Early warning system (EWS) is a crucial element when dealing with credit risk management. EWS can be defined as a system for collecting information and then using this information to monitor certain object or subject.
Among other matters, banks are responsible to operate efficiently, to keep solvency and to credit checks on (potential) borrowers. This is how they manage risks, which they take on (ECB 2015). Because in most banks credit risks represents the biggest share of overall risks, is determining, measuring and managing credit risks very important indication of bank’s financial health and quality of their balance sheet.
Costs of credit risk (e.g. writing off of borrower’s credit) of European banks have increased rapidly in the recent years and are still rising in some markets.
Banks with successful monitoring of credit risk and efficient EWS can identify risky borrowers six to nine months before these borrowers face serious difficulties and become unable to pay off their liabilities to the bank.
Banks with good credit risk monitoring are able to lower the sum of unprotected loans of borrowers on their watch list by 60% in the maximum span of nine months.
Differences in efficiency of different types of credit risk monitoring can be shown by utilizing credit conversing factors (CCFs). CCFs indicate differences in successfully sourcing already approved credits (or credit lines) up to a year before the loan(s) repayments has started to fall behind. CCF for firms and general population varies on average between 39% and 72%. In other words, banks that have set up an efficient monitoring system can unable sourcing of already approved credit lines, because they can determine that credit risk level is too high.
Experiences have shown that improving credit risk monitoring leads to lowering of sum of loan write offs by 10% to 20%.
Foundation for successful EWS is reliable data base, which is then complemented by some subjective factors/indications.
Bank sets the indicator thresholds for automatic alerts. On the basis of alerts (orange and red flags) we form different watch lists, which are crucial element of successful EWS. Goal of monitoring is to define actions that follow the aforementioned monitoring.
Actions, that the bank takes, include shrinking of non-binding credit lines, lowering of credit exposure to certain borrower(s) and requesting additional collateral or credit insurance.
The successfulness of the monitoring and actions requires a very good cooperation between organizational unit for monitoring and the bank’s commercial department.
Big Boss™ and EWS
“The foundation for successful EWS is a reliable data base, which is then complemented by some subjective factors/indications …”
Tracking clients performance
Using Big Boss™, we collect periodical data about our clients (input tables, publicly accessible data) that is financial and also non-financial (in forms of questionnaires) in nature.
After the data has been entered in the database, indicators that are defined for EWS are automatically calculated.
Indicators can be monitored in Reports sections, where they are coloured red, yellow or green depending on their position outside or within the boundaries we set.
Dashboards
Tasks (actions) and projects
“The value of monitoring is visible in defining actions that follow the monitoring.”
Using Big Boss™ we can define actions for every client’s indicators and tie them to alerts. It is important that we have an overview of all actions and tasks and that there are clear notification (coloured statuses and e-mails) if actions are not performed in a certain time frame.
CRM
“EWS requires a very good cooperation between organizational unit for monitoring and the bank’s commercial department.”
Using Big Boss™ we can filter and track different lists of clients (e.g. red/yellow watch list/…).
Client’s info card lets us see all the development connected to the client, such as ongoing projects, tasks, communication, contacts …
Balanced score card – control over realization of strategic plans
“Banks with successful monitoring of credit risk and efficient EWS can identify risky borrowers six to nine months before these borrowers face serious difficulties and become unable to pay off their liabilities to the bank.”
That complies with Kaplan-Norton methodology, which highlights the fact that firm’s financial indicators alerts us to problems with one to two year delay. That is why it might be sensible to track realization of strategic goals of larger clients. Big Boss™ allows monitoring strategic goals of the firm using a system of balanced indicators to alert us about realization status of those strategic goals.