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by edmundsauto
1586 days ago
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Plus, systemic risk of a repeatable exploitation is more likely without humans in the loop. Making a bad loan for $1M is bad, but if “attackers” can repeatedly prove until they get a bad risk $1B loan, it becomes business shattering. |
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No bank in any credible jurisdiction will have an automated system approving 1bn USD equivalent loans any time soon. A typical system would be loans up to a certain amount can get approved automatically, up to $xM by a credit officer, up to $yM by a senior credit officer, anything over that by the credit committee. Regulators push back very hard on automated decisionmaking for large loans particularly because of "default correllation skew"[1] problems as were revealed in the 2008 crisis. Relatively few bad decisions on big loans can push a bank into difficulties if they are not well-capitalized. This is particularly a problem for automated decision-making because as loans get larger they also get more idiosyncratic and therefore it's much harder to fit a model with confidence because there simply aren't enough data points.[2]
[1] Often credit quality for a group of loans rises because of idiosyncratic factors but deteriorates together, so as loans become more risky in an adverse economic environment the correllation of the default probability between the loans goes up. An intuitive way of thinking about this is in housing loans. If 3 or 4 of your neighbours default on their loan, property prices on your street will go down (because the banks will be trying to sell all those houses at once), making it much more likely you and the rest of the residents will default too.
[2] Say I'm trying to approve a 200k loan to expand a pizza restaurant. If I'm in a big bank I have hundreds of similar loans to use as data points for pricing and risk. If I'm trying to approve a 200M loan to build a luxury hotel complex that includes 5 restaurants, accommodation, retail etc it is completely a one-off. Even if I'm the largest commercial lender this loan will be unique in my portfolio. I will have many other large loans but there will be lots of idiosyncratic factors that make them different.