creating a range of scenarios to quickly model potential outcomes at a granular level.In this article, we discuss five imperatives that may support edge sharpening across the following dimensions in credit risk management: 1 Michael Birshan, Ishaan Seth, and Bob Sternfels, “ Strategic courage in an age of volatility,” McKinsey, August 29, 2022. To both minimize risk and unlock pockets of value, more fundamental changes are required.Īs discussed in a recent McKinsey article, organizations that thrive in uncertainty hone three kinds of edge: superior insights, clarity and commitment to specific actions, and speed of execution. However, the current combination of events is unprecedented, and the challenge cannot be finessed by simple tweaks to model parameters. Many banking leaders are quickly realizing that new approaches are required to navigate current conditions and to spot potential opportunities.įaced with an array of unusual correlations, banks need to find ways to balance macro and micro risks, incorporating the diverse factors shaping the economy and understanding the implications for clients and portfolios. Indeed, the historical data used to support credit decisions often do not compute in the current context. Rising interest rates, high inflation, low unemployment, supply chain concerns, elevated commodity prices, strong but evolving consumer balance sheets, low consumer sentiment, and febrile geopolitics are among factors leading to bouts of financial and economic volatility-and deepening uncertainty for bank credit exposures. There is nothing new under the sun, as the old expression goes.
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