Commercial Lending Credit Risk Management

by Cubillas Ding, January 7, 2009

Abstract

London, United Kingdom 8 January 2009

: Surveying Business and Risk Technology Practices

As firms head into a tougher economic environment, commercial lending institutions will need to be more disciplined and streamlined in the way technology enables lending operations. Celent presents findings from a global commercial lending risk IT study and urges firms to adopt a value-based approach to optimize commercial credit technology practices.

Within an environment of heightened economic uncertainty, lending practices at most banks have changed. As we face a more perilous risk environment, firms are adopting conventional ‘defensive’ measures such as tightening lending standards, scrutinizing approvals more closely, and mobilizing workout departments’ ability to manage deteriorating credit conditions.

However, in meager times, as firms tighten their belts, the challenge often lies in discerning incremental improvements to hone and guide critical capabilities through adverse economic conditions – for instance, around collateralization, firm-wide credit exposure reporting / monitoring, ‘balanced’ early warning mechanisms, and workout effectiveness – such that the efficacy of these capabilities are high. In this global study of commercial lending institutions, Celent presents the technology levers, best practice considerations, and success factors underpinning these capabilities, such as managing universal counterparty identifiers (UCI), collateral and loss data, both from processes and IT perspective.

"Despite jarring markets, noisy headlines, and a fall in lending volumes, the impetus and mid-to-long term goal should not necessarily be to scale back lending activities, but to re-examine and realign risky ventures within the portfolio," says Cubillas Ding, Celent senior analyst and author of the report.

In every downturn scenario and through adverse market conditions there will still emerge winners and losers – characterized by the ability to execute on conventional defensive measures, strengthen the appropriate credit risk IT levers, and achieve a level of 'connectedness' in credit risk data in order to be able to draw out actionable information and dynamically respond to changing economic conditions. Celent’s findings suggest that, today, investment has not been optimised for these areas and a selective, dynamic approach could rapidly yield significant performance opportunities.

"In lean times, forward-thinking firms recognize the imperative to align critical capabilities with a value-based approach to optimize commercial credit technology practices, and to skew investment in credit risk technology to match this realignment," Ding adds.

As financial institutions engage in strategies to remain profitable during a recessionary and credit constrained environment, rather than preserving the status quo or pursuing indiscriminate cost rationalizations, firms should intelligently examine opportunities to weed out inefficiencies and ensure smart deployment of technology capabilities to achieve the right mix of tactical and strategic outcomes. These will delineate and propel leading institutions that possess the capabilities to take advantage of opportunities in a more volatile environment, from firms that are merely on the defensive.

Based on global surveys of more than 20 commercial lending institutions in North America, Europe and Asia, this report highlights ongoing risk IT pain points faced by firms, the spectrum of industry practices and geographical nuances, as well as delivering insights into best practice approaches and considerations for investing in, and building out risk technology management capabilities.

The 46-page report contains 17 figures and five tables. A table of contents is available online.

of Celent's Finance & Risk research service can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.  

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

London, United Kingdom 8 January 2009

Executive Summary 3
Commercial Lending -- Market and Business Trends 6
  6
  13
Credit Lifecycle and Risk Technology Underpinnings 14
The Need to Strengthen Practices 14
Study Overview 17
  17
  18
  19
Front Office Workflow 20
  20
  21
  22
UCI / Obligor Data 24
  24
  25
  26
Collateral Data Management 30
  30
  31
  32
Loss Data Management 34
  34
  35
  36
State of Commercial Lending Risk Technology 37
Considerations for Deploying Component-Based "Building Block" Technologies 38
Facing a Downturn: Enhancing Risk Technology Capabilities to Support Recessionary Strategies 42
  42
Conclusion / Looking Forward 48

 

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