PORTFOLIO ANALYSIS OPTIONS

Portfolio analysis is not a simple action, it is a series of decisions supported by extensive systems.

Effective portfolio analysis not only paints a portrait of where your pools of risk lie at any given moment in time. The best analysis approaches have reliable predictive power.

It is the ability to see where you are going before you get there that empowers you to take a pro-active approach to risk management.

As you look for specific analysis tools -- a search that I can help you with -- you need to make many important decisions:

• Goal of the analysis: what actionable outcomes are you looking for? Knowing what you will do with the results is the first step in choosing analysis models and building data management systems to get you those results.
• Data management system: from enhancing your risk rating system to collecting the particular details that will support the desired analysis, there are many, many "tricks of the trade." In fact, getting the right data, gathering clean, meaningful, timely inputs, can be much more complicated than you might assume, and that's why I offer consulting help in preparing for and implementing portfolio analysis.
• Developed in-house or purchased: do you plan to manage the number crunching entirely on your own ? Plug your data into a standard model provided by a vendor? Purchase access to an analysis program that allows some customization?
• Platform: is your analysis model implemented in a series of complex spreadsheets? By custom software? "In the cloud" on a Web-based platform?
• Supporting systems/actions: what training, policy, culture issues will you have to address to support your risk analysis and risk management efforts?

Understanding Portfolio Analysis: An Example

There are many models for analyzing risk in your portfolio, and you may have heard terms like "migration analysis," which is a way of tracking how risk profiles change in your portfolio over time.

Let's take a quick look at one model that I highly recommend, known as "Terminal Risk Analysis." Understanding the basic concept may shed some light on the decisions you face in choosing and implementing a sophisticated, predictive analysis program.

Conceptually, Terminal Risk Analysis involves the following steps:

1. The bank assembles data needed to support the analysis. This step is by no means a simple one, which is why I offer consulting help on implementing an analysis program.
2. The model takes a series of overlapping "snapshots" or "time slices" at regular points in the history, tracking individual credits, not just aggregate numbers.
3. The analysis identifies patterns over time, especially in regard to risk ratings and outcomes. If additional data, such as location, is available, the analysis can also detect patterns associated with those factors.
4. Terminal risk analysis applies the patterns that have been identified to predict future patterns, what the portfolio will look like at a coming point in time.
5. The predicted state of the portfolio is used by bank management to set appropriate reserves and assess capital adequacy.

As straightforward as this process may appear, it can challenging to implement. Continue on for some tips on implementing portfolio analysis ...

Choosing or designing the right portfolio analysis program for your bank is a major step toward optimizing risk management.