We help clients increase revenue and minimize costs by supporting the development of sound credit-risk strategies, organizational structures, and portfolio-management processes. CPM functions have an opportunity to step in and take a vital role in the definition of business requirements, combining the perspectives of business, risk, and finance together with those of the IT department. Get the latest KPMG thought leadership directly to your individual personalized dashboard. PORTFOLIO MANAGEMENT Portfolio management covers the full spectrum of overseeing and administering the credit card programs, portfolios, and accounts. In decentralized instances, the figure was 75 percent. Identification and close monitoring of impaired credit exposures, with potential workout solutions determined: Monitoring of risk concentrations, for example, sectoral concentrations in collateral. In contrast to traditional origination and credit risk-management functions that look only at individual deals or borrowers, CPM looks across the entire credit book. As a consequence, more capital must be held. Select topics and stay current with our latest insights, The evolving role of credit portfolio management. To be successful, CPM will need to work closely with the businesses and the risk and finance functions. It is therefore all the more important to be ready to present a robust analysis and a clear strategy for action. COVID-19 is having far-reaching consequences for the global economy. Luis Nario is a partner in McKinsey’s New York office; Tamara Pfister is an associate principal in the Munich office, where Thomas Poppensieker is a senior partner; Uwe Stegemann is a senior partner in the Cologne office. Please email us at: McKinsey Insights - Get our latest thinking on your iPhone, iPad, or Android device. Credit Portfolio Management (CPM) has grown as a discipline over the past 15 years in response to financial institutions’ continuing efforts to measure credit risk more accurately and to manage it more effectively across the firm. Just as there has never been a unique template for the CPM function, there is no consensus on how it will evolve. tab. And they can align incentives. It is now imperative to reassess the risk situation as soon as possible in order to better anticipate market developments and to be able to react appropriately to the crisis. And if CPM is not taking on an expanded role, who will be responsible for integrating balance-sheet optimization, stress testing, and ongoing management of the credit books? hereLearn more about cookies, Opens in new Before the crisis, CPM units often used transfer pricing to create effective internal markets. In particular, however, the review should enable the identification of risk concentrations from an overall portfolio perspective, whereby various dimensions can be considered, including sectoral and geographical concentrations of loans and collateral. While authorities around the world are in the process of cushioning these effects with a range of countermeasures, it is nevertheless expected that the global economy will experience a further crunch in the coming weeks, Switzerland included. {{vm.newUser1}} To understand exactly how the role of CPM is evolving, McKinsey, in collaboration with the International Association of Credit Portfolio Managers (IACPM),1 1.The IACPM (iacpm.org) is an industry association established to further the practice of credit exposure management by providing an active forum for its member institutions to exchange ideas on topics of common interest. Some 60 percent already use them, and 71 percent expect to do so in the near future. Sixty-five percent of institutions use the internal-ratings-based (IRB) advanced approach, 10 percent the IRB-foundation approach, and 5 percent the standardized approach. • The products and structures used to manage the portfolio. This simplifies their mandate to optimize risk returns on the balance sheet as they naturally consider funding and liquidity needs. Only with a trusted tool kit that provides the business superior insights from a portfolio perspective, which they cannot gain without CPM’s support, will the CPM function be able to earn the right to be part of strategic discussions and business decisions. Portfolio managers at banks who require information concerning their risk/return levels with regard to the credit risk of their portfolios will find this ES bundle highly useful. Both effects will lead to a lower capital ratio and, in extreme cases, to insufficient (regulatory) capital. In Europe and Asia–Pacific, most institutions (up to 80 percent) expect CPM to assume an active, first-line role in managing the portfolio, taking responsibility for reducing credit risk and optimizing the balance-sheet structure to secure the highest return on equity or return per risk within the constraints of regulation. GUIDELINES ON CREDIT RISK MANAGEMENT Principle 11 : Banks must have in place a system for monitoring large exposures, and the overall composition and quality of the credit portfolio to manage concentration risks. About CPS. In contrast, tools such as index options and single-name CDS hedges are losing influence. For example, 54 percent of respondents said they already observed a change in the scope of the function and the tasks it was conducting, with an increasing focus on loan origination, expanded analytics (for example, on deposits and client profitability), use of additional metrics (such as the leverage ratio), more explicit alignment with risk appetite, and additional legal entity reporting. Rather than using this ES bundle from a profit center perspective portfolio managers would do, this ES bundle is also very useful from the perspective of controlling risk, enabling the creation of integrated of risk and return reporting for the bank's senior management. Corporate Profile Consumer Portfolio Services is an independent specialty finance company that provides indirect automobile financing to individuals with past credit problems, low incomes or limited credit histories. This post is also available in the following languages. The historical role of CPM remains. The financial crisis of 2007 changed the way most functions at these institutions operate, and CPM is no exception. Historically, its role has been to understand the institution’s aggregate credit risk, improve returns on those risks—sometimes by trading loans in the secondary market, and hedging—and identifying … An option to address this challenge might be to establish a thin central “layer” that combines the information from decentralized teams. As the largest component of the balance sheet is typically the credit book, they are looking to draw on CPM’s unique portfolio-management expertise, and to encourage CPM to influence loan origination as well as asset sales. Postcrisis market conditions are a third dimension in the evolution of CPM, though less important than rising capital needs and cost pressures: only about 40 percent of surveyed institutions felt that this is a key driver for change. Once largely focused on the loan book, in many institutions CPM is now managing the entire range of credit exposures and their effect on the balance sheet. We purchase retail installment sales contracts primarily from franchised automobile dealerships secured by late model used vehicles and, to a lesser extent, new … Large institutions often want CPM to have direct market access, which would place it on the first line and hence anchored in the business. You will not continue to receive KPMG subscriptions until you accept the changes. Portfolio Management - Duration: ... Risk management in banks - Duration: 5:32. eduCBA 102,379 views. This booklet applies to the OCC's supervision of national banks. “Collaboration across the organization—covering risk and finance—is key to developing a capital-efficient business,” was the view expressed by one respondent. Please click "Accept" to help us improve its usefulness with additional cookies. Institutions can give businesses and CPM joint responsibilities, such as ownership of models for pricing or industry analysis. Banks are confronted with a completely new market situation practically overnight. Login is required for this action. Fundamental to successful CPM is the availability, analysis, and interpretation of information. {{ vm.siteSelectorList.flyout.cell1.heading }}, {{ vm.siteSelectorList.flyout.cell1.global.countryLocale }}, {{ vm.flyout.cell1.viewAll.newTabAllow }}, Impact of COVID-19 on credit portfolios of banks, Identification of risk criteria and risk exposures. {{vm.newUser2}} Learn more about cookies, Opens in new You will not receive KPMG subscription messages until you agree to the new policy. With a firm understanding of the credit portfolio management process in hand, you’ll be introduced to the tools needed to manage a portfolio of credit assets. In our experience, CPM functions at European banks tend to be anchored in finance or treasury, especially when newly established. We asked what changes were afoot, what CPM’s mandate should be, how it should be organized to deliver on that mandate, and what tools and analytics were required. While several factors came to light, institutions identified three main reasons for the changes in CPM’s role. However the future role of CPM shapes up, it will need excellent data to fulfill its tasks and comply with regulations. Our recent projects have included: 1. helping a client define its risk appetite for large-corporate credit underwriting 2. devising de… However, new regulatory requirements, especially with respect to capital and liquidity, increasing cost and margin pressure, and changed market conditions have pushed CPM into a broader role with the need to align closely with other areas, such as finance, treasury, risk data and methodology, and business-origination functions. In Europe, where liquidity is tighter, more active portfolio management might be required. A second-line CPM might also be seen as a team that only wants to “hit the brakes” instead of a function supporting the business. When a bank operates, it acquires and disposes of income-earning assets. Techniques includes: credit approving authority, risk rating, prudential limits, loan review mechanism, risk pricing, portfolio management etc. The new limit system needs to be in line with overall targets and limits for the balance sheet, reflecting the multitude of key performance indicators the institution has to optimize for. This is a significant change. According to the Bank for International Settlements, single-name CDS outstanding had a global notional value of $18.1 trillion in the second half of 2010. The authors wish to thank Florian Fuchs for his contribution to this article. Appropriate proactive measures are then defined on the basis of this analysis. The former will need a global overview and advice on risk positions and improving cross-selling, while the latter might benefit more from active portfolio management at a sector level. To steer the business, CPM will need sufficient detail for portfolio analysis. Press enter to select and open the results on a new page. One of the most important aspects from a risk management perspective is a detailed analysis of COVID-19 effects on the credit portfolio. Participants included 39 banks and 2 insurance firms. ABA Certificates: This course applies to the Certificate in Bank Financial Management. For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance. Credit risk is the possibility of losing a lender takes on due to the possibility of a borrower not paying back a loan. each individual credit service that one can begin to manage the l oan portfolio as . For example, activity in securitization markets and single-name credit-default swaps (CDS), CPM’s main hedging tool, have declined significantly because of higher costs and stricter rules for CDS. Currently, 95 financial institutions in 19 countries are members. The defining characteristic of credit portfolio management activities is that Credit Riskis assessed and managed not on a standalone basis but in an aggregate, portfolio, setting. Sophisticated tools and analytics will allow them to earn credibility, participate in the primary market, and be a strategic partner to the business. Various case studies add a real world element to the theory presented in the book while also offering in-depth instruction on how to avoid the pitfalls of active credit risk management.' A new survey reveals how portfolio managers are dealing with growing complexity. Geography made almost no difference to respondents’ views on this issue. Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more. Better available credit and risk information can increase revenue from better decision making. Any database needs to be updated in real time to avoid potentially outdated information, as well as be keyword optimized to ensure easy location of information. They can make CPM the advocate of business in its dealings with finance and risk. Eighty-three percent of executives describe an increased need for coordination between CPM and the rest of the organization during the past few years, particularly with finance and risk, and more than a quarter of respondents said they saw the need for significant change in the current interaction model. Credit Risk Management consists of many management techniques which helps the bank to curb the adverse effect of credit risk. That has to change—even as banks wrestle with an urgent challenge to substitute interest income with fee income. Bloomberg for instance reported that half of all listed retail companies in China could collapse. A credit portfolio review will identify credit exposures based on their risk exposure, recognizing where action is required. Some 85 percent of institutions surveyed said that regulations relating to the levels of capital and liquidity that banks must hold—and the prospect of even tighter regulation ahead—were the main reason. The portfolio risk in turn comprises intrinsic and concentration risk. Some 59 percent of surveyed institutions named the resulting cost and margin pressure as a motive for CPM’s evolution. Another complication for CPM is the multiplication of different and sometimes contradictory requirements (such as the rules on risk-based capital minimums, which are at odds with the leverage-ratio rules). In response to the COVID-19 crisis, FINMA has granted various temporary exemptions, for instance, relating to the calculation of the leverage ratio or risk diversification requirements (see FINMA Guidance 02/2020, 31 March 2020). ABA Professional Certifications: 8.0 CERP. Meaningful market parameters must be determined, which can be varied when simulating possible scenarios. We want to make sure you're kept up to date. In the secondary market, survey participants see wholesale loan purchases and sales as the most important CPM tool. The IACPM conducted the 2013Principles and Practices in CPM Surveyto provide benchmarking on the evolution of CPM. If you would like information about this content we will be happy to work with you. Significant value adjustments could be imminent. Whatever the function’s mandate and the way it is organized, it will need outstanding analytic capabilities. 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