Cost of living crisis to create 'volatile’ data set

During an invite-only event, Credit Strategy Premium Members from across the financial services space came together to discuss what the risk environment looks like post-pandemic. 

Based on credit bureau data, most of the attendees have seen a “very stable population stability index (PSI)” across the UK population. One of the experts put this stability partly down to payment holidays - which have been hiding or delaying a lot of delinquencies. 

In terms of some macroeconomic factors, there were some aspects the members expected would have come into play which haven’t played much of a role - such as second employment. 

There has, however, been a more general degradation in the economy such as cost of living and rising electricity and gas costs, which will affect everyone. 

Credit quality 

When building model collaborations to assess their customers’ credit positions, one of the panellists said they deliberately looked to exclude the last two years from the process. This, they believed, built other risks into the model.

The members discussed the upcoming cost of living crisis, with one of the experts seeing this as a growing concern in the coming months, and will result in an incredibly volatile data set. 

One of the dangers of assessing the credit market during this period, according to another one of the panellists, is that it could rebase credit quality and establish a new baseline. This then ends up normalising aspects of the current crisis such as a seven percent inflation rate and challenges that are being seen in the consumer book. 

The abnormality of the current state of the market makes it difficult to understand what the underlying credit quality is and for a business to determine what its risk appetite becomes. 

Assessing when the ‘new normal’ will be 

One issue raised by a member was that when developing credit models, you never have enough data, and while what the industry currently has is very informative - the difficulty is it currently competes with itself. This is mainly because the data sets are in a period of artificial support put in place in order to mitigate the effects of the pandemic. 

Therefore, how quickly can a firm run through that period of concession on forbearance to get to a point where it can say ‘this is what the underlying credit quality of our customers are, and that’s how we’re going to start making sense’. 

One of the experts present said they weren’t sure when stability is going to be sufficient so that they can start to use the data with confidence - with part of them thinking they’ve got to put some clear blue water between them and the pandemic in terms of time. They added they weren’t sure whether that’s going to be six months, 12 months or 24 months.