Other parts of this series:
In the first blog in this series, we discussed short-term actions that financial services firms can take to strengthen their credit risk capabilities in response to the COVID-19 pandemic.
In addition to adjusting credit policies, modeling and other areas, firms should also think about their operational support capacities. Underwriting functions should anticipate a higher inflow of loan applications and ramp up team capacities to support higher loan volumes. To simplify the assessment process, banks should consider a risk-based approach to underwriting given the increase of “virtually credit risk-free” loans.
In the longer term, firms require a more permanent solution to any interim credit policies enacted in the crisis environment.
In parallel, underwriting functions should have in place adequate verification and screening processes to confirm that borrowers are following the strict eligibility rules for the use of borrowed funds (such as employee salaries, rent, utilities and debt coverage). Broader default management policies, procedures and workflows should also be assessed and refined to improve forbearance, loan modification and bankruptcy processes.
Firms should consider building out collections and workout solutions with new drivers of default and in alignment with government relief programs. This could include capturing additional data (including industry type and current crisis-related debt, versus that which is non-current crisis related) on non-performing accounts and using analytics capabilities for effective client outreach and loss mitigation.
In the longer term, firms require a more permanent solution to any interim credit policies enacted in the crisis environment. It is also essential to perform a thorough and detailed review of all credit policies affected by this crisis and find the right balance between adjusting policy content or otherwise anticipating and allowing for future policy exceptions.
Underwriting criteria may need to evolve to evaluate the customer’s business models with enhanced methods, such as by looking at digital channels, automation capabilities and business continuity functions. In such cases, customers with less sophisticated businesses would be assigned a higher level of risk. These types of changes to underwriting criteria and other functions would need to be formalized in credit policies and procedures.
Firms may also want to evaluate new technologies for ways to improve their credit procedures and processes. Certain digital workflow solutions can help streamline and expedite the credit review and approval process.
It is important for firms to establish a process to implement and communicate all changes to credit policies, procedures and governance processes. Setting up dedicated change management and communication processes is key to establishing broad alignment across all functions. Training may also be required for business functions that are affected by changes to credit procedures or processes.
Finally, proper governance processes should be in place so that revised credit policies and procedures are being followed, accountability is properly defined, and issues are escalated appropriately.
Portfolio management and reporting
Because the traditional customer profile may change, banks may want to identify and capture new data sets to reevaluate the internal ratings of their counterparties and obtain new inputs to improve early warning system models and the customer due diligence process. Banks should clearly define their requirements for new reporting needs to better inform credit decisioning and to determine whether there is any need for new tools (such as artificial intelligence, machine learning or data visualization) to keep the portfolio on track with targets, risk appetite and new regulations.
Once requirements are clearly defined, additional new data sets and their associated systems of record should be identified. The processes and workflows needed to capture these new data sets should be defined and documented; then, the supporting technology infrastructure should be built to permit new and sustainable reporting processes that are built directly into and inform revised credit processes and policies.
Underwriting, collections and default management
Big data capabilities can support underwriting and default management activities. With the influx of new information available on social media, big data can provide tools to capture and analyze these largely untapped data sources to help banks better assess the businesses of their counterparties. Firms can consider working with select third-party data providers and alliances to expedite the build-out of their big data capabilities.
Existing models should be updated, and new models created, to reflect the changing risk profile of customers and companies in certain industries. The potential new data captured by big data tools and other data sources can greatly improve models, in turn enhancing credit decisioning and default management capabilities. Firms could be better positioned to build auto-decisioning and risk-based pricing processes to speed up and enhance underwriting activities, and better able to utilize their new data inputs to prioritize and strengthen their outreach and collection strategies.
The additional reporting capabilities built out to help support portfolio management processes can also help inform the longer-term team resourcing and capacity planning needed to support the operational processes related to underwriting, collections and other default management activities.
Please contact Fred or Jeff or our colleague Hortense Viard if you wish to discuss steps financial services firms can take in addressing the challenges of this human and business crisis. You can also consult our COVID-19 hub which features our latest thinking on a variety of subjects including a document on how banks can manage the business impact of the pandemic.