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. Other product and company names mentioned herein are the trademarks of their respective owners. No part of this copyrighted work may be reproduced, modified, or distributed in any form or manner without the prior written permission of Experian. Experian Public. Sophisticated loss forecasting made easy Chuck Robida Experian Robert Stone Experian #vision2014

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Transcript of Vision 2014: Sophisticated-loss-forecasting-made-easy

Page 1: Vision 2014: Sophisticated-loss-forecasting-made-easy

© 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.

Other product and company names mentioned herein are the trademarks of their respective owners. No part of this copyrighted work may be reproduced, modified, or distributed in

any form or manner without the prior written permission of Experian. Experian Public.

Sophisticated loss forecasting made easy

Chuck Robida Experian

Robert Stone Experian

#vision2014

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2 © 2014 Experian Information Solutions, Inc. All rights reserved. Experian Public.

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:

[email protected]

[email protected]

Hear the latest from Vision 2014

in the Daily Roundup:

www.experian.com/vision/blog

@ExperianVision | #vision2014

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