The banking industry is traditionally risk-averse – but when many businesses are in need of help and some economies are flatlining, are some banks being too rigid in their approach to risk? Tapan Agarwal, Risk Product Council Chair, iGTB, explains how technology can help banks manage their risks more realistically and remain open for business
Banks are traditionally cautious, and this is entirely commendable: after all, they are the custodians of their customers' wealth. However, in the current environment there are an overwhelming number of factors reinforcing this inherent tendency, causing some of them to keep too tight a grasp on the purse strings, or to batten down the hatches entirely.
This impulse is fully understandable: for bankers, nowadays, there really never is a worry-free moment. If they are not apprehensive about clients defaulting, they are concerned they might be money-laundering, or anxious about economic or political volatility undermining their financial viability. Add to this the pressure of regulatory risk which is now constant, and constantly growing.
To top it all, the media is awash with stories calculated to raise bankers' blood pressures further, conjuring nightmares of the ultimate risk scenarios – like the recent publication of the Panama papers. As well as putting governments of countries as far apart as Argentina, Russia and Australia under pressure to answer allegations, publication of these documents threw up uncomfortable questions about how well some banks really know their customers.
A rock and a hard place
In the eyes of the rest of the world, of course, bankers can in any case never get it right when it comes to risk: too lax and they are accused of preparing the ground for the next financial crisis, but too tight and they are lambasted for stifling the economy by refusing to release funds desperately needed by corporates to grow and thrive.
Somewhat inevitably in the current economic climate, certain types of business – particularly start-ups whose financial viability is as yet unknown, and businesses with weak financial reporting – are liable to get bogged down in a kind of vicious circle. Unattractive prospects to banks, they will be penalised by high interest rates and high collateral requirements for loans, which may in turn lead to cash flow problems precipitating default.
Simply blaming banks for this is, however, a knee-jerk reaction. Banks' aim is to remain healthy, liquid and profitable – and they can only do that if they effectively manage their risks.
As we have seen, being rigidly risk-averse is not ideal. What banks need are ways of finding a happy medium and offering businesses the help they need, in terms of loans, accounts or payments, while still keeping a firm grip on the risks involved.
Getting low down and digital
The solution is of course better risk management, based on improved knowledge of the risks. Technology can supply all the data and tools needed – to know which risk is supportable, for how long and at what cost – and can supply such knowledge in an ongoing, constantly updated and largely automatic way. This allows bankers to gauge and monitor each type of risk more accurately, and alerts them when there is a problem, giving them the data and tools to reclassify the risk level and adjust the cost, or indeed to pull the plug.
This is simply digital banking in the risk arena; putting more and better quality data than ever available before – along with more sophisticated processing and analysis – straight into bankers' hands. Thus equipped, they can make balanced and realistic decisions in every instance.
When it comes to country risk, for example, instead of putting a blanket ban on doing business with a country, banks may use better and enhanced due diligence and screening techniques. This would allow them to assess precisely how risky business is likely to be with a particular client at a particular time, in a particular business sector and geographical region within that country.
When it comes to payments, rather than setting payment limits for each product across the board, banks can now deploy technology that allows them to implement complex limit structures at an individual client level, offering a pay/no-pay/refer decision based on limits and balances across accounts.
Lending is a further prime example. Technology can enable banks to measure the probability of default in various circumstances, taking into account the industry, region and country of the debtor, and to monitor changes in market variables for a constantly updated risk figure: a more empirically-based, productive and positive approach than simply denying a customer a loan out of hand.
A bank wanting to decide whether or not to grant a correspondent banking account – say, to an organisation in Africa, or to open an account for a corporate dealing in dual-use goods – may well be able to do either or both of these things by improving the operations, technology and processes put in place to manage the associated risks.
Banks are long accustomed to playing it safe, but they need business opportunities just as badly as their clients do. But technology can help in instances where banks are missing opportunities not because the opportunities are inherently risky but because bankers are either unsure about the precise nature of the risk, or have not been able to measure it with sufficient precision. With the right tools and attitude, bankers will soon become accustomed to leveraging technology to fine-tune their responses to any type of risk.