10 critical risk management services yours should provide.

by. Dennis Child and Randy Thompson, Ph.D.

The past eight years have been traumatic for most financial institutions. We in the lending business witnessed how dramatically loan portfolios can change over relatively short time frames and how detrimental those changes can be.

Federal and state regulators have made it clear they are going to focus more of their resources on making sure credit unions are doing a better job of managing the risk in their investments and loan portfolios than in the past. A credit migration tool designed around stochastic methodology is an essential part of managing credit risk in loan portfolios. Stochastic methodology magnifies the directionality of credit migration and expands its value with statistical analysis that identifies variables which predict the risk factors of loans. A variety of vendors have developed and offer these models in the marketplace.

Our credit migration model was developed over 20 years, based on extensive experience and research. Here are 10 important findings about loan portfolios in just the past seven years:

• A borrower’s financial situation can change quickly—impacting his ability to pay existing debt or take on new debt.
• Loan portfolio book-values are dynamic and continually changing as a result of borrowers’ finances and shifting credit scores.

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