Sunday, April 15, 2007

Decompositional Analytics|Measuring Stick for Risk

In lending, as with most investment opportunities, presents itself with various degrees of risk. How much of a risk you are willing to take depends on you. Forecasting the factors that contribute to the risk in your lending business is essential if you want to anticipate and minimize the impact of such problems. Decompositional analytics is one such tool as it splits forecasting performance into individual parts, and takes into account the effect of seasonality and vintage maturation as well as volatile environmental factors on your business portfolio. Factors may be multiple possible macro economic scenarios, competitors' actions and offerings, and management actions. Some leading lenders are now using such methods to forecast loss more accurately and to better understand and manage investment portfolio performance. Using decompositional analytics, it is possible to isolate the impact of each performance driver and to create a more accurate economic response model. Traditional forecasting approaches rely largely on historical data and do not accurately measure the many volatile factors that can influence investment portfolio performance. Consequently, traditional forecasts may fall short or fail to reveal which factors impacted performance.

The ability to isolate and measure the various components of performance enables the early optimization of marketing campaigns.
If you could minimize the time required to confidently estimate business campaign profitability or reduce the error rate of loan loss forecasts to one percent. In an increasingly competitive consumer lending environment, predicting your investment performance has never been more critical. Lenders can evaluate, for example, if loan rates are robust enough to withstand a modest slowing in the economy. If not, they can adjust penalty fees and other loan terms to reduce pricing fragility. Also, taking into account seasonality, it maybe difficult for your clients to pay you back in the months of the holiday season since there is an increase in spending so planning ahead to anticipate this will give you an edge.

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