A 30-year-old risk rating system just isn’t viable anymore.
For years, commercial loans have been granted based upon a single number, typically ranging from one-to-eight, which defines the risk based on an amalgamation of borrower data.
While this approach does employ real, tangible facts, relying on a single number may not be the most accurate way to evaluate risk.
Just look at the percentage of your own commercial loan portfolio that’s rated between “three” and “four.” Are all of these companies—and the loans they carry—really that similar? Chances are they’re not.
Although traditional risk-rating models worked 30-years ago, they don’t provide the insight needed to succeed in the financial services world today. Slowly but surely, models are beginning to change, bringing new transparency to loan portfolios and enabling institutions to make better lending decisions.
Let’s look at the emerging trends driving this risk rating evolution.