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Documentos de Profesional
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2010
Enterprise risk management (ERM) has become an important topic in todays more complex, interrelated
global business environment, replete with threats from natural, political, economic, and technical sources.
Banks especially face financial risks, as the news makes ever more apparent in 2008. This paper demonstrates
support to risk management through validation of predictive scorecards for a large bank. The bank developed
a model to assess account creditworthiness. The model is validated and compared to credit bureau scores.
Alternative methods of risk measurement are compared.
Journal of the Operational Research Society (2010) 61, 179 190. doi:10.1057/jors.2008.144
Published online 7 January 2009
Keywords: enterprise risk management; model risk management; credit risk; statistical analysis
1. Introduction
The concept of enterprise risk management (ERM) developed
in the mid-1990s in industry, expressing a managerial focus.
ERM is a systematic, integrated approach to managing all
risks facing an organization (Dickinson, 2001). It has been
encouraged by traumatic recent events such as 9/11/2001 and
business scandals to include Enron and WorldCom (Baranoff,
2004). A Tillinghast-Towers Perrin survey (Miccolis, 2003)
reported that nearly half of the insurance industry used an
ERM process (with another 40% planning to do so), and
40% had a chief risk officer. But consideration of risk has
always been with business, manifesting itself in medieval
coffee houses such as Lloyds of London, spreading risk
related to cargos on the high seas. Businesses exist to cope
with specific risks efficiently. Uncertainty creates opportunities for businesses to make profits. Outsourcing offers many
benefits, but also has a high level of inherent risk. ERM seeks
to provide means to recognize and mitigate risks. The field
of insurance was developed to cover a wide variety of risks,
related to external and internal risks covering natural catastrophes, accidents, human error, and even fraud. Financial
risk has been controlled through hedge funds and other tools
over the years, often by investment banks. With time, it was
realized that many risks could be prevented, or their impact
reduced, through loss-prevention and control systems, leading
to a broader view of risk management.
The subprime crisis makes companies increasingly stringent about the effective functions of ERM. The failure of the
Correspondence: Desheng Dash Wu, RiskLab, University of Toronto, 105
St. George Street, Toronto, Canada M5S 3E6.
E-mail: dash@ru.is
2. Risk modelling
It is essential to use models to handle risk in enterprises. Risktackling models can be (1) an analytical method for valuing
instruments, measuring risk and/or attributing regulatory or
economic capital; (2) an advanced or complex statistical or
econometric method for parameter estimation or calibration
used in the above; or (3) a statistical or analytical method for
credit risk rating or scoring.
The Committee of Sponsoring Organizations of the
Treadway Committee (COSO) is an organization formed
to improve financial reporting in the US. COSO decided
ERM was important for accurate financial reporting in 1999
(Levinsohn, 2004). Smiechewicz (2001) reviewed COSO
focuses on ERM. The tools of risk management can include
creative risk financing solutions, blending financial, insurance
and capital market strategies (AIG, as reported by Baranoff,
180
Table 1
Perspectives
Goals
Measures
Financial
Survive
Succeed
Prosper
Cash flow
Quarterly sales, growth, operating income by division
Increase in market share, Increase in Return on Equity
Customer
New products
Responsive supply
Preferred suppliers
Customer partnerships
Internal business
Technology capability
Manufacturing excellence
Design productivity
New product innovation
Technology leadership
Manufacturing learning
Product focus
Time to market
Table 2
181
Model
Model risk
Figure 1
Illustration of divergence.
182
Figure 2
Table 3
Illustration of KS statistics.
Scorecard
Beacon
Beacon/Empirical
Scorecard
(No Bureau score)
Bureau 1
Bureau 2
Good
N
Mean
Std. dev
26 783
250
24
25 945
734
55
26 110
734
55
673
222
22
26 783
42
9
26 783
208
21
Bad
N
Mean
Std. dev
317
228
23
292
685
55
296
685
55
21
204
13
317
40
9
317
188
22
Total
N
Mean
Std. dev
27 100
249
24
26 237
733
55
26 406
733
55
694
221
22
27 100
42
9
27 100
207
21
m
i=1
Table 4
183
Scorecard
Beacon
Beacon/Empirical
Scorecard
(No Bureau score)
Bureau 1
Bureau 2
Good
N
Mean
Std. dev
20 849
248
24
20 214
728
54
20 302
728
54
547
222
23
20 849
42
9
20 849
206
21
Bad
N
Mean
Std. dev
307
231
23
296
691
55
297
692
55
10
208
12
307
40
9
307
191
22
Total
N
Mean
Std. dev
21 256
248
24
20 510
727
54
20 599
727
54
557
222
22
21 156
42
9
21 156
206
21
Table 5
Scorecard
Beacon
Beacon/Empirical
Scorecard
(No Bureau score)
Bureau 1
Bureau 2
Good
N
Mean
Std. dev
23 941
246
24
23 254
723
54
23 361
723
54
580
223
21
23 941
41
9
23 941
205
21
Bad
N
Mean
Std. dev
533
225
21
490
683
51
495
683
51
38
216
16
533
38
9
533
187
20
Total
N
Mean
Std. dev
24 474
245
24
23 744
723
54
23 856
723
54
618
222
20
24 474
41
9
24 474
204
21
Table 6
Time
Statistic
Scorecard
Beacon
KS value
Divergence
Bad%
39
0.869
1.17
37
0.792
1.11
KS value
Divergence
Bad%
33
0.528
1.45
KS value
Divergence
Bad%
38
0.843
2.18
Scorecard
Bureau 1
Bureau 2
37
0.79
1.12
44
0.877
3.03
14
0.07
1.17
36
0.814
1.17
26
0.45
1.44
26
0.435
1.44
42
0.624
1.8
10
0.04
1.45
29
0.498
1.45
33
0.606
2.05
33
0.598
2.07
26
0.147
6.15
14
0.078
2.18
34
0.789
2.18
Beacon/Empirical
184
Figure 3
Figure 4
Figure 5
Figure 6
185
37
25
30
37
42
46
49
48
48
46
40
37
38
527 207
< 170
170179
180189
190199
200209
210219
220229
230239
240249
250259
260269
270279
> 280
Total
72 925
1430
1209
1888
3284
4885
5735
6716
7543
8762
9121
8826
8310
5216
(3)
JanJun 99 #
100
7.13
4.76
5.83
7.04
7.98
8.79
9.31
9.21
9.11
8.73
7.69
7.20
7.22
(4)
FICO
development %
100
1.96
1.66
2.59
4.50
6.70
7.86
9.21
10.34
12.02
12.51
12.10
11.40
7.15
(5)
JanJun 99 %
0.0517
0.0310
0.0324
0.0254
0.0128
0.0093
0.0010
0.0113
0.0290
0.0378
0.0441
0.0420
0.0006
(6)
Proportion
change (5)(4)
0.2749
0.3483
0.4440
0.6394
0.8398
0.8944
0.9895
1.1226
1.3187
1.4328
1.5739
1.5835
0.9910
(7)
Ratio (5)/(4)
1.2912
1.0546
0.8119
0.4471
0.1746
0.1116
0.0106
0.1156
0.2767
0.3596
0.4535
0.4596
0.0090
(8)
Weight of
evidence in (7)
527 207
68 351
1447
1352
2106
3609
5452
6169
7009
7454
7908
7774
7362
6716
3993
(3)
JulyDec 99 #
100
7.13
4.76
5.83
7.04
7.98
8.79
9.31
9.21
9.11
8.73
7.69
7.20
7.22
(4)
FICO
development %
Total
37
25
30
37
42
46
49
48
48
46
40
37
38
< 170
170179
180189
190199
200209
210219
220229
230239
240249
250259
260269
270279
> 280
601
093
742
128
055
355
068
577
034
023
541
940
050
(2)
FICO
development #
(1)
Score range
100
2.12
1.98
3.08
5.28
7.98
9.03
10.25
10.91
11.57
11.37
10.77
9.83
5.84
(5)
JulyDec 99 #
0.0502
0.0278
0.0275
0.0176
0.0000
0.0023
0.0095
0.0169
0.0246
0.0264
0.0308
0.0263
0.0138
(6)
Proportion
change (5)(4)
0.2968
0.4156
0.5284
0.7498
0.9999
1.0265
1.1018
1.1836
1.2699
1.3029
1.4007
1.3654
0.8094
(7)
Ratio (5)/(4)
1.2146
0.8781
0.6379
0.2880
0.0001
0.0261
0.0969
0.1685
0.2389
0.2646
0.3370
0.3114
0.2114
(8)
Weight of
evidence in (7)
0.1461
0.0609
0.0244
0.0175
0.0051
0.0000
0.0001
0.0009
0.0029
0.0059
0.0070
0.0104
0.0082
0.0029
(9)
Contribution
to index (8)(6)
0.2027
0.0668
0.0327
0.0263
0.0114
0.0022
0.0010
0.0000
0.0013
0.0080
0.0136
0.0200
0.0193
0.0000
(9)
Contribution
to index (8)(6)
601
093
742
128
055
355
068
577
034
023
541
940
050
(2)
FICO
development #
(1)
Score range
7.13
11.89
17.72
24.77
32.74
41.53
50.84
60.06
69.17
77.90
85.59
92.78
100.00
(10)
Ascending cumulative
of FICO %
7.13
11.89
17.72
24.77
32.74
41.53
50.84
60.06
69.17
77.90
85.59
92.78
100.00
(10)
Ascending cumulative
of FICO %
2.12
4.10
7.18
12.46
20.43
29.46
39.71
50.62
62.19
73.56
84.33
94.16
100.00
(11)
Ascending cumulative
of JulyDec 99 #
1.96
3.62
6.21
10.71
17.41
25.27
34.48
44.83
56.84
69.35
81.45
92.85
100.00
(11)
Ascending cumulative
of JanJun 99 %
186
Journal of the Operational Research Society Vol. 61, No. 2
2.46
4.80
8.80
14.91
23.20
32.40
42.92
54.10
65.28
76.06
86.07
94.67
100.00
0.1036
7.13
11.89
17.72
24.77
32.74
41.53
50.84
60.06
69.17
77.90
85.59
92.78
100.00
0.0498
0.0171
0.0069
0.0013
0.0001
0.0002
0.0015
0.0038
0.0043
0.0043
0.0061
0.0025
0.0057
37
25
30
37
42
46
49
48
48
46
40
37
38
527 207
< 170
170179
180189
190199
200209
210219
220229
230239
240249
250259
260269
270279
> 280
Total
100
78 403
100
0.3448
0.4925
0.6859
0.8664
1.0401
1.0462
1.1306
1.2129
1.2276
1.2348
1.3020
1.1939
0.7391
7.13
4.76
5.83
7.04
7.98
8.79
9.31
9.21
9.11
8.73
7.69
7.20
7.22
(2)
(1)
601
093
742
128
055
355
068
577
034
023
541
940
050
1928
1838
3136
4784
6505
7212
8250
8762
8769
8451
7850
6736
4182
2.46
2.34
4.00
6.10
8.30
9.20
10.52
11.18
11.18
10.78
10.01
8.59
5.33
0.0467
0.0242
0.0183
0.0094
0.0032
0.0041
0.0122
0.0196
0.0207
0.0205
0.0232
0.0140
0.0188
1.0648
0.7082
0.3770
0.1434
0.0393
0.0451
0.1227
0.1930
0.2050
0.2109
0.2639
0.1772
0.3024
(11)
(10)
(9)
(8)
(7)
(6)
(4)
(3)
(5)
Weight of
evidence in (7)
Ratio (5)/(4)
Proportion
change (5)(4)
JanJun 00 %
FICO
development %
JanJun 00 #
FICO
development #
Score range
Contribution
to index (8)(6)
Ascending cumulative
of FICO %
Ascending cumulative
of JanJun 00 %
187
188
0.10
0.100.25
0.0959
Contribution
index
0.10
0.0962
0.1097
Aug-00
Sep-00
0.0940
0.0926 0.0693
0.0656
0.1313 0.1236
Figure 7
Figure 8
0.0979 0.0829
0.0907
0.0816 0.0817
0.0915
0.0771
definition of FICO score) development sample, Jan-99 to Jun99, Jul-99 to Dec-99, and Jan-00 to Jul-00 (see Figures 7
and 8). From Figure 8, we can see a very notable population
shift across the samples where the recent applicants clearly
were scoring lower points than before. On the other hand,
the development sample was markedly distinct from the three
selected samples from three time slots.
for each of the above three selected sample from three time
slots, included funded accounts only. Computation shows that
the indexes for the three time slots on funded accounts are
greater than 0.1, and the more recent samples scores a lower
index than the older samples: 0.2027 for the Jan-99 to Jun-99
sample, 0.1461 for the Jul-99 to Dec-99 sample, and 0.1036
for the Jan-00 to Jun-00 sample. We also compute the monthly
population stability which shows the monthly index for total
applications (funded or not funded) in the past 2 years starting
from Jan-00. This result further confirms on the declining
trend with the monthly indexes for the past 20 months all rest
within 0.1 (see Table 10).
As indicated in Figures 7 and 8, more of the latest sample
accounts were having a lower score compared to the older
samples. A tendency of lower score over time has been
revealed. All of the three samples from three time slots had
a score distribution higher than the Development sample.
The stability indices revealed that the greatest population
shift occurred when the Scorecard was originally put in place,
then the extent of shift reduced gradually across time. The
indexes stayed within 0.1 for the past 20 months.
References
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CVaR constraints on portfolio selection with the mean-variance
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Anders U and Sandstedt M (2003). An operational risk scorecard
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189
190
(b) Good accounts were defined as those that did not meet
the bad definition.
(c) Credit score is a number that is based on a statistical
analysis of a persons credit report, and is used to represent
the creditworthiness of that personthe likelihood that
the person will pay his or her debts.
(d) A credit bureau is a company that collects information from various sources and provides consumer credit
information on individual consumers for a variety of
uses.