Two top-of-mind credit-related concerns for today’s banks share one important characteristic: Both are highly data-dependent.
The two issues – adapting to the new current expected credit loss (CECL) model for estimating credit losses and complying with new stress-testing requirements for commercial real estate (CRE) portfolios – require banks to be capable of processing extensive volumes of data from a variety of sources. Moreover, a bank’s ability to successfully accomplish these critical credit initiatives is directly affected by the quality and reliability of that data.
Fortunately, this common data dependence means both functions also can be directly improved through the application of effective data management and data governance practices. Advanced data automation can have a significant positive impact on a bank’s ability to address both the data quality and data quantity challenges that are associated with CECL adoption and CRE stress testing.
High-profile topical issues such as the coronavirus outbreak and the resulting concerns about interest rate uncertainty and liquidity issues are generating the most immediate attention and anxiety across the financial services industry today. In the longer term, however, these top-of-mind concerns must be viewed in the context of larger, overall industry trends, such as the steady, continuing improvements in net operating revenues and reserve coverage ratios that have characterized the past decade.
It also is important to remember that the apprehensions reflected in today’s headlines make sound credit management an even more important concern. After all, most major downturns over the past 40 years – from the savings-and-loan crisis of the 1980s and 1990s to the subprime mortgage crisis of 2007-2008 – were triggered by credit issues.
The stated intentions of regulatory agencies add further impetus to credit management and credit data initiatives. Current exam priorities, as reflected in Federal Deposit Insurance Corporation and other supervisory publications, indicate that examiners are likely to pay increased attention to issues related to IT and data risk, credit risk, and internal controls, with particular focus on credit concentrations in commercial real estate and the agriculture and energy industries.
Against this background, the industry’s attention to issues related to credit data is both prudent and timely – and the sense of urgency is growing. For example, when a large group of bank executives participating in a recent Crowe webinar was asked to rank their credit departments’ critical current priorities, three out of 10 (30.1%) cited CECL implementation as their top concern.