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Combating inconsistency in risk management

October 14, 2014
Read Time: 0 min

When it comes to the risk management process, there is no one-size-fits-all approach. Financial institutions have a wide variety of approaches, as calculations and analyses differ between lenders.

“It is as much an art as a science,” says Tim McPeak, risk management consultant at Abrigo. “Everyone’s going to have their own ways, and from bank to bank they will have different underwriting guidelines and standards. At a high level, that’s fine. That’s what creates good banks and bad banks; some banks are better at those things than others.”

But these inconsistencies pose significant challenges to managing credit risk at financial institutions. Here are some common areas where inconsistencies exist at banks and credit unions:

Data entry: Putting a number in the wrong field can have a cascading effect and negate the accuracy of the entire project. Other common manual errors include double counting income and debt-service and excluding necessary tax forms.

Spreading: “Three analysts at the same institution may spread three tax returns into financial statements three different ways,” notes McPeak. For example, if a business sells an asset and makes a gain, some would count that gain as income, while others would choose to exclude it because it is not recurring.

Applying regulatory guidance: Standards are often not applied consistently across the portfolio, e.g. risk rating score. Financial institutions also need a systematic and consistent process for determining the provision for the ALLL.

Data tracking and documentation: Many financial institutions do not have adequate documentation of key financial ratios and how risk ratings are derived for regulators and auditors. You not only have to have the answers, but also have to show how you got to those answers.

There are many ways to improve consistency at financial institutions, but here are two ways to address these challenges:

1. Establish a credit culture

2. Utilize technology


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Establish a credit culture

To combat inconsistencies, it is necessary to put methodologies in place to account for differences in approaches between lenders and analysts. Consider establishing a strong credit culture that includes procedures for gathering data and definitions of relevant terms.

Also, ensure that your lenders and analysts are asking borrowers for the set of information and including exactly which forms and schedules should be included in the tax return. Try creating a one-page checklist summarizing the necessary information and tax forms for everyone to use. This could improve consistency across the board.

Utilize technology

Technology is another methodology to improve consistency, and can be particularly helpful for entering data and documenting loans. Many technological solutions can also automate reports for loan grading, global cash flow analysis and calculating reserves. This can go a long way in improving consistency in your institution’s risk management process.


About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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