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A comprehensive redesign of credit-risk systems and processes

By transforming its credit processes and systems, a leading retail bank lowered its cost of risk to 23 basis points below that of its competitors.


Following a merger, a major European retail bank faced the challenge of integrating two vastly different credit platforms. To add to the complexity of the challenge, inefficient credit processes were contributing to high operating expenses at both banks. And, as it sought to implement a single credit platform, the bank also had to ensure compliance with Basel II/III requirements. The bank’s leaders reached out to McKinsey for support.


The McKinsey team started by examining all aspects of the credit value chain. Working closely with the client, the team first mapped existing credit processes against Basel II/III requirements and “lean” best practices to identify potential sources of noncompliance and waste. It analyzed the merging entities’ credit-scoring systems and benchmarked them against international best practices. It evaluated the credit organizational structures and incentive systems to determine whether they were in alignment with the bank’s overall credit-quality objectives.

Using this fact base as a foundation, the McKinsey team then helped the client with a comprehensive redesign of the credit business. The main elements included the following:

  • defining a credit-risk strategy based on the bank’s risk appetite and overall risk-return profile
  • revising underwriting processes to improve operational efficiency and the accuracy of credit decisions
  • developing Basel II/III–compliant credit origination and pricing processes and tools (including scoring systems) for small businesses and individuals
  • improving credit monitoring and business reporting at both the deal level and the portfolio level
  • refining the bank’s loss-mitigation techniques, with a focus on collection and workout of nonperforming loans both in the client’s home country and in its main foreign subsidiaries
  • designing and implementing new processes for asset valuation and disposal


By unifying and optimizing its credit operations, the bank achieved a significant reduction in its cost of risk, which in prior years was on average 50 basis points higher than rival European banks. In the three years following the project, the bank’s cost of risk dropped to 23 basis points below that of its peers. In addition, the application of lean techniques resulted in more efficient credit processes, yielding a 15 to 20 percent reduction in operating expenses in each customer segment.

With these gains established, the McKinsey team is now helping the bank pursue even greater effectiveness by fully incorporating forward-looking, cross-segment perspectives into its credit-risk strategy. The team is also helping the client achieve further efficiency improvements by integrating the IT systems that govern all credit processes, from origination to early collection.

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