Research & Thoughts

Credit Risk - A New and Positive Balance for the Credit Equation in a Transformed Market

How do you grow market share and revenues while guarding effectively against losses?

More balanced growth supported by strong policies and better adherence in the future should be the center of every lending strategy – a view supported in the UK by the British Bankers’ Association, which has started to promote the sort of “sensible lending practices” which are already at the heart of a far more prescriptive statutory approach elsewhere. (Germany’s MARisk framework is an excellent example.)

Lending institutions need to consider every element of the credit lifecycle when making strategic decisions. Effective organizations need to adopt a sustainable approach; one which remains true to internal codes of ethics, while decisively embracing the opportunity for positive change.

The foundation of future success will be adherence to a strategic process which can accommodate continual change. The key word is adherence. If process steps are ignored or corners cut, outcomes will inevitably deteriorate.

The proactive gathering and sharing of accurate data, both within and outside any given institution, can significantly enhance relationships and improve planning and decision quality.

Equally important is the need to critique internal processes and ask awkward questions where necessary. This is key to making an honest assessment of practice in the four key areas which offer the greatest potential to improve profitability: Customer, Vendor, Policy and Costs.

In 2010 and beyond, financial institutions, regulators and consumers who have not done so already will all realize the need for change; but each of these groups will have different and potentially conflicting ideas of what “change” means.

One thing is clear, however: change within Credit Risk departments is both inevitable as an outside force and essential as an internal attitude and culture. A rigid approach that ignores a different financial landscape is highly unlikely to work. An understanding of the key cost drivers and cost optimization techniques – reducing loss or reducing lending – will be critical, if lenders are to find a new and positive balance for the credit equation in a transformed market.