Technologically Transforming Credit Risk Management

By CIOReview | Tuesday, August 7, 2018

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Credit risk is the risk of default on the part of a bank borrower or counterparty to meet the credit obligations or pay debt as defined in pre-agreed terms. Banks and corporates are under tremendous pressure in the wake of challenging economic circumstances to deal with credit risk management in a more effective and risk-averse fashion. The new regulations such as Basel III and Solvency II have introduced tighter rules on risk management, including credit risk. Within such situations, managing credit risk revolves around reducing credit risk exposure within acceptable limits to make sure that even in a situation of a default the damage will not jeopardize the organization’s core business operations and activities.

Management of credit risks begin with the understanding of risk within the financial organization. An extensive knowledge of all internal elements that can influence credit risk exposures and identification of assets of the organization that are exposed to credit risk is a primary concern.

Financial institutions need to bring effective solution in place to appropriately monitor and measure credit risk in relation to their counterparties. This is where technology steps in to aid organizations in streamlining the process of managing credit risks. Automation of business operations and compliance practices to monitor each action against risk will enable organizations in ensuring enhanced auditability and mitigating credit risk. Implementation of a business process management (BPM) system will help financial institutions to effortlessly construct efficient processes and design the necessary strategic measures to ensure proper performance and minimize operational risk. Once the stage for technological support for measuring financial exposure is set, limits to automatically track and calculate credit risk in agreement with pre-defined requirements can be defined.