Kimberly has over 18 years of experience in the commercial banking and software development fields. She currently serves as director of risk solutions for D+H where she is focused on developing a wide range of innovative products for the financial services industry. Kimberly leads a team of banking and industry subject matter experts, and provides overall product direction for D+H’s risk management offering within the U.S.
You are hereResourcesOur ViewpointsData-Driven Credit Risk Assessment: The New Reality
The sub-prime mortgage meltdown of 2008 changed the banking industry forever. Although community bankers weren’t the catalyst for this financial tsunami, everyone is now feeling the regulatory impact. Mortgage lending can no longer be based on relationship and instinct alone. The government now demands more transparency – requiring you to provide documentation of not only what decisions your loan officers made and what ratings they gave – but why.
The same thing has happened in the commercial lending segment as well. Three years ago, relying on the intuition and experience of your seasoned commercial loan officers was enough. Although that customer relationship and “gut feel” are still significant, loan decisions and customer ratings must now be data driven.
The problem is, many institutions have very manual credit processes. Most capture the rating itself, but have little to no documentation on how that rating was determined. Even lenders with more mature processes rely heavily on Excel spreadsheets containing financial data for individual accounts. However, this siloed approach doesn’t work in the new world of lending. For example, let’s say a regulator asks for a report listing every customer with a credit rating of four. Your only option is to manually open and segment 100 different spreadsheets. Or, what if the auditors – or bank president -- want to know the total assets of the 40 accounts with that credit rating? Same manual process.
The good news is, with the right technology tools, your institution can standardize your risk rating process and provide the documentation required by regulators, as well as improve your risk management process through more accurate reporting and tracking. The key is finding a comprehensive solution with these characteristics: a centralized database, customization options, transparent workflow, and compliance.
Instead of a disparate risk management process with individual spreadsheets, choose a solution that enables you to store all of your data in a centralized database. This approach not only provides one, comprehensive repository for all your risk management information, but it standardizes the way you look at this data institution-wide.
The database is essential for pulling reports for auditors, but also gives your institution new, more agile internal reporting capabilities. For example, the price of gas skyrockets. You have the ability to get a quick view of your trucking customers to determine how their profitability may be impacted. If a natural disaster strikes, you can quickly review every agricultural loan to identify which clients may have crop damage. At the same time, you can more efficiently manage your risk appetite, identifying at-risk loans more quickly, without having to wait for month-end reports.
Standardizing risk management shouldn’t require giving up your institution’s unique way of evaluating risk. Make sure your solution enables you to define your specific risk-rating questionnaire or model, and then transform this model into a process that is rolled out consistently throughout your institution. Your staff should be able to automatically retrieve in-file information and financial statements from within the centralized database, or add additional, judgmental information that supports their lending decisions.
Transparent, Data-Driven Workflow
By housing all lending and credit data in a single location, you enable everyone working on the loan documentation to collaborate, from the person selling the loan to those behind the scenes doing the heavy lifting. The loan officer can enter the financials, which can electronically move through the workflow for input from other people, then route back to the originator in one system. All the financial analysis becomes data-driven, based on the customized workflow and rules you’ve applied to the process. Just as important, all of the data, ratings logic and rationale behind the loan or credit decision now resides with the account detail in the database, making it easily extractable for reports, regulatory audits or ongoing risk assessment.
By replacing paper routing with a more sophisticated, digital workflow, you also gain the ability to see every loan in the pipeline and where each transaction is in the workflow at any given time.
Commercial lending has traditionally not been as heavily regulated as consumer lending, but all that is about to change with Dodd-Frank. Once specific regulations are issued to implement certain requirements of Dodd-Frank, commercial loans will require extensive data collection, which is a whole new compliance element. It’s important to choose a solution with compliance and data collection features built in, and to choose a solution provider who has a team dedicated to staying one step ahead of future regulatory changes. Clearly, this is only the beginning of the changes.
Today, data-driven credit risk assessment is the new reality. Although regulatory change is the catalyst for this transformation, with the right tools, financial institutions can benefit from the changes. By centralizing siloed lending data into a single collaboration platform, and standardizing processes and workflows organization-wide, institutions can gain transparency, efficiencies and instant insight into their portfolio – without minimizing the customer relationship and instincts of your lending staff.