Pandemic exposes limits of lenders' traditional credit metrics

Despite economic crisis spurred by the global coronavirus pandemic, there is a consensus that it will be of finite duration.

Yet traditional credit models don’t account for this “black swan” event, so lenders need to build credit models that complement the traditional with alternative data. Strong underlying pre-crisis economic fundamentals together with the current unique consumer circumstances reinforces the vital need for an expanded approach to consumer credit underwriting for banking and financial services institutions.

Unfortunately, credit markets are going in the opposite direction. Stressed loan books and an uncertain economic forecast are causing consumer lenders to resort to the usual crisis playbook: increasing rates and tightening standards.

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