Applying Automation to Improve Risk Management

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.

Using Automation to Enhance Risk Management

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.

1. Capturing & Leveraging Data –

   Oftentimes, bankers must input duplicate data into disparate systems to originate and decision a loan, conduct an annual review, and more. Instead of rekeying data, banks should automate data collection from multiple sources, including from their core and any relevant third-party systems. This reduces the risk of human error. Entering just one wrong number can result in inaccurate decisioning and credit analysis.

2. Risk Rating –

   The process of rating risk within the portfolio can be automated as well. By capturing data from the core, financial spreads and other external sources, a financial institution can regrade their portfolio, detect emerging trends and set appropriate risk thresholds.

3. Risk Mitigation –

   Financial institutions can set parameters and rules-based triggers within lending and risk management workflows that automatically alert team members when a credit policy is breached, whether it’s a covenant that has deteriorated or a required loan document is missing. This significantly reduces reliance on manual reviews and reactionary intervention.

4. Compliance & Regulatory Reports – 

   Automated workflows also help ensure and prove a bank’s business processes are compliant with all state and federal regulatory requirements. Automated processes are designed to follow a specific set of rules and generate an audit trail, making it much easier for bankers to compile reports for regulators.

Areas to Apply Automation

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.

Accuracy & Consistency

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.

Efficiency at Scale

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.

Author Bio

Baker Hill empowers progressive financial institutions to increase revenue, reduce risk, and drive more profitable relationships.

Streamline business, consumer direct and indirect lending with our common origination platform. Understand profitability and risk at every level with our sophisticated business intelligence and analytics. Monitor and maintain a healthy financial portfolio with our statement analysis, exception, and risk management solutions.

Explore our solutions below for more information on how to generate sustainable growth, minimize risk and increase profitability.