Interthinx has announced the availability of its new industry paper entitled “Understanding the Financial Crisis Through Decomposition of Retail Lending Portfolio Performance.” The study, produced by the Interthinx Predictive Analytics group, notes that an improved approach to forecasting and stress testing portfolios against separate origination strategies and economic factors will help lenders determine what percentage of risk is within their control and what is not. The use of time-series decomposition when analyzing retail lending portfolio performance can predict how much future loss will come from the quality of underwriting, age of loans, and economic environmental impacts.
“Understanding the development and progression of the financial crisis through the lens of time-series decomposition of retail lending portfolio performance is crucial to implementing effective regulatory requirements and management practices that may help prevent similar occurrences in the future," said Shane De Zilwa, PhD, director of analytics for Interthinx. “Our findings reveal the importance of distinguishing between origination quality and exogenous environment trends, of measuring loan quality directly rather than using proxies such as traditional estimates of creditworthiness, and of accounting for maturation lag when evaluating origination strategies.”
Michael Smith, chief technology officer and chief architect at Interthinx, said, “More accurate forecasting models that benchmark performance against industry data and stress test under different economic scenarios will help guard against future financial crises. Our study quantifies short-term and long-term factors that contributed to the last consumer credit crisis in the U.S. As the nation embarks on a slow recovery, it’s important to understand the development and progression of the crisis so that we may take the necessary steps to avert similar disruptions in consumer lending in the future. We believe our study supports new and positive business practices for effective consumer lending portfolio management.”
Click here to view “Understanding the Financial Crisis through Decomposition of Retail Lending Portfolio Performance."