| August 2009 Bookmark This |
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Letter from the CEORisk = Revenue. Here’s why from ALI…You probably saw the same story I observed, and maybe it gave you the same sharp stab: "A record 12 percent of homeowners with a mortgage are behind on their payments or are in foreclosure as the housing crisis spreads to borrowers with good credit." It’s that last phrase. You knew it was coming, and so did we, but still, it’s confronting. Not just because it confirms the vastness of the credit problem, but because the phrase itself is ironic. If borrowers “with good credit” are caught up in the housing crisis, then by definition it is hard to say that they have “good credit.” What they have is a credit problem that neither they nor their lenders anticipated. Traditional, once-reliable credit tools and risk analytics failed to predict their situation. This neatly encapsulates today’s conundrum for lenders and risk managers. Like the Associated Press writer, many are having trouble neatly delineating between high-risk customers and high-profit customers, yet doing so has never been more important. Making bad bets on the former has never been costlier – charge-offs are trending upwards and are more unpredictable than ever. Taking bad actions on the latter runs off revenue that has never been harder to find now that credit demand is down and fees are taking a regulatory beating. Which in the long run is more damaging to the health of an institution? Taking on risky customers or failing to retain and expand your solid, revenue-producing customers (and attract more like them)? Okay, that’s a rhetorical question, but not a rhetorical dilemma. They are both untenable and imminent for many lenders. But traditional tools won’t help you much on either score. They don’t give you enough actionable information which is why many institutions are defaulting to limit credit risk even when doing so could imperil important revenue streams. The trenchant fact about risk management is this: If you are not incorporating new risk assessment tools, new layers and sources of information, and new optimization techniques that let you confidently discern levels of risk, you haven’t diminished your credit risk, but you have created revenue risk. Sincerely, Featured Headlines
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