Using Technology to Improve Credit Risk Oversight

Introduction

While governments and regulatory bodies are trying to revive their economies and are pressuring banks to increase their lending, the industry's ability to manage credit risk remains weak. This situation is boosting a re-evaluation of credit risk management processes and underlying technologies, in order to minimize the exposure to current and future credit losses.

Scope

*The report examines the growing exposure to credit losses that drive the adoption of credit risk oversight strategies and technologies.

*It provides insight into the integration of credit risk with other risks and the blending of business processes and technologies.

*The recommendations provide the necessary intelligence for enterprises to formulate their technology strategy and for vendors to align their offerings

Highlights

Bankers should focus on stronger governance in order to establish efficient measurement systems, and strengthen the credit culture within an organization. Although in many cases banks already have credit risk management systems in place, they were, for the most part, bypassed or ignored with a false confidence in securitization.

The focus on oversight demands that banks provide a more comprehensive view of their credit risk exposure. One of the main needs is to record and monitor risks, so that a bank is always completely aware of its overall credit risk exposure. Therefore, banking organizations need to implement much more advanced systems to manage risks and capital.

Reasons to Purchase

*Gain insight into the challenges faced by retail banks seeking to improve their credit risk oversight practice.

*Gauge how market conditions are shaping the development trajectory of the credit risk management discipline.


Report Highlights
Bankers should focus on stronger governance in order to establish efficient measurement systems, and strengthen the credit culture within an organization. Although in many cases banks already have credit risk management systems in place, they were, for the most part, bypassed or ignored with a false confidence in securitization.

The focus on oversight demands that banks provide a more comprehensive view of their credit risk exposure. One of the main needs is to record and monitor risks, so that a bank is always completely aware of its overall credit risk exposure. Therefore, banking organizations need to implement much more advanced systems to manage risks and capital.
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SUMMARY 1
Impact 1
Ovum view 1
Key messages 2
Implementation of strong credit risk governance is a necessity to avoid financial failures 2
Business intelligence and analytics will be required for stronger credit risk oversight 2
Banks should focus on a framework approach when evaluating credit risk technology 2
MARKET ConTEXT: The impact of the credit crisis 3
Banks need to understand the relationship between credit and other types of risks 3
The boom-bust drama drives the failure of existing credit risk mitigation strategies 3
Securitization does not remove the need for conscientious credit risk management 4
Risks need to be managed as interconnected areas to prevent financial disasters 6
Strong credit risk governance is a necessity 6
Access to precise and reliable information enables accurate decision making and monitoring 7
business Focus: the road toward maturity 8
Underperforming organizations must revisit their credit risk processes 8
The ability to analyze risks on aggregate positions across transactional data and credit portfolios is key 8
Business intelligence and analytics will be required for stronger credit risk governance 10
The approach toward credit risk needs to mature through the implementation of enterprise-wide risk strategies 10
Credit risk must be treated as a component of a wider risk strategy 11
The reliance on quantitative models must be balanced with a qualitative approach 13
Managers should focus heavily on a more predictive approach to risk measurement 14
Credit risk should create added value for banks 16
Technology FOCUS: integration is key 17
Automation is the efficiency king 17
Banks need to automate their risk management lifecycle 17
A comprehensive and automated risk platform is the driver behind efficiency 18
Computing power is a necessity for successful credit risk implementation 20
Grid computing is an emerging trend 20
Server platforms must meet the requirements of processing-hungry credit risk applications 21
The total cost for a long-term strategy needs to be considered 21
Compliance continues to drive credit risk technology spending 21
The evaluation criteria should be based on a long-term risk management strategy 23
A bank's sourcing strategy must reflect its strategic approach to credit risk 24
Best-of-breed 24
Best-of-suite 24
It is a necessity to create a proper data foundation 25
Data quality is key 26
RECOMMENDATIONS 27
Recommendations for enterprises 27
Banks need to focus on the stronger governance of their credit risk processes 27
The 'ownership' of the credit risk technology needs to be shifted from IT to risk officers 27
Sound data management and data quality procedures need to be implemented 27
Recommendations for vendors 28
Solution providers need to focus on long-term strategy and short-term execution 28
APPENDIX 29
Ask the analyst 29
Definitions 29
Further reading 29
Methodology 30
Disclaimer 30
List of Figures
Figure 1: The boom-bust model 4
Figure 2: The boom-bust in housing starts 5
Figure 3: Credit process and risk management 9
Figure 4: Risk maturity scale 13
Figure 5: Roadmap to develop optimized risk across the bank 15
Figure 6: Credit risk architecture 18
Figure 7: Which areas of regulatory compliance will be driving IT project spending in 2010? 22
Figure 8: Which are the most important business areas that you are increasing IT investment in? 22
Figure 9: Best-of-breed versus best-of-suite strategies and associated risks and rewards 25

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