Over the last 20 years, the number of banks has dropped from 9,000 to a little under 5,000, and net interest margins have continued to decline.
As you can see in the chart provided above, there’s a significant swing associated with total losses that banks have experienced over the last 14 to 20 years.
At the heart of any banks losses are risk management and specifically credit risk exposure. Banks have to understand expected loss more than ever, but this has always been a difficult undertaking. The cost, expense and time associated with aggregating this data into actionable reports frequently prevented optimized decision making. Data silos and manual reporting made understanding the methodology difficult and integration into a banks’ best practices a challenging exercise.
The advent of cloud computing and SaaS tools like SOLA Analytics unified data platform, tools that used to be exclusively available to Super-Regional and Global Banks are now within reach of community and regional banks.
With these technology barriers removed, community and regional banks can now effectively manage their product and services mix to optimize margin and credit extensions. Strategically, this allows executives to create an environment in which revenue generation and risk are blended to best service the community and impact customers. Tactically, sales teams and operations personnel have the data necessary to effectively serve customers and increase the banks standing in the community.
Properly measuring expected loss helps your bank determine which products, services, customers and credit extensions can be made most effectively and profitably. Additionally, understanding the marketplace can reveal future opportunities that would otherwise be masked by traditional operations.
When that credit-risk exposure cost is understood and measured effectively and accurately, then it can be leveraged to provide insights and inform decisions for:
- Product and service pricing structures
- Product and services to be developed for new markets
- You can decide what market and customers to pursue
- And what segments and industries to pursue
Your team will have a clear understanding of the risk profile of each of those existing markets, segments, customer profiles and product mixes and they can be rank-ordered and then executed on appropriately by the bank as they move forward with their margin, growth and sales strategies.
Combining Risk and Finance Data Can Help You Win More Business
Even more powerful is your ability to connect your credit risk to finance data.
Once risk is properly measured and effectively reported, you will have a clear understanding of how each product or service contributes to the bottom line, whether that’s in dollars, basis points or margin percentage. With this kind of visibility, you can move forward by selling the products that most closely align with your strategic plan.
Typically, dashboards and reports will allow you to understand:
- Which products and services are most profitable in which markets and which ones aren’t
- Which exposures you should charge more for
- And in some cases what exposures should you charge less for
If you don’t price correctly the competition’s going to take these customers.
In the current market, consumers have access to many options – so pricing fairly and competitively is critical. Understanding the risk profile of a customer, combined with the existing risk profile of the bank, can help you win business that you might otherwise lose.
Watch this short 7:00 minute message to learn more about Credit Risk Scorecard Best Practices
About Finance. Risk. Unified.
Finance Risk Unified is a single, modern software solution that provides strategic visibility and combines financial and risk analytics in a highly automated and intuitive technology platform. It provides institutions with the tools to compete effectively against the largest and most sophisticated banks in the country.
Sola Analytics and OnPoint Risk Advisors have collaborated to provide banks with best practices for Financial and Risk Management delivered inside a cutting-edge technology solution.
We are bankers helping bankers. Key delivery components include Financial Reporting, Budgeting & Forecasting, CECL Allowance Models, and Enterprise Wide Stress Testing and Best Practice Credit Risk and Enterprise Risk Management Methods.