Commercial Banks and the Legal Entity Identifier Project
Anyone who is familiar with the legal entity identifier (LEI) system will likely know that it is generally focused on international trading entities. However, what may be surprising to some people is the fact that the LEI system has a massive potential benefit to commercial banks as well.
This is especially true if they start requiring an LEI as part of any transactions they do with small and medium-sized enterprises (SMEs). Here are the various ways that commercial banks can benefit from the LEI project and save themselves up to $4 billion USD annually, according to research done by GLEIF and McKinsey.
The commercial credit life cycle process that is used by commercial banks all over the world generally consists of four distinct phases. The first of these phases is something called origination, which is where commercial banks try to figure out the identity of potential customers as well as establish a pre-rating of their product limits, among other things.
The problem that commercial banks frequently run into is that SME's tend to either only use a partial name or use a variation of a name. However, this can pose a big issue because, as the head of commercial lending strategy at a top-five global financial institution explains, “It’s not uncommon for us to have two different products with different legal names listed. [This] creates a mess in the middle and back office. A way to standardize this would be great.”
However, the problem might be even worse than this according to recent findings from a large bank’s client services division. Their division found that for each organization, they had an average of five names which were all minor variations of each other.
Having an LEI for each one of these entities would help commercial banks quickly establish the identity of the applicants, even if they use a variant or incomplete name. This is because all variations of their names that have ever been used are attached to the same LEI number, which makes establishing their true identity incredibly easy.
Once their identity has been confirmed, they will be able to look at the entity’s history with the bank, as well as their external financial history, which helps them offer the appropriate products to the applicant.
Two of the biggest steps involved in the underwriting phase include preparing the final risk analysis and credit approval. Luckily, the LEI system can assist commercial banks in both of these steps.
Since an LEI number allows institutions to clearly see who owns whom, it makes it easy for them to accurately trace the entity’s lineage and ownership history. This lets them know whether there are any hidden risks that should be included in the final risk analysis or that will impact the credit approval that the entity receives.
In the administration phase, a lot of time is spent manually collecting and verifying the documents for disbursement as part of the customer onboarding process. With up to $2 trillion USD being laundered every year, several hours are often spent manually conducting the required anti-money laundering (AML) checks in order to ensure the accuracy of the information.
With a single identifier such as an LEI number, commercial banks would be able to streamline their various AML and compliance checks, which can save them countless dollars and hours of work.
Accurate Portfolio Management
The last phase of the commercial credit lifecycle involves both the review of account risk as well as the monitoring of changes in account performance. In order to speed up these processes and increase the accuracy of the data reconciliation required for these tasks, commercial banks need to start incorporating LEIs into their system.
By having an LEI number for the entity, the banks would be able to compare the data reconciliation against the financial health, transactions, and legal background that the LEI provides. This will help ensure that the entity’s risk profile is both up to date and incredibly accurate.
Across all four of these phases, an LEI would help to digitize and automate the various tasks by providing a reliable and standardized data field. This means far less work and money being devoted to both customer onboarding and loan processing. With the United States having more than 18 million small businesses with revenues of less than $10 million and 183,000 more firms with revenues between $10 million and $1 billion, commercial banks need to incorporate LEIs now more than ever.