Managing Consumer Credit Risk*
Peter Burns
Anne Stanley
September 2001
Summary: On July 31, 2001, the Payment Cards Center of the Federal Reserve Bank of Philadelphia hosted a
workshop that examined current credit risk management practices in the consumer credit industry. The session was
led by Jeffrey Bower, senior manager in KPMG Consulting’s financial services practice. Bower discussed "best
practices" in the credit risk management field, including credit scoring, loss forecasting, and portfolio management.
In addition, he provided an overview of developing new methodologies used by today's risk management
professionals in underwriting consumer risk. This paper summarizes key elements of Bower's presentation.
*The views expressed here are not necessarily those of this Reserve Bank or of the Federal Reserve System.
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PORTFOLIO MANAGEMENT AND ANALYTICS
In Bower’s view, consumer credit risk must be understood in terms of a portfolio
management strategy that balances capital preservation with capital optimization, that is,
“ . . . a continuous process of identifying and capitalizing upon appropriate opportunities
while avoiding inappropriate exposure in such a way as to maximize the value of
enterprise.” Capturing data across all steps in the customer relationship and integrating
information management are the keys to effective portfolio management. While this is a
fairly straightforward prescription, executing it is often beyond the scope of many
lenders, with the credit card companies generally in the vanguard. Often, the process
steps are managed on separate legacy systems, which complicates efforts to integrate
information. KPMG consultants find that many firms typically purge specific files
before the information is extracted and combined with other data to provide effective
portfolio management. The loss of application data, for example, would mean that
critical score-card and demographic information would not be available to model
behavior in defined customer or risk segments.
BEST PRACTICES IN CREDI