Feb 13th, 2017

Hari Murakonda and Sanjeevni Wanchoo
February 14th 2017


If you’ve ever been part of stress testing at a bank, you have probably heard of term “peer banks” often. So who are these peer banks ? Why would a subject bank like to know its peers ? What role do peer banks play in stress testing ?

Banks often show interest in knowing their peers from the lens of operating strategy, lending practices, funding strategy and earnings strength. These peers tend to operate in similar markets, have similar size and similar performance metrics. For example, banks that operate only in California tend to look for peers who operate only, or near California. Banks that mostly lend to commercial real estate firms tend to observe and understand peers with similar lending practices

In stress testing, the need for peer banks arises from situations where subject bank doesn’t have enough data and could safely rely on data (i.e. publicly available) from peers to interpolate any missing elements. Subject bank could also use this data to benchmark its relative performance to its peers. Identifying peer banks would also help a subject bank to strategize and rationalize the markets as a whole

Usually, senior management in most of the banks have an intuitive feeling for who their peers might be and guide stress testing teams to incorporate this expert knowledge into their models and analysis. However identifying these peers through data-driven approaches would help build confidence in conversations with senior management and also drives stress testing teams closer to the truth. Moreover this approach supported by strong statistical and quantitative analysis helps build confidence and support documentation for internal stakeholders (model risk management teams and stress testing teams) and external stakeholders (regulators)

About Tool

The data is sourced from publicly available call report data. The core idea here is to introduce various data science approaches that algorithmically identify banks that are similar to a subject bank based on certain financial ratios. These approaches are loosely inspired from recommendation algorithms such as Netflix movie recommendations based on users tastes and history; Amazon product recommendations based on user browsing and purchase history and Tinder match recommendations based on user like and dislike history

How to use the Tool

Select ratios that should be associated with peer banks. Click the submit button to generate a list of subject banks. Select a particular bank in the list to populate peer banks