Sitting down with three risk and data science experts – Katie Stones, Nevan McBride, and Carl Ireland - we asked them to forecast the pivotal focuses for financial services organisations in 2024.
Watch their risk predictions now, or dive into the key takeaways below.
AFFORDABILITY
Affordability will remain a key focus for lenders. Despite inflation coming down, prices aren’t - they’re just going up less quickly for consumers. The PRA reflect this in their recent Dear CFO letter by prompting firms to scrutinise their models, ensuring affordability is adequately captured in their outputs.
Three key themes from this letter include:
- High inflation data isn't yet integrated into models due to the consistently evolving economic landscape. Because of this, many firms have acknowledged the need for PMAs (Post-Model Adjustments) to get more accurate ECL (Expected Credit Loss) calculations. The PRA have emphasised the importance of not applying a PMA at portfolio-level, but looking at different segments instead – this is because different segments will be affected differently by high inflation. For instance, considerations might revolve around customers with low disposable income or those approaching the conclusion of fixed-term mortgages facing impending rate hikes.
- Employing identified PMA drivers for staging criteria or SICR (Significant Increase in Credit Risk) calculations emerges as a best practice as leveraging PMA data to inform staging logic enhances the accuracy and relevance of these assessments.
- The PRA highlights the need for granular model monitoring to detect early indications of changes in recovery outcomes feeding into LGD models.
IFRS 9
As mentioned, firms have struggled to directly model the heightened affordability risks from high inflation and high interest rates, causing many lenders to look for inventive ways of capturing affordability and vulnerability risks in their ECLs via PMAs. We’d expect some of these innovative techniques to be factored into the IFRS 9 models over the next year, in fact, the innovation team at Jaywing have been looking at alternative ways of modelling the forward-looking requirements of IFRS 9, predominantly by examining the linkage between affordability and ECLs.
Jaywing have been supporting a number of our clients over the last year on model redevelopments, and this has uncovered some key learnings for us, including:
- The data through the COVID and COVID recovery period should not be automatically disregarded, and that efforts should be made to include it within the models where plausible.
- A firm’s impact and sensitivity analysis must be a highly thorough exercise, auditors will be looking for clear explanations for any movements in ECLs due to model redevelopments and firms must comprehensively examine how plausible outcomes and scenarios will affect model outputs.
- Climate change effects must be integrated within IFRS 9 models.
MODEL RISK
We anticipate increased scrutiny on model risk from both auditors and regulators:
- More firms will expand their model risk management frameworks and the regulatory definition of a model will expand model inventories.
- Independent model validators will be in high demand across the industry, potentially causing a challenge for 2024 as we have seen there is a limited pool of suitably experienced people who want to do IMV full time. Firms should plan for this and consider how much validation resource they will need so they can train and up-skill their current staff or consider hiring external support.
Looking ahead, it's evident that firms need to gear up for a proactive approach. Building robust model risk management frameworks, enhancing model validation practices, and attracting skilled professionals will be crucial steps in navigating the evolving landscape of risk and data science in 2024.
OPEN SOURCE TECHNOLOGY
Shoehorning-in a final prediction, Jaywing expects the shift away from traditional programming languages toward open source platforms to keep gaining momentum – primarily driven by cost-effectiveness and the rising wave of tech-savvy analysts proficient in Python and modern software.
At Jaywing, we’re at the forefront of navigating the ever-evolving landscape of risk and data science across the financial services industry and beyond. Our experience of working with many of the UK’s leading lenders offers us unique insights.
If you want to discuss any of these emerging trends and their potential impact on your organisation in 2024, we’re here to help. Email us here to schedule a meeting with us early next year. Let's delve into how these trends could shape your strategies and operations moving forward.