Today’s environment signals need for innovation in credit review

A financial institution’s loan portfolio is often its most valuable asset, so making improvements to this function can be beneficial over the long term.

Large interest rate hikes, ongoing inflation, geopolitical upheaval and the prospect of an economic recession are headlines that greet credit risk professionals each morning, but these might not be the only issues keeping them up at night.

In its Semiannual Risk Perspective for Spring 2022, the Office of the Comptroller of the Currency outlined a number of additional factors that could amplify credit risk in the months ahead, including an increasingly complex operational environment, regulatory and policy uncertainty, and a growing number of banks exceeding guidance thresholds for commercial real estate concentration. Moreover, the demand for specialized talent continues to exceed supply, putting more pressure on teams already stretched thin.

At the same time, regulatory expectations for credit review functions are higher than ever. Interagency regulatory guidance reinforces its “critical importance,” stating that as a portfolio’s composition and/or risk level changes, banks should ensure the scope, expertise and experience of credit review staff keep pace. Credit risk professionals know that emerging systemic risks will soon affect their portfolios (if they haven’t already) but understanding precisely what the impacts is another matter.

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While many credit review functions have broadened their scope to meet heightened regulatory expectations, processes for reviewing loans and monitoring loan portfolio risks have remained relatively unchanged for decades at some financial institutions. That means review cycles are slow and highly experienced senior personnel often perform low-impact tasks.

Sophisticated tools that bring automation and analytics capabilities to this critical bank function are growing in number. Forward-looking credit risk executives will look to implement these tools to gain timely loan portfolio insights and gradually shift top human talent to more high-impact work. Here are a few tips to make that process easier.

Focus on aligning skills and responsibilities: Consider, for example, the process of planning and scoping a review and selecting loan samples. Do you have deep credit experts doing time-consuming pivot tables and data analytics work when they are better suited to evaluate credit risk? If so, automating data manipulation and analysis could yield significant return on investment. Similarly, tasks like loan data entry and retrieving relevant loan information or financial statements from other bank source systems typically involve redundant work that can be automated or performed by more junior staff. Incremental changes to these workflows can reduce cycle time and data errors.

Weigh “buy-vs-build” scenarios carefully: Banks further along the digital transformation curve might be better equipped to develop custom credit review technology in house. For those just beginning their transformation, off-the-shelf technology can help bring automation and robust digital analytics capabilities without requiring a complete process overhaul. Alternatively, it could make sense to implement a combination of home-grown and outsourced solutions. Ultimately, whether you choose to buy or build, integrating customizable automated technology into credit review workflows will equip you to better navigate existing and emergent risks to your loan portfolio.

Take an iterative approach: The pace of technological and economic change in today’s world continues to accelerate, which means the pursuit of greater productivity and efficiency must be ongoing. Transforming your credit review function is not a one-time project. This can be an intimidating realization, since every organization faces constraints on time, money and expertise, but process improvement doesn’t have to be a large, expensive endeavor. By taking a gradual but deliberate approach to enhancing processes and workflows, you’ll accumulate smaller efficiency wins that ultimately make a big difference in the aggregate.

Most financial institutions have launched at least one major digital transformation initiative, and the lessons they’ve learned could make it easier to accelerate digital adoption across other business units. As leaders think about where to introduce new technology moving forward, they shouldn’t overlook credit review.

A financial institution’s loan portfolio is often its most valuable asset, which makes innovating within this function critical to its long-term survival. The benefits of innovation might not come all at once, but even implementing small, incremental changes over time can be hugely beneficial, as the pressure to do more with less continues to mount in today’s uncertain credit environment.

Kelly Jenkins is an independent consultant and former head of credit risk review at Truist, and Bridgette Sullivan is a consultant at FI Consulting.