Step ahead of shadow banks and stay within your risk appetite

Senior Strategist, Financial Risk Product Management, IBM

Today banks around the world are still dealing with the regulatory and competitive aftermath of the global financial crisis. In the years following the crisis, when banks retreated from riskier forms of lending, a myriad of shadow banking firms stepped into the void. In recent years, as this article in The Economist reveals, private-equity firms and other shadow lending institutions have been “deliberately expanding into areas where banks are retreating” and making significant profits in the process.

The 2015 Global Shadow Banking Monitoring Report by the Financial Stability Board (FSB), a global financial watchdog, reveals that asset growth in shadow banking is outpacing the banking sector — the shadow banking sector accounting for roughly a quarter of total financial assets worldwide, compared to about half within the banking system. Based on reporting from authorities within 20 jurisdictions and the euro area, the FSB report shows that credit intermediation by other financial intermediaries has been increasing steadily since 2010, reaching $29 trillion in 2014. This growth was led primarily by fixed income investment funds, with jurisdictions such as Hong Kong and Japan experiencing the fastest expansions. banks can survive, and thrive, in a world of shadow banking

This recent market research paper reveals how, with commercial and industrial loan volumes on the rise in several markets, some banks are meeting the competitive challenge from shadow banks by easing commercial lending standards without implementing improvements to their loan portfolio management. This general trend is, however, problematic given that:

  • Banks, operating without effective credit-event management, face an increased likelihood of credit losses.

  • Shadow banks, operating without banks’ regulatory constraints, have more room to maneuver and undercut banks.

Industry observers argue that to more effectively compete and grow sustainably, banks should avoid broadly relaxing lending standards and instead pursue solutions that can help identify markets and transactions that most appropriately balance risk and return.

Achieving sustained growth in loan portfolios, and increasing return on capital, requires that banks compete smarter—meeting the challenge of shadow banks with advanced technologies of their own.

Smarter risk technology for smarter, more profitable decision support across the credit lifecycle

For banks to successfully compete with the shadow banking sector, they need smarter systems that can deliver decision support throughout the entire credit lifecycle (See Figure 1). This requires risk systems with the comprehensive scope and power to provide on-demand insights at each stage of the lifecycle, enabling managers to:

  • Support growth, by identifying and nurturing valuable client relationships.

  • Manage risks, with proactive detection of changes in customer credit profiles to mitigate potential losses.

  • Decrease operating costs, through more automated processes and consolidated systems.

Figure 1: Smarter decisions throughout the credit lifecycle.

See how IBM Algo Credit Manager gives banks competitive advantage — with smarter risk insights and critical decision support across the credit lifecycle — by watching the following brief video featuring the Head of Credit Change from Absa Corporate & Investment Banking.

IBM Algo Credit Manager empowers banks to better compete with the shadow banking sector, giving managers the technology to confidently serve commercial loan clients with a broader range of risk profiles. With ‘pricing for profit’ capabilities supporting generation of multiple risk versus reward scenarios at the company, group, or subsidiary level, the solution embeds risk adjusted return on capital calculations into the credit application approval process for both individual firms and groups of companies. With the power and sophistication of IBM Algo Credit Manager, credit officers will be able to confidently evaluate applications that are augmented with analysis on RAROC and the incremental exposure by country, currency, and sector risk.

Learn more about how new IBM Risk Management technologies can provide the risk-informed decision support critical to growth in today’s marketplace.