Credit Risk Response to the Covid-19 Crisis
Recent papers and presentations written during the crisis:
Great Expectations: Raising Standards in the Covid-19 Crisis (Gerard Scallan and Helen McNab, June 2020) - Presentation - Download PDF here
Covid-19 is a challenge to portfolio governance for consumer credit. Fast corporate response is a key determinant of whether a lender survives or not. Current policies are based on assumptions - and the assumptions are always wrong. The key is to identify the gap between the assumptions and reality as rapidly as possible and then to adjust the policies in line with management understanding.
This requires judgmental adjustments to scorecards and other models, subsequently validated and modified by data. For this adaptative process to work, management information must measure performance against standards that reflect the real assumptions driving portfolio management and not against irrelevant scorecard development samples. Vintage matrices are key - but their design should accelerate spotting when customer behaviour is not in line with expectations.
Finally, models must link to financials. Effective use of the budgeting process is key to rapid adjustment of policies - and to profiting from the opportunities that come with every crisis.
Stable Income Index (Gerard Scallan and Helen McNab, June 2020) - Outline Specification - Download PDF here
The Covid-19 crisis has changed consumer behavior and changed consumer borrowers' risk. There is an overall increase in future losses and a change in the relative risks of different groups. Many lenders have superimposed policy rules on their acquisition and behavioral scorecards to allow for these changes, or made ad hoc adjustments to the scorecard coefficients. These judgmental adjustments are proving very difficult to evaluate and to adjust to emerging evidence. The result is a widening gap between what the scores say and the management understanding of risk. This is dangerous.
The key change in customer relative risk is due to future shocks to income. If someone loses their job or a large part of their income in the next year, they will have difficulty repaying their borrowing. This is the key factor that has changed in ranking consumer risk.We have formulated a "Stable Income Index" to give one number to rank the likelihood of significant loss of income.
The Stable Income Index uses information about both employment and financials (from current account and bureau) to give a numerical index. It can either be used in a scorecard or overlaid as a policy criterion. It is a judgmental index, but structured to allow future adjustments, as the economic impact of the crisis unfolds and new evidence emerges. The key is to get a robust manageable structure.
Building Payment Holidays into Scores (Gerard Scallan, July 2020) - Download PDF here
This paper defines a road map for scorecard changes arising from payment holidays. It focuses on ongoing behavioral scores, used to support operational decisions, IFRS9 provision calculations and Basel capital calculations. Like any good road map, it sets out alternative routes. It is not a recipe book set of instructions.
Managing through the Covid-19 Crisis: a 3-phase Approach (Helen McNab, April 2020) - Download PDF here
Initial guidance for managing models during the early part of the COVID-19 crisis.
Older papers and presentations about managing credit portfolios during a recession:
Keeping on the Rails: when Delinquency Overshoots (2011): Download PDF here.
This presentation gives an analytic framework with practical examples for managing through a recession.
Speed Reading: Portfolio Tracking in a Recession (2009): Download PDF here.
This paper was originally presented in 2009 following the GFC and still has relevance for managing portfolios in crisis situations today.
And the methodological underpinning of the way we think about portfolio and model management:
Actual = Expected: Statistical Framework for Scorecard Management (Gerard Scallan - 2013 revised 2020): Download PDF here.
Originally published in 2013, this paper has been updated and revised (31 March 2020) to begin thinking through the approach we need during / post the COVID-19 crisis. Presented by webinar on 31 March and 6 April 2020.
Email firstname.lastname@example.org for further guidance and for notification of resources as they become available.