Risk Management

Summary

The Open Risk Academy course NPL270672 is a CrashCourse introducing the EBA NPL Templates.

Content

We start with the motivation for the templates and the domain of credit data (to which NPL data belongs). We discuss three core classes that capture the essence of lending operations from a lenders point of view (Counterparty, Loan, Collateral). Next we explore classes that capture events in the lending relationship lifecycle (which we term NPL Scenarios). We look into the main data types: elementary data types, choice lists, arrays and unstructured text. We close with discussing some more complex issues involving graph and timeseries data.

Motivation

Equinox is an open source platform that supports holistic risk management and reporting of Sustainable Finance (Sustainable Portfolio Management). The platform integrates geospatial information with applicable regulatory and industry standards from EBA, PCAF and Equator Principles to provide a holistic view of the footprint of both individual projects and portfolios, in particular of project finance investments.

Celebrating Pi Day 2021

Pi Day is celebrated every year on March 14th. The reason of course is that the day is denoted in some calendars as (3/14), which evokes of 3.14, the first three digits of “π”. A thin excuse maybe but sufficient for the true believers to join along! The occasion represents an annual opportunity for mathematics and science enthusiasts to recite the infinite charms of Pi, including its irrationality, to talk to friends and family about math and its uses, and, when everything else fails, simply eat pie.

What is the future of stress testing?

To speculate on the future of Stress Testing we need first a basic definition what stress testing is. Broadly speaking, the goal of Stress Testing is to assess how a system would behave under adverse conditions that - while not the most likely outcome with the knowledge of today - are within the realm of the plausible.

Risk, Randomness, Uncertainty and other Ambiguous Terms

Uncertainty versus Risk is a popular discussion topic among risk managers, especially after major risk management disasters. The debate can get really hairy and drift into deep philosophical areas about the nature of knowledge etc. Yet the significance of having an as clear as possible language toolkit around these terms should not be underestimated. Practical risk management typically shuns too deep excursions into the meaning of things, yet that is not quite compatible with the use of sophisticated methods and tools (such as a Risk Model ) that assumes an understanding of the scope and limitations of “knowledge”.

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. openNPL 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.

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. Following calls from the EU Commission and the EU Council to develop data templates to reduce information asymmetries between potential buyers and sellers of NPL, the European Banking Authority (EBA) has developed such standardised data templates.

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

A survey of existing definitions of risk

When looking up the meaning of Risk we are confronted with a surprising situation. There is no satisfying and authoritative general purpose one-line definition that we can adopt without second thoughts. Let us start with the standard dictionary definitions:

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.

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.

What is a Risk Taxonomy?

There are various 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)

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.

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 While both Regulatory Stress Testing and IFRS 9 / CECL accounting require investment in analytic capabilities and provide unique new insights, both are aimed at satisfying evolving prudential or investor disclosure requirements. Neither is designed to help credit portfolio managers analyse and steer their portfolios in the bottom-up fashion that is an essential part their mandate.

The above developments are overlaid into pre-existing conceptual and practical frameworks such as

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.

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.

The Promise of Open Risk Data

There is a legend that every time a data set is released into the open, somewhere dies a black swan

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.

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.