Risk Management Watch: Banks Seek Talent for Greater Credit Risk Insight
The Federal Reserve last week committed up to $800 billion to ease the flow of credit. The move comes on the heels of reports that the economy slowed even more in the third quarter than expected. The two programs announced by the Fed involve the injection of up to $800 billion into the market to boost lending. In a statement, the Fed says it will buy up to $600 billion in mortgage-backed assets in an attempt to deal with the financial crisis. Up to $500 billion will be spent on mortgage-backed securities, while an additional $100 billion or so will be spent purchasing mortgages held by mortgage giants Fannie Mae, Freddie Mac, and the Federal Home Loan Bank. The Central Bank will also provide $200 billion for consumer loans, such as through credit cards, car loans, or student loans.
Some experts suggest that as the government looks for ways to ease the credit freeze, they have little choice but to adopt strategies that carry greater risks. In today’s economic climate, mitigating credit risk across an organization has become a main focus for financial institutions. Time recently made this prediction on the future of risk: “In the short term, an era of risk aversion is sure to continue, as financial outfits, gripped by the fear that something more will go wrong–loans not paid back, a company on the other side of a trade going bust–pull back on everything from the creation of complex securities to credit-card limits. Executive search firm, A.E. Feldman notes the trend has markedly increased demand for senior-level talent with expertise in credit risk management.
Credit Risk Essential to ERM
Following the Fed’s recent announcement of $800 billion in measures to unfreeze U.S. credit markets and stem a deepening economic crisis, the government finds itself on riskier ground: credit cards, student loans and auto loans.
Right now debt collecting is a booming industry, according to CNNMoney. The report states that outstanding consumer debt reached $2.59 trillion in September, an increase of $6.9 billion over August. There are roughly 5500 debt collection agencies nationwide that made more than one billion contacts with consumers in 2007, reports CNNMoney, citing ACA International, a trade association for the collection industry. Looking ahead, most industry experts expect those numbers to climb.
As the trend continues, banks are renewing their focus on credit risk. In finance, credit risk management is the process of assessing risk in an investment. When the risk has been assessed, investment decisions can be made and the risk vs. return balance considered from a better position, according to Wikipedia. The goal of credit risk management is to maximize a bank’s risk-adjusted rate of return by maintaining credit risk exposure within tolerable parameters. Banks must manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions.
The effective management of credit risk has emerged as a critical component of a comprehensive approach to risk management. According to the Risk Management Association (RMA), today’s marketplace is broader and more complex, and best-practice institutions must recognize that managing credit risk is essential to enterprise-wide risk management.
What are banks doing?
In the run up to the current financial crisis, financial services institutions took on risk from instruments like credit-default swaps and collateralized debt obligations to realize profits. But the models used to estimate the value of such instruments failed to consider an outsize event, such as declining home prices. In a recent report, Time acknowledges that financial companies say they want top-down control, as evidenced by UBS chairman Peter Kurer’s decision to divide the company into three parts. But…the report goes on to say that “as the appetite for risk returns–and it always does–companies are promising long-lasting change. This time around, they’ll handle it differently, they say.”
What are banks doing? A.E. Feldman reports banks are shoring up their risk teams and risk management jobs are evolving to better manage initiatives to ensure that business objectives are met, losses are minimized, business processes are improved and greater accountability is achieved. A.E. Feldman also notes that financial and risk professionals with expertise in processes for assessing credit and counterparty risk and liquidity risk are in demand. As Time puts it, “Banks are stuffing their boards with risk experts…And so risk morphs from a slop trough of moneymaking into a business line like any other, one that requires human beings to ask the big-picture questions that computer models don’t, like, What would happen if fundamental assumptions–house prices go up, institutions are too big to fail–prove to be wrong?”
Credit Risk More Complex
A number of the challenges currently facing the financial services industry can be attributed to poor credit risk decision-making. Industry experts say the risk management needs of financial institutions must evolve to go beyond regulatory risk. Banks must break down traditional risk silos to drive toward an enterprise-wide risk view.
In keeping with this trend, Cognos, an IBM company, announced it has developed new analytic software designed to provide retail banks with complete access to accurate, timely and transparent credit risk information across their loan portfolios.
“Credit risk management in the banking industry has become increasingly complex due to financial deregulation, weakness in the economy, financial product complexity and the recent and unprecedented turmoil in the financial services industry,” said Craig Focardi, Research Area Director for TowerGroup.
Are you working in Credit Risk Management? If you want to grow your career or your company’s bottom line, contact A.E. Feldman’s President, Mitch Feldman, now. Find out more about Risk Management jobs today!
