Credit Risk and Crystal Balls

“Hindsight is 20/20.” There’s a reason it’s a common saying. If only you’d know the job you moved across the country for was going to be a bad fit, the movie you paid full price for was going to be terrible, the blind date your best friend set you up on was bad news. If only you had a crystal ball, you could have made better choices, taken fewer risks, and saved a lot of time, energy and money. 

A bad movie is one thing. A bad underwriting policy or retail loan portfolio is another. These risks can ruin more than a single evening—they can put your whole business in jeopardy. This is why identifying and managing credit risk is a critical part of every bank’s risk management program.

Looking Back

A recent FDIC analysis found that most credit MIS programs do a good job of tracking lagging indicators of risk, such as loan delinquencies, charge-offs, and other measures of current loan portfolio performance.

For example, if loan portfolios begin to show signs of weakening due to increases in charge offs or delinquencies, most credit MIS programs can identify and flag these indicators, giving management the chance to adjust their course of action.

“Forward-looking” risk indicators, on the other hand, have traditionally been harder to track, especially if banks are using manual processes, if data is siloed or in disparate systems, or if reporting is cumbersome and difficult to access. These include things like loan grade migrations, production and portfolio trends by product, debt-to-income ratio, lien position, and property type, all of which can be indicative of future performance. If banks had a “crystal ball” they could identify these risks and proactively identify and mitigate risk exposure. Foresight, rather than hindsight.  

If that sounds like a dream come true, I have good news: the crystal ball exists. These forward-looking credit metrics can be easily tracked. The secret is implementing a single platform loan origination system.

Looking Ahead

A cloud based loan origination system is uniquely able to aggregate loan and customer information into a single platform, providing powerful on-demand reporting across lending and credit activities that help management make informed, strategic decisions.

With all the bank’s data in one place, management can access timely, meaningful and accurate reporting in a format that clearly identifies risks, and then use that information to make strategic decisions about the future. They can also integrate solutions and incorporate data analytics into reporting, automate regular and ad-hoc reporting, and centrally maintain information for future reporting requests.

The result? A strong credit management information system, which can be used by senior management and board members to oversee lending activities, support strategic decision making, and provide the power to modify policies and underwriting to respond to emerging risks in real time. The banks who implement this tool are more competitive, because they can be proactive, rather than reactive.

Hindsight may be 20/20, but the ability to see the future is priceless. 

Kendra Tolley, Retail Product Line Head, nCino will be speaking on this topic at RMA’s Annual Risk Management Conference, November 4-6, 2018.  For more information, and to register for the Conference, please visit: https://landing.rmahq.org/rmaconf2018

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