Credit Management Information System

A critical part of credit risk management is the ability to identify credit risk.

An article in the Federal Deposit Insurance Corporation's Supervisory Insights looks at credit management information systems. The article argues that a comprehensive credit management information system needs to employ forward-looking risk indicators, just not lagging risk indicators.

Lagging risk indicators include merics, such as charge-off rates, delinquency rates, and restructured loans.

According to the article, relying too heavily on "lagging risk indicators can result in inadequate risk identification and lead to decisions based on an incomplete understanding of the risks facing the institution."

Forward-looking indicators, however, proactively assess risks.

Examples of forward-looking risk indicators for retail loans include tracking production and portfolio trends by product, loan-to-value ratio, debt-to-income ratio, lien position, and credit scores.

The article has a table of forward-looking credit metrics for both commercial and retail loans.

To be effective, these reports need to be received on a timely basis, should include trend analysis, and should not rely to heavily on averages.

In conclusion, a forward-looking credit management information system is an important component of a strong governance structure.

Read the article.