It is worth observing that ‘One cannot manage what one cannot see', so the first objective of ECM, through mathematical and statistical analysis, is to provide full transparency of the lender's credit risk for management.

Because of the confidential and sensitive nature of ECM consulting, it is not possible to identify individual case studies. It is, nonetheless, worthwhile to describe some of Credit Expo's experiences in more general terms.

Reduced Loan Losses

One bank client was operating on overly optimistic estimations of early Loss Probabilities and of Loss Given Default and was neglecting front end arrear collections. By demonstrating true credit risk the Bank was able to initiate earlier intervention and, progressively, to reduce its write off experience. Identification of that bank's Hot Spot’ additionally improved collections management and reduced its bad debts.

Bank Cross Subsidisation of Loan Losses

In the case of one bank it was found that while the overall calculation of the loss forecast was broadly accurate, the distribution of risk across different regions and branches was skewed, resulting in misleading perceptions of risk, of individual performances and of local profitability. By retuning relevant (formerly undifferentiated) calculations to reflect local experiences, local management and local performance were assisted, progressively improving the Banks bottom line.

Rigid and Inaccurate Calculations of Loss Probability

In one case reviewed a Bank was applying Loss Probability figures 'imported' from another Irish bank. However the two banks operated in different market segments and empirical analysis showed that the (rigid) loss probabilities then being applied understated the risk ,especially for 'early' arrears, additionally encouraging the neglect of such front -end arrears and delaying collections activity until arrears had progressed to a later, more intractable, stage. ECM was able to adjust the loss probability calculations, which were allowed to respond empirically to actual experiences, and to redistribute the collections work pragmatically, delivering focus and performance management to collections.

Securing Additional Relief from Corporation Tax

An ECM review of one client Bank's provisioning calculations demonstrated that certain bank calculations understated credit risk and the appropriate provision requirement. By recasting the calculations empirically it was possible to make an adjustment in the Bank’s financial statements and to secure significant additional tax relief (ECM had previously been submitted to and audited by Revenue for the purpose of agreeing such ECM calculations)

Revising Loss Given Default Calculations (LGD)

One bank client was operating on the basis of an assumed, universal LGD / write off rate of 72%. Using ECM analysis it proved possible to complete an net present value (npv) calculation of net recoveries over several years and to differentiate the bank's LGDs across asset types, loan maturities and at the account level.

Credit Unions and Resolution 49

A study for one Credit Union identified a serious inadequacy in the Resolution 49 provision-mandated calculation, leading to the underpricing of loan risk, the neglect of certain collections and significant under-provisioning. The ECM analysis was able to provide the business intelligence to re-inform all three calculations.