Automotive Finance: The Case for an Industry-Specific Approach to Risk Management

Automotive finance has come to represent a significant portion of many financial institutions' portfolios. The list of these institutions includes financial service entities of automotive groups as well as banks, bank-owned and independent finance companies. All of them face the need to assess and manage the risks of their activities in the automotive sector. These risks depend to large extent on the dynamics of the market for motor vehicles. Understanding these dynamics well enough is an essential prerequisite for dealing adequately with the financial risk they imply. The requirements imposed on providers of financial services in the automotive business clearly go beyond the standard techniques applied to the assessment and the management of risk in traditional banking. This is the reason why, in virtual absence of literature on this subject, the present contribution is concerned with the specific aspects to be considered when managing risk in automotive finance.