Recession can be avoided by marrying models with economic forecasting
Rita Chakravarti, director of analytics at FICO, believes economic data, consumer health and credit scoring should be incorporated into credit risk management for better accuracy in forecasting. October 27, 2011 | Rita ChakravartiThe entire world was caught off-guard during the 2008 economic crisis, where banks did not have the tools to cushion the fall. However, this spurred adoption of predictive analytics to map potential future scenarios for improved risk management. FICO’s post crisis research yielded three major lessons about credit risk management: all elements of risk management must be treated dynamically; rapid and significant changes in economic forces and market forces render traditional risk management approaches less reliable; and credit providers need better economic forecasting relative to risk management for loan origination and portfolio management. Evidence suggests that due to the changing environment, default rates vary in the same score bands and we’ve observed this in the US and Hong Kong. Given how quickly the global economy plunged in the last recession, incorporating economic data dynamically and intelligently could improve the risk management framework to cope with such a situation. While we’re seeing that regulators in Hong Kong, Korea and Singapore have recommended this approach, observation suggests it isn’t conducted consistently and proactively. The 2008-2009 crisis added one more complexity to the risk environment. Western economies (primarily the U.S., and to some extent, European economies) were believed to be robust and could be relied upon to provide the consumer demand that cushioned the rest of the world. They were also the primary importers and East Asia grew riding on their consumer needs. Now, the situation in Asia is fraught and uncertain, with export-dependent nations particularly at risk, given the current debt crisis in U.S. and in Western Europe. Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Credit Risk, Data & Analytics, Risk and Regulation, Risk ManagementCredit Risk,Data & Analytics,Risk and Regulation,riskmanagement, Credit Risk,Data & Analytics,Risk and Regulation,Risk Management, Keywords:FICO, 2008 Economic Crisis, GDP, Default Probabilities FICO, 2008 Economic Crisis, GDP, Default Probabilities
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