Last weekend, longtime colleagues now at Bain posted this wise advice regarding credit processes: pivot towards forward-looking trend assessments based on “data from all available sources.” A previous post recommended that banks should rely on “innovative techniques, ranging from advanced analytics, optical character recognition, natural language process and machine learning, to improve the performance of their models…”
Bain is right.
When the risk measurement industry converged on a value-at-risk (VAR) industry standard in the 1990s, the shortcomings of measuring risk based on historical data and a normal distribution were well known. Creating composite risk assessments based on data sets representing past credit and market behavior has lulled many into a false sense of security regarding the precision of the risk measurement process.
The multi-decade race for big data to generate robust modeling outcomes relegated scenario analysis to the outskirts of the risk process. If the most outlandish scenario one can devise is limited by experience with past stress events (e.g., the Great Financial Crisis ten years ago and/or the Great Depression), scenario analysis becomes the conceptual equivalent of a Friday night game of darts at a local bar. Financial engineers will view the scenario analysis process as too subjective.
Today’s COVID-19 Era complicates risk assessment for another reason. Immediate economic dislocations associated with the health crisis change consumer and business behavior at a fundamental level. The break in the data series regarding loss rates and risks are impacted by commendable fiscal and monetary policy mechanisms designed to soften the economic blow.
Shifts are inevitable, but they will take time to appear in the economic data. Financial firms, risk managers, strategists and analysts instead need to make decisions now. The mismatch between the availability of concrete data and the necessity for action is acute
In addition, risk profiles and behavior are now more directly impacted by shifts in public policy than at any other time in the recent past since the Great Financial Crisis.
Forward-looking measures of risk exposures thus must now explicitly take into account exposure to public policy risk both at the national and international level (particularly for cross-border firms) in order to provide meaningful insight.
We at BCMstrategy, Inc. naturally support strongly Bain’s recommendations for firms to rely on a broad range of alternative data. Our company operates at the innovation frontier precisely in this space. We use patented processes to convert the words of the public policy process into structured data that can be used by risk managers, analysts, and strategists to develop forward-looking assessments of public policy risks.
As we wrote for Interactive Brokers last year, advanced technology makes it possible to conduct “nowcasting” mechanisms with respect to public policy risks. Quantifying public policy risks and paying attention to daily shifts in policy positioning makes it possible to craft more accurate and forward looking scenario analysis that can, as Bain notes, provide far more meaningful insight into potential risk exposures than traditional backward looking risk measurements.
When one can see risk exposures and evolving policy trajectories more clearly, it also becomes possible to assess more accurately alpha generation and strategic position options.
Knowledge literally delivers the power to see around the corner and make better decisions.
Those interested in how our patented processes provide superior insight and nowcasting capabilities are more than welcome to join our complimentary webinar on Eventbrite later this week (May 21, at 11:30 am EST). We will be using our platform data to identify forward-looking policy trajectories in a range of areas, from AI policy, digital currency, and trade to Brexit, the LIBOR transition, and climate change.
Please join us for an hour of data-driven policy trend projection and interactive components that help you verify whether (or not) you and your team are up-to-speed on the latest technical policy developments underway amid the pandemic. We promise the session will provide you with components to enhance your scenario analysis. To reserve your spot please visit us HERE on EventBrite or click on the image below:
BCMstrategy, Inc. is a technology company bringing the data revolution to policy intelligence by using patented processes to quantify the language of public policy risks. Our PolicyScope platform provides on-demand time series generation for a range of policy issues globally. Our daily COVID19 Report provides insight and policy trend projection to subscribers powered by PolicyScope platform data. For more information, please visit us at: www.policyscope.io or www.bcmstrategy2.com. Interactive Brokers customers can access the daily COVID19 Report directly from their Traders Workstation.