Accenture reports that 77% of risk leaders across a variety of industries have raised concerns regarding the fact that operational and financial risks are emerging more rapidly than ever. In the case of credit risk, regulators have asked that banks make concerted efforts to work with borrowers to mitigate risk exposure and avoid default amid ongoing CRE concerns.
The FDIC’s 2024 Risk Review noted: “Overall, though CRE credit quality was resilient in 2023, weak office space demand and rising borrowing costs in the higher rate environment are likely to weigh on CRE performance in 2024.” In anticipation of ongoing stress in the sector, the FDIC, together with other regulatory agencies, issued various advisories in the last year cautioning financial institutions about risk. Regulatory guidance promotes working prudently and constructively with creditworthy borrowers during times of financial stress, retaining sufficient capital, and ensuring appropriate credit loss allowance levels.
“This means financial institutions need to accelerate their response to a more pervasive and complex risk environment and take steps to reinvent their risk management,” the FDIC said in its 2024 Risk Review.
Banking, lending and risk management processes include a substantial number of repetitive and manual tasks, which take up a lot of time and effort. Automated technology can revolutionize these processes by making them more efficient, accurate and consistent, particularly when it comes to lending and risk management workflows. This not only supports regulatory requirements by ensuring loan origination and risk mitigation strategies are standardized across business lines, but automation also gives bankers more time and bandwidth to engage with borrowers.
Let’s look at four areas where automation presents the most potential for financial institutions and their risk mitigation strategies.
For banks looking to jumpstart their automation journey, it can be difficult to determine where to start.
Spreading financial statements and tracking exceptions are ideal projects to begin with.
Oftentimes, banks rely on spreadsheets for these activities, which is time-consuming, manual and rarely scalable, especially for institutions that have undergone mergers or acquisitions in recent years, where new business lines may have been added to the bank’s operations. However, automating these tasks presents numerous benefits, such as improved accuracy and consistency in lending and risk management, as well as greater operational efficiencies.
When banks automate the financial spreading process, they streamline the input, analysis and interpretation of financial data. Not only do they streamline this process and reduce the risk of human error, but banks also ensure greater consistency in how that data is interpreted and reported.
These benefits also apply to exception tracking. When credit policies, exceptions and tracking items are managed in disparate systems and spreadsheets, it’s difficult to keep track of various requirements, collateral items, documents and other information associated with a loan. Automation standardizes these processes to improve credit quality and compliance without burdening team members with additional manual work, which brings us to our next point.
Redundant data entry drains time and resources, and it’s an issue many banks struggle with. It’s not uncommon for multiple teams to spend time entering data from various systems into their own workflows. For example, a credit team member may have to rekey data from financial statements to create a credit memo and an operations team member may have to input the same data again to produce the appropriate loan documents.
All of this can be automated to support more efficient portfolio growth while effectively mitigating risk. These tactics are especially impactful for streamlining loan renewals and this is a timely benefit considering the nature of the CRE market. Depending on the type of loan, some CRE loans that are coming up for renewal may be performing well while others may warrant a closer look. By automating data entry and the initial analysis of financial statements, credit analysts can spend their time on bigger, more complex commercial deals that need attention.
Using spreadsheets to attempt to monitor and comprehensively evaluate portfolio risk, as well as analyze risk for new loan applications is a practice that is full of potential pitfalls and blind spots. Intelligent automation can quickly spot and alert lenders to different risks, whether it’s risk that impacts decisioning for a new deal or a loan that’s up for renewal. Automation that streamlines and standardizes lending and risk management workflows ensures every credit decision is made with the bank’s policies in mind and uncovers risks that may not be so obvious upfront.