Integrating credit data and risk: housing credit risk in a central location can pay market and regulatory benefits.

• Author: van Steen, Michael
• Position: RISK

In the present economic landscape, risk management at the point of credit origination is tied not only to spreading risk data or selecting the correct product proposal and pricing. Effective and comprehensive risk management requires a series of steps along a continuum that integrates covenant tracking, counterparty management, financial spreading, probability of default, loss given default, limits checking, product proposals and pricing, and back-office activities. This broader scope of risk management includes stress testing; assessing risk appetites; calculating correlations and concentrations at the portfolio and enterprise levels; determining the impact of related parties, ensuring consistent underwriting and pricing methodologies; and, particularly of late, meeting compliance requirements from the Federal Deposit Insurance Corp., Financial Industry Regulatory Authority, Inc., Office of the Comptroller of the Currency, the U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, and Securities Investor Protection Corporation, to name a few.

The Broader Scope of Risk Management

Very few financial institutions adopt consistent risk management, origination and calibration methodologies across portfolios, business lines, products, or regions. Instead, institutions frequently turn to quick fixes, overlays or "silver bullets," particularly at the edges of their businesses, to assess and manage risk or to produce specific reports. Lack of integration between credit origination processes and firm-wide risk management and portfolio strategies makes it almost impossible to assess the origination and holding of credit risk accurately within a portfolio.

This leaves institutions ill-prepared to conduct the detailed level of analysis and stress testing of their portfolios expected by internal audit teams, external regulators, and the overall competitive environment.

To mitigate inaccurate measurement of risk and potential regulatory noncompliance, institutions are looking for an approach that minimizes the pain of implementing new IT systems and integrating these systems with their legacy technology infrastructure. The first origination priority, therefore, should be to maintain a single, richly detailed and internally consistent, picture of the existing book of business. For instance, in the diagram below, to assess the institution's total credit risk accurately, credit managers need to take a series of steps to make...