Until now, it has been very difficult for a lender to understand the pressures on any consumer in terms of their ability to absorb more credit and pay off the required instalments, without placing unbearable stress on their finances.
Lenders are looking for new ways to connect with the estimated 3 billion people worldwide who fall outside the credit mainstream. These “credit invisibles” don’t have credit cards, bank accounts or credit history — so how can a lender assess their risk?
When young Russians apply for their first credit card at Sovcombank, they go through a fun, interactive survey that starts with the question, “How do you feel today?” What they’re doing is participating in a new type of psychometric credit scoring that could expand credit in markets worldwide. The scoring methodology was developed by EFL Global and marketed by FICO as part of our FICO Financial Inclusion Initiative, designed to open up credit markets around the world to a larger number of unbanked and underserved consumers. Sovcombank, a universal bank with more than 2 million customers, is using the score to “gamify” the credit application process. The EFL credit risk score is created through a dynamic behavioral design and psychometric assessment that analyzes character traits with a proven relationship to credit risk. It’s an ideal approach for applicants who do not have a credit history and therefore cannot be scored... [Read More]
We’ve been blogging about our recent survey, conducted with Chartis, where we queried global financial institutions (FIs) about their capital adequacy programs. As part of the survey, we asked FIs about their practices in model risk management. What we discovered is that following industry-standard best practices is the exception, not the norm. Regulators mandate that all financial institutions have adequate processes in place for model risk oversight and control of every analytic model utilized throughout the credit lifecycle. Industry best practice is to develop such practices using a tri-layered defense: Solid and effective controls exerted by the business, including formal processes for definition, development, implementation and ongoing monitoring of models. Enterprise risk functions and committees that establish standards for model governance, validation and monitoring of adherence to established policies. Independent audit and assessment of both the design and effectiveness of the controls and policies from the first two lines of... [Read More]
Regulators in Europe and the US are mandating that financial institutions (FIs) embed stress testing into their Internal Capital Adequacy Assessment Process (ICAAP). But as shown by our recent survey of global FIs, conducted jointly with Chartis, most treat these stress tests purely as a regulatory compliance exercise. They are, therefore, missing a key opportunity to embed results into broader efforts around business planning, risk management and capital allocation. Source: Chartis Research 2015 As our survey results show, stress testing, business planning and risk management processes are fragmented. Most FIs, for instance, have separate stress test processes for compliance requirements and for determining risk appetite. This clearly creates a scenario where limited resources are tied up conducting similar processes but for two different purposes. Not a good use of time and effort! Perhaps even more concerning is that only 15% of respondents state that stress testing is a core item... [Read More]
Working with Chartis, we recently completed a global survey of financial institutions about their current capital adequacy regimes. Not surprisingly, we found that many still struggle with both the pace of regulatory change as well as the best way in which to implement capital adequacy programs. After the financial crisis, a number of major reforms and new regulations were enacted to strengthen the financial system and increase transparency. A fundamental focus of these reforms was on defining and calculating capital adequacy, as exemplified by Basel 3, Dodd Frank and CCAR. This regulatory focus on capital adequacy will not abate any time soon. It’s estimated that by 2019, capital reserve requirements will have increased in the US by an additional $870 billion and in Europe by €1.1 trillion. With that shortfall in mind, it is noteworthy which financial regulations our survey respondents felt had significant impact on their capital adequacy methods... [Read More]