There is certainly no shortage of villains to blame for the sub-prime mortgage crisis and subsequent economic slowdown – including irresponsible borrowers, lax regulators and complacent government officials, to name a few.
But they aren't the only culprits, experts agree. Add to that list bankers and mortgage lenders who didn't receive, didn't understand or willfully ignored financial risk-related data analysis.
Craig Focardi, research area director for banking at the Needham, Mass.-based TowerGroup, agreed, saying: "Quite simply, [banks] decided to approve and purchase loans with little or no documentation and really abandoned previously accepted good underwriting techniques."
In other cases, Wiklund and Focardi said, banks had all the data they needed to make sound investment decisions but lacked an effective way to aggregate and understand it. Partly as a result, more than a few borrowers found themselves swimming in debt they couldn't carry, which eventually snowballed into the current worldwide credit crunch.
But while data analytics, or a lack thereof, helped create the current economic crisis, better risk-based data analytics and business intelligence (BI) tools could help end it too. "Data analytics played a material role in getting us into the [economic] mess we're in," Wiklund said, "and it will play a material role in getting us out of this mess."
Breaking down silos
Most BI vendors have some form of banking and credit-related analytics tools. Some, like Business Objects, an SAP company with dual headquarters in San Jose and Paris, embed some credit risk analysis functionality into their core BI platforms. Others -- like Cary, N.C.-based SAS Institute, whose Credit Risk Management for Banking application was ranked the top credit risk management tool by Chartis Research last year -- offer standalone solutions.
Both analysts expect BI and risk management vendors to use the economic crisis as an opportunity to beef up their existing banking and financial risk-based data analytic offerings or, in some cases, to roll out new tools.
For example, Cognos, an IBM company based in Ottawa, yesterday released Cognos 8 Banking Risk Performance – Credit Risk, a set of prepackaged applications designed to collect credit information and other financial data from all of a bank's disparate data sources, aggregate and analyze it, then display the resulting analysis in one convenient location, according to the company.
With the new software, banks will be able to analyze their investments by customer, industry, geographic location or product, said Frank McKeon, banking industry director at Cognos.
"Certainly, the current market conditions are driving the need for enhanced visibility related to credit risk, specifically for banks, and for them to really understand the key drivers to manage risk," McKeon said.
TowerGroup's Focardi said the Cognos banking analytics software, which takes an enterprise-wide view of risk-related data, is a step up from most other analytical tools on the market, which focus on just one type of financial product, like mortgages or student loans.
He predicts that other BI vendors will follow suit with enhancements to existing (or the introduction of new) financial risk applications that likewise look to break down data silos, and he seems likely to be correct in that assessment.
Despite enhancements, still 'only tools'
Business Objects plans to add a number of enhancements to its financial risk-based applications in light of the current economic crisis, according to Andy Hirst, the company's senior director of industry marketing. They include key risk indicator libraries for banks, and tools for aligning financial loss data to Basel II requirements, he said.
"Few managers and executives had access to the right information in the right format at the right time due to silos of information and the inability to access the granularity of information," Hirst said in an email interview. "Business Objects and SAP will continue to enhance functionality in their enterprise GRC offerings, as well as search and visualization integrated with the innovations in banking provided by the SAP Financial Services line of business."
SAS, which earlier this year developed what it calls the Comprehensive Credit Assessment Framework to help companies evaluate credit risk, also plans to release new financial and credit risk-based tools in the coming year, according to David M. Wallace, global financial services marketing manager at SAS. Wallace declined to give details.
Financial Insights' Wiklund, for one, thinks the current financial crisis might be the needed jolt for "a sense of realism to return to financial services" through the better use of data analytics.
"[Banks] will keep using scoring models but will change how they're developed and how often they're evaluated," he said. "And the data going into them will be looked at more closely."
The hope for both new and upgraded banking applications, the analysts said, is to give responsible bankers a clearer picture of credit and other financial data before they make investment decisions, in order to minimize exposure and risk. They should also help banks better manage investments once they are on the books and recover or reduce losses should a loan go bad.
Unfortunately, however, even the best credit scoring models and risk analysis software won't stop unscrupulous lenders who choose to ignore them. "Analytics are essential tools for loan decision making," Focardi said. "But they're only tools."