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

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DATA

EXPERIENCE

SALES

“WON’T GET

FOOLED AGAIN”

EVERYTHING & EVERYBODY

MAX PROFITS

VALUE INFORMATION

RISK RATEPREDICTION

CREDIT

PAST

TECHNOLOGY

DATA

UNDERWRITING

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Understanding Risk

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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

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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

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Dramatically communicates the impact of exposures to various risk levels

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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

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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

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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

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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

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Economic Scenarios: Growth vs RecessionSystematic and Systemic Risk

Higher probability of default give level of risk is consistent with Adverse Selection

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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