The Importance Of Third-Party Data In Effective Bank Underwriting

As we move from an era of central banks injecting liquidity into the financial system to one of monetary tightening, the time of “easy money” is quickly giving way to global inflationary pressures and rapidly rising interest rates. This is putting pressure on bank underwriters, who are pivoting from a long period where cheap funding was plentiful, to one where risk-appropriate pricing is essential to funding new deals. Underwriters have to find ways to compete in this volatile environment, and they have to address the relationship between rising interest rates and increasing risks of lending and refinancing, especially with more highly leveraged companies. This is requiring underwriters to be more diligent with their risk assessment when considering which firms and financial institutions to extend loans to, and under what terms.

Risk management has always been an important and integral facet of bank underwriting and in today’s volatile environment it is ever more so. Faced with myriad risks to consider, underwriters need to look for trusted sources of data to help facilitate timely and high-quality lending and pricing decisions. All the while they must continue to monitor their existing credit portfolios for deterioration, maintain capital requirements and keep an eye on the evolving regulatory environment. For these reasons, it’s important to work with a trusted third-party data provider that can help underwriters address these needs and present a variety of solutions to provide banks and other entities with a more holistic view of risk, as they navigate this unstable period.

To do their jobs effectively, underwriters need the right tools at the right time, and much of that is underpinned by quality data that’s timely, granular, and comparable. Underwriters need data to support their day-to-day operations to confirm legal identities, assess financial risks, monitor credit portfolios, set terms for individual and group borrowers, and meet regulatory obligations. A third-party data provider can support a strong underwriting process, reducing operating risk by consistently delivering needed information that underwriters can use to make more confident, higher quality loan decisions.

Firmographic Data and Ownership Links Are Necessary to Build Customer Profiles

Before banks can begin working with a client, they must develop a full customer profile and identify any associated risks. Access to timely and deep firmographic and ownership data is necessary to perform this check, a third-party data provider is needed to deliver this information. Company name, contact information, legal structure (e.g., sole proprietorship, corporation, etc.), country of origin, and industry classification are all examples of necessary firmographics. Linking this third-party data to internal data will require a standard identifier, such as a NAICS code, or other identifier, like our Orbis ID, or both.

Corporate structure data and ownership links are important to help underwriters see the total indebtedness of the group and assess potential credit and solvency risks.

Ownership links are important for several reasons. First, detailed corporate structures and sophisticated parent/group and ownership analytics can give banks the means to see into the total group indebtedness. If the parent company is financially sound, but it’s tied to less solvent entities, that could introduce credit and solvency risks. If an owner has a stake in multiple companies, those connections will be exposed through data and present a better view into their total risk exposure. Another benefit of ownership data is that it provides the user with the ability to monitor individuals on sanctions and watch lists, which is critical to adhering to compliance regulations.

Standardized Financial Data Will Help Underwriters Analyze Banks Across Jurisdictions

Underwriters need granular financial data that’s structured and comparable across peer groups. More useful yet, is if a third-party data provider has a template and tools to allow underwriters to perform apples-to-apples financial comparisons across peer groups. Along with standardized financials, impartial third-party ratings and scores can provide valuable inputs into credit-risk modeling on current portfolios and to help determine the creditworthiness of potential clients, leading to more confidence to act on pricing decisions. A third-party data provider can provide ratings and scores across many important financial variables, such as probability of default, expected default frequency (EDF), climate-adjusted EDF, and ESG performance.

Impartial third-party ratings can help underwriters assess the credit worthiness of existing and potential clients.

Near-Zero Latency News Keeps Underwriters Abreast of Industry, Client And Owner Events

It’s also important to have access to near real-time industry news and alerts. An underwriting team will want to know immediately if a client, or prospective client has significant exposure to a sector, entity, or individual that is suddenly experiencing a shock, or negative event, so they can factor that news into their credit analysis. A third-party data provider that can deliver near-zero latency news and alerts, designed specifically for the underwriter’s requirements, can bring this added value into their underwriting solutions.

Access to near real-time news and alerts can help underwriters stay on top of timely information that could factor into credit decisions.

Information Delivery Is Important When Considering A Third-Party Data Provider

Finally, how data is delivered is an important consideration. Many larger banks prefer raw data feeds into existing proprietary systems. This allows them to blend the third-party data with their own internal data, linked by a unique identifier, to arrive at a more complete entity view. Other banks may prefer a packaged solution available via web browser to allow them to quickly get up-and-running with their underwriting risk management. Regardless of the approach, a trusted third-party data provider can help determine the right solutions to meet underwriting objectives.