Introduction to Article Series on Credit Risk Topics

Overview

Purpose of this article is to outline theme of series of articles you might see over next few months. Why “might see”? Well, honestly speaking, I have not written any additional article yet and uncertainty is the only certainty, which we are certain of as risk practitioners. If things go as planned, you will see series of articles in credit risk domain in next few months. Having spend more than a decade in credit risk domain working back with top global / regional / local banks, trust me, it is a deep ocean. My experience working in credit risk domain resonates very well with a famous saying “the more you know, the more you realize that you don’t know”.

What is the theme?

As you can expect, I am going to start with “fundamentals of credit risk”. Tricky part is that interpretation of fundamentals might be different depending on who is reading that article. For example, definition of credit risk might be too elementary for a credit risk person, but a data scientist who wants to get an entry into credit risk domain might found it must. However, that same credit risk person might want to know about model validation, which could be fundamental for a seasoned credit risk person. On the contrary, that seasoned credit risk person might want to know about differentiating aspects of validating different kind of models, e.g. quantitative, qualitative, vendor based, etc. Long story short, I intend to write on fundamentals, e.g. how banks operates, what is credit risk, how do you measure credit risk, what are its key components, etc.

This part shall interest folks who have some exposure to credit risk and want to further their skills / career in model validation. Do not confuse it with literal “exposure” used in risk management! Specifically, I intend to write on “model risk management fundamentals”, e.g. model life cycle, understanding model validation as a process, deep-dive into SR11-7 (refer link) expectations, etc.

Seasoned folks might be interested in “practitioner views on model validation” topics, e.g. differentiating aspects of validating an IRB (Internal Rating Based) model vis-à-vis say an IFRS9 (International Financial Reporting Standards) model or a model used for stress testing purpose, etc. To better articulate those differences, it is pertinent to outline underlying regulations. Therefore, I intend to write on “basics of underlying regulations”, e.g. IRB, IRB 2.0, IFRS9, etc. before dwelling into aforementioned differentiating aspects.

Folks in the model development role and/or aspiring model developers, do not worry. I do intend to write on “practitioner views on PD (Probability of Default), LGD (Loss Given Default) and EAD (Exposure at Default) model development”. Yes, I have worked in model development as well! I will try not to over simplify the development process. If it was so simple, then why there are large model development teams across banks. Rather, I will try to outline an illustrative model development process with dummy data and emphasize on implicit / explicit limitations. Emphasis on limitations is must – no one can become a model developer with reading some articles and / or executing some codes. It comes with experience. Let us respect that. Naturally, basics of statistics are must for better understating model development. Therefore, I intend to write on basics of two most commonly used algorithms viz. multiple linear regression and binary logistic regression.

Lastly, how can I miss the buzzwords or “advanced topics – machine learning and climate risk”? Having created various proof-of-concepts on usage of machine learning in credit risk measurement, I do intend to write on the same. As a certified SCR and an earlier member of an internal think-tank on this topic, I do intend to write on climate risk topics, e.g. integration of climate risk into credit risk management.

What you can expect from me?

• A genuine effort to write thoroughly with an intention to make the reader understand
• Practitioner’s views on niche topics (I will refer to guidelines / other sources for details, wherever warranted)
• Practical knowledge actually passed-on

What I expect from reader(s)?

• Constructive feedback to become a better professional

What is in it for me?

Honestly speaking, nothing at this stage apart from passing-on whatever understanding / knowledge (albeit limited) I am having and hoping to benefit some individual(s) in his/her career, and further polishing my writing skills.

Disclaimer

The ideas, views and opinions expressed in this article represent my own views and not those of any of my current or previous employers.