Vision 2014: Sophisticated-loss-forecasting-made-easy
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© 2014 Experian Information Solutions, Inc. All rights reserved. Experian and the marks used herein are service marks or registered trademarks of Experian Information Solutions, Inc.
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Sophisticated loss forecasting made easy
Chuck Robida Experian
Robert Stone Experian
#vision2014
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Making it easy for lenders to fulfill escalating regulatory requirements
– Steve Jobs
This is what customers pay us for – to sweat
all these details so it's easy and pleasant for
them to use our computers. We're supposed
to be really good at this. That doesn't mean
we don't listen to customers, but it's hard for
them to tell you what they want when they've
never seen anything remotely like it.
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Experian core competencies
Enable lenders to focus
efforts on revenue and
profitability growth
Analytical
expertise
Execution
capability
Domain
knowledge
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Regulations
solution consulting
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Regulatory
Comprehensive Capital Analysis and Review
Dodd Frank Act Stress Test
Basel
Sound businesses practices
Everyone is invited to the future
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Solution – the easy part
Experian executes
loss forecasting
algorithm
Mortgage suite
First
Second
HELOC
Auto suite
Bankcard suite
Reports with
quarterly expected
losses
Lender sends
consumer and
account data
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Stress scenario: severely adverse
First mortgage Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9
Incremental loss total $50.1 $71.2 $89.0 $106.8 $117.5 $111.6 $106.0 $95.4 $86.8
Cumulative loss total $50.1 $121.3 $210.3 $317.1 $434.5 $546.1 $652.1 $747.5 $834.3
Incremental default rate 0.53% 0.68% 0.79% 0.94% 1.03% 1.01% 1.01% 0.97% 0.95%
Cumulative default rate 0.53% 1.21% 2.00% 2.93% 3.96% 4.97% 5.98% 6.95% 7.89%
Cumulative prepay rate 2.64% 5.14% 7.63% 10.13% 12.49% 14.54% 16.38% 18.10% 19.73%
Stress scenario: base line
First mortgage Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9
Incremental loss total $49.8 $50.7 $51.2 $51.1 $50.4 $49.2 $47.5 $45.3 $42.7
Cumulative loss total $49.8 $100.5 $151.7 $202.8 $253.2 $302.5 $350.0 $395.3 $438.0
Incremental default rate 0.50% 0.49% 0.49% 0.49% 0.49% 0.50% 0.50% 0.51% 0.53%
Cumulative default rate 0.50% 0.99% 1.48% 1.97% 2.46% 2.96% 3.46% 3.98% 4.51%
Cumulative prepay rate 1.49% 2.87% 4.20% 5.51% 6.71% 7.70% 8.62% 9.50% 10.35%
Deliverables Meet regulatory and sound business requirements
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Client
Personally identifying information
Property address*
Loan type/terms
Interest rate/type
Open date
Original, current balance
Current status
Original property value
Current property value
Economic forecasts–MSA/state/US
HPI forecasts–MSA/state
Experian
Current VantageScore® V3.0
AVM*
Economic forecasts –MSA/state/US
HPI forecasts – ZIP®/MSA/state
Data requirements
Calculations
Static
► Origination LTV
► Spread at origination
Forecasted
► Current LTV, equity measures
► Current interest rate spread
► Transformations (economic)
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Bottom-up
The piecing together of systems to give rise to more
complex systems1
Competing-risk framework
Unique approach
Analytical approaches
1 "Top-down Approach." Wikipedia. Wikimedia Foundation, 02 Oct. 2014. Web. 11 Mar. 2014.
Top-down
The breaking down of a system to gain insight into its compositional sub-systems1
Vintage-based
Roll rates
EAD EL PD LGD
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Competing risk frame-work
Obs/Out 0 PPD 1 PPD 2 PPD 3–5 PPD Default Paid
0 PPD 0.950 0.008 0.009 0.011 0.007 0.015
1 PPD 0.300 0.300 0.160 0.180 0.010 0.005
2 PPD 0.098 0.200 0.300 0.250 0.150 0.002
3–5 PPD 0.004 0.100 0.150 0.325 0.375 0.001
Loan Forecast 1
State 1 Forecast 2
State 1
State 2
State 3
State 4
State 5
State 6
State 2 Forecast 2
State 3 Forecast 2
State 4 Forecast 2
State 5
State 6
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Cutting edge methodology
► Discrete = interactions: consumer x loan x property x geography x economy
► Current consumer risk
Flexible
Accessible
Cost effective
Transparent
The Experian difference
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Approach to meet bank and regulatory requirements:
Data pull and aggregation
Pooling of accounts and aggregation to general pool-level predictions
Stress test following FR Y-14M data schedules
Strictly impose sound modeling practices
Time series analytics
Model diagnostics
Consistency of results
Focus on economic factors
Stress testing
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Stress testing
Assess or
predict stress
values for
economic
variables related
to credit risk
Calculate
minimum capital
requirements
and other
desired outputs
under scenario
Specify basic
stress-test
scenario
characteristics
Predict values
from credit
loss models
consistent with
stress-scenario
assumptions
Methodology
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Discussion items:
Number of and types of models (e.g., risk, financial, etc.)
Framework components to be analyzed and delivered
Availability of model data, code and documentation
Specifications of delivered reports
Stress testing
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Input required:
Data
► Scores and components, key segments, exclusions indicators, observation dates and performance flags
► Benchmark scores to eliminate need for archives
► Macroeconomic data for stress testing and agreed upon thresholds
► Data dictionaries and data processing requirements
Full model documentation
Model scoring coding – eliminate recoding
Stress testing
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Experian = experience, collaboration and partnership
Extensive experience:
Notable CCAR/DFAST experience including work with many of the Top-5 U.S. banks
Extensive experience in loss forecasting, stress testing, modeling and analytics, banking and risk measurement and simulation
Unmatched modeling and benchmarking experience
Extensive understanding of credit and business data resulting in best practice methodology to develop the most predictive loss forecasting systems
Experian solution Stress testing
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Experian = experience, collaboration and partnership
Collaborative approach and partnership:
Experian can provide support on the whole process or specific project segments
Provide detailed documentation of Experian’s stress testing and benchmarking process
Knowledge transfer of the process and models to the bank as part of the project process
Experian solution Stress testing
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For additional information, please contact:
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in the Daily Roundup:
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@ExperianVision | #vision2014
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