The Future of Credit Risk Management Lies with Technology
Improve your credit risk models and processes using Decision Intelligence.
Generous government support programs have helped mitigate the negative economic impacts of the Covid-19 pandemic across the globe – for banks and other lenders, as well as for businesses and consumers. But now, the gradual unwinding of pandemic-related financial support and forbearance policies are creating a new level of uncertainty – and a major challenge for credit lending and holistic risk management.
The European Central Bank (ECB) summarized the challenge in their recently released Supervisory Priorities for 2022-2024.
What is the future of risk management in banking?
Along with the ECB (European Central Bank), globally, regulators are focusing and prioritizing their focus to ensure the uncertainty does not equate to large credit losses and a downfall in financial services stability.
Some of the key items the banking industry must focus around:
Being able to understand the true creditworthiness of borrowers following the tapering down of policy measures to support the economy – are institutions able to quantify the impact into 2023?
Holistic portfolio risk management – The pandemic highlighted the importance of connected lending. Institutions are no longer able to assess the risk of the borrower in silos. Instead, they must look at the borrower and its connected network, its supply chain, and its concentrations.
Guarding against complacency – How reactive and dynamic are your early warning signals and credit models? Can they assess what is a true credit loss vs what is a credit loss due to fraud? With the right credit risk technology, data and interconnectedness will better identify and mitigate future risks and losses.
Managing today’s economic reality with innovative credit risk models
Managing today’s economic reality, considering the ever-changing impacts of the global pandemic, requires an innovative and dynamic approach to credit risk management models. These models are required to be more future-oriented and agile than ever before – shifting attitudes about work, changes in consumer behavior and retail shopping patterns, supply chain disruptions, and severe impacts on selected industry sectors like hospitality and travel.
A key part of the solution involves leveraging additional data (which, in many cases, already resides within the banks but is not being utilized or connected) and advanced analytics to enable real-time monitoring and effective mining of data. Portfolio and Risk Management must have early warning signals of declining (or improving) asset quality and/or increasing (or reducing) risk, not only at the individual borrower level, but beyond that, with industry sectors, supply chains (and subsequent unknown connection risks), and geographic areas to enable effective and efficient capital planning and provision estimations.
Powering advanced technologies to tackle credit and ESG risks
A key strategy for improving credit risk management models’ forward-looking capabilities is to bring in more qualitative – and, where possible, quantitative – data that enables analysts to visualize correlations, connections, and associations between entities. This enables risk governance teams to identify risk factors in the associations and connections between companies and individuals – linkages that would otherwise be hidden or difficult to find without this capability.
Achieving this requires advanced technologies that can connect KYC (Know-Your-Customer) with Credit and ESG Risk to simplify the complexity that comes with analyzing billions of data points from both internal and external sources. This would create a holistic view of connected risks and empower divisions to conduct a search of unstructured data automatically, and within moments.
Helping banks to proactively manage the risks within the portfolio, by having real-time and dynamic early warning signals in place, would allow teams to better manage risks holistically and make accurate decisions, at speed.
How COVID-19 has impacted holistic risk management
The pandemic has served as a catalyst and accelerator for digital and risk transformation efforts in the banking and insurance industries that were already underway. The same holds true now for applying new technology, new approaches, new data types and sources to the process of building strong credit risk models and better lending decisions. Now that banking industry regulators in the UK, Europe, the US, among others, have made credit risk management, transformation and ESG a top priority for 2022, it is a trend that we can expect to continue into 2023.
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