How do we address these credibility and credit problems?

February 10, 2009 by Guest Contributor

Part 2

Reason one
Unfortunately, there is a management issue regarding their transparency with the investment community and/or client base.  Regrettably for the managers and leaders choosing this approach, if this problem persists too long, the organization may choose to rectify with a change in the management and leadership

Reason two
The solution is both simple and complex.  In simplistic terms, the financial institution must evolve its portfolio risk management reduction techniques and take a more proactive stance.  Both internal and external data exists that can provide significant insight to the portfolio, its trends and potential future loss.

Such data sources include:

  • Internal behavioral characteristics (negative changes outside of just delinquencies)
    • High line usage
    • Non sufficient funds frequency & severity (for those borrowers who also have a deposit account with the institution)
    • Deposit account closuresExternal data
    • Regular rescore of the borrowers (both small business and consumer)
    • Derogatory payment trends with other creditors (the borrower may be current with you but for how long?)
    • Judgments or liens

Such data can be used to create models for portfolio performance calculating:

  • Delinquency trends by score (as the portfolio trends up or down in the score ranges we can adjust the expected loss rates, delinquency rates, etc.)
  • Within score ranges and based upon other behavioral characteristics, what is the likelihood for charge-off or recovery.

The biggest takeaway is that these portfolio management techniques are not new and untested.  Your data provider (such as Experian), has used these techniques and has the data to support the effectiveness.  While we are in trouble, we may find ourselves wanting to keep the “dirty secrets” to ourselves.  Too often such an approach leads to one’s demise.  Seek information, seek help, get control and truly start to move in a positive direction.