Scavenger hunts can be a fun part of a child’s birthday party. But when it comes to putting together, reviewing or approving loan packages, a scramble for the right information is the last thing a financial institution wants or can afford. In fact, it’s critical for team members in the loan review or risk management process to be able to access quickly and efficiently all pertinent information. This is especially important as banking regulators evaluate an institution’s efforts to identify loans for impairment and to estimate reserves against potential losses.
Yet inefficient data management has become a big issue for many financial institutions. Bank profitability levels can hardly afford the costs in dollars and staff time that inefficient data management produces, especially considering that low interest rates and tepid loan growth are expected to continue to pressure financial institutions’ net interest margins.
Here are some common ways that inefficient data management can bedevil financial institutions in the credit risk management process:
- Times change, but not all systems have. Widespread consolidation in the banking industry since the mid-1980s has meant thousands of legacy data systems have been combined. But others have not, even when banks were swallowed up by others. Harlan Hill, president of risk management and corporate finance training firm Hill Financial Education Services, recently noted, “The acquired bank typically wants to keep its system and is often allowed to do that, at least temporarily…You may have two or three versions of analytical data being looked at.” Fortunately, this is slowly becoming less of an issue as technology allows people to gather data more quickly.
- Multiple entries, multiple opportunities for error. Often, data is entered into both a core processing system and custom spreadsheets. Each keystroke increases the odds of an error. Duplicate data can also be a problem. Furthermore, systems that can’t communicate with each other can make it more difficult to get an accurate, big-picture view of the financial institution’s credit strengths and exposures.
- Information, information everywhere. When property appraisals, rent rolls and income and expense statements are located in a bank’s credit files but not in the core accounting system, staff time and costs are spent gathering and checking data – time better spent on the analysis of a loan. Data in separate sources must also be collected for FAS 114 loans or FAS 5 pools in order to conduct the calculation for the Allowance for Loan and Lease Losses. If employees are gathering information from various places, they could come up with different values for key metrics.
- Where is that document? It’s easy to see how organizing and storing paperwork for hundreds or thousands of mortgage and commercial loans at an institution might overwhelm available resources. When that happens, just putting your hands on the right documents can be a problem during an audit or examination. When data isn’t managed efficiently, it could mean a document needed to defend the bank’s methodologies or credit decisions can’t be located at a critical time.
- Security and ease of access. When information is stored in various locations, financial institutions face delays and headaches in accessing data. For example, a bank employee may need to generate a report quickly to show a borrower’s outstanding documents, their loan balances and the relevant financials. But the institution could have half of that data in its core system, some on spreadsheets and more on paper filed away in drawers. Such inefficient data management makes it difficult, if not impossible, to create a simple report quickly.
Cloud storage for banks can make it easier and faster to access a variety of data. Cloud-based systems also provide security that can’t be achieved when data is scattered across locations and the purview of many people. Bank technology-examination guidelines note that agencies expect institutions to test controls and to take steps to address the always changing threats to information security. Cloud-based computing access is one way to protect not only the data, but also the infrastructure for electronic document management. It’s important, however, to conduct due diligence on your cloud-based service providers.
In a scavenger hunt, part of the fun is in figuring out where to look for items on the search list, and in trying to find something that might be hidden right in front of you. But financial institutions don’t need that kind of uncertainty or “adventure” in today’s regulatory environment. Developing efficient document tracking and document management systems for data used in loan approvals or risk management will go a long way toward bolstering confidence in lending decisions. Another major benefit is improved financial efficiency. When an institution isn’t focusing significant employee effort on data collection, data input and data retrieval, it can use those resources on more valued areas of customer service and risk management.
Mary Ellen Biery is a research specialist at Sageworks, a financial information company that provides credit risk management solutions to financial institutions.