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What Hurricane Sandy can teach companies about risk management

Nov 05, 2012 Walt Wojciechowski

What Hurricane Sandy can teach companies about risk management
The recent hurricane that hit the east coast of the United States crippled some of the biggest financial and governmental institutions in the world. The New York Stock exchange suffered damages, and much of downtown Manhattan was flooded. Businesses from Maine to Virginia were without power, some for days. In terms of credit risk management, it may seem like these elements have little thread connecting them, but there is a lesson here for businesses of all kinds.
 Picking out the meaning
When assessing the risk involved in extending funds to a requestor, companies need to determine how likely it is they will be repaid or what ability to obtain repayment they can count on. Learning the right kind of entities to invest in requires understanding not only past and present finances, but also how well these applicants have prepared for the future. A home loan provider might not feel comfortable extending a mortgage to a consumer with no homeowner's insurance, for instance, because if disaster struck, the signer could suddenly be without funds to repay the loan. Similarly, Hurricane Sandy showed that credit risk management needs to take into account the likelihood of disaster and how well companies have prepared for this. When the New York Stock Exchange was shut down for a few days, international finance was somewhat crippled. Had this been a private lender and a small business, it's likely that institution would not be able to expect repayment from the SMB unless it had adequate business continuity plans in place. Ready for anything
When disaster strikes, a business needs to be ready to meet all the challenges that could be thrown its way. Similarly, an investing entity should partner with companies that have this sort of forethought, as it safeguards their financial future. When this isn't the case, debt collection strategies can be put on the table, so taking careful steps to assess the risks involved before handing out funds is important. Some entities procure insurance just to protect credit risk management, reported Benzinga, a financial media news outlet. In the event of a power outage or physical damage to a business, the entity is compensated for time and revenue lost. In connection with disaster insurance and other backup safeguards, these precautionary methods may make a business a more likely lending recipient. Even if something should go wrong, an investing institution can rest assured it is more likely to be repaid than not, reducing the overall risk involved.