Category Archive: Credit Risk

Darker Clouds Covering the Cloud

Darker Clouds Covering the Cloud
 

New age technologies are dominating the present business environment. Mobility, cloud computing, social media and analytics have been affecting the different realms of business at an ever-increasing rate. Though most of the impacts are favourable, yet it will be reckless to ignore the severity of the negative ones.

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ANZ uses R programming for Credit Risk Analysis

At the previous month’s “R user group meeting in Melbourne”, they had a theme going; which was “Experiences with using SAS and R in insurance and banking”. In that convention, Hong Ooi from ANZ (Australia and New Zealand Banking Group) spoke on the “experiences in credit risk analysis with R”. He gave a presentation, which has a great story told through slides about implementing R programming for fiscal analyses at a few major banks.

 
ANZ uses R programming for Credit Risk Analysis
 

In the slides he made, one can see the following:

 

How R is used to fit models for mortgage loss at ANZ

A customized model is made to assess the probability of default for individual’s loans with a heavy tailed T distribution for volatility.

One slide goes on to display how the standard lm function for regression is adapted for a non-Gaussian error distribution — one of the many benefits of having the source code available in R.

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Apple Watch’s Strategy Analytics, Return to 1% Growth

As per the latest research from strategy analytics, the global smart watch shipments of Apple has grown by 1 percent annually to hit the major record of 8.2 million units in the 4th quarter of the year 2016. The growth of apple watch drove and got dominated with 63 percent in global smart watch share of market and Samsung still continues to hold its second position.
 
Apple Watch’s Strategy Analytics, Return to 1% Growth

 

Neil Mawston, the Executive Director at Strategy Analytics stated on the issue by saying – the global shipments have grown by 1 percent annually from the pre-existing 8.1 million units in quarter 4 in 2015 to 8.2 million in quarter 4 in 2016. The market shows a marked growth in the fourth quarter for growth in smart watches industry after the past two consecutive quarters for declining volumes. The smart watch growth is also seen to be recovering ever so slightly due to new product launches from other company giants. Moreover, there is a seasonal demand for these gadgets, and a giant such as Apple is launching stringer demand in the major developed markets in the US and UK. Hence, the international smart watch shipments grew by 1 percent annually; from the previously existing 20.8 million in full-year 2015 to a record high of 21.1 million in 2016.

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The Opportunities and Challenges in Credit Scoring with Big Data

Within the past few decades, the banking institutions have collected plenty of data in order to describe the default behaviour of their clientele. Good examples of them are historical data about a person’s date of birth, their income, gender, status of employment etc. the whole of this data has all been nicely stored into several huge databases or data warehouses (for e.g. relational).

 
The Opportunities and Challenges in Credit Scoring with Big Data
 

And on top of all this, the banks have accumulated several business experiences about their crediting products. For instance, a lot of credit experts have done a pretty swell job at discriminating between low risk and high risk mortgages with the use of their business mortgages, thereby making use of their business expertise only. It is now the goal of all credit scoring to conduct a detailed analysis of both the sources of data into a more detailed perspective with then come up with a statistically based decision model, which allows to score future credit applications and then ultimately make a decision about which ones to accept and which to reject.

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The Olympics Turn To Data Analysis: Canadian Olympic Committee Deals In With Analytics

The Canadian Olympic company has recently teamed up with a major Big Data Company to ramp up the analytics for the benefit of the athletes.

 
The Olympics Turn To Data Analysis: Canadian Olympic Committee Deals In With Analytics
 

Recently the COC made an announcement about an eight-year, cash and services sponsorship deal with SAS, which is an analytics software with a brag-worthy client list from varied industries, like universities, hotels, banks casinos and much more.

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Understanding Credit Risk Management With Modelling and Validation

The term credit risk encompasses all types of default risks that are associated with different financial instruments such as – (like for example, a debtor has not met his or her legal duties according to the debt contract), migrating risk (arises from adverse movements internally or externally with the ratings) and country risks (the debtor cannot pay as per the duties because of measure or events taken by political or monetary agencies of the country itself).

 

Understanding credit risk management with modelling and validation

                        Understanding Credit Risk Management With Modelling and Validation

 

In compliance to Basel Regulations, most banks choose to develop their own credit risk measuring parameters: Probability Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD). Several MNCs have gathered solid experience by developing models for the Internal Ratings Based Approach (IRBA) for different clients.

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Introduction To Credit Score Cards: Its Use in Crisis

The incident we are about to describe took place during 2009 circa at a party, a year in which the world was going through one of its worst financial crisis for the longest time. Every average bloke on the streets was aware of terms like mortgage-backed securities (MBS), sub-prime lending and credit crisis, after all these are the reasons for his plight.

 

Introduction To Credit Score Cards: Its Use in Crisis

 

But at this party we are speaking of, I was fortunate enough to meet with an informed and highly compassionate elderly woman, and after a few minutes of discussion the topic came to what we here do for a living. She wanted to know more about credit scorecard systems. As I further went on to explain the details of how this system works, her expression changed from being just plainly curious to angry to pained.

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Banking Business and Banking Instruments

Having discussed some amount of mandatory regulatory compliances for banks over the past couple of blogs, let us now focus on the bank’s lines of business. Understanding the different banking products is inevitable for credit risk management and analytics. One has to be well versed with the nature of banking products before they step in to develop model for any of them.  Each banking product has its own characteristics and its own set of risk exposure. Hence, understanding these products is the top priority. In this blog we discuss three of the major banking products: Checking Accounts, Savings accounts and Certificate of Deposits.

 

BANKING BUSINESS AND BANKING INSTRUMENTS- Part 1

 

Checking Accounts: This is a transactional deposit account held at a financial institution that allows for withdrawal and deposits. Money held in a checking account is liquid, and can be easily withdrawn using checks, automated cash machines, and electronic debits among other methods. It allows for numerous withdrawals, unlimited deposits etc. These accounts are known as current accounts in UK. These are often loss leaders for large commercial banks since they become highly commotized. Because money held in checking accounts is so liquid, aggregate balances nationwide are used in the calculation of M1 money supply.

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BASEL and Capital Adequacy Requirements

In one of our previous blogs, we had initiated a discussion on the BASEL accords- a set of recommendations on banking regulations aimed at ensuring adequate capital for financial institutions such that they can absorb unexpected loss. Presently, we try to dig deeper into the different characteristics of the accords and their recommendations for capital adequacy.

As a regulatory capital requirement framework BASEL has evolved over time. The first set of Basel accords, BASEL-I created a risk insensitive minimum capital requirement. BASEL-II has been a huge development over its ancestor, as it had explicit emphasis on identifying different risk sources and allocating financial capital for each of them. BASEL-III is a more conservative version of BASEL-II. In this blog, we will focus on explaining minimum capital requirements prescribed in BASEL-II.

basel2
The minimum capital requirements are defined as the capital required, covering the three main areas of risk: Credit Risk, Operational Risk and Market Risk. Credit risk is the risk that arises from the default of making required payments on debt. Operational risk arises from failed internal processes (such as legal risk. Strategy and Reputation risk falls outside the purview). Market risk arises from losses on and off balance sheet position arising from movement in market prices. For the estimate of minimum capital requirements, the Risk-Weighted Assets must be calculated.

Why are Risk-Weighted Assets important in calculating minimum capital requirement?

Not all assets in a bank’s balance sheet are equally risky. For e.g. cash in an ATM is safer than a sub-prime mortgage. So regulatory capital must be set in relation to the riskiness of the asset rather than just by the value of the asset in the balance sheet. For Risk weighting asset, off-balance sheet as well as on-balance sheet items must be included. The idea is to prevent banks from creating tons of off-balance sheet assets and claiming there’s no risk at all. Off-balance sheet items include: financial instruments like forwards & future options, credit default swaps etc. Basel II prescribes the following risk weights across asset classes:

AssetsRisk Weights
Cash and Equivalents0%
Residential Mortgages35%
Credit/ auto loans75%
Commercial Real Estate100%
Govt. SecuritiesBy Rating
Interbank loans/Corporate LoansBy Rating
Other assets100%
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Credit Risk Analytics and Regulatory Compliance – An Overview

Credit Risk Analytics and Regulatory Compliance – An Overview

 

Post the Financial Crisis of 2008, there has been an increase in the regulatory vigilance of the capital adequacy of commercial banks across the globe. Banks need to be compliant with different regulatory capital requirements, so that they can continue their operations under situations of stress. A majority of analytical work in Indian BFSI domain is to provide analytical support to US based multinational NBFC’s. We would like to throw some light on the opportunities and scope of credit risk analytics in the US banking and financial services industry. The Federal Reserve requires the banks to be compliant with three main regulatory requirements: BASEL- II, Dodd Frank Act Stress Testing (DFAST) and Comprehensive Capital Analysis and Review (CCAR).

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