Independent Banker - November 2017 - 52

SPECIAL SPOTLIGHT
NEXT-GEN BANKING
Combining Information to Better Assess the Credit
Risk of Small Firms and Medium-Sized Enterprises
C
ould you improve your analysis of borrower risk
by leveraging more types of data?
In this latest Moody's Analytics article, Dr. Douglas
Dwyer discusses the issues associated with lenders
acquiring and transforming current fi nancial and
behavioral information into business decisions. The
article also presents a unifi ed modeling approach
for combining the information into a credit-risk
assessment for both small fi rms and medium-sized
enterprises.
" The future of lending
will likely involve
automated approaches to
collecting both fi nancial
statement information
and behav ioral
Lenders are increasingly tasked with making good
lending decisions quickly. Such decisions require
the ability to combine different types of information.
Lenders typically rely purely on fi nancial information
to assess the credit risk of medium-sized enterprises.
For small businesses, however, they consider more behavioral
factors, such as usage of credit lines, history of late payments
and the age of a relationship.
information for small
fi rms. "
- DR. DOUGLAS DWYER
A good origination process allows a lender to make loans
faster, increase market share and lower operational costs. A
good risk model lowers charge-offs and provisions, especially
during business downturns. To remain competitive, lenders
to small fi rms and medium-sized enterprises require both a
good origination process and risk model. To quickly act on
such information, fi rms must combine the information into a
unifi ed risk assessment.
Behavioral information is useful for understanding the credit
risk of a small business, but is it as useful for mediumsized
enterprises? Conventional wisdom would say no. For
medium-sized enterprises, the fi nancial statement information
is much better, so credit assessments can rely more on
the fi nancial statements. The question can be addressed
empirically by constructing a model that measures the
relative importance of fi nancial information and behavioral
information by fi rm size.
Arguably, behavioral data should be more heavily weighted
in the assessment of small fi rms whose fi nancial data is
often incomplete or inaccurate. Carrying out risk decisions
using a model based on one form of data alone is shown to
result in an overestimate or understatement of the actual
probability of default. Making risk decisions based on partial
information can lead an institution to take a loss on a bad
loan or spend too much time on the origination process,
increasing costs and the potential to lose business.
The future of lending will likely involve automated approaches
to collecting both fi nancial statement information and behavioral
information for small fi rms. The facilitated collection of this
data enables lenders to use both types of information to make
better and more informed credit decisions.
Learn how to combine both types of information into a better
assessment of credit risk. Click the button below to download
the full article.
moodysnext-gen
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402-344-5296 | moodysanalytics.com
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Independent Banker - November 2017

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