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Author:Canals-Cerda, Jose J. 

Working Paper
Credit risk modeling in segmented portfolios: an application to credit cards

The Great Recession offers a unique opportunity to analyze the performance of credit risk models under conditions of economic stress. We focus on the performance of models of credit risk applied to risk-segmented credit card portfolios. Specifically, we focus on models of default and loss and analyze three important sources of model risk: model selection, model specification, and sample selection. Forecast errors can be significant along any of these three model-risk dimensions. Simple linear regression models are not generally outperformed by more complex or stylized models. The impact of ...
Working Papers , Paper 15-8

Working Paper
Can We Take the “Stress” Out of Stress Testing? Applications of Generalized Structural Equation Modeling to Consumer Finance

Financial firms, and banks in particular, rely heavily on complex suites of interrelated statistical models in their risk management and business reporting infrastructures. Statistical model infrastructures are often developed using a piecemeal approach to model building, in which different components are developed and validated separately. This type of modeling framework has significant limitations at each stage of the model management life cycle, from development and documentation to validation, production, and redevelopment. We propose an empirical framework, spurred by recent developments ...
Working Papers , Paper 21-01

Working Paper
Who Provides Credit in Times of Crisis? Evidence from the Auto Loan Market

We examine the contribution of different lending channels to the auto loan market in times of crisis. Specifically, we explore lending from traditional banks, credit unions, and finance companies (nonbanks) over the past two decades, with an emphasis on the Great Recession and the COVID-19 pandemic. We find that banks provided weak support during the pandemic, thus losing market share and continuing the trend that emerged following the Great Recession. Nonbank market share during this period grew most significantly for subprime borrowers and in counties with stronger bank dependence. Survey ...
Working Papers , Paper 25-06

Report
Summary of the Workshop on Credit Card Lending and Payments

The Federal Reserve Bank of Philadelphia’s Supervisory Research Forum (SURF) and Consumer Finance Institute (CFI) held the virtual Workshop on Credit Card Lending and Payments on September 16‒17, 2020. The workshop included sessions on payment systems and financial innovation, the COVID-19 pandemic's impact on consumer finance and credit use, and the industry impact of machine learning and artificial intelligence (ML/AI). This summary offers highlights of keynote speakers, academic paper presentations, and discussion panels.
Consumer Finance Institute conference summaries

Working Paper
CECL Implementation and Model Risk in Uncertain Times: An Application to Consumer Finance

I examine the challenges of economic forecasting and model misspecification errors confronted by financial institutions implementing the novel current expected credit loss (CECL) allowance methodology and its impact on model risk and bias in CECL projections. We document the increased sensitivity to model and macroeconomic forecasting error of the CECL framework with respect to the incurred loss framework that it replaces. An empirical application illustrates how to leverage simple machine learning (ML) strategies and statistical principles in the design of a nimble and flexible CECL modeling ...
Working Papers , Paper 24-03

Working Paper
From Incurred Loss to Current Expected Credit Loss (CECL): A Forensic Analysis of the Allowance for Loan Losses in Unconditionally Cancelable Credit Card Portfolios

The Current Expected Credit Loss (CECL) framework represents a new approach for calculating the allowance for credit losses. Credit cards are the most common form of revolving consumer credit and are likely to present conceptual and modeling challenges during CECL implementation. We look back at nine years of account-level credit card data, starting with 2008, over a time period encompassing the bulk of the Great Recession as well as several years of economic recovery. We analyze the performance of the CECL framework under plausible assumptions about allocations of future payments to existing ...
Working Papers , Paper 20-09

Discussion Paper
Climate Change and Consumer Finance: A Very Brief Literature Review

Extant research shows that climate change can impose significant costs on consumers’ wealth and finances. Both sea-level rise and flooding from hurricane events led to high price declines and thus wealth loss for homes in coastal areas or in disaster-struck areas, with effects lingering for a number of years in some cases. In terms of consumer finance, while the average consumer is not always significantly negatively affected by a disaster, the vulnerable groups (those with low credit scores and who are low income) can be severely affected, experiencing higher rates of delinquencies and ...
Consumer Finance Institute discussion papers , Paper 21-04

Working Paper
Credit risk analysis of credit card portfolios under economic stress conditions

We develop an empirical framework for the credit risk analysis of a generic portfolio of revolving credit accounts and apply it to analyze a representative panel data set of credit card accounts from a credit bureau. These data cover the period of the most recent deep recession and provide the opportunity to analyze the performance of such a portfolio under significant economic stress conditions. We consider a traditional framework for the analysis of credit risk where the probability of default (PD), loss given default (LGD), and exposure at default (EAD) are explicitly considered. The ...
Working Papers , Paper 12-18

Working Paper
ENDOGENOUS/EXOGENOUS SEGMENTATION IN THE A-IRB FRAMEWORK AND THE PRO-CYCLICALITY OF CAPITAL: AN APPLICATION TO MORTGAGE PORTFOLIOS

This paper investigates the pro-cyclicality of capital in the advanced internal ratings-based (A-IRB) Basel approach for retail portfolios and identifies the fundamental assumptions required for stable A-IRB risk weights over the economic cycle. Specifically, it distinguishes between endogenous and exogenous segmentation risk drivers and, through application to a portfolio of first mortgages, shows that risk weights remain stable over the economic cycle when the segmentation scheme is derived using exogenous risk drivers, while segmentation schemes that include endogenous risk drivers are ...
Working Papers , Paper 17-9

Working Paper
From Incurred Loss to Current Expected Credit Loss (CECL): Forensic Analysis of the Allowance for Loan Losses in nconditionally Cancelable Credit Card Portfolios

The Current Expected Credit Loss (CECL) framework represents a new approach for calculating the allowance for credit losses. Credit cards are the most common form of revolving consumer credit and are likely to present conceptual and modeling challenges during CECL implementation. We look back at nine years of account level credit card data, starting with 2008, over a time period encompassing the bulk of the Great Recession as well as several years of economic recovery. We analyze the performance of the CECL framework under plausible assumptions about allocations of future payments to existing ...
Working Papers , Paper 19-8

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