Featured Column
Risk Weighted
By: Tony Hughes
Topical perspectives on risk analytics, regulation, credit loss forecasting, traditional risk modeling and AI methodologies.
To Model or Not to Model?
May 16, 2025
Banks that choose to eschew models in favor of human intuition run a big risk. What are the most important elements of model development, and why are ...
Read ArticleThe Place for Generative AI in Risk Management
March 14, 2025
What are the pros and cons of the next wave of AI? Though technology like ChatGPT is flawed and must always be validated, it is proving its worth in ...
Read ArticleThe Ultimate Model Risk: Lawsuit Could Prompt Big Changes to the Federal Reserve’s Stress Test
February 2, 2025
Questions about the transparency and objectivity of the central bank’s annual CCAR exercise have been raised in a recent lawsuit brought by banks, ...
Read ArticleThe Fallout from Political Elections for Central Banks
November 22, 2024
The global map of political leaders has been completely reshaped over the past year. Could this overhaul threaten the independence of central banks?
Read ArticleThe Art of Buying and Selling Risk Analytics
October 11, 2024
How can consultants or third-party vendors of analytics separate themselves from the pack? And how are banks evaluating and comparing these external ...
Read ArticleGenerative AI Has Made Banking Cheaper - But Has It Made It Better?
September 27, 2024
Large language models, like ChatGPT, have ushered in a new wave of AI that should save banks time and money, and perhaps mitigate some risk. But ...
Read ArticleHow Would You Like Your Model-Based Financial Disclosures?
August 16, 2024
Disclosures from credit-loss models can divulge vital data about the key risks facing a financial institution. Today’s scenarios-heavy IFRS 9 and ...
Read ArticleThe Art of Distinguishing Real Risks from Pretenders
July 19, 2024
Risk managers today seem to allocate a lot of time to extreme “what if” tail-risk scenarios. Geopolitical risk is now the conjectural topic du jour, ...
Read ArticleThe Limitations of Models and the Need for Simpler Scenarios
June 14, 2024
Risk models today are asked to perform statistical miracles, covering a multitude of far-flung scenarios that cannot be validated. This approach ...
Read ArticleThe Rise of Conjectural Risk Management
May 17, 2024
Today, stress testing forecasts and ECL calculations are heavily reliant on guesswork scenarios that largely forgo empirical data. How has scenario ...
Read ArticleA Modest Suggestion to Improve Stress Testing
April 26, 2024
The current process for ensuring that banks have enough capital to cover their potential losses is too reliant on conditional scenario analysis. ...
Read ArticleThe Data Conundrum for Risk Modelers
March 28, 2024
Forecasts, scenario projections and other types of model output are not data. They are subject to error and potential bias, and risk managers would ...
Read ArticleDid CECL and IFRS 9 Fix the Procyclicality Problem?
February 23, 2024
Modern reporting standards for expected credit losses are, as anticipated, more volatile than the previous incurred-loss approach. But the key ...
Read ArticleThe Costs of Credit Scores and Data Privacy
January 19, 2024
EU courts have recently granted even more protection to consumers’ data, raising doubts about the future of credit scoring in Europe. While greater ...
Read ArticleWill Increased Complexity Save Scenario Analysis?
December 8, 2023
Banks are now under pressure to deploy more explanatory scenarios that expand the range of tail risks they consider. The hope is that this approach ...
Read ArticleGenerative AI: The Next Wave in Credit Assessment?
October 13, 2023
Banks must now consider how the latest advancement in AI can help risk analysts measure consumer and corporate credit.
Read ArticleShould Internal Bank Models Be Used for Capital?
September 22, 2023
Large U.S. banks may be forced to employ standardized, regulator-driven models to calculate capital in the future. But, for a variety of reasons, ...
Read ArticleReassessing the Current State of Bank Safety
August 25, 2023
What level of danger are banks now facing? In the wake of a series of extreme events, do they need to adopt complex, nonlinear models for tail risk ...
Read ArticleCECL and IFRS 9: Superior Risk Management or Psychological Ploy?
July 21, 2023
Projecting expected credit losses is tricky, partly because scenario analysis is imprecise and partly because recessions do not necessarily yield ...
Read ArticleRisk Management and Radical Uncertainty
June 23, 2023
Extremely rare tail-risk events simply cannot be modeled. But that doesn’t mean traditional models that rely on historical data do not have worth.
Read ArticleRisk Modeling: What Can We Learn from the Rigor of Academics?
May 26, 2023
Financial risk models have repeatedly been found wanting over the past few years, partly because model developers are limited by regulations. But ...
Read ArticleLying with Statistics: How Risk Model Selection Contributed to SVB's Downfall
April 21, 2023
Just how easy is it to choose data in a model to suit the preferences of bank management? Flaws in the current model selection and model validation ...
Read ArticleWould DFAST Have Saved SVB?
March 24, 2023
There is a school of thought in the banking industry that Silicon Valley Bank would not have failed had it been subject to comprehensive stress ...
Read ArticleA Defense of Empirical Risk Management
February 24, 2023
Traditional credit risk models have recently come under heavy fire. But there is still value in learning from history, even while modifications are ...
Read ArticleAI in Banking: Past, Present and Future
January 20, 2023
The growth of artificial intelligence in the financial services industry has been somewhat kept in check by regulators, but risk managers still make ...
Read ArticleThe Stagnation of Stress Testing: Causes … and Potential Solutions
November 18, 2022
An overreliance on scenarios can limit the effectiveness of stress tests. Why is excessive dependence on scenarios problematic, and, with a recession ...
Read ArticleEconomic Misery and Bank Financial Performance
October 28, 2022
Current risk models don’t have sufficient data to account for today’s volatile markets. What’s the true impact of factors like unemployment and ...
Read ArticleAre CECL and IFRS 9 Reasonable and Supportable?
September 23, 2022
Recent events, including the pandemic, have raised questions about whether the forward-looking accounting standards that are now in place for credit ...
Read ArticleHumility and Risk Modeling
August 26, 2022
To build better models with more accurate forecasts, risk managers must be humble enough to accept the uncertainties of their own analysis and to ...
Read ArticleScenario Analysis: Assessing the Quality of the Journey
July 29, 2022
The current macro approach to stress testing is limited and does not reveal much about the variety of risks facing the banking system. Could models ...
Read ArticleModern Modeling: The Elusiveness of Forward-Looking Data
June 24, 2022
In these uncertain times, backward-looking models are under fire. But methodologies based on fanciful, speculative scenarios are unreliable, and, in ...
Read ArticleThe Pandemic Will Improve Risk Modeling – If We Let It
May 6, 2022
Weaknesses in credit-risk models were exposed during both the COVID-19 catastrophe and the global financial crisis. These flaws can be corrected, and ...
Read ArticleHow to Fix Stress Testing
April 1, 2022
The pandemic has reinvigorated the debate about whether traditional stress tests have become outdated, check-the-box compliance exercises. Rather ...
Read ArticleDetermining the Price of Model Interpretability
January 7, 2022
ML models for credit risk calculation have been described as both more accurate and more opaque than traditional approaches. To figure out which ...
Read ArticleThe Future of Real Estate Machine Learning: Risks and Opportunities
November 24, 2021
Risk professionals who analyze real estate portfolios must overcome complex modeling and liquidity risk challenges. How are disruptive technologies ...
Read ArticleClimate Risk: Short-Term and Long-Term Credit Consequences
October 29, 2021
Undoubtedly, climate change has had, and will continue to have, profound effects on society, but the key question in financial services is how, ...
Read ArticleThe Case for Monte Carlo Simulations
September 17, 2021
Traditional, narrative credit-risk scenarios offer many benefits, but they are also limited and difficult to analyze. How do complex simulations ...
Read ArticleThe Modeling Dilemma: Great Expectations and Cold Reality
August 27, 2021
As we have learned amid the COVID-19 crisis, the forecasts of modelers are not always supported by the data. However, even when models need to be ...
Read ArticleHow Will Pandemic-Era Data Be Modeled?
July 30, 2021
As COVID-19 winds down, financial institutions will need to revamp their credit models to capture the complex effects of the coronavirus crisis and ...
Read ArticleThe Futility of Stress Testing for Unprecedented Scenarios
June 25, 2021
Risk modelers will eventually learn from COVID-19, putting empirical analysis of data to proper forecasting use - just as they did in the aftermath ...
Read ArticleRisk Model Benchmarking and Innovation: Pros and Cons
May 28, 2021
Regulators play an important role in assessing the risk weighting and capital components of banks' models. But can they perform true ...
Read ArticleA Modeling Reboot: If Not Now, When?
April 23, 2021
It seems that the window is opening for financial institutions to consider overhauling their models. But should this occur immediately, to account ...
Read ArticleShould COVID-19 Change Through-the-Cycle Calculations for ECL?
March 26, 2021
The pandemic certainly threw credit risk professionals for a loop, most notably by skewing forecasts for expected credit losses. What separates ...
Read ArticleIn Search of a Post-Pandemic Modeling Paradigm
February 26, 2021
Last year, faced with COVID-19-driven uncertainty, credit loss-forecasting models were too pessimistic. To prevent similar failures in the future, ...
Read ArticleScenario Analysis in the Age of COVID-19: Do We Need a Different Approach?
October 30, 2020
Stress testing has remained largely unchanged since the global financial crisis, but - as we have learned amid the pandemic - the existing scenarios ...
Read ArticleModel Risk and the COVID-19 Reality
September 25, 2020
This year, the pandemic has reminded us that even perfectly-good models sometimes yield bad results. What's the difference between model risk and ...
Read ArticleHow to Address CECL and IFRS 9 Weaknesses Exposed by COVID-19
August 28, 2020
The pandemic has illuminated deficiencies in existing accounting standards for expected credit losses. What are these shortcomings, and is there a ...
Read ArticleStress Testing in War and Peace: How to be Better Prepared for Future Crises
July 31, 2020
The Fed's most recent CCAR exercise has come under fire from critics who contend that it should have been postponed - but the data that is available ...
Read ArticleClimate Credit Risk: Lessons from the PG&E Bankruptcy
June 26, 2020
The failure of one of the world's largest utility providers highlighted the considerable obstacles standing in the way of climate risk ...
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