Banks are very resilient institutions. Banks form the backbone of the local and the national economy – they provide the services and often the credit required to ensure that economies keep growing. What is often missed by people outside the banking industry is that banks have a much more critical role to play when the economy is not performing well. The current times are the perfect example of the role that banks can play.

Many different government programs running to support small businesses are all working through banking channels. Banks are providing credits to businesses that need to pay their employees’ salaries, but banks do not have enough funds because the shutdowns have blocked their revenue streams. Now, as the economy is striving to move back towards a semblance of normalcy, the banks will be helping businesses to recover by providing necessary services and credit wherever viable.

As banks provide critical support to other businesses, it is important to remember that the banks can only provide their necessary services if they protect themselves and their operations. Share on X

The Danger of Uncertainty

As banks provide critical support to other businesses, it is important to remember that the banks can only provide their necessary services if they protect themselves and their operations. Banks function by staying ahead of the curve. They look at the current market trends, expected economic outlooks, and historical outcomes to prepare the bank for the future. In the simplest terms – when banks expect growth they invest and avail as many opportunities as they can. When banks expect a contraction, they limit new investments and instead focusing on ensuring that they have the resources they need to continue serving their existing clientele and markets.

It is critical that a bank has intelligence that can be trusted to predict long-term economic outcomes. If a bank expects there to be a lot of growth and it invests heavily, the bank can find itself in a very uncomfortable position with the bank being exposed to a lot of risk. On the other hand, if a bank expects a contraction and limits its investments only for the markets to show growth, the bank will have missed out on a lot of opportunities and will no longer be competitive enough for the market.

Generating Reliable Risk Intelligence

It is difficult to be certain about the economy in these uncertain times. There is no scientifically backed duration of the pandemic or the shutdowns. Many states have opened, only to close businesses again if cases surged. The long-term outlook is uncertain, and uncertainty is a very dangerous element for a bank.

Banks generally have a lot of different sources which provide them with accurate information and predictions. The problem is that the pandemic and the ensuing economic shocks have removed or modified the role of most of the sources of information. Government actions are generally slow and methodical by design; governments ensure that all stakeholders are aware of the upcoming changes beforehand so the economy can keep performing smoothly. In these days the local and national governments are instead updating orders as they get more information about the pandemic.

Historical precedence has a lot of importance in the banking industry as well. Lessons learnt from the Great Depression have been applied to future economic downturns to ensure that the same type of depression never happens again, and the government has largely succeeded in this endeavor. However, historical precedents aren’t available right now, because the modern banking system has never dealt with a global pandemic before Covid-19.

Banks Have Invaluable Data

So, what are the smart bankers doing in this situation where the government’s plans may change rapidly (relatively speaking) over the next year and they cannot rely on predictive models because they don’t have enough data about precedence? They are focusing on the intelligence that they have in their own data and the data of their peers. Banks aren’t just passive observers that must rely on the data provided to them by the government or trade publications – they run the local economy and thus have more data than other institutions.

Banks know what type of businesses are not performing well, because the account details of those businesses seemed to them not positive. Banks also know what loans are underperforming, which businesses have bounced back, and much more. This intimate knowledge about the local economy can be priceless when it comes to generating risk intelligence. The only problem is that smaller banks generally do not have access to the analytical framework or tools that would enable such predictions and insights. The pandemic has made mid-sized and smaller banks focus on getting access to the latest technology.

Modern risk management solutions enable banks to combine internal metrics, peer benchmarking, and external metrics to create comparisons, unearth insights, and create a predictive model that can help in executive decision-making. Comparing these metrics in real-time allows banks to instantly gain new business intelligence as soon as there are important changes in data – ensuring that the banks can continue to stay ahead of the curve and maintain their authoritative position in the market. It gives them intelligence which allows them to act as consultants for other players in the local economy.

Interested in seeing how your bank can generate business intelligence by combining internal and external metrics with peer benchmarking? Get in touch with our risk experts for a complementary demonstration.