Credit Risk

Transition Matrix Library First Release

Transition Matrix Library First Release

Reading Time: 2 min.
Open Risk released version 0.1 of the Transition Matrix Library Motivation: State transition phenomena where a system exhibits stochastic (random) migration between well defined discrete states (see picture below for an illustration) are very common in a variety of fields. Depending on the precise specification and modelling assumptions they may go under the name of multi-state models, Markov chain models or state-space models. In financial applications a prominent example of phenomena that can be modelled using state transitions are credit rating migrations of pools of borrowers.
The Zen of IFRS 9 Modeling

The Zen of IFRS 9 Modeling

Reading Time: 6 min.
The Zen of IFRS 9 Modeling: At Open Risk we are firm believers in balancing art and science when developing quantitative risk tools. The introduction of the IFRS 9 and CECL accounting frameworks for reporting credit sensitive financial instruments is a massive new worldwide initiative that relies in no small part on quantitative models. The scope and depth of the program in comparison with previous similar efforts (e.g. Basel II) suggests that much can go wrong and it will take considerable time, iterations, communication and training to develop a mature toolkit that is fit-for-purpose.
Reducing variation in credit risk-weighted assets – The benign and vicious cycles of internal risk models

Reducing variation in credit risk-weighted assets – The benign and vicious cycles of internal risk models

Reading Time: 4 min.
Reducing variation in credit risk-weighted assets - The benign and vicious cycles of internal risk models: March 2016 wasn’t a good month for so called internal risk models, the quantitative tools constructed by banks for determining such vital numbers as how much buffer capital is needed to protect the savings of their clients. First came the Basel Committee’s proposed revision to the operational risk capital framework applicable to banks, next came a similarly fundamental overhaul of what form of risk quantification will be acceptable for calculating credit risk capital requirements.
Risk Capital for Non-Performing Loans

Risk Capital for Non-Performing Loans

Reading Time: 2 min.
Risk Capital for Non-Performing Loans: Currently many countries are drowning in bad credits This visualization from the World Bank shows the current distribution of non-performing loans (NPL’s in short) around the world, as fraction of the total outstanding loans: Translated in absolute numbers (according to IMF data) the European NPL book alone stands at around 1 trillion EUR. As the adage goes, a trillion here, a trillion there, you pretty soon talk about serious money
FX Lending Risk

FX Lending Risk

Reading Time: 3 min.
FX Lending Risk: A stress testing methodology for analyzing FX lending risk. Extends standard credit risk modelling tools to capture the increased risks of FX lending in a consistent way Financial Weapons of Mass Destruction Warren Buffet famously declared financial derivatives as weapons of mass destruction (although apparently this did not prohibit him from using them when convenient). The leverage afforded by such contracts, their potential complexity, or simply their novelty which may imply lack of understanding, are some reasons why one would classify them as potential contributors of systemic risk, which is a polished rephrasing of the more popular this sucker is going down quote.
Resources for Concentration Risk

Resources for Concentration Risk

Reading Time: 4 min.
Resources fo concentration risk management: Concentration Risk Management is a staple of risk management. Open Riskdeveloped a unique and novel set of risk management resources to assist with building in-house knowledge for managing credit concentration risks. Resources range from courses and online manuals to open source calculators and mobile eLearning games. In this post we have a brief summary of what is available, you can find more details by clicking on the embedded links
Revisiting simple concentration indexes

Revisiting simple concentration indexes

Reading Time: 1 min.
Revisiting simple concentration indexes: Our white paper Revisiting simple concentration indexes reviews the definitions of widely used concentration metrics such as the concentration ratio, the HHI index and the Gini and clarify their meaning and relationships. This new analytic framework helps clarify the apparent arbitrariness of simple concentration indexes and brings to the fore the underlying unifying concept behind these metrics, thereby enabling their more informed use in portfolio and risk management applications.
Concentrating on Concentration Risk

Concentrating on Concentration Risk

Reading Time: 4 min.
Concentrating on Concentration Risk: Senior economists such as Ben Bernanke were still studying the Great 30s Depression when the financial crisis struck in full force circa 2007. Given the complexity of the modern economic and financial landscape compared to the blessed good old days - we have no reports of FWMD (financial weapons of mass destruction) from back then - we can reasonably project that economists will be studying and pontificating on causes and remedies for the current crisis for the next 100 years or so
FuriousBanker: The Credit Detox Challenge

FuriousBanker: The Credit Detox Challenge

Reading Time: 2 min.
FuriousBanker(TM) helps you learn risk management concepts in a fun and engaging way. This educational game series for mobiles and tablets is developed by Open Risk to enable modern interactive elearning for people working (or aspiring to work) in financial risk management. The first episode sees FuriousBanker facing The credit detox challenge: Game instructions for FuriousBanker: You Objective: You inherited a pretty toxic credit portfolio and your objective is to reduce the concentration, even while improving your profitability.
Pilot Course on Name Concentration

Pilot Course on Name Concentration

Reading Time: 0 min.
We just added a new course at the Open Risk Academy! The course covers name concentration risk measurement, chiefly the construction of suitable metrics based on portfolio data (Free registration is required for this course)