Featured Column: Risk Weighted


The Limitations of Models and the Need for Simpler Scenarios

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 of...

June 14, 2024 | By Tony Hughes


The Rise of Conjectural Risk Management

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


A Modest Suggestion to Improve Stress Testing

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


The Data Conundrum for Risk Modelers

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


Did CECL and IFRS 9 Fix the Procyclicality Problem?

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


The Costs of Credit Scores and Data Privacy

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


Will Increased Complexity Save Scenario Analysis?

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


Generative AI: The Next Wave in Credit Assessment?

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


Should Internal Bank Models Be Used for Capital?

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


Reassessing the Current State of Bank Safety

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


CECL and IFRS 9: Superior Risk Management or Psychological Ploy?

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


Risk Management and Radical Uncertainty

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


Risk Modeling: What Can We Learn from the Rigor of Academics?

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


Lying with Statistics: How Risk Model Selection Contributed to SVB's Downfall

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

Culture & Governance

Would DFAST Have Saved SVB?

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


A Defense of Empirical Risk Management

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


AI in Banking: Past, Present and Future

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


The Stagnation of Stress Testing: Causes … and Potential Solutions

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


Economic Misery and Bank Financial Performance

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


Are CECL and IFRS 9 Reasonable and Supportable?

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


Humility and Risk Modeling

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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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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