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Improving the way consumer credit risk is assessed

Summary of the impact

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.

Submitting Institution

University of Southampton

Unit of Assessment

Business and Management Studies

Summary Impact Type

Economic

Research Subject Area(s)

Mathematical Sciences: Statistics
Economics: Applied Economics
Commerce, Management, Tourism and Services: Banking, Finance and Investment

Increasing insights into Credit Risk of Small and Medium-Sized Enterprises (SMEs)

Summary of the impact

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.

Submitting Institution

University of Edinburgh

Unit of Assessment

Business and Management Studies

Summary Impact Type

Economic

Research Subject Area(s)

Mathematical Sciences: Statistics
Economics: Applied Economics
Commerce, Management, Tourism and Services: Banking, Finance and Investment

Effects of Interactions on Risk

Summary of the impact

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.

Submitting Institution

King's College London

Unit of Assessment

Mathematical Sciences

Summary Impact Type

Economic

Research Subject Area(s)

Mathematical Sciences: Statistics
Economics: Econometrics
Commerce, Management, Tourism and Services: Banking, Finance and Investment

Stochastic models of longevity risk adopted by the pension industry

Summary of the impact

Research carried out by Cairns (Maxwell Institute), Blake (Cass Business School) and Dowd (Nottingham, now Durham) in 2006 produced the `CBD' model for predicting future life expectancy. The CBD model and its extensions developed in 2009 by Cairns and collaborators have had a major impact on pensions and life industry risk management practices: multinational financial institutions [text removed for publication] and other stakeholders have relied on the CBD model to risk assess, price and execute financial deals [text removed for publication] since 2010. CBD is also used by risk management consultants to advise clients, is embedded in both open-source and commercial software, and is used by the UK's Pension Protection Fund to measure and manage longevity risk.

Submitting Institutions

University of Edinburgh,Heriot-Watt University

Unit of Assessment

Mathematical Sciences

Summary Impact Type

Economic

Research Subject Area(s)

Mathematical Sciences: Statistics
Economics: Applied Economics
Commerce, Management, Tourism and Services: Banking, Finance and Investment

Designing the Next Generation of Retail Credit Risk Models

Summary of the impact

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.

Submitting Institution

University of Edinburgh

Unit of Assessment

Business and Management Studies

Summary Impact Type

Economic

Research Subject Area(s)

Economics: Applied Economics, Econometrics
Commerce, Management, Tourism and Services: Banking, Finance and Investment

1: Impact of Research on Financial Crises

Summary of the impact

As part of our commitment to public sociology (see REF3a), we have prioritised making Edinburgh sociological research on financial crises available to wider audiences: financial practitioners, policy makers and interested members of the general public. This has been primarily via six essays by Donald MacKenzie in the London Review of Books (LRB) and two invited articles in the Financial Times, listed in section 5.3. The impact of this research is in enhancing cultural understanding of finance and contributing to critical public debate. Evidence of its significance and reach includes: (a) public recognition (eg Prospect magazine naming MacKenzie amongst the 25 intellectuals with most impact on the "public conversation" about the financial crisis);
(b) articles by others in prominent sources (the Financial Times and Economist) drawing on his work;
(c) use of the Edinburgh University research in a major US corporate lawsuit;
(d) reprints of the LRB articles eg in French and German public affairs magazines, in the booklets accompanying a Swedish exhibition and a Belgian art video, and in two financial-practitioner magazines.

Submitting Institution

University of Edinburgh

Unit of Assessment

Sociology

Summary Impact Type

Societal

Research Subject Area(s)

Economics: Applied Economics, Econometrics
Commerce, Management, Tourism and Services: Banking, Finance and Investment

Convex optimisation in financial risk management

Summary of the impact

Prof. Pennanen and collaborators have developed mathematical models and computational techniques for financial risk management. The techniques allow for quantitative analysis and optimization of financial risk management actions in an uncertain investment environment. The techniques have been used by the State Pension Fund, Ministry of Social Affairs and Health, Bank of Finland and Pension Policy Institute. The techniques have significant impact on practitioners and professional services in increasing the awareness and understanding of long-term financial risks that are difficult to quantify with more traditional techniques. Beneficiaries of the developed risk management techniques include future pensioners and tax payers.

Submitting Institution

King's College London

Unit of Assessment

Mathematical Sciences

Summary Impact Type

Economic

Research Subject Area(s)

Mathematical Sciences: Applied Mathematics, Statistics
Commerce, Management, Tourism and Services: Banking, Finance and Investment

Improved pricing of European natural catastrophe insurance by statistical modelling of storm clustering

Summary of the impact

Statistical modelling of storms by Professor David Stephenson and co-workers in the mathematics institute at the U. of Exeter, has improved the understanding and thereby the pricing of insurance risk due to European windstorms and tropical cyclones. Temporal clustering in these catastrophic natural hazards has been quantified using novel process-based statistical models, which have then been implemented by industry to improve insurance pricing, e.g. on the integrated financial platform used by Willis actuaries to provide a more reliable view of risk as required by EU solvency 2 regulation. This research has also raised awareness in the industry about storm clustering, and has stimulated significant improvements in the main vendor catastrophe models, which are the main tools used by insurance companies to price European windstorm insurance.

Submitting Institution

University of Exeter

Unit of Assessment

Mathematical Sciences

Summary Impact Type

Environmental

Research Subject Area(s)

Mathematical Sciences: Statistics
Earth Sciences: Atmospheric Sciences, Oceanography

Understanding where money comes from and applying credit creation analysis to portfolio management

Summary of the impact

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.

Submitting Institution

University of Southampton

Unit of Assessment

Business and Management Studies

Summary Impact Type

Economic

Research Subject Area(s)

Economics: Applied Economics, Econometrics
Commerce, Management, Tourism and Services: Banking, Finance and Investment

Valuing complex insurance liabilities using least squares Monte Carlo

Summary of the impact

Research by Cathcart, McNeil (both Maxwell Institute) and Morrison (Barrie & Hibbert) during the period 2008-2012 has developed a methodology based on least squares Monte Carlo to value complex insurance liabilities and manage their risks. This methodology has been adopted by Barrie & Hibbert (B&H, part of Moody's Analytics) and has enabled the company to develop an internationally leading proposition for valuing insurance products. This has generated £2.5M in revenue since 2011, through implementation in 5 new products and use in 12 new consulting projects.

Submitting Institutions

University of Edinburgh,Heriot-Watt University

Unit of Assessment

Mathematical Sciences

Summary Impact Type

Economic

Research Subject Area(s)

Mathematical Sciences: Statistics
Economics: Econometrics
Commerce, Management, Tourism and Services: Banking, Finance and Investment

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