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Operational

Scenario Analysis: Assessing the Quality of the Journey

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 quality...

July 29, 2022 | By Tony Hughes

Market

Modern Modeling: The Elusiveness of Forward-Looking Data

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

Credit

The Pandemic Will Improve Risk Modeling – If We Let It

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

Credit

How to Fix Stress Testing

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

Technology

Determining the Price of Model Interpretability

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 calculation...

January 7, 2022 | By Tony Hughes

Technology

The Future of Real Estate Machine Learning: Risks and Opportunities

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

Credit

Climate Risk: Short-Term and Long-Term Credit Consequences

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. A...

October 29, 2021 | By Tony Hughes

Credit

The Case for Monte Carlo Simulations

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

Credit

The Modeling Dilemma: Great Expectations and Cold Reality

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

Operational

How Will Pandemic-Era Data Be Modeled?

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

Operational

The Futility of Stress Testing for Unprecedented Scenarios

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

Culture & Governance

Risk Model Benchmarking and Innovation: Pros and Cons

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

Operational

A Modeling Reboot: If Not Now, When?

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

Credit

Should COVID-19 Change Through-the-Cycle Calculations for ECL?

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

Credit

In Search of a Post-Pandemic Modeling Paradigm

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

Credit

Scenario Analysis in the Age of COVID-19: Do We Need a Different Approach?

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

Operational

Model Risk and the COVID-19 Reality

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

Credit

How to Address CECL and IFRS 9 Weaknesses Exposed by COVID-19

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

Credit

Stress Testing in War and Peace: How to be Better Prepared for Future Crises

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

Culture & Governance

Climate Credit Risk: Lessons from the PG&E Bankruptcy

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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