One of the most significant changes banks have made since the financial crisis is their assessment of portfolio risk. Generally, an older reactive approach has give way to more effective proactive measures. However, some banks still struggle to identify and address symptoms of negative issues before a problem arises, necessitating yet another shift in thinking. As lending competition rises and portfolio growth assumes a greater priority, banks should evaluate their ability to quickly and successfully recognize trends, both positive and negative. Here are four key questions that banks should ask to determine whether their current processes effectively mitigate risk and uncover opportunities for growth:
Are we effectively identifying negative trends?
If identifying downward trends relies on manually sorting through reports, the answer to this question is most likely “no.” Even if done on a daily basis, it is nearly impossible to manually review deposit accounts and changes in line-of-credit balances, or notice declining credit scores with the precision needed to anticipate problems. Without automation, banks remain in reactive mode. Proactive risk management has become synonymous with technology, enabling banks to spot potential problems at the onset and then shore up with additional collateral or guarantors, modify the loan or take other necessary measures.
How many places are portfolio managers going in order to access data?
Data integration is one of the most significant hurdles associated with portfolio risk management. Often, key data remains housed in separate Excel spreadsheets and reports. Together, integration and automation enable banks to constantly collect third-party data along with core data, organized within a single database. In addition to easier access, this gives portfolio managers a holistic view of their portfolios to better manage behavior and more quickly catch potential problem credits.
Are we accounting for the positive side of the risk management spectrum?
Think about risk management as a spectrum; on one end, there’s the risk we typically consider–credit risk. On the other side, there is the opportunity risk of potentially losing a good customer. Banks notoriously expose themselves to opportunity risk by being poor miners of their own data. Since the best prospects are existing customers, growth requires banks to better harness their data, making it actionable to improve cross selling.
Are we conducting regular stress tests?
Increasing the frequency of portfolio reviews and stress testing is also reliant on technology. Annual portfolio reviews are simply not enough. Likewise, stress testing should not be an annual event, but instead a dynamic component of banks’ risk management strategies. With processes for continuous, technology-driven portfolio risk management, evaluating both vulnerabilities and opportunities can shift from an annual practice to an ongoing one.
The final question banks should ask is whether excess resources dedicated to portfolio monitoring are coming at the expense of generating new business. Reactive strategies can be distracting because they typically require client facing, revenue-producing resources to be actively involved in the portfolio management process. Portfolio risk management is about weighing all costs; those incurred from delays in recognizing credit risks as well as those associated with missed opportunities. Technology today makes it possible to lessen those costs and instead, support growth objectives and above all else, your bottom line.