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The fourth dimension in conduct analysis

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If interest rates rise, how will it affect your customers and your portfolios?

The Bank of England have indicated that it expects to begin hiking interest rates in the spring of 2015, but some members of the Bank’s Monetary Policy Committee have refused to rule out an earlier move. There are a number of economic and financial risks out there that mean that interest rates could go up faster and by more than can be reasonably expected over the next 12-18 months.

This is likely to impact affordability, customer’s financial stability and also purge changes into business portfolios as these rises come into fruition.

Even before the actual rise trends in behaviours are starting to appear. A surge of applications for fixed rate mortgages is predicted, as well as customers and businesses reviewing the best strategy for investments.  House prices are already growing at record levels, but ‘would-be’ home buyers will be considering the viability of buying a house given a higher monthly mortgage fee.  Understanding the impact of a rise in rates, regardless of how much, is critical for securing stability in your portfolio.

Having measures and contingencies in place can help set you in good stead for the day rates do rise – which they will.

More than ever, this is the time to evaluate the potential impact.

The combination of market and portfolio insight into current risk concentrations (benchmarked against the rest of market) , alongside our expertise in economics provide a range of deliverables to assist you in strategic  planning, contingency management and stress testing. Our tailored solutions aim to give you the insight you need to use within your strategy and planning. Specifically providing you with:

  • Regulation support
  • Operational planning
  • Risk appetite
  • Mitigation of future risks

Measuring a customer’s affordability, using robust processes and the most accurate data on their financial commitments, will ensure that your customers can not only pay you back at the start of the loan, but will also allow you to monitor their continuing ability to maintain payments in the future.

The decision making process needs to take into account not only risk assessment, but also levels of indebtedness and affordability.

A typical affordability assessment process will include: the capture and retrieval of robust data on the customer’s financial situation, income estimation and verification, the calculation of disposable income to assess ability to repay both today and over the lifetime of the commitment, setting of affordable limits and an assessment of both indebtedness and risk.

Our comprehensive macroeconomic forecasting capability allows us to undertake client-specified scenario exercises at a national, regional and segmented household level/ Scenario analysis can be carried out by Experian, using our own suit of models; or by clients, using desktop scenario tools built and licensed by us.

There is ample evidence that economic conditions influence debt behaviour.

Experian’s approach to incorporating economics into credit analysis acknowledges and exploits the variation in economic conditions facing different groups of borrowers (identified on the basis of residential location and household type), so greatly expanding the information available.

Experian offers a set of new bureau scores (Future Delphi) based on the existing Delphi scores, which incorporate household economic data at national, regional and local level.

These new scores are able to track the changes in bad rate over time, which make our scores more resilient to economic change – future proof.

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