Do you want to meet regulatory requirements for credit risk? Or do you want to go beyond the requirements and improve your business with your credit risk models? If your credit risk is managed properly, you should be able to do both. Let’s break it down.
Credit risk refers to the probability of loss due to a borrower’s failure to make payments on any type of debt. Credit risk management is the practice of mitigating losses by assessing borrowers’ credit risk – including payment behavior and affordability. This process has been a longstanding challenge for financial institutions.
Continued global economic crises, ongoing digitalization, recent developments in technology and the increased use of artificial intelligence in banking have kept credit risk management in the spotlight. As a result, regulators continue to demand transparency and other improved capabilities in this space. They want to know that banks have a thorough knowledge of customers and their associated credit risk. And as Basel regulations evolve, banks will face an even bigger regulatory burden.
To comply with ever-changing regulatory requirements and to better manage risk, many banks are overhauling their approaches to credit risk. But banks who view this as strictly a compliance exercise are being short-sighted. Better credit risk management presents an opportunity to improve overall performance and secure a competitive advantage.