The sub-prime mortgage crisis is the latest business drama to obsess pundits and grab headlines. It is being described as many things, including a shakeout, a matter of greed, a sign of economic weakness and a failure of banking industry controls. But it's also important to keep in mind exactly what the current turmoil in the credit markets is not.
It absolutely is not a failure of technology. This isn't an instance of computer systems underperforming or shutting down. It's not an example of limited legacy systems lacking the ability to support changes in the market. It has nothing to do with any kind of unavailability of risk management, analytical or modeling tools that might have helped forecast problems in the sub-prime market.
The problems the industry is addressing today stem, to a great extent, from good information being ignored, or from risk parameters being set too generously, as Senior Editor Maria Bruno-Britz reports in a related article, " Sub-Prime Lending Mess Not Technology's Fault."
That's not to say that plenty of vendors won't jump on developments in the credit markets as opportunities to promote solutions designed to assess credit risk, or automate and improve lending workflow, reporting and transparency. Nor does it mean that most of these offerings aren't good technology and well-suited to financial institutions' needs. But the reality is that such solutions have been available to lenders for a while.
Another thing the sub-prime mess is not about is the risks of lending to the underbanked -- as Eric Lindeen, marketing director for credit decisioning solutions company Zoot Enterprises, told me when I chatted with him at last month's Gartner Financial Services Technology Summit, "The underbanked are not necessarily a bad risk." Lindeen pointed out that the challenge for banks of doing business with underbanked consumers is the lack of traditional credit-related information about them -- as opposed to most sub-prime customers, about whom there was plenty of credit history (but not much justification for offering mortgages). The logical response would be to turn to nontraditional data rather than abandoning the market.
Ultimately, as the sub-prime mess spurs layoffs, stock market turmoil, business failures and new laws, it will be difficult but essential for bankers to maintain their objectivity and focus on growth and innovation.
Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio