ON Scenario Analysis Qorus Banking Innovation Awards 2023

When it comes to commercial lending, a strong approach to credit risk management is essential. Accurately and efficiently determining the creditworthiness of new or returning borrowers will help both traditional and newer lenders increase the amount they lend to businesses, in addition to also reducing the risk of late payments or defaults. In our experience, most banks are limited to using traditional data sets, such as historical financials, personal experience of a particular sub-sector and, critically, no real-time data to provide forward looking insight. However, with more and better data, commercial lenders can find the ‘right path to yes’, expanding the range of businesses they lend to and uncovering new opportunities with their existing clients. With an increased level of understanding, relationship managers and analysts working at the banks will no doubt gain the confidence to lend into unfamiliar industries, supported by industry insights and peer comparisons. Furthermore, today’s market dynamics and volatile economic environment is making the need for actionable scenario analysis increasingly evident. This is further reinforced by current regulatory stress testing, such as the Federal Reserve’s severely adverse scenarios, not reflecting the economic reality. This was made apparent by the recent bank failures that came about due to regulatory stress tests being seen as a tick-box exercise, rather than an opportunity to use a range of forward-looking economic scenarios to gain a better understanding of the possible impacts on liquidity, and profitability. Additionally, with banks facing top-line pressures because of net interest margin compression and the continued economic downturn, there is an increased focus on efficiency. In commercial lending, actionable scenario analysis can play a vital role in guiding banks where to deploy limited resources, meaning lenders can do more with their existing assets while continuing to grow.