Lending Briefing: There is a recession coming but don’t worry, it’s not 2008 all over again
- The oncoming recessions is one of the most anticipated downturns in recent history.
- But things are not the same as 2008, here's why.
It’s 2023, and things are looking gloomy. Covid remains a challenge for some countries and, to make it more difficult, war is wreaking havoc on supply chains. As the calendar pages turn, the economy seems to be barreling towards a recession that will likely make things more difficult for households and financial institutions alike.
Lending is transforming in these turbulent times, with lenders dialing back credit risk in one of the most anticipated recessions in history, according to Brian Hughes, Chief Risk Officer at Discover.
However, unlike 2008, multiple features of the current economy differentiate the oncoming downturn from the previous one, Hughes noted in a webinar.
First, the cause of current economic headwinds does not stem from the finance sector, but instead it's fuelled by the government’s monetary policy and macroeconomic conditions.
Second, due to the pandemic, many firms were not able to hire according to their needs. This foretells a thin silver lining for the coming year in which, unlike past recessions, firms may continue to hire and the labor market as whole may be able to avoid widespread unemployment.
This recession is expected to impact the financial system differently than the ones in the past. “The credit losses that banks are going to suffer, I think, are going to be driven by expense pressure, rather than revenue pressure,” said Hughes.
Hughes thinks that since the downturn is more of a result of macroeconomic and government policies, the recession may be less of a crash and more of a slump. After 3 years of anxiety, uncertainty and instability, we are counting our blessings, and this is one of them.
Recession aside, credit is changing. New products that aim to bring in underserved communities into the fold as well as innovative credit risk assessment methodologies are becoming part of the zeitgeist. Alternative data is slowly but surely driving this push. Due to its capability to capture consumer segments that were written off by the traditional credit scoring system.
While innovation is welcome, it is also difficult. Alternative data is new, the traditional compliance and regulatory mechanisms that safeguarded the traditional credit system are out of the picture right now. Moreover, alternative data which comprises consumer income and cash flow transactions is consumer permissioned as well as messy.
Sarah Davies, Head of Data Analytics, at Nova Credit points out that this messiness is borne from the newness of using cashflow and transaction data. Traditional credit data has evolved sophisticated supporting infrastructure like the Metro 2 format, that exhaustively details how data is to be recorded, stored and eases sharing within organizations. This essential scaffolding is missing from this “nascent” environment at the moment.
So how do you get around this messiness? According to Hughes the answer is in the basics: test, test and test again. Using models such as champion/challenger methodology can help firms streamline their analytics and gear up for new products like BNPL.
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