Tag: stress testing

While an overdue economic downturn has been long discussed, arguably no one could have foreseen the economic disruption from COVID-19 to the extent that’s been witnessed thus far. But now that we’re here, is there a line of sight to financial institutions’ next move? With the current situation marked by a history-making rise in unemployment, massive amounts of uncertainty within the market as well as for consumers and small businesses and consumer spending changes, loss forecasting is more important now than ever before. After the longest period of economic growth in history, financial institutions are caught off guard. While large banks are more prepared as they have stress testing capabilities in place and are estimating the potential large impact on their loss allowances, the since-delayed CECL requirements emphasized forecasting for the masses, and yet many are still under-equipped. Loss forecasting has evolved from a need for a small few to now a necessary strategy for all. While some financial institutions will look to loss forecasting to potentially reduce the severity of impact for the path ahead during these times (or even how they might come out stronger than their competition), for many, loss forecasting is the key to survival. Bare necessities. Understanding the possible outcomes of the pandemic’s impact is necessary to make critical business decisions. Lenders are likely receiving numerous questions about their portfolios and possible outcomes. These questions include, but are not limited to: What could the range of outcomes to my portfolio based on expert forecasts of macroeconomic conditions? How will I make lending decisions in the short term? Do my models need to change? How bad could charge offs be for my portfolio? If I have reduced marketing and application flows, at what point do I need to begin opening new accounts or consider portfolio acquisitions? How can lenders get answers? Loss forecasting. As Mohammed Chaudhri, Experian Chief Economist, said, “Loss forecasting is more pivotal than ever…existing models are not going to be up to the task of accurately predicting losses.” Whatever questions you’re receiving, you need certain necessary pieces of information to navigate this new era of loss forecasting. Those pieces are frequently updated client and industry data; ongoing access to expert macroeconomic forecasts; and sophisticated and evolved forecasting models. Client and Industry Data Loan-level data, bankruptcy scores and customer-level attributes are key insights to fueling loss forecasting models. By combining several data sets and scores (and a comprehensive history of both) your organization can see greater benefits. Macroeconomic Forecasts As has been mentioned numerous times, the economic impact resulting from COVID-19 is not at all like the Great Recession. As such, leveraging macroeconomic forecasts, and specifically COVID-19 forecasts, is critical to analyzing the potential impacts to your organization. Sophisticated Models Whether building models on your own or leveraging an expert, the key ingredients include the innerworkings of the model, leveraging historical data and making sure that both the models and the data are updated regularly to ensure you have the most accurate, thorough forecasts available. Also, leveraging machine learning tools is imperative for model specification and evaluation. Fortunately, while model building and loss forecasting used to be synonymous with countless resources and dollar signs, innovation and digital transformation have made these strategies within reach for financial institutions of all sizes. Incorporating the right data (and ensuring that data is regularly updated), with the right tools and macroeconomic scenarios (including COVID-19, upside, baseline, adverse and severely adverse scenarios) enables you to get a line of sight into the actions you need to take now. Empowered with insights to compare and benchmark results, discover the cause of changes in results, explore result scenarios in advance, and access recommended optimizations, loss forecasting enables you to focus on the critical decisions your business depends on. Experian helps you with loss forecasting for now and the future. For more information, including an on-demand webinar Experian presented with Oliver Wyman as well as the opportunity to engage Experian experts into your loss forecasting strategy, please click the button below. Learn More

The response to the coronavirus (COVID-19) health crisis requires a brand-new mindset from businesses across the country. As part of our recently launched Q&A perspective series, Jim Bander, Market Lead of Analytics and Optimization and Kathleen Peters, Senior Vice President of Fraud and Identity, provided insight into how businesses can work to mitigate fraud and portfolio risk. Q: How can financial institutions mitigate fraud risk while monitoring portfolios? JB: The most important shift in portfolio monitoring is the view of the customer, because it’s very different during times of crisis than it is during expansionary periods. Financial institutions need to take a holistic view of their customers and use additional credit dimensions to understand consumers’ reactions to stress. While many businesses were preparing for a recession, the economic downturn caused by the coronavirus has already surpassed the stress-testing that most businesses performed. To help mitigate the increased risk, businesses need to understand how their stress testing was performed in the past and run new stress tests to understand how financially sound their institution is. KP: Most businesses—and particularly financial institutions—have suspended or relaxed many of their usual risk mitigation tools and strategies, in an effort to help support customers during this time of uncertainty. Many financial institutions are offering debt and late fee forgiveness, credit extensions, and more to help consumers bridge the financial gaps caused by the economic downturn. Unfortunately, the same actions that help consumers can hamstring fraud prevention efforts because they impact the usual risk indicators. To weather this storm, financial institutions need to pivot from standard risk mitigation strategies to more targeted fraud and identity strategies. Q: How can financial institutions’ exposure to risk be managed? JB: Financial institutions are trying to extend as much credit as is reasonably possible—per government guidelines—but when the first stage of this crisis passes, they need to be prepared to deal with the consequences. Specifically, which borrowers will actually repay their loans. Financial institutions should monitor consumer health and use proactive outreach to offer assistance while keeping a finger on the pulse of their customers’ financial health. For the foreseeable future, the focus will be on extending credit, not collecting on debt, but now is the time to start preparing for the economic aftermath. Consumer health monitoring is key, and it must include a strategy to differentiate credit abusers and other fraudsters from overall good consumers who are just financially stressed. KP: As financial institutions work to get all of their customers set up with online and mobile banking and account access, there’s an influx of new requests that all require consumer authentication, device identification, and sometimes even underwriting. All of this puts pressure on already strained resources which means increased fraud risk. To manage this risk, businesses need to balance customer experience—particularly minimizing friction—with vigilance against fraudsters and reputational risk. It will require a robust and flexible fraud strategy that utilizes automated tools as much as possible to free up personnel to follow up on the riskiest users and transactions.   Experian is closely monitoring the updates around the coronavirus outbreak and its widespread impact on both consumers and businesses. We will continue to share industry-leading insights to help financial institutions manage their portfolios and protect against losses. Learn more About Our Experts: [avatar user="jim.bander" /] Jim Bander, Market Lead, Analytics and Optimization, Experian Decision Analytics, North America Jim joined Experian in April 2018 and is responsible for solutions and value propositions applying analytics for financial institutions and other Experian business-to-business clients throughout North America. He has over 20 years of analytics, software, engineering and risk management experience across a variety of industries and disciplines. Jim has applied decision science to many industries, including banking, transportation and the public sector. [avatar user="kathleen.peters" /] Kathleen Peters, Vice President, Fraud and Identity, Experian Decision Analytics, North America Kathleen joined Experian in 2013 to lead business development and international sales for the recently acquired 41st Parameter business in San Jose, Calif. She went on to lead product management for Experian’s fraud and identity group within the global Decision Analytics organization, launching Experian’s CrossCore® platform in 2016, a groundbreaking and award-winning new offering for the fraud and identity market. The last two years, Kathleen has been named a “Top 100 Influencer in Identity” by One World Identity (OWI), an exclusive list that annually recognizes influencers and leaders from across the globe, showcasing a who’s who of people to know in the identity space.

Preparation is key – whether you’re an amateur/professional sports, free-soloing up El Capitan, or business contingency planning as part of a recession readiness strategy. It’s not so much predicting when events will occur, or trying to foresee and pivot for every possible outcome, but rather, acting now so that your business can act faster and smarter in the future. There are certain priorities that have come to be associated with what are widely accepted as the three environments the economy can sustain at any one time: As with recessions throughout the country’s history, those periods have often been characterized by layoffs, charge-offs, delinquencies, and other behaviors as the economy turns to a counter-cycle environment. Rather than wait to implement reactive strategies , the time to manage accounts, plan, stress test and implement contingency plans for when the next economic correction comes, is now. While economists and financial services industry experts argue over when a recession will hit and how severe its implications may be (in comparison with the Great Recession of 2008), there’s a  need to start tactical business discussions now. Even in the face of a strong economy, that has seen high employment levels and increased spending, 45% of Americans (112.5 million) say they do not have enough savings to cover at least three months of living expenses, according to a 2018 survey by the Center for Financial Services Innovation. Regardless of the economic environment – pro-cycle, counter-cycle, and cycle-neutral – those statistics paint an alarming picture of consumers' financial health as a whole. These are four crucial considerations you should be taking now: Create individualized treatments while reducing manual interactions Meet the growing expectation for digital consumer self-service Understand your customer to ensure fair treatment React quickly and effectively to market changes While it may not be on the immediate horizon just yet, it’s important to prepare. For more information, including portfolio mixes, collections considerations and macroeconomic trends, download our latest white paper on recession readiness. Download white paper now  

From a capricious economic environment to increased competition from new market entrants and a customer base that expects a seamless, customized experience, there are a host of evolving factors that are changing the way financial institutions operate. Now more than ever, financial institutions are turning to their data for insights into their customers and market opportunities. But to be effective, this data must be accurate and fresh; otherwise, the resulting strategies and decisions become stale and less effective. This was the challenge facing OneMain Financial, a large provider of personal installment loans serving 10 million total customers across more than 1,700 branches—creating accurate, timely and robust insights, models and strategies to manage their credit portfolios. Traditionally, the archive process had been an expensive, time-consuming, and labor-intensive process; it can take months from start to finish. OneMain Financial needed a solution to reduce expenses and the time involved in order to improve their core risk modeling.   In this recent IDC Customer Spotlight, sponsored by Experian, "Improving Core Risk Modeling with Better Data Analysis," Steven D’Alfonso, Research Director spoke with the Senior Managing Director and head of model development at OneMain Financial who turned to Experian’s Ascend Analytical Sandbox to improve its core risk modeling through reject inferencing. But OneMain Financial also realized additional benefits and opportunities with the solution including compliance and economic stress testing. Read the customer spotlight to learn more about the explore how OneMain Financial: Reduced expense and effort associated with its archive process Improved risk model development timing from several months to 1-2 weeks Used Sandbox to gain additional market insight including: market share, benchmarking and trends, etc. Read the Case Study

In recent months, the topics of stress-testing and loss forecasting have been at the forefront of the international media and, more importantly, at the forefront of the minds of American banking executives. The increased involvement of the federal government in managing the balance sheets of the country’s largest banks has mixed implications for financial institutions in this country. On one hand, some banks have been in the practice of building macroeconomic scenarios for years and have tried and tested methods for risk management and loss forecasting. On the other hand, in financial institutions where these practices were conducted in a less methodical manner, if at all, the scrutiny placed on capital adequacy forecasting has left many looking to quickly implement standards that will address regulatory concerns when their number is called. For those clients to whom this process is new, or for those who do not possess a methodology that would withstand the examination of federal inspectors, the question seems to be – where do we begin? I think that before you can understand where you’re going, you must first understand where you are and where you have been. In this case, it means having a detailed understanding of key industry and peer benchmarks and your relative position to those benchmarks. Even simple benchmarking exercises provide answers to some very important questions. • What is my risk profile versus that of the industry? • How does the composition of my portfolio differ from that of my peers? • How do my delinquencies compare to those of my peers? How has this position been changing? By having a thorough understanding of one’s position in these challenging circumstances, it allows for a more educated foundation upon which to build assessments of the future.