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Research on risk assessment of SMEs conducted at the University of Edinburgh Business School (2005-current) in conjunction with the international credit industry has improved understanding of SME behaviour with a view to assisting lending bodies in their decision-making. It has led to refinements in the process of developing commercial credit risk models by providing valuable additional details to enhance existing models. It has developed methodologies now used by some of the leading lenders [text removed for publication] to cut the cost of providing credit, thereby making more credit available to SMEs. The reach of the work has extended across 349 credit practitioners from 38 countries.
Credit scoring, the process of estimating the risk of lending to consumers, has traditionally estimated the likelihood of default over a fixed period, usually 12 months. Research carried out at Southampton's School of Management has led to a gradual shift by many financial institutions in the UK and elsewhere towards an alternative method that estimates default over any period. This approach provides accurate risk estimates over any time period. It also allows for the inclusion in the "scorecard" of economic conditions and the lending rates charged — features whose absence from previous scorecards was identified as contributing to the sub-prime mortgage crisis.
Research carried out at the University of Southampton into banking, economic growth and development has made Professor Richard Werner a trusted source of advice for economic policy-makers at the highest level, for example for the Financial Services Authority, the Independent Banking Commission, the International Monetary Fund and the Bank of England. Through articles, books and many media contributions, he has promoted a greater public understanding of economics and the financial crisis. His credit creation analysis has also been adopted by two investment funds in their portfolio management, leading to financial gains for investors, outperforming the FTSE100.
A portfolio of research on the structure, conduct and performance of credit unions has led to the following impacts:
Professor Wilson's research has increased understanding of how credit unions have developed in different countries, with the intention of informing policy around these institutions. Such work is especially important in the aftermath of the financial crisis in 2008, as many countries seek to strengthen their retail financial sectors. The research has had wide-ranging impact internationally on the ways in which policy makers, regulators and practitioners view the sector. Specifically, as part of the Irish Commission on Credit Unions, Wilson's work was taken up in reports which made a raft of recommendations that were later adopted to form the basis for new legislation (Credit Union and Co-operation with Overseas Regulators Act 2012). This new legislation in turn has affected the governance, regulation, stabilisation policy and structure of the credit union sector in Ireland.
Research carried out by members of the Credit Research Centre (CRC) at the University of Edinburgh has changed the way that credit risk modelling teams in major multinational retail banks think about and model the probability that an applicant will default on a loan. Such models are used monthly to assess the risk associated with most of the 58 million credit cards in the UK and hundreds of millions of credit cards elsewhere in the world. The research has also changed the way banks model a crucial parameter in the amount of capital they have to hold to comply with international regulations, and has allayed their concerns about estimating models based on only samples of previously accepted applicants.
Research of Professor Brigo in the areas of credit risk, pricing models for the valuation of counterparty risk, and the development of accurate calibration methods of various credit risk models has generated significant impact both on public policy and on practitioners and professional services. His models were implemented and his calibration methods adopted in the financial industry. The significance attached to his work by the industry also resulted in a collaboration with the German regulator (BAFIN). Further evidence of his impact can be found in the fact that a Court of Law based its analysis in a financial intermediation case on Brigo's research.
The UK Survey of SME Finances (UKSMEF) was conceived and developed by Dr W.S. Fraser to provide policy makers, and other users of the research, with a detailed analysis of SMEs, their owners and the availability and cost of finance. This innovative UKSMEF project has had sustained and on-going impact, playing an essential part in informing national policy to address the financing of the SME sector, and has resulted in providing SMEs with better access to finance opportunities, as well as leading to initiatives such as the Enterprise Finance Guarantee and the Ethnic Minority Business Taskforce. As a result new sources of finance for SMEs have been created and the UKSMEF has provided an on-going evidence base for policy-makers, aiding decision making and policy development.
Research by Reimer Kühn (RK) and collaborators has produced a framework to study and quantify the influence of interactions on risk in complex systems, including default risk in economy-wide networks of financial exposures. This work has had impact on practitioners and professional services dealing with financial risk, including research groups at central banks, who — partly in response to the recent financial crisis — have adopted such network oriented approaches to analyse and quantify systemic risk. The Financial Stability Division at the Bank of England has, for instance, developed refined versions of the network-oriented models proposed by Kühn and collaborators to specifically assess risk in the British banking system.
This case study describes impact resulting from research on assessing the performance of credit scoring models conducted by the Consumer Credit / Retail Banking Research Group of the Mathematics Department at Imperial College. The group's work has influenced both high-level industry strategies for developing scoring models, and also low-level performance measures for which such models are developed, refined and evaluated. We describe examples of companies or bodies that have benefitted from improved credit scoring models, including Prescient Models (a US credit scoring company), Experian and the US Office of the Comptroller of Currency. The group has established a very significant reputation for a wide range of commercially valuable work in this area — to the extent that the group received the major Credit Collections and Risk industry award for Contributions to the Credit Industry in 2012.