The challenges around internationally standardised company information for credit risk
In our last article we discussed the disparities of private company information around the globe – in particular in to what level companies are expected to log their financial information. It's no secret that the inconsistency amongst credit scoring will vary between information providers too.
Traditionally, one of the issues the credit market has had is the 'black box' approach to scoring and data. The 2008 credit crunch had a definitive impact on this however, and compounded by the rise and rise of big data and proactive credit management we are seeing a shift in the transparency of scoring.
However, it's not unusual for a credit team to be working with over five different providers across multiple countries and when that happens it is no surprise that independent and differing calculations for credit scoring are provided. Moreover, standardised decisions will then be made based on this incompatible mix. Yet, without knowing the methods used to create these scores there is likely to be confusion not just for a business but also their customers.
How do we make an informed decision – not one based on assumptions of compatibility (where there is none)? And is it possible to build a complete picture and truly compare like for like?
In answering all these questions there are several factors that we, at Bureau van Dijk, a Moody's Analytics company, believe makes the difference between a risky decision and one based on much more certainty.
• Applying context
• Data-gathering workarounds
If we apply approaches such as 'Fuzzy' logic and the MORE (Multi-Objective Rating Evaluation) score to credit risk modelling then we can assess a company's health (versus their riskiness) in a detailed and substantiated way. The key is to "contextualise the analysis to the specific background the company is working in" - such as the country, the sector and available financial figures. And by harnessing these types of processes we can start to turn a very complex analysis into something a bit more manageable.
There is a need to deal with information in varying ratios – e.g. solvency, DSO (days sales outstanding) and many more, and also a large range of countries, differing accounting and standards and multiple sectors – but none of them should be removed from consideration.
Which is why 'fuzzy' logic and the MORE method have been created – these theories are hugely complex, and, in order to exemplify how these metrics enhance our picture of a company's financial health, we go to certain lengths to explain them in our white paper Internationally standardised company information for credit risk. Algorithms like these certainly enrich the company information in our database by applying context in a way that would be impossible to do manually.
It also means that logic and standardisation can be applied where once there were many varying and incomparable metrics.
To further enhance the bigger picture, we also need to consider filling the gaps in the information we have. In our last article, we talked about the mind-boggling methods that information providers employ to extract data from small, siloed governing bodies, to produce valuable insights. Small repositories of company information are key to piecing together knowledge required to form a bigger picture.
And if we then use standardised parameters against the information we hold then it becomes easier to discover, assess and analyse the data needed to make an informed decision. For example, definitive, hierarchically organised industry classification codes, projected financials, company descriptions – all of which, once rigourously standardised, improve searchability and results.
In order to enter into business with a company, or to make a decision on whether to extend credit to it, a global view is required – not just of the parent company but its subsidiaries and group exposure. Your picture of that company must be drawn from external data of verified sources, all globally standardised and contextualised.
We have given an overview of how we believe Bureau van Dijk create a transparent, coherent and global view of companies, but it's a vast subject matter! If it's something of interest you can do some further reading on this topic in our white paper Internationally standardised company information for credit risk or please get in touch - we'd be happy to hear from you if you'd like to chat further.
By Stephen McKinney
General Manager – Oceania
T: 61 2 9233 3088