Ask the Expert
Technology and Risk Management, Considerations for An Integrated Approach
Warren Cole is Senior Lending Consultant with Harland Financial Solutions. He has an extensive background in commercial banking, professional services and product management. Warren’s background also includes bank administration and management, product portfolio management, management of information systems development and asset securitization. He is an instructor for the Risk Management Association and has earned the RMA Credit Risk Certified designation.
How should technology contribute to a financial institution's credit risk management strategy?
WC: Credit risk management combines many functional areas including credit underwriting, regulatory compliance, legal and documentation compliance, policy compliance and portfolio monitoring and performance.
Most financial institutions have technology supporting these functions. Often, though, institutions implement individual technical solutions to address individual issues such as separate solutions for statement spreading, exception and covenant tracking, document creation and imaging, and uploading of completed transactions to an accounting system. Unfortunately, individual solutions may not communicate across functions. For example, financial statement analysis systems address financial spreads, ratio calculations, peer comparisons and trends as part of the underwriting function. However, financial statement ratios are also key performance indicators when related to loan performance for the monitoring and performance function. Relating current financial ratios to loan performance is highly desirable to observe adverse trends or to identify which loans might be affected by a marginal deterioration in key ratios affected by changes in economic conditions. Financial statement ratios are also often covenants of business loan agreements requiring consistent definition in both the financial analysis system and in the legal documents for the legal and documentation function. Further, once defined, these covenants require regular monitoring for compliance, again as part of the portfolio monitoring function. Individual technical solutions that do not bridge these functions are not contributing to an institution’s overall credit risk management goals.
How should technology address these bridging requirements?
WC: A key to technology supporting credit risk management is integration of technical solutions into both an operational and information infrastructure.
Operational integration provides efficiency, consistency, elimination of redundant data entry and the resulting potential errors. To the extent that policies are embedded into an operationally integrated solution, it also addresses regulatory and policy compliance functions. For example, an integrated commercial loan solution will include the following functions:
• Underwriting with absolutely current account and performance information
• Approval documentation including financial statement displays
• Approval processing including terms and conditions as well as authorities
• Generating loan documentation with key ratios for inclusion in a business loan agreement as covenants
• Boarding
• Tracking of pre-closing and post-closing conditions and exceptions for policy and regulatory compliance and other reporting
• Portfolio monitoring for performance, credit quality and loss control
Information integration provides the means for all the functions to share common data sources as part of a deliberate strategy with several objectives:
• Minimize systems of record
• Convert parts of the credit process into usable data
• Ensure consistency and reliability in reporting
• Address diverse information requirements for regulators, auditors and management
What are some of the considerations for a financial institution considering an integrated technology approach to credit risk management?
WC: Planning and preparing for the degree of change is evidence of a well-planned integrated system implementation.
An advantage of technology is the opportunity to capture more information about a credit relationship or facility as data for improved reporting. However there are cultural considerations, too. Some functions that have been historically performed using stand-alone tools or no tools at all could be performed differently with a technical solution. For example, a loan officer who used to scribble a few lines on a pad of loan information sheets might complete a screen of information. Taking the time to capture the information at the point of origination of a loan or relationship provides a means to trend changes, track performance and capture or eliminate coding errors or miscommunications that could lead to documentation errors.
Integrated technical and information solutions lead to other process changes that allow a financial institution to centralize critical or technical operations through the free and consistent flow of information. For example, centralized documentation functions are supported by a solution that provides the means for consistent communication of loan requirements, eliminating multiple communications otherwise required. For another example, in a well-integrated system an analyst can spread a statement, while a loan officer composes an update to the business background or describes a proposed deal structure, while a documentation specialist completes an online checklist and ensures that policy requirements for CIP/KYC and required entity documents are obtained.
