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.

Behavioral scoring has become commonplace, but there is still room for improvement in those models. They have not kept pace with the inherent risk, and we need to correct that.

When a customer goes bad in revolving credit, they go bad at the peak of their line. When you make a mistake in revolving credit, it's twice as much of a problem as with installment credit. You have to have better techniques with revolving credit, just to stay even.

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 the risk of a customer having multiple cards. The more cards a person had used to deem people more creditworthy. It sets up a Ponzi scheme of people using credit cards to pay one off with another and then declaring bankruptcy at their borrowing peak.

I don't think our techniques have adequately taken care of the adverse selection that is taking place. There is no inkling of bad credit in the profile of a person who has multiple cards.

Personal bankruptcies are becoming more common as a way to get rid of debt problems. The whole social stigma of bankruptcy isn't what it used to be.

You can go from a current payer to bankruptcy in a day. You don't get warnings anymore.

Can your typical individual shareholder calculate your securities portfolio risk and how you're managing it from the company's public disclosures? KOVACEVICH: You have quite a bit of disclosure in the securities portfolio in the 10Ks and 10Qs we release. In the case of the loan portfolio, it's much more difficult to assess the risk. What one needs to do in that situation is understand the philosophy of lending at that particular institution. Size of loan, maturity levels, geography, all of these a shareholder can find out. You'll never find out about individual loans, but you can get a bigger-picture sense.

Secondarily, you look at what reserves are available. In Norwest's case, even if you don't understand the loan portfolio, you can see if the institution is reserved adequately. It isn't necessary for the investor to understand the loan portfolio. We've covered it both ways.

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