Covenants play a critical role in credit risk management, particularly within the complex realm of commercial lending. However, monitoring these covenants presents significant challenges for many banks, often requiring time-intensive and costly manual follow-up processes. Regulatory frameworks, such as the Guidelines of the European Banking Authority (EBA), further increase the monitoring demands placed on financial institutions. Banks must be equipped to assess the risk position of a loan at any given moment. In this first installment of our ‘Business Solutions in Banking’ series, we explore how covenant tracking can be swiftly and securely implemented through a modern business application on a banking platform.
Covenant management is just one of many areas where banks seek solutions that can enhance processing efficiency while meeting current and future risk management standards. A customizable software solution allows experts to significantly speed up the processing workflow, improve collaboration, and leverage monitoring data to gain deeper insights into customers. A modern covenant application not only reduces the risk of credit default but also ensures that documentation requirements are met with comprehensive and traceable decision-making processes.
Challenges in Compliant Covenant Monitoring
Recurring monitoring activities can be both time-consuming and prone to errors for many middle- and back-office units. These errors often stem from manual processes and insufficient system support. In many financial institutions, covenants are managed using simplified database solutions or even unstructured documents. This approach not only raises concerns about audit security and regulatory compliance but also lacks the potential for system support and automation.
Monitoring tasks are often managed through inflexible resubmission processes without system support, making it difficult to respond to interim events like the temporary suspension of commitments. Although formal and material checks are usually conducted by experts, many of these tasks involve standardized structures, such as compliance certificates defined in credit agreements, which could be systematized. The absence of structured data and data management also prevents the contextualization of monitoring information, limiting its use as actionable insights for the deal team, such as for cross-selling opportunities.
Regulatory requirements emphasize the importance of close contact between relationship managers and customers in the monitoring process (as outlined in EBA/GL/2020, 8.4). However, many financial institutions struggle with operationalizing and documenting such concepts. Commercial customers typically have numerous credit agreements, making it a significant challenge to provide the necessary information or documents. Integrating monitoring capabilities into the customer portal and ensuring a seamless customer experience could encourage more frequent use by professional customers, enhancing their overall satisfaction.
Implementing Risk-Relevant Use Cases with a Banking Platform
The isfinancial banking platform offers a ready-made digital expert workspace designed for operations like covenant monitoring. With existing modules and curated tools, the necessary business logic can be implemented, extended, or adapted efficiently and securely.
Aggregate Data, Gain Insights
Using a domain-driven data model, covenants are not managed as isolated business data but are contextualized within applications, product agreements, customers, and more. This approach structures data within the broader customer relationship, enabling the extraction of valuable customer insights. This not only benefits sales strategies by identifying financing opportunities but also enhances early risk detection.
Automating Business Processes
The platform’s curated technology facilitates the automation and acceleration of overall processes: from business data capture and request creation to task assignment for experts. The system notifies users of pending tasks, with events or escalations triggered automatically based on due dates or business rules.
Transparency for Customers and Supervisors
As all interactions are logged on the platform, decision inputs can be verified for compliance and regulatory adherence, with process status and SLA conformity available at any time. Additionally, isfinancial enhances customer experience by providing business data to customer portals, offering status updates. The platform also captures business data uploaded via customer portals, mobile apps, or third-party platforms.
Would you like to learn more? Our covenant monitoring example uses a video to demonstrate how a banking platform manages business logic throughout its lifecycle and adapts to constant changes.
Conclusion
A banking platform allows risk-relevant and complex use cases to be implemented swiftly and securely. This applies to monitoring as well as various functional and recurring tasks across all office operations. The platform reduces the burden of routine tasks on experts, accelerates processes, lowers transaction costs, improves the customer experience, and strengthens audit security and early risk detection.
We are excited to offer our platform and expertise in implementing tailored software solutions for financial institutions. We look forward to being your trusted partner in the digital transformation of your retail and commercial lending business. Feel free to reach out with any questions or comments!
