De-risking the banks

They offered high risk mortgages to customers
without income, jobs or assets. They
invested in high yield instruments which, like
a pyramid scheme, were bound to collapse
one day.
Today, in the sober light of September 2009,
these same banks, together with governments
and financial experts are busy figuring out
how to avoid such a calamity in future. Key to
their deliberations is how to mitigate the risks
they face.
Some commentators argue that banks need
to return to the plain, low-risk style of business
that pertained up until the 1980s, where
they made solid but unspectacular profits,
leaving the higher risk strategies to specialist
investment firms that do not benefit from
governmental guarantees and so are liable for
their own losses.
In this more cautious climate, banks are
keen to assess their risk profile with more accuracy
and scrutiny than before. Companies
such as Experian specialise in conducting
such assessments, as the company’s European
chief executive Victor Nichols explains.
“In portfolio management, where institutions

have aggregated portfolios of lending
assets that they are servicing, there is a lot of
work going on to better assess the risk, with
broader data and more rigorous analytics
than in the past,” he says.
Where banks have been obliged to merge,
as happened so dramatically in late 2008, Experian
has the tools to help them understand
their risk profile, says Nichols. “We have a
broad view of the data and of the individual
companies, broader than either one of the
companies may be able to bring to bear, so we
can do a more complete portfolio assessment
and the risk they represent.”
Advances in information technology have
meant that financial transactions and portfolios
can be tracked far more accurately and
promptly than in the past, giving banks more
visibility of any potential risks. “They get
more of a dynamic, or ‘real time’ view of their
credit position on a particular loan or portfolio,”
says Nichols. “They are much more in
tune with how it is changing incrementally
over its lifetime and what actions they may
need to take from a capital requirement or
from a servicing viewpoint. Banks can now
do an even better job of assessing information
about a debt position or aggregate liabilities
and the relative risk for any one customer.”
Outside the arena of purely financial risks,
other commentators draw attention to the
risks from political instability, terrorism,
disruptive technologies, hyper competition,
food, energy and environmental crises and
the relentless rise of world poverty. “These
factors will all contribute to a raised level of
turbulence, with unpredictable spikes, and
we have to be prepared for it,” says business
development guru John Caslione, author of
Chaotics. “In the banking sector, that will
mean greater scrutiny and higher reserve
requirements,” he says. “And let’s not forget
that eight of the world’s top ten investment
funds are from autocracies.”
Yet even Caslione is optimistic. “We always
find a solution,” he concludes.