models

Challenges to modelling

Modelling the Current Expected Credit Loss (CECL) may present problems to some banks. Possibly a bank is collecting data for annualized charge-off rates and “how would that inform someone as to the loss rate over the lifetime of the portfolio?” asked Michael Gullette, SVP, Tax and Accounting at the American Bankers Association. The question is whether a bank has enough data of the right kind to see trends and relationships. “And if you have the data, what is the quality?” Gullette said. He was part of a round-table discussion about the transition to CECL that was webcast by the Global […]

Never too early to start

The “reasonable and supportable” clause of the new Current Expected Credit Loss (CECL) standard “is the most hotly debated part” of the regulation, according to Cristian deRitis, Senior Director, Consumer Credit Analytics at Moody’s Analytics. He was part of a round-table discussion about the transition to CECL that was webcast by the Global Association of Risk Professionals (GARP) on January 10, 2018. CECL is the new credit impairment standard under Financial Accounting Standards Board (FASB). “Auditors are grappling with what ‘reasonable and supportable’ means, too,” he added. For best practice in terms of modelling credit risk, the phrase boils down to whether […]

Myths of CECL

The time for proper accounting of credit impairment is running out. How prepared is your team? Do you even know what the biggest concern of the auditors will be? This was the call to action voiced by Tom Caragher, Senior Product Manager of Risk and Performance at Fiserv, a US provider of financial services technology on October 26, 2017. He spoke about implementation of current expected credit losses (CECL) at a webinar sponsored by the Global Association of Risk Professionals. (Note that CECL is the impairment standard under Financial Accounting Standards Board (FASB).) “When it comes to CECL, there are many […]

Volatility Clustering

When looking at stock market time series, one notices immediately a certain “jitter” or “noise” in the daily returns. This is ordinary volatility. Every once in a while, volatility becomes higher and stays that way—for a while. “Volatility clustering occurs when the volatility of the returns becomes correlated from one day to another,” said Attilio Meucci, CEO and founder of Advanced Risk and Portfolio Management (ARPM). He was the sole presenter at the May 11, 2017, webinar on Modeling and Forecasting Volatility Clustering sponsored by the Global Association of Risk Professionals. Meucci began by showing an example of volatility clustering […]

Central Clearing Design

If you had to design a central clearinghouse for transactions in financial markets, what size of guarantees should be offered? And what percentage fees should be charged? “The central clearing modifies the market,” said Andreea Minca, “because the old network structure [of one-to-one] is changing to a new ‘star’ structure.” Minca is Assistant Professor at the School of Operations Research and Information Engineering at Cornell University and was the sole presenter at the December 6, 2016, webinar on systemic risk and central clearing design to members of the Global Association of Risk Professionals (GARP). Under new US legislation, all over-the-counter […]

Clash of Titans

In the wake of the financial crisis, the two Titans that create accounting standards tried to hammer out agreement over how to account for impairment of loans. These bodies are the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). “FASB and IASB share the same goal but unfortunately were not able to agree on the same standard,” said Emil Lopez, Director of Risk Measurement at Moody’s Analytics. FASB calls their impairment standard “current expected credit losses” (CECL) whereas IASB deals with impairment and expected losses in their International Financial Reporting Standards as IFRS 9. Lopez was […]

Move Beyond Spreadsheets

Is your firm ready? Financial institutions are seeking answers that will help them plan a roadmap for implementation of the new current expected credit losses (CECL) standard issued by the Financial Accounting Standards Board (FASB). “The runway looks long but firms need to start to prepare now,” said Anna Krayn, Team Lead for Impairment, Capital Planning and Stress Testing at Moody’s Analytics. She was the second of three panellists at the webinar “The Long Road to CECL” sponsored by the Global Association of Risk Professionals on September 8, 2016. “Now is the time to educate, organize and govern, quantify, and […]

Long Road, Many Challenges

Nothing like a financial crisis to show the rough spots in estimation of losses. “Credit losses weren’t being recognized on a timely basis,” and the impairment accounting models were complex and varied widely, according to Kevin Guckian, Partner, National Professional Practice at Ernst &Young. He was the first of three panellists at the webinar “The Long Road to CECL” sponsored by the Global Association of Risk Professionals on September 8, 2016. “FASB’s final standard should accelerate recognition of credit losses,” Guckian noted, referring to the current expected credit losses (CECL) standard newly adopted by the Financial Accounting Standards Board. He […]

Avoid Jekyll and Hyde

Accurate price determination for commodities means that data must be gathered, processed and analyzed. What, then, are current best practices for data management? “Organizations are beginning to recognize their current solutions are no longer meeting current needs,” said Michal Peliwo, Vice President of Business Solutions at ZE PowerGroup.  He was the third and final speaker at a webinar on August 24, 2016, sponsored by the Global Association of Risk Professionals, titled “The Price is Right? Strategies for Market Discovery & Optimum Pricing Challenges.” Peliwo described the fragmented world of data management as it exists at most companies. “MS Excel is […]

Optimum Price a Moving Target

How was risk-taking originally priced, and has this changed over time? Centuries ago, mercantile economies used to pool risk for the trading ships that were sent out. Over time, this “big chunk risk” has given way to increasingly more precise ways of determining risk, and is now down to individual financial transactions. “Pricing is the centre of gravity of this operation,” said Robin Bloor, Chief Analyst at The Bloor Group. “For every product theoretically there is an optimum price.” Beginning with this historical comparison, he was the first of three speakers at a webinar on August 24, 2016, sponsored by […]