Richard M. Kovacevich, chairman, chief executive, and president of Minneapolis-based Norwest Corp., the country's 10th-largest bank holding company, says he sees a causal relationship between intensifying competition in the financial services industry and greater portfolio risk. Mr. Kovacevich pointed out that because credit cards are now a commodity business the need for a better understanding of customer behavior is crucial. "With multiple credit cards being offered to consumers, people can be using one card to pay off another card or an installment loan. The old credit scoring processes have not taken into account" this kind of risk, he said.

He elaborated on his views in a recent interview. Have new risk management techniques compensated for the risk inherent in the fast growth of consumer credit in recent years? KOVACEVICH: The short answer is yes. But in my opinion, probably competition has done more to negatively impact the risk management relationship than some sort of lack of sophistication of techniques. The best example is in credit cards, where the margins are declining as credit card providers reduce their prices and they are going after more marginal credits. It's competition, not because they don't know what they're doing. What you really need to do is divide the question into three categories. In installment credit, not much has changed. Credit scoring techniques continue to work. There hasn't been much change in the risk profiles, and there hasn't been much change in the way we deal with those credits. When a person goes bad in an installment loan, you get about half of that credit. In revolving credit, behavioral profiles are very important. You need to have very effective behavioral scoring because you need to keep on top of the customer.

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