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Whenever a bank considers the construction or purchase of a new model, the first decision they must take is always, “should we or shouldn’t we?” This decision, which is not well covered by existing...
May 16, 2025 | By Tony Hughes
The Federal Reserve is now being sued, by the American Bankers Association and other lobby groups, about the opaqueness and fairness of its stress testing framework. Though the central bank has heard...
February 2, 2025 | By Tony Hughes
The recent election of scandal-scarred Donald Trump to a second term as U.S. president may appear to be an anomaly – but it is consistent with a well-established global trend.
Since the pandemic,...
November 22, 2024 | By Tony Hughes
Gathering data and modeling is – by a considerable margin – the best way to optimize portfolio construction and management. But because modeling talent is spread thin and wide, it would be...
October 11, 2024 | By Tony Hughes
Since its origins in the 1950s, artificial intelligence (AI) has been marked by periods of intense optimism, interlaced with eras of rank pessimism.
The past decade, which saw the rise of computers...
September 27, 2024 | By Tony Hughes
Model-based risk assessments are at the heart of several current industry initiatives that have been adopted, ostensibly, to improve the quality of financial disclosures.
CECL and IFRS 9 – which use...
August 16, 2024 | By Tony Hughes
These days, financial institutions and their risk managers seem to be more focused on geopolitical risk than on data-driven credit risk issues. It’s certainly fair to question, though, whether this...
July 19, 2024 | By Tony Hughes
The range of potential threats faced by banks today is limitless, and scenarios are therefore becoming more and more complex. But is this a good trend?
When we take a closer look at the evolution...
June 14, 2024 | By Tony Hughes
Scenario analysis has taken center stage in the 15 years since the global financial crisis (GFC). It’s now not only a core component of forecasting for expected credit losses but is also at the heart...
May 17, 2024 | By Tony Hughes
Over the last 15 years, every stress testing issue that has cropped up has prompted precisely the same response from regulators. Scenario analysis is apparently the right tool for the job – from...
April 26, 2024 | By Tony Hughes
Credit risk modelers today face a myriad of challenges, ranging from scenario analysis to forecasting to validation. But when modelers use a loose definition of the term “data,” bad habits can form...
March 28, 2024 | By Tony Hughes
Now that we've experienced a pandemic-driven recession, it seems as good a time as any to assess whether the CECL and IFRS 9 reporting standards for expected credit losses (ECL) have had their...
February 23, 2024 | By Tony Hughes
Over the past year, European courts have been grappling with the way data privacy laws impact the credit scoring industry on the continent. The rulings of the Court of Justice of the European Union...
January 19, 2024 | By Tony Hughes
Regulators have set their sights on improving stress testing in the wake of the mini banking crisis that unfolded in the U.S. earlier this year. One idea is for banks to consider a wider range of...
December 8, 2023 | By Tony Hughes
How might financial institutions use generative AI for both retail and corporate credit risk assessment? Potentially, this innovative technology could be used for everything from credit scoring,...
October 13, 2023 | By Tony Hughes
A few weeks back, U.S. regulators proposed a suite of new rules designed to strengthen capital requirements for large banks. The most consequential proposal was a dramatic scaling back of banks’...
September 22, 2023 | By Tony Hughes
The recent and rapid confluence of tail-risk events – from the deadly global pandemic to Russia’s invasion of Ukraine to the subsequent supply-chain disruptions and inflation spike – has triggered...
August 25, 2023 | By Tony Hughes
By now, we all know the drill with respect to forecasting expected credit losses (ECL). When a recession is predicted, for example, banks must increase their loan-loss reserves in compliance with...
July 21, 2023 | By Tony Hughes
Having lived through a financial crisis in the late 2000s and a global pandemic in the early 2020s, and with the threat of global warming and cybercrime ever present, risk managers might be excused...
June 23, 2023 | By Tony Hughes
In the post-COVID era, in the midst of a mini-banking crisis, we’re at something of a crossroads in modeling and model risk management. Figuring out a way to improve financial risk modeling, which...
May 26, 2023 | By Tony Hughes
Choice is the root of all evil in statistics. We require bankers to use a single model, which ultimately means that one must be selected. It’s unrealistic, however, to believe that this choice will...
April 21, 2023 | By Tony Hughes
What lessons can we learn about the true nature of stress tests from the failures of Silicon Valley Bank (SVB) and Signature Bank? There is at least some belief that these banks would have avoided...
March 24, 2023 | By Tony Hughes
Is risk modeling broken? Many so-called experts are now beating that drum after flaws in historical-data-driven models were exposed amid the pandemic. Some are even saying we should completely ditch...
February 24, 2023 | By Tony Hughes
It’s easy to get the impression that artificial intelligence is a 21st century phenomenon, but the idea is actually rather ancient. Neural networks, a central idea in the field today, were first...
January 20, 2023 | By Tony Hughes
Next year, with a potential recession on the horizon, bank stress testing will be as vital as ever. Today, though, these tests remain too reliant on scenario projections of uncertain quality.
Why is...
November 18, 2022 | By Tony Hughes
The global economy is not yet in a recession, but things sure feel miserable. In the context of strong demand and low unemployment, inflation is currently elevated in all major economies.
After 30...
October 28, 2022 | By Tony Hughes
CECL and IFRS 9, a pair of next-generation accounting standards, were supposed to provide a solution to credit loss estimation problems that became apparent during the global financial crisis (GFC)....
September 23, 2022 | By Tony Hughes
Having seen my share of risk models in the financial services industry, there are two conventional practices that I find especially infuriating. One is the overuse and misuse of statistical...
August 26, 2022 | By Tony Hughes
Whenever I question the statistical properties of scenario-based projections, people invariably remind me that the journey is more important than the destination.
But how should we assess the...
July 29, 2022 | By Tony Hughes
All across the industry, it seems, people have a penchant for “forward-looking” models. They are sick of crude “backward-looking” tools, and are instead keen to use “modeled” rather than “historical”...
June 24, 2022 | By Tony Hughes
Risk modelers around the financial services industry are grappling with the question of how to handle pandemic-era data. As is well known, the vast majority of pre-COVID models dramatically overshot...
May 6, 2022 | By Tony Hughes
The time is ripe to reflect on whether we’ve extracted all we can from traditional stress tests, and to then consider some alternative strategies for future installments.
On the heels of the recent ...
April 1, 2022 | By Tony Hughes
How do machine-learning (ML) models stack up against more traditional credit risk approaches?
Just a few weeks ago, the EBA released a discussion paper on the use of ML techniques for the...
January 7, 2022 | By Tony Hughes
Financial risk managers must assess a broad spectrum of threats, including the liquidity risks connected to substantial real estate investments. For many reasons, it’s hard to build valuation models...
November 24, 2021 | By Tony Hughes
Whether climate risk is actually a threat to financial stability has been a subject of ongoing debate. But a recent regulator-driven stress test has offered some clarity on this hot-button subject.
...
October 29, 2021 | By Tony Hughes
When narrative scenarios first became a standard tool for risk management, around the time of SCAP in 2009, I was frankly skeptical that the technique would last. Having emerged from academia, I was...
September 17, 2021 | By Tony Hughes
Sometimes you perceive something as a major risk, but the reality exposed by the data just doesn't live up to your expectations. This is, in fact, what many modelers (myself included) experienced...
August 27, 2021 | By Tony Hughes
Over the next 12 months, as COVID slowly wanes as an economic disruptor, a lot of industry credit risk models will be redeveloped. Historically, these methods have provided superior predictions to...
July 30, 2021 | By Tony Hughes
Consider a new pandemic scenario. In 2023, a pathogen will be discovered that, relative to COVID-19, is twice as deadly and five times as transmissible. It quickly becomes clear that vaccine...
June 25, 2021 | By Tony Hughes
Last month, the European Central Bank published the results of its monumental TRIM project - a detailed five-year exercise to assess the internal models used by large banks to determine risk weights...
May 28, 2021 | By Tony Hughes
As the world awakens, one of the vexed questions we face as model risk managers is when to redevelop. The simple fact is that the established procedure of designing and building a model, and then...
April 23, 2021 | By Tony Hughes
In credit risk management, it is common to distinguish between point-in-time (PIT) and through-the-cycle (TTC) estimates of default probability or expected loss. But amid a unique pandemic, TTC loss...
March 26, 2021 | By Tony Hughes
The COVID-19 saga has caused real difficulties for risk modelers. Loss projections made using pre-pandemic models soared in mid-2020, as global economic data spiraled downward. Portfolio performance,...
February 26, 2021 | By Tony Hughes
2020 has been a challenging year for risk modelers, rife with uncertainty. What have we learned about the effectiveness of existing stress tests and the scenarios that drive them?
After the global...
October 30, 2020 | By Tony Hughes
Looking in the rearview mirror, it's usually easy to see whether previously accepted risks were adversely realized. The moment you pay back the $20 I loaned you last month, for example, I know that...
September 25, 2020 | By Tony Hughes
During the 2008/09 global financial crisis, loan-loss accounting methods were unable to provide timely, accurate information to investors about the quality of loans held by banks. CECL and IFRS 9...
August 28, 2020 | By Tony Hughes
In 2020, for the first time in 11 years, a U.S. stress test was conducted while the economy was actually in recession. The test has been criticized by detractors who have argued that it did not take...
July 31, 2020 | By Tony Hughes
Modeling climate risk, and analyzing your risk of default, is extremely difficult - particularly if you are an electricity provider. All one has to do to realize the enormity of this challenge, and...
June 26, 2020 | By Tony Hughes
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