With Columbian Bank and Trust Co. shuttered-the ninth bank to fail this year, with estimates that as many as 300 more could face a similar fate-many are debating how next-generation business analytics will factor into lending, versus drive it. It's a discussion that raises many questions, most not easily answered.
But one thing is clear as the financial industry continues to wade through the credit crisis: Executives became too dependent on business analytics and decisioning to create exotic loan products and extend credit to borrowers either unable or barely able to make good on their obligations. The absence of sound judgment, exacerbated by the securitization of these loans, has had global implications.
Now the industry finds itself looking for solutions. Clark Abrahams, chief financial architect of SAS's financial services business, says that solution should be part art (judgment) and part science (technology)-not one forsaking the other.
In a recent discussion with Abrahams, he argued the industry became overly reliant on credit-risk-scoring models that did not give a 360-degree view of borrowers, or adequately address the "full range of risk factors in the market."
That, he says, must change. It's not the technology that's wrongheaded; it's how it is being applied, and what other market factors should be considered in addition to credit risk. Abrahams says that credit scoring did not adequately assess risk in the subprime market, triggering a global domino effect.
His assessment of the crisis: conventional risk models were applied to non-conventional loan products, which behave differently; lenders measured credit risk inaccurately and incompletely; and underwriting practices relied too heavily on quantitative models and automated underwriting systems.
The missing link? No one was minding the models. "Loans first need to be properly classified, and then risk rated. Today's process has that backward," he says.
To be sure, the goal for financial institutions is to use technology to help them develop, understand and distribute products that help them to remain competitive in the marketplace, while also maintaining the highest levels of safety and soundness. The prescription for what ails the banking industry doesn't have to wipe out the former, but it certainly should boost the latter-to the delight of investors, Wall Street and regulators.
What the industry is experiencing is indeed a cycle, but it's a painful one that players must learn from, not just hope to survive. If not, all the technology in the world won't save an institution from its overly ambitious-some would say reckless-patterns of business behavior.(c) 2008 Bank Technology News and SourceMedia, Inc. All Rights Reserved.http://www.americanbanker.com/btn.html/ http://www.sourcemedia.com/