openNPL 0.2 release: The open source openNPL platform supports the management of standardized credit portfolio data for non-performing loans. In this respect it implements the detailed European Banking Authority NPL loan templates. It aims to be at the same time easy to integrate in human workflows (using a familiar web interface) and integrate into automated (computer driven) workflows. The latest (0.2) release exposes a REST API that offers machine oriented access using, what is by now, the most established mechanism for achieving flexible online data transfers.
openNPL now Available in Dockerized Form: Following up on the first release of openNPL the platform is now available to install using Docker. Running openNPL via docker is the installation option that simplifies the manual process (but a working docker installation is required!). Docker Hub You can pull the latest openNPL image from Docker Hub (This method is recommended if you do not want to mess with the source distribution).
Non-Performing Loans: The covid-19 crisis will certainly impact the concentration of Non-Performing Loans but given the special nature of this economic crisis compared (in particular) with the 2008 financial crisis it is unclear how precisely things will evolve. In a previous post and white paper (OpenRiskWP07_022616) we discussed the importance of advancing open and transparent methodologies for managing the risks associated with such credit portfolios. Effective management of NPL is also a top regulatory priority.
What is Risk Compensation? Risk Compensation is a behavioral model of human attitudes towards risk which suggests that people might adjust their behavior in response to the perceived level of risk. It follows that, depending on the strength of the effect, that it might counteract and even annul the impact of risk mitigation, if the updated attitude and behavior modifies the actual underlying risk Examples of potential risk compensation effects abound A prominent example of potential risk compensation in recent times that established the concept in more formal terms in public policy debates concerned the beneficial role of safety belts in automobiles.
A survey of existing definitions of risk: When looking up the meaning of risk we are immediately confronted with a surprising situation. There is no satisfying and authoritative general purpose one-liner that we can adopt without second thoughts. Let us start with the standard dictionary definitions: The online Merriam Webster Dictionary defines risk as the possibility of loss or injury The online Cambridge Dictionary opines that risk means the possibility of something bad happening The Oxford English (Concise, Hardcover!
Making Open Risk Data easier: In an earlier blog post we discussed the promise of Open Risk Data and how the widespread availability of good information that is relevant for risk management can substantially help mitigate diverse risks. The list of Open Risk Data providers, particularly from public sector, keeps increasing and we are aiming to document all available datasets in the dedicated page of the Open Risk Manual.
NACE Classification and the EU Sustainable Finance Taxonomy: The integration of climate risk and broader sustainability constraints into risk management is a monumental task and many tools are still lacking. Yet there is strong support and bold initiatives from policy bodies and an increasing focus from the private sector side. The EU (Sustainable Finance) Taxonomy is one such initiative of fundamental significance as it attempts to map at a granular level economic activities with respect to their climate risk mitigation or adaptation potential and create tangible metrics and thresholds to measure progress (the ultimate anti-greenwashing treatment)
What is a risk taxonomy? There are formal definitions of risk taxonomies (and we will go over those below), but it might be useful to first look at a very intuitive example of a risk taxonomy: the classification of fire hazards (also known as fire classes) Everybody knows (or should know!) that the different types of fire (the underlying Risk in this context) cannot be treated the same way because they respond in different ways to the substances used to suppress the fire.
Limit frameworks are fundamental tools for risk management: A Limit Framework is a set of policies used by financial institutions (or other firms that actively assume quantifiable risks) to govern in a quantitative manner the maximum risk exposure permitted for an individual, trading desk, business line etc. Why do we need limit frameworks? A limit framework is expressing in concrete terms the Risk Appetite of an institution to assume certain risks.
Credit Portfolio Management in the IFRS 9 / CECL and Stress Testing Era: The post-crisis world presents portfolio managers with the significant challenge to asimilate in day-to-day management the variety of conceptual frameworks now simultaneously applicable in the assessment of portfolio credit risk: The first major strand is the widespread application of regulatory stress testing methodologies in the estimation of regulatory risk capital requirements The second major strand is the introduction of new accounting standards (IFRS 9 / CECL) for the measurement and disclosure of expected credit losses
The data privacy genie is out of the bottle: From Yahoo’s massive email data leaks, to Equifax’s exposing of sensitive data for a large segment of the US population, to Apple’s resisting the bypassing the security features of the iPhone, not a week goes by without some alarming piece of news around data privacy. The ramifications for the legal use of private digital data by companies and government and the consequences of illegal or unintended use are huge.
How to Stress Test Financial Weapons of Mass Destruction: In recent decades we have been collectively spared the haunting images and existential anxiety provoked by the sight of detonating nuclear weapons for testing purposes - not to mention the increased levels of radiation in the atmosphere and other side-effects. This achievement is largely thanks to a series of treaties to control nuclear bomb testing that have been signed and enforced by most (unhappily not all) countries worldwide.
There is a legend that every time a data set is released into the open, somewhere dies a black swan The Promise of Open Risk Data: Well, it is not a true legend. Legends take centuries of oral storytelling to form. In our frantic age, dominated by the daily news cycle and viral twitter storms, legends have been replaced by the rather more short-lived memes and #hashtags. Black Swans need no introductions The whole informal theory of black swans concerns improbable events (low likelihood events) that come as a nasty surprise and have large impact.
Seeking clues for financial stability from quantum physics: How physicists discovered why the world is stable Physics is one of those remarkably successful branches of science that have helped shape the modern era. Let your gaze drop on any man made gadget in your surroundings and its likely that its working principles go back to a fundamental discovery in physical science that dates back no more than two hundred years or so.
If banks were airlines: Ever since the scary turbulence of the Great Financial Crisis it has been instructive and illuminating to compare the travails of the financial industry with the state of other industries, especially those more down to earth, also known as real world industries. The automotive industry was particularly handy for good analogies: Almost all of us have first-hand experience with the successes and failures of risk management when it concerns cars and driving.
Fintech Risk Events: Fintech Risk Events is an open catalog of observed and publicized operational failures of fintech business models. The catalog aims to document, in due course, such events reasonably accurately, to allow risk managers understand the (potentially new) vulnerabilities of new financial services models. Scope The scope of the operational risk database is Fintech companies. By that we mean newly established financial services providers that operate exclusively via new (digital) platforms and are (mostly) unregulated.
The Atlas of Bad Risk Management: The Atlas was discovered recently in archeological work studying pre-crisis civilizations. Despite the obvious wear and tear, all key risk failure areas have been preserved. We note the remarkable diversity of organizational forms and economic structures. Most interestingly, there is even an uncharted territory that was rumored to be inhabited by black swans. We handed over this invaluable treasure to a risk management expert and asked her to identify any similarities with modern risk management challenges.
Visualizing the risk management of the future: How do we communicate risk insights? The information tools used by risk managers to communicate insights have been transformed multiple times over the ages. In each era we have adopted existing technologies, but we also created demand for new technologies. Our era is no exception. To understand where we are going, we need to understand where we are coming from. So lets briefly recap our industrious past before we peer briefly into the visually exciting crystal ball.
Save the AMA whale: ΝΒ: This is not a post about real whales and the ongoing struggle to keep these magnificent mammals alive for future generations to marvel at. Hopefully the individuals who have risked their lives to bring the near extinction of many whale species to worldwide attention will not take offense with us usurping imagery linked to this valiant campaign. We simply want to draw attention to another, rather more armchair type of campaign, namely: saving the AMA risk model.
Risk Management Internship: In finance, it’s the best of times, it’s the worst of times It is a special moment to start a career in financial services. We are walking amid the ruins of the previous financial order. Fallen banks, broken markets, negative interest rates, shell-shocked economies and discredited theoretical assumptions. We see the enormous cost and impact to the welfare of society of a less than perfect financial system which has not kept pace with the advancement of our general knowledge and technical capabilities in most other domains.