Improved credit risk management could result in substantial savings
Financial institutions identified credit risk management as a far bigger issue than a simple matter of regulatory compliance, according to the findings of a recent survey from Risk Waters Group and SAS, the leader in business intelligence.
The global survey of more than 250 financial institutions and regulators sought to identify the business drivers behind credit risk programs and how they relate to regulatory requirements.
Companies have identified longer-term benefits and economic rewards as top benefits for improving their credit risk management function, such as improved business and performance management and improved risk-based pricing. Overwhelmingly the findings show that organisations anticipate significant rewards, including a 10% reduction in economic capital and a 14% reduction in the cost of credit losses.
"If we apply this cost saving to a mid-sized global bank (one that stated a $1 billion annual credit risk loss in its most recent annual report) then it is reasonable to assume that it could save around $140 million per year through improved credit risk management," said Peyman Mestchian, head of the risk management practice, SAS UK.
"The findings demonstrate that the 'demand side' of the risk management marketplace has a strong awareness of the financial and business leverage that can be gained from improved credit risk management. We think it is ahead of the consultants and vendors on the 'supply side' of the market who are still pushing the regulatory agenda, perhaps to reduce sales cycles," he continued.
Respondents ranked data management as the biggest obstacle to a successful implementation of credit risk management systems.
"Under regulatory requirements organisations are required to hold counterparty data history and in many firms this will need to be sourced from disparate systems. Data management, including the reporting infrastructure and developing the credit risk warehouse still represents a huge part of the strategic challenge for many organisations, so it is no surprise that money continues to be invested at around 36% of total expenditure by respondents to address these requirements," added Mestchian.
Rather more surprising was the low allocation (7.3% of expenditure by respondents) for data cleansing tools. This finding was backed up by another: a significant number of companies are only in the "planning to implement" stage with regard to data cleansing. A significant number are in the process of implementing a data warehouse, which would suggest that they are having problems gathering and integrating historic data.
"In our experience clean, consistent and credible data is a key issue. It appears respondents feel data quality is already taken care of at other levels of implementation - the access, storage, analytics or reporting stage. However, in reality, this is rarely the case, and unless cleansing is taken care of at the base level it will affect the other usage of the data," continued Mestchian.
For a summary of the survey results, please visit www.sas.com/crsurvey.
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SAS can assist institutions in addressing credit risk with SAS Credit Risk Management, a comprehensive solution capable of performing credit data management, credit scoring, credit portfolio risk management and providing a credit risk dashboard. The SAS solution enables organisations to measure credit risk exposures accurately and then evaluate alternative strategies for managing risk. This ensures maintenance of adequate regulatory capital reserves and capabilities beyond Basel II like modelling of economic capital. For more information on SAS Credit Risk Management, please visit www.sas.com/industry/fsi/credit.
With respect to data obstacles faced by organisations, SAS is highly regarded in the area of data management. SAS has powerful advanced data management capabilities, which include data cleansing, change management, process management and audit.
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