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European stress tests reinforce need for new analytics

Starting today -- July 23 -- the Committee of European Banking Supervisors (CEBS) has begun publishing results of stress tests on European Union banks at http://stress-test.c-ebs.org/firstresults.htm. THE CEBS has performed this stress test on 91 banks “to assess the overall resilience of the EU banking sector and the banks’ ability to absorb further possible shocks on credit and market risks, including sovereign risks, and to assess the current dependence on public support measures.” 

Understanding the impact of future economic scenarios isn’t new, but it’s taken on a new urgency because of the global recession. This week I discussed how banks can marry macro-economic forecasts with customer-level risk assessments in Bank Systems and Technology, in an article called “Credit Scores Aren’t Broken, But Are Being Enhanced with New Analytics.”

To put it briefly, we can now forecast how macro-economic conditions are likely to impact customer risk levels at given risk score ranges. These analytics can generate an index of how much default rates are likely to increase or decrease under a range of economic forecasts. In other words, the analytics consider the macroeconomic view of market conditions within the micro-analysis of individual consumer risk.

FICO has used the analytic methodology discussed in two new solutions, the FICO Economic Impact Service (custom  models) and the FICO Economic Impact Index (based on the FICO® Score). You can also see me discussing our solution in a FICO Tech Talk video.

I’m excited by the work we’ve done with our clients in this area. As economic forecasts continue to fluctuate, it’s a good time to begin a closer integration between your view of the future and your decisions on customers.

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