Preparing for the Credit Downturn

July 2, 2008

Abstract

New York, NY, USA July 2, 2008

Since banks have become accustomed to a low default environment, they run the risk of not being adequately prepared for a downturn, despite having invested significantly in credit risk measurement techniques in recent years.

discusses what banks can do to prepare for the next credit downturn. It outlines some of the management structures that need to be in place and provides seven recommendations aimed at ensuring that levers for managing credit risk exposure are effective and appropriate.

A credit downturn also offers an upside, such as opportunities to acquire weaker competitors, expand distressed debt trading, and offer third party workout services. To seize these opportunities, a bank will have to have its own house in order and be in a position of relative strength.

The report is 16 pages and has three figures. A table of contents is available online.

 

Members of Celent's Retail Banking, Wholesale Banking, Wealth Management, Institutional Securities & Investments, and Finance, Risk & Compliance research services can download the report electronically by clicking on the icon to the left.  Non-members should contact info@celent.com for more information.

 

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

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North America
Michele Pace
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Tel: +1 212 345 1366

Europe (London)
Chris Williams
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Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
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Tel.: +81 3 3500 3023

Table of Contents

New York, NY, USA July 2, 2008

 

 

Introduction 3
Signs of a looming credit downturn 5
Risk measurement is necessary, but not sufficient 7
Effective credit portfolio management structure 8
Essential levers in a credit downturn 10
  Develop a plan for tightening lending standards 10
  Develop a plan for changing approval processes 10
  Review and test the effectiveness of early warning systems 11
  Recognise the limitations of economic capital and ask common-sense "what if" questions 11
  Pursue opaque and hidden risks 12
  Conduct a comprehensive balance sheet and risk transfer review 13
  Ensure your workout department is prepared 13
Conclusion 15

 

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