Jeff Judy

Jeff's Thoughts - May 4 , 2016


In the financial services industry, we're good at figuring out what went wrong. In the best run institutions, problem credits are detected quickly and are met with an aggressive response.

Beyond that immediate action, there are follow-up systems with functions like compliance, internal audit and credit review that explicitly examine the organization's performance in risk management. Hopefully, something is learned from that review that can be applied at the front end of the credit process to improve outcomes.

And there's the rub, as they say. As an industry, we are reasonably good at identifying mistakes we have made and problems we have helped create. And we are very good at documenting these problems.

But are we good at learning from them? How good is your institution at closing the feedback loop? How much does what you learn after problems occur influence how you act in the initial interactions with the customer?

The computer world has long embraced the acronym GIGO, which stands for "Garbage In, Garbage Out." The best software cannot give you an answer, an output, that is of higher quality than the input that is fed into the program.

In credit terms, your portfolio is the output of a complex process, much like software. The inputs are the individual credits that are approved, of course. In a sense, the applications you decline are also a kind of input to the process.

And, obvious though it is, it cannot be repeated often enough: the quality of the individual credit decisions you make determines the quality of the portfolio you carry.

Now, every institution believes their front lines are trying to book good quality credits. But some go beyond lip service to make sure their front-line staff see themselves as part of the risk management effort.

For instance, when new credit staff are hired, is risk management part of the discussion during the job interview?

What about incentives? If there is recognition for booking credits, is similar recognition given to credit staff whose customers go a long time without creating problems? Manufacturers recognize units that go long stretches without an accident, maybe we could learn something from that practice.

Speaking of incentives, regulators are beginning to pay more attention to the "Garbage In" part of the process (see Steve Cocheo's article, referenced below). Expect them to show more and more interest in how your culture of risk management is expressed, not just in the compliance and review functions, but from the very first contact with the customer.