Jim Goodnight, who co-founded Cary, N.C., analytics software company SAS Institute in 1976 and has been its CEO ever since, came to New York Wednesday to tell journalists about the company's high-performance and visual analytics software. Goodnight's conversation with Bank Technology News veered toward the efficacy of risk models.
BTN: What's the state of the art in analytics right now?
Goodnight: High performance analytics. That's a very big push right now in banking. If you can make the modelers much more productive, running 10 to 100 more models to make the very best investment they can find, instead of running 4-5 times in a week, that can make a big difference in banks.
BTN: Wall Street firms use high-performance computing to run pricing and risk models. Are you seeing this used a lot in more traditional banks?
In retail banking, it's all about making sure you're gaining new customers. The emphasis is on customer intelligence and marketing, to know who you should be marketing to. We're seeing a lot of that.
BTN: When you say "high-performance computing," are you talking about in-memory computing [in which calculations and queries are performed on data stored in local memory, rather than on a separate storage device]?
Yes. It's not only in-memory computing, but also using hundreds of processors rather than a single processor. Almost everything we do today is one processor beating itself to death trying to compute billions of operations. We've found it's much better on some larger problems to enlist hundreds of processors. They've gotten so darn cheap, for $10,000 you can buy a blade with 256 gigs of memory and 32 processors running in parallel, so you ought to take advantage of the hardware. Companies like us need to suck it up and get it done. That's what we've been doing for the past three years, trying to get all of our software running in parallel so that we can solve much bigger problems.
BTN: Have you accomplished that?
Yes. It's all done, we'll come out with another major release in June or July of high-performance analytics.
BTN: What has adoption of high-performance analytics been like in banking?
It's been very high. Right now, we have quite a few situations where people are taking another look at risk. After the London Whale did its job over there, everybody's concerned about risk. We have high-performance risk analytics where we can do 100,000 market simulations in a matter of 15-20 minutes, where it used to take 15-16 hours.
BTN: What do you think of the state of banks' risk models? The Fed recently conducted stress tests of the largest U.S. banks. The banks' own stress tests had much rosier results than the Fed's.
The only difference would be the pricing algorithms, because if you define the factors that are to be stressed, it's just a mere computation of what that market value will be, plus or minus 20% of that risk factor. Only the pricing models would be different.
BTN: Do you think some of the pricing models need to be tweaked?
Every bank thinks they have the best pricing models in the world. I'm not sure they'd tweak them.
BTN: There was a lot of debate after the financial crisis about how good banks' risk models are, a lot of risk managers never thought housing prices would drop. They made adjustments later, in hindsight.
In risk simulation, you're simulating the state the market has been in the last two years. If it makes a dramatic move that hasn't occurred in two years, your risk model is not going to be accurate.
And so the real trouble with Bank´s Risk Models, and credit ratings, is regulators believing in them too much, as they do now... authorizing some mindboggling bank equity leverage for holding some "absolutely safe" assets.
And using Bank´s Risk Models, and credit ratings to set different capital requirements while the information therein contained is already being cleared for in so many ways, is lunacy, as it introduces extremely dangerous distortions in the market.
Like now, when in the land of the brave, banks are allowed to make much higher risk-adjusted return on their equity when lending to the "absolutely safe" than when lending to the "risky", like to small businesses and entrepreneurs.
http://subprimeregulations.blogspot.com/2013/03/there-is-plentiful-of-vested-interest.html