1. NACM 114th
CREDIT CONGRESS
MAY 19, 2010
VERNON E GERETY, PHD
WWW.VGADVISORS.COM

2. EVERYTHING &
TECHNOLOGY DATA EVERYBODY
DATA VALUE INFORMATION
PAST “WON’T GET
EXPERIENCE FOOLED AGAIN”
UNDERWRITING PREDICTION RISK RATE
CREDIT MAX PROFITS SALES
2

3. Understanding Risk
3

4. Modern Portfolio Theory
Investing in a Portfolio of “Assets”  Customers
Maximizing Returns & Minimizing Risk  Max Profits
Types of Risk
 Credit Risk : Specific Risk – single asset – Diversify
 Market Risk:
 Systematic Risk – Changes within the market Non-Diversify
 Systemic Risk – Market Collapse – Mortgage / Real Estate Non-Diversify
 Operational Risk: How effective is the credit department?
 Other Risk: FOREX – Hedge
Understanding Risk of an Asset
 Risk Rate to measure risk
 Minimize Risk: Avoidance, Diversify, Hedge, and Insurance
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5. Accounts Receivables
40%
30%
20%
10%
0%
A B C D E F
Risk Rating
Understanding the mix of risk is key to
managing performance
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6. 25%
$ Loss /AR
23.3%
20%
15%
10% 8.8%
5% 4.6%
1.8%
0.1% 0.4%
0%
A B C D E F
Risk Rating
Dramatically communicates the impact of
exposures to various risk levels
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7. Segmenting Risk
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8. Risk Rating: Segment Comparison
% Distribution By Risk Class
50%
Small Medium Large
40%
30%
20%
10%
0%
A B C D E F
Risk Rating
Rating can be used to understand
risk by various segments
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9. Risk Rating: Segment Comparison
BAD Rates By Risk Rating
70%
60%
Small
50%
Medium
40%
Large
30%
20%
10%
0%
A B C D E F
Risk Rating
Different method to identifying risk
but consistent performance by rating
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10. Economic Risk
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11. Economic Scenarios: Growth vs Recession
Specific Risk
40%
Growth Recession
30%
20%
10%
0%
A B C D E F
Risk Rating
Shift to higher risk ratings A, B, C to D, E F
which helps to automatically manage risk
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12. Economic Scenarios: Growth vs Recession
Systematic and Systemic Risk
40%
Growth Recession
30%
20%
10%
0%
A B C D E F
Risk Rating
Higher probability of default give level of
risk is consistent with Adverse Selection
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13. Strategic Risk Management
 Improved Organization Communication
 Consistent treatment across the customer base
 Minimize credit “oops”
 Act rather than react
 Profit Maximizing by Minimizing Risk
Doing Managing
deals Risk
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