Stories and Learnings from a Career in Risk Management
For this last article of the year, I thought it would be appropriate to write a light hearted piece about some of the funny or strange things I have encountered in my many years in the credit risk industry. Over these years I met a lot of people and saw a lot of things, including the ‘good, the bad and the ugly.’
Here are three stories, from three distinct parts of the world, and for obvious reasons all names and institutions have been anonymised.
The early part of my career was spent in the credit risk departments of New York banks. Anyone who has visited New York will be accustomed with the yellow cabs that ply their trade in the five boroughs of the city. These taxis have become synonymous with NYC and are highly regulated through a medallion system of licensing. The number of medallions has been consistent over the years at approximately 13,500. In order to own a medallion, a person has to buy one off a medallion owner and due to the shortage of medallions, they were expensive in the 1980s.
One of the banks I worked for specialised in medallion loans, as they were seen as minimal risk, due to the scarcity and lack of change in value. (This is no longer the case, due to the advent of Uber). The loans were backed by the medallion as collateral and even though the borrowers, (often a consortium, so that they could run the taxi 24 hours a day), could individually be higher risk, with the medallion as collateral, the vast majority of applications were approved.
I say the vast majority, but not all applications, as there was one individual in the large underwriting department who had a pathological hatred of taxi drivers. Nobody ever found out the reason for this, but after 12 months when we ran reports to analyse various products acceptance rates by underwriter, the average for medallion loans was around 95% approvals. Except for this one individual, who had a 100% decline rate.
Shortly after, management ensured that this one underwriter was never given another medallion credit application. It is one of life’s mysteries as to why this individual had such a bias against cab drivers.
- Run reports frequently to look for high side and low side underwriter overrides.
- Implement scoring to ensure human bias is not costing the company lost deals
- Ensure that the lending policy is adhered to at all times
I will just add that this all occurred in a manual, non-scoring environment and it was a second report that was run which convinced management to implement scoring.
It was decided to run reports looking at acceptance rates based on the time of the day and day of the week. The statistics elude me now, but a very large discrepancy was found between Monday mornings and Friday afternoons!
Monday mornings were the worst time of the week to apply for credit and Friday afternoons were by far the best, with a difference in acceptance rates that was frightening!
- Scorecards consistently produce the same result every day and are never hungover/planning their weekend activities.
Looking the Beast in the Eye
On my first trip to the Arabian Gulf in the early 1990s I was consulting with a bank that was introducing both application and behaviour scoring and so it was a huge change in how the credit risk department operated. Often these changes result in a lot of resistance from the team and operational negation occurs.
The bank’s new management had introduced scoring and automated decisioning in a ‘top down’ manner, without securing the buy-in from the affected teams. After a few months they didn’t see any changes in the results and so we were dispatched to investigate.
After doing all of the technical investigations, no errors could be found, as the application scores had been implemented correctly. At this point, we decided to spend a few days observing the applications process from receipt of application to data entry, to credit review of the referrals and it all looked to be within usual tolerances.
Finally, on the last day of the investigation, we were really grasping at straws and asked if there were any final steps in the process? To which a junior analyst there piped up “oh yes there is also the photo department.” (A little backstory is required here. It was standard practice for all credit applications to require photos of the applicant. This was curious, as the bank did not issue photo credit cards).
We asked to visit the ‘photo department’ which was on a separate floor and was staffed by 5 gentlemen. Their department was the last step in the process and their role was to manually review every application that had been received and also look at the attached photos. This process was referred to as “looking the beast in the eye”.
Photos that they did not like the look of were subsequently declined, regardless of their score and photos that they did approve of were approved, regardless of their status!
We spent the next few hours asking the same questions, as we had never come across anything like this in our lifetimes and the strange thing was that they were very serious and earnest about their role.
Needless to say, this is what was causing the lack of improvements in results after implementing scoring and the department that nobody had thought about was subsequently disbanded.
- Never underestimate the negative effect that operational negation can produce.
- Whenever implementing substantial changes within a department, staff buy-in, training and communication is of paramount importance.
- Never underestimate the time required to change the culture and modus operandi of a bureaucracy. Making changes in a bank can sometimes be akin to changing the course of an ocean liner.
Predictive Dialler vs. Account Decisioning System
This story occurred in the UK, when I was working as a risk management consultant and also conducting pre-sales activities for an account decisioning system.
The software was highly successful and within just a few years had a 75%+ market share of the UK cards issuers. In fact, there were only two large banks that were holding out. One based in the South, which was still holding on to a competitors product and one in the North, which didn’t see the need or any of the benefits of automated account management!
At the time my boss was based 8,000 kilometres away and so would visit once a year and we would do a grand tour of all of the clients and the key prospects.
We made the trip to the sceptical bank and had the annual meeting with the ‘old school’ head of risk management. After initial niceties we tried to get him interested in at least running a proof of concept for the decisioning system, but his mind was made up. “No!”
We pointed out that all of their competitors were using decisioning and so they were running the risk of being left behind.
He became angry and said the phrase that will ring in my ears for a lifetime. “At XYZ bank, we don’t need a decisioning system, we have a power dialler!”
At my wits end and overcome with irritation at this ‘stick in the mud’ I countered with: “Congratulations, that means you can call the wrong customers faster.” As soon as the words had passed my lips, I realised I had crossed a line, and in front of my boss nevertheless!
As we were being escorted off the premises by two security guards who had been summoned, my career prospects flashed through my eyes, and I was scrambling to produce some kind of excuse. We reached outside, the security guards left, and my boss burst out laughing and said, “I wish you had said that 30 minutes earlier, he was clearly never going to change his mind!”
- No matter how right you think you are, some people are never going to accept your position, so know when to ‘hold ‘em and when to fold ‘em.’
- Never try to have the last word, no matter how right you think you are.
- Patience is a virtue and so if you stumble at the initial attempts, just keep on trying, you will succeed in the end.
As a post script, that risk manager was forced to retire the next year and within three months of this occurring we were busy installing the system.
If you enjoyed these stories, please let me know and I can always create future articles with additional tales, of which there is no shortage of!
About the Author
Stephen John Leonard is the founder of ADEPT Decisions and has held a wide range of roles in the banking and risk industry since 1985.
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