It really is a great time to be a credit risk officer, but many people might think that is an absurd statement.
After the past three years of massive loan defaults and bank failures nobody could say the industry has done a good job of evaluating risk. While not all banks got heavily involved in the most risky types of lending, the focus for many banks strayed from traditionally sound lending practices.
The public’s opinion of banks and credit risk officers may be as low as it has ever been. And, the government is stepping in with new regulations that will almost certainly make the job that much harder.
So why should anyone want to be a credit risk officer? However bleak the outlook, the only way to go is up. Remember the number one rule in the stock market or life—buy low, sell high. Besides, history shows us time and time again that great opportunity is born from adversity. Bank management has, as a whole (at least for the ones that are still in business), learned the value of evaluating and acting on credit risk appropriately.
Bank management a decade or so ago thought they could ease their risk through bundling loans across different geographical and economic regions and shifted away from the importance of analyzing individual credit risk, believing that through bundling and other practices they could minimize the risk of the portfolio.
Clearly this was not a successful strategy for the financial institutions that chose that path. The rest of the industry is paying the price for the ones that did. The desire for big returns meant that even though there was doubt whether the risks should be taken, there was pressure on credit risk officers to dismiss those doubts and go for the big money.
This is the perfect time to take back the traditional role and importance of risk management within the financial industry. The still-standing banks and financial institutions are mostly back to being profitable, but they know the only way to remain profitable and grow is to bring in new customers and grow wallet share with existing customers without taking on unacceptably high risk.
To grow safely, banks must go back to the proven fundamentals in analytics and risk evaluation. New data, technologies and automation are available to facilitate the shift to getting back to the basics of profitable banking.
It is not as if these functions completely disappeared; it was that their overall importance and use in the organizations diminished. Consequently, basic risk practices stopped evolving, and the focus shifted to the questionable practices described earlier.
One of a financial institution’s best data resources, their own in-house customer data, is becoming available for use in real-time decisioning. Banks’ investments in data warehouses and analytic capabilities have made in-house data and customer insights available for use in real-time that wasn’t available before.
In the past this data was difficult to consolidate and wasn’t consistent or accessible quickly. The speed of today’s technology allows for greater evaluation of credit and fraud risk before the loan is made, but within the near realtime timeframes demanded by today’s consumers.
Also, non-traditional data outside of the major credit bureaus is being used in new ways. While the data has not necessarily changed, it has been proven to be effective for instant prescreen, demand deposit account (DDA) opening and across all lines of business.
As one example I’ll share how new data can positively impact DDA opening. In the past, opening a DDA required evaluating a consumer for a history of checking account fraud or abuse, closed for cause or various other red flags. Banks used this data to find out what accounts shouldn’t be opened based on the past history of someone who had abused a checking account.
Top financial institutions also are using alternative data to gather new insight on consumers' lifetime value to the bank and the next most likely product they will purchase. Until now financial institutions did not have a compelling reason to use anything but the traditional data sources they relied upon for years.
Today, enterprise credit risk officers are looking at risk across the enterprise not just a single silo. Bank management, stock holders, government and the public are demanding banks do a better job and the cornerstone of those changes is better credit risk assessment.
Tom Johnson is vice president of product and business development at Zoot Enterprises.
