Despite all the tools, algorithms, models and tests that we use to assess and formally manage risk, the core of risk management seems to me still more of an art than science. As I am working with financial institutions of all size and on almost all continents, I am always searching for a common denominator in the management of risks. What makes the credit risk assessment of a commercial bank in the US similar to the work of a leasing company in Africa or a microfinance institution in South America?
I think, it’s the approach to the risk assessment. It is the way, how credit analysts study the risk profile of a client and how they try to truly understand all the key risk factors that are driving the client’s ability to serve his obligations. There are certainly special niches, where we can rely scoring models to simplify the assessment. For a large part of the lending business, it is still the assessment and the experience of the analyst, combined with a watertight documentation and execution that eliminates avoidable risks.
To create the perfect environment to enable credit analysts to perform their work, we need to establish a good risk culture. This culture combines well written policies and guidelines, the right tools that simplify the work without relying on black box style algorithms, and a work environment that provides the space to learn and collect experience from the team, from superiors, and from the clients themselves.
In this environment, policies and guidelines take an key role to define the borders of the work. A successful analyst is one who does not need those borders, because he takes them as a minimum requirement and goes beyond those rules in the assessment.
More important for an analyst is to be part of a good team, managed by the right coach (team leader/boss). In sports we always accept that even the best players rely heavily on the support of a coach and on training which takes more time than the actual competition. In the regular work environment we still assume that the employee enters the job perfectly prepared. Credit analysts like other employees often do need a coach who guides them, puts them on the right track, and challenges their performance, even if they are working well. Making the team better and more experienced is something we strive for in sports but sometimes neglect in the work environment.
Who is the right coach for a team? To continue with the analogy of sports, the answer is: it depends! It depends on “the league in which the team of analysts is playing”. Many financial institutions play in local or regional markets. Ideally they have composed teams of analysts who fit perfectly well in that environment. They are satisfied with this environment and are happy to work with the clients and solve the challenges that this specific market has. In the same way, also the coach needs to fit in that environment.
The same holds true for the training methods. There is no need to apply training methods which are used to get players in shape for the champions league, if the actual competition takes place in a regional league. It might actually be counterproductive, because the methods do not address the preconditions and needs of the analysts. Nothing is more frustrating than the feeling of a bad and unqualified player.
In summary, if the initial assumption, that there is still a lot of art in the management of risk is true, then it is recommended to create a risk culture that supports work in the best possible way and creates an environment in which analysts can work well while being challenged to improve continuously.