CSCCXI conference

The Credit Scoring and Credit Control XI Conference will take place in Edinburgh on 26-28 August 2009.   This conference bridges the academic-practitioner divide with a range of talks regarding current industry issues (like Basel II) to the latest statistical research findings.   It provides an ongoing forum to debate theory versus practice as well as for meeting up with old – and new – colleagues.

I will be presenting two papers outlined below.

Dynamic Models of Default on UK Credit Cards
Tony Bellotti and Jonathan Crook

Abstract

Typically models of default are built on static data, usually collected at time of application.  We consider alternative models that also include behavioural data about credit card holders and macroeconomic conditions across the credit card lifetime, using a discrete survival analysis framework.  We find that models that include these dynamic variables give statistically significant improvements in model fit which translate into better forecasts of default at both account and portfolio level when applied to an out-of-sample data set.  Additionally, by simulating extreme economic conditions, we show how these models can be used to stress test credit card portfolios.

Macroeconomic conditions in models of Loss Given Default for retail credit

Tony Bellotti & Jonathan Crook

Abstract

Loss Given Default is an important measure of credit loss used by financial institutions to compute risk within credit portfolios, expected loss on individual loans and capital requirements.  We investigate models of Loss Given Default for UK retail credit cards which incorporate macroeconomic conditions.  We find bank interest rates and unemployment rate are important explanatory variables and their inclusion improves forecasts of Loss Given Default for hold-out data sets.  Additionally, the inclusion of macroeconomic conditions is important since it enables stress testing and provides a means to model downturn Loss Given Default as required by the Basel II Accord for the advanced internal ratings based approach to calculating capital requirements.

Stress test of major US banks

Sorry for the delay reporting this but better late than never!

On May 7 the Federal Reserve System published its report on stress tests on 19 major US banks.  They used economic scenarios, comparing a “baseline” state assuming the economy follows their predicted trend with a “more adverse” state where the economy performs worse than expected.  The result is that they expect the 19 banks to accrue debts of $600billion during 2009 and 2010 assuming adverse economic conditions.  Of this, $455billion would be for consumer debt.  This underlines the importance of understanding risk within consumer credit portfolios.  Research in this area lags behind corporate credit, but consumer credit accounts for much more of bank risk.  The bottom line is that between them the banks are short of capital requirements by $75billion.

It is also worth reading the BBC report on this stress test.

Several US financial commentators have dismissed these stress tests as too weak and it has been done simply to allay the fears of the public and investors in the US banking system.  The conditions used by the Fed to represent “more adverse” conditions were not sufficiently adverse and some of the indicators, such as unemployment rate, are already close to the value chosen for adveerse conditions (ie adverse is normal!).  For further details, Professor Campbell Harvey at Duke University (NC)  gives a detailed criticism.

Bryan Magee interviews

I always enjoy reading Bryan Magee’s works on philosophy because he writes so clearly. Here are some remarkable interviews he conducted with some of the great modern philosophers on a variety of subjects such as Wittgenstein, logical positivism and Frege. I haven’t watched all of them yet but I’ve enjoyed what I’ve seen so far. You just don’t get TV like this any more!
http://www.youtube.com/results?search_type=&search_query=bryan+magee&aq=f