Case Study: Risk Management - Predictive Analytics

Background:One of the leading banks wanted to evaluate the life-time loss of their mortgage portfolio and track the potential loss over time. The bank could face the prospect of loss on two counts, namely default of a loan and prepayment of a loan. Evaluating the losses arising out of each of these two events is essential as it enabled the bank to mitigate their risk factor for future loan origination as well as estimating the capital reserves required for the bank’s portfolio over time.

Approach:Competing hazard risk model was used to evaluate the propensity of default/prepayment of a loan over its tenure. The model incorporated macro-economic factors like home price index, unemployment rate, fed fund rate etc, apart from customer level variables like credit score, disposable income and other such significant variables.

Impact: The client was able to monitor a $ 15 billion portfolio in a regulated way and kept tabs on estimated potential loss amounting to $10 million from the portfolio with changing macro-economic situation. The model also helped track the actual losses resulting from the default of mortgages vis-à-vis the forecasted losses.

Customer Default & Pre-Payment of Loan