Harry (Harald) Scheule is Professor of Finance at the University of Technology Sydney. His expertise is in the area of Banking, Credit and Liquidity Risk, Data Analytics, Housing Finance, Insurance, Machine Learning, Portfolio Construction, Prudential Regulation, and Securities Valuation.
Harry is a strategic partner for banks and regulators in Asia-Pacific, Europe and North America. He has had influence with financial institutions who have applied his work to improve their risk management practices. His award-winning research has been widely cited and published in leading journals. He currently serves on the editorial board of the Journal of Risk Model Validation.
Harry is a dedicated educator, who consistently receives excellent student feedback, and his PhD students have produced impactful industry research. His textbooks on credit risk analytics are used around the world in data analytics courses and include: "Credit Risk Analytics: Measurement Techniques, Applications, and Examples in SAS" and "The R Companion".
Can supervise: YES
Asset Pricing, Banking, Credit and Liquidity Risk, Home Equity Release, House Prices in Distress, Insurance, Mortgages, Prudential Regulation, Real Estate Finance, Securities Evaluation and Structured Finance
25751 Financial Institution Management
25574 Commercial Bank Management
25575 Investment Banking
Scheule, H, Rosch, D & Baesens, B 2017, Credit Risk Analytics: The R Companion, Amazon, USA.
Scheule, H, Baesens, B & Roesch, D 2016, Credit Risk Analytics Measurement Techniques, Applications, and Examples in SAS, John Wiley & Sons.
This book ends the search by providing a comprehensive, focused resource backed by expert guidance. Credit Risk Analytics is the reference every risk manager needs to streamline the modeling process.
Scheule, H 2003, Prognose von Kreditausfallrisiken, Uhlenbruch Verlag, Germany.
Luong, TM, Pieters, R, Scheule, H & Wu, E 2020, 'The Impact of Government Guarantees on Banks’ Wholesale Funding Costs and Risk-taking: Evidence from a Natural Experiment', Pacific-Basin Finance Journal.
© 2019, Springer Science+Business Media, LLC, part of Springer Nature. This paper analyses how mortgage borrower liquidity constraints and home equity drive the realized loss rates given default using loan-level data. We define defaulted loans with zero loss as cures and those with non-zero loss as non-cures. We find economically that borrower liquidity constraints and positive equity explain cure, while negative equity explains non-zero loss. The findings provide an important economic-rationale for a separation of the cure and loss processes in mortgage loss models and their applications such as loan pricing and bank capital regulation. The results have great relevance for the multi-trillion dollar mortgage industry for a more efficient capital allocation, better mortgage pricing and more forward-looking loan loss provisioning.
Do, H, Roesch, D & Scheule, H 2018, 'Predicting loss severities for residential mortgage loans: A three-step selection approach', European Journal of Operational Research, vol. 270, no. 1, pp. 245-259.View/Download from: UTS OPUS or Publisher's site
Krueger, S, Roesch, D & Scheule, H 2018, 'The impact of loan loss provisioning on bank capital requirements', Journal of Financial Stability, vol. 36, pp. 114-129.View/Download from: UTS OPUS or Publisher's site
Kruger, S, Oehme, T, Roesch, D & Scheule, H 2018, 'A copula sample selection model for predicting multi-year LGDs and Lifetime Expected Losses', Journal of Empirical Finance, vol. 47, pp. 246-62.View/Download from: UTS OPUS or Publisher's site
Bui, C, Scheule, H & Wu, E 2017, 'The value of bank capital buffers in maintaining financial system resilience', Journal of Financial Stability, vol. 33, pp. 23-40.View/Download from: UTS OPUS or Publisher's site
Claussen, A, Löhr, S, Rösch, D & Scheule, H 2017, 'Valuation of systematic risk in the cross-section of credit default swap spreads', Quarterly Review of Economics and Finance, vol. 64, pp. 183-195.View/Download from: UTS OPUS or Publisher's site
© 2016 Board of Trustees of the University of Illinois.We analyze the pricing of systematic risk factors in credit default swap (CDS) contracts in a two-stage empirical framework. Firstly we estimate contract-specific sensitivities (betas) to several systematic risk factors by time-series regressions using quoted CDS spreads of 339 U.S. entities from January 2004 to December 2010. Secondly, we show that these contract-specific sensitivities are cross-sectionally priced in CDS spreads after controlling for individual risk factors. We find that the credit market climate, the Cross-market Correlation, and the market volatility explain CDS spread changes and that their corresponding sensitivities (betas) are particularly priced in the cross-section. Our basic risk factors explain about 83% (90%) of the CDS spreads prior to (during) the crisis.
© 2016 Elsevier B.V.This study examines the relationship between funding liquidity and bank risk taking. Using quarterly data for U.S. bank holding companies from 1986 to 2014, we find evidence that banks having lower funding liquidity risk as proxied by higher deposit ratios, take more risk. A reduction in banks' funding liquidity risk increases bank risk as evidenced by higher risk-weighted assets, greater liquidity creation and lower Z-scores. However, our results show that bank size and capital buffers usually limit banks from taking more risk when they have lower funding liquidity risk. Moreover, during the Global Financial Crisis banks with lower funding liquidity risk took less risk. The findings of this study have implications for bank regulators advocating greater liquidity and capital requirements for banks under Basel III.
Lee, Y, Roesch, D & Scheule, H 2016, 'Accuracy of mortgage portfolio risk forecasts during financial crises', European Journal of Operational Research, vol. 249, no. 2, pp. 440-456.View/Download from: UTS OPUS or Publisher's site
This paper explores whether factor based credit portfolio risk models are able to predict losses in severe economic
downturns such as the recent Global Financial Crisis (GFC) within standard confidence levels. The paper
analyzes (i) the accuracy of default rate forecasts, and (ii) whether forecast downturn percentiles (Valueat-Risk,
VaR) are sufficient to cover default rate outcomes over a quarterly and an annual forecast horizon.
Uninformative maximum likelihood and informative Bayesian techniques are compared as they imply different
degrees of uncertainty.
We find that quarterly VaR estimates are generally sufficient but annual VaR estimates may be insufficient
during economic downturns. In addition, the paper develops and analyzes models based on auto-regressive
adjustments of scores, which provide a higher forecast accuracy. The consideration of parameter uncertainty
and auto-regressive error terms mitigates the shortfall.
© 2015 Institutional Investor LLC. All Rights Reserved. This article analyzes the sensitivity to systematic credit risk and pricing in fixed income instruments and compares corporate bonds and asset securitizations. The article finds crosssectional variation of systematic credit risk given the same credit rating and a market premium for the systematic risk embedded in yield spreads. Therefore, credit ratings do not provide comprehensive information on the degree of systematic risk, and investors are compensated for such differences in systematic risk after controlling for credit ratings and other risk characteristics.
Rösch, D & Scheule, H 2016, 'The role of loan portfolio losses and bank capital for Asian financial system resilience', Pacific Basin Finance Journal, vol. 40, pp. 289-305.View/Download from: Publisher's site
This paper analyses the systemic risk in relation to bank lending for Asian economies. The methodology complements existing market-based systemic risk measures by providing measures based on accounting information that regulators typically collect. Loan loss provisions of banks are decomposed into (i) a prediction component that is based on observable bank characteristics, and (ii) two frailty components: a bank-specific systematic factor based on the assumption that a bank's asset portfolio is diversified and a systemic factor. Systemic risk is measured as the Value-at-Risk and Expected Shortfall of the financial system based on a simulation model that takes into account the current condition of banks in the financial system, the absolute size and the capitalisation of financial institutions, as well as the sensitivity to systematic and systemic frailty risk.
Scheule, H, Kellner, R & Rösch, D 2016, 'The role of model risk in extreme value theory for capital adequacy', Journal of Risk, vol. 18, no. 6, pp. 39-70.View/Download from: UTS OPUS or Publisher's site
Jobst, R, Roesch, D, Scheule, H & Schmelzle, M 2015, 'A Simple Econometric Approach for Modeling Stress Event Intensities', Journal of Futures Markets, vol. 35, no. 4, pp. 300-320.View/Download from: Publisher's site
Luetzenkirchen, K, Roesch, D & Scheule, H 2014, 'Asset portfolio securitizations and cyclicality of regulatory capital', European Journal Of Operational Research, vol. 237, no. 1, pp. 289-302.View/Download from: Publisher's site
Roesch, D & Scheule, H 2014, 'Forecasting mortgage securitization risk under systematic risk and parameter uncertainty', Journal of Risk and Insurance, vol. 81, no. 3, pp. 563-586.View/Download from: UTS OPUS or Publisher's site
The global financial crisis exposed financial institutions to severe unexpected losses in relation to mortgage securitizations and derivatives. This article finds that risk models such as ratings are exposed to a large degree of systematic risk and parameter uncertainty. An out-of-sample forecasting exercise of the financial crisis shows that a simple approach addressing both issues is able to produce ranges for risk measures consistent with realized losses. This explains how financial markets were taken by surprise in relation to realized losses.
Roesch, D & Scheule, H 2014, 'Forecasting probabilities of default and loss rates given default in the presence of selection', Journal of the Operational Research Society, vol. 65, no. 3, pp. 393-407.View/Download from: UTS OPUS or Publisher's site
Bodenstedt, M, Roesch, D & Scheule, H 2013, 'The path to impairment: Do credit-rating agencies anticipate default events of structured finance transactions?', European Journal of Finance, vol. 19, no. 9, pp. 841-860.View/Download from: UTS OPUS or Publisher's site
The global financial crisis (GFC) has led to a general discussion of the accuracy and declining standards of credit-rating agency ratings. Substantial criticism has been directed towards the securitisation market, which has been identified as one of the main sources of the crisis. This study focuses on the ability of rating agencies to adjust their ratings prior to impairments of structured finance transactions. We develop a new measure that quantifies a rating agency's performance in advance of defaults. By analysing a large number of impaired transactions rated by Moody's Investors Service, we find that rating quality deteriorated during the GFC. Furthermore, we identify tranche-specific and macroeconomic factors that explain differences in Moody's performance.
Loehr, S, Mursajew, O, Roesch, D & Scheule, H 2013, 'Dynamic implied correlation modeling and forecasting in structured finance', Journal of Futures Markets, vol. 33, no. 11, pp. 994-1023.View/Download from: UTS OPUS or Publisher's site
Correlations are the main drivers for credit portfolio risk and constitute a major element in pricing credit derivatives such as synthetic single-tranche collateralized debt obligation swaps. This study suggests a dynamic panel regression approach to model and forecast implied correlations. Random effects are introduced to account for unobservable time-specific effects on implied tranche correlations. The implied-correlation forecasts of tranche spreads are compared to forecasts using historical correlations from asset returns. The empirical findings support our proposed dynamic mixed-effects regression correlation model.
Luetzenkirchen, K, Roesch, D & Scheule, H 2013, 'Ratings based capital adequacy for securitizations', Journal of Banking and Finance, vol. 37, no. 12, pp. 5236-5247.View/Download from: UTS OPUS or Publisher's site
This paper develops a framework to measure the exposure to systematic risk for pools of asset securitizations and measures empirically whether current ratings-based rules for regulatory capital of securitizations under Basel II and Basel III reflect this exposure. The analysis is based on a comprehensive US dataset on asset securitizations for the time period between 2000 and 2008. We find that the shortfall of regulatory capital during the Global Financial Crisis is strongly related to ratings. In particular, we empirically show that insufficient capital is allocated to tranches with the highest rating. These tranches account for the greatest part of the total issuance volumes. Furthermore, this paper is the first to calibrate risk weights which account for systematic risk and provide sufficient capital buffers to cover the exposure during similar economic downturns. These policy-relevant findings suggest a re-calibration of RBA risk weights and may contribute to the current efforts by the Basel Committee on Banking Supervision and others to re-establish sustainable securitization markets and to improve the stability of the financial system.
Lützenkirchen, K, Rösch, D & Scheule, H 2012, 'Angemessenheit von regulatorischen Kapitalanforderungen für Verbriefungstransaktionen', Frankfurter Institut für Risikomanagement und Regulierung, pp. 93-94.
This paper analyzes the capital incentives and adequacy of financial institutions for asset portfolio securitizations. The empirical analysis is based on US securitization rating and impairment data. The paper finds that regulatory capital rules for securitizations may be insufficient to cover implied losses during economic downturns such as the Global Financial Crisis. In addition, the rating process of securitizations provides capital arbitrage incentives for financial institutions and may further reduce regulatory capital requirements. These policy-relevant findings assume that the ratings assigned by rating agencies are correct and can be used to build a test for the ability of Basel capital regulations to cover downturn losses.
Chan, H, Faff, RW, Hill, P & Scheule, H 2011, 'Are watch procedures a critical informational event in the credit ratings process? An empirical investigation', Journal of Financial Research, vol. 34, no. 4, pp. 617-640.View/Download from: UTS OPUS or Publisher's site
The Boot, Milbourn, and Schmeits (2006) model (Boot model) predicts certain credit rating events are likely to be more informative than others and that credit watch procedures are an important driver of such differences. We test the core empirical predictions of their model. Our sample comprises U.S. corporate issuer credit ratings provided by Moodys, 19902006. Our findings fail to uncover compelling evidence for the empirical predictions of the Boot model in relation to the role of watch procedures as coordinating mechanisms. Rather, our findings are more supportive of the view that rating agencies are always at an informational advantage relative to investors.
Claussen, A, Löhr, S, Lützenkirchen, K, Scheule, H & Rösch, D 2011, 'Credit Ratings und Kapital für Verbriefungstransaktionen', Risiko-manager, vol. 9, pp. 20-21.
Roesch, D & Scheule, H 2010, 'Downturn credit portfolio risk, regulatory capital and prudential incentives', International Review of Finance, vol. 10, no. 2, pp. 185-207.View/Download from: UTS OPUS or Publisher's site
This paper analyzes the level and cyclicality of bank capital requirement in relation to (i) the model methodologies through-the-cycle and point-in-time, (ii) four distinct downturn loss rate given default concepts, and (iii) US corporate and mortgage loans. The major finding is that less accurate models may lead to a lower bank capital requirement for real estate loans. In other words, the current capital regulations may not support the development of credit portfolio risk measurement models as these would lead to higher capital requirements and hence lower lending volumes. The finding explains why risk measurement techniques in real estate lending may be less developed than in other credit risk instruments. In addition, various policy recommendations for prudential regulators are made.
Roesch, D & Scheule, H 2009, 'Credit portfolio loss forecasts for economic downturns', Financial Markets, Institutions and Instruments, vol. 18, no. 1, pp. 1-26.View/Download from: UTS OPUS or Publisher's site
Recent studies find a positive correlation between default and loss given default rates of credit portfolios. In response, financial regulators require financial institutions to base their capital on `Downturn loss rates given default which are also known as Downturn LGDs. This article proposes a concept for the Downturn LGD which incorporates econometric properties of credit risk as well as the information content of default and loss given default models. The concept is compared to an alternative proposal by the Department of the Treasury, the Federal Reserve System and the Federal Insurance Corporation. An empirical analysis is provided for US American corporate bond portfolios of different credit quality, seniority and security.
One of the most significant developments in international credit markets in recent years has been the trade in Collateralized Debt Obligations (CDO), which has enabled financial institutions to repackage the credit risk of an asset portfolio into tranches to be transferred to investors. The present paper evaluates the credit risk of such a portfolio and the related tranches by applying two prominent prototypes for credit ratings, namely the point-in-time and through-the-cycle approach. The central parameters default probability and correlation are forecast for multiple years and related forecasting errors are included. The article's main findings are that banks which transfer debt tranches but retain an equity part and apply a through-the-cycle rating approach may be exposed to higher insolvency risk. Firstly, the credit risk retained may be underestimated resulting in an inadequate capital allocation. Secondly, the credit risk transferred may be overestimated resulting in additional risk-based transfer costs.
Recent studies find a positive correlation between default and loss given default (LGD) rates for credit portfolios. In response, financial regulators require financial institutions to base their capital on the downturn loss rate given default, which is also known as downturn LGD. This paper compares alternative concepts for the downturn LGD of Hong Kong mortgage loan portfolios.
Roesch, D & Scheule, H 2007, 'Multi-year dynamics for forecasting economic and regulatory capital in banking', The Journal of Credit Risk, vol. 3, no. 4, pp. 113-134.
Roesch, D & Scheule, H 2007, 'Stress-testing credit risk parameters: An application to retail loan portfolios', Journal of Risk Model Validation, vol. 1, no. 1, pp. 55-75.
Hamerle, A, Liebig, T & Scheule, H 2006, 'Forecasting credit event frequency - Empirical evidence for West German firms', The Journal of Risk, vol. 9, no. 1, pp. 75-98.
Rauhmeier, R & Scheule, H 2005, 'Eigenschaften von Ratings und ihre Auswirkung suf die Kapitalanforderung nach Basel II', Deutsches Risk, vol. 5, pp. 34-40.
Rauhmeier, R & Scheule, H 2005, 'Rating properties and their implications for Basel II capital', Risk, vol. 18, no. 3, pp. 78-81.
Roesch, D & Scheule, H 2005, 'A multi-factor approach for systematic default and recovery risk', Journal of Fixed Income, vol. 15, no. 2, pp. 63-75.
Roesch, D & Scheule, H 2004, 'Forecasting retail portfolio credit risk', The Journal of Risk Finance, vol. 5, no. 2, pp. 16-32.
Roesch, D & Scheule, H 2003, 'Modeling systematic consumer credit risk', The RMA Journal, vol. 86, no. 4, pp. 66-69.
Scheule, H 2003, 'Die Auswirkung der Ratingqualität auf das Basel II-Eigenkapital', Zeitschrift für das gesamte Kreditwesen, vol. 56, no. 15, pp. 837-839.
Boegelein, L, Hamerle, A, Rauhmeier, R & Scheule, H 2002, 'Parametrisierung von CreditRisk+ im Konjunkturzyklus: Dynamische Ausfallquoten und Sektorenanalyse', Deutsches Risk, vol. 2, no. 2, pp. 37-42.
Boegelein, L, Hamerle, A, Scheule, H & Rauhmeier, R 2002, 'Modelling Default Rate Dynamics in the CreditRisk+ Framework', Risk, vol. 15, no. 10, pp. S24-S28.
Scheule, H 2002, 'Credit Risk and Taxes: A Shareholder Value Analysis', Journal of Risk Management, vol. 4, no. 1, pp. 77-89.
Scheule, H 2001, 'Kreditbewertung im deutschen Steuersystem', Zeitschrift fur das gesamte Kreditwesen, vol. 54, no. 3, pp. 127-130.
Bodenstedt, M, Rösch, D & Scheule, H 2015, 'The path to impairment: Do credit-rating agencies anticipate default events of structured finance transactions?' in Contemporary Issues in Financial Institutions and Markets, Routledge, UK, pp. 31-50.View/Download from: UTS OPUS
© 2015 Taylor & Francis. All rights reserved.The global financial crisis (GFC) has led to a general discussion of ihe accuracy and declining standards of credit-rating agency ratings. Substantial criticism has been directed towards the securitisation market, which has been identified as one of the main sources of the crisis. This study focuses on the ability of rating agencies to adjust their ratings prior to impairments of structured finance transactions. We develop a new measure that quantifies a rating agency's performance in advance of defaults. By analysing a large number of impaired transactions rated by Moody's Investors Service, we find that rating quality deteriorated during the GFC. Furthermore, we identify tranche-specific and macroeconomic factors that explain differences in Moody's performance.
Luetzenkirchen, K, Roesch, D & Scheule, H 2013, 'Regulatory capital requirements for securitizations' in Roesch, D & Scheule, H (eds), Credit Securitisations and Derivatives: Challenges for the Global Markets, John Wiley & Sons, Australia, pp. 343-356.View/Download from: UTS OPUS or Publisher's site
Asset securitizations are one of the most significant developments in financial intermediation in recent years. Financial institutions use vehicles such as asset-backed securities (ABSs), collateralized debt obligations (CDOs) or mortgage-backed securities (MBSs) to restructure the asset risks of their portfolios and transfer these to investors. Under regulations which are currently implemented, banks may apply the following three approaches: at present two different ways for financial institutions that have received the approval to use the IRB Approach to determine regulatory capital for securitized assets are provided: the Ratings Based Approach (RBA) and Supervisory Formula Approach (SFA). Non-IRB banks (banks that use the Standardized Approach (SA) for their calculations of regulatory capital for their credit exposures) are required to apply the SA to calculate capital requirements for their securitization exposures. The SA is also based on external ratings but is less sophisticated than the RBA approach.
Roesch, D & Scheule, H 2013, 'Credit securitizations and derivatives' in Rösch, D & Scheule, H (eds), Credit Securitisations and Derivatives: Challenges for the Global Markets, Wiley, Australia, pp. 3-9.View/Download from: Publisher's site
This is the introductory chapter of Credit Securitisations and Derivatives, which provides regulators with an overview of the risk inherent in credit securitizations and derivatives. The book aims to help quantitative analysts improve risk models and managers of financial institutions evaluate the performance of existing risk models and future model needs. The book addresses challenges in relation to the evaluation of credit portfolio securitizations and derivatives. It covers the following areas: credit portfolio risk measurement, credit portfolio risk tranching, credit ratings, credit default swaps, indices and tranches, counterparty credit risk and clearing of derivatives contracts, liquidity risk, and regulation.
Roesch, D & Scheule, H 2010, 'Downturn model risk: Another view of the global financial crisis' in Scheule, H & Roesch, D (eds), Model risk - Identification, measurement and management, Risk Books, London, UK, pp. 3-18.View/Download from: UTS OPUS
Researchers and practitioners have spent ample resources modelling credit, explaining correlations between risk models as well as inputs and outputs. One popular example is asset correlation, which describes the co-movement between the asset value returns of corporate borrowers or issuers. Other examples are default correlations, correlations between default and recovery processes and correlations between risk categories such as credit, interest, liquidity or market risk. In statistical terms, correlations are often placeholders for relationships which cannot be explained and are also known as "seeming correlations". The 2008-9 global financial crisis caught us by surprise and showed that, starting with US subprime mortgage markets, other markets such as equity, credit and commodity markets have declined globally. These links have not been included into existing risk models, and this chapter identifies these links and shows . how to address these relationships in risk models.
Roesch, D & Scheule, H 2008, 'Integrating stress-testing frameworks' in Roesch, D & Scheule, H (eds), Stress testing for financial institutions: Applications, regulations and techniques, Risk Books, London, UK, pp. 3-15.View/Download from: UTS OPUS
Bank regulators (compare Basel Committee on Banking Supervision 2006) expect financial institutions to provide sufficient Tier I and Tier II capital to cover future worst-case credit portfolio losses. These worst-case losses are based on conservative assumptions for a set of parameters such as the probability of default (PD), asset correlation, loss given default (LGD) or exposure at default (EAD) Stress of PD: probability of default is based on a one factor, non-linear model where the factor equals the 99.9th percentile of a systematic standard normally distributed variable and the sensitivity is based on the so-called asset correlation . Stress of EAD and LGD: EAD and LGD are modelled based on economic downturn conditions.
Roesch, D & Scheule, H 2012, 'Securitization rating performance and agency incentives', Fourth Joint BIS/ECB/World Bank Public Investors Conference, Washington DC, USA.
Roesch, D & Scheule, H 2012, 'Systematic risk and credit ratings', The Seventh Annual Conference on AsiaâPacific Financial Markets (CAFM) of the Korean Securities Association (KSA), Seoul, South Korea.
Scheule, H 2012, 'Systematic risk and credit ratings', Methods in International Finance Network (MIFN) Conference, Sydney, Australia.
Roesch, D & Scheule, H 2011, 'Systematic risk and parameter uncertainty in mortgage securitizations', Fifth Annual Risk Management Conference, Singapore.
Scheule, H 2011, 'Systematic risk and credit ratings: How bonds and mortgage securitizations are different', Quantitative Methods in Finance 2011 Conference, Sydney Australia.
Roesch, D & Scheule, HH 2010, 'Securitization Rating Performance and Agency Incentives'.
Roesch, D & Scheule, HH 2009, 'Rating Performance and Agency Incentives of Structured Finance Transactions'.
Roesch, D & Scheule, HH 2012, 'Forecasting Probabilities of Default and Loss Rates Given Default in the Presence of Selection'.
FINSIA Retail and Business Banking Council
Global Association of Risk Professionals
Hong Kong Institute for Monetary Research