The Future of Risk Management Digitization in Credit Risk Management

Credit and risk management professionals in financial services face numerous challenges every day. Volatile market conditions, increased competition from Fintech firms, and fears of cyber security breaks are just some of the market pressures that have increased the need to work faster and smarter than ever before. This has driven many firms to look at ways to digitize their credit risk workflows to help streamline activities and improve efficiencies. To provide a lens on some of the trends reshaping credit risk practices, “Digitization in Credit Risk Management” summarizes insights we gathered from over 200 professionals in countries around the world to see what steps they were taking before the COVID-19 pandemic took hold and how this unprecedented time has accelerated change. This blog summarizes some of the findings in the report.

Digitization Efforts Began Before COVID

There has been a growing push for credit and risk management teams to improve operating procedures and the efficiency and quality of decision making. A full three quarters (75%) of respondents to our survey were already working on digitization efforts before the pandemic hit to capitalize on a range of benefits. A large number (71%) indicated that digitization provides for better risk control and management to protect organizational profitability, while 62% mentioned improved efficiencies and 59% pointed to having better early-warning systems in place.

Not surprisingly, 70% of respondents said the pandemic accelerated these efforts, as the rapidly changing environment and surge of bankruptcies taxed traditional credit risk management workflows. Many began to look for alternative sources of data, new analytical approaches, and more dynamic reporting to stay on top of deteriorating credit conditions.

The Pandemic Underscored the Need for More Timely and Granular Data

Many credit and risk professionals were challenged by not having essential information at their fingertips at the start of COVID-19, especially when it came to assessing small- and medium-sized enterprises. This spurred firms to consider a range of new approaches on the data front. About half (51%) of respondents are looking to combine alternative sources with traditional data to help estimate resilience to crises situations. In addition, others are considering data mining and machine-learning techniques to extract new and deeper insights, and upgraded data platforms for faster data delivery.

Listen to our webinar replay on “Data That Delivers: Automating the Credit Risk Workflow”

Existing Analytical Approaches Also Came Under Pressure

Given the wave of non-performing exposures seen during the pandemic, many credit and risk management professionals have focused on enhancing their models and early-warning systems to quickly identify potential problems. Half (50%) of respondents are looking to update models to better estimate probabilities of default, loss given default, and recoveries. In addition, half (50%) want to  monitor portfolios in a more granular manner with back-testing exercises and internal ratings–based models, while over one third (37%) want to put in place advanced early-warning systems.

More Dynamic Reporting Emerged as a “Must Have”

Having lived through a crisis situation, 64% of respondents now see the importance of developing more automated and dynamic reports for executive decision-making. It has become clear that creditworthiness not only differs by sector and sub-sector, but also within these categories, requiring more detailed monitoring. In addition, a range of new risks related to environmental, social, and governance (ESG) issues and additional regulations must now be taken into account.

Progress is Being Made on All Fronts — But More Must Be Done

When considering data, analytics, and reporting, the most progress has been made on the data front, according to 39% of respondents. Interestingly, however, data is also seen as the most challenging area as more firms try to uncover hard-to-find, granular information on public and private, and rated and unrated companies around the world to dig deeper on potential risks.

Firms Look for Additional Support to Move Ahead

Half (50%) of respondents are using a combination of internal and external resources for their digitization efforts. When asked how third-party providers could enhance their credit risk management offerings to address some of the challenges around digitization, many answers were given. Almost two thirds (63%) of respondents are interested in predictive analytics or insights, while 58% would like to see advanced analytics for early-warning systems. To meet growing demands, third-party providers are taking their risk management capabilities to new levels, and considering where investments are most important.

For more details on our findings, please read Digitization in Credit Risk Management.

In addition, learn more about how to transform your global credit risk assessment workflow with S&P Global Market Intelligence’s flexible and scalable Credit Analytics Enterprise Solutions.