Helping banks understand credit risk and lending

August 2020 – Following the initial round of government loans, and with more to follow, banks are now faced with a variety of challenges regarding managing their loan books.

• Identifying early warnings and signs of distress in the loan book. Understanding what is already committed and how it links to the borrowers’ ecosystem.

• Retrospectively examining new COVID-19 related lending. A lot of lending had to be done quickly, ignoring risk models and risk appetite, perhaps even undergoing a lighter-touch ‘Know Your Client’ process. All work that was done quickly, will need to be re-visited. Some banks lent many multiples more than they would annually in the space of three months; this loan ‘hump’ will also present portfolio management challenges, as the portfolio requires day-to-day oversight and annual renewals.

• Understanding second-order risk. When a major client gets into trouble, it is absolutely critical that the bank can quickly understand (or ideally already know) what the impact will be not just on the lending that they have provided to the company now in trouble, but the entire supply chain, across their lending portfolio.

• Deep diving on specific ‘at risk’ sectors specifically those hardest hit by the COVID-19 pandemic. For example; transportation, food and beverage. Industry and sector code analysis will become key.