European Risk Managers Rank Increasing Lending over Increasing Capital

As European economies recover from the recession risk managers say increasing lending will be a higher priority for 2014 than increasing capital, reports predictive analytics and decision management software specialist FICO.

The company, formerly known as Fair Isaac, released its ninth
‘European Credit Risk Survey’
, conducted in partnership with the European Financial Management Association (Efma), a non-profit body.

The survey found that at the top of the list of risk management priorities for 2014 were improving risk management processes and systems, which 96% of respondents named a priority or a top priority, improving the customer experience (also 96%) and growing the profitability of existing customers (93%). These were also the top priorities for risk managers in the US and Canada, according to a similar newly-released survey by FICO and the Professional Risk Managers’ International Association (PRMIA).

Some 85% of respondents said increasing lending to consumers is a priority, and 74% said the same for lending to small businesses. By contrast, 51% of respondents said increasing capital to meet regulatory requirements is not one of their bank’s risk priorities for 2014.

“Regulatory compliance is still top-of-mind for banks, but the pressure to build capital has eased and banks need to apply their capital to support new business growth,” said Daniel Melo, senior director of Fair Isaac Advisors, FICO’s consulting group.

“New lending to consumers and small businesses is a higher priority, but the use of capital today demands better results, so risk managers will focus not only on increasing customer profitability but also on improving the customer experience, to build loyalty and fuel new sales.”

“This forecast is good news for consumers and the European economy,” said Patrick Desmarès, secretary general of Efma. “While credit demand will not return to normal for some time, the supply side of the equation appears to be recovering.”

While the priorities for capital may have changed, the focus on regulations has not. “Like most other financial institutions, our priority continues to be driving forward the regulatory compliance agenda,” said Denis Hall, chief risk officer of GE Capital International. “The demands from our lead regulator, the Federal Reserve, as well as from regulators across all the countries we serve, continue to increase, and that will not stop in 2014. The greatest concern I have is how to ensure that this heightened risk awareness continues once times return to the heady days when volume is king.”


Lenders Take New Collections Approaches

The forecast for delinquencies is more optimistic in the new survey, with fewer than 50% of respondents forecasting an increase in delinquencies for all products, and most respondents expecting mortgage and auto loan delinquencies to remain at their current levels. However, these forecasts vary widely by market, and lenders interviewed for the survey discussed new ways they are working with distressed borrowers.

“We continually optimise our strategies for working with customers who experience financial difficulties,” said Maria Topaler, credit and risk head at Germany’s Targobank. “For example, during the 2009 crisis, unemployment in Germany increased only slightly, but some of our customers experienced a temporary income reduction because of the short working hours programme, which was introduced by the German government to help avoid major layoffs and encourage companies to keep qualified workers through the crisis.

“We implemented a new remedial tool for the impacted customers: a temporary reduction of monthly instalments for the duration of the short working hours programme. I think this was a very timely measure that helped both our customers and our bank to get through the difficult times.”

“We have put in place a debt restructuring policy that enables our customers with difficulties to spread their repayments over a period which takes account of their financial capacity,” said Michel Galiay, director of risk for retail banking in France at Société Générale.

“We have organised our recovery procedures to ensure that they are more reactive, in order to improve our efficiency. At the same time, by being proactive before difficulties emerge, we are able to avoid worst-case scenarios and adjust repayment schedules to reflect the new financial constraints of our customers.”

Some 73 representatives from 32 European countries and 66 institutions participated in the ninth European Credit Risk Survey. A detailed report, including specific results for the UK/Ireland, Germany/Austria/Switzerland and Central and Eastern Europe, is
available online
. Participants included credit-granting institutions ranging from local banks to global institutions.

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