How Costly is Noise? Data and Disparities in Consumer Credit

Link: https://arxiv.org/abs/2105.07554

Cite:


arXiv:2105.07554
 [econ.GN]

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Abstract:

We show that lenders face more uncertainty when assessing default risk of historically under-served groups in US credit markets and that this information disparity is a quantitatively important driver of inefficient and unequal credit market outcomes. We first document that widely used credit scores are statistically noisier indicators of default risk for historically under-served groups. This noise emerges primarily through the explanatory power of the underlying credit report data (e.g., thin credit files), not through issues with model fit (e.g., the inability to include protected class in the scoring model). Estimating a structural model of lending with heterogeneity in information, we quantify the gains from addressing these information disparities for the US mortgage market. We find that equalizing the precision of credit scores can reduce disparities in approval rates and in credit misallocation for disadvantaged groups by approximately half.

Author(s): Laura Blattner, Scott Nelson

Publication Date: 17 May 2021

Publication Site: arXiv

Bias isn’t the only problem with credit scores—and no, AI can’t help

Link: https://www.technologyreview.com/2021/06/17/1026519/racial-bias-noisy-data-credit-scores-mortgage-loans-fairness-machine-learning/

Excerpt:

But in the biggest ever study of real-world mortgage data, economists Laura Blattner at Stanford University and Scott Nelson at the University of Chicago show that differences in mortgage approval between minority and majority groups is not just down to bias, but to the fact that minority and low-income groups have less data in their credit histories.

This means that when this data is used to calculate a credit score and this credit score used to make a prediction on loan default, then that prediction will be less precise. It is this lack of precision that leads to inequality, not just bias.

…..

But Blattner and Nelson show that adjusting for bias had no effect. They found that a minority applicant’s score of 620 was indeed a poor proxy for her creditworthiness but that this was because the error could go both ways: a 620 might be 625, or it might be 615.

Author(s): Will Douglas Heaven

Publication Date: 17 June 2021

Publication Site: MIT Tech Review

Sovereign Defaults Hit Record in 2020; More Are Possible

Link: https://www.fitchratings.com/research/sovereigns/sovereign-defaults-hit-record-in-2020-more-are-possible-08-06-2021

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Excerpt:

The sovereign issuer-based default rate rose to a record high in 2020 against a backdrop of weakened sovereign credit profiles due to the Covid-19 pandemic, Fitch Ratings says. Downgrade pressures have eased this year, but our ratings indicate that more defaults are possible.

Fitch’s recent Sovereign 2020 Transition and Default Study shows that five Fitch-rated sovereigns defaulted in 2020, up from only one in the previous year. As a result, the sovereign default rate rose more than threefold to 4.2% from 0.9% in 2019. The previous high was 1.8% in both 2016 and 2017.

Publication Date: 8 June 2021

Publication Site: Fitch Ratings

ACLI Webinar Series: Navigating Credit Trends and Market Challenges

Video:

ACLI learning link: https://learning.acli.com/product?p=acli-webinar-series-navigating-credit-trends-and-market-challenges

Description:

It seems that not a week goes by without an announcement of another merger/acquisition transaction in the life insurance industry. With an overlay of persistent capital market volatility and a sharply increased focus on ESG risk factors, life insurance executives will have their plates full of challenges for the balance of 2021. Whether large national carriers or smaller regional players, virtually every life company will experience changes in their operating environment. Our panelists will share their perspectives on how these trends will shape the insurance markets and discuss the implications for credit and risk management.

Author(s): Peter Giacone, KBRA; Celeste Guth, Erinn King, David Marcinek

Publication Date: 13 May 2021

Publication Site: ACLI on Vimeo

Bidenomics Takes Root in Europe’s Economically Fragile South

Link: https://www.wsj.com/articles/bidenomics-takes-root-in-europes-economically-fragile-south-11620039617

Excerpt:

Since the 1990s, Italian leaders have tried to overhaul the sclerotic economy while also running tight budgets. Mr. Draghi is the first in decades who can deploy massive fiscal firepower to help.

Italy’s economy has rarely grown by more than 1% annually over the past quarter-century. The economy has never fully recovered from the global financial crisis and subsequent eurozone crisis, and slumped by another 9% in 2020 amid the pandemic and strict lockdowns.

Germany, France and other EU countries backed the recovery fund mainly for fear that Italy and Southern Europe could get stuck in another deep economic slump that once again tests the cohesion and survival of the eurozone.

….

Most of Greece’s debt is in bailout loans from the rest of the eurozone, with no repayments due for many years, making another Greek debt crisis unlikely for a long time.

Author(s): Giovanni Legorano

Publication Date: 3 May 2021

Publication Site: Wall Street Journal

Moody’s: New Chicago firefighter pension law is “credit negative”

Link: https://capitolfax.com/2021/04/12/moodys-new-chicago-firefighter-pension-law-is-credit-negative/

Excerpt:

House Bill 2451 eliminates a formula based on birth date that provided lower pension COLAs to certain retired firefighters. As a result of the new law, all retirees that are considered “Tier 1” members of the FABF will now receive a 3% COLA annually on their pension, with no cumulative cap. Before House Bill 2451, retired firefighters in Tier 1 would have received a 1.5% COLA, subject to a 30% cumulative cap, if born on or after January 1, 1966. Members of the FABF receive Tier 1 benefits if hired before January 1, 2011, while those hired on or after January 1, 2011 receive less generous Tier 2 pension benefits.

One potentially advantageous effect of House Bill 2451 is that it forces immediate recognition of 3% COLAs for Tier 1 members. The state law governing Chicago firefighter pension COLAs has been amended on several occasions in the past to alter the birth date that would determine eligibility of a Tier 1 retiree for a 3% COLA versus a 1.5% COLA. The most recent such change occurred in 2016, when the law was updated to provide a 3% COLA to all Tier 1 firefighters born before January 1, 1966, compared to January 1, 1955, before the change. That change, in addition to several other provisions, triggered a roughly $227 million (4.5%) increase to the actuarial accrued liability reported by the FABF as of the December 2016 actuarial snapshot.

Author(s): Rich Miller

Publication Date: 12 April 2021

Publication Site: Capitol Fax

The End of Joe Biden’s Student Debt Prison May Be in Sight

Link: https://jacobinmag.com/2021/04/biden-student-debt-loan-forgiveness-bankruptcy

Excerpt:

Bankruptcy courts have not been friendly to student borrowers. That’s at least partly attributable to Biden. In 2005, “the senator from MBNA,” so named for his close relationship with the credit card company that was also his largest donor, was one of eighteen Senate Democrats who backed a successful Republican-led bankruptcy reform bill that stripped private student loans of bankruptcy protection amid an explosion of private loan debt.

“He is a zealous advocate on behalf of one of his biggest contributors — the financial services industry,” Senator Elizabeth Warren (D-MA) said of Biden at the time.

For his part, Biden argued the law was necessary to prevent abuse of the system by borrowers who could afford to repay some of their debt. He and other supporters of the bankruptcy bill claimed the legislation would enable private lenders to lower costs for people seeking credit. But both arguments were ultimately proven wrong — abuse was minimal, and interest rates in general did not go down. Instead, the law resulted in a system that leaves borrowers with few options for relief.

Author(s): Walker Bragman

Publication Date: 8 April 2021

Publication Site: Jacobin Magazine

Bricks Without Straw?

Link: https://www.rstreet.org/2021/03/30/bricks-without-straw/

Excerpt:

Credit analytics firm FICO posits that the reason for the correlation of credit history and claim probability is that “individuals who closely and cautiously monitor and manage their finances tend to also take better care of their cars and homes and are, generally, more diligent in their risk management habits.” Because such individuals are found across demographic classifications, the discrimination argument becomes hard to uphold.

If insurers find that credit scores have bearing on accident propensity, insurers should be allowed to use them. Preventing insurers from deploying basic tools required to generate appropriate risk-adjusted prices leads to mispricing of risk, harming insurance buyers as well as insurers. What is more, such deprivation leads to unintended negative consequences—an unfair socialization of risk, leaving customers either overcharged or undercharged. Executive fiat prohibiting insurers from accessing the tools of their trade is tantamount to Pharaoh ordering the Israelites of old to make bricks without straw. Bad business, bad policy.

Author(s): Jerry Theodorou

Publication Date: 30 March 2021

Publication Site: R Street

Moody’s warns pension benefit increase for Chicago firefighters a ‘credit negative’ – Quicktake

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Excerpt:

Anybody who’s been following Chicago knows the last thing the city needs is more debt. Chicagoans are being swamped by pension debts, already the biggest per-capita burden of any major city in the country. By signing the new legislation into law, Pritzker has shoved more debt onto ordinary Chicagoans.

Not surprisingly, Moody’s has called the action “credit negative…because it will cause the city’s reported unfunded pension liabilities, and thus its annual contribution requirements, to rise.”

…..

Two important facts to note about the city’s pension shortfalls. First, Chicago officially says its four city-run pension funds – police, fire, municipal and laborers – are short by some $31 billion. But Moody’s puts the number at nearly $47 billion using more realistic, market-based assumptions. 

Second, those debt numbers don’t include the Chicago Public Schools. When you add its $23 billion (Moody’s, 2018) pension shortfall, the total burden on Chicagoans for Chicago-only debts jumps to $70 billion. Divvy that between Chicago’s 1.04 million households and you’re talking about $67,000 in debt each. And that number far underestimates the real household burden considering nearly 20 percent of the city’s population don’t have the means to contribute a dime to that pension shortfall. 

Publication Date: 10 April 2021

Publication Site: Wirepoints

Office of Financial Research Annual Report to Congress, 2020

Link: https://www.financialresearch.gov/annual-reports/files/OFR-Annual-Report-2020.pdf

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Excerpt:

There remains a striking contrast between the quick recovery of financial markets and the slower recovery of the economy, which experienced the highest unemployment rate since World War II (see Figures 5 and 6). The possibility remains for heavy ongoing credit losses and failures. Consumer spending and business investment face pervasive uncertainty about the course of the pandemic and its consequences.

Date Accessed: 6 April 2021

Publication Site: Office of Financial Research

Federal Reserve to End Emergency Capital Relief for Big Banks

Link: https://www.wsj.com/articles/federal-reserve-to-end-emergency-capital-relief-for-big-banks-11616158811

Excerpt:

The Federal Reserve said it was ending a yearlong reprieve that had eased capital requirements for big banks, disappointing Wall Street firms that had lobbied for an extension.

Friday’s decision means banks will lose the temporary ability to exclude Treasurys and deposits held at the central bank from lenders’ so-called supplementary leverage ratio. The ratio measures capital — funds that banks raise from investors, earn through profits and use to absorb losses — as a percentage of loans and other assets. Without the exclusion, Treasurys and deposits count as assets. That will likely force banks to hold more capital or reduce their holdings of those assets, both of which could ripple through markets.

Analysts have been keying on the issue, which is widely viewed on Wall Street as carrying potential implications for markets from bonds to stocks to commodities.

Author(s): Andrew Ackerman, David Benoit

Publication Date: 19 March 2021

Publication Site: Wall Street Journal

Aldermen Vow to Keep Pressure on Banks that Hold the City’s Cash to Lend Equitably

Link: https://news.wttw.com/2021/03/22/aldermen-vow-keep-pressure-banks-hold-city-s-cash-lend-equitably#new_tab

Excerpt:

Aldermen endorsed a measure Monday that would allow the city to expand the number of banks authorized to hold its cash — even as city officials vowed to keep pressuring financial institutions to do a better job lending to Black and Latino Chicagoans.

Led by Ald. Harry Osterman (48th Ward), the chair of the City Council’s Housing Committee, and Treasurer Melissa Conyears-Ervin, city officials plan to form a task force and a working group to draft new requirements for banks to meet if they want to keep the city’s lucrative business.

Author(s): Heather Cherone

Publication Date: 22 March 2021

Publication Site: WTTW News