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Credit risk management in the modern era

Jul 29, 2013 Walt Wojciechowski

As economic conditions remain turbulent in the United States, enterprise decision makers have had to pay especially close attention to credit risk management. Consumer and corporate credit scores have fluctuated erratically throughout the years following the Great Recession, making it far more difficult to manage risk that in the years before the financial crisis.

Though the economy does seem to be improving more consistently, it has not yet taken a substantial bite out of credit risk. Thus far, the strengthening conditions have led to higher demand for loans, products and services, which subsequently makes credit risk management more difficult. Enterprises need to use the most advanced technology and strategies to protect their finances in the modern era.

A complete overhaul
The ABA Banking Journal recently listed several ways in which enterprise decision makers can revise credit risk management strategies for more successful and consistent financial performances. Sometimes it will take a comprehensive revision of risk management protocols to ensure relevance.

According to the news provider, the reorganization of processes and personnel is the first step toward a new credit risk management strategy. This action becomes more important when the individual responsible for managing risk has not been trained in the new threats to financial security that are currently present, or exits the firm.

For restructuring purposes, enterprises should look into the responsibilities of the chief financial officer, compliance officer, internal auditor and chief lending officer, when applicable. The source asserted that some enterprises will benefit from creating a chief credit officer position, or outsourcing the associated tasks to a firm that specializes in the processes.

The ABA Banking Journal noted that all arms of the business should always be held accountable for risk management processes, as an all-hands-on-deck approach will often yield the most favorable results. Executives will need to ensure that all types of risk are accounted for when trying to comprehensively control financial management.

The news provider stated that credit, interest rate, liquidity, operational, strategic, reputation, compliance and market risks are among the most common facing the modern enterprise. Leveraging advanced technology and conducting regular vulnerability tests or financial assessments will improve the overall capabilities of companies to manage risk.

What to do after mergers and acquisitions
Mergers and acquisitions have become more active and widespread in the recovering economy, as companies continue to try to expand operations and bolster global footprints. By their very nature, these processes are filled with risk, though firms can handle the situations more efficiently by implementing fluid risk management protocols.

Director of Finance suggested enterprise executives begin to focus more on the management of risk before, during and after mergers and acquisitions. While outsourcing is an excellent method for businesses that have not gone through the gauntlet of credit risk management, or mergers and acquisitions, new technology can help more experienced corporations.

According to the source, several cloud computing-based software solutions are now available that help to streamline the process of credit risk management, especially during major changes in the corporate makeup.