Union Bank uses SAS Credit Scoring to keep at-risk loans from default


Although midsize US banks do not need to follow the Basel II accord, some choose to. And as Hans Helbekkmo, Chief Risk Officer for San Francisco-based Union Bank, told guests at April’s SAS Global Forum Executive Conference, the decision to follow the Basel II requirements using a transparent, in-house approach makes good business sense.

There are no black boxes at Union. Helbekkmo knows exactly what information goes into the models used to determine risk – and more importantly how those models were built. “This is what appeals to me, having a standardized view of the system [that]allows me to really audit what goes on from a high level. We don’t have people writing pages of ‘spaghetti’ code.’’

Helbekkmo's bank chose SAS Credit Scoring for Banking to provide this transparent, auditable solution. He not only walked listeners through how UB uses the solution to measure risk, but brought the point home by discussing how the bank uses this information to help decide what businesses are worth being in.

Union Bank is well-known for keeping the jumbo mortgage loans it makes on its books. The bank, with $79.1 billion in assets, has received positive coverage in National Mortgage News.

Originating and holding loans is what banks did years ago – but today it is considered a bit old-fashioned. Given the rapidly changing marketplace, it requires a keen sense of which markets to enter and when – and also an almost prescient ability to sniff out loans that are about to go sour.

But we’re getting ahead of ourselves. As Helbekkmo explained, using risk-adjusted return on capital as a yardstick, the bank decided a few years ago to exit car loan, home equity and credit card businesses. “We said we only want to focus on high-quality buyers and high-quality properties. In retrospect, that turned out to be a very wise decision.’’

Now as it decides which markets to enter (the bank does most of its lending in California, Oregon and Washington but is looking to expand), it uses SAS Business Analytics and in-house models to gauge portfolio and model performance. “You can use this to show [the]resilience of different products, markets, etc. You can see deterioration in performance across products, geographies, branches – you name it.’’

Helbekkmo says the bank is using its SAS models to look at interest-only loans that are due to enter the reset period. Helbekkmo says rather than waiting for the inevitable increase in defaults that typically hits when the resets take place, the bank can use payment history, housing prices and other factors in a model and get an early idea of who is more likely to go into default, and which customers are of good quality. “You can use strategies to negotiate with customers,’’ says Helbekkmo, “suggesting terms that will keep the customer current on the loan even if the loan-to-value ratio has deteriorated. You can sort of sit back and say, ‘Well, it happens,’ or you can start using this risk information to actually characterize and calculate what is at risk, and further create value by designing risk-adjusted strategies for maximizing value.

Helbekkemo is not the only CRO using SAS Credit Scoring for Banking to improve the risk dynamic in the bank. With the rapidly changing regulatory environment, does Helbekkemo’s idea of proactively following the Basel II Accords seem like a good idea to you? How has your bank handled loans at risk for default? Read what other thought leaders are saying about risk management best practices on the Risk Management Knowledge Exchange.


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