Over 80 banks in America have been closed down this year and others have announced higher trading losses amidst increased regulatory scrutiny. Finland was the first country to announce a double dip recession. Northern Rock cut 650 jobs as part of their restructuring efforts. We’re obviously not out of the woods yet.
Basel III is on the horizon - more regulation, tighter controls, more analytics. But many banks aren’t waiting for its arrival – they are adapting traditional methods to give them an edge now.
So what are they up to?
Bank of America has taken steps to improve the time it takes to calculate probability of default. They had already deployed the latest risk management analytics to improve accuracy, but are now using “grid” technology to leverage multiple machines in parallel. Instead of taking 96 hours to compute, they can now do it in 4. The new setup brings other advantages. Ad hoc or computational analysis can be scheduled and prioritized so that it doesn’t compete with scheduled work. Instead of taking 3 hours to score 400,000 loans using a suite of models with multiple scenarios over the 360 months of a typical mortgages life, it can now be done in 10 minutes. The faster they can assess risk, the faster they can manage/ mitigate it.
The Generali Group has adapted their strategy and with it the need to manage risk across all its dimensions. Hedging to manage risk has become far more complex – particularly given the uncertainties associated with government bonds/ debt. As a bank that operates across Europe, Generali chose to set up a virtual community that exploited expertise and competence across the group, overcoming the traditional functional distinctions between project participants (analysts, programmers, risk managers and so on).
Wescom Credit Union has added advanced forecasting techniques on top of traditional credit scoring methods. They can now add 350 economic indexes with 25 years of forecast to improve the picture and accuracy of risk. As a result, employees can plan business strategies one, two, three or even five years ahead with confidence. It means they can be more selective in how they treat specific sectors and understand how impacts such as a fall off in international trade will ripple through that sector and thus their customer’s propensity to default. All of which means they can take pro-active action to avoid bad debt and mitigate risk.
What other approaches have you seen banks adopt over the last couple of years?