White Paper Reveals Stress Testing Best Practices

Expert Analysis: The Second SCAP Requires a Model Rethink. This Paper Provides It.

Santa Fe, N.M., December 1, 2010 — Strategic Analytics has released a new white paper titled “Best Practices in SCAP Modeling.” Strategic Analytics is a provider of scenario-based forecasting software designed to enable retail lenders to build and manage more profitable and less volatile loan portfolios. The white paper specifically targets retail lending and pertains to institutions that must meet the Federal Reserve’s new stress testing guidelines for banks.

“Through the U.S. mortgage crisis, the first SCAP [Supervisory Capital Assessment Program] stress test in 2009, and the European stress tests in mid-2010, we have learned a great deal about the right way to conduct stress tests for retail loan portfolios,” said Strategic Analytics CEO Dr. Joseph Breeden. “This new white paper captures those insights and makes it available to our clients.”

For the last 12 years, Strategic Analytics has been a leading global provider of forecasting and stress-testing software and services for retail loan portfolios. Retail loans include credit cards, auto loans, mortgages, home equity loans, personal loans, and student loans.

The Federal Reserve announced on November 17 that the nation’s 19 largest bank holding companies will have to pass a second round of stress tests before increasing dividends. The first round of stress tests was conducted in early 2009 in response to the extreme problems that the U.S. mortgage industry was then experiencing. An analysis of retail lending data from around the world has taught the banking industry and its regulators a great deal about what is required for creating believable stress test models.

“The newly available data and insights should be incorporated into retail lending stress test models,” Breeden said. “Retail loans exhibit strong consumer life cycles, management policy changes, and macroeconomic impacts. This makes stress testing a complex problem, and simple models routinely fail. In addition, the Federal Reserve is requiring banks to develop their own scenarios and assess the likelihood of those scenarios occurring. These issues are addressed in the white paper so that banks can improve their stress tests.”

Breeden is well known in the financial services industry, both in the U.S. and abroad. Professor Lyn Thomas of the University of Southampton is one of the world’s leading authorities on retail lending credit risk. He says of Dr. Breeden: “[He] has, through his published research papers and his book, developed his work on dual-time dynamics into a robust, flexible, and verifiable data-based modeling procedure. It has proved particularly effective at including the changes in economic conditions in estimating the credit risk of portfolios on consumer loans and so is ideally suited for Basel-type stress testing.”

“Best Practices in SCAP Compliance” is available now for download from the company’s website at http://www.strategicanalytics.com/whitepaper-request.php.

About Strategic Analytics
Strategic Analytics, part of the Interthinx business unit of Verisk Analytics, provides credit risk and capital management solutions to the world’s leading consumer and mortgage lenders. Designed specifically for the unique challenges in retail credit modeling, the company’s advanced software applications and professional services enable clients to build and manage more profitable and less volatile portfolios, enhance regulatory compliance, and increase shareholder value. Strategic Analytics helps clients to analyze more than $2 trillion in retail loans worldwide. For more information about the company, visit www.strategicanalytics.com.

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Contact:
Rick Grant
570-325-2818
rick.grant@rga-pr.com