Everything Banks Think They Know About Risk is Wrong
The pandemic proved banks need to rethink their methods and start using real-time data to avoid lending mistakes in turbulent times
Rishi Kholsa | Founder and Group CEO, OakNorth
April 5, 2021
The risk models that banks use to help inform their commercial-lending decisions have been dealt a blow by Covid-19. The pandemic has presented a crisis where historical correlations do not hold. In 2021 we will find new ways of assessing risk that use forward-looking as well as backward-looking data. This will make lending smarter and better for everyone.
Traditional risk models are based on historical data, but the dynamics of the Covid-19 crisis mean that extrapolating from the past may now be a less helpful approach. As is the case with trade wars, natural disasters or, indeed, climate change, pandemics 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.
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