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Risk Monetization
Question: Why is risk monetization important in small midsize business (SMB) lending?
Answer: Bankers can create a greater level of transparency and enrich the sales process with SMB prospects by helping them understand risk monetization. Long the province of insurance underwriters, the monetization of risk is understood as a way to value risk transfer products. Bankers need to understand risk monetization as a way to protect and generate returns on equity for the business. Risk monetization is possible as a result of a through enterprise risk assessment that reviews an SMBs products and markets, business support functions and the critical success factors that enables businesses to achieve its goals outlined in its business plan.
An SMB that conducts a thorough risk review will find numerous enterprise threats and business development opportunities. Risk monetization assigns a dollar amount to mitigate a risk or fund an opportunity. A typical analysis of an SMB can assess well over 100 risk and opportunity factors. Successful bankers will work with the SMB to prioritize risk /opportunity initiatives that are critical to attaining growth and profitability goals. Understanding opportunity cost and what initiatives will produce the greatest return on capital employed are the positive result of a risk monetization exercise.
Prioritizing which risk/opportunity initiatives to fund is critical because of the SMB limited capacity to undertake a multitude of development projects. Using a cost benefit, ROI analysis and an understanding of Value at Risk will help bankers and business managers prioritize business projects and initiatives and the requisite funding needed to achieve the desire returns.
These simple decision making tools will help small businesses realize the goals outlined in their business plans. Bankers who conduct this exercise with their clients will feel confident that the decision to extend credit was based on a process of risk monetization that optimizes capital allocation strategies to build equity and business profitability.
Sum2 Boilerplate
Sum2 is dedicated to offering creative sound practice solutions. The Profit|Optimizer product suite builds profitability for SME's by helping to identify opportunities and initiate effective risk management practices. See our full product portfolio at www.sum2.com or call us at 201.440.1173.
First published on BankersOnline.com 4/28/08
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