Wednesday, July 29. 2009RMA Journal Article Proposes "Change" as the Sixth C of Credit In the September 2009 issue of the RMA Journal, the 5 C’s of Credit have again achieved center stage as “the banking world’s long-established tools for credit analysis,” to quote the author, Warren Stell. In the article, Mr. Stell makes the case for qualitative, in addition to quantitative, analysis that leverages the 5 C’s of Credit with a future-oriented focus. At the close of his article, he quotes Richard Fischer, president of the Federal Reserve Bank of Dallas, who commented to The Wall Street Journal on the causes of the credit bubble: “Finally … there was the ‘mathematization of risk:’ Institutions were ‘building risk models’ and relying heavily on ‘quant jocks’ when ‘in the end there can be no substitute for good judgment.’” Mr. Stell concludes that “Good judgment is the lender’s trump card, augmented with qualitative and quantitative analytical tools such as the Cs of credit …” which he advocates now ought to include Change.We concur with his assessment and in our latest book we quoted Benjamin Franklin, who said “There is no substitute for Common Sense,” as a lead-in to the second chapter, which makes the case for a comprehensive credit assessment framework that is rooted in the 5 C’s of credit! It is not surprising that we are on the same wavelength with yet another RMA feature article in the space of 5 months. In our book, we cover, in detail, how the new system we propose will greatly improve the vast majority of loan underwriting systems in operation for consumer and small business lending today. I have been receiving considerable positive feedback on the book from a wide variety of stakeholders since its publication in April. Privately, one bank consumer loan underwriting manager shared that a cursory examination of our book’s ideas connected to lessons learned and some resulting cynicism that has emerged in him about the inadequacy of the current best practices, which he liked to an exercise driven by” a bunch of data monkeys.” I have fielded a call from one national bank CEO who confided that he had been experiencing a growing skepticism about what he was being told about his bank's credit quality by his own internal staff. There is a more general sense among CEOs and CFOs I have met during the past 6 months that the credit picture is somehow incomplete, and some worry that it has been that way for quite a while. The majority feel that there is too much reliance on the FICO score, with many questioning its value in today's environment which is witnessing changes in consumer credit habits and circumstances. I read in the July 20 issue of the American Banker that on a recent call with analysts, Bank of America's CFO Joe Price warned that "it is hard to get comfortable with credit projections using traditional methods." One CFO at a community bank asserted that you would need a crystal ball in order to know what the loan losses are going to look like a few quarters in advance.
In our latest book we make the case for a new system that provides an approach to evaluating credit risk and making loans that is more: 1) comprehensiveThe capabilities of the new system that enable it to do so are: 1) improved and more complete dataFor those of you who feel compelled to dust of your crystal ball in order to: 1) make sound loanswe suggest you check out our book instead! Trackbacks
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About Clark Abrahams Clark Abrahams is Chief Financial Architect at SAS where he leads business and product development. He has over 30 years of experience in the financial services industry. Along with co-author Mingyuan Zhang, Clark has written two books that re-think credit risk management and granting access to credit:
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