Those With The Best Risk Strategy Win Vernon Gerety Nacm Credit Congress May 2010
13
NACM 114 th CREDIT CONGRESS MAY 19, 2010 VERNON E GERETY , PHD WWW .VGADVISORS.COM
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Transcript of Those With The Best Risk Strategy Win Vernon Gerety Nacm Credit Congress May 2010
NACM 114th
CREDIT CONGRESSMAY 19, 2010
VERNON E GERETY, PHDWWW.VGADVISORS.COM
2
DATA
EXPERIENCE
SALES
“WON’T GET
FOOLED AGAIN”
EVERYTHING & EVERYBODY
MAX PROFITS
VALUE INFORMATION
RISK RATEPREDICTION
CREDIT
PAST
TECHNOLOGY
DATA
UNDERWRITING
3
Understanding Risk
4
Investing in a Portfolio of “Assets” Customers
Maximizing Returns & Minimizing Risk Max Profits
Types of Risk
Credit Risk : Specific Risk – single asset – Diversify
Market Risk:
Systematic Risk – Changes within the market Non-Diversify
Systemic Risk – Market Collapse – Mortgage / Real Estate Non-Diversify
Operational Risk: How effective is the credit department?
Other Risk: FOREX – Hedge
Understanding Risk of an Asset
Risk Rate to measure risk
Minimize Risk: Avoidance, Diversify, Hedge, and Insurance
Modern Portfolio Theory
0%
10%
20%
30%
40%
A B C D E FRisk Rating
Accounts Receivables
5
Understanding the mix of risk is key to managing performance
0.1% 0.4%
1.8%4.6%
8.8%
23.3%
0%
5%
10%
15%
20%
25%
A B C D E F
Risk Rating
$ Loss /AR
6
Dramatically communicates the impact of exposures to various risk levels
7
Segmenting Risk
0%
10%
20%
30%
40%
50%
A B C D E F
Risk Rating
% Distribution By Risk Class
Small Medium Large
Risk Rating: Segment Comparison
8
Rating can be used to understand risk by various segments
0%
10%
20%
30%
40%
50%
60%
70%
A B C D E F
Risk Rating
BAD Rates By Risk Rating
Small
Medium
Large
Risk Rating: Segment Comparison
9
Different method to identifying risk
but consistent performance by rating
10
Economic Risk
0%
10%
20%
30%
40%
A B C D E FRisk Rating
Growth Recession
11
Economic Scenarios: Growth vs RecessionSpecific Risk
Shift to higher risk ratings A, B, C to D, E F which helps to automatically manage risk
0%
10%
20%
30%
40%
A B C D E F
Risk Rating
Growth Recession
12
Economic Scenarios: Growth vs RecessionSystematic and Systemic Risk
Higher probability of default give level of risk is consistent with Adverse Selection
13
Strategic Risk Management
Improved Organization Communication
Consistent treatment across the customer base
Minimize credit “oops”
Act rather than react
Profit Maximizing by Minimizing Risk
Managing Risk
Doing deals
