Lessons from the Recession: What role did human capital play?

We're more than five years removed from the beginning of the Great Recession, and blame for the financial crisis is still being assessed.

One of the causes of the downturn that we talk about most on this blog is the cavalier lending practices of banks in the years and decades leading up to the collapse. Writing for American Banker, Noma Bruton notes that part of the problem can be traced back to deficiencies in human capital. For myriad reasons, those working for lenders were unable to adequately assess risk at all levels of their operations.

"Missing from companies' workforces were leaders and employees with the skills required to work and lead through an economic downturn," Bruton said. "Employees knew well how to expand the loan portfolio rapidly in a growing market. But, their ability to change course and react in a severe recession had atrophied, if it had ever existed at all."

Perhaps if more lenders had been more risk averse and used tools like loan management software to assess the creditworthiness of borrowers, fewer high-risk loans would have been provided.

But it doesn't just end there. Going forward, lenders also need to consider internal risk as well.

In comparing banks to cars, neither of which can operate independently, Bank Systems and Technology's Eric Werab notes that "disparate spreadsheets and outdated reconciliation systems increase risk exposure by preventing banks from clearly seeing and understanding their operations." These internal processing errors can be just as damaging to a lender's operations as an inability to implement effective risk management mechanisms related to borrowers.

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