Operational

How to Become a Better Risk Modeler: Debating the Validity of Significance Tests

Those engaged in social science - a category that includes most forms of risk modeling - are often accused of being bad scientists. The accusations generally come from physical scientists, who enjoy...

January 17, 2020 | By Tony Hughes

Technology

Driverless Cars, and the Prospect of Level 5 Automation in Banking

Can disruptive technologies ever truly and completely replace human judgment in finance? We can begin our search for answers by considering automation progress in other industries. In the world of...

December 13, 2019 | By Tony Hughes

Culture & Governance

How Will Climate Change Impact Banks?

Since the issue of climate change stress testing burst onto the radar screen, I've become a little obsessed by Hurricane Katrina. That event, in 2005, not only caused widespread human suffering and...

November 15, 2019 | By Tony Hughes

Operational

Conservative Banks Do Not Need Conservative Models

When banks manage risk, conservatism is a virtue. We, as citizens, want banks to hold slightly more capital than strictly necessary and to make, at the margin, more provisions for potential loan...

October 11, 2019 | By Tony Hughes

Operational

Model Validation Need Not Be a Blood Sport

My team did a big validation project for a financial institution a few years ago. We were actually the backup, external validators called in to resolve a disagreement between the model build team and...

September 13, 2019 | By Tony Hughes

Credit

Will CECL Ultimately Be Worth All the Fuss?

The industry is currently a hive of CECL-related activity. Many banks are busily testing their systems or finalizing their preparations for the go-live date, which is either in January 2020 or...

August 9, 2019 | By Tony Hughes

Credit

The Real Value of Stress Testing: Has CCAR Been Validated?

Last year, the US Congress and President Trump enacted major revisions to the Dodd-Frank Act that dramatically reduced the scope of stress-testing regulations. Now, with the Comprehensive Capital...

July 12, 2019 | By Tony Hughes

Culture & Governance

Climate Change Stress Testing

For risk modelers at lending institutions, climate change represents an enormous challenge. Until now, stress testing has focused on acute short- and medium-term recession risk and has avoided...

June 7, 2019 | By Tony Hughes

Technology

Human Versus Machine: The Pros and Cons of AI in Credit

In recent years, attention has increasingly turned to the promise of artificial intelligence (AI) to further increase credit availability and to improve the profitability of banks and other lenders....

May 17, 2019 | By Tony Hughes

Credit

Finding a CECL Solution for Smaller Banks

Smaller lending institutions face a dilemma. The primary motivation behind the Current Expected Credit Loss (CECL) standard is to provide investors with enhanced forward-looking information about the...

April 5, 2019 | By Tony Hughes

Credit

Commercial Lending Imbalances and the Looming Recession

Stress testing, up until now, has basically been a theoretical exercise. Growth has been slow but steady and the imbalances that can trigger recessions have largely been absent. However, with many...

March 8, 2019 | By Tony Hughes

Technology

Information Overload: The Risk Documentation Challenge

For banks, one of the more onerous aspects of regulatory supervision is documentation. Regulators demand detailed descriptions of the models being used and banks have responded by the bucket-load. To...

February 8, 2019 | By Tony Hughes

Culture & Governance

CECL, IFRS 9 and the Demand for Forecast Stability

Suppose I have two competing forecasting methods, each designed for CECL or IRFS 9 loss provisioning. Both would pass muster with regulators and auditors. How do I decide which is better? This is a...

January 11, 2019 | By Tony Hughes

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