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December 14, 2011
Singapore— 14 December 2011—FICO (NYSE:FICO), the leading provider of analytics and decision management technology, today called for local banking institutions to develop a greater understanding of how changes in the economy will impact consumers’ credit risk. According to Dan McConaghy, president, FICO Asia Pacific, building economic information into risk models is imperative for banks to execute effective risk management strategies, and to protect the stability of the banking system.
“2011 taught us one thing: volatility and change are constant,” said Mr. McConaghy. “Stability is needed for recovery, and banks need infrastructures in place that enable them to understand market changes quickly, so they can react to these changes and even predict upcoming events. Banks should leverage this economic risk modeling to track how stresses in the economy affect consumers’ ability to repay their debts, and to enable banks to shore up capital in stressed portfolios.”
This sentiment of frequent and more comprehensive economic risk modeling was echoed at the recent FICO APAC Chief Risk Officer Forum, a gathering of more than 30 chief risk officers from retail banks around the Asia Pacific region. Findings and discussions from this closed-door meeting highlighted the increasing role of risk officers in improving chances for growth in the economy.
“There is no greater time to highlight the importance of risk management than now, given jitters within the market and the interconnectedness of global banking systems. Financial regulation by itself is only one step toward putting the economy back on track. In addition industry leaders need to strengthen systems that enable them to track macroeconomic changes and react to those changes quickly,” said Dr. Andrew Jennings, chief analytics officer, FICO.
Concurring with opinions of risk officers at the FICO APAC Chief Risk Officer Forum was Cyrus Daruwala, managing director, Asia Pacific, IDC Financial Insights.
“Incorporating predictive analytics in the customer origination and management process is going to be critical for banks in the region. While banks are still focusing on customer acquisition and growing market share, they’re now increasingly interested in FICO’s approaches to identify prime customers that will prove to be more profitable.” He added that analyzing historical customer behavior was not enough to determine creditworthiness of customers and that predictions on customer behavior under different economic stresses would be invaluable in determining next steps toward lending and economic stability.”
While East Asia is set to grow in 2012, broader market uncertainty is clouding the rate of growth for the region as a whole. The Asian Development Bank has predicted that emerging East Asia is slated to expand 7.2 percent in 2012, but this is lower than its previous forecast of 7.5 percent – the rate at which it is expected to grow in 2011.
The Bank also examined three scenarios with correlating forecasts. First, the Eurozone falls into recession; second, the Eurozone and the U.S. economies contract; and third, a new global crisis occurs, with Eurozone and U.S. output dropping to 2009 levels. In the third and worst scenario, emerging East Asia would each lose between 0.6 to 3.7 percentage points of GDP growth.
“Such variation could produce even larger variations in the credit performance of consumers, and as a result, affect retail banking profitability,” said Dr. Jennings. “Banks need to improve their understanding of the interplay of risk and the economy, to identify some of the unknowns and turn them into manageable risks.”
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