The new year is a time of analysis and planning – of reflecting on the previous year’s accomplishments and deciding what’s most important to achieve in the coming year. Looking back at 2020, most banks are ready to move on to more stable, normal times – even if that normal happens to be “new.”
While the pandemic has tested our resilience, it has also given us a chance to reassess what’s working and what isn’t. As loan quality deteriorated in Q2 2020 in certain industries, many banks became painfully aware that their current risk ratings failed to help them focus on the borrowers that needed special attention. With 70% or more of the portfolio simply rated as a “Pass 4”, how do relationship managers know where to start?
With all the craziness of 2020, however, few banks had a chance to make the proactive risk rating system upgrades needed to prepare for managing out of the pandemic and whatever comes next. So, what’s your New Year’s Resolution for 2021? Here are five reasons to consider making 2021 the year you finally upgrade your institution’s risk rating system:
1. Tap into a better way to manage credit risk and portfolio quality, no matter what comes next.
As credit quality in the industries hardest hit by the pandemic continues to look uncertain, a new, more sophisticated risk rating system offers a solution to better manage credit risk and portfolio quality. Using RMA Dual Risk Rating, for example, you can improve ratings granularity, consistency, and objectivity by tapping into an expert-judgment-based scorecard system with a dual rating scale that separates the borrower risk from the facility risk. This way, you can risk rate and manage the portfolio with greater precision and more confidence, even in uncertain times.
2. Upgrading your system is now being easier than ever.
Another reason to consider upgrading your risk rating system in 2021 is how much easier it is today to do so than it may have been a year or two ago. This is largely because of RMA’s investment in making RMA Dual Risk Rating as turnkey as possible for member institutions, from the development of six borrower scorecards and one facility scorecard to the careful documentation of the solution to ease change management. There is also the issue of deploying the new risk rating system in a way that best suits your institution’s technology ecosystem, which we will cover in the next point.
3. More fully integrate the system with your existing technology.
Technology will continue to change rapidly in 2021, and your risk rating system needs to keep up. Chances are, if you have a basic Excel- or even Word-based risk rating system, there’s very little in the way of integration with the bank operating system. Look for or aim to build a risk rating system like RMA Dual Risk Rating with open architecture to integrate with other systems and data sources, plus a way to bring data in and export when needed.
4. Become more transparent with auditors, credit review, and examiners.
With increased ratings granularity from the more sophisticated scale/methodology and improved data availability/analytics from the deeply integrated solution in place, your institution can better stand up to scrutiny from auditors, credit review, examiners, and other parties looking to understand your risk rating reasoning and history. Using RMA Dual Risk Rating, you can provide read-only access to those who need it in their assessments, easily report on your portfolio at the client or industry level, as well as drill down on portfolio concentrations and migration over time.
5. Look at your portfolio with fresh eyes in the years to come.
Finally, a new risk rating system gives your institution an opportunity to look at its portfolio in a new way. This could mean reevaluating all your existing loans to determine which loan categories are underpriced and giving up too much of the balance sheet versus which loan categories are overpriced and at risk of being picked off by competitors for refinancing. Plus, looking forward, you have a better means of proactively managing credits for the future as well as react with agility to the next adverse market event.
You may have noticed one underlying theme in the above points: how trying something NEW with your risk rating system could be the key to managing the uncertainty of the current environment and what follows. After all, what could be better than a risk rating ‘reset’ to orient your bank toward realizing its full potential in a new year?
Learn More About RMA Dual Risk Rating
Please visit our website or email firstname.lastname@example.org today to learn more about how our dual risk rating solution can help your institution increase ratings granularity, consistency, and transparency to improve portfolio management.
Steven is the Director of Business Solutions at RMA, responsible for all five of its core products. He is a 25+ year veteran of the banking industry with proven expertise in successfully developing and implementing bank technology. Most recently, Steven was VP at Sageworks, helping financial institutions modernize lending. Steven holds an MBA from Stanford University.