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Risk management is key for lenders

Mar 23, 2011 Brian Bradley

One of the biggest issues for any financial institution today is credit risk management. Deciding which customers are worthy of credit can be a key factor in whether or not a company is able to be profitable or whether it will lose money based on poor lending. In a recent column for Business Insider, Tim Grant of Quant Network says that poor decisions led to the downfall of the many in the finance industry and that it was up to those in leadership positions within the firms to make sure that they are not risking the stability of the whole institution when making judgements. He also points to added pressure on banks from new regulations passed after the recent financial crisis. One of the biggest factors in the meltdown was the fact that consumers with questionable credit histories were given housing and other loans when they were not able to make the monthly payments. Grant argues that had there been a better understanding of risks, many of the companies that were over-leveraged, including many of the bailed out banks, could have avoided the significant loses they encountered. "Had such transparency been provided during the financial fiesta of the bull market leading up to the crisis, it would have revealed that in many cases investment philosophy and risk management were hardly linked at all. It would have revealed that many organizations did not fully understand the difference between risk taking, risk management and risk control, and that these three terms would morph into each other creating gray areas that in the end became the black holes which consigned to history some of the world’s most venerable financial institutions," Grant wrote for the source. He said that there needed to be better communication within the organization when it came to making important decisions. One industry that has not been afraid to step back into the lending market is auto dealers. According to a study by CNW Marketing Research, in 2010 more than 859,000 new cars were sold to consumers with subprime credit ratings, some 60 percent higher than the year before. Many see the auto industry financing increases as a sign that the sector is stabilizing after facing its own fair share of challenges in the recent past.