Mid-size and smaller banks tend to specialize in selected types of properties and are often limited to investing in commercial properties in a few nearby metropolitan areas. In a recent interview to CNBC, Lea Overby from Wells Fargo Securities explained that as a large investor with a diversified portfolio Wells Fargo was not as much at risk by the downturn in commercial properties. According to Overby smaller banks were at more risk due to their tendency to limit their investments to selected types of properties or to a few nearby metropolitan areas. Local banks will thus need to put in preventative measures to ensure they can mitigate this risk properly.

This problem also highlights the importance of risk predictions for smaller banks. The largest banks in the country spend billions of dollars on technology per annum and thus have access to sophisticated risk analytics. These insights are not a major source of competitive advantage for these banks – they are a competitive necessity. Every major bank in the country has invested in technology that helps provide risk insights and trends. Not using risk technology would mean being left behind by competitors with better market insights.

Risk prediction solutions track external metrics and leading indicators. This data is often combined with internal metrics to help banks reassess their risk management framework and get early warnings about emerging risks. Share on X

Mid-size and smaller banks have currently not reached the full potential of risk technology when it comes to risk predictions and analytics. Many banks may have a solution that helps them in assessing current risks, but solutions that provide insights into risks that may affect the bank in the next quarter are relatively rare. Choosing better metrics that provide such insights can help smaller banks close this information gap and provide them with the time to proactively mitigate risks through better strategic moves.

Meaningful, Insightful Metrics for Predictions

All banks, no matter the size, keep close track of internal metrics. Internal metrics related to deposits, funds, and other banking metrics are a necessity for any bank and banks are required by laws and regulations to keep track of these metrics. While such metrics can provide a lot of insights for current risks, the metrics that can help predict risks for the next quarter are different. Predicting risks requires a focus on leading indicators.

As the name suggests, leading indicators are the metrics that can hint at things to come. They are referred to as leading indicators because they are the first metrics of an event or a series – they lead, and in the next few months the effects are felt on the metrics that banks use to assess current risks. The current situation with the commercial real estate market is a good example of a leading indicator. The effects of the downturn have not yet been fully felt by smaller banks, but Wells Fargo’s analysis shows it that smaller banks are exposed to more risk than most realize. It is imperative that smaller banks have access to similar analytics.

E Guide - How to Establish a Culture of Risk Awareness and Compliance in the Banking Sector

Selecting the Right Metrics

Metrics from the real estate such as housing starts and property values are just some of the many metrics that banks can use to predict risks. The unemployment rate is another great leading indicator. The unemployment rate has no immediate effect on the bottom line of banks but there are gradual effects which are felt over the year. As unemployment keeps increasing the number of deposits in banks goes lower, fewer people are interested in mortgages, loan delinquencies go higher, and much more. Thus, while tracking the unemployment rate does not provide much insights into current risks, it is an essential metric for banks that are interested in knowing the risks the bank may face in the next quarter.

Simply keeping track of such metrics can provide a lot of insights for most banks. For banks that want a more sustainable and codified approach towards risk management there are risk prediction solutions that can automate the process and deliver more in-depth insights. These solutions track external metrics and leading indicators. This data is often combined with internal metrics to help banks reassess their risk management framework and get early warnings about emerging risks. Such solutions are remarkably easy to set up and provide an extensive level of customization to ensure that smaller banks can get the functionality they need without needing to get an expensive bespoke solution developed for the bank.

Enterprise Risk Management Software

360factors recently launched a white paper that dives into the topic of choosing the right metrics in detail. If you are interested in picking the right metrics for your bank, we recommend downloading the complimentary white paper titled The Top 7 Strategic Risk Metrics Your Board Needs for 2021 and Beyond. For a demonstration of how a risk prediction solution can benefit your organization, get in touch with our risk experts for a demonstration of Predict360 Risk Insights.