In times of uncertainty, identify vulnerability in your portfolio
Managing risk in an ever-changing world
Traditional risk models are based on historical data, but in a rapidly-changing world, extrapolating from the past is an approach that is no longer fit for purpose. Events such as trade wars, pandemics, natural disasters and climate change are by their very nature situations that are hard to predict or plan for. We can make assumptions based on what we have seen with similar events in the past, but no two are the same, so any view of them needs to be supplemented with forward-looking data, which takes into account future challenges that may arise.
The pandemic proved banks need to rethink their methods and start using real-time data to avoid lending mistakes in turbulent and unpredictable times.
Forward-looking data, such as projections of revenues, provide an additional means of understanding future risks. As these offer a glimpse of a possible outcome under certain assumptions, they can never be as accurate as historical numbers, but they do give banks and borrowers the opportunity to act with foresight.
Every crisis is so different and ever-evolving that banks need to be able to re-run scenarios on loans on a regular basis, using new, real-time data as they receive it.
Lending models need to provide an understanding of the portfolio at the granular-loan level, taking into account the individuality of each business and how metrics such as cashflow may be affected by a crisis.
"As bankers, we know the clients you support in the tough times and during down cycles, often become your most loyal. So, OakNorth’s ability to help us gain clarity on the challenges our clients are facing and what level of support they need and when, is critical."
EVP, Chief Credit Executive at Old National Bank
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