In Focus Risk
Credit strategies must adapt to changing
economic conditions to manage the book within the risk appetite. Any portfolio can be divided into multiple
One can link these portfolio segments to economic metrics and develop marginal segments which could be severely impacted on account of the deterioration or changes to economic conditions
It is important that credit strategies are
nimble, for they are the primary tool to manage exposure and thus loss emergence. Acquisition credit strategies are simpler to manage, while account-management strategies are more difficult to deliver. It is far more difficult to justify the lowering of limits for existing customers as it is likely to lead to customer disengagement.
segments – credit strategies look to identify segments and thus align eligibility to the risk appetite. One can link these portfolio segments to
economic metrics and develop marginal segments which could be severely impacted on account of the deterioration of, or changes to economic conditions. Marginal segments are often based on
scorecards. This is, indeed, a prudent approach for it is a quick fix to stem any incremental losses. However, it may be a good idea to develop a few economic metric- linked segments: l Income – indebtedness segments can be used to identify segments impacted by lower wages. l Low score – indebted customers will be impacted by the rise in debt-servicing costs. Customers newly migrated to the UK could be impacted by structural changes to the economy. One can identify
self-employed customers and they could be severely impacted by any fall in economic demand. The organisation can develop a few
segments (relevant to their target market and product) and monitor early stress. Early stress can be identified by measuring increases in credit searches, missed payments, returned items or even ‘keeping an ear to’ customer service interactions. Economic models are used to determine
Capital and Provisions (in IFRS9). The unemployment rate is considered a key factor in modelling future losses. The structural changes to employment (rapid rise in self- employment since the 2008 financial crisis) could potentially mean that linkages between the unemployment rate and credit losses will be weakened. Lower demand for contractors will not be reflected in the unemployment rate but could lead to a drop in income and thus to credit losses. As portfolio managers, wearing the hat of
an economist can help us discover smart ways to manage the portfolio through the cycle. CCR
The Revolution is coming. January 2018
www.CCRMagazine.co.uk 39
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