Credit Management January February 2024

CREDIT MANAGEMENT
The initial wave of adoption will provide valuable insights, but
getting a return on investment will always be reliant on data
quality and seamless integration into existing systems, a process
which could take three to five years. Truly transformative
applications are still unknown but are likely to stem from
Predictive and Generative AI being used together.
The learning curve is steep, however, and numerous
unanswered questions remain as we head into the new year.
While best practice in AI risk was emerging globally, the
advent of Generative AI has surfaced additional risks, such
as ‘hallucinations’, and accentuated the challenge of needing
to procure models from external providers. Most institutions
believe they are well equipped to identify, monitor, and
mitigate the risks, with 60 percent telling UK Finance that they
are already leveraging existing risk-management capabilities
and adjusting their frameworks to include Generative AI.
“Banks also face the
prospect of the number
of loan defaults rising
amid the economic
downturn.”
Interest rates
But maybe there is a wider perspective to observe here. After
all, the Bank of England is expected to lower its policy rate in
the first half of 2024 after reaching a peak of 5.75 percent at the
end of 2023. Analysts Deloitte consider the story to be similar
to the Bank of Canada: rates should decline in the second half of
2024 after surpassing 5 percent, as per the Canadian Economic
Quarterly Forecast by TD Economics.
The proliferation of new technologies is opening banks to risks
they may have never had to grapple with before. Open banking
and the increase in partnerships with technology partners, for
example, can expose banks’ infrastructure to new vulnerabilities
and cyber-attacks. Fourth-party risks are also becoming more
of a threat as banks engage in more partnerships with service
providers that have their own vendors.
Regulation
In terms of regulation, whisper it gently, but concerns over
Consumer Duty may finally be coming to an end, with
the industry appearing to have adapted well to the new
environment. The last part of the regulation is due to be
introduced as Consumer Duty comes into force for closed
products at the end of July 2024.
On a more global scale, US federal banking regulators put a
spotlight on how other regulators would no doubt follow by
releasing a notice of proposed rulemaking (NPR) on Basel III
final reforms. The proposed changes are aimed at improving
the “strength and resiliency” of the US banking system and
will impact the regulatory capital frameworks for banks above
US$100bn in assets (about 36 banks).
Smaller banks with significant trading activity will also be
subject to the new risk framework. These changes are estimated
to result in a 16 percent increase to CET1 (common equity tier 1)
capital levels and a 20 percent increase to RWA (risk-weighted
assets) for large bank-holding companies. Where the US leads,
one expects, the UK will be obliged to follow.
Tackling financial crime
Within the UK, one regulator will retain its position of primacy:
the Financial Conduct Authority (FCA). It is maintaining
financial crime as a significant focus.
Over the past year it has worked to improve cross-organisational
response to financial crime. In 2024, it says that it will aim to
build upon these relationships, increasingly using data-led
approaches to act quickly to identify and close down weaknesses
in the system and disrupt those seeking to cause harm.
However, it emphasises that any efforts to tackle financial
crime will only be successful if the response is system-wide,
including across public and private partners.
Conclusion
So, there will, no doubt, be both dangers and opportunities as
we head into the new year. But it is precisely these kinds of risks
that the lending industry is so adept at weighing and developing
the best route forward for stakeholders and customers. As a
result, the future could look quite bright.
As Anna Anthony at EY puts it: “While the economic
environment is likely to be tough over the next few months,
economic conditions are expected to improve over the course
of 2024. This is likely to have a positive impact on consumer
and business confidence – and lending growth – as we head
into 2024.”
Brave | Curious | Resilient / www.cicm.com / January & February 2024 / PAGE 15