Best Practices of Influential Credit Risk Managers

Over my career in consumer lending across different asset classes (credit cards, unsecured loans, auto loans, mortgages, HELOCs) in banking as well as fintech companies, I have developed key beliefs regarding how credit risk managers can make a strong impact in consumer lending businesses. I owe a lot of gratitude to Capital One for helping shape much of my early thinking, and to Lending Club and Affirm for helping me enhance and refine it.

Effective credit risk managers enable sustainable and resilient growth. They manage risk for resilience (preserving capital under scenarios where losses may be higher than expected) as well as returns – and often in that order. Managing credit loss rates or delinquency rates is in service of achieving appropriate risk adjusted returns.

Credit Philosophy

Credit risk managers have a strong, foundational credit philosophy to guide their work.

• Think of business economics upfront (e.g. Net Present Value, Return on Assets) and customize how to manage risk adjusted returns under different situations. In the early stages of developing a new product, credit risk managers might choose to optimize portfolio level aggregate returns but implement stringent controls to avoid catastrophic losses; whereas when managing well-developed mature products, they might more precisely optimize returns for each incremental decision.
• Understand that marketing, product, pricing and credit decisions are integrated decisions that impact consumer selection and economic returns. Channel strategies, pricing relative to competition, differentiation of product features, all determine the kind of consumer being lent to. Credit risk managers incorporate consumer selection as a critical input into decisions they make.
• Value data over new algorithms. Having rich data - unbiased data, new sources of data, custom features based on commonly available data - is a bigger competitive advantage compared to having a new technique or algorithm. Good credit risk managers do not belittle the importance of new learning methods but rather recognize that investment in exploration, ingestion, and transformation of data is often more important in making robust lending decisions.
• Understand how business cycles are affected by competitive actions. While unemployment rate and housing price deterioration influence credit losses, good credit managers comprehend the impact of credit overextension. Competitive frothiness in a benign macro-environment can lead to aggressive credit offers that in turn result in unsustainable consumer indebtedness. Conversely, some of the best lending decisions are made soon after an economic downturn, when effective credit risk managers are prepared to expand quickly while others may be tentative.

Intent Execution

Credit risk managers implement a virtuous loop of test-and-learn to execute and innovate.

• Boldly conceptualize tests, and recognize how they accelerate innovation. True experimentation allows for making grounded assumptions in anticipation of strategy changes. Although experimentation is not cost-free, good credit managers understand the criticality of experimentation and champion extensive testing by highlighting its value.
• Understand the strategic importance of monitoring. The ability to act nimbly to outcomes allows for taking risks more confidently. Beyond looking at metrics compared to expectations as well as trends over time, credit risk managers are acutely aware of outliers and anomalies. Particularly important in a quickly changing environment is the ability to look for explanatory drivers that may not be in their current decision-making framework.
• Think ahead about the action levers to deploy in order to handle an adverse situation such as an economic downturn. A rational assessment of options is easier when critical decisions do not have to be made in the heat of the moment. An assessment of what levers will be significant also reveals what capabilities may need to be built to be fully prepared.

Communication and Influence

Credit risk managers have a strong repertoire of communication and influencing skills.

• Engage as an adept synthesizer and rigorous analyst, at the same time. Credit risk managers need to be conversant with the implicit assumptions, analytical framework, and biases in data in order to critically assess any strategy. Simultaneously, they need to be able to draw implications of their strategy for the team, external investors, and regulators. This kind of interaction is a crucial part of their role, and cannot be executed well without a deep knowledge of assumptions and limitations of their analyses.
• Communicate a balanced picture of what is going on, including what’s going well, and what is not. When risk managers solely focus on areas of concern but fail to put those concerns into perspective of how things are going overall, they can be perceived as pessimistic and limit their ability to enable change. 
• Possess deft influencing ability to explain perspectives that may not seem intuitive. Credit risk managers think through issues independently and may come up with viewpoints that aren’t aligned with consensus. In order to convince others, they need to invest time, thought, and energy in building a reputation as trusted enablers of sustainable growth.

The role of a credit risk manager is pivotal in ensuring resilient growth. It draws on varied competencies - robust understanding of customers, product and marketing strategies, data science, economics, regulations, and competitive cycles - and is immensely impactful for a lending business!