Additional Thoughts On Proactive Portfolio Risk Management
Many of you joined the webinar on Proactive Portfolio Risk Management earlier in the summer. If you missed it, or wish to view it again, you can find the recording here. In that webinar we discussed many issues around this topic including some definitions, behavior triggers, etc. But there are a couple areas we either did not touch on or that can be highlighted a bit further.
First, your best line of defense is a strong credit culture. Your credit and underwriting teams are your first line against problem loans down the road. Not every bad loan can be stopped at origination, but a strong and consistent credit culture can make a huge difference. This is true whether the economy is strong or struggling.
“In financial services, if you want to be the best in the industry, you first have to be the best in risk management and credit quality. It’s the foundation for every other measure of success. There’s almost no room for error.” — John Stumpf, chairman and CEO of Wells Fargo
Ignoring credit risk during the best times only causes issues when times are not the best. In our current economic environment, clients that had tight cashflow but caused no concern because they were “growing rapidly” may now be the ones asking for skip pays, extended terms or filing for bankruptcy. A bank or credit union does itself no favors weakening credit standards chasing growth.
To prepare for the next credit growth cycle, now is the time to look at your credit policy and procedures. Do they align? Do they support the needed analysis in this season? Does Credit Admin have a strong enough voice in Loan Committee?
Second, many of you have had some form of proactive portfolio risk management for several years now like Baker Hill NextGen® Portfolio Risk Management. Most of you acquired your proactive portfolio risk management solution during strong economic times. So, during implementations or various discovery phone calls, no one was particularly concerned with managing the information gathered in the system or focusing on rule recalibrations, adequate staffing of the portfolio manager role, etc. The use of the system was primarily focused on streamlining renewals and reviews. While that made sense at the time, that focus was determinantal to the overall value of proactive portfolio risk management which is credit risk. Understanding trends and behaviors over the long game to gain insight into the future is key.
Now is the time to change all that. If you have a proactive portfolio risk management solution, do the following immediately:
- Recalibrate your score-based rules to focus on the bottom 10% of your portfolio. This should be done once a year or 1,000 triggers, whichever comes first.
- Verify your rules are working accurately. If you have added products, cost centers, changed definitions of small business, acquired another financial institution, etc., your rules may need to be updated. Compare the output of the rules to core reports or do a random sample to verify accuracy.
- If you turned off certain rules because they did not add value at that moment, reevaluate this. Those rules may be exactly what you need today.
- Analyze the information gathered. Look for trends by product, NAICS, region, time in business, etc. Let the information discovered guide credit risk and underwriting decisions.
- Do you have a full-time portfolio manager? Is this his/her primary function? Remember, one portfolio manager can manage 1,500-1,800 business notes OR 3,000 consumer notes. If you are an organization with one portfolio manager handling 6,000 notes plus underwriting, it is time to hire and reallocate tasks.
A strong credit culture and good underwriting coupled with a proactive portfolio management solution are the keys to surviving and thriving in today’s economic environment.
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Posted on June 26th, 2020 at 8:22 am
Topics: Risk Management
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